Depreciation on Wheel loaders & Graders as Motor Vehicles

DCIT Vs Quippo Construction Equipment Ltd. (ITAT Hyderabad)

The issue under consideration is whether the CIT(A) is correct in charging depreciation at the rate of 30% on wheel loaders and graders?

The assessee company, engaged in the business of infrastructure/construction equipment rental services. During the course of assessment proceedings, the AO observed from the depreciation chart claimed as per the I.T. Act that the assessee has claimed depreciation @ 30% on commercial vehicles. He observed that the assets comprised of the following which are not in the nature of “commercial vehicles”. The assessee was therefore, asked to explain as to why depreciation should not be restricted to 15%. Assessee state that depreciation @30% on crane, chasis, motor graders, wheel loaders, soil compactors, JCBs, concrete boom placers given on hire. At the outset, it is humbly submitted that as per Entry-III-(3)(ii) of Appendix-I of the I.T. Rules “Motor buses, motor lorries and motor taxis used in a business of running them on hire” are eligible for depreciation @30%. The AO however, was not convinced with the above reply, accordingly, the excess depreciation was disallowed and brought to tax.

ITAT states that, the assessee has filed the computation of depreciation allowable u/s 32 in the financial year 31.3.2012 wherein the Plant & Machinery and commercial vehicles were separately shown and depreciation has been claimed at 30% on such commercial vehicles. The details of the fixed assets on which depreciation has been claimed are also filed before us. On perusal of the same, ITAT find that the wheel loaders and graders are motor vehicles as held by the Coordinate Bench of this Tribunal in the case of NAC Infrastructure Equipment Ltd (Supra), assessee’s sister concern. Therefore, respectfully following the decision of the Coordinate Bench, they do not see any reason to interfere with the order of the CIT (A). Therefore, the Revenue’s appeals are dismissed.

FULL TEXT OF THE ITAT JUDGEMENT

The appeals are filed by the Revenue for the A.Ys 2012-13 to 2014-15, while the C.O is filed by the assessee for the A.Y 2014-15. The issue raised in the Revenue appeals is common for all the A.Ys and for the sake of convenience, the appeals were heard together and are disposed of by this common and consolidated order. The common grounds raised by the Revenue in all these appeals are as under:

“1. The CIT (A) erred in directing to allow depreciation @ 30% on plant & machinery instead of eligible rate of 15%.

2. CIT (A) erred in interpreting the definition of the commercial vehicles as defined in Entry III-(3)(II) of Appendix-I of the Income Tax Rules.

3. The CIT (A) erred in not appreciating that facts of M/s. NAC Infrastructure Equipment Ltd are difference from the facts of the present case and that the revenue did not prefer further appeal in the said case in ITA No.464/Hyd/2015 dated 6.7.2016 because of low tax effect.

4. Any other ground that may be urged at the time of hearing”.

2. Brief facts of the case are that the assessee company, engaged in the business of infrastructure/construction equipment rental services, filed its return of income for the relevant A.Ys and the same were processed u/s 143(1) of the Act. Subsequently, the assessee revised the returns of income and thereafter, the assessments were picked up for scrutiny. During the course of assessment proceedings, the AO observed from the depreciation chart claimed as per the I.T. Act that the assessee has claimed depreciation @ 30% on commercial vehicles. He observed that the assets comprised of the following which are not in the nature of “commercial vehicles” as defined in the Motor Vehicles Act:

i) Concrete Boom Placer

ii) All Terrain crane

iii) Motor Grader

iv) Rough Terrain Crane

v) Soil Compactor

vi) Mobile Crane etc

The assessee was therefore, asked to explain as to why depreciation should not be restricted to 15% which is the rate applicable to the vehicles as the above are used for specific purpose but does not form part of motor business, motor lorries and motors taxis used in a business of running them on hire. In reply to the same, the assessee vide letter dated 20.,01.2015 submitted as under:

“During the year consideration, the assessee claimed depreciation @30% on crane, chasis, motor graders, wheel loaders, soil compactors, JCBs, concrete boom placers given on hire. At the outset, it is humbly submitted that as per Entry-III-(3)(ii) of Appendix-I of the I.T. Rules “Motor buses, motor lorries and motor taxis used in a business of running them on hire” are eligible for depreciation @30%”.

