2013 (10) TMI 602 - AT - Income Tax

Disallowance u/s.40A(2)(a) - reasonableness of an expenditure - f interest paid by the assessee-company on the deposits by its directors and principal shareholders - assessee paid interest @24% - AO restricted the claim to 15% - Held that - an interest rate in the range of 16% to 18% p.a. i.e. 33% to 50% over the PLR would represent the FMV of the interest on the unsecured deposits as raised by the assessee. The Revenue has also not brought any material on record to justify the assessed rate of 15% p.a. and besides the assessee has claimed its business to be relatively new. - taking a liberal view of the matter an interest rate of 18% p.a. allowed to meet the ends of the justice. - Decided partly in favor of assessee. Depreciation on Motor car - Vehicle not registered under name of assessee but purchased in the name of employee - Held that - the basis on which the assessee claims the beneficial ownership of the said asset is not clear or understood. Have the parties entered into an agreement or understanding to this effect? This is as the law deems the registered owner to be the owner proper. How would and on what basis one may ask the assessee claim the vehicle from the concerned employee when required as when the employee leaves the service? Who of the two has its possession? It is only where the beneficial ownership is not disputed that it has been held by the hon ble courts that the absence of registration or legal title would not operate to preclude the claim for depreciation on the relevant asset. - matter remanded back for reconsideration.

Issues Involved:
1. Disallowance under Section 40A(2)(a) concerning interest paid on deposits.
2. Allowance of depreciation on storage equipment.
3. Claim of depreciation on a motor car not registered in the company's name.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(2)(a) concerning interest paid on deposits:

The first issue pertains to the disallowance of Rs. 7,81,288/- under Section 40A(2)(a) of the Income Tax Act, 1961, concerning the interest paid by the assessee-company on deposits made by its directors and principal shareholders. The interest rate claimed was 24% per annum, while the Revenue restricted it to 15% per annum, citing the Prime Lending Rate (PLR) of the bank at the relevant time being around 12% per annum. The assessee justified the higher rate on the grounds of the deposits being unsecured and the assessee being an unrated customer. However, the Revenue did not find this justification sufficient and restricted the allowance to 15% per annum.

Upon appeal, the Tribunal noted that the Revenue has the jurisdiction to inquire into the reasonableness of the expenditure under Section 40A(2)(a), with the test of reasonableness being the Fair Market Value (FMV) of the services for which the cost was incurred. The Tribunal found that the assessee did not provide sufficient evidence to justify the 24% interest rate with reference to the FMV. The Tribunal concluded that an interest rate of 18% per annum would be reasonable, considering the unsecured nature of the deposits and the business risk involved. Thus, the Tribunal allowed the interest rate at 18% per annum, partially allowing the assessee's appeal on this ground.

2. Allowance of depreciation on storage equipment:

The second and third grounds for the assessment year 2007-08 and the first two grounds for the assessment year 2008-09 relate to the allowance of depreciation on storage equipment used in the warehouse. The assessee claimed depreciation at the rate applicable to 'plant and machinery,' while the Revenue allowed it at the rate applicable to 'furniture and fittings,' resulting in an under-allowance of depreciation.

The Tribunal observed that some items, such as storage equipment, could qualify as 'plant and machinery,' while others, like cabin partitions, would only qualify as 'furniture and fittings.' Given the mixed nature of the items, the Tribunal opined that the matter should be remitted back to the assessing authority to rework the depreciation accordingly. However, considering the nominal amount involved and the tedium of the process, the assessee chose not to press the matter further. Consequently, the Tribunal dismissed the assessee's grounds on this issue.

3. Claim of depreciation on a motor car not registered in the company's name:

The third issue for the assessment year 2008-09 concerns the disallowance of depreciation on a motor car, which was not registered in the name of the assessee-company. The Revenue disallowed the claim on the grounds that the vehicle was registered in the name of an employee, and merely paying for the vehicle did not imply ownership by the company.

The Tribunal acknowledged that beneficial ownership, rather than titular ownership, is relevant for claiming depreciation. The Tribunal referred to the decision by the jurisdictional High Court in CIT vs. Dilip Singh Sardarsingh Bagga and other relevant case laws, which emphasize beneficial ownership. However, the Tribunal noted that the assessee did not provide clear evidence of beneficial ownership, such as an agreement or understanding with the employee. The Tribunal remitted the matter back to the first appellate authority to decide on the aspect of beneficial ownership based on the evidence provided by the assessee. The Tribunal clarified that the Revenue should not have a preconceived notion and should consider the evidence objectively.

Conclusion:

In conclusion, the assessee's appeal for the assessment year 2007-08 was partly allowed concerning the interest disallowance, while the grounds related to depreciation on storage equipment were dismissed. For the assessment year 2008-09, the appeal was partly allowed for statistical purposes, with the matter of depreciation on the motor car being remitted back to the first appellate authority for further examination. The order was pronounced in the open court on May 29, 2013.

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