1984 (10) TMI 12 - HC - Income Tax

Summary

Issues Involved:
1. Disallowance of depreciation on motor cars used for personal purposes by partners.
2. Disallowance of motor car expenses for personal use by partners.

Summary:

Issue 1: Disallowance of Depreciation on Motor Cars Used for Personal Purposes by Partners

The Tribunal was tasked with determining whether the Income-tax Officer (ITO) was justified in disallowing a portion of the depreciation claimed by the assessee-firm on motor cars, which were used partly for personal purposes by the partners. The ITO had disallowed 1/3rd of the depreciation, amounting to Rs. 2,453, on the grounds of personal use. This decision was upheld by the Appellate Assistant Commissioner (AAC). However, the Tribunal allowed the full depreciation claimed by the assessee, reasoning that the cars were owned by the firm and thus entitled to full depreciation.

The High Court, however, disagreed with the Tribunal's decision. It referred to section 38(2) of the Income-tax Act, 1961, which mandates that where any plant (including vehicles) is not exclusively used for business purposes, the depreciation allowance should be proportionate to the business use. The Court noted that the Tribunal had already sustained a disallowance of about 1/4th of the motor car expenses for personal use. Therefore, it held that 1/4th of the depreciation should also be disallowed, aligning with the proportion of personal use established for the motor car expenses.

Issue 2: Disallowance of Motor Car Expenses for Personal Use by Partners

The ITO had disallowed Rs. 7,000 out of the total motor car expenses of Rs. 22,359, estimating this amount to be for personal use by the partners. This disallowance was confirmed by the AAC. The Tribunal, however, reduced the disallowance to Rs. 5,000, reasoning that the personal use by partners would not amount to 1/3rd of the total expenses. The High Court did not dispute this finding, noting that the Tribunal's decision on this matter had become final as no reference u/s 256 was made regarding this disallowance.

Conclusion:

The High Court concluded that the Tribunal was not justified in allowing the entire depreciation claimed by the assessee-firm. It held that the disallowance of depreciation should be restricted to 1/4th of the total depreciation claimed, in line with the proportion of personal use established for the motor car expenses. The question of law was answered in the negative, in favor of the Department and against the assessee. Both parties were directed to bear their own costs.