Allowance of depreciation on motor vehicles owned and used by tour operators and travel agents in the business of running these vehicles on hire for tourists
1. The second proviso to section 32(1)(ii) of the Income-tax Act, 1961, which disallows depreciation on foreign motor cars, is reproduced below :—
“Provided further that no deduction shall be allowed under this clause in respect of any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975, and is used otherwise than in a business of running it on hire for tourists.”
2.1 The intention behind this provision is to discourage use of foreign cars for the purposes of business or profession. However, in order to promote tourism industry, an exception has been made in the case of foreign motor cars used in a business of running them on hire for tourists, on which full depreciation is allowable.
2.2 Where tour operators or travel agents use certain foreign motor cars, owned by them, for providing transportation services to tourists, depreciation should be allowed on these cars. The position will not change even where such transportation services are provided as a part of package tour for tourists, which may include a number of other services like boarding and lodging, service of guides, etc. A tourist, who opts for a package tour, agrees to pay for a number of services including use of car provided to him by the tour operator or travel agent. Thus, it can be said that the car has been taken by him on hire from such tour operator or travel agent. Therefore, depreciation on foreign motor cars, owned by him and used for providing transportation services to tourists, whether in a package tour or otherwise, should be allowed.
3. Further, under sub-item (2)( ii) of item III of Appendix I to the Income-tax Rules, 1962, a higher rate of depreciation, namely, 40 per cent is allowed on motor buses, motor lorries and motor taxis used in a business of running them on hire. Therefore, where a tour operator or travel agent uses such vehicles, owned by him, in providing transportation services to the tourists, higher rate of depreciation should be allowed on such vehicles. It is clarified that “motor vans” are akin to “motor lorries” or “motor buses” and, therefore, higher rate of depreciation will be allowed on motor vans also, if they are used for providing transport services to tourists.
Circular : No. 609, dated 29-7-1991 as amended by Circular No. 622, dated 6-1-1992.
JUDICIAL ANALYSIS
EXPLAINED IN – The above circular was explained in Sita World Travel (I) (P.) Ltd. v. IAC [1993] 45 ITD 623 (Delhi – Trib.), in the following words :
“We are unable to agree with the stand of the revenue that the C.B.D.T. circular is not applicable to the instant case. It clearly states that when a tourist, who opts for a package tour agrees to pay for a number of services including use of car provided to him by the tour operator or travel agent, it could be said that the car has been taken by him on hire from such tour operator or travel agent and that therefore, depreciation on foreign motor car owned by him and used for providing transportation services to tourists, whether in a package tour or otherwise, should be allowed. It also further adds that where a tour operator or travel agent uses such vehicles owned by him in providing transportation services to the tourists, higher rate of depreciation should be allowed on such vehicles. No appreciable argument has been advanced by the Revenue as to how the C.B.D.T. circular is not applicable to the facts of the instant case. The intention behind the legislative provision is only to discourage use of foreign cars for the purpose of business or profession, but in order to provide the tourism industry, an exception has been made in the case of foreign motor cars used in a business of running them on hire for tourists, as in the instant case, on which full depreciation is allowable. Hence as is evident from the circular, this enables the assessee to have his claim fully allowed in regard to depreciation.” (p. 626)
APPROVED IN – The above circular was referred to with approval, in ABC India Ltd. v. Dy. CIT [1996] 217 ITR 255 (Gauhati), with the following observations :
“. . . it is made clear that the circular dated July 29, 1991 and circular dated June 14, 1993 (see Sl. No. 214), shall be binding on the income-tax authority, but whether the petitioner will be entitled to the benefit of the circulars will have to be decided by the authority as and when the same is agitated before the authority.” (pp. 268-269)
