Income Tax Appellate Tribunal - Mumbai
Assistant Commissioner Of Income-Tax vs Jagdish C. Sheth on 23 January, 2006
Equivalent citations: [2006]101ITD360(MUM), [2006]285ITR179(MUM), (2007)106TTJ(MUM)911
ORDER
O.K. Narayanan, Accountant Member
1. This is an appeal filed by the Revenue. The relevant assessment year is 1998-99. The appeal is directed against the order of the CIT(A)-XVI at Mumbai dated 20-11-2002 and arises out of the assessment completed under Section 143(3) read with Section 147 of the Income-tax Act, 1961.
2. The assessee had purchased two foreign cars from State Trading Corporation during the previous year 1995-96 which formed part of block of assets pertaining to the assessment year 1996-97. During the relevant previous year period, the cars were utilized for the business of running on hire and depreciation was allowed thereon. After granting the depreciation allowance for the assessment year 1996-97, the said two foreign cars formed into the concerned block of assets. But the claim of depreciation for these two cars for the impugned assessment year 1998-99 has been rejected by the assessing authority on the ground that the two foreign cars were not used for the prescribed business of running on hire during the previous year period relevant to the assessment year under appeal. In first appeal, the CIT(A) agreed that the two cars were cars manufactured outside India and, therefore, normally not entitled for depreciation in India unless the cars were used for specified business. He agreed with the assessing authority that as a general proposition, depreciation was not allowable on the two foreign cars owned by the assessee. But at the same lime, the CIT(A) found that the depreciation was already granted for those two cars in the assessment year 1996-97 and, therefore, the two cars became part of the block of assets. As they have become block of assets in the light of Section 32(1)(ii), depreciation has to be allowed on the opening value of block of assets and, therefore, by virtue of this unique situation, assessee was entitled for depreciation on the two foreign cars. On this ground, the appeal of the assessee was allowed.
3. It is against the above relief the Revenue has preferred this appeal before us.
4. Shri K.C.P. Patnaik, the learned departmental representative appearing for the Revenue contended that there is no dispute regarding the fact that the two cars are foreign made cars. The law relating to depreciation clearly provides that foreign made cars arc not entitled for depreciation. The only exception is that the cars should be deployed in the business of running on hire. In the present case, even though the assessee had used the two foreign cars for running them on hire in the past, but during the relevant previous year, the cars were not used for the specified business. Therefore, it is simply clear that the assessee could not claim depreciation on those two foreign made cars.
5. The learned departmental representative submitted that the finding of the CIT(A) is contradictory. The CIT(A) himself has found that the two cars arc foreign cars not entitled for depreciation. After coming to such a finding, the CIT(A) proceeded against the same finding and granted depreciation only on the ground that the two cars have become part of the block of assets and part of the opening value of the said block of assets. The learned departmental representative submitted that this reasoning relied on by the CIT(A) is not sustainable in law.
6. We heard Shri Anjay Agarwal, Chartered Accountant appearing for the respondent assessee. The learned Chartered Accountant submitted that depreciation on any motor car manufactured outside India will not be allowed unless it is used in a business of running it on hire for tourists. He stated that the two cars purchased from State Trading Corporation in the financial year 1995-96 were used for the purpose of running it on hire for tourists and formed part of block of assets for the assessment year 1996-97. Once the cars formed part of the block of assets, it remains in that block of assets. The depreciation must be allowed on the written down value of such block and one is not allowed to pick individual asset from the said block. Depreciation is provided on block of assets and not on individual assets according to Section 32 read with Section 43(6) of the Income-tax Act. Hence, the Assessing Officer cannot take out individual assets from the block of assets as the identity of individual asset is lost as and when it formed part of block of assets and disallow depreciation on such individual asset. It is also not known to the assessee as to how the Assessing Officer has computed depreciation of Rs. 2,24,642 on which cars and disallowed the same. The car was given on lease to M/s. Kent Cars Pvt. Ltd. which is carrying on business of car leasing and they are having expertise in the field. M/s. Kent Cars Pvt. Ltd. used the cars for running it on hire for the tourists and confirmed the same. If a car is registered as tourist taxi, it is presumed that the car is used in a business of running it on hire for tourists particularly when it is on record that the car has been given to M/s. Kent Cars Pvt. Ltd. whose business is leasing cars for tourists. The Chartered Accountant referred to the following cases in his support:
