The Assessing Officer has disallowed one-sixth of my company's car expenses and depreciation because the directors used the cars personally. Can he?
Not where the company is the assessee. The Gujarat High Court held that where the directors were entitled under their terms of appointment to use the company's vehicles for personal purposes, the expenditure is remuneration within the Explanation to s.198 of the Companies Act 1956 and is the company's business expenditure, so no part of the vehicle expenses or depreciation could be disallowed for personal use.
Decided by the High Court (A.R. Dave J) on 2001-07-25, reported as [2002] 253 ITR 749 (Guj); [2002] 108 Comp Cas 675 (Guj); assessment year 1979-80. It bears on section 32, section 38(2) of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
This is the standard answer to the routine one-sixth or one-fifth disallowance that appears in almost every company assessment. The reasoning is that a company is a juristic person that can have no personal use of its own; any personal element is the director's perquisite, taxable in his hands, and remains business expenditure of the company. The limits matter as much as the holding. It does not help a proprietor, a firm or an LLP, where personal use by the proprietor or a partner is real and s.38(2) applies to the depreciation and s.37 to the running expenses. It depends on the vehicles being available to the directors under their terms of appointment, so where a company has not fixed remuneration in that way, or where the vehicle is used by someone who is not an employee or director at all, the argument is weaker. And where the disallowance is of depreciation rather than of expenses, the officer's provision is s.38(2), on which this judgment does not turn.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee company owned several vehicles, spending Rs. 96,653 on them in the year, which were entrusted to its directors, who were entitled to use them for personal purposes as part of the terms and conditions on which they were appointed. The Assessing Officer disallowed one-sixth of the total car expenditure and of the depreciation claimed, on the footing that there was personal use of the cars. The Tribunal upheld the disallowance, and the question referred was whether it was right in law in disallowing one-sixth of the total car expenses and depreciation because of the personal use of the car entrusted to the director.
The question was answered in the negative, in favour of the assessee and against the Revenue (para 15), and the reference was disposed of with no order as to costs (para 16). The Tribunal was wrong to disallow one-sixth of the total car expenditure and depreciation on account of personal use of the cars by the directors (paras 9, 10 and 15).
The Court reasoned from the Companies Act. Section 309 provides how the remuneration of a director is determined; s.198 caps overall managerial remuneration; and the Explanation to s.198 defines remuneration to include expenditure incurred in providing any benefit or amenity free of charge or at a concessional rate, and any expenditure which would have been incurred by the director but for the company incurring it. Expenditure on maintaining vehicles that were available to the directors for their personal use therefore falls within remuneration as so defined. Once remuneration is fixed in the manner s.309 requires, it is not possible to say that the company incurred an expenditure for the personal use of the directors: even if there was personal use, it was as per the terms and conditions of service, and so far as the company was concerned it was business expenditure and not disallowable (para 9).
even if there was any personal use by the directors, the same was as per the terms and conditions of service and in so far as the assessee-company was concerned it was a business expenditure and not disallowable as such.
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Handle my notice → Ask a CA on WhatsAppNot where the company is the assessee. The Gujarat High Court held that where the directors were entitled under their terms of appointment to use the company's vehicles for personal purposes, the expenditure is remuneration within the Explanation to s.198 of the Companies Act 1956 and is the company's business expenditure, so no part of the vehicle expenses or depreciation could be disallowed for personal use. This was decided by the High Court (A.R. Dave J) and bears on section 32, section 38(2) of the Income Tax Act 1961. It is reported as [2002] 253 ITR 749 (Guj); [2002] 108 Comp Cas 675 (Guj); assessment year 1979-80. This is the standard answer to the routine one-sixth or one-fifth disallowance that appears in almost every company assessment. The reasoning is that a company is a juristic person that can have no personal use of its own; any personal element is the director's perquisite, taxable in his hands, and remains business expenditure of the company. The limits matter as much as the holding. It does not help a proprietor, a firm or an LLP, where personal use by the proprietor or a partner is real and s.38(2) applies to the depreciation and s.37 to the running expenses. It depends on the vehicles being available to the directors under their terms of appointment, so where a company has not fixed remuneration in that way, or where the vehicle is used by someone who is not an employee or director at all, the argument is weaker. And where the disallowance is of depreciation rather than of expenses, the officer's provision is s.38(2), on which this judgment does not turn. If it applies to you, the first step is this: If your client is a company, take this point first: identify the resolution or the appointment terms under which the directors are entitled to use the vehicles, and put them on record.
