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Before: SHRI KULDIP SINGH & SHRI ANADEE NATH MISSHRA, AC C O U N TA N T MEMBER
PER ANADEE NATH MISSHRA. AM : This appeal by the assessee is filed against the order of learned Commissioner of Income Tax (Appeals)-36, ("learned CIT(A)", for short), New Delhi, dated 2nd December, 2016 for assessment year 2013-14, on the following grounds
"1. That the Ld. Assessing Officer has erred in disaiiowing higher rate of depreciation @ 30% amounting to Rs.19,57,837/- on commercial vehicles used in the business of promotional activity in rural markets of India. The assessee earns more than 75% of its income primarily from this activity and hire charges of vehicles are duly charged from its clients.
The Appellant craves to amend, modify, alter, add or forego any ground of appeal at any time before or during the hearing of this appeal. "
The only issue in dispute in the present appeal before us is whether the assessee is eligible for higher rate of depreciation at the rate of 3 0 % or the normal rate of depreciation at the rate of 1 5 % on the vehicles used by the assessee in the business of promotional activities in rural markets of India.
During assessment proceedings, the Assessing Officer raised a query about this issue, in response to which, the assessee submitted justification. However, the Assessing Officer did not accept the assessee's justification for higher rate of depreciation at the rate of 3 0 % and restricted the depreciation to 15%. The relevant portion of the assessment order is reproduced as under
"2. During the assessment proceedings the detailed submissions fifed b y the assessee have been duly perused and it was noticed that assessee has charged depreciation @ 30% p.a. amounting to Rs.34,19,477/- and Rs.4,95,796/- respectiveiy on commercial video vans and commerciaf vans body instead of 15% as prescribed b y the income Tax Rules, 1962. The AR of the assessee was specifically asked about the same vide note sheet entry dated 06/11/2015. In compliance thereto the assessee has fifed a reply, which is being reproduced as under:
Sub : Income Tax Scrutiny proceedings in the case of M/s Rural Communication & Marketing P.Ltd. for the A. Y. 2013- 14. 10. justification o f Depreciation on Commercial Vehicles:
The company uses its commercial vehicles on hire for promotional activity for its various clients. The company books all its income from running of Promo-vans under the head of "Van Hire Charges" and has duly segregated the same as separate head of income. Due to a different mode of promotional activity, the method of charging or billing has been designed in a manner that it includes not just the
Hire for Van but for various other combined set of activities. Therefore, since the vehicles are being used for hire to its clients, the company is well justified in claiming depreciation @ 30 on such commercial vehicles. These vehicles are the main source of income for the assessee and undergo lot of wear and tear while on roads in rural areas. In fact, due to hard rural conditions, these vehicles undergo more than usual depreciation."
2.1 The reply of the assessee was duly considered but not found tenable, as the assessee company is engaged in the business of rural marketing, promotions, road shows, display advertising etc. and not in the business o f hiring of vehicles. The assessee carries out its business activities for promotions o f brands through its vans duly fitted with display devices, it is germane to mention here that the assessee is not carrying on business of transportation. By delving into the records of usage by the assessee it is perceived that these vans were used b y the assessee wholly and exclusively for its own business. In this context the decision b y the Apex Court in the SLP(C) No.12846 of 2007published vide 3 0 5 ITR 132 (SC) (2008) in the case of C ITv. Gupta Global Exim P.Ltd. is reproduced below :
"Generally, this court does not interfere with the concurrent finding of facts recorded b y the authorities below. However, we are aware of the view that in this case, a neat substantiai question of law arose for determination which needed interpretation o f the Depreciation Table given in Appendix-1, to the income Tax Rules, 1962. The said table gives rates at which depreciation is admissible. Under sub-item 2(H) of Item Hi, higher rate of depreciation is admissible on m otor trucks used in a business of running them on hire. Therefore, the user of the same in the business of the assessee of transportation is the test. In the present case, none of the Authorities below (except the A O ) has examined the matter b y applying the above test The A O has given his findings that the assessee was not in the business of trading in timber logs. That, the burden was on the assessee to establish that it is the owner of motor lorries and that it used the said motor lorries/trucks in the business of running them on hire.
