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TMI Blog1979 (10) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellate Tribunal was right in holding that the sum of Rs. 2,350 paid by the assessee-company to the Registrar of Companies as fees for increasing the capital of the company should be allowed as deduction under section 37(1) ? " We shall deal with each of these questions separately. The assessee took three buildings on lease, viz., 3/4, Godown Street, Madras, 181, Mount Road, Madras and 86, Wallajah Road, Madras it effected improvements to these three buildings. This expenditure was disallowed on the ground that it represented capital expenditure, and depreciation was not allowed on the ground that the assessee was not the owner of these buildings. The AAC, on appeal, found that a sum of Rs. 51,070 was spent on the construction of a wooden wall in the centre of the hall with show windows on both the sides with fittings; construction of wooden ladder for going to a mazzanine floor; wall panelling of the shop to prevent moisture; and construction of two cabins in the mazzanine floor for accounts section and one big show window near the entrance of the shop. This expenditure on the Mount Road property was considered to be a capital expenditure by the AAC also. As regards the Godow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and the air-conditioning machinery was disallowed by the ITO without any discussion. When the matter was taken on appeal to the AAC, he agreed with the assessee that the flat along with furnitures and air-conditioning machinery were the business assets of the company. However, he considered that the provision of s. 40(c) was clearly attracted to this case as no evidence was produced before him to show how the change of premises occupied by L. K. Chellaram, the managing director, from Mafatlal Park, Bombay, to the new flat helped the expansion programme of the company. In his view, beyond making a general statement that there was an increase in the turnover in this year, there was no material to show that the company derived any benefit by the acquisition and use of this flat. The entire claim of depreciation on the flat, furniture and the air-conditioning machinery was considered to be unreasonable and the disallowance made by the ITO was, therefore, upheld. The assessee took the matter on appeal before the Tribunal, and the Tribunal in its order observed that depreciation being a statutory allowance the ITO could not have any discretion to disallow a portion of the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alone. The question as to whether such a conclusion would be proper or not would, of course, have to be considered separately. However, the tribunal did not stop there. The Tribunal considered that as far as 3/5ths of the expenditure was concerned, in the personal assessment of the director he had been taxed as having derived a perquisite. The Tribunal has rightly observed that s. 40(c)(ii) vested in the ITO the discretion to disallow a portion of the allowance relating to the asset if he considered the claim of the allowance as excessive or unreasonable having regard to the legitimate business needs of the company. It, however, further proceeded to observe" Depreciation is a statutory allowance and the rate of such allowance in respect of the flat, furniture and air-conditioning machinery is fixed under the Income-tax Rules. Obviously, the Income-tax Officer cannot have a discretion to disallow a portion of the statutory allowance of depreciation. It is, therefore, clear that disallowance of portion of the statutory allowance of depreciation cannot be made by invoking s. 40(c)(ii). " The Tribunal is clearly in error in making the above observation. Even a statutory allowance ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the Act, that is ss. 28 to 39. Where a flat is occupied by a director or a person having a substantial interest in the company then to that extent there is a personal benefit derived by him. Section 40(c)(i) cannot be invoked unless there is a personal benefit derived by the director or the person having a substantial interest in the company. It would, therefore, follow that the company did not, and the director alone did, use that particular asset. It is only in respect of such cases that the allowance is sought to be curtailed by s. 40(c)(ii). Therefore, it is necessary for the authorities functioning under the Act to find out as to whether any director has been in occupation of the particular flat as the one in the present case and whether the occupation is for his personal or for the company's purpose. The finding in the director's personal assessment would not really be conclusive in this behalf though it cannot be said to be irrelevant. When it is found that the director or the other person used that asset, then the jurisdiction to disallow springs up. The ITO is then required to go into the question of the excessive or unreasonable nature of the claim having regard ..... X X X X Extracts X X X X X X X X Extracts X X X X
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