DEPRECIATION ON CAR PURCHASED IN THE NAME OF DIRECTOR

[Mr. M. GOVINDARAJAN]

Depreciation

Section 32 of the Income Tax Act, 1961 (‘Act’ for short)  allows certain deductions, one of them being depreciation of buildings, etc., owned by the assessee and used for the purposes of the business or profession. It is the word "owned" as occurring in sub-section (1) of section 32 which is the core of controversy in much litigation. Is it only an absolute owner or an owner of the asset as understood in its legal sense who can claim depreciation? Or, a vesting of title short of full-fledged or legal ownership can also entitle an assessee to claim depreciation under section 32? Allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting relevant to the assessment year and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes place.

Section 32 of the Act confers a benefit on the assessee. The provision should be so interpreted and the words used therein should be assigned such meaning as would enable the assessee securing the benefit intended to be given by the Legislature to the assessee. It is also well-settled that where there are two possible interpretations of a taxing provision the one which is favorable to the assessee should be preferred.

Depreciation on car

It is used to purchase cars/vehicles by the companies for the use of its business.  Sometimes the cars may be purchased by the company but in the name of the Directors for their own use.  The issue to be discussed in this article is  as to whether the company can claim depreciation on the car purchased by the company in the name of the Directors.

The Gujarat High Court in THE PRINCIPAL COMMISSIONER OF INCOME TAX 1 VERSUS ASIAN MILLS PVT. LTD - 2021 (12) TMI 365 - GUJARAT HIGH COURT  the company purchased car in the name of the Director of the Company for the business purposes.  The Assessing Officer held that the car purchased and owned in the name of Directors, cannot be said to be the asset of the company, since the assessee company and the Directors are two different persons. It was held to be their asset in personal capacities. Again, according to the Assessing Officer, the Director may not be the Director of the assessee company and he may also hold Directorship with other company or can also hold stake in some other business concern.  The company filed appeal against this order before the Commissioner of Income Tax (Appeals) which allowed the appeal filed by the company.   The Revenue challenged the same before the Tribunal.  According to the ITAT, the material available on record, when looked at, the assessee though was not the legal owner of the vehicle, it has made the payment for acquisition of cars and thus, it is a beneficial owner. It is, therefore, held to be entitled for depreciation on the car.  The Revenue filed appeal against the order of the Tribunal before the High Court. The question raised before the High Court by the Revenue is - Whether the Appellate Tribunal has erred in law and on facts in deleting the depreciation on car and car expenses of Rs. 34,63,547/- without appreciating the fact that the car purchased in the name of director cannot be said to be assets of the company.  The High Court held that where an assessee company had made payment for the acquisition of cars and qualified as the beneficial owner, it would be entitled to depreciation under Section 32 even though the car was registered in the name of the directors.

In ‘SHIVAM WATER TREATERS PVT. LTD. VERSUS A.C.I.T., (OSD) CIRCLE-8, AHMEDABAD AND D.C.I.T., (OSD) CIRCLE-8, AHMEDABAD VERSUS SHIVAM WATER TREATERS PVT. LTD. AND (VICE-VERSA)  - 2022 (5) TMI 940 - ITAT AHMEDABAD - the Ahmadabad Income Tax Appellate Tribunal (‘Tribunal’ for short)  held that depreciation could not be denied merely on the reasoning that cars were registered in the name of the directors of the Company. The Tribunal also held that depreciation was an allowance and not an expenditure which had to be allowed in pursuance to the provisions of Section 32 irrespective of its use by the Directors.

In MUKESH TRENDS LIFESTYLE LIMITED VERSUS THE DY. COMMISSIONER OF INCOME TAX CIRCLE - 2 (1) (2) , AHMEDABAD - 2024 (2) TMI 1236 - ITAT AHMEDABAD,  the appellant company purchased a Audi Car in the name of its Director.  The appellant claimed depreciation on the said car @ 18% amounts to Rs.11,75,823/-.  While making assessment of the company the Assessing Officer requested the company to furnish explanation with the copy of log book whereupon it was replied that the car is being used by the Company which is reflected in the books of the company.  This is to ascertain whether the car was utilized for business purposes.  The Assessing Officer finalized the assessment and disallowed the depreciation as claimed by the appellant.  The Assessing Officer held that the Car was purchased in the name of the Director and not in the name of the company and since not fulfilled the condition required for claim of depreciation.  Further the appellant failed to show the car was used exclusively for the business purposes by supporting documents.

The appellant, being aggrieved against the order of Assessing Officer, filed an appeal before the Commissioner of Income Tax (Appeals).  The appellant submitted the following before the Commissioner of Income Tax (Appeals)-

• The new car was registered in the name of the Director of the company.
• The said car was purchased by the company and the same was shown as asset in the financial statement of the company.
• The company is the owner of the vehicle and has dominion over the vehicle and, thus, depreciation was rightly claimed.
• Since the car was wholly utilized for the purposes of the company, disallowing the depreciation of the car is not warranted.

The Commissioner of Income Tax (Appeals) confirmed the order passed by the Assessing Officer. 

Against the order of Commissioner of Income Tax (Appeals), the appellant filed an appeal before the Income Tax Appellate Tribunal (‘Tribunal’ for short). Before the Tribunal the appellant contended that the interest on car loan and the insurance expenses were allowed and therefore the question of disallowance of the depreciation on the car is not warranted.  The Revenue relied upon the orders passed by the authorities below.

The Tribunal heard the submissions of both the parties.  The Tribunal observed that the purchase of a car was made by the appellant company which is also reflected in the books of account of the appellant company.   it can be well said that the car is commercially used for the purpose of business of the company and the depreciation thereon cannot be denied.    The interest on car loan and car insurance was allowed by the department.  The appellant’s case is squarely covered by the Jurisdictional High Court in the case of THE PRINCIPAL COMMISSIONER OF INCOME TAX 1 VERSUS ASIAN MILLS PVT. LTD  - 2021 (12) TMI 365 - GUJARAT HIGH COURT, following the judgment passed by the  Apex Court in the case of Mysore Minerals Ltd. v. Commissioner of Income Tax.  The Tribunal allowed the appeal filed by the appellant and directed the Department to allow depreciation on car in accordance with the provisions of law.