In a recent judgment Mumbai ITAT following judgments of High Courts, allowed the depreciation to company on cars registered in the name of the directors of the company to the company.

In this case, ITAT also quashed the disallowance u/s 40A(2)(a) for incentives paid to directors .

Case Details:
ITA No. 5376/Mum/2011 ; 594/Mum/2013 AY: 2008-09 to 2010-11
Edwise consultants (P) Ltd. (Appellant) vs Dy./Addl Commissioner of Income Tax (Respondent)

The assessee had filed above appeals relating to assessment years 2008-09 to 2010-11 challenging the orders passed by CIT(A)-8, Mumbai .

In all the three years, the assessee among other, was aggrieved by the decision of CIT(A) for confirming disallowance of depreciation.

In the present case, the assessing officer noticed that the assessee had purchased vehicles (cars) in the name of its directors and claimed depreciation thereon. Though the said cars were accounted as the assets of the assessee company, the AO disallowed the depreciation claim on the reasoning that the assessee cannot be considered to be the legal owner of the cars. The Ld CIT(A) also confirmed the said disallowance in all the three years under consideration. The Tribunal also confirmed the disallowance of depreciation made in AY 2007-08.

Excerpt from ITAT Judgment/Order:

The next issue relates to the disallowance of depreciation. The assessing officer disallowed the depreciation claim made on the cars only for the reason that the vehicles stood in the name of the directors and hence the assessee cannot be considered to be the legal owner. The Ld A.R submitted that the funds for purchase of cars were provided by the assessee company and the vehicles have been accounted as the assets of the assessee company only. He further submitted that the registration is only a formality and the same would not disentitle the assessee from claiming depreciation, even if it is registered in the name of its directors. In this regard, he placed reliance on the following case law:- (a) Poddar cements Ltd (226 ITR 625) (b) ITO Vs. Electro Ferro Alloys Ltd (2012)(13 ITR (Tri) 594 (c) CIT Vs. Aravali Finlease Ltd (2012)9341 ITR 282)(Guj) (d) CIT Vs. Basti Sugar Mills Co. Ltd (2002)(257 ITR 88)(Delhi)

On the contrary, the Ld D.R submitted that the co-ordinate bench of Tribunal has confirmed identical disallowance made in the assessee’s own case in AY 2007-08.

We have heard the parties on this issue and perused the record. We notice that the Hon’ble Gujarat High Court has considered identical issue in the case of Aravali finlease Ltd (supra) and has taken the decision that the depreciation is allowable in the hands of the company, even if it is registered in the name of its director provided that the vehicle is used for the purpose of business of company and income derived there from was shown as income of the company. In the instant case there is no dispute with regard to the fact that the vehicles are used for the purpose of business of the assessee company. In the case of Basti Sugar Mills Co. Ltd (supra), the Hon’ble Delhi High Court approved the decision of the Tribunal in holding that, since vehicle is a movable asset, the registration as required in the case of transfer of immovable property is not a condition precedent for legal ownership. In the instant case, the funds for purchase of vehicles have been provided by the assessee company and they have been shown as assets of the assessee company. Hence, in our view, the assessee company should be considered as owner for all practical purposes and hence it is entitled for depreciation. In view of the direct decision of Hon’ble Gujarat High Court is available on this issue, we prefer to follow the same to that rendered by the Tribunal in the assessee’s own case for AY 2007-08. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to allow depreciation on vehicles.

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