Income Tax Appellate Tribunal - Mumbai
Shri Virendra K. Mehta And Shri Deepak K. ... vs Acit 13(2) on 21 June, 2006
Equivalent citations: (2007)109TTJ(MUM)30
ORDER
V.V.S.N. Murthy, Accountant Member
1. These three appeals have been filed by the assesses against the order of CIT(A) arising from the order of AO passed under Section 143(3) for the assessment years 2000-01 and 2001-02. Appeal in ITA No. 2992/M/03 had been heard before us on 21/06/2003 and appeals in ITA Nos. 5450 & 5451/M/2004 have been heard by us on 29/06/2006. AR and DR submitted that the arguments in the appeal in ITA No. 2992/M/03 may be considered in the other two appeals also, the issue being the same. The solitary effective ground urged in the three appeals is the same; to the effect that the CIT(A) is not justified in confirming the action of AO in disallowing the claim for depreciation under the provisions of Section 32 in respect of motor car and/or motor cycle used for the purpose of business, by the appellants who are partners of the same firm. AR sought our consideration to the facts of the case, as per the orders of AO and CIT(A) in ITA No. 2992/M/03, which are as follows:
2. Appellant is a partner in the firm M/s. V.K. Industrial Corporation and the main sources of income are share income from firm, interest on capital account and remuneration from the said firm and capital gains and income from other sources. Appellant had claimed deduction towards depreciation on two Motor Cars and one Motor Cycle against the income earned from the firm in which he is a partner. Appellant justified claim for depreciation before the AO with the explanation that the same has been claimed as a deduction against business income, as the vehicles have been used in the business of the firm from which he derived income. Appellant placed reliance on the following judgments in support of his claim: (i) CIT v. K.G. Sadagopan 104 ITR 412(Mad.) (ii) Addl. CIT v. N. Vaidyanathan 189 ITR 198 (Mad.). AO rejected the claim stating following reasons: (i) Though appellant is the owner of the vehicles, the same were used by the firm in which he is a partner, which had claimed deduction for the expenditure incurred on maintenance of the motor vehicles, which establishes the fact that the vehicles have been used only for the business of the said firm, (ii) The condition laid down under Section 32(1) that depreciation is only allowable in the hands of the assessee who is the user of the asset for the purpose of business or profession, has not been satisfied. (iii) The reliance placed by the appellant on the two judgments of the hon'ble Madras High Court(supra) is not applicable, as the same relate to the claim when the share income of a partner was taxable under the provisions of Section 67(2), which is not the case of the appellant, as the provisions under which the partner's income from a firm is subject to tax, are entirely different with effect from 1/4/1993. CIT(A) upheld the AO's action holding that the appellant even before him did not produce any evidence in the shape of log book or any other details to the effect that the motor vehicles have been used for the purpose of business.
3. AR sought our consideration to the assessment order of the firm filed in the paper book before us and submitted that it was held therein that 4/5ths of the expenditure incurred on motor vehicles maintenance having been allowed in the hands of the firm and only 1/5th having been disallowed on estimate basis on the ground that personal use of the motor vehicles owned by the partner in his hands cannot be ruled out, that it is an accepted fact that the motor vehicles on which depreciation has been claimed by the appellant have been used for the purpose of the business of the firm in which the appellant is a partner. AR besides placing reliance on the decisions relied upon before AO, placed further reliance on the decision of the ITAT in the case of Santhosh Kumar Aggarwal v. ACIT 78 ITD 394(Mum.) and submitted that as per the ratio of these decisions, appellant's claim is allowable.
4. DR submitted that it being evident from the facts available and the orders of lower authorities, that the appellant's claim is not tenable, that the orders of lower authorities be confirmed.
5. We have considered arguments of the AR and DR, orders of lower authorities and material placed before us. The short issue arising from the facts is, whether depreciation can be allowed in the hands of an assessee in respect of the assets owned by him which have been used for the purpose of the business of the firm in which he is a partner, as per the provisions applicable to taxation of registered firms and its partners with effect from 1/4/1993. As per the provisions of Section 32, depreciation is allowable on an asset used for the purpose of business and in case of personal use, as per the provisions of Section 38(2), partial depreciation can be disallowed. In the case before us, it is a fact that the AO of the firm in which the appellant is a partner, had held that personal use of the appellant cannot be ruled out and disallowed part of the expenditure claimed on the vehicles maintenance, the claim of depreciation in respect of which is in dispute before us. According to us, once the department having accepted that the motor vehicles have been used substantially for the purpose of business of the firm in which the appellant is a partner, that question cannot be reconsidered in the hands of the appellant-partners of the firm. The issue hence, to be adjudicated only is, whether a partner who has used the assets owned by him for the purpose of business of the firm in which he is a partner; can claim depreciation on such assets as a deduction allowable against the share income, remuneration and interest received from such firm. In the appellant's case, the details of income offered in appellant's hands in respect of the firm in which he is a partner are as follows:
Rs.