1. ITO v. Asian Steel Yard IT Appeal No. 1888/(Bom.) of 1991, dated 1-10-1991, Bombay Bench SMC
2. Packwell Printers v. Asstt. CIT [1996] 59 ITD 340 (Jb.)
3. Natco Exports v. Dy. CIT [2003] 86 ITD 445 (Hyd.)
4. South Eastern Coalfields Ltd. v. Jt. CIT [2002] 77 TTJ (Nag.) 401/85 ITD 608
5. South Eastern Coalfields Ltd. v. Jt. CIT [2003J 260 ITR (AT) 1 (Nag.-Trib.)
6. Dy. CIT v. Udaipur Distillery Co. Ltd. [2002] 74 TTJ (Jodh.) 193 (Jodh. - Mag.) : [2001] 119 Taxman 206.
7. We heard both sides in detail. Regarding the factual aspect of the case that the two foreign made cars were leased out to M/s. Kent Cars Pvt. Ltd. and ultimately used for running it on hire for tourists has not been adjudicated by the CIT(A) in his order. The CIT(A) has allowed the appeal of the assessee on the legal ground that once an asset formed part of a particular block of assets, then the asset loses its identity and formed part of the block of assets and thereafter automatically qualifies for depreciation as forming part of that block of assets. It is on this proposition of law that the Revenue has come in appeal. The learned Chartered Accountant has cited a number of decisions before us to reiterate his argument that once an asset is included in block of assets, it is impossible to retrieve it back individually and lost its identity and irrespective of the future state of affairs of that individual asset, it would be entitled for depreciation as part of the said block of assets. The proposition of law made out by the CIT(A) and argued by the learned Chartered Accountant is an accepted proposition in general terms. In many of the case laws cited by the learned Chartered Accountant, that even if an asset is sold or discarded or become defunctant, still it formed part of the block of assets and therefore, it qualifies for depreciation allowance. We do not have quarrel on that proposition. Where an asset is added to the block of assets it becomes part of that block of assets and even if that individual asset is sold out, discard or otherwise dispensed with, still the proportionate written down value of that particular asset always remained with the block of asset as a result of which the written down value of such discarded asset would still be entitled for depreciation. This is a natural consequence of the concept of block of assets. The block of assets even though a legal concept, its factual computation is a matter of accounting and logic. The arguments advanced by the learned Chartered Accountan the light of the decisions are fully supported by the legal frame of a block of asset and textual content of logic and accounting.
8. In all the case laws cited by the learned Chartered Accountant, the assets are of analogous character 'otherwise entitled for depreciation'. Whether it is the case of a truck or any plant and machinery, those assets are by virtue of their nature includible in a block of assets and entitled for depreciation. There was no dispute regarding the eligibility of those assets for depreciation allowance even if 'those assets remained independent of the block of assets'. Therefore, the most important point to be looked into is and the primary question to be asked is whether an asset is entitled for depreciation or not. If and only if the answer is positive then an asset is entitled for depreciation, the next question arises as to how the depreciation has to be computed. It is at this secondary stage that the old concept of individual asset is replaced by the new concept of block of assets. But still, the basic compulsory and primary condition that an asset must be entitled for depreciation remains throughout the history of depreciation allowance when it was computed on individual asset basis or computed on block of assets basis. Even under the concept of a block of assets, it is very essential that an asset going to be included in the said block of asset is otherwise entitled for depreciation.
9. An asset, not entitled for depreciation, cannot form part of a block of asset eligible for depreciation. Heterogeneous items of assets cannot form part of a homogeneous block of assets entitled for depreciation. There is no such proposition of law in Section 32 of the Income-tax Act, 1961.
10. In the present case, the foreign made cars are not otherwise eligible for depreciation. The only exception is that they can claim depreciation if deployed in the business of running it on hire for tourists. If the cars were used for hiring out for tourists in an earlier assessment year, depreciation was rightly allowed and the cars were rightly brought under a specified block of assets. But when those cars cease to be deployed for running on hire for tourists, the assets become non-eligible for depreciation and become a strange co-traveller in the company of other assets falling under that block of assets, still eligible for depreciation. Therefore, these two foreign cars not used for the specified purpose and not qualified for depreciation should vacate the block of assets. That has rightly been done by the Assessing Officer on the basis of his findings. The question whether once an asset formed part of a block of assets, could that be pushed out of that block of assets, is only a question of logic and not a question of law. Another difficulty pointed out by the Chartered Accountant is that it is not possible to work out the written down value of those particular asset to be expelled from the block of assets. We do not find force in this contention. Once an asset is necessarily to be expelled from the eligible block of assets its written down value would be calculated by adjusting for the depreciation written off at the specified rate and deducting such depreciation allowed for all the earlier previous years and then work out the written down value. Even if for the purpose if depreciation law, an asset is losing its identity and merging with a block of assets, 'the individual value of the asset is still traceable'.
11. In the facts and circumstances, we do not agree with the finding of the CIT(A) that a non-qualified asset should be granted depreciation only for the reason that the asset qualified for depreciation in the earlier assessment year and formed part of a block of asset. The above finding of the CIT(A) is, therefore, vacated. The order of the CIT(A) is not sustainable on this point.
12. The learned Chartered Accountant has further reiterated his argument that apart from the question of law as stated above, still the two cars were entitled for depreciation for the reason that in fact they were used for the purpose of giving it on hire to tourists. He explained that the cars were leased out to M/s. Kent Cars Pvt. Ltd., who in turn hired out them to tourists. Therefore, on the basis of this fact itself, the two foreign cars were entitled for depreciation.
13. The orders of the lower authorities on this factual aspect arc not speaking and conclusive. Therefore, we are not in a position to come to a conclusion. Therefore, we remit back the issue to the Assessing Officer for the limited purpose of examining whether these two cars were hired out to tourists in the course of regular business either by the assessee directly or through a lease agreement. If the Assessing Officer find that as a matter of fact, the cars were deployed in the business of hiring it out to tourists, depreciation may be granted, and if not the claim may be disallowed. The assessee is directed to furnish the details before the assessing authority and the assessee shall be given a reasonable opportunity of being heard on this point.
14. In result, this appeal filed by the Revenue is treated as allowed for statistical purpose.