2024 (7) TMI 579 - AT - Income Tax

Revision u/s 263 - higher rate of depreciation rate on assets used for business and hiring purposes - assessee has claimed higher rate of depreciation @30% for the assets used for hiring income - as per CIT since all the assets were not used for the hiring, therefore, the order of the AO allowing depreciation @30% on entire block is erroneous as well as prejudicial to the interest of revenue - HELD THAT - As the entire block of plant and machinery contained the mixed assets i.e. certain assets which are used fully and exclusively for the construction business and certain items which are hiring income. From the direction given by the ld. Pr.CIT, it is seen that the Pr.CIT has emphasized upon the dominant use of the assets to determine the character for claiming higher rate of depreciation. In this regard, in the case of Gupta Global Exim (P) Ltd. 2008 (5) TMI 7 - SUPREME COURT as held that accrual of income as a determinative factor for coming to the conclusion that trucks were used in the business of running them on hire is not correct. Therefore, we are of the view that the assessee is eligible for higher rate of depreciation on the assets which were used for business of hiring, no matter how much is the quantum of income from such hire business. Therefore, we direct the AO to allow higher rate of depreciation on the assets which are used in hiring business and the order of the ld. Pr.CIT is modified to this extent only.

Summary

Issues:
- Jurisdiction of CIT under section 263 of the IT Act
- Correctness of depreciation allowance on plant and machinery
- Dominant use of assets for determining depreciation rate

Jurisdiction of CIT under section 263 of the IT Act:
The appeal was filed against the order of the ld. CIT(A) by the assessee, challenging the jurisdiction of the Principal Commissioner of Income Tax (Pr. CIT) under section 263 of the Income Tax Act. The grounds of appeal included contentions that the order was arbitrary, illegal, and unjust, and that the Pr. CIT erred in exercising jurisdiction under section 263 without proper satisfaction of jurisdictional requirements. The appellant argued that the Pr. CIT's order lacked proper appreciation of facts and was passed without making a minimal inquiry, thus being liable to be quashed.

Correctness of depreciation allowance on plant and machinery:
The dispute centered around the depreciation claimed by the assessee on plant and machinery, particularly the rate of depreciation allowed. The Pr. CIT alleged that the depreciation claimed @30% on certain assets used for vehicle hiring was excessive, given the low involvement of the assessee in the hiring business. The Pr. CIT directed the AO to allow depreciation based on the dominant use of the assets. The appellant contended that the depreciation rate should be determined based on the purpose for which assets are used, citing the decision of the Hon'ble Supreme Court in a specific case. The contention was that the Pr. CIT's allegation regarding the depreciation rate was incorrect, and the order under section 263 should be quashed.

Dominant use of assets for determining depreciation rate:
The Tribunal analyzed the assets claimed for depreciation by the assessee, noting a mix of assets used for construction business and those generating hiring income. Emphasizing the dominant use of assets, the Tribunal referred to the Supreme Court judgment, stating that income accrual should not solely determine the depreciation rate. Relying on this precedent, the Tribunal held that the assessee was eligible for a higher depreciation rate on assets used for hiring business, regardless of the income quantum. Consequently, the Tribunal modified the Pr. CIT's order to allow a higher rate of depreciation on assets used for the hiring business. The appeal was partly allowed based on this analysis.

This detailed analysis of the judgment highlights the key issues of jurisdiction under section 263, correctness of depreciation allowance, and the determination of depreciation rate based on the dominant use of assets.