Allowability of depreciation if car is purchased by firm in the name of one of its partner

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Allowability of depreciation if car is purchased by firm in the name of one of its partner

short overview : Although the asset on which depreciation was claimed by assessee-firm, was in the name of one of its partners, but if it was found that the said asset was purchased from the resource of the firm or purchase consideration was credited to the partner’s current account or capital account, then it would be construed that the firm would be the owner of the said asset and accordingly, the firm would be entitled to claim depreciation on such asset.

Assessee-firm claimed deduction of depreciation, interest, loan processing charges, life tax and insurance towards car owned by the partner of the firm. AO disallowed such claim, as the car was not owned in the name of the firm.

it is held that In the case of the assessee, the car was owned in the name of the partner of the firm. If the car was purchased from the resource of the firm or purchase consideration was credited to the partner’s current account or capital account, then it would be construed that the firm would be the owner of the car. Accordingly, the AO was directed to verify whether the car was acquired from the resource of the firm or the purchase consideration was credited to the partner’s current or capital account and if so grant depreciation as claimed by the assessee. Further, AO was also directed to grant 50% deduction with respect to the claim of interest expense and insurance expense on car loan since the said expenses were revenue in nature. However, life tax would be added to the cost of car because it adds to the value of car as well as loan processing charges being an expense incurred before the acquisition of asset, the same would also be added to the cost of the car.

Decision: Partly in favour of assessee.

Referred: CIT v. Navdurga Transport Co. (1999) 235 ITR 158: 1999 TaxPub (DT) 210 (All-HC), CIT v. Nidish Transport Corporation (1990) 185 ITR 669: 1990 TaxPub (DT) 303 (Ker-HC)

IN THE ITAT, CHENNAI BENCH

A.MOHAN ALANKAMONY, A.M. & DUVVURU RL REDDY, J.M.

NVR Cinema v. ITO

I.T.A. No. 2125/Chny/2018

14 February, 2019

Appellant by: Vikram Vijayaraghavan, Advocate

Respondent by: S. Murali Mohan, Jiont Commissioner

ORDER

  1. Mohan Alankamony, A.M.

This appeal by the assessee is directed against the order passed by the learned Commissioner (Appeals)-14, Chennai, dated 28-2-2018 in ITA No. 318/Commissioner (Appeals)-14/2016-17 for the assessment year 2014-15 passed under section 250(6) read with section 143(3) of the Act.

  1. The appeal was filed by the assessee with a delay of 24 days. The learned Authorised Representative submitted before us that the assessee had filed miscellaneous petition before the learned Commissioner (Appeals) to rectify certain mistake in his order and was of the firm belief that the issue would be resolved in favour of the assessee at the first appellate authority stage itself. But the said miscellaneous petition has not been disposed off. Subsequently the assessee’s counsel advised to file the appeal before the Tribunal. Hence the delay had occurred. Therefore the learned Authorised Representative pleaded that the delay in filing the appeal may be condoned. The learned Departmental Representative strongly objected to the submission of the learned Authorised Representative. After hearing both sides though we do not appreciate the lapse on the part of the assessee to obtain legal opinion promptly and file the appeal, considering the issues involved in the appeal, in the interest of justice we hereby condone the delay in filing the appeal and proceed to hear the issues on merits.
  2. The assessee has raised several grounds in its appeal however the cruxes of the issues are that

(i) The learned Commissioner (Appeals) has erred in confirming the order of the learned assessing officer who had disallowed the claim of 50% depreciation, interest, loan processing charges, life tax and insurance aggregating to Rs. 22,48,934 on the car acquired by the firm in the name of the partner

(ii) The learned Commissioner (Appeals) has erred in confirming the order of the learned assessing officer who had disallowed the expenditure of Rs. 3,50,000 under section 40A(3) of the Act towards payment made by cash for acquiring rights of film.

