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50% Depreciation on Car can drive amazing Tax Saving!

Recover 25% Of Your Car Cost In 2 Years

Through New Purchase By 30th September, 2009!

Planning to purchase a new motor car for your business or professional use sometime in 2009? Are you aware of the fact that buying your car by 30th September, as compared to any time on or after 1st October can have a huge impact on your resultant tax saving?

            With a view to give a boost to the auto-sector in the prevailing economic recession, the Central Board of Direct Taxes (CBDT) vide its Notification No. 10/2009, dated 19-01-2009 announced a special rate of depreciation of 50% on new commercial vehicles acquired and put to use between 1st January to 31st March, 2009.  Vide further Notification No.37/2009 dated 21-04-2009, this benefit came to be extended until 30th September, 2009.  

             Under the I.T. Depreciation Table, ‘Commercial vehicle’ has been defined to mean heavy goods vehicle, heavy passenger motor vehicle, light motor vehicle, medium goods vehicle and medium passenger motor vehicle, but shall not include maxi-cab, motor-cab, tractor and road-roller. All these terms are to be understood as defined in the Motor Vehicles Act, 1988 (MVA). 

 RTO confirms Motor Car is LMV

             On seeking the opinion of the RTO, Ahmedabad, he has confirmed that there is no specific definition of the term ‘Commercial Vehicle’ under MVA and under MVA a motor car weighing less than 7500 kilograms is treated as LMV.                 

           When a motor car is thus clearly included and in no way specifically excluded from the scope of the term ‘commercial vehicle’ under the I.T. Rules and further, when it comes to be used for the purpose of business or profession as stipulated by the Notification, there can be no logical justification to take a contrary view in the matter. Moreover, the timing and purpose of this announcement, aimed at giving a boost to the auto industry under the prevailing business recession, also quite rationally go to justify the inclusion of a motor car for purposes of higher depreciation.

 Write off 75% Cost of your Car

By way of Depreciation in 2 Years

             Keeping in view the normal 15% depreciation rate on motor car, the special rate of 50% (available only for purchases until 30th September) can amazingly go to speed up your tax saving! So much so, that in a period of just about 2 years, you can virtually write off by way of depreciation nearly 75% cost of your car. If you are in the top tax bracket of 33.99%, you can effectively recover over 25% of your car cost from the resultant tax saving you can reap through availing 50% depreciation during this 2 year period (refer Chart-A). Just compare it with the 21% depreciation write off and around 7% tax saving over the similar period of 2 years (refer Chart-B), if you were to avail the normal 15% depreciation on car purchase made on or after 1st October.   

            Difficult to believe, but true! On a car purchased for Rs.10,00,000, the net difference in tax saving in case of a taxpayer in the top tax bracket of 30.9% would work out to a healthy Rs.1,65,701 (Rs.2,31,750 as per Chart-A less Rs.66,049 as per Chart-B). This saving could effectively fill up 3,450 litres of petrol (at Rs.48 per litre) in your car during the 18 month period, which would translate to literally enjoying a free daily ride of over 75 kms (at an average of 12 kms per litre).  In case of a company attracting tax at the rate of 33.99%, this saving would work out even higher. You just cannot afford to forget the old English saying, “A stitch in time saves nine!”  

CHART-A: Working for Car purchased for Rs.10,00,000

before 30th September, 2009

 

 FINANCIAL YEAR

COST/WDV

DEPRECIATION

RATE

DEPRECIATION

AMOUNT

TAX SAVING

@ 30.9%

TAX SAVING

@ 33.99%

2009-10

10,00,000

50%

5,00,000

1,54,500

1,69,950

2010-11

5,00,000

50%

2,50,000

77,250

84,975

TOTAL

 

 

7,50,000

2,31,750

2,54,925 

CHART-B: Working for Car purchased for Rs.10,00,000

on or after 1st October, 2009

 

 FINANCIAL YEAR

COST/WDV

DEPRECIATION

RATE

DEPRECIATION

AMOUNT

TAX SAVING

@ 30.9%

TAX SAVING

@ 33.99%

2009-10

10,00,000

7.50%

75,000

23,175

25,493

2010-11

9,25,000

15%

1,38,750

42,874

47,161

TOTAL

 

 

2,13,750

66,049 

72,654 

ITAT holds Motor Car as Commercial Vehicle

            Since the popular notion in regard to a commercial vehicle is generally a goods or a transport vehicle, a large number tax professionals have being debating as to how a motor car purchased for the use of business or profession can be covered within the scope of a ‘commercial vehicle’.  A deeper search and tracking down an identical context that arose nearly ten years ago brings to the fore, a sound ruling of the Income-tax Appellate Tribunal (ITAT), which happily dispels all doubts in the matter. 

