There was one more aspect of the matter which required to be considered. The assessee, which was a private limited company, was a distinct assessable entity as per the definition of ‘person’ under section 2(31) of the Act. Therefore, it could not be stated that when the vehicles were used by the directors ‘even if they were personally used by the directors’, the vehicles were personally used by the company, because a limited company by its very nature cannot have any ‘personal use’. The limited company is an inanimate person and there cannot be anything personal about such an entity. The view was supported by the provision of section 40(c) and section 40A (5) of the Act. Once the expenditure in question was in terms as provided in sections 309 and 198 of the Companies Act, there could not be any ‘non-business’ purpose insofar as the assessee-company was concerned. – Hon’ble Mumbai ITAT

2023 (4) TMI 553 – ITAT MUMBAI

SILVER SPARK APPAREL LTD. VERSUS. DY. CIT, CC-8 (1) , MUMBAI

ITA No. 558/Mum/2021 ,ITA No. 1060/Mum/2021

Dated: – 20-10-2022

Judgment / Order

SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER

For the Appellant : Sh. Madhur Agrawal, Adv.

For the Respondent : Sh. Chetan M. Kacha, Sr. DR

ORDER

PER GAGAN GOYAL, A.M:

These appeals by the assessee are directed against the order of Commissioner of Income Tax (Appeals)-50, Mumbai [hereinafter referred to as (‘CIT(A)] vide common order dated 17.02.2021 for the Assessment Years (AY) 2013-14 & 2014-15 respectively. The assessee has raised similar grounds of 2 ITA No. 558 & 1060/Mum/2021-Silver Spark Apparel Ltd. appeal in both the AYs. Firstly, we are taking ITA No. 558/Mum/2021 for A.Y. 2013-14 as lead case. The assessee has raised the following grounds of appeal:

Ground No. 1:

On the facts and circumstances of the case and in law, the Hon’ble CIT (A) erred in confirming disallowance of depreciation to the extent of 50% made in respect of Nissan Skyline (luxury sports car). The appellant prays that the said action of Hon’ble CIT (A) may please be held as bad-in-law and be deleted.

Ground No. 2:

On the facts and circumstances of the case and in law, the Hon’ble CIT (A) erred in confirming disallowance to the extent of 50% of the expenses incurred in respect of Nissan Skyline (luxury sports car). The appellant prays that the said action of Hon’ble CIT (A) may please be held as bad-in-law and be deleted.

The appellant craves leave to add, omit or alter ground of appeal before or during the hearing of the appeal.

2. Brief facts of the case are that the assessee filed its return of income on 22.11.2013 declaring total income of Rs. 24,24,21,580/-. Assessee’s case was selected for scrutiny and a show-cause was issued for disallowance of depreciation on Sports Car.

3. The findings of AO with regard to disallowance of depreciation on luxury sport car and expenses occurred on it are as under:

“Addition on account of depreciation on sports car

On perusal of the deprecation chart, it is noticed that the assessee has claimed deprecation on luxury sports car of Rs. 5, 90,596/- and expenses occurred on It of Rs. 3, 45,918/-. In this case, during the course of search action, the assessee was failed to establish the purpose of purchase of sports care and nature of use for business purpose carried by it. In this respect, it is relevant to mentioned that the car racing activity or car sports activity is the prime purpose for which the owner possesses this kind of cars. Requirement of such a car for a unit engaged in manufacturing of suits and trousers is, not wholly and exclusive necessary for the purpose of the business. In this connection, the provisions of section 38(2) of the Act relevant for this purpose are reproduced as under:

Provision of section 38(2):

“Where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, the deduction under sub-clauses (ii) of clause(a) and clause(c) of section 30, clause (1) and (ii) of section 31 and clause (ii) of subsection (1) of section 32 shall be restricted to a fair proportionate part thereof which the assessing officer may determine, having regard to the user such building, machinery, plant or furniture for the purposes of the business or profession”.

From the above provisions, it is clear that the fair proportionate deprecation pertaining to the non-business purpose as worked out by the assessing officer is liable to disallowed. During the course of assessment proceedings, the assessee, vide order sheet noting, was asked to justify as to why the depreciation claimed on sports car should not be disallowed. The assessee, vide its letter dated 15/03/2016, has submitted its justification note. The assessee’s justification has been considered and verified. Taking into consideration the facts of the case in totality and having regard to the fact that the identical issue involved in the past year wherein assessee’s claim of depreciation was denied, the undersigned does not find any reason to deviate from the conclusion drawn in earlier years. Therefore, the depreciation claim of Rs. 5,90,596/- and expenses occurred on it of Rs. 3,45,918/- totalling amount of Rs. 9,36,514/- is disallowed and added back to the total income of the assessee.

