2003 (1) TMI 258 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for depreciation on imported cars.
2. Use of imported cars for business purposes.
3. Compliance with conditions for concessional duty rates on imported cars.
4. Interpretation of Section 32 of the Income Tax Act.
5. Validity of rental agreements and their terms.

Detailed Analysis:

1. Eligibility for Depreciation on Imported Cars:
The primary issue revolves around whether the assessee-company is eligible for depreciation on imported cars. The assessee claimed depreciation on both Indian and imported cars. The Assessing Officer (AO) disallowed the claim for depreciation on imported cars, arguing that these cars were not used for the business of running on hire for tourists, as required under Section 32 of the Income Tax Act. The CIT(A) upheld this disallowance, stating that the cars were leased to companies not connected to tourism.

2. Use of Imported Cars for Business Purposes:
The assessee argued that the imported cars were registered as taxis and advertised for rental to tourists, and were rented out on both short and long-term bases to companies and individuals for their foreign visitors and guests. However, the AO and CIT(A) found that the cars were leased to companies for extended periods and were not specifically used for tourist purposes, as required by Section 32. The agreements with the companies did not mention that the cars would be used for tourist purposes, and the control and possession of the cars remained with the renter companies.

3. Compliance with Conditions for Concessional Duty Rates on Imported Cars:
The AO scrutinized the import documents and found that the assessee enjoyed a special concessional duty rate on the condition that the cars would not be sold, transferred, leased, or otherwise disposed of for five years without prior approval from the Director General of Tourism. The AO issued a show-cause notice to the assessee to justify the claim of depreciation, as the cars were not used for tourist purposes. The assessee's reply and the rental agreements showed that the cars were leased to companies not involved in tourism, and the agreements did not specify that the cars would be used for tourist purposes.

4. Interpretation of Section 32 of the Income Tax Act:
Section 32 provides that no deduction shall be allowed for depreciation on imported cars unless they are used in the business of running on hire for tourists or outside India in the assessee's business or profession. The CIT(A) and AO concluded that the assessee did not fulfill these conditions, as the cars were leased to companies not connected to tourism. The Tribunal also noted that the intention behind this provision was to discourage the use of foreign cars for business or profession, except for promoting tourism.

5. Validity of Rental Agreements and Their Terms:
The Tribunal examined the rental agreements between the assessee and the companies to whom the cars were leased. The agreements indicated that the cars were leased for extended periods, with no provision for periodic payment of rent, and the control and possession of the cars remained with the renter companies. The agreements did not mention that the cars would be used for tourist purposes. The Tribunal concluded that the assessee failed to prove that the cars were used for tourist purposes, as required for claiming depreciation.

Conclusion:
The Tribunal upheld the orders of the AO and CIT(A), disallowing the claim of depreciation on imported cars. The Tribunal found that the assessee did not fulfill the conditions under Section 32, as the cars were not used for the business of running on hire for tourists. The rental agreements did not specify that the cars would be used for tourist purposes, and the control and possession of the cars remained with the renter companies. The appeals were dismissed accordingly.