2010 (1) TMI 19 - HC - Income Tax

Company entitled to claim depreciation on trucks registered in directors' names as de facto owner.

The Commissioner of Income Tax, Varanasi & another Versus M/s. Varanasi Auto Sales (P) Ltd., Varanasi.

The Commissioner of Income Tax, Varanasi & another Versus M/s. Varanasi Auto Sales (P) Ltd., Varanasi. - [2010] 326 ITR 182 (All) Issues:- Interpretation of Section 32 of the Income Tax Act regarding depreciation on vehicles registered in the name of Directors of a company.Analysis:1. The main issue in this case revolves around the interpretation of Section 32 of the Income Tax Act, specifically regarding the entitlement to claim depreciation on vehicles that are registered in the names of Directors of a company. The Commissioner of Income Tax raised a question of law concerning the justification of allowing depreciation under Section 32 to the assessee on trucks registered in the names of Directors and those under hire purchase agreements.2. The learned Standing Counsel argued that as per Section 32 of the Act, only the owner of the vehicle is eligible for depreciation. In this case, the company, as the assessee, claimed depreciation on vehicles registered in the name of the Directors, which, according to the counsel, did not entitle the company to claim depreciation under Section 32.3. On the other hand, the respondent's counsel contended that the Tribunal found the trucks were purchased in the Directors' names for convenience, with funds invested by the company. The hire rent received on these trucks was credited to the company's account and taxed accordingly. The counsel argued that since the company was the de facto owner of the trucks, the Tribunal rightfully allowed depreciation on these vehicles.4. The Tribunal's findings revealed that the trucks were held by the Directors as benami for the company, with the company investing funds, making payments, and enjoying income from the trucks. The company was deemed the de facto owner, as evidenced by various factors such as insurance payments and registration expenses being debited in the company's books.5. Notably, the department did not challenge the Tribunal's findings that the company was the de facto owner of the trucks registered in the Directors' names. Consequently, the Tribunal's decision to allow depreciation to the company on these vehicles was upheld, emphasizing the company's entitlement to claim depreciation under Section 32.6. Referring to the Supreme Court's interpretation in M/s. Mysore Minerals Ltd. v. Commissioner of Income Tax, the Court emphasized that the benefit of depreciation should be granted to the one utilizing and investing in the capital asset. The Court highlighted the concept of ownership in the context of Section 32, emphasizing the right to use and occupy the property as a key factor in determining ownership for depreciation purposes.7. Citing the case of Commissioner of Income Tax v. Navdurga Transport Co., the Court reiterated that registration under the Motor Vehicles Act does not necessarily determine ownership, especially when vehicles are used by a firm through agents and income is credited to the firm. The Court emphasized that ownership for depreciation purposes is based on the entity exercising rights over the asset in its own capacity.8. Ultimately, the Court concluded that the Tribunal's decision to allow depreciation on trucks registered in the Directors' names, but owned by the company, was justified. Since the department did not challenge the factual findings establishing the company as the de facto owner, the appeal was dismissed, affirming the company's right to claim depreciation under Section 32 for the relevant vehicles.