ITAT allows Depreciation on car in partner name

NVR Cinema Vs ITO (ITAT Chennai)

Section 4 of the Partnership Act defines partnership as the relation between person who had agreed to share the profit of the business carried on by all or any of them acting for all. Partners are collectively called as “firm”. Thus Partnership is merely an association of individuals and the firm’s name is only a collective name of those individuals who constitute the firm. Therefore as per common law the partnership firm is not a legal entity. Only the Income Tax law for the purpose of income tax recognize partnership firm as a distinct personality. Therefore the partnership firm can own assets only in the name of the partners. In the case of the assessee firm, the car is owned in the name of the partner of the firm. If the car is purchased from the resource of the firm or the purchase consideration is credited to the partner’s current account or capital account then it shall be construed that the firm is the owner of the car. Further in the case CIT vs. Nidish Transport Corporation in 185 ITR 669 the Hon’ble Kerala High Court had held that “for the transfer of ownership of the motor vehicle, mutation of the name in the certificate of registration was not necessary and the vehicle could be sold and purchased without following the procedure prescribed under Section 31 of the Motor Vehicles Act. The assessees were the owners of the vehicles and they used them in their business and, therefore, they were entitled to depreciation on them.” Similar view was also expressed by the Hon’ble Allahabad High Court in the case CIT Vs. Navdurga Transport Company reported in 235 ITR 158. Therefore we hereby direct the Ld.AO to verify whether the car is acquired from the resource of the firm or the purchase consideration is credited to the partner’s current or capital account and if so grant depreciation as claimed by the assessee. Similarly, we also hereby direct the Ld.AO to grant 50% deduction with respect to the claim of interest expense & insurance expense incurred by the assessee on the car loan since these expenses are revenue in nature and the assessee has used the car for business as well as for personal purpose and the assessee itself had disallowed 50% depreciation in his computation of income. However the life tax has to be added to the cost of the car because it adds to the value of the car. It is also pertinent to mention that the loan processing charges is an expense incurred by the assessee before the acquisition of the asset and therefore the same has also to be added to the cost of the car. Needless to mention that depreciation has to be granted after taking into consideration the life tax and the loan processing charges as the cost of the car. It is ordered accordingly.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-14, Chennai, dated 28.02.2018 in ITA No.318/CIT(A)-14/2016-17 for the assessment year 2014-15 passed U/s.250(6) r.w.s. 143(3) of the Act.

2. The appeal was filed by the assessee with a delay of 24 days. The Ld.AR submitted before us that the assessee had filed miscellaneous petition before the Ld.CIT(A) to rectify certain mistake in his order and was of the firm belief that the issue would be resolved in favour of the assessee at the first appellate authority stage itself. But the said miscellaneous petition has not been disposed off. Subsequently the assessee’s counsel advised to file the appeal before the Tribunal. Hence the delay had occurred. Therefore the Ld. AR pleaded that the delay in filing the appeal may be condoned. The Ld. DR strongly objected to the submission of the Ld. AR. After hearing both sides though we do not appreciate the lapse on the part of the assessee to obtain legal opinion promptly and file the appeal, considering the issues involved in the appeal, in the interest of justice we hereby condone the delay in filing the appeal and proceed to hear the issues on merits.

3. The assessee has raised several grounds in its appeal however the cruxes of the issues are that

(i) The Ld.CIT(A) has erred in confirming the order of the Ld.AO who had disallowed the claim of 50% depreciation, interest, loan processing charges, life tax and insurance aggregating to Rs.22,48,934/- on the car acquired by the firm in the name of the partner

(ii) The Ld.CIT(A) has erred in confirming the order of the Ld.AO who had disallowed the expenditure of Rs.3,50,000/-U/s.40A(3) of the Act towards payment made by cash for acquiring rights of film.

(iii) The Ld.CIT(A) has erred in confirming the order of the Ld.AO who had invoked the provisions of Section 40(a)(ia) of the Act for violation of Section 194J of the Act, since tax was not deducted at source towards the payment made for acquiring distribution rights for the film Balupu amounting to Rs.1,73,50,000/- and for the film Appadalu amounting to Rs.20 lakhs aggregating to Rs.1,93,50,000/-.

3. The brief facts of the case are that the assessee is a firm engaged in the business of purchase and sale of movies and also exhibition of movies through distributors in theatres, filed its return of income for the assessment year 2014-15 on 17.11.2014 admitting total income of Rs.13,03,150/-. Initially the return was processed U/s.143(1) of the Act on 15.12.2014. Subsequently the case was selected for scrutiny and notice U/s.143(2) & 142(1) of the Act was issued on 18.09.2015 & 06.06.2016. Finally assessment was completed U/s.143(3) of the Act on 30.12.2016 wherein the Ld.AO made several additions.

4. Ground No.3(i) : Disallowance of 50% depreciation, interest, loan processing charges, life tax & insurance on the car acquired by the firm in the name of the partner aggregating to Rs.22,48,934/-:-

During the course of scrutiny assessment proceedings, it was

observed by the Ld.AO that the assessee firm had claimed deduction towards the car owned by the partner of the firm as detailed herein below:-

The Ld.AR disallowed the claim of the assessee because the car was not owned in the name of the firm. On appeal the Ld.CIT(A) also confirmed the order of the Ld.AO by agreeing with his view.