           As per the third proviso to Section 32 of the I.T. Act, a similar relief of depreciation at a higher rate of 40% was announced for new commercial vehicles purchased during 1st October, 1998 to 31st March, 1999. 

         The ITAT Mumbai Bench, in the case of ‘Daleep S. Chandnani v/s. ACIT’ (14 SOT 233), had occasion to consider a situation where the assessing officer rejected the claim of the taxpayer for 40% depreciation holding that the Maruti Zen purchased for his business was not a commercial vehicle. In its reasoned decision in favour of the taxpayer, the Tribunal has upheld the very logic and reasoning as discussed in this column two weeks ago.   

       Analyzing the expression ‘commercial vehicle’ which includes ‘light motor vehicle,’ the ITAT noted that ‘light motor vehicle’ as defined in the Motor Vehicles Act, 1988, means any transport vehicle or omni bus, the gross physical weight of either of which or a motor car or a Tractor or Road Roller the unladen weight of which does not exceed 7,500 kgs. The Tribunal thus concluded that a motor car not exceeding the specified weight classifies as ‘commercial vehicle.’ Noting that different entries exist in Appendix-I for different categories of motor vehicles, providing for depreciation at specified rates, depending upon the period of acquisition and the purpose for which they are deployed, the ITAT concluded that the nomenclature of commercial vehicle should not be so construed to deprive a taxpayer of higher depreciation when all the conditions specified in the Act and the Rules have been met by him.    

Logical interpretation of ‘Commercial Purposes’

             Another interesting decision of the Mumbai Bench of the Income-tax Appellate Tribunal (ITAT), interpreting the meaning and scope of the term ‘commercial purposes’, also fortifies the above view.

             In the case of Garware Wall Ropes Ltd. v/s. Addl. CIT 89 ITD 221 (Mum.), the ITAT had occasion to decide the issue as to whether a helicopter used by the company for its business could be considered as being used for ‘commercial purposes’, so as to entitle it to exemption within the meaning of Section 2(ea) of the Wealth-tax Act.

            Rejecting the departmental contention that “used for commercial purposes means used for running on hire,” the Tribunal held that the term ‘commercial purposes’ has been used to indicate that the asset should be used for the purpose of business and there is no condition that the aircraft should be used as an air taxi or that it should be let on hire.

 Overview of Important Points 

            A brief overview given hereunder will summarize the key points in this connection:  

  • Only new and not second hand cars purchased before 30th September, 2009 will be eligible for depreciation at the higher rate.    
  •  The effective rate of depreciation for the current FY 2009-10 & FY 2010-11 will be 50%. However, it needs to be borne in mind that from FY 2011-12, the new Direct Tax Code will come into force and as currently proposed, the rate of depreciation on such motor cars earlier eligible at the higher rate of depreciation pf 50% will be only at the normal rate of 15% per annum.   
  • The benefit of depreciation being available only in respect a car used by a taxpayer for his business or profession (lawyer, doctor etc. included), a salaried employee cannot avail of any tax saving through the purchase of a new car.  
  •  In the case of a car purchased by a company or a partnership firm from its funds (thus treated as being of its ownership) and used for its business, though registered in the name of its director or partner, would very much entitle the company or firm to claim depreciation.  
  • In case of a car purchased through bank borrowing, the interest payable on the car loan is also deductible business expenditure.  
  • No disallowance of motor car running and maintenance expenses or depreciation can be made in the case of a company, on the ground of personal use of such car by any director or employee. It also needs to be noted that expenditure under this head is no longer liable to Fringe Benefit Tax (FBT), as earlier in force until FY 2008-09.    
  • And do keep in mind that the value of a car (as reduced by any liability against the same) held by a company, individual or HUF, even for business purposes, is liable to wealth-tax.

Depreciation Claim for Car in

Director or Partner’s Name

             “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), 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.

 

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