TMI Blog1995 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,629 out of the director's remuneration was disallowable ? At the instance of the Revenue : 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the disallowance under section 40A(5) is to be based on the value of the perquisite in the form of free use of cars by the employee directors and not with reference to the extent of the expenditure which resulted in such perquisites as provided in section 40A(5)(a)(ii) ? 4. Without prejudice to the above question if the value of the perquisite in the form of free use of cars by the employee directors is to be made, whether the Tribunal was right in law in directing that the same should be done in accordance with the provisions of rule 3(c)(ii) of the Income-tax Rules, 1962 ? 5. Without prejudice to the above question, whether, it was proper for the Tribunal to have directed the adoption of the valuation of the perquisites in the form of free use of cars by the employee directors according to the provisions of rule 3(c)(ii) of the Income-tax Rules meant for the valuation of perquisites for taxation in the hands of the employees instead of making or causing enquiries to be mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the balance. This resulted in disallowance of a sum of Rs. 62,629 under section 40(c) of the Act. The assessee was aggrieved by the above disallowance, as according to it, disallowance under section 40(c) could be made only if such payments were found to be excessive or unreasonable. In other words, according to the assessee, the ceiling of Rs. 72,000 laid down in section 40(c) would be attracted only to cases where the payments are found to be unreasonable or excessive. The assessee, therefore, appealed to the Commissioner of Income-tax (Appeals) against the above disallowance. The Commissioner (Appeals) did not find any merit in the construction sought to be put by the assessee on section 40(c) of the Act. He, therefore, rejected the appeal of the assessee and upheld the disallowance made by the Income-tax Officer under section 40(c) of the Act. The assessee went in further appeal to the Income-tax Appellate Tribunal (" the Tribunal "). The Tribunal, following the decision of its Special Bench, also held that the overall ceiling of expenditure falling under section 40(c) of the Act, which could be allowed, was Rs. 72,000 per annum in respect of each director, and rejected the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the previous year, the amount of seventy-two thousand rupees ; (B) Where such expenditure or allowance relates to a period not exceeding eleven months comprised in the previous year, an amount calculated at the rate of six thousand rupees for each month or part thereof comprised in that period : Provided that in a case where such person is also an employee of the company for any period comprised in the previous year, expenditure of the nature referred to in clauses (i), (ii), (iii) and (iv) of the second proviso to clause (a) of sub-section (5) of section 40A shall not be taken into account for the purposes of sub-clause (A) or sub-clause (B), as the case may be ; . . . . Explanation. --- The provisions of this clause shall apply notwithstanding that any amount not to be allowed under this clause is included in the total income of any person referred to in sub-clause (i) ; " It is abundantly clear from a reading of section 40(c) of the Act, as set out above, that it imposes an overall ceiling on the allowance of expenditure on remuneration paid or benefit or amenity provided, inter alia, to a director or a person having substantial interest in the company. The ceiling is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to amend section 40(c) under which expenditure incurred by a company on the provision of any remuneration or benefit or amenity to directors, persons, who have a substantial interest in the company and their relatives and the expenditure or allowance in respect of any assets of the company which are used by such persons for their own purposes or benefit is not allowed as a deduction to the extent such expenditure or allowance is, in the opinion of the Income-tax Officer, excessive or unreasonable. Under the amendment, the deduction on account of such expenditure or allowance will be further subject to an overall ceiling limit of Rs. 72,000 in respect of any one director or a person who has a substantial interest in the company or a relative of a director or of such person. . . ." (emphasis supplied). We are also supported in our above conclusion by the decision of the Calcutta High Court in Bilaspur Spg. Mills and Industries Ltd. v. CIT [1982] 135 ITR 496. Similar controversy arose in the above case. After elaborate discussion, speaking for the Bench, Sabyasachi Mukharji J. (as his Lordship then was) held (page 500) : " . . . . it appears to us that there were two conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Appeals) considered the contention of the assessee and observed that in the absence of detailed record regarding the use of the cars for the personal use of the directors and for the purpose of the assessee's business, it was not possible to make a reasonable estimate of the personal user of cars by the directors or officers. In the circumstances, the Commissioner (Appeals) turned to rule 3(c)(ii) of the Income-tax Rules which lays down the method of computing the value of perquisites in respect of the motor car provided by the employer for the use by the employees and directors partly in performance of their duties and partly for the private or personal use and applied the same for the purpose of valuing the perquisite in respect of the user of the cars by the directors. On valuing the perquisites in the manner laid down in the said rule, he found that the value of the perquisites was less than the ceiling imposed by section 40A(5) of the Act. He, therefore, held the same to be deductible