(iii) The learned Commissioner (Appeals) has erred in confirming the order of the learned assessing officer who had invoked the provisions of section 40(a)(ia) of the Act for violation of section 194J of the Act, since tax was not deducted at source towards the payment made for acquiring distribution rights for the film Balupu amounting to Rs. 1,73,50,000 and for the film Appadalu amounting to Rs. 20 lakhs aggregating to Rs. 1,93,50,000.

  1. The brief facts of the case are that the assessee is a firm engaged in the business of purchase and sale of movies and also exhibition of movies through distributors in theatres, filed its return of income for the assessment year 2014-15 on 17-11-2014 admitting total income of Rs. 13,03,150. Initially the return was processed under section 143(1) of the Act on 15-12-2014. Subsequently the case was selected for scrutiny and notice under section 143(2) & 142(1) of the Act was issued on 18-9-2015 & 06-6-2016. Finally assessment was completed under section 143(3) of the Act on 30-12-2016 wherein the learned assessing officer made several additions.
  2. Ground No. 3(i) : Disallowance of 50% depreciation, interest, loan processing charges, life tax & insurance on the car acquired by the firm in the name of the partner aggregating to Rs. 22,48,934 :–

During the course of scrutiny assessment proceedings, it was observed by the learned assessing officer that the assessee firm had claimed deduction towards the car owned by the partner of the firm as detailed herein below:-

(i) Depreciation 50%- Rs. 9,25,807
(ii) Life Tax & Insurance- Rs. 9,27,108
(iii) Interest on loan- Rs. 2,02,818
(iv) Loan Processing Charges-  Rs. 1,93,199
TOTAL Rs. 22,48,934

The learned Authorised Representative disallowed the claim of the assessee because the car was not owned in the name of the firm. On appeal the learned Commissioner (Appeals) also confirmed the order of the learned assessing officer by agreeing with his view.

4.1 At the outset we do not agree with the view of the learned Revenue Authorities. Section 4 of the Partnership Act defines partnership as the relation between person who had agreed to share the profit of the business carried on by all or any of them acting for all. Partners are collectively called as “firm”. Thus Partnership is merely an association of individuals and the firm’s name is only a collective name of those individuals who constitute the firm. Therefore as per common law the partnership firm is not a legal entity. Only the Income Tax law for the purpose of income tax recognize partnership firm as a distinct personality. Therefore the partnership firm can own assets only in the name of the partners. In the case of the assessee firm, the car is owned in the name of the partner of the firm. If the car is purchased from the resource of the firm or the purchase consideration is credited to the partner’s current account or capital account then it shall be construed that the firm is the owner of the car. Further in the case CIT v. Nidish Transport Corporation in (1990) 185 ITR 669 (Ker) : 1990 TaxPub(DT) 303 (Ker-HC) the Hon’ble Kerala High Court had held that “for the transfer of ownership of the motor vehicle, mutation of the name in the certificate of registration was not necessary and the vehicle could be sold and purchased without following the procedure prescribed under section 31 of the Motor Vehicles Act. The assessees were the owners of the vehicles and they used them in their business and, therefore, they were entitled to depreciation on them.” Similar view was also expressed by the Hon’ble Allahabad High Court in the case CIT v. Navdurga Transport Company reported in (1999) 235 ITR 158 : 1999 TaxPub(DT) 210 (All-HC). Therefore we hereby direct the learned assessing officer to verify whether the car is acquired from the resource of the firm or the purchase consideration is credited to the partner’s current or capital account and if so grant depreciation as claimed by the assessee. Similarly, we also hereby direct the learned assessing officer to grant 50% deduction with respect to the claim of interest expense & insurance expense incurred by the assessee on the car loan since these expenses are revenue in nature and the assessee has used the car for business as well as for personal purpose and the assessee itself had disallowed 50% depreciation in his computation of income. However the life tax has to be added to the cost of the car because it adds to the value of the car. It is also pertinent to mention that the loan processing charges is an expense incurred by the assessee before the acquisition of the asset and therefore the same has also to be added to the cost of the car. Needless to mention that depreciation has to be granted after taking into consideration the life tax and the loan processing charges as the cost of the car. It is ordered accordingly.