4. Aggrieved with the order of AO, assessee preferred an appeal before the Ld. CIT(A)-50, Mumbai. Before the ld. CIT(A), assessee made following submissions as under:

“1. The Ld. AO without giving any categorical reasoning for denial of deprecation and expenses has simply rejected the appellant’s claim by placing reliance on earlier years’ orders. No finding was given by the Ld. AO regarding the merits and demerits of the case. Every assessment year is a different year by itself which requires its separate adjudication and therefore, the Ld. AO has violated the principles of natural justice.

2. In earlier years, the revenue had taken a stand that the car was used for personal purposes, without any evidence available on records. The allegations of the Department are not backed by any evidence and it is pure assumptions.

3. In earlier years, the revenue had taken a stand that claim cannot be entertained due to non-maintenance of log book, but there is no denial by the department that Nissan Skyline was a company owned vehicle. Further, when the car has been used only for business purposes, there is no statutory requirement of maintaining a log book as per law and non-maintenance of log book by the appellant cannot be a reason in itself to suggest that the car was not used for business purposes.

4. The Ld. AO cannot question the requirement of such car for the appellant company as he cannot step into the shoe of the appellant company.

5. It’s not illegal for a company engaged in textile business to own luxury car.

6. In earlier years, the AO disallowed the expenses and depreciation on said car on the ground that the appellant was engaged in car racing activities, without any basis for the same.

7. The said car is capable of being used for commuting purposes of the executives and it is not the case that said car only be used for racing activities.

8. The said car was used for advertising and marketing purposes by the appellant.

9. There cannot be any element of person use where the expenditure was incurred by a corporate entity like the appellant company. In this respect the appellant has placed reliance on the decision of the Hon’ble ITAT, Mumbai in the case of NIBR Bullion P Ltd v/s DCIT in ITA Nos. 5522 to 5524/Mum/2011. The appellant has also placed reliance on the decision of the Hon’ble Gujarat High Court in the case of Sayaji Iron & Engg. Co. v/s CIT reported in 253 ITR 749 and that in the case of Dinesh Mills Ltd vs. CIT reported in 122 Taxman 384.

10. Without prejudice to the above, the appellant has also placed reliance of the decision dated 10.10.2017 in their own case for case for AY 2012-13 of my Ld. Predecessor, wherein 50% of expenses and deprecation were allowed. It has also been submitted that as on date, the decision of Ld. CIT (A) in the appellant’s own case for AY 2012-13 holds good as the Department has not preferred an appeal before the Hon’ble Tribunal.”

5. Ld. CIT (A) himself categorically given a finding vides para-5.3.3 “I find that the appellant’s luxury sports care has never been used for racing purposes and there cannot be any objection owning such sport car by the appellant company. This vehicle has been used for commuting of key managerial personnel of the appellant company.” Ld. CIT (A) further observed vide para-5.3.4 “I also find that there is no ban for owning a luxury sports car for business in a textile industry. I also notice that the appellant company belongs to the Raymond Group of companies which is a leading manufacturing company of textile and garments. The business of the Raymond Group is in brand based consumer business. This luxury sports car was used by the appellant company for commuting thereby providing good opportunity to the appellant for advertisement. I am therefore of the considered view that the appellant’s sports vehicle has been used for the purpose of business and eligible for claim of depreciation as well as of the expenditure incurred on maintenance and upkeep of the vehicle.”

6. We have gone through the order of the AO, order of the Ld. CIT (A) and submissions of the assessee. We further considered the decision of ITAT, Mumbai in the case of NIBR Bullion P Ltd v/s DCIT in ITA Nos. 5522 to 5524/Mum/2011, Hon’ble Gujarat High Court in the case of Sayaji Iron & Engg. Co. v/s CIT reported in 253 ITR 749 and that in the case of Dinesh Mills Ltd vs. CIT reported in 122 Taxman 384.

[2002] 121Taxman43 (Gujarat) Sayaji Iron & Engg. Co. v. Commissioner of Income-tax

“As the directors of the assessee-company were entitled to use the vehicles of the assessee-company for their personal use as per the terms and conditions on which they were appointed, it was not proper on the part of the Assessing Officer to disallow one-sixth of the expenditure incurred by the assessee on maintenance of its vehicles. Section 309 of the Companies Act, 1956 provides the modality for determining the remuneration payable to directors, including any managing or full-time director. Such remuneration is payable either as stated in the articles of association of the company or in accordance with the resolution which may be passed by the company in the general meeting. This payment of remuneration is subjected to overall limits of managerial remuneration laid down in section 198 of the Companies Act. After going through section 198 of the Companies Act, it was clear that the expenditure incurred by the assessee-company on maintenance of vehicles which were available to the directors for their personal use would fall within the meaning of ‘remuneration’ as defined in the Explanation to section 198 of the Companies Act and once such remuneration was fixed as provided in section 309 of the Companies Act it was not possible to state that the assessee-company incurred an expenditure for personal use of the directors. The same was as per the terms and conditions of service and insofar as the assessee-company was concerned, it was a business expenditure and not disallowable as such.

