1.The Income tax Appellate Tribunal has referred the following questions of law arising out of its order dated July 22, 1993, for the assessment year 1984-85.
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding the interest on sticky loan was liable for taxation on accrual basis ?
2. Whether, on the facts the Tribunal was right in holding that conveyance allowance paid to the employees would be hit by the provisions of Section 37(3A) of the Act and accordingly was liable to be computed for computation of disallowance ?'
2. So far as the interest on sticky loans is concerned, in UCO Bank v. CIT : [1999]237ITR889(SC) , it was observed by the apex court as under (page 900):
'Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of Section 145 and are meant to ensure that as.sessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or 'sticky' loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received.'
3. In view of the above observations, we are of the view that the Tribunal was not right in law in holding that interest on sticky loans was liable for taxation on accrual basis. Accordingly the first question is answered in favour of the assessee and against the Department.
4. As regards the conveyance allowance of Rs. 1,28,160 which was paid to the employees who owned two-wheelers, the Assessing Officer had included the same within the calculation for disallowance under Section 37(3A) of the Income-tax Act on the ground that it is a type of running and maintenance expenses of motor cars, etc. On appeal, the Commissioner of Income-tax (Appeals) directed that conveyance allowance was not to be included for the purpose of computation of disallowance under Section 37(3A). On appeal by the Revenue, it was held by the Tribunal that Explanation (c) to Section 37(3A) includes within the field, expenditure on running and maintenance of air-crafts and motor cars and that the said Explanation does not exclude conveyance allowance paid by the employer. The Tribunal further held that the scope of running and maintenance of motor car had been widened to extend to all sorts of conveyance allowance paid to the employees and the introduction of Explanation (c) is plain and simple and does not warrant any ambiguity. The Tribunal accordingly allowed the appeal filed by the Revenue. Section 37(3A) reads as under :
'Notwithstanding anything contained in Sub-section (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in Sub-section (3B) exceeds one hundred thousand rupees, twenty per cent. of such excess shall not be allowed as deduction in computing the income chargeable under the head 'Profits and gains of business or profession'.'
5. Section 37(3B) as inserted by the Finance Act, 1983, with effect from April 1, 1984, stood as under :
'(3B) The expenditure referred to in Sub-section (3A) is that incurred on-
(i) advertisement, publicity and sales promotion ; or
(ii) running and maintenance of aircraft and motor cars ; or
(iii) payments made to hotels.
Explanation.--for the purposes of Sub-sections (3A) and (3B),--
(a) the expenditure specified in Clause (i) to Clause (iii) of Sub-section (3B) shall be the aggregate amount of expenditure incurred by the assessee as reduced by so much of such expenditure as is not allowed under any other provision of this Act ;
(b) expenditure on advertisement, publicity and sales promotion shall not include remuneration paid to employees of the assessee engaged in one or more of the said activities ;
(c) expenditure on running and maintenance of aircraft and motor cars shall include,--
(i) expenditure incurred on chartering any aircraft and expenditure on hire charges for engaging cars plied for hire ;
(ii) conveyance allowance paid to employees and, where the assessee is a company, conveyance allowance paid to its directors also.' A contention was raised that the employee who does not have a motor car but receives the conveyance allowance cannot be considered for the purpose of disallowance as the payment has been made for maintaining the scooters and two wheelers, which cannot be considered as motor car. The Tribunal was of the view that it is the payment of conveyance allowance paid to the employees which shall be considered as an expenditure for running and maintaining a motor car. Explanation (c) to Section 37(3B) includes the expenditure incurred on hire charges for engaging cars plied for hire. But that is not the case here. Besides that, the conveyance allowance paid to the employees has been treated as expenditure on running and maintenance of motor car. From the perusal of Section 37(3B) it is evident that if the expenditure is incurred by the employer as conveyance allowance then it will fall within the provisions of Section 37(3A). It is not necessary for payment of conveyance allowance that the employees should own any vehicle. The allowance is paid even when they do not own the vehicle or they may own any vehicle and get the conveyance allowance irrespective of the fact as to whether the vehicle is a two-wheeler or car. The fact that the employees were owning scooters will not change the character of payment of conveyance allowance which has been included by giving an enlarged meaning in Explanation (c) and as such we are of view that the Tribunal was right in holding that conveyance allowance paid to the employees would be hit by the provisions of Section 37(3A) of the Act and accordingly was liable to be computed for computation of disallowance.
6. Accordingly the second question is answered in favour of the Revenue and against the assessee.