In our view the entire approach of CIT(A) was erroneous when he has stated that the transportation income of Rs.12,50,639/- b y way of running the subject vehicles on hire is an integral part of the appellants business and its inclusion in the head "business income" is not disputed even b y the AO. In our view, mere inclusion of Rs,12,50,639/- in the total business income is not the determinative factory for deciding whether trucks were used y the assessee during the relevant year in a business of running them on hire, in our view, the CIT(A) had erred in relying upon the accrual o f income as a determinative factor for coming to the conclusion that trucks were used in a business of running them on hire.
What is relevant for consideration under sub-item 2(H) of item ill of Appendix f to the income-tax Rules, 1962, is whether the assessee was in the business of hiring out his trucks in addition to his business of trading in timber. The order of assessment clearly indicates that the assessee was only in the business of trading in timber. We do not have the Returns filed b y the assessee company before us. There is no evidence to indicate that the assessee was in the business of hiring out motor lorries for running them on earn business income. The entire inference is drawn by CIT(A) only on the footing that the AO had treated Rs.12,59,639/- as part of Total Business Income, which is not determinative factor of the above test, viz., whether the trucks were used in transportation business as claimed b y the assessee. For the aforesaid reasons, we set aside the impugned Judgment of the High Court and we rem it the m atter to CIT(A) for de novo examination of the case in accordance with the law................." This fact is further substantiated b y the ratio of decision b y Gujarat High Court in the case of C IT v. Prad/p N. Desai (HUF) (2012) 3 4 1 ITR 277 (Guj.) "Wherein it has been held that as the assessee was not carrying on the business hiring of vehicle, not entitled to higher rate of depreciation." 2.2 in view of the foregoing facts and circumstances of the case and in law, the assessee is entitled for depreciation on these vans @ 15% p.a. and the excess
depreciation claimed at Rs.17,09,939/- on commercial video vans and Rs.2,47,898/- on commercial van body aggregating to Rs.19,57,837/- is being disallowed and added to the income of the assessee. / am satisfied that assessee has concealed true particulars of income within the provisions of section 2 7 1 (l)(c ) of the Income Tax Act, 1961, so penalty proceedings u/s 2 7 1 (l)(c ) are being initiated separately."
The assessee filed appeal before the learned C1T(A). However, vide order dated 2nd December, 2016, learned CIT(A) confirmed the action of the Assessing Officer. The relevant portion of the order of learned CIT(A) is as under
"8.1 The A O has disallowed depreciation @ 30% on commercial vehicles vans and commercial vans though the depreciation has been allowed @ 15% as prescribed b y the i.T. Rules. The assessee is in the business o f rural marketing promotion, road shows, display advertising etc. The key ingredient of the billing to clients includes the vehicle hire charges for which a separate ledger account is also being maintained b y the assessee. It was contended that the vehicles are used b y the assessee for its clients and proper hire charges are collected. Reliance has been made on two cases of Apex Court. However, it is seen that the case of SREl Infrastructure is about claim of depreciation o f motor vehicles given on lease and the debate mainly was about the ownership o f the assets and therefore the facts of the case are not same at all. In the case of iCDS Ltd., the debate is on whether the asset are used for the purpose of business and again about the leasing company which lease out the trucks. There is no dispute about the claim of depreciation on the vehicles owned b y the assessee which has also been allowed b y the AO. The only issue is whether depreciation is allowed at 15% or at higher rate of 30%. / am inclined to agree with the AO that the assessee does not carry on the business of either transportation or hiring out motor vehicles. The main business of the assessee is outsourcing of brand promotion b y its clients and the vehicles are only one part of the whole process. Obviously hire charges are a part of the cost but it does not change the nature of the business. The twin requirement of "ownership" and "usage for