There was one more aspect of the matter which required to be considered. The assessee, which was a private limited company, was a distinct assessable entity as per the definition of ‘person’ under section 2(31) of the Act. Therefore, it could not be stated that when the vehicles were used by the directors ‘even if they were personally used by the directors’, the vehicles were personally used by the company, because a limited company by its very nature cannot have any ‘personal use’. The limited company is an inanimate person and there cannot be anything personal about such an entity. The view was supported by the provision of section 40(c) and section 40A (5) of the Act. Once the expenditure in question was in terms as provided in sections 309 and 198 of the Companies Act, there could not be any ‘non-business’ purpose insofar as the assessee company was concerned.

In the circumstances, the Tribunal was wrong in disallowing one-sixth of the total car expenditure and depreciation claimed by the assessee-company on account of the personal use of the cars which had been used by the directors.

NIBR Bullion P Ltd v/s DCIT in ITA Nos. 5522 to 5524/Mum/2011

“In the light of the above decisions from Hon’ble High Court, it can be concluded that the vehicles of the assessee company are used as per terms and conditions of the service and since the assessee is a private limited company. it is assessable as a distinct assessable entity, as per the definition of person’ under section 2(31) of the Act. The Hon’ble High Court clearly held that it could not be stated that when the vehicles were used by the directors ‘even If they were personally used by the directors, the vehicles were personally used by the company, because a limited company by its very nature cannot have any personal use. The limited company is an inanimate person and there cannot be anything personal about such an entity. The view was supported by the provision of section 40(c) and section 40A (5) of the Act. Once the expenditure in question was in terms as provided in sections 309 and 198 of the Companies Act, there could not be any non-business purpose insofar as the assessee company was concerned. While coming to the aforesaid conclusion, Hon’ble High Court followed the decision from Hon’ble Madras High Court in CIT v/s L.G. Ramamurthi (1977) 110 ITR 543 (Mad.). No contrary decisions or facts were brought to our notice by the Revenue. Thus, respectfully following the aforesaid decision from Hon’ble High Court, these grounds of the assessee are allowed. Our aforesaid conclusion/order will also cover identical grounds for the Assessment Year 2007-08 (ITA No.5523/Mum/2011) and Assessment Year 2008- 09 (ITA No.5524/Mum/2011) also. Thus, these grounds are allowed in the respective appeals.”

7. Considering the finding of facts given by Ld. CIT (A) (supra) and judicial pronouncements mentioned (supra), we are of the opinion that the action of AO in disallowing 50% of depreciation and maintenance charges on the sports car owned and used by the assessee for the purpose of business is not justified. AO is failed to establish, on the given facts that sports car being owned by the assessee has any personal use or being not used fully for the purposes of business.

8. There was one more aspect of the matter which required to be considered. The assessee, which was a private limited company, was a distinct assessable entity as per the definition of ‘person’ under section 2(31) of the Act. Therefore, it could not be stated that when the vehicles were used by the directors ‘even if they were personally used by the directors’, the vehicles were personally used by the company, because a limited company by its very nature cannot have any ‘personal use’. The limited company is an inanimate person and there cannot be anything personal about such an entity. The view was supported by the provision of section 40(c) and section 40A (5) of the Act. Once the expenditure in question was in terms as provided in sections 309 and 198 of the Companies Act, there could not be any ‘non-business’ purpose insofar as the assessee-company was concerned.

9. In view of the above, appeal of the assessee is allowed with a direction to the AO for deletion of depreciation amounting to Rs. 5,90,596/- and expenses incurred amounting to Rs. 3,45,918/-.

10. In the result, appeal filed by the assessee is allowed.

ITA No. 1060/Mum/2021 (A.Y. 2014-15)

11. As the facts and issued involved is similar to ITA No. 558/Mum/2021 for AY 2013-14. Our findings will be applicable mutatis mutandis to this appeal also and no separate adjudication is required.

12. In the result, appeal filed by the assessee is allowed.

Order pronounced in the open court on 20th day of October, 2022.

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