2006 (1) TMI 548 - AT - Income Tax

Depreciation on two foreign made cars - two foreign cars for running them on hire in the past, but during the relevant previous year, the cars were not used for the specified business - whether an asset is entitled for depreciation or not? - HELD THAT - In the present case, the foreign made cars are not otherwise eligible for depreciation. The only exception is that they can claim depreciation if deployed in the business of running it on hire for tourists. If the cars were used for hiring out for tourists in an earlier assessment year, depreciation was rightly allowed and the cars were rightly brought under a specified block of assets. But when those cars cease to be deployed for running on hire for tourists, the assets become non-eligible for depreciation and become a strange co-traveller in the company of other assets falling under that block of assets, still eligible for depreciation. Therefore, these two foreign cars not used for the specified purpose and not qualified for depreciation should vacate the block of assets. That has rightly been done by the Assessing Officer on the basis of his findings. We do not find force in this contention. Once an asset is necessarily to be expelled from the eligible block of assets its written down value would be calculated by adjusting for the depreciation written off at the specified rate and deducting such depreciation allowed for all the earlier previous years and then work out the written down value. Even if for the purpose of depreciation law, an asset is losing its identity and merging with a block of assets, the individual value of the asset is still traceable . Thus, we do not agree with the finding of the CIT(A) that a non-qualified asset should be granted depreciation only for the reason that the asset qualified for depreciation in the earlier assessment year and formed part of a block of asset. The above finding of the CIT(A) is, therefore, vacated. The order of the CIT(A) is not sustainable on this point. The orders of the lower authorities on this factual aspect are not speaking and conclusive. Therefore, we are not in a position to come to a conclusion. Therefore, we remit back the issue to the Assessing Officer for the limited purpose of examining whether these two cars were hired out to tourists in the course of regular business either by the assessee directly or through a lease agreement. If the Assessing Officer finds that as a matter of fact, the cars were deployed in the business of hiring it out to tourists, depreciation may be granted, and if not the claim may be disallowed. The assessee is directed to furnish the details before the assessing authority and the assessee shall be given a reasonable opportunity of being heard on this point. In result, this appeal filed by the Revenue is treated as allowed for statistical purpose.

Summary

Issues:
1. Claim of depreciation on foreign cars used for business purposes.
2. Interpretation of law regarding depreciation on foreign-made cars.
3. Treatment of assets forming part of a block of assets for depreciation.

Issue 1: Claim of Depreciation on Foreign Cars:
The appeal pertains to the claim of depreciation for two foreign cars purchased by the assessee, used for running on hire for tourists. The assessing authority rejected the claim for the assessment year 1998-99, stating the cars were not used for the specified business during the relevant period. The Commissioner of Income-tax (Appeals) allowed the depreciation based on the unique situation where the cars became part of the block of assets, making them eligible for depreciation. The Revenue disputed this decision, arguing that the cars were foreign-made and not entitled to depreciation as they were not used for the specified business during the relevant period.

Issue 2: Interpretation of Law on Depreciation for Foreign-Made Cars:
The key legal question revolves around whether foreign-made cars are entitled to depreciation, specifically if used for running on hire for tourists. The learned Departmental Representative contended that the law clearly states foreign cars are not entitled to depreciation unless used for the specified business. The Commissioner of Income-tax (Appeals) decision to allow depreciation based on the cars becoming part of the block of assets was challenged as unsustainable in law. The learned chartered accountant argued that once an asset is included in the block of assets, it loses its individual identity and qualifies for depreciation as part of the block.

Issue 3: Treatment of Assets in Block of Assets for Depreciation:
The Tribunal analyzed the concept of block of assets and depreciation eligibility. It was emphasized that assets must be entitled to depreciation to be included in a block of assets. The Tribunal noted that if an asset ceases to be used for the specified purpose, it should be removed from the block of assets. The Tribunal disagreed with the Commissioner of Income-tax (Appeals) finding that a non-qualified asset should receive depreciation solely based on its previous inclusion in the block. The case was remitted back to the Assessing Officer to determine if the cars were indeed used for hiring out to tourists, directing the assessee to provide necessary details for assessment.

In conclusion, the appeal filed by the Revenue was treated as allowed for statistical purposes, highlighting the complex legal interpretation regarding the depreciation eligibility of foreign-made cars used for business purposes and their treatment within a block of assets for depreciation calculations.