2002 (8) TMI 93 - HC - Income Tax

Depreciation allowance and sales promotion expense disallowance in tax appeal: tribunal disallowance set aside, appeal allowed.

Depreciation entitlement rests with the person who has dominion over and is using the capital asset, as the depreciation benefit belongs to the investor ... Depreciation allowance under section 32 - Whether the Appellate Tribunal was justified in law in disallowing out of sales promotion expenses in the absence of any material to support it ? - HELD THAT:- The concept of depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset, is utilising the capital asset and thereby losing gradually investment caused by wear and tear and would need to replace the same by having lost its value fully over a period of time. There cannot be two owners of the property simultaneously and in the same sense of the term. The intention of the Legislature in enacting section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent. Disallowance of sales promotion expenses - According to the assessee-company it spent on giving major gift items. The Assessing Officer held that keeping in view the nature of the business of the assessee-company and the reasonableness of such expenditure he deemed it fit to disallow 50 percent of the expenditure on gift items as detailed in the table being of a non-business nature and thus disallowable as per the provisions of section 37(1) of the Income-tax Act and initiated penalty proceedings under section 271(1)(c) of the Act separately on this issue. There is no material on record to show that any part of the sales promotion expenditure was incurred for non-business purposes. The Tribunal has not given any basis whatsoever while confirming the disallowance to the extent of Rs. 75,000. All that the Tribunal observed was that the disallowance of Rs. 75,000 under this head will meet the ends of justice. The approach of the Tribunal in dealing with this aspect of the matter was erroneous and cannot be sustained. We set aside this part of the order. On the basis of our aforesaid findings, the appeal is accordingly allowed and disposed of. Thus, we direct the parties to bear their own costs. Issues: (i) Whether depreciation under section 32(1) of the Income-tax Act, 1961, is allowable to the assessee in respect of a factory taken over and used though legal title/registration remained with the vendor until payment of full consideration; (ii) Whether the Tribunal was justified in law in confirming a disallowance of Rs. 75,000 out of sales promotion expenses in the absence of any material to support such disallowance.Issue (i): Whether depreciation under section 32(1) of the Income-tax Act, 1961, is allowable where the assessee has taken possession, used the asset in business and has paid consideration but the formal conveyance/registration remains with the vendor.Analysis: The issue was examined in light of precedents interpreting 'owner' for income-tax purposes and the purpose of section 32. Authorities establish that for tax purposes 'owner' denotes the person in whom dominion or the right to enjoy and use the asset for business vests, not necessarily the holder of formal legal title. Depreciation is a tax benefit linked to economic investment and use of the asset; the test focuses on actual control, possession and entitlement to derive income or use rather than strict registration. Comparable factual situations where part payment and possession conferred practical ownership have been treated as entitling the assessee to depreciation.Conclusion: Depreciation under section 32(1) is allowable to the assessee because dominion and the right to use the factory for business purposes vested in the assessee notwithstanding that formal transfer/registration was to follow on completion of payment. This conclusion is in favour of the assessee.Issue (ii): Whether the Tribunal was justified in confirming a disallowance of Rs. 75,000 from sales promotion expenses without supporting material.Analysis: The record contains no material demonstrating that any portion of the sales promotion expenditure was not for business purposes. The Tribunal confirmed a specific disallowance of Rs. 75,000 merely stating that such disallowance 'would meet the ends of justice' without providing factual or legal basis. Absent evidence or reasoning to sustain the partial disallowance, the confirmation is unsupported.Conclusion: The disallowance of Rs. 75,000 is unsustainable and is set aside. This conclusion is in favour of the assessee.Final Conclusion: The appeal is allowed and disposed of; depreciation under section 32(1) is granted and the Tribunal's confirmation of the Rs. 75,000 disallowance is set aside.Ratio Decidendi: For the purpose of section 32(1) of the Income-tax Act, 1961, depreciation is allowable to the person in whom dominion and the right to use the asset for business vests, even if formal legal title/registration remains with the vendor pending completion of payment.