SAYAJI IRON & ENGG CO vs. COMMISSIONER OF INCOME TAX

ITR/158/1986HC GujaratGJHC24010782198624 July 2001Author: HONOURABLE MR. JUSTICE ANIL R. DAVE,HONOURABLE MR. JUSTICE D.A.MEHTA6 pages
AI SummaryAllowed

What were the facts?

The assessee, Sayaji Iron & Engg Co., a private limited company, incurred expenditure of Rs. 96,653/- on vehicles for the assessment year 1979-80. The Assessing Officer disallowed 1/6th of this expenditure and depreciation, considering the personal use of company vehicles by directors. The Commissioner of Income Tax (Appeals) upheld this disallowance, as did the Income Tax Appellate Tribunal. The assessee appealed to the High Court of Gujarat, which was asked to decide on the correctness of the Tribunal's disallowance. The assessee contended that vehicle use by directors was part of their perquisites and salary, and that for other assessment years, such expenditure was allowed in full.

What did the High Court hold?

The High Court held that the Tribunal was wrong in disallowing 1/6th of the total car expenses and depreciation. The Court reasoned that if directors are entitled to use company vehicles for personal use as part of their terms of appointment, such expenditure falls within the definition of 'remuneration' under Explanation to Section 198 of the Companies Act, 1956. Once remuneration is fixed as per Section 309 of the Companies Act, the expenditure incurred by the company for such use is a business expenditure and not disallowable. Furthermore, a limited company, being an inanimate entity, cannot have 'personal use' itself; any use by directors, even if personal, is as per their service conditions. The Court also noted that for all other assessment years, the expenditure was allowed, and past disallowances were deleted by the Tribunal, which was not challenged. The Court respectfully agreed with the Madras High Court's view in CIT vs. L.G. Ramamurthi and Others (110 ITR 453) regarding the institutional integrity of the Tribunal. The question was answered in the negative, in favour of the assessee. The reference was disposed of accordingly.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in disallowing 1/6th of the total car expenses and depreciation claimed by the assessee because of the personal use of the car entrusted to the director by him? (Question of law) Assessee's contentions: - The disallowance of 1/6th of the expenditure is not justified as directors were permitted to use the vehicles as a perquisite, which was part of their salary and perquisites. - The Assessing Officer should not have disallowed the expenditure without recourse to Sections 40(c) and 40A of the Act. - For all assessment years except 1979-80, vehicle expenditure was allowed in toto, and past disallowances were set aside. - The expenditure was incurred for business purposes as salary and perquisites to directors. Revenue's contentions: - Directors were using the vehicles for personal use, not exclusively for the company's purpose. - The Tribunal was justified in disallowing 1/6th of the expenditure and depreciation.

Which sections of the Income-tax Act were involved?

Section 256(1),Section 40(c),Section 40A,Section 198,Section 2(31),Section 40A(5)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 158 of 1986

For Approval and Signature:

Hon'ble MR.JUSTICE A.R.DAVE and Hon'ble MR.JUSTICE D.A.MEHTA

============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements?

2.

To be referred to the Reporter or not? : YES

3.

Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge? : NO -----------------------------------

The order continues below.

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