2019 (9) TMI 540 - AT - Income Tax

Disallowance of 50% depreciation, interest, loan processing charges, life tax insurance on the car acquired by the firm in the name of the partner - HELD THAT - The assessee were the owners of the vehicles and they used them in their business and, therefore, they were entitled to depreciation on them. Similar view was also expressed by the Hon ble Allahabad High Court in the case CIT Vs. Navdurga Transport Company 1997 (9) TMI 35 - ALLAHABAD HIGH COURT . Direct the AO to verify whether the car is acquired from the resource of the firm or the purchase consideration is credited to the partner s current or capital account and if so grant depreciation as claimed by the assessee. We also hereby direct the AO to grant 50% deduction with respect to the claim of interest expense insurance expense incurred by the assessee on the car loan since these expenses are revenue in nature and the assessee has used the car for business as well as for personal purpose and the assessee itself had disallowed 50% depreciation in his computation of income. However the life tax has to be added to the cost of the car because it adds to the value of the car. It is also pertinent to mention that the loan processing charges is an expense incurred by the assessee before the acquisition of the asset and therefore the same has also to be added to the cost of the car. Needless to mention that depreciation has to be granted after taking into consideration the life tax and the loan processing charges as the cost of the car. Disallowance of expenditure u/s 40A(3) - cash payments - HELD THAT - It is the practice in the business to hand over the collection as soon as the film is screened. Therefore the assessee is forced to pay the amount collected from the theatres on Sunday night itself after screening the film when the banks are closed. Hence the exclusion prescribed under Rule 6DD.2(j) of the Rules is applicable in the case of the assessee for the payment made during the period when the Bank do not function. For the above stated reason we hereby direct the Ld.AO to delete the addition made by invoking the provision of Section 40A(3) of the Act. Disallowance of expenditure towards purchase of pictures / movies by invoking the provisions of Section 194J r.w.s. 9(1)(v) 40(a)(ia) - AO opined that the payment made by the assessee tantamount to payment of royalty as per Section 194J r.w.s.9(1)(v) and therefore the assessee is bound to deduct tax at source in accordance with the provisions of Section 40(a)(ia) - HELD THAT - Explanation 2(v) of Section 9(1)(v) of the Act makes it abundantly clear that consideration towards sale, distribution or exhibition of cinematography films does not fall within the ambit of royalty. In the case of the assessee it is evident that the assessee has obtained rights for exhibiting cinematography films. Therefore the payment made by the assessee for obtaining such rights cannot be construed as payment made towards fees for professional or technical services as provided U/s 194J of the Act. Hence 40(a)(ia) cannot be invoked in the case of the assessee for non-deduction of tax. Therefore we hereby direct the AO to delete the addition made in the hands of the assessee invoking the provision of Section 40(a)(ia) of the Act r.w.s. 194J 9(1)(v) of the Act.

Summary

Issues Involved:
1. Condonation of delay in filing appeal.
2. Disallowance of 50% depreciation, interest, loan processing charges, life tax, and insurance on car.
3. Disallowance of expenditure under Section 40A(3) of the Act.
4. Disallowance of expenditure for purchase of movie rights under Section 194J r.w.s. 9(1)(v) & 40(a)(ia) of the Act.

Condonation of Delay in Filing Appeal:
The appeal was filed by the assessee with a delay of 24 days. The delay was attributed to the assessee's belief that a pending miscellaneous petition before the Ld.CIT(A) would resolve favorably. The delay was condoned despite objections, emphasizing the importance of hearing the appeal on merits in the interest of justice.

Disallowance of 50% Depreciation, Interest, Loan Processing Charges, Life Tax, and Insurance on Car:
The Ld.AO disallowed the claim of the assessee regarding car-related expenses due to ownership technicalities. However, the Tribunal disagreed, citing partnership law principles where the firm is not a legal entity, and assets can be owned in partners' names. Precedents were referenced, directing the Ld.AO to verify ownership details and grant deductions accordingly.

Disallowance of Expenditure under Section 40A(3) of the Act:
The Ld.AO disallowed an expenditure of ?3,50,000 paid in cash for screening films under Section 40A(3). The Tribunal accepted the explanation that payments were made when banks were closed, falling under Rule 6DD.2(j) exceptions. The addition was directed to be deleted.

Disallowance of Expenditure for Purchase of Movie Rights under Section 194J r.w.s. 9(1)(v) & 40(a)(ia) of the Act:
The Ld.AO disallowed expenditure for purchasing movie rights, citing non-deduction of tax at source. However, the Tribunal found no merit in this decision. It clarified that the payment for movie rights did not constitute royalty under the Act, thus Section 40(a)(ia) was inapplicable. The Ld.AO was directed to delete the disallowed amount.

In conclusion, the appeal was partly allowed, with the Tribunal overturning various disallowances made by the lower authorities. The judgment provided detailed legal reasoning and interpretations to support the decisions taken on each issue raised by the assessee.