business” is prescribed for a successful claim of depreciation u/s 32 which is fulfilled in this case and therefore the depreciation is valid and there is no two views about it However, the same tests are not enough for claiming of higher rate of depreciation. / also find that the judgm ent o f Apex Court in the case of Gupta Global relied upon b y the AO is most appropriate where it was held that higher rate of depreciation is admissible on m otor trucks used in a business of running them on hire, therefore the user o f the same in the transportation business o f the assessee is a test The Apex Court had found that reliance cannot be made upon the accrual of income as a determinative factory for coming to conclusion that trucks were used in the business o f running them on hire. What is relevant is whether the assessee was in the business o f hiring out his trucks in addition to his business of trading in timber (in that case). The assessee b y self admission is engaged in business of marketing & brand activation serving and advertising through A V methods, mobile vans, T. V, Radios, etc. The use of vehicles is thus only the means to do so. It is dear that in the case of the assessee, without the work of brand promotion/road shows/rural marketing etc., the assessee would not hire out trucks m erely for transportation. Therefore, it cannot be said that the assessee was in the business o f hiring of vehicles o f transportation. In the above circumstances the disallowance of higher rate of depreciation at 30% is confirmed. "
The present appeal before us is filed by the assessee against the aforesaid impugned appellate order dated 2nd December, 2016 of the learned CIT(A).
During appellate proceedings in ITAT, a paper book consisting of 108 pages was filed from assessee's side containing the following particulars
Particulars S.No. Form-36 1 Statement of Facts 2
Grounds of Appeal 3 Power of Attorney 4 Copy of the Order by Commissioner of 5 Income Tax-(Appeals)-36 dated 02-12-2016 Copy of Order by DCIT, 21(2) u/s 143(3) 6 dated 29-01-2016 7 Relied upon cases 8 Relied upon documents
At the time of hearing before us, the learned Authorized Representative of the assessee fairly conceded that the business of the assessee was rural marketing, promotions, road shows, display advertising etc., and further that the assessee was not in the business of running vehicles on hire. However, he drew our attention to the paper book which contained copy of invoices raised by the assessee. He highlighted that invoices raised by the assessee included, inter alia, charges for vehicles used by the assessee, and termed it as hire charges for the vehicles. Further, the learned AR submitted that in addition to vehicles owned by the assessee, the assessee was also taking vehicles on hire from outside parties for use in assessee's business of rural marketing, promotions, road shows, display advertising etc. The learned AR also submitted that the vehicles used by the assessee in the assessee's business of rural marketing, promotions, road shows, display advertising etc. were altered/modified to suit the purpose of the assessee's business of rural marketing, promotions, road shows, display advertising etc. Such alteration/modification of the vehicles was based on the requirements of different clients of the assessee, the learned AR submitted. The learned AR of the assessee also drew our attention to the statement of facts accompanying Form No.36, relevant portion of which follows
"1. That the assessee company is mainly engaged in the business o f operating video vans in rural areas for handling marketing and promotional activities. Over 75% o f revenue o f the company is from this source only and it cannot provide these services without using commercial vehicles. The company has its own fleet of 85 (eighty five) commercial vehicles duty registered in its name and also used over 200 (two hundred) vehicles hired from private operators. These vehicles are duty registered as commercial vehicles and National/State permits are taken for operating them on roads. These commercial vehicles are fabricated, branded, painted and modified according to the needs of clients and promotional activity is carried-out in Rural markets of India which are based m ostly in interior parts of India. Due its reach in remote areas, large number of clients from sectors like FMCG, Automobile, Beverages etc., take services from the assessee. it is also pertinent and emphasized that the hire charges for vehicles are duty charged in the overall billing to its clients b y the assessee.
