2008 (3) TMI 358 - AT - Income Tax

Summary

Issues Involved:
1. Deductibility of depreciation on foreign-made cars.
2. Business of running cars on hire for tourists.
3. Application of Board Circular No. 609.
4. Interpretation of Section 32(1) proviso of the Income-tax Act.
5. Consistency in allowing depreciation claims.
6. Evidence of car usage for hire.

Issue-wise Detailed Analysis:

1. Deductibility of Depreciation on Foreign-made Cars:
The primary issue is whether the assessee is entitled to claim depreciation on a foreign-made car under the proviso to section 32(1) of the Income-tax Act. The proviso specifies that no deduction shall be allowed for any motor car manufactured outside India unless it is used in a business of running it on hire for tourists or outside India in the assessee's business or profession in another country.

2. Business of Running Cars on Hire for Tourists:
The assessee, engaged in the hotel business, claimed depreciation on a German-made Mercedes Benz car, asserting it was used for providing transport facilities to hotel guests, thus qualifying as running cars on hire for tourists. The revenue argued that the assessee was not in the business of running cars on hire but in the hotel business, and the car was primarily used for personal purposes.

3. Application of Board Circular No. 609:
The assessee relied on Board Circular No. 609, which allows depreciation on foreign motor cars used by tour operators or travel agents for providing transportation services to tourists, even if these services are part of a package tour. The circular clarifies that the car is considered hired by the tourist as part of the package, thus qualifying for depreciation.

4. Interpretation of Section 32(1) Proviso of the Income-tax Act:
The Tribunal had to interpret whether the assessee's use of the car for transporting hotel guests as part of a package qualifies as running the car on hire for tourists under the proviso to section 32(1). The Tribunal noted that the car was used for 'pick up and drop service' and occasionally hired out, but the receipts from such hires were nominal.

5. Consistency in Allowing Depreciation Claims:
The assessee had been claiming and was allowed depreciation on foreign-made cars in previous years. The Tribunal considered whether the principle of consistency should apply, given that the business model and usage of the cars had not significantly changed.

6. Evidence of Car Usage for Hire:
The revenue argued that the low rental income from the car indicated it was not primarily used for hire. The assessee countered that the car was used as part of a package for hotel guests, and separate charges were not always made due to the nature of the hotel business and economic conditions.

Judgment Analysis:

Majority Decision:
The majority of the Tribunal members concluded that the assessee was not entitled to claim depreciation on the foreign-made car. They reasoned that the car was primarily used for hotel business and not for running on hire for tourists. The nominal receipts from car hire did not establish that the assessee was carrying on an independent and separate business of running cars on hire. Thus, the beneficial circular applicable to tour operators and travel agents could not be extended to the hotel business where hire charges were nominal or non-existent.

Dissenting Opinion:
The Judicial Member disagreed, emphasizing that the car was imported under a specific license for use by tourists and was used as part of a package offered by the hotel. He argued that the Board Circular No. 609 supports the assessee's claim as it allows depreciation where transportation services are provided as part of a package tour. He also cited the Rajasthan High Court's decision in Lake Palace Hotels & Motels (P.) Ltd. and the Kerala High Court's decision in Dr. K.R. Jayachandran, which supported the view that depreciation should be allowed even if the hiring business is incidental to the main business.

Third Member Decision:
The Third Member sided with the Judicial Member, noting that the assessee had consistently claimed and was allowed depreciation in previous years. The car was imported specifically for use by tourists, and the reduction in hire charges was due to economic conditions, not a change in the nature of the business. The Third Member concluded that the car was used for the business of running on hire for tourists, thus entitling the assessee to claim depreciation.

Final Decision:
The Tribunal, by majority, decided in favor of the assessee, allowing the depreciation claim on the foreign-made car under section 32(1) proviso of the Income-tax Act.