Skip to content


Mehta Parikh and Co. Ltd. Vs. Commissioner of Income-tax, Gujarat - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 177 of 1974
Judge
Reported in[1980]124ITR448(Guj)
ActsIncome Tax Act, 1961 - Sections 28(2), 30, 31, 32, 33, 34, 35, 36, 37, 37(1), 38, 39, 40, 66(5), 80VV and 260(1)
AppellantMehta Parikh and Co. Ltd.
RespondentCommissioner of Income-tax, Gujarat
Appellant Advocate K.C. Patel, Adv.
Respondent Advocate G.N. Desai, Adv.
Cases ReferredC) and Keshav Mills Co. Ltd. v. Commissioner of Income
Excerpt:
.....that the approach has been on the part of the revenue to ascertain whether the expenditure on motor cars, both for motor car expenses as well as depreciation, was expenditure for the use of the company and personal use of the directors and at no stage, till the stage of the tribunal, was the question considered from the point of view of unreasonableness or excessiveness of the expenditure in the light of the needs of the company or the benefit to the company. in the circumstances, we think it appropriate to decline to answer the question on the ground that the tribunal has failed to consider and decide the question whether the expenditure was laid out or expended wholly and exclusively for the purpose of the business of the company and has not considered all appropriate provisions..........company had maintained four cars at bombay and two cars at ahmedabad. in connection with these six motor cars the company had incurred certain expenditure towards maintenance and running of motor cars and had also claimed depreciation in respect of these six cars. the particulars regarding the motor car expenses and the motor car depreciation as also the car expenses disallowed, depreciation disallowed and the total disallowance by the income-tax officer year-wise are as follows; ______________________________________________________________________year motor car motor car car expenses depreciation totalexpenses depreciation disallowed disallowed dis-allowance______________________________________________________________________rs. rs. rs. rs.1965 26,248 8,691 6,562 2,547 9,1091966.....
Judgment:

Divan, C.J.

1. In this case at the instance of the assessee the following question has been referred to us for our opinion :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in applying the provisions of section 40(c)(ii) of the Income-tax Act, 1961, in upholding the disallowance made by the Income-tax Officer both in respect of motor car expenses as well as depreciation ?'

2. The facts leading to this reference are as follows : We are concerned with assessment years 1966-67 to 1969-70, the relevant accounting years being calendar years 1965, 1966, 1967 and 1968. The assessee is a private limited company which carries on business in textile accessories. If follows mercantile system of accounting. During the relevant years of account, the company had maintained four cars at Bombay and two cars at Ahmedabad. In connection with these six motor cars the company had incurred certain expenditure towards maintenance and running of motor cars and had also claimed depreciation in respect of these six cars. The particulars regarding the motor car expenses and the motor car depreciation as also the car expenses disallowed, depreciation disallowed and the total disallowance by the Income-tax Officer year-wise are as follows;

______________________________________________________________________Year Motor car Motor car Car expenses Depreciation Totalexpenses depreciation disallowed disallowed dis-allowance______________________________________________________________________Rs. Rs. Rs. Rs.1965 26,248 8,691 6,562 2,547 9,1091966 24,379 8,995 6,000 1,000 7,0001967 22,744 10,539 6,000 2,000 8,0001968 21,587 16,529 6,000 2,000 8,000______________________________________________________________________

3. The ITO disallowed the depreciation to some extent and car expenses to some extent, namely, one-fourth of the car allowance, on the ground that the managing director and other directors did not have cars of their own and the possibility of the company's cars being used for the personal use of the directors could not be ruled out. Having disallowed the car expenses on this footing, the depreciation was consequently disallowed.

4. The Appellate Assistant Commissioner deleted the disallowance made by the ITO. It was held by the AAC that the ITO had not given even remotely sufficient reasons for justifying the disallowance for motor car expenses or for depreciation for motor cars.