That the assessee claimed depreciation @ 30% on commercial vehicles used in the business o f handling promotional activity in Rural areas. These vehicles are the main source of income for the assessee without which the company cannot provide such promotional services in Rural Market for which it is known in the market Due to hard rural conditions these vehicles undergo lot o f wear and tear while on roads. Since large area of Rural India is not connected b y metalled roads, these vehicles undergo more than usual depreciation.
That the assessee buys chassis of commercial vehicles and thereafter gets the body fabricated to rest over it. These bodies become part and parcel of the vehicles when operated and are interchangeable. Therefore, these are capitalized under separate head of "Commercial Vans Body". However, depreciation is charged at the same rate as for Commercial Vehicles as these essentially form part of the "Commercial Video Vans". A vehicle is actually incomplete without body part of it. 3. That the A.O. disallowed higher rate of depreciation on "Commercial Vehicles" and "Commercial Vans Body" @ 30% on the premise that these vehicles are not used in the
business of hiring and that the main activity of the assessee company is that of Rural Marketing, promotions, road shows, display advertising etc. Further, there is no evidence that the vehicies are used for earning Business Income. He a/so quoted that the assessee is not carrying on the business of Transportation. In order to substantiate his argument, he also quoted the case o f C IT V Gupta Global Ex/m PvtLtd. 305 ITR 132 (SC) 2008 and another case o f C IT v Pradip N. Desai (HUF) (2012) 341 ITR 277 (Guj). The A O calculated the allowable depreciation @ 15% instead of 30% and disallowed an amount o f Rs.19,57,837/- on this account He also initiated a penalty u/s 2 7 1 (l)(c ) for concealment of true particulars of income.
The Assessee filed appeal before C!T(Appeals)-36 with all the facts and also filed sample copies o f invoices showing specific charge o f "Rental/Hire for Commerciai vehicles" used in the business of promotional activity. The assessee also relied upon following two land mark judgements in support o f its argument for allowability of Higher rate of depreciation:
i) SREl Infrastructure Finance Ltd. vs. Additional Commissioner o f income Tax Delhi High Court (2015) 281 CTR 0532 (Del) : (2015) 116 DTR 0359 (Del)
ii) i.C.D.S. Ltd. vs. Commissioner o f Income Tax Supreme Court of India, 14th January, 2013 (2013) 350 ITR 0527.
The CIT(Appeal), confirmed the disallowance of higher rate of depreciation @ 30% even upon satisfaction of twin requirements of "ownership" and "usage of business" b y grossly relying of judgem ent in the case o f Gupta Global Exim (P) Limited (2008) 305 ITR 132 (SC). "
He also relied on the submissions made by/on behalf of the assessee before the Assessing Officer and the learned CIT(A).
On the other hand, the learned Departmental Representative submitted that the assessee is not in the business of running the vehicles on hire. Since the assessee is not in the business of running the vehicles on hire, learned DR contended, and instead, the assessee is in the business of rural marketing, promotions, road shows, display advertising etc.; the assessee is eligible for the depreciation on vehicles at the normal rate of 15% and not at the higher rate of 30%.
We have heard both sides carefully. We have perused the material on record carefully. We have considered the judicial pronouncements brought to our notice or referred to in the records. The rate at which depreciation is admissible to the assessee is contained in Part A of New Appendix i read with Rule 5 of Income-tax Rules, 1962 read with Section 32 of Income-tax Act, 1961. The relevant portion of the New Appendix I is reproduced as under
"Block o f assets Depreciation allowance as percentage of written down value PART A ” TANGIBLE ASSETS
I. Building (1 ) (2) (3) ...................... ..................... (4)
Furniture and fittings //.