4.1 At the outset we do not agree with the view of the Ld.Revenue Authorities. Section 4 of the Partnership Act defines partnership as the relation between person who had agreed to share the profit of the business carried on by all or any of them acting for all. Partners are collectively called as “firm”. Thus Partnership is merely an association of individuals and the firm’s name is only a collective name of those individuals who constitute the firm. Therefore as per common law the partnership firm is not a legal entity. Only the Income Tax law for the purpose of income tax recognize partnership firm as a distinct personality. Therefore the partnership firm can own assets only in the name of the partners. In the case of the assessee firm, the car is owned in the name of the partner of the firm. If the car is purchased from the resource of the firm or the purchase consideration is credited to the partner’s current account or capital account then it shall be construed that the firm is the owner of the car. Further in the case CIT vs. Nidish Transport Corporation in 185 ITR 669 the Hon’ble Kerala High Court had held that “for the transfer of ownership of the motor vehicle, mutation of the name in the certificate of registration was not necessary and the vehicle could be sold and purchased without following the procedure prescribed under Section 31 of the Motor Vehicles Act. The assessees were the owners of the vehicles and they used them in their business and, therefore, they were entitled to depreciation on them.” Similar view was also expressed by the Hon’ble Allahabad High Court in the case CIT Vs. Navdurga Transport Company reported in 235 ITR 158. Therefore we hereby direct the Ld.AO to verify whether the car is acquired from the resource of the firm or the purchase consideration is credited to the partner’s current or capital account and if so grant depreciation as claimed by the assessee. Similarly, we also hereby direct the Ld.AO to grant 50% deduction with respect to the claim of interest expense & insurance expense incurred by the assessee on the car loan since these expenses are revenue in nature and the assessee has used the car for business as well as for personal purpose and the assessee itself had disallowed 50% depreciation in his computation of income. However the life tax has to be added to the cost of the car because it adds to the value of the car. It is also pertinent to mention that the loan processing charges is an expense incurred by the assessee before the acquisition of the asset and therefore the same has also to be added to the cost of the car. Needless to mention that depreciation has to be granted after taking into consideration the life tax and the loan processing charges as the cost of the car. It is ordered accordingly.

5. Ground No.3(ii) : Disallowance of expenditure of Rs.3,50,000/- U/s.40A(3) of the Act :-

The Ld.AO as well as the Ld.CIT(A) had disallowed the expenditure of Rs.3,50,000/- incurred by the assessee being the amount paid by cash for screening films invoking the provisions of Section 40A(3) of the Act. The Ld.AR had explained before the Ld.AO that the amount was received by the assessee in cash from theatres during Sunday and the same was paid to the representative of the rightful owner of the picture on Sunday night itself; however the same was recorded in the books of accounts on the subsequent day as cash paid. It was therefore explained that as per Rule 6DD.2(j) (The excluded situations) where the payments are required to be made on a day on which the banks are closed provisions of Section 40A(3) cannot be invoked. However both the Revenue Authorities rejected the above submission of the Ld.AR. After perusing the facts of the case and hearing both sides, we find merit in the explanation tendered by the Ld.AR. It is the practice in the business to hand over the collection as soon as the film is screened. Therefore the assessee is forced to pay the amount collected from the theatres on Sunday night itself after screening the film when the banks are closed. Hence the exclusion prescribed under Rule 6DD.2(j) of the Rules is applicable in the case of the assessee for the payment made during the period when the Bank do not function. For the above stated reason we hereby direct the Ld.AO to delete the addition of Rs.3,50,000/- made by invoking the provision of Section 40A(3) of the Act.

6. Ground No.3(iii) : Disallowance of expenditure towards purchase of pictures / movies by invoking the provisions of Section 194J r.w.s. 9(1)(v) & 40(a)(ia) of the Act for Rs.1,93,50,000/-

During the course of scrutiny assessment proceedings it was observed by the Ld.AO that the assessee had purchased movie rights of the movie named Balupu for a period of 5 years for Rs.1,73,50,000/- and another movie rights for the movie Appadalu for a period of 1 year for Rs.20,00,000/- aggregating to Rs.1,93,50,000/-. The Ld.AO opined that the payment made by the assessee tantamount to payment of royalty as per Section 194J r.w.s.9(1)(v) of the Act and therefore the assessee is bound to deduct tax at source in accordance with the provisions of Section 40(a)(ia) of the Act. But since the assessee had not deducted tax at source the Ld.AO disallowed the expenditure of Rs.1,93,50,000/-and added to the income of the assessee. On appeal the Ld.CIT(A) concurred with the view of the Ld.AO and thereby sustained the addition made by the Ld.AO.

6.1 At the outset we do not find any merit in the orders of the Ld.Revenue Authorities on this issue as pointed out by the Ld.AR. Explanation 2(v) of Section 9(1)(v) of the Act provides as under:-

“(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting but not including consideration for the sale, distribution or exhibition of cinematographic films; or

Thus Explanation 2(v) of Section 9(1)(v) of the Act makes it abundantly clear that consideration towards sale, distribution or exhibition of cinematography films does not fall within the ambit of royalty. In the case of the assessee it is evident that the assessee has obtained rights for exhibiting cinematography films. Therefore the payment made by the assessee for obtaining such rights cannot be construed as payment made towards fees for professional or technical services as provided U/s 194J of the Act.

Hence 40(a)(ia) of the Act cannot be invoked in the case of the assessee for non-deduction of tax. Therefore we hereby direct the Ld.AO to delete the addition of Rs.1,93,50,000/- made in the hands of the assessee invoking the provision of Section 40(a)(ia) of the Act r.w.s. 194J & 9(1)(v) of the Act.

7. In the result, the appeal of the assessee is partly allowed.

Order pronounced on the 14^th February, 2019 at Chennai.