5. Against the decision of the AAC the revenue took the matter in appeal before the Appellate Tribunal. The Tribunal found it as a fact that the directors of the company and their family members did not own cars, but the cars were maintained by the assessee-company for the purpose of its own business and in the course of the business activity the cars were given to the directors for their use. The Tribunal found that the assessee was a closely-held company to which the provisions of s. 40(c) would be applicable and the cars which were owned by the company were used by the directors and their family members. Therefore, the impugned expenditure would be clearly hit by the provisions of s. 40(c)(ii) of the Act and the only question which survived for the consideration of the Tribunal was whether the disallowance made by the ITO was reasonable having regard to the business needs of the company or the benefits accruing therefrom. The Tribunal came to the conclusion that the disallowance could not be said to be excessive or unreasonable. In this view of the matter the Tribunal reversed the decision of the AAC as regard the disallowance for motor car expenditure and motor car depreciation and restored the disallowance made by the ITO on both the heads. Thereafter, at the instance of the assessee, the question, hereinabove set out has been referred to us for our opinion.

6. In order to appreciate the controversy between the parties, it is necessary to refer to only two provisions, namely, section 37 and s. 40(c)(ii). Section 37 which is applicable to all assessees, provides under sub-s. (1) :

'37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profit and gains of business or profession'.'

7. Section 40 deals with 'amounts not deductible'. It starts with a non-obstante clause stating :

'Notwithstanding anything to the contrary in sections 30 to 39',

the amounts mentioned in s. 40 shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession'. Clause (a) applies in the case of any assessee; clause (b) applies in the case of any firm; clause (c) applies in the case of any company and reads as follows :

'40. (c) in the case of any company -......

(ii) any expenditure or allowance in respect of any assets of the company used by any person referred to in sub-clause (i) either wholly or partly for his own purposes or benefit',

and the persons referred to in clause (i) are 'director and a person who has a substantial interest in the company or a relative of the director or of such person, as the case may be'. It is, therefore, clear reading the provisions of clause (c), that if the expenditure is in respect of any assets of the company used by a director or a person who has a substantial interest in the company or a relative of a director or of a person who has a substantial interest in the company, the ITO has to disallow any such expenditure if, in his opinion, 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, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub-clause (i) shall, in no case, exceed the limits laid down in cls. (A) and (B) of s. 40(c). It is, therefore, clear reading the non-obstante clause at the commencement of s. 40 that the provisions of s. 37 must yield to the provisions of s. 40(c)(ii). At the same time it is also clear that the considerations which will weigh while considering the case under s. 37 are altogether different from consideration which will weigh while disallowing an item under s. 40(c)(ii). Under s. 37, if the expenditure is in the nature of personal expenses of the assessee, by the very words of s. 37(1), it is not allowable whereas under s. 40(c)(ii), before disallowing the amount of the expenditure claimed, the ITO must come to the conclusion that any such expenditure or allowance is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. Therefore, in order to disallow any particular expenditure under s. 40(c)(ii), the test which is to be applied is whether it is reasonable or whether it is excessive having regard to the legitimate business needs of the company and the benefit derived by or accruing to the company from the expenditure. It is possible that in certain cases, in the light of the facts of a particular case, the application of the provisions of s. 37 and s. 40 may overlap, but if it falls under s. 40(c), the provisions of s. 37 cannot be invoked by virtue of the clear provision of the non-obstante clause of s. 40. However, it must be borne in mind that the whole approach of the revenue authorities should be from the point of view of commercial exigencies and commercial concerns who are incurring this expenditure and not hypertechnical or technical point of view. In the instant case, we find that in para. 10 of its order the Tribunal observed :

'We have given our careful consideration to the rival submissions. Now it is an admitted fact that the directors or the members of their family did not own cars, but in the instant case, the disallowance has been made in the hands of the company on the ground that the cars have been used for non-business purposes by the directors. All the cars are maintained by the assessee-company for the purpose of its own business and in the course of its business activity. The cars are given to the directors for their use. The use to which the directors are excepted to put these cars is the use for the purpose of company's business. The question, therefore, before us is whether the above disallowance made by the Income-tax Officer is sustainable in accordance with the provisions of the Income-tax Act. It is no doubt true that the expenditure incurred would be allowable under the provisions of section 37 of the Act. It is also true that the provisions of section 28(2) have no application in the instant case, but then, we have also to consider the provisions of section 40(c)(ii) in dealing with the point before us.'