Share Income exempt Under Section 10(2A) 9,54,881 Interest on capital 9,00,579 Remuneration 8,39,484
6. We consider it appropriate to extract the reasons stated by the AO for disallowing appellant's claim, which arc as follows;
On scrutiny of the details of business income earned from the said firm, it has been noticed that while computing the income from firm, the assessee has claimed depreciation on two motor cars at Rs. 1,00,767/- and on one motor cycle at Rs. 7,345/-. The assessee was specifically asked to justify the clam of depreciation on motor car and motor cycle, from income earned from firm, which includes only interest on capital and remuneration being working partner and the share of profit is excluded as exempt Under Section 10(2A).
Alternatively, the assessee's reliance on the decision in the cases of CIT v. Sadagopan and Addl. C.I.T. v. N. Vaidyanathan is also of no help to the assessee. These decisions were delivered by the hon'ble Madras High Court with reference to the provisions of Section 67(2) of the I.T. Act, 1961 which were on the statute at that time. But, now since the said Section 67 has been completely omitted by the Finance Act, 1991 w.e.f. 01.04.1993, from the statute and new scheme of the assessment of firms and its partners from A.Y. 1993 94 onwards has been introduced, with due respect to the said decision, these decisions are not comparable to the facts and circumstances of the present case, hence the assessee's reliance on these decisions is treated as misplaced and accordingly rejected.
In view of the above narrated facts, the depreciation claim of Rs. 1,00,767/- on motor car and Rs. 7,345/- on motor cycle, though owned by the partner, but used by the firm for its own business purpose is rejected. Penalty proceedings Under Section 271(1)(c) are initiated in this respect for furnishing inaccurate particulars/ concealing the particulars of income by claiming wrong depreciation.
7. From the above, it is clear beyond doubt that the contention of the AO for rejecting appellant's claim is that the assets on which depreciation has been claimed have been used by the firm in which he is a partner and not by the appellant for earning income from the said firm. According to us, once it is accepted by the AO that the assets have been only used by the firm in which the appellant is a partner, the question that the appellant had not produced any evidence in support of the contention that the assets have been used for earning income from the firm in which he is a partner does not arise.
8. In the judgement of the hon'ble Madras High Court in the case of CIT v. K.G. Sadagopan 104 ITR 412(Mad.), it has been held as follows: Depreciation is allowable in the individual assessment of the assessee on assets owned by him and used for the business of the firm in which he is a partner. We have considered the reliance placed by the AR on the other judgment of the hon'ble Madras High Court in the case of Addl. CIT v. N. Vaidyanathan 189 ITR 198 (Mad.), in which it has been held that when the assessee had used half portion of his house for the purpose of profession, that he is entitled to depreciation thereon. The third decision relied upon by the AR is the case of Santosh Kumar Aggarwal v. ACIT 78 ITD 394(Mum.) in which it has been held that an assessee is entitled to deduction of interest paid in respect of the amounts borrowed for the capital invested in the firm in which he is a partner, against the income by way of remuneration received by him which is assessable as business income. It was held that as per the provisions applicable w.e.f. 1.4.1993, that the remuneration of a partner of a firm being taxable under the head Profits and Business of Profession as per the provisions of Section 28(v), that any expenditure incurred for earning the same is allowable as per the same ratio. According to us, the ratio of this decision would also apply to a case when the depreciation owned by the assets which arc used by the firm in which he is a partner is claimed as a deduction. The issue before us is one which is squarely covered in favour of the appellant by this decision of the Tribunal and the judgments of the hon'ble Madras High Court referred to above and also as per the amendments introduced in respect of assessment of firms and partners with effect from 1.4.1993. It is a fact that in the assessment of the firm, AO had held that 1/5th of the expenditure on motor car is to be treated as personal in nature in the hands of the appellant i.e. the partner of the said firm. According to us, it is a case that the motor cars owned by the appellant and used for the business of the firm in which he is a partner have also partially been used for personal purpose, when an addition has been on this ground in the hands of the firm. With this view, we hold that it would be reasonable to disallow 1/5th of the depreciation on the motor cars owned by the assessee in respect of which depreciation has been claimed and which have been used by the firm in which the appellant is a partner. For this position, there is a specific provision under Section 38(2), as per which when an asset is not exclusively used for the purpose of business, the AO shall restrict the claim for depreciation to a fair proportion of the purpose for which the asset is used for the purpose of business or profession. AO in the assessment of the firm having held that 1/5th as the estimated proportion in respect of which the motor cars are not used exclusively for the purpose of business of the firm, following the same, we direct that 4/5ths of the claim for depreciation be allowed in the hands of both the appellants, the facts being the same.
9. In the result, the three appeals are partly allowed.
Order pronounced in the open court on 21st June 2006