  1. Ground No. 3(ii) : Disallowance of expenditure of Rs. 3,50,000 under section 40A(3) of the Act :–

The learned assessing officer as well as the learned Commissioner (Appeals) had disallowed the expenditure of Rs. 3,50,000 incurred by the assessee being the amount paid by cash for screening films invoking the provisions of section 40A(3) of the Act. The learned Authorised Representative had explained before the learned assessing officer that the amount was received by the assessee in cash from theatres during Sunday and the same was paid to the representative of the rightful owner of the picture on Sunday night itself; however the same was recorded in the books of accounts on the subsequent day as cash paid. It was therefore explained that as per rule 6DD.2(j) (The excluded situations) where the payments are required to be made on a day on which the banks are closed provisions of section 40A(3) cannot be invoked. However both the Revenue Authorities rejected the above submission of the learned Authorised Representative.

After perusing the facts of the case and hearing both sides, we find merit in the explanation tendered by the learned Authorised Representative. It is the practice in the business to hand over the collection as soon as the film is screened. Therefore the assessee is forced to pay the amount collected from the theatres on Sunday night itself after screening the film when the banks are closed. Hence the exclusion prescribed under rule 6DD.2(j) of the Rules is applicable in the case of the assessee for the payment made during the period when the Bank do not function. For the above stated reason we hereby direct the learned assessing officer to delete the addition of Rs. 3,50,000 made by invoking the provision of section 40A(3) of the Act.

  1. Ground No. 3(iii) : Disallowance of expenditure towards purchase of pictures/movies by invoking the provisions of section 194J read with section 9(1)(v) & 40(a)(ia) of the Act for Rs. 1,93,50,000

During the course of scrutiny assessment proceedings it was observed by the learned assessing officer that the assessee had purchased movie rights of the movie named Balupu for a period of 5 years for Rs. 1,73,50,000 & Anr. movie rights for the movie Appadalu for a period of 1 year for Rs. 20,00,000 aggregating to Rs. 1,93,50,000. The learned assessing officer opined that the payment made by the assessee tantamount to payment of royalty as per section 194J read with section 9(1)(v) of the Act and therefore the assessee is bound to deduct tax at source in accordance with the provisions of section 40(a)(ia) of the Act. But since the assessee had not deducted tax at source the learned assessing officer disallowed the expenditure of Rs. 1,93,50,000 and added to the income of the assessee. On appeal the learned Commissioner (Appeals) concurred with the view of the learned assessing officer and thereby sustained the addition made by the learned assessing officer.

6.1 At the outset we do not find any merit in the orders of the learned Revenue Authorities on this issue as pointed out by the learned Authorised Representative.

Explanation 2(v) of section 9(1)(v) of the Act provides as under :–

“(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting but not including consideration for the sale, distribution or exhibition of cinematographic films; or

Thus Explanation 2(v) of section 9(1)(v) of the Act makes it abundantly clear that consideration towards sale, distribution or exhibition of cinematography films does not fall within the ambit of royalty. In the case of the assessee it is evident that the assessee has obtained rights for exhibiting cinematography films. Therefore the payment made by the assessee for obtaining such rights cannot be construed as payment made towards fees for professional or technical services as provided under section 194J of the Act.

Hence 40(a)(ia) of the Act cannot be invoked in the case of the assessee for non-deduction of tax. Therefore we hereby direct the learned assessing officer to delete the addition of Rs. 1,93,50,000 made in the hands of the assessee invoking the provision of section 40(a)(ia) of the Act read with section 194J & 9(1)(v) of the Act.

  1. In the result, the appeal of the assessee is partly allowed.

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