DISALLOWANCE OF CAR EXPENSE, Income Tax

[manoj gupta]

A doctor has his hospital at ground floor and his residence at first floor of same building. He owns two cars which he has purchased from funds of hospital. He is claiming car expenses, depreciation and interest on car loan for the past several years as business expenditure. In the assessment of current year, the A.O. wants to disallow entire car expenses on the ground that as the doctor has residence and hospital in the same building,the car cannot be used for official purposes and the entire expenses on car are for personal purpose. The doctor has explained that he has to use the car for attending conferences, visiting patients and other official work though no such specific evidence of these particular visits is maintained. Now, can the A.O. disallow the entire expenses. what is the legal position. Pls. tell along with any relevang case laws. I will be grateful for sincere help and advise.Thank you.

Posts / Replies

[B L Bhojwani]

The mere fact that the business and residential premises of the doctor are in the same premises cannot lead to a conclusion that there cannot be any business use of the cars. Such a contention is preposterous. Whether a particular asset has been put to business use or not is a pure question of fact and is to seen in the light of specific facts and circumstances of the case. In the given case, the doctor is owning two cars. There should be no difficulty in justifying the business use of one car. The assessee has to properly present his case to justify the business use of two cars. However, the possibility of some personal use of cars of the doctor cannot be ruled out and some reasonable disallowance in the absence of log book and other relevant details can be made by the assessing officer.

 

I am giving below favourable case law on the subject.

 

It has been held in CIT v. Union Carbide (I) Limited (2002) 174 CTR (Cal) 334, that once it is shown that the assessee has put the machinery to use, for the purpose of the assessee's business, then further inquiry about the degree or type of use is not permitted to be scrutinized by the language of the section. Once the assessee can establish bona fide use of the machinery for the purposes of the assessee's business, then and in that event, the assessee establishes the right to claim depreciation.

 

Without prejudice to the foregoing, the assessee should also contend on the following lines :

 

Cars fall under the Machinery and Plant Block. The said Block includes not only cars but also machinery and plant owned by the doctor. The individual asset loses its identity and the question whether an individual asset is put to use in a particular year or not is irrelevant in as much as the requirement of law is to establish the use of the block of assets and not the use of particular equipment. In Packwell Printer v. Assistant CIT (1996) 59 ITD 340 (Jab-Trib), for the year under consideration, the assessee had three trucks, out of which one truck was not plied during the accounting year relevant to the assessment year under consideration .The assessing officer disallowed the depreciation  on this truck as the same was not used in the year under consideration .  It was held that after the amendment by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from 1-4-1988, the individual assets have lost their identity and for the purpose of allowing of depreciation, only the block of assets has to be considered. It has to be seen whether the particular block of assets is owned by the assessee are used for the purpose of the business. If the block of assets is owned by the assessee are used for the purpose of the business, depreciation will be allowed . Therefore, the test of the user has to be applied upon the block as a whole instead of upon an individual asset. Also see Deputy CIT  v. Udaipur Distillery Co. Ltd. (2002) 74 TTJ (Job-Trib) 193 and South Eastern Coalfields Ltd. v. Joint CIT (2002) 77 TTJ (Nag-Trib) 401

 

Similarly, the Delhi High Court in CIT v.  Bharat Alumunium Co. Ltd. (ITA Nos. 532,1484,1486, 1487,1592, 1593,1670 and 1671 of 2006; ITA Nos. 657 and 659 of 2007; ITA No. 1489 0f 2008 and 323 of 2009; Judgment, dated October 15, 2009; per : A K Sikri), on appeal by the Revenue, HELD affirming the Tribunal's Order :

 

(i)               The rationale and purpose for which the concept of block asset was introduced, as reflected in the CBDT's Circular dated 23.09.1988 is that once the various assets are clubbed together and become 'block asset' within the meaning of s. 2(11), it becomes one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation being allowable at the same rate. Individual assets lose their identity and become an inseparable part of block asset insofar as calculation of depreciation is concerned;

 

(ii)            The fusion of various assets into the block asset gets disturbed only when the eventuality contained in clause (iii) of s. 32 takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which first brought in use). Even in that event, the amount by which the moneys payable in respect of that particular building, machinery, etc. together with the amount of scrap value is to be deducted from total written down value of the 'block asset';

 

(iii)          Though as per s. 32(1) the asset is to be owned and "used" for the purpose of business or profession, the expression "used for the purpose of business" when applied to block asset would mean use of block asset and not any specific items in the said block as individual assets have lost their identity after becoming inseparable part of the block asset;

 

(iv)   The fact that under the second proviso to s. 32 assets acquired after 30th Sept shall be entitled to 50% depreciation of amount admissible does not mean requirement of user of individual asset remains intact. In the first year when the particular asset is acquired, user of the asset is required. In subsequent years, the user of individual assets is not required.