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

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “E”, MUMBAI BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER (A.Y. 2013-14) (A.Y. 2014-15) Silver Spark Apparel Ltd. Ground Floor, New Hind House, Norottam Morarjee Marg, Ballard Estate, Mumbai-400001 PAN: AACCR1288G ...... Appellant Vs. Dy.CIT, CC-8(1), 6th Floor, Aayakar Bhavan, Mumbai-400020. ..... Respondent Appellant by : Sh. Madhur Agrawal, Adv. Respondent by : Sh. Chetan M. Kacha, Sr. DR Date of hearing : 27/07/2022 Date of pronouncement : 20/10/2022 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 appeal in both the AYs. Firstly, we are taking 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.

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.

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 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.”

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 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.