2020 (1) TMI 769 - AT - Income Tax

Higher rate of Deprecation on vehicles used in the business of promotional activities in rural markets of India - @30% or 15% - HELD THAT - It is obvious from a perusal of the bare provisions in law that the normal rate of depreciation on vehicles is 15% as per Part A of S.No.III(2) of New Appendix I. The higher rate of 30% is admissible to an assessee, under S.No.III(3)(ii) of Part A of New Appendix I only if the vehicles are used in the business of running them on hire. Before us, it was admitted by the learned AR of the assessee that the business of the assessee is rural marketing, promotions, roadshows, display advertising etc. and that the assessee is not in the business of running the vehicles on hire. We are not persuaded by the contention raised on behalf of the assessee that the assessee is eligible for higher rate of depreciation at the rate of 30%. Merely because the invoices raised by the assessee include, inter alia, charges for running of vehicles, does not mean that the assessee is in the business of running the vehicles on hire. The fact remains that the vehicles are used by the assessee in the assessee's business of rural marketing, promotions, roadshows, display advertising etc. and that the assessee is not in the business of running the vehicles on hire. See GUPTA GLOBAL EXIM (P) LTD. 2008 (5) TMI 7 - SUPREME COURT - Decided against assessee.

Summary

Issues Involved:
1. Eligibility for higher rate of depreciation at 30% on commercial vehicles used in the business of promotional activities.
2. Determination of whether the assessee is in the business of running vehicles on hire.

Detailed Analysis:

Issue 1: Eligibility for Higher Rate of Depreciation at 30%

The primary issue in dispute is whether the assessee qualifies for a higher rate of depreciation at 30% on commercial vehicles used for promotional activities in rural markets or if the standard rate of 15% applies.

During the assessment proceedings, the Assessing Officer (AO) questioned the justification for the higher rate of depreciation. The assessee argued that the vehicles were used on hire for promotional activities, thus justifying the 30% depreciation rate due to significant wear and tear from rural conditions. However, the AO did not find this justification tenable, emphasizing that the assessee was not in the business of hiring vehicles but rather in rural marketing and promotional activities. The AO cited the Supreme Court decision in CIT v. Gupta Global Exim P. Ltd., which established that higher depreciation is admissible only if vehicles are used in a business of running them on hire.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, stating that the assessee's main business was rural marketing and promotional activities, not transportation or vehicle hiring. The CIT(A) referenced the Supreme Court’s ruling in Gupta Global Exim P. Ltd., which clarified that the nature of the business and the use of vehicles are critical factors in determining eligibility for higher depreciation rates.

Issue 2: Determination of Business Nature

The assessee contended that over 75% of its revenue came from promotional activities using commercial vehicles, which were essential for its business. The vehicles were registered as commercial vehicles and used extensively in rural areas, justifying the higher depreciation due to increased wear and tear. Despite these arguments, the CIT(A) and AO concluded that the assessee was not in the business of running vehicles on hire. The CIT(A) noted that the vehicles were integral to the promotional activities and not used independently for transportation or hiring purposes.

During the appellate proceedings in ITAT, the assessee reiterated that the vehicles were used for promotional activities and included hire charges in their billing. However, the ITAT found that the mere inclusion of vehicle charges in invoices did not qualify the assessee for higher depreciation. The ITAT emphasized that the vehicles were used in the business of rural marketing and promotional activities, not for running them on hire.

The ITAT referred to the statutory provisions in the Income-tax Rules, 1962, which stipulate that a higher depreciation rate of 30% is applicable only if vehicles are used in the business of running them on hire. Given the undisputed fact that the assessee was not in the business of running vehicles on hire, the ITAT upheld the CIT(A)'s order and dismissed the appeal.

Conclusion:

The ITAT concluded that the assessee was not eligible for the higher depreciation rate of 30% as the vehicles were not used in a business of running them on hire but were integral to the assessee's promotional activities. The appeal was dismissed, and the decision was pronounced in the open court on 12th July 2019.