Hi. Machinery and Plant (1 ) .......................... (2) Motor cars, other than those used in a business of running them on hire, acquired or put to use on or after the 1st day of April, 1990 15 (3) (i)....... .................... (ii) Motor buses, motor lorries and m otor 30
taxis used in a business o f running them on hire
Therefore, it is obvious from a perusal of the bare provisions in law that the normal rate of depreciation on vehicles is 1 5 % as per Part A of S.No.111(2) of New Appendix I. The higher rate of 3 0 % is admissible to an assessee, under S.No.lll(3)(ii) of Part A of New Appendix I only if the vehicles are used in the business of running them on hire. Before us, it was admitted by the learned AR of the assessee that the business of the assessee is rural marketing, promotions, road shows, display advertising etc. and that the assessee is not in the business of running the vehicles on hire. In view of this undisputed fact, we are not persuaded by the contention raised on behalf of the assessee that the assessee is eligible for higher rate of depreciation at the rate of 30%. Merely because the invoices raised by the assessee include, inter aiia, charges for running of vehicles, does not mean that the assessee is in the business of running the vehicles on hire. The fact remains that the vehicles are used by the assessee in the assessee's business of rural marketing, promotions, road shows, display advertising etc. and that the assessee is not in the business of running the vehicles on hire. For coming to this conclusion, we take guidance from the order of Hon'bie Supreme Court in the case of C IT Vs. Gupta Globa! Exim P.Ltd. - [2008] 305 ITR 132 (SC), wherein Hon'bie Apex Court held as under
"Generally, this court does not interfere with the concurrent finding of facts recorded by the authorities below. However, we are aware of the view that in this case, a neat substantia! question of law arose for determination which needed interpretation o f the Depreciation Tab/e given in Appendix-1, to the Income Tax Rules, 1962. The said table gives rates at which depreciation is admissibie. Under sub-item 2(H) of Item III, higher rate of depreciation is admissibie on m otor trucks used in a business of running them on hire. Therefore, the
user of the some in the business o f the assessee of transportation is the test In the present case,, none of the Authorities below (except the A O ) has examined the m atter b y applying the above test The A O has given his findings that the assessee was not in the business of trading in timber logs. That, the burden was on the assessee to establish that it is the owner o f motor lorries and that it used the said motor lorries/trucks in the business o f running them on hire.
in our view the entire approach o f CIT(A) was erroneous when he has stated that the transportation income of Rs.12,50,639/- b y way of running the subject vehicles on hire is an integral part of the appellants business and its inclusion in the head "business income" is not disputed even by the AO. in our view, mere inclusion of Rs.12,50,639/- in the total business income is not the determinative factory for deciding whether trucks were used y the assessee during the relevant year in a business of running them on hire. In our view, the C!T(A) had erred in relying upon the accrual of income as a determinative factor for coming to the conclusion that trucks were used in a business o f running them on hire. What is relevant for consideration under sub-item 2(H) of Item Hi o f Appendix I to the Income-tax Rules, 1962, is whether the assessee was in the business of hiring out his trucks in addition to his business of trading in timber. The order of assessment clearly indicates that the assessee was only in the business of trading in timber. We do not have the Returns filed by the assessee company before us. There is no evidence to indicate that the assessee was in the business o f hiring out motor lorries for running them on earn business income. The entire inference is drawn by C1T(A) only on the footing that the AO had treated Rs.12,59,639/- as part of Total Business Income, which is not determinative factor of the above test, viz., whether the trucks were used in transportation business as claimed b y the assessee. "
Respectfully following the aforesaid decision of Hon'bie Apex Court in the case of Gupta GlobalExim P.Ltd. (supra), and in view of the undisputed fact that the assessee is not in the business of running the
vehicles on hire, and also in view of the clear-cut statutory provisions as discussed in the foregoing paragraphs 9 and 10, we uphold the order of learned CIT(A) and dismiss the assessee's appeal,
In the result, the appeal of the assessee stands dismissed. Decision pronounced in the open Court on 12th July, 2019.
Sd/- Sd/- (ANADEE NATH MISSHRA) (KULD1P SINGH) ACCO U N TAN T MEMBER JUDICIAL MEMBER
VK.