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.

·        The tax payer contended that registration was not a criteria for claiming depreciation u/s. 32 of the ITA and in this regard relied on the following judicial precedents:

·        CIT vs. Navdurga Transport Co 149 CTR 219 (1998) (All)

·        Mysore Minerals Ltd vs. CIT 106 Taxman 166 (1999) (SC)

·        CIT vs. Dilip Singh Sardarsingh Bagga 201 ITR 995 (1993) (Bom)

·        On the basis of the above decisions, the tax payer contended that non registration of assets in the name of the tax payer was no ground for disallowance of depreciation. Thus, the tax payer should be entitled to depreciation on the motor cars.

 

Contentions of Revenue:

·        The Revenue argued that the cars were registered in the names of the directors of the company and since the company was not the owner it did not have any right to claim depreciation on the same.

 

ITAT’s Observation:

·        The ITAT distinguished all the three case laws cited by the tax payer as under:

·        It observed that all the judgments cited by the tax payer had a common fact that although the ownership and possession over the assets were transferred to the assessee in the respective cases, the title could not be registered due to certain exigencies, reasons, compulsions or omissions.

·        However, in the case of tax payer, there was no restriction or compulsion which prevented the tax payer from registering the cars in its own name instead of in the names of the directors.

·        No explanation was offered by the tax payer as to why the cars had been purchased and registered in the name of its directors although the company wanted to have ownership and domain over the said cars.

·        It was the directors and not the company under law who were not only the legal owners of the property (cars) but were also actually using and possessing the same.

·        In the tax payer’s case, it cannot be said to be holding the property to the exclusion of others as it was in the cases cited especially when the cars were not only purchased in the name of the directors but they were also in the possession of the cars and were exercising all the rights of the ownership.

·        The Directors have neither sold nor transferred these cars to the tax payer.

·        The judgements cited by the tax payer can be applied to a case where the property has been transferred to the tax payer and the tax payer has been using, possessing and exercising its rights as owner over it, but due to certain circumstances the title could not be transferred in the name of the tax payer.

·        Where a person claims himself to be the owner of the property but does not offer any sufficient explanation for purchasing the property in someone else’s name and never makes any efforts for getting its ownership or title transferred in its own name, rather allows deliberately the title registration in the name of other person, then such person cannot claim its ownership to the exclusion of the registered owner/purchaser of the property.

·        Merely because the said cars have been shown in the balance sheet or books of account as assets of the tax payer, did not mean that the tax payer had become the owner of the same.

·        The Tribunal concluded that the tax payer cannot be said to the owner of the cars even in the light of the extended definition of ownership u/s. 32(1) of the Income Tax Act given by the various judgements.

·        Further, the Tribunal upheld the observation of the CIT(A) that the payment made towards cars should be treated as loans in the hands of the directors.

 

Our Observation:

The Tribunal has pronounced an important judgement that would have an adverse effect on companies which have been claiming depreciation when the car is registered in the name of the Directors but beneficial ownership is with companies. Mumbai Tribunal has reached the finding that depreciation shall not be allowed unless it is established that it is ‘beyond the control’ of the tax payer to register the asset in its name. Thus, merely financing the asset shall not suffice to claim the ownership. This decision brings to fore the age old controversy surrounding the concept of “legal ownership” versus “beneficial ownership”. In our view, the ITAT has ignored the principle of beneficial ownership and has confirmed the disallowance of depreciation on the criteria of legal ownership. Due to this decision, tax payers, particularly in Mumbai, would have a tough time in claiming depreciation in such a situation and one hopes that Mumbai High Court takes a more liberal view in this matter and allows the depreciation based on the “beneficial ownership”