When motor vehicles are in the gross block of the company and used for business it cannot ipso facto lead to an inference that the depreciation has to be partly disallowed on the assumption that these are partly used for personal use: Claridges Hotels case.
In many cases dispute come across regarding the disallowance of depreciation on motor vehicles used on the assumption by AO regarding the personal use of these. Recently, in ACIT, New Delhi vs. Claridges Hotels Pvt. Ltd. & vice-versa [ITA Nos.:- 5848, 5849/Del /2014 and CO Nos.:- 160 & 161/Del /2015(In ITA Nos. 5848/DEL/2014, 5849/DEL/2014, 10.11.2017], a search and seizure operation was carried out under section 132(1) of the Income Tax Act,1961 at residential and business premises of Shri Suresh Nanda, his family members and his business associates on 24.2.2012. The assessee-company was also covered under the said search on the same date. The assessee-company was doing business of running of the hotels under the name and style of ‘Claridges Hotels Pvt. Ltd.’ In the above appeal, one of the ground raised was, on the facts and circumstances of the case, the CIT (A) has erred in law in deleting the addition of Rs.13,03,519/- out of total addition of Rs.33,03,519/- made by AO on account of disallowance of depreciation and car running expenses.
The brief facts were that during the course of search, certain cars were found from the residence of Shri Suresh Nanda as well as Shri Sanjeev Nanda, who were though not the Director in the company but directly and indirectly had control in the assessee company. Accordingly, the A.O. issued show cause notice as to why the depreciation claimed in respect of these cars should not be disallowed. The details of the cars had been given in para 6 of the assessment order. The assessee in response to show cause notice submitted that, the Claridges Hotel was undergoing extensive renovation of its hotel and there were severe constraint of parking space and pending such renovation, these cars were temporarily parked at the residence of Shri Suresh Nanda who resided nearby at 4, Prithviraj Road and both being non-resident mostly stayed abroad and therefore, their parking space was used. The A.O. held that neither Shri Suresh Nanda nor Shri Sanjeev Nanda offered any income for letting out their premises for parking out the cars of Claridges Hotel and thus, he held that these cars cannot be said to be wholly and exclusively used for the purpose of assessee’s business and accordingly, he disallowed the depreciation and also made lump sum amount of Rs. 20 lacs on account of repairs and maintenance and expenses related to these cars. In this manner, disallowance of Rs. 33,03,519/- was made.
On first appeal, CIT(A) first of all, after verifying the facts on record held that the motor vehicles were owned by the assessee company and Shri Suresh Nanda and his son Shri Sanjeev Nanda held majority stake directly or indirectly in the assessee company. He further held that there is no evidence to establish that motor cars were not used for the purpose of assessee’s business and even if the vehicles were parked at the residence of two majority stake-holders or it has been used by them. In absence of such evidence, then it is presumed that the cars have been used for the purpose of business of the assessee company. In any case depreciation has to be allowed to the owner who has legal right on the asset and has been used for its business purpose. Thus, he allowed the claim of depreciation.
On appeal to ITAT, Delhi, it observed that on the perusal of the relevant finding given in the order, there is no dispute that these cars are assets of the assessee company which have been shown as part of the fixed assets in the balance sheet. Most of the cars were appearing as WDV in the schedule of fixed assets and depreciation has been claimed at Rs. 13,03,519/-. Once the cars are owned by the assessee company and is found to part of fixed assets then, ostensibly depreciation has to be allowed. The assessee before the AO as well as before the CIT (A) had categorically submitted that since renovation work was carried out at hotel premises, therefore, these cars were parked at the residence of Shri Suresh Nanda and his son Shri Sanjeev Nanda who held majority stake directly or indirectly in the assessee company. Mere parking of cars at the premises of these persons, cannot ipso facto lead to an inference that the depreciation has to be disallowed which otherwise are the assets of the assessee company. Assessee had also submitted that these cars were used purely and wholly for the purpose of hotel business and in absence of rebuttal of this explanation, depreciation cannot be disallowed. The ITAT held that CIT (A) had rightly allowed depreciation.