2008 (3) TMI 3 - HC - Income Tax

Disallowance of depreciation u/s 38(2) where the asset is not exclusively used for the Assessee s business purposes - Assessee did not run the business of bar and restaurant during the year - it transferred 85% of its daily restaurant and bar sales to other person Disallowance upheld

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal regarding depreciation claim under Section 260(A) of the Income Tax Act, 1961 for assessment year 2001-02.

Analysis:
The case involved an appeal challenging the order of the Income Tax Appellate Tribunal regarding the depreciation claim under Section 260(A) of the Income Tax Act, 1961 for the assessment year 2001-02. The Assessee company had entered into an agreement with another party, transferring 85% of its daily restaurant and bar sales in exchange for materials and labor. The Assessing Officer observed that the Assessee did not run the business during the year, and the assets were not exclusively used for its own business purposes. The Assessee's claim of depreciation was restricted under Section 38(2) of the Act, allowing only 18% of the depreciation claimed.

The Assessee appealed to the Commissioner of Income Tax (Appeals), who allowed the appeal. Subsequently, the Revenue challenged this decision before the Tribunal, which upheld the Assessing Officer's decision under Section 38(2) of the Act. The Assessee contended that the assets were owned by them and utilized for business purposes, with the other party acting as a caterer. However, the Tribunal found that the assets were not exclusively used for the Assessee's business, leading to the restriction of depreciation claim.

The relevant sections of the Act, Section 32(1) and 38(2), were crucial in resolving the controversy. Section 32(1) allowed depreciation for assets used for business purposes, while Section 38(2) restricted deductions if assets were not exclusively used for business. The Tribunal's decision was based on the fact that the Assessee did not use its fixed assets solely for its business, as evidenced by the transfer of 85% of receipts to the other party. The Tribunal's finding was upheld, stating that no substantial question of law arose for consideration, and the appeal was dismissed.

In conclusion, the judgment affirmed the Tribunal's decision regarding the restriction of depreciation claim under Section 38(2) of the Income Tax Act, 1961, as the Assessee did not utilize its fixed assets exclusively for its business purposes. The legal provisions were applied appropriately, and the appeal was dismissed accordingly.