Can Depreciation be Disallowable merely because Purchase of the Car is from the Personal Account?
Depreciation under the Income Tax Act is a deduction allowed for the reduction in the real value of a tangible or intangible asset used by a taxpayer. The concept of depreciation is used for the purpose of writing off the cost of an asset over its useful life.
While computing one’s income, the depreciation as per Income Tax Act, 1961 is allowed while the book depreciation is disallowed. This is because the Income Tax Act prescribes its own rate of depreciation.
The Income Tax Act allows depreciation on the Written down Value of the assets. The depreciation is computed on ‘Block of assets’ at the rates prescribed rates provided in the Income Tax Rules, 1962.
As per section 32 of Income Tax Act, 1961, an assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:
- Assessee must be owner of the asset – registered owner need not be necessary.
- The asset must be used for the purposes of business or profession.
- The asset must be used during the previous year.
While computing the profit and gains from business or profession, there are certain expenditures which are disallowed. This means that the income tax department does not allow the benefit of such expenditures and the assessee is required to pay taxes on such expenditures by adding it back to the net profits. There are two primary reasons for disallowance of any expenditure:
- The tax amount required to be deducted on certain expenditures are not deducted while making the payment.
- The expenditure does not implicitly relate to the conduct of such business or profession
Let’s refer to the case of Desh Raj Arora Vs ITO (ITAT Delhi) where the issue under consideration was whether the depreciation on car purchased by assessee can be disallowed only because the payment towards purchase of the same is made through his personal account?
Facts of the Case
- The assessee is an individual carrying on the business of trading of tools and hardware etc
- The assessee filed his return of income which was assessed by the Assessing Officer (AO) u/s 143 (3) of the Income Tax Act making certain additions/disallowances.
- The assessee preferred appeal before the Commissioner Of Income Tax (Appeals) [CIT(A)], who confirmed the order of the AO
- Aggrieved with the order of the CIT(A), assessee appealed before the Income Tax Appellate Tribunal (ITAT).
Observations of the ITAT on the disallowance of depreciation on the car purchased by the assessee
- The assessee purchased the car in his personal name. The payment of the purchase of the car was also made from his personal account.
- Therefore the AO took the view that as the assessee had used this car for his personal purposes, the depreciation on purchase of the new car was disallowed.
- He further noted that assessee has not debited the expenses related to the car in the profit and loss account and therefore it was used for personal purposes and not for business purposes.
- The assessee preferred appeal before the CIT(A) against the above disallowance who confirmed the addition.
- ITAT observed that the assessee was a proprietor of M/s Diamond Tool (India) carrying on the trading of hardware and tools.
- As the assessee is an individual so naturally the assessee will purchase the car in his own name only.
- Therefore, ITAT did not find any reason that assessee should not be allowed depreciation on the car, which was used for the purposes of his business.
- Merely because assessee had made payment for purchase of car from his personal account did not mean that it was not the business asset of the assessee.
- Further the AO had not found any expenditure debited to the profit and loss account, however it could not be said that depreciation on the asset was not allowable to the assessee.
- The assessee owned an asset, which was used for the purposes of the business of the assessee.
- The AO has presumed that assessee was not using motor car for his business purposes, which could not be the basis of disallowance of depreciation.
- ITAT directed the AO to delete the disallowance of depreciation and accordingly the same was deleted.
- Let us also refer to the other 2 additions made by the AO in this case.
Observations of the ITAT on addition on account of cash deposited in savings bank account of the appellant
- The appellant explained before the AO that he had sold his old car and had purchased a new car.
- The old car was sold for Rs 90,000 and the cash was deposited in the savings bank account of the appellant.
- The assessee also produced two cash receipts of Rs 45,000 each against sale of the old car.
- This evidence was also submitted before the CIT(A). However as the assessee had not made any application under rule 46A for admission of the additional evidence the CIT(A) did not admit it and confirmed the addition made by the AO.
- ITAT carefully considered the rival contention and found that assessee has sold his old car for INR 90,000 and has also shown two cash receipts of Rs 45,000 each against the sale of old car and therefore the addition made by the lower authorities deserved to be deleted.
- Merely because the assessee had not made any application under rule 46A for admission of the additional evidence the CIT(A) had not considered the above evidence and confirmed the disallowance.
- ITAT did not find the confirmation of the addition by the CIT(A) in accordance with the law. Therefore ITAT directed the AO to delete the addition.
Observations of the ITAT with respect to low household withdrawal by the assessee
- The addition was made by the AO noting that the assessee had shown total drawing of Rs 190,000 for the year under assessment.
- From the perusal of the balance sheet, the assessee was asked to give the justification for the withdrawal.
- The assessee stated that his family consisted of himself, his wife and 2 independent children having their own income.
- However the AO made the addition of Rs 50,000 holding that personal and household expenses are Rs 20,000 month amounting to Rs 240,000 p.a.
- The CIT(A) also confirmed the same.
- ITAT found that appellant’s family consisted of 4 persons wherein the children were independent. Therefore the assessee has to bear the expenditure of self and his wife.
- For this purpose the assessee had shown the total withdrawal of Rs 190,000 p.a.
- Before the AO and CIT(A), assessee had stated that he was residing in a colony where the cost of livelihood was less.
- ITAT did not find any reason to sustain the above addition because of the reason that no expenditure was found to have been incurred by the assessee outside the books of accounts. In view of this, ITAT directed the AO to delete the addition of RS 50,000 because of low withdrawal.
Therefore, in conclusion, merely because an assessee has made payment for purchase of car from his personal account does not mean that it is not the business asset of the assessee. Depreciation will be available if the said asset is used for business purposes.