Mukesh Patel.in
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international tax expert / columnist / author / speaker

NAME GAME ON CAR DEPRECIATION!

Firm or company can claim depreciation on car purchased out of its funds, though in the name of its partner or director!

                    “What’s in a name? That which we call a rose by any other name would smell as sweet.”  This Shakespearean quote seems to have inspired as many five High Courts to hold that the Income-tax Department cannot refuse the claim for depreciation on a vehicle owned by a company or a firm, on the mere ground that it is not registered in its name, but stands in the name of its director or partner. Interestingly, there is no decision of any court or tribunal that has taken a contrary view on the subject.

             Section 32 of the Income-tax Act entitles a taxpayer to claim depreciation at prescribed rates for assets owned and used by the taxpayer for purposes of his business or profession. In case of a vehicle such as a motor car, it is common to come across cases where the car is registered under the Motor Vehicles Act in the name of a partner or a director (since it is a lot more economical to do so in terms of RTO taxes and registration charges), though the same has actually been purchased by a firm or company out of its own funds, or if acquired through borrowed funds the loan is repaid along with interest by the firm or company.

             In Salkia Transport Associates 143 ITR 39 (Cal.), Nidish Transport Corporation 185 ITR 669 (Ker.), Dilip Singh Bagga 201 ITR 995 (Bom.), Navdurga Transport Co. 235 ITR 158 (All.) and Basti Sugar Mills 257 ITR 88 (Del.), it has been clearly and consistently held that mere non-registration of a vehicle in the name of the company or firm under the Motor Vehicles Act cannot disentitle it in regard to its claim of depreciation, when the facts on record are undisputed that such company or firm has infact made the investment in purchase of the vehicle and such vehicle is being used for its business. The requirement of Section 32 of the I.T. Act is that the vehicle must be owned by the taxpayer and not that the taxpayer must be a ‘registered owner’ of the same under the Motor Vehicles Act.

             For arriving at the above conclusion, the latest decisions of various High Courts and Tribunals on the above issue have also usefully relied upon the ratio of the Supreme Court in the case of Mysore Minerals 239 ITR 775 (SC), wherein the Apex Court has held that the term ‘owned’ u/s. 32 must be assigned a wider meaning. In the case before the Supreme Court, although a building was formally not registered in the name of the taxpayer through execution of a conveyance deed, the Court held that since the taxpayer had actually invested in the asset and was utilizing the same and thereby incurring loss on account of wear and tear of such asset, it was entitled to claim depreciation in respect of the same.

              The latest judicial pronouncement in the row is that of the Allahabad High Court in the case of CIT vs. Varanasi Auto Sales 326 ITR 182, which highlighted its logical reasoning for allowing the taxpayer’s claim by observing that, “the very concept of depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset, is utilizing the capital asset and thereby losing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time. In the instant case the Tribunal had found that the trucks had been purchased in the names of the directors just for the convenience and the funds had been invested by the assessee-company and the higher rents received on such trucks had been credited by the company in their account and such receipts had been taxed by the department and the company was the de facto owner of such trucks. In view of the aforesaid finding, it was to be held that the Tribunal had rightly allowed the depreciation on such trucks which, though were in the names of the directors but were actually owned by the company, in the case of the company.” 

          In one of its absorbing decisions, the Lucknow Bench of the Income tax Appellate Tribunal in the case of Surinder Kaur vs. ITO 27 SOT 28 (Luck.) has also explained this aspect in a very well reasoned manner by noting that, “mere non-registration of vehicles under the ‘Motor Vehicles Act’ would not disentitle an assessee for claiming depreciation. The purpose of registration under the ‘Motor Vehicles Act’ is different. It permits an assessee to ply the vehicle in any public place. It does not indicate a legal evidence of ownership. If a vehicle is registered in the name of a person, the presumption is that he is the legal owner of the vehicle but where the vehicle is not registered in the name of the assessee then it is not a presumption that the assessee is not the owner of the vehicle. The ownership of the vehicle has to be determined from the finances utilized in making the purchases of vehicles, its control and management, use of the same as an apparatus for earning income, declaring income earned from those vehicles in the return of income and their acceptance by the department and there being no counter claim against such declaration.”

 

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