8. Later on, in its order, the Tribunal observed :

'The only question, therefore, which survives for our consideration is whether the disallowance made by the Income-tax Officer is reasonable having regard to the business needs of the company or benefit accruing to it therefrom. As indicated earlier, the Income-tax Officer has restricted the disallowance of 1/4th of the total expenditure in respect of motor car expenses and also in respect of depreciation. The disallowance, in the circumstances of the case, cannot be said to be excessive or unreasonable.'

9. We are unable to see how the question of disallowance being excessive or unreasonable can never arise under s. 40(c)(ii). What has to be considered by the I.T. authorities under s. 40(c)(ii) is whether the expenditure which is claimed is unreasonable or excessive and not whether the disallowance is excessive or unreasonable. Secondly, the Tribunal has pointed out in its order that the approach has been on the part of the revenue to ascertain whether the expenditure on motor cars, both for motor car expenses as well as depreciation, was expenditure for the use of the company and personal use of the directors and at no stage, till the stage of the Tribunal, was the question considered from the point of view of unreasonableness or excessiveness of the expenditure in the light of the needs of the company or the benefit to the company. As we have pointed out earlier, the requirements of s. 40(c)(ii) are that the ITO must form the opinion that the expenditure or allowance is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it from the expenditure. Even before the Tribunal this aspect has not been gone into and it seems that the assessee-company never was called upon to justify its expenditure on motor cars from the point of view of reasonableness or non-excessiveness having regard to the legitimate business needs of the company and the benefit derived by it or accruing to it therefrom.

10. The question then arises as to what course should be adopted in this case. The only course in the light of the events which have happened is to adopt the course which the Supreme Court adopted in CIT v. Indian Molasses Co. P. Ltd. : [1970]78ITR474(SC) , Shah J., as he then was, speaking for the Supreme Court, observed :

'Two courses are now open to us : to call for a supplementary statement of the case from the Tribunal; or to decline to answer the question raised by the Tribunal and to leave the Tribunal to take appropriate steps to adjust its decision under section 66(5) in the light of the answer of this court. If we direct the Tribunal to submit a supplementary statement of the case, the Tribunal will, according to the decisions of this court in New Jehangir Vakil Mills Ltd. v. Commissioner of Income-tax : [1959]37ITR11(SC) , Petlad Turkey Red Dye Works Co. Ltd. v. Commissioner of Income-tax : [1963]48ITR92(SC) and Keshav Mills Co. Ltd. v. Commissioner of Income-tax : [1965]56ITR365(SC) , be restricted to the evidence on the record and may not be entitled to take additional evidence. That may result in injustice. In the circumstances, we think it appropriate to decline to answer the question on the ground that the Tribunal has failed to consider and decide the question whether the expenditure was laid out or expended wholly and exclusively for the purpose of the business of the company and has not considered all appropriate provisions of the statute applicable thereto.'

11. In the instant case, we find that the Tribunal has not considered the question from the point of vies which is required to be considered, viz., from the point of view of s. 40(c)(ii) and particularly from the point of view whether this expenditure was unreasonable or excessive having regard to the business needs of the company and the benefit derived by the company or accruing to it from this expenditure.

12. Under the circumstances, we decline to answer the question which has been referred to us on the ground that the Tribunal has failed to consider and decide the question in the light of the provisions of s. 40(c)(ii). It would be open to the Tribunal to dispose of the appeal before it under s. 260(1) of the I.T. Act in the light of the observations made by us after determining the questions which ought to have been decided. It will be open to both sides to lead evidence after the appeal goes back to the Tribunal either by way of additional evidence or on remand, if the Tribunal so thinks fit, so that the whole question, whether the expenditure on motor cars, both by way of expenditure as well as depreciation, was unreasonable or excessive having regard to the business needs of the company and the benefit derived by the company or accruing to the company from that expenditure can be gone into completely in the light of the evidence which the revenue or the assessee may be able to lead. There will be no order as to costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //