The Hindu Business Line : A bungle in the boot

THE income-tax rule governing valuation of car(s), among other things, blithely says that if an employee has his own car but the running and maintenance expenses thereon are met by his employer and the car is used both for official and personal purposes (twin purposes), the taxable value of the benefit accruing to the employee would be the actual amount of expenditure incurred by the employer as reduced by Rs 1,200 or Rs 1,600 a month, according as the car is small or big. If the employer also provides the services of a chauffer, a further Rs 600 a month will be reduced.

A moment's reflection would show up the fallacy in this formula. The amounts of Rs 1,200 or Rs 1,600, as the case may be, is actually (as per the rule) the value of the taxable benefit in case the car, which is used both for official and personal use, is owned or hired by the employer and the expenses thereon are also met by him. Now, how can this be reduced from the total amount on running and maintenance incurred by the employer on the car owned by him?

Let us take an example to drive home this fallacy. An employer spends Rs 10,000 a month on car owned by his employee which is used both for official and personal purposes. Now the taxable value is Rs 8,800 or 8,400 depending upon whether the car is small or big. What the rule evidently set out to accomplish was to deduct from the total expenditure, the amount relatable to official travel. But what the rule allows as deduction is the amount relatable to personal travel, given the fact that Rs 1,200 or Rs 1,600 a month is the value attributable to personal travel when the employer owns the car. It is funny that from the total expenditure, instead of deducting the amount relatable to the official travel, what is asked to be deducted is the amount relatable to the personal travel.

In the above example, the upshot is that the poor employee is saddled with a value of Rs 8,800 or Rs 8,400 that is admittedly the value of official travel if one goes by the standards adopted by the rule itself, whereas the avowed aim of the rule is to attribute to him the value of the personal travel. The whole issue can be looked at from another angle.

When the employee owns the car, the taxable value of expenses incurred by the employer attributable to personal use ought to be less vis-à-vis when the car is owned or hired by the employer. This is because when the employee owns the car, depreciation in the value of the car is suffered by him and not by his employer. Thus, if the taxable value is Rs 1,200 a month when the car is owned by the employer and used for twin purposes, in similar circumstances the taxable value ought to be less than Rs 1,200 when the car is owned by the employee. Granted, the employee in the example on hand, saddled with a tax liability on Rs 8,800 or Rs 8,400 a month, can claim a higher deduction for official travel from the total amount spent by the employer on his car by fulfilling all the prescribed formalities — maintenance of log book, obtaining a certificate from his supervising authority, and so on. And this should take care of his problem — he does not have to pay tax on Rs 8,800 or Rs 8,400 a month. But then why make an irrational rule in the first place?

If the basic rule were rationalised, there would not be any need to go through the farce of logbook maintenance, certification by the supervisor, and so on.

And for such rationalisation, one does not have to look beyond the rules. In other words, the necessary corrective is contained in the rule itself.

When the rule says, as it does, that the taxable value attributable to personal use is Rs 1,200 a month when a small car is owned by the employer and used for twin purposes by the employee and it is Rs 400 a month in similar circumstances when running and maintenance expenses are taken care of by the employee himself, the implication is that Rs 400 a month is attributable to depreciation of the car.

Now all that the CBDT has to do is to extend this a situation where the employee owns the car.

The taxable value of a small car owned by the employee but maintained by the employer which is used for twin purposes, thus, should be Rs 800 a month (Rs 1,200 minus Rs 400) and, by the same logic, that of a big car owned by the employee but maintained by the employer which is used for twin purposes, Rs 1,000 a month (Rs 1,600 minus Rs 600).

The CBDT cannot follow double standards. The hassle-free concessional method of valuation cannot be confined to one set of employees.

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