2011 (5) TMI 687 - AT - Income Tax

Disallowance of depreciation u/s.32(2) - CIT A after examining the submissions was of the view that the AO was not justified in holding that VSAT equipments provided by the assessee company at the premises of the directors were not exclusively used for the purpose of business of the assessee - assessee would be entitled to full depreciation for the said equipment and restriction of the provisions of sec. 38(2) were not applicable

Summary

Issues Involved:
1. Depreciation Claim on VSAT Network Equipment

Detailed Analysis:

Depreciation Claim on VSAT Network Equipment:
During the assessment proceedings, the Assessing Officer (AO) observed that the assessee had installed a VSAT network for screen-based trading in the capital market, licensed by the Department of Telecommunication (DTC). The network's main hirer was the assessee, while the approved users and brokers were subsidiary users. The AO concluded that the VSAT network was not exclusively used for the assessee's business, as it was also used by the members, leading to a proposed restriction on the depreciation claim under section 38 of the Income Tax Act. The AO estimated that only 40% of the network was used for the assessee's business and disallowed 60% of the depreciation on this equipment.

The assessee argued before the Commissioner of Income Tax (Appeals) [CIT(A)] that the VSAT network was essential for the assessee's business, as it enabled screen-based trading, which replaced the traditional floor trading. The network included a hub located at the assessee's premises and VSAT equipment at the brokers' premises. The assessee contended that the network was used exclusively for its business, as trading could not occur without it. The CIT(A) agreed, noting that the AO had not properly interpreted the term "exclusively used for the purpose of business." The CIT(A) emphasized that the network was necessary for the assessee's business operations and allowed full depreciation on the equipment, rejecting the AO's application of section 38(2).

Before the Income Tax Appellate Tribunal (ITAT), the Departmental Representative (DR) argued that the VSAT equipment was used by brokers and therefore not exclusively for the assessee's business, citing several case laws. However, the assessee's counsel explained that the VSAT network was installed to facilitate screen-based trading, which was a requirement imposed by the DTC. The counsel argued that without the VSAT equipment, the assessee could not conduct its business, and the network was used exclusively for business purposes, despite being located at the brokers' premises.

The ITAT considered the submissions and found that the VSAT network was essential for the assessee's business. The Tribunal noted that the network was installed under a no-profit-no-loss basis as per DTC conditions and that the assessee charged user fees to the brokers. The Tribunal concluded that the network was used exclusively for the assessee's business, as the brokers could not use it for any other purpose. The ITAT upheld the CIT(A)'s decision to allow full depreciation on the VSAT equipment, rejecting the AO's restriction under section 38(2).

The ITAT referred to the Supreme Court's observations in Eastern Investments Ltd. v. CIT and CIT v. Chandulal Keshavlal & Co., emphasizing that commercial transactions are often mutually beneficial and that the primary consideration is whether the expenditure was incurred for the assessee's business. The Tribunal also relied on the Delhi High Court's decision in Goyal Gases (P.) Ltd., which allowed depreciation on gas cylinders used by customers, drawing an analogy to the VSAT equipment used by brokers.

In conclusion, the ITAT confirmed the CIT(A)'s order, allowing full depreciation on the VSAT network equipment and rejecting the AO's application of section 38(2), as the network was used exclusively for the assessee's business.