The main legal point established in the judgment is that the limit on deductible expenses under S.40(a)(v) and S.40A(5) should apply only to the extent of personal use by the employee and not to the entire expenditure.

Headnote:
S.40(a)(v) - Expenses on Cars and Buildings - S.40(a)(v), S.40A(5)
Fact of the Case:

The assessee, a private limited company, incurred expenses on cars and buildings. The Income Tax Officer disallowed a portion of the car expenses, and the assessment was reopened. The Appellate Tribunal found that the vehicles were used for personal purposes of the Directors but not exclusively. The Tribunal limited the deductible expenses on the cars to 1/3rd. The Tribunal also held that the expenses on the buildings did not fall under S.40(a)(v) as the employees did not derive any benefit from such expenditure.
Finding of the Court:

The court found that the entire expenditure incurred on the car should not be subject to the ceiling limit specified in S.40(a)(v) and S.40A(5) as it was used partly for business purposes. The court also held that the expenses on the buildings did not fall within the scope of S.40(a)(v) or S.40A(5) as the employees did not derive any benefit from such expenditure.
Issues: The main issues were whether the entire car expenses should fall within the scope of S.40(a)(v) and S.40A(5) and whether the expenses on the buildings should be subject to the limit specified in S.40(a)(v) and S.40A(5).
Ratio Decidendi: The court interpreted S.40(a)(v) and S.40A(5) to limit the deductible expenses on assets used by employees for their personal purposes. The court held that the limit should apply only to the extent of personal use by the employee and not to the entire expenditure. The court also considered the historical background of the provision and subsequent modifications to interpret the meaning of the Act.
Final Decision: The court held in favor of the assessee regarding the car expenses, finding that the limit should apply only to the extent of personal use by the employee. However, the court held in favor of the Revenue regarding the expenses on the buildings, finding that the expenses should be subject to the limit specified in S.40(a)(v) and S.40A(5).

Judgment :-

1. Excepting in the last of the cases the assessee in all the cases is the same. The reference in ITR. 76 of 1978 concerns the year 1971-72 and that in ITR. 103 of 1980 also concerns the same year and the same assessee, two different questions having been referred in these two references. In respect of the same assessee there is reference of the same two questions for the assessment year 1970-71 in ITR. 44 of 1979. In ITR. No. 79 to 82 of 1978 similar questions are referred. We say 'similar' because the provision of the Incometax Act referred to in the latter cases is that substituted for the earlier provision, though materially not very different. In ITR. 87 of 1978 in which the assessment concerns a different assessee the same questions as in ITR. 79 to 82 of 1978 have been raised in relation to the year 1974-75.

2. The two questions referred to this court in ITR. 44 of 1979 are:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the entire expenses on the cars used by the Directors could not be considered under S.40 (a) (v) of the Incometax Act, 1961?

2. Whether, on the facts and in the circumstances of the case, and on an interpretation of S.40 (a) (v) of the Incometax Act, 1961 the Tribunal is right in law in allowing the expenses incurred for the maintenance of the buildings?"

In ITR. 76 of 1978 the question referred is this:

"Whether, on the facts and in the circumstances of the case, and on an interpretation of S.40 (a) (v) of the LT. Act 1961, the Tribunal is right in law in allowing the expenses incurred for the upkeep of the building?"

This is substantially question No. 2 in ITR 44 of 1979. In ITR. 103 of 1980 there is a separate reference because the Tribunal declined to refer the question and on this court directing such reference it was independently referred. The question so referred is identical with question No. 1 in ITR. 44 of 1979.

3. S.40 (a) (v) was omitted by Finance Act of 1971 with effect from 141972. S.40A (5) which substantially covers the same subject-matter came into force with effect from 1 4 1972. The other references which are for the years subsequent to 1971-72 therefore refer to S.40A (5). The two questions raised there corresponding to the questions raised in ITR. 44 of 1979 are:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the entire expenses incurred by the assessee on the car used by the Director, could not be considered u/s. 40A(5) of the Incometax Act, 1961?

2. Whether, on the facts and in the circumstances of the case, and on an interpretation of S.40A(5) of the Income-tax Act. 1961, the Tribunal is right in law in allowing the expenses incurred for the maintenance of the buildings?"

4.Since the correctness of the decision of this Court in Commr, of Inc. Tax, Kerala v. Travancore Tea Estate Company Ltd., 1980 KLT. 173 was doubted by a Division Bench of this Court the case was referred to a Full Bench and that is how the matter is now before us.

5. The assessee in all but the last of the cases is a private limited company, M/s Forbes Ewart & Figgis Private Limited. The assessee in the last of the cases is a limited Company, M/s Harrison & Crossfield Limited, Cochin. M/s. Forbes Ewart & Figgis Private Limited (in short M/s, Forbes) owns 3 cars and two bungalows The Bungalows are given to the Directors for occupation free of rent. Maintenance expenses had been incurred by the Company in respect of these buildings The cars of the company were being used by the Directors for their personal purposes too Expenses have been incurred on the cars. The total expenses on the cars together with depreciation amounted to Rs. 22,192 in the case of the car used by one of the Directors, Mr Thomas and Rs. 15,597/- in the case of the car used by another Director Mr. Patridge.

We are stating the facts with reference to ITR. 76 of 1978 for the year 1971-72. It may not be necessary to s

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1981 Supreme(Ker) 98

The main legal point established in the judgment is that the limit on deductible expenses under S.40(a)(v) and S.40A(5) should apply only to the extent of personal use by the employee and not to the entire expenditure.

Cases Referred (1)