It is a common practice followed by many companies, particularly by private limited companies, to register the motor cars purchased by them under the Motor Vehicles Act in the name of their directors and treat the same as its own asset in the books of account. Since the company finances the purchase of these motor cars and uses it for the purpose of its business, it treats it as its own fixed asset inspite of it being registered in the name of director and claims depreciation under section 32 of the Income Tax Act (‘ITA’).
Now the moot question is whether the motor car is the asset of the company or of the director since registration is in the name of the director but is financed by the company and also whether the company would be eligible to claim depreciation on the same?
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) in a recent case of Edwise Consultants Pvt. Ltd. Vs. ACIT (391/MUM/2011) has, inter alia, considered the matter regarding allowability of depreciation when the cars were registered in the name of the directors but were financed and recorded as assets by the company. This tax alert discusses this aspect.
Facts of the case:
- During the previous year relevant to assessment year 2007-08, Edwise Consultants Pvt. Ltd (‘tax payer’) was engaged in the business of providing educational advice.
- The tax payer claimed ownership of three motor cars and availed depreciation u/s. 32 of the ITA on them.
- These motor cars though purchased by the tax payer and appeared as assets in the balance sheet of the company but were registered in the individual names of the concerned directors.
- The invoices for the motor cars were also in the names of the directors.
- The Assessing Officer (‘AO’) disallowed the depreciation claim of the tax payer on the ground that the tax payer was not the owners of those cars.
- On further appeal, Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance of depreciation claimed.
- Thus, the tax payer was in appeal before the ITAT.
Contentions of the Tax Payer:
- The tax payer contended that even though the motor cars were registered in the names of the directors, the payments for their purchase were made by the tax payer.
- The cars formed a part of the fixed assets in the books of accounts of the company.
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