and allowed the appeal of the assessee and set aside the disallowance of Rs. 73,990 made by the Income-tax Officer under section 40A(5) of the Act. Against the above order of the Commissioner (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to the provisions of clause (b) thereof, " so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in clause (c) shall not be allowed as a deduction. Sub-section (5) of section 40A, so far as relevant, as it stood at the material time, reads as under : " 40A. Expenses or payments not deductible in certain circumstances. -- (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head ' Profits and gains of business or profession '.... (5)(a) Where the assessee, --- (i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or (ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit, then, subject to the provisions of clause (b), so mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ceiling is 20 per cent. of the amount of salary payable or an amount calculated at the rate of Rs. 1,000 for each month, whichever is less, subject, however, to a further overall ceiling of salary (including the above perquisites and benefits) of Rs. 72,000 per annum. In the instant case, the assessee incurred expenditure on a fleet of six cars which were used by the employee directors of the assessee for the business purposes of the assessee as well as for their own personal or private purposes. In such a situation, the ceiling imposed by section 40A(5)(a)(ii) clause (c) will apply in respect of that part of the expenditure which can be attributed to the use of the cars by the employees or directors for their own purposes or benefit. There is no dispute about the fact that the ceiling in respect of such expenditure as specified in sub-clause (ii) of clause (c) is one-fifth of the amount of the salary or an amount calculated at the rate of Rs. 1,000 for each month, whichever is less. There is also no controversy in regard to the fact that the fleet of six cars owned by the assessee was used by its employees and directors both for the business and their personal purposes. In such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peals) and the Tribunal in the light of the provisions of section 40A(5)(a)(ii) of the Act. We have also perused rule 3 of the Income-tax Rules. On a careful consideration of the same, we are of the view that the Commissioner (Appeals) and the Tribunal were justified in the instant case in taking resort to rule 3 of the Rules for determining the amount attributable to the personal user of the car by the employees. It may be pertinent at this stage to mention that rule 3 has been framed to get over identical difficulties that arise in valuing the perquisites for the purpose of computing the income chargeable under the head " Salaries ". It lays down the manner of determining the value of perquisites in respect of user of the assets of the employer by the employee for his personal use. Clause (c) thereof lays down the manner of valuing the perquisite in respect of use of motor car. Rule 3(c) so far as relevant, as it stood at the material time, reads as follows : " 3. Valuation of perquisites.---For the purpose of computing the income chargeable under the head ' Salaries ' the value of the perquisites (not provided for by way of monetary payment to the assessee) mentioned below sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et or reimbursed to the assessee by the employer 2. Where the motor car is owned or 100 150 hired by the employer but the expenses on maintenance and running for the assessee's private or personal purposes are met by the assessee ------------------------------------------------------------------------------------------------------------------------------------------------ Provided that where a chauffeur is also provided to run the motor car, the value of the perquisite as calculated in accordance with this Table shall be increased by a sum of Rs. 150 per month ; (iii) where one or more motor cars are owned or hired by the employer of the assessee and the assessee is allowed the use of such motor car or all or any of such motor cars (otherwise than wholly and exclusively in the performance of his duties), an amount calculated in accordance with the Table under sub-clause (ii) and the proviso thereto, as if the assessee had been provided one motor car for use partly in the performonce of his duties and partly for his private or personal purposes : Provided that where two or more motor cars are allowed to be so used and the h.p. rating of any one of such motor cars exceeds 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employee for the purpose of computing the income chargeable under the head " Salaries ", we do not find anything wrong in applying the same for valuing the perquisites for the purpose of computing the disallowance under section 40A(5) of the Act because it has been framed by the Central Board of Revenue with a view to getting over the difficulties that might arise in determining the value of perquisites in respect of the use of the car owned and maintained by the employer by the employee. In that view of the matter, in our opinion, the Commissioner (Appeals) and the Tribunal were fully justified in taking resort to the manner of determination of the value of the perquisite in respect of the user of the car laid down in the said rule. We do not find any infirmity in the above action of the Tribunal. In our opinion, in the absence of any material on record, it would be appropriate on the part of the Income-tax Officer to follow the manner laid down in this rule than to resort to arbitrary estimation of the expenditure without any basis or material. We are supported in our above opinion by the decision of the Calcutta High Court in CIT v. Britannia Industries Co. Ltd. [1982] 135 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X
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