3. The AO however, was not convinced with the above reply and held that the term “commercial vehicle” has been clearly defined in the Notes to the Table of Rates of Depreciation admissible in the Appendix to Income Tax Rules and since the assets leased by the assessee are used for the specific purpose of construction and are not the commercial vehicle as defined in the Rules at 15% only by treating them as plant & machinery. Accordingly, the excess depreciation was disallowed and brought to tax. Aggrieved, the assessee preferred an appeal before the CIT (A) who allowed the same by following the decision of the ITAT in the assessee’s sister concern i.e. Dy. CIT vs. NAC Infrastructure Equipment Ltd, in ITA No.464/Hyd/2015 dated 6.7.2016. Aggrieved by the order of the CIT (A), the Revenue is in appeal before us.

4. The learned DR supported the orders of the AO and submitted that the CIT (A) has erroneously followed the decision of the ITAT in the case of Dy.CIT vs. M/s. Nac Infrastructure Equipment Ltd (Supra), though the said appeal has been dismissed on account of low tax effect.

5. The learned Counsel for the assessee has filed a copy thereof and it is seen that the Tribunal has dismissed the Revenue’s appeal thereon both on the issue of reopening and also on merits. For the sake of convenience and ready reference, the relevant paragraph of the ITAT order is reproduced hereunder:

“5. On the issue of depreciation on wheel loaders and wheel graders, assessee made detailed submissions that these items are nothing but motor-vehicle as per Entry III-(3)(ii) of Appendix-I of Income Tax Rules. Reliance was placed on the judgment of Hon’ble Apex Court in the case of Bose Abraham Vs. State of Kerala [AIR 2001 SC 835]. Further, assessee also relied on the Hon’ble Gujarat High Court judgment in the case of Gujco Carriers Vs. CIT [256 ITR 50] (Guj.) wherein, ‘motor lorries’ were explained to include fire trucks, forklift trucks and crane trucks which are designed for special services. Assessee also relied on various decisions of the ITAT to justify that claim of 40% allowed by the AO in the original assessment is correct and restriction by the AO to 25% is not according to the provisions of law. Ld. CIT(A) allowed assessee’s claim by stating as under:

“9. The submissions of the assessee, the factual position as brought out by the Assessing Officer in the assessment order and the documents placed on record are considered. It is seen that though the motor graders and wheel loaders are not depicted as motor vehicles by the appellant, the same have been registered as ‘other vehicle-MMV’ by the Registration Authorities. In view of the ratios laid down by Hon’ble Supreme Court and followed by various Tribunals holding that the motor vehicles designed for special services are to be treated as motor vehicles, the appellant is eligible for depreciation @ 40% as claimed. Reliance is specially placed on the decisions of Hon’ble Karnataka Tribunal in the case of Bothra Shipping Services Vs. CIT (ITA No. 586/Kol/2010) and CIT Vs. Gaylord Construction (2010) 190 Taxmann 406 (Ker). Accordingly, the ground of appeal is allowed”.

6. After considering the detailed submissions of the DR and perusing the Paper Book placed on record, I am of the opinion that there is no merit in Revenue’s contentions. As seen from the assessment order passed u/s. 143(3) originally, AO has considered the claim of depreciation and made certain disallowances out of various depreciation claims made in the schedule. It indicates that AO found the claim of 40% depreciation on the above said vehicles appropriate and allowed the same. Since there is specific discussion on the depreciation claims in the first assessment order, allowance of 40% depreciation by the AO certainly indicates that he has consciously allowed the depreciation at that rate after due examination. Therefore, any opinion by the subsequent AO to restrict the same to 25% is a change of opinion, which is not permitted under the provisions of law. Moreover the wheel loaders and Graders are Motor vehicles and is certainly eligible for depreciation at 40% as per schedule and the case law on the subject. In view of this, I do not see any reason to interfere with the well reasoned order of the CIT(A), both on the issue of reopening and as well as allowance of depreciation at 40% on wheel loaders. For these reasons, I uphold the order of CIT(A) and reject the grounds of Revenue.

6. Thus, it can be seen that the Revenue’s appeal was not dismissed on low tax effect but was disposed on merits. Further, we also find that the Hon’ble Gujarat High Court in the case of Gujco Carriers vs. CIT (2002) 256 ITR 50 (Guj.) has considered the expression “motor lorries” in Entry III-E(1A) of Appendix I to IT Rules, 1962 to hold that the vehicles which are registered as heavy motor vehicles would, for the reason given, clearly fall within the expression “Motor Lorries” in Entry III-E(1A) of the Table in Appendix I to IT Rules and since they were used by the assessee in its business of running them on hire, the assessee was entitled to higher rate of depreciation.

7. Similar view was expressed by the Coordinate Bench of this Tribunal in the case of Ansari Holdings & Investments (P) Ltd vs. DCIT (2007) 12 SOT 438 (Hyd.) wherein mobile cranes registered as heavy motor vehicles were held to would fall within the expression of “motor lorries” and hence eligible for depreciation @ 40%.