The assessee company owned several vehicles, spending Rs. 96,653 on them in the year, which were entrusted to its directors, who were entitled to use them for personal purposes as part of the terms and conditions on which they were appointed. The Assessing Officer disallowed one-sixth of the total car expenditure and of the depreciation claimed, on the footing that there was personal use of the cars. The Tribunal upheld the disallowance, and the question referred was whether it was right in law in disallowing one-sixth of the total car expenses and depreciation because of the personal use of the car entrusted to the director. The matter was decided on 2001-07-25 by the High Court (A.R. Dave J). On those facts the High Court held as follows. The question was answered in the negative, in favour of the assessee and against the Revenue (para 15), and the reference was disposed of with no order as to costs (para 16). The Tribunal was wrong to disallow one-sixth of the total car expenditure and depreciation on account of personal use of the cars by the directors (paras 9, 10 and 15).
The Court reasoned from the Companies Act. Section 309 provides how the remuneration of a director is determined; s.198 caps overall managerial remuneration; and the Explanation to s.198 defines remuneration to include expenditure incurred in providing any benefit or amenity free of charge or at a concessional rate, and any expenditure which would have been incurred by the director but for the company incurring it. Expenditure on maintaining vehicles that were available to the directors for their personal use therefore falls within remuneration as so defined. Once remuneration is fixed in the manner s.309 requires, it is not possible to say that the company incurred an expenditure for the personal use of the directors: even if there was personal use, it was as per the terms and conditions of service, and so far as the company was concerned it was business expenditure and not disallowable (para 9). In the words reproduced by the source cited on this page: "even if there was any personal use by the directors, the same was as per the terms and conditions of service and in so far as the assessee-company was concerned it was a business expenditure and not disallowable as such."
It was decided by the High Court on 2001-07-25 and is reported as [2002] 253 ITR 749 (Guj); [2002] 108 Comp Cas 675 (Guj); assessment year 1979-80. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 32, section 38(2), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The question was answered in the negative, in favour of the assessee and against the Revenue (para 15), and the reference was disposed of with no order as to costs (para 16). The Tribunal was wrong to disallow one-sixth of the total car expenditure and depreciation on account of personal use of the cars by the directors (paras 9, 10 and 15). It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 32, section 38(2) of the Income Tax Act 1961, and was decided by A.R. Dave J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show that the perquisite value has been dealt with in the directors' hands, which is what makes the expenditure remuneration rather than a personal expense of the company. If the client is a proprietor, a firm or an LLP, do not rely on this case; instead put a measured business-use proportion on record before the officer picks a fraction. Where the disallowance is out of depreciation, address s.38(2) expressly — the officer's power there is to restrict the deduction to a fair proportionate part having regard to user. Watch the year: the question here was referred out of an assessment for 1979-80 and the reasoning rests on the Companies Act 1956; for current years the corresponding provisions of the Companies Act 2013 have to be cited.
Validity check could not be completed. Later treatment was not checked. The reasoning depends on the Companies Act 1956, in particular ss.198 and 309 and the Explanation to s.198, which have since been replaced by the Companies Act 2013; whether the corresponding provisions carry the same definition of remuneration was not verified. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment does not cite s.38(2) by number in anything read; it is tagged here because it is the provision an Assessing Officer uses for the depreciation half of this disallowance and a practitioner will search for it. indiankanoon carries at least three copies of this 25 July 2001 judgment (/doc/663906/, /doc/321516/, /doc/121544/); the copy at /doc/663906/ was reported as running to 16 paragraphs while the copy at /doc/121544/ ends at paragraph 11 with the disposal, and paragraphs 9, 10 and 11 read identically in both. The quote is taken from para 9 as reproduced verbatim through /docfragment/, where the transcription prints section references in brackets, for example '[Section 198]'; the bracketed markers are the site's linking and are not in the quoted words used here. On verification: the referred question was read verbatim and expressly covers "the total car expenses and depreciation"; the answer is at para 15 and the disposal at para 16 (indiankanoon prints "fetal" for "total" in para 15, and the quote used avoids that word). The judgment speaks in the plural — "In our opinion" at para 9, "The view that we are adopting" at para 10 — although the page header names only A.R. Dave J; a second judge could not be identified from anything read. The statement in this entry that the reasoning does not help a proprietor, a firm or an LLP is an inference from para 10, where the Court holds that a limited company "by its very nature cannot have any personal use"; the judgment itself says nothing about firms or proprietors. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered in the negative, in favour of the assessee and against the Revenue (para 15), and the reference was disposed of with no order as to costs (para 16). The Tribunal was wrong to disallow one-sixth of the total car expenditure and depreciation on account of personal use of the cars by the directors (paras 9, 10 and 15).
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