Vildirect: IncomeTax-caselaws-1984-VIL-60-ITAT-

1984-VIL-60-ITAT-

Equivalent Citation: ITD 010, 788, TTJ 021, 465,

Income Tax Appellate Tribunal MADRAS

Date: 05.09.1984

INCOME-TAX OFFICER.

ASHOKA BETELNUT COMPANY (PRIVATE) LIMITED.

BENCH

Member(s) : DR. V. BALASUBRAMANIAN., P. S. DHILLON., S. RAJARATNAM.

JUDGMENT

Per Shri P. S. Dhillon, Judicial Member -- The revenue has preferred this appeal against the order dated 28-2-1983 of Shri A.B. Menon, the Commissioner (Appeals), who partly allowed the appeal against the order dated 25-9-1982 of Shri A.A. Ryon, the ITO.

2. The relevant facts in brief are that the assessee is a private limited company. The previous year relevant for the assessment year 1979-80 ended on 31-12-1978. The assessee filed return of income for the assessment year 1979-80 and thereby made claims, inter alia, for motor car maintenance expenses amounting to Rs. 1,70,891. The ITO did not allow the claim of the assessee on the ground that the details required for the purpose of ascertaining whether and, if so, to what extent the expenditure exceeded the limits specified by rule 6D of the Income-tax Rules, 1962 ('the Rules'), had not been furnished by the assessee and the disallowance, therefore, should be made. In appeal, the Commissioner (Appeals) sustained it at Rs. 14,178 on the ground that the disallowance was not unjustified as the motor car had been used by the directors of the company and, therefore, the disallowance is to be made if the limit prescribed under section 40(c) of the Income-tax Act, 1961 ('the Act'), is surpassed. The revenue being aggrieved has preferred this appeal.

3. Shri S.L. Narasimhan, the learned departmental representative, contends that in the case of a company, flat rate is applicable and, therefore, the expenses, if at all on any item of expenditure, are to be incurred and expended by the company, if so authorised by passing a resolution as required under the Companies Act, 1956. Furthermore, section 40(c) can be applied if there is a resolution of the company to authorise the use of motor cars by the directors as perquisite in the previous year relevant for the assessment year under consideration. In the case of the assessee, the resolution is passed on 29-6-1979 while the previous year ended on 31-12-1978 and, therefore, the claim is not authorised, hence, disallowable. Reliance is placed on the decisions in CIT v. C. Kulandaivelu Konar [1975] 100 ITR 629 (Mad.) and M.M. Mehta v. CIT [1979] 117 ITR 362 (Cal.). On the other hand, Shri R. Santhanakrishnan contends that the impugned order is justified and calls for no interference as the authorisation for the expenses is there in view of the resolution passed above and the resolution goes back. He further contends that, on the facts and in the circumstances of the case, rule 6D is not applicable and section 40(c) is applicable. Therefore, the impugned order calls for no interference. He relies on the impugned order and the paper book pages 1, 2 and 3 filed on 19-10-1983 at the time of hearing of the appeal.

4. We have heard the rival contentions and gone through the record before us. In the case of C. Kulandaivelu Konar, their Lordships of the Madras High Court held that in order to bring a benefit or advantage within the provisions of section 17(2)(iii) of the Act, it must have a legal origin and since any unauthorised advantage taken by an employee without the authority of the employer would create a legal obligation to restore such advantage, it would not amount to a benefit or advantage within the meaning of section 17(2)(iii), that in cases where the company permits an employee to utilise its funds for his own benefit, it shall be deemed to have given a personal benefit to such employee and the benefit was not derived by the employee de hors his status as an employee. Similarly, their Lordships of the Calcutta High Court in the case of M.M. Mehta held that free use of car belonging to the company is no benefit or perquisite to its managing director or director or employee if there is no service contract between the company and the managing director, director or its employee for the same. Their Lordships of the Calcutta High Court followed the decision of the Madras High Court in the case of CIT v. A.R. Adaikappa Chettiar [1973] 91 ITR 90. Thus, from the aforesaid decisions, it is more than manifest that perquisite and benefit in the case of an employee of the company, managing director or director is there if there is service contract to provide for any perquisite or benefit between the company and such employee. In this case, there is no such contract. Moreover, the plea of the learned counsel for the assessee is that in view of the resolution dated 29-6-1979, the expenditure is authorised by the company and, therefore, the Commissioner (Appeals) is not justified in sustaining the disallowance on the application of section 40(c), which plea is not relevant or justified. Hence, we reject it. The reason is that authorisation is to be there as required by the aforesaid decisions of the Hon'ble Madras High Court in A.R. Adaikappa Chettiar's case and C. Kulandaivelu Konar's case, which say that benefit or perquisite in the case of managing director, director and employee of the company is there if it is as per conditions of service contract. Further, in the case of the assessee, the expenditure in the assessment year under consideration is unauthorised as it was authorised by the resolution on 29-6-1979 which date falls outside the previous year relevant for the assessment year under consideration. The decisions of the Madras High Court are binding on the Benches of the Tribunal at Madras situated within its jurisdiction and, therefore, following it with respect, we hold that the Commissioner (Appeals) is unjustified in making the allowance for maintenance of cars expenditure. Apart from it, there are no details regarding this expenditure. The expenditure can be allowed if the expenditure is verifiable and is allowed under the law and the same is expended in the business and not in contravention of public policy. Therefore, in view of our above discussion, we hold that the Commissioner (Appeals) is not justified in making the allowance of the expenditure for the use of motor cars by the directors of the company as the same was not authorised by the company in view of the fact that the resolution was passed in the general meeting of the company held on 29-6-1979 to authorise the use of company's cars so much so that in their service contract, there is no condition between the directors and the company to provide the cars to its directors as benefit or perquisite and, therefore, there is no question of application of section 40(c) on the facts and in the circumstances of the case and that of the decision of the Madras High Court referred to above. Accordingly, we accept the contention of the departmental representative and set aside the order of the Commissioner (Appeals) on the issue and restore that of the ITO.

5. In the result, the appeal is allowed.

Per Shri S. Rajaratnam, Accountant Member -- I regret that I am unable to find my way to agree with the conclusion of my learned brother.

2. The assessee, a private limited company, returning a net income of Rs. 9,14,577 from business of manufacture of scented betelnuts, had claimed travelling expenses of Rs. 1,54,137 which, on analysis, was found to consist of expenses of the following description :

Rs.

Travelling in India 43,726

Foreign travel 27,185

Expenses on scooters 12,335

Expenses on cars 70,891

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Total 1,54,137

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There is no surviving dispute regarding foreign travel expenses and scooters. The ITO disallowed one-fifth of travelling expenses in India on the ground that it did not contain details to enable him to disallow the expenses in excess of the permissible limits under rule 6D. This disallowance of Rs. 8,745 is again not before us inasmuch as the assessee has not come up in appeal against the order of the first appellate authority confirming the disallowance. This disallowance in dispute before us is one-fifth of the expenses for running/maintenance of cars totalling Rs. 70,891. The disallowance is of Rs. 14,178. The reason for the disallowance is that the directors were also using these cars for their personal purposes. The assessee has not disputed the fact of such use. It was, however, claimed that such expenditure relating to the directors was nothing more than provision of perquisites for them and that there could be no such disallowance unless the payment exceeded the limit under section 40(c), the first appellate authority found that the ITO has not shown that the benefit was excessive or unreasonable or that it is beyond the limit laid down by section 40(c). It is under these circumstances, he deleted the addition. In the departmental appeal, it is claimed that the specific resolution authorising such personal use by the directors was passed at the general meeting only on 29-6-1979 which is beyond the assessee's accounting year which ends on 31-12-1978. It was, therefore, presumed that the benefit was unauthorised during the year and that it is hit by the decision of the Calcutta High Court in the case of M.M. Mehta and the Madras High Court in C. Kulandaivelu Konar's case. The learned departmental representative repeated the stand. The learned counsel for the assessee, however, claimed that it will be wrong to say that the perquisites were unauthorised. The directors were whole-time employees attending to the family business conducted by the company and that the personal use was merely incidental. It was claimed that there was no bar inasmuch as the assessee was a private limited company and there is no provision which required a resolution to govern the accounting year as well, though such a resolution was specifically passed as a matter of abundant caution in view of the departmental objection. It was pointed out that this resolution itself shows that the three directors were full-time employees, one as managing director and the other two as in charge of sales and manufacture, respectively. Hence, these perquisites were given to them to enable them to better attend to the affairs of the company. It was claimed that it did not exceed the ceilings laid down under section 40(c). Since the company is a private limited company, it was argued that there was no prior approval necessary for the grant of these perquisites and, hence, these were not unauthorised as assumed in the grounds of appeal. It was also further pointed out that the decisions, referred to above, related to the question of treatment to be accorded to the perquisites in the hands of the directors in their personal assessments and were in no way concerned with the assessment of the company.

3. As for the facts, it is a matter of record that these directors were full-time directors of the company and that the use of the cars was, therefore, incidental to their employment and not in the capacity of the directors. In other words, it did not arise to them merely as director-shareholders as appropriation of profits, but as director-employees who had the use of the cars for official purposes and had incidentally used them for private purposes. The assessee is also correct in claiming that the provisions of the Companies Act fixing maximum remuneration and perquisites applies only to public companies. Section 198 of the Act clearly specifies that the provisions are applicable to public companies and deemed public companies. Even if it is to be assumed, though without basis, that the assessee is a company to which the regulations as to the ceiling on remuneration fixed by section 198 are applicable, it is still not possible to disallow the perquisite element for use of the company's cars for more than one reason. Since the accounting period relevant for the assessment year ends on 31-12-1978, the guidelines as to the managerial remuneration under the Companies Act provide that car can be provided to the directors for official and private purposes, but the value thereof has to be ascertained on the basis of rule 3 of the Rules for the purposes of the ceiling of one-third of the salary or Rs. 30,000, whichever is less. It was only in 1979 the guidelines were modified limiting the use of the car for such private purposes to one car subject again to the revised limits with which we are not concerned for this year--See Managerial Remuneration by Dr. Vinod K. Singhania [1983] 15 Taxman 46 (Sec. IV). Hence, the departmental inference that this perquisite was unauthorised under the Companies Act, is incorrect. Even the argument of the learned counsel that the fact that the accounts were approved by the general body and that a special resolution was recorded in the subsequent year authorising the allowance also confirm the assessee's claim that it was not unauthorised. Again, even if the allowance was unauthorised, but all the same if it is in the interest of the business, this cannot be disallowed. The Madras High Court in the case of CIT v. Sree Rajendra Mills Ltd. [1974] 93 ITR 122 held that even a payment in infringement of section 360 of the Companies Act did not justify the disallowance of the amount. All that would happen is that the amount, if it is to be returned to the company for lack of approval of the Central Government, would be taxable on such return. This view followed an earlier decision of the same High Court in the case of CIT v. Ramakrishna Mills (Coimbatore) Ltd. [1974] 93 ITR 49. Hence, sitting as we do in Madras, it cannot possibly be stated that a disallowance can be made merely on the ground that it is not authorised by the Companies Act. I would hasten to add that as the matter stands, such perquisites are not barred even for public companies as the law stood at the relevant time. Since it is nobody's case that the expenditure is in excess of the ceilings laid down either under section 40(c) or section 40A(5) of the Act or that it is excessive or unreasonable with reference to section 40A(2), there cannot be any disallowance. Since the assessee is a company having a corporate existence of its own with common seal and perpetual succession, it is not possible to treat the 'personal' expenses of the directors as 'personal' expenses of the company in the manner in which the partner's personal expenses could be so treated in the assessment of a firm. In the case of the assessee-company, the personal use of the car by the directors amounted to an amenity or perquisite by the assessee-company. Commercial expediency required that the company should provide the car to the directors for better service from them. The ITO has disallowed the same as though it were open to him to disallow one-fifth of the car expenses merely on the ground that the directors used it for personal purposes. This view is obviously wrong. The first appellate authority was right in concluding that the deduction is admissible on the facts and in the circumstances of the assessee's case.

4. I have, however, to deal with the decisions cited on behalf of the revenue. The Madras High Court in Kolandaivelu Konar's case was dealing with the question of taxability or otherwise of the value of an interest-free drawings by a director from a company in the director's personal assessment. It was found that such benefit amounted to a perquisite within the meaning of section 17(2)(iii). The Madras High Court followed its earlier decision in the case of A.R. Adaikappa Chettiar and pointed out that whether the benefit is authorised or even if unauthorised, it would still be a perquisite since it is a benefit or advantage in the hands of the company. The High Court in the decision relied on by the revenue in C. Kulandaivelu Konar's case observed as under :

". . . It is by reason of the fact of his being an employee deriving such a benefit, that provision directs it to be included in the salary income of such an employee. Normally, a company is not expected to allow its funds to be utilised by its employee for his personal benefit. In cases where the company permits an employee to utilise its funds for his own benefit, it shall be deemed to have given a personal benefit to such employee. The relationship of employer and employee, in such circumstances, is the primary reason for grant of such benefit to the employee. We have, therefore, no doubt that the benefit was not derived by the employee de hors his status as an employee."

The purport of this decision is that an amenity or benefit granted to an employee would amount to a perquisite of an employee as it arises in his capacity as an employee, though he may be a director as well. It was for this reason that it was considered taxable as a perquisite in employee's hands. The very same logic would show that even in the assessee's case, it should be treated as a perquisite granted by the company to its directors. Hence, this decision, in my opinion, only supports the assessee's case. The other decision relied upon by the revenue is that of the Calcutta High Court in M.M. Mehta's case, which dealt with the case of a provision of a free use of company car by an employee. This case also dealt with the question of assessment in the hands of the employee. This was found unassessable because the provision was considered extra-legal and not contractual. It followed the decision of the Madras High Court in A.R. Adaikappa Chettiar's case. This decision itself had been explained by the Madras High Court in the case of C. Kulandaivelu Konar. The Madras High Court had further explained the decision and taken a view that the question whether the payment was authorised or not authorised was not important by itself. In a later decision, the Madras High Court in CIT v. S.S.M. Lingappan [1981] 129 ITR 597 specifically pointed out that a benefit conferred by the company, even unilaterally outside an agreement between the parties, could still be a perquisite in the hands of the employees. The High Court clearly pointed out that if the inference is that the earlier decisions of the Madras High Court in A.R. Adaikappa Chettiar's case and C. Kulandaivelu Konar's case are taken as laying down the proposition that only authorised benefit could be treated as a perquisite, such an inference is wrong. In this decision, the Madras High Court cited the decision of the Allahabad High Court in Lakshmipat Singhania v. CIT [1974] 93 ITR 162, wherein it was pointed out that it was not necessary that the benefit should have been received by the assessee under an enforceable right. Hence, it cannot be stated that after the decision of the Madras High Court in S.S.M. Lingappan's case, the unauthorised benefit cannot be treated as perquisite. I would again hasten to add that there is no material for holding that the perquisite is unauthorised in this case, though even if it were so unauthorised, it would still be a perquisite in the hands of the employees. This point has to be laboured because the sole reason for the departmental appeal is that it is so unauthorised and, therefore, not to be allowed as a deduction. In the assessee's case, it is, however, not unauthorised. Again, the entire ground in the appeal is on the basis of the decisions in the case of employees. The position regarding the company is that the perquisite allowed to an employee would be deductible unless it is hit by section 40(c) or section 40A(5), as the case may be. In the case of CIT v. P.R. Ramakrishnan [1980] 124 ITR 545 (Mad.), where a similar car perquisite was involved and it was considered as a perquisite by the High Court, the High Court had occasion to consider the assessment of the company as regards such benefit in the following words :

"From a reading of clause (c) of section 40, it would be clear that it applies only to a case where the person concerned is either a director or has substantial interest in the company or his relative. In the present case, we are concerned with sub-clause (ii) of section 40(c) because the motor cars and telephones are found to be the assets of the company. The expenditure has been incurred by the company on the motor cars as well as the telephones. In such a case, the ITO must apply his mind to find out whether the expenditure is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. It would, thus, be clear from section 40(c) that it applies only to a case where excessive expenditure had been incurred by the company with reference to its assets which were used by the director or a person who had a substantial interest in the company or his relative. The disallowance is also limited to the excess so determined by the ITO."

The decision of the Madras High Court is the same as that of the first appellate authority in this case that the amount could be disallowed only if it exceeds section 40(c) limit as in this case the employees are directors. Since no such case under section 40(c) was either stated by the ITO in the assessment order or canvassed before us, the order of the first appellate authority should stand and the departmental appeal dismissed.

ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 -- I suggested for reference to the President the following question :

"Whether, on the facts and in the circumstances of the case, an amount of Rs. 14,178 expended on personal use of company's cars by its directors without any contract between the company and directors for the use of the company's cars by them is to be disallowed being unauthorised expenditure ?" However, the learned Accountant Member has suggested vide his D. O. Letter No. AM II/1984, dated 7-1-1984, the following question for reference :

"Whether, on the facts and in the circumstances of the case, an amount of Rs. 14,178 being the estimated value of company's cars for personal purposes of the directors could be disallowed ?"

Therefore, both these questions are referred to the President under section 255(4) of the Act.

THIRD MEMBER ORDER

Per Dr. V. Balasubramanian, Vice President -- The assessee, a private limited company, has the business of manufacturing scented betelnuts. The ITO found that out of the travelling expenses claimed of Rs. 1,54,137, Rs. 70,891 related to expenses on cars. He disallowed one-fifth of this amount (coming to Rs. 14,178) on the ground that the directors used these cars for their personal purposes. The fact of personal use by directors was not disputed by the assessee. It was, however, claimed that any disallowance on this account can be made only if resort to section 40(c) is possible. The Commissioner (Appeals) deleted the addition, since section 40(c) was not applied to the case. It is, thus, that the matter came up to the Tribunal on a departmental appeal.

2. The members who heard the matter having differed, reference is made to me as the Third Member. The Judicial Member has posed the following question :

Whereas the Accountant Member has referred the following question :

"Whether, on the facts and in the circumstances of the case, an amount of Rs. 14,178 being the estimated value of personal use of company's cars for personal purposes of the directors could be disallowed ?"

3. The learned counsel for the department has pointed out that the assessee is a private limited company. It is thus under the complete control of the directors. Substantial amounts are spent on maintenance of cars. The directors have no cars of their own. The car expenses incurred by the company to some extent went to the benefit of the directors personally. Since the actual amount of expenditure incurred for the personal use of the directors was not available, an estimate was made and the appropriate disallowance was also made. This is a clear case where there is no authority under which the directors utilised the motor cars belonging to the company. No resolution of the board of directors or the general body permitted the directors to make such use. As a matter of fact, the assessee has accepted the fact of the personal use of the motor cars by the directors. Against such a background, it certainly cannot be stated, according to the learned counsel, that this much extent of motor car expenses has been utilised for the company's business. This amount, therefore, representing the personal use of motor cars by the directors was to be disallowed as not permitted even under section 37 of the Act. The question of application of section 40(c), etc., does not come in. Section 40(c) is relevant when the expenditure itself is authorised and adds up to the remuneration of the director. That is not the position here. Even though a resolution as to the use of the car by the directors was passed on 29-6-1979, the previous year of the assessee having ended on 31-12-1978, the resolution had no legal effect. On the basis of this resolution, the user of the cars cannot even be said to be authorised. He also stressed the clear points made out in the judgment of the learned Judicial Member.

4. For the assessee, it is pointed out that a disallowance of such an item of expenditure can be made only where section 40(c) applies. The assessee did accept the use of the car by the directors for the personal purposes. This does not, however, mean that they were utilised for non-business purposes. They were only perquisites added to the salary. No disallowance in respect of such perquisites can be made by resort to section 37 or any other section.

5. That the directors made personal use of the company's cars is not disputed. The learned counsel for the department stressed the fact that the user was unauthorised. Exactly what this concept of authorisation means is not clear. Possibly what is sought to be made out is that there is no resolution of the board granting a car allowance or permitting the user of the cars personally to the directors. I am not sure that in order to remunerate an employee or even a director, it is absolutely necessary to pass a resolution of the board nor even where the provisions of the Companies Act require the passing of such a resolution ; if it could be shown that as a matter of fact, there was an agreement to make a particular payment to an employee or director, the fact of the payment could be ignored or its legality challenged. Any contravention of the Companies Act made, have to be dealt not under the 1961 Act especially in a tax matter in an altogether different context. In my opinion, therefore, to say that the user of the car is unauthorised, would neither be correct nor proper. The directors knew that they were using the cars. The company knew that the directors were using the cars. Admittedly, this was going on from day-to-day. Certainly if there was any irregularity, prejudice to the company, etc., somebody would have stopped the use of the cars. The facts, therefore, would indicate that there was complete ad idem with regard to the user of the cars on the part of the directors as well as the company.

6. There is no factual information with the department to show that the expenditure to the extent disallowed on the maintenance of cars was not necessary for the business of the assessee. This can be so only if the proper remuneration to be paid to the directors for the work done by them for the company would be equal to or less than the remuneration other than user of the cars paid to them. It is possible that even including the right to use the cars for personal purposes from the point of view of the work done by the directors, the remuneration paid to them is inadequate. Be that as it may, there are no facts to support the department's view that maintenance expenditure of the cars is not necessary for the assessee's business and so could be disallowed under section 37. On the contrary, in the absence of such factual information, it only means that in addition to the remuneration, the company has by a course of conduct permitted the directors to avail of this additional facility. The company has incurred the expenditure for such facility. At best, it constitutes extra remuneration to the directors. In any case, this is a clear outgoing of the company and for the purpose of remunerating the directors. If the user of the cars has been made by persons other than those related to the company as employees, directors, etc., it could perhaps be held that the expenditure incurred was not necessary for the business of the assessee. That certainly is not the case made out by the department in the present instance.

7. I have no doubt, therefore, in holding that the expenditure disallowed has been clearly incurred by the company for the purpose of its business, it being an addition to the salary bill. A deduction of this amount does not even require resort to section 37 but would come under the provisions of section 28 of the Act itself.

8. Admittedly, no claim for disallowance under section 40(c) is made by the department. I, therefore, agree with the learned Accountant Member that the addition has been properly deleted and the departmental appeal should be dismissed. Though the learned Judicial and Accountant Members have referred different questions, in substance, it relates to the allowability or otherwise of the sum of Rs. 14,178 on the facts and in the circumstances of the case. The case would go back to the Bench which originally heard it, for proper disposal according to law.

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