8. Having regard to the rival contentions and the material on record, we find that the assessee has filed the computation of depreciation allowable u/s 32 in the financial year 31.3.2012 wherein the Plant & Machinery and commercial vehicles were separately shown and depreciation has been claimed at 30% on such commercial vehicles. The details of the fixed assets on which depreciation has been claimed are also filed before us. On perusal of the same, we find that the wheel loaders and graders are motor vehicles as held by the Coordinate Bench of this Tribunal in the case of NAC Infrastructure Equipment Ltd (Supra), assessee’s sister concern. Therefore, respectfully following the decision of the Coordinate Bench, we do not see any reason to interfere with the order of the CIT (A). Therefore, the Revenue’s appeals are dismissed.

9. As regards the Cross Objection filed by the assessee for the A.Y 2014-15 in ITA No.858/Hyd/2016, we find that the assessee has raised the following grounds of appeal:

“1. That on the facts and in the circumstances of the case, the learned CIT (A) (herein after referred to as learned CIT (A) erred in confirming disallowance of claim of leave encashment on provision basis amounting to Rs.4,50,247/- in computing total income.

2. That on the facts and in the circumstances of the case, the learned CIT (A) was not justified and grossly erred in confirming ad-hoc disallowance of labour expenses to the tune of Rs.5,00,000/-.

3. That the respondent craves leave, to add, to amend, modify, rescind, supplement or alter any of the grounds stated here-in-above either before or at the time of hearing of the appeal”.

10. As regards Ground No.1, the learned Counsel for the assessee submitted that though the issue is covered in favour of the assessee by the decision of the Hon’ble Calcutta High Court in the case of Exide Industries Ltd vs. Union of India (2007)292 ITR 470 (Cal.) and the Coordinate Bench of the Tribunal in the case of DCIT vs. A.P Seeds Development Corporation Ltd in ITA No.1459/Hyd/2013 has followed the same to hold that the provisions made towards leave encashment is allowable as a deduction, he submitted that the decision of the Hon’ble Calcutta High Court has been stayed by the Hon’ble Apex Court and the issue is pending for adjudication. He prayed that the issue may be remanded to the file of the AO to pass the final order after the Apex Court decides the issue.

11. The learned DR had no objection to this submission. Therefore, we deem it fit and proper to remand the issue to the file of the AO with a direction to give effect to the Hon’ble Supreme Court’s decision in the case of Exide Industries Ltd (Supra). Thus, ground No.1 is treated as allowed for statistical purposes.

12. As regards Ground No.2, brief facts are that the AO observed that the assessee had debited a sum of Rs.5,24,78,000/- towards labour charges as against a sum of Rs.4,83,53,000/- claimed in the earlier A.Y 2013-14. Observing that the expenditure claimed is not in proportion to the turnover declared for the A.Ys 2013-14 and 2014-15 respectively, the AO disallowed 5% of the labour charges. On appeal, the CIT (A) restricted the disallowance to Rs.5.00 lakhs and the assessee is in cross objection before us.

13. The learned Counsel for the assessee submitted that the assessee is maintaining books of account and the books have not been rejected by the AO but the disallowance was made. On appeal, the CIT (A) restricted the disallowance to Rs.5.00 lakhs. The learned Counsel for the assessee submitted that the AO could not have made the disallowance without rejection of the books of account of the assessee and therefore, making the adhoc disallowance, is not sustainable. In support of this contention, he placed reliance upon the decision of the Calcutta High Court in the case of Washabarie Tea Co. (P) Ltd vs. DCIT (1997) 59 TTJ 693 (Cal.) and also in the case of Sonic Biochem Extractions Pvt. Ltd vs. ITO (2013) 59 SOT 4 (Mum).

14. The learned DR was also heard.

15. Having regard to the rival contentions and the material on record, we find that the AO has made an adhoc disallowance without pointing out any discrepancy or defects in the books of account. The CIT (A) observed that the disallowance on the labour charges is on a higher side and hence restricted it to Rs.5.00 lakhs. We are of the opinion that only such expenditure which is not substantiated by proper bills & vouchers or which could not be explained by the assessee can be disallowed. Even for making the adhoc disallowance, there has to be a basis or comparative analysis. Since there is no such material on record, we are satisfied that the adhoc disallowance is not sustainable.

16. In the result, C.O filed by the assessee is partly allowed.

17. To sum up, Revenue’s appeals are dismissed and C.O. by the assessee is partly allowed.

Order pronounced in the Open Court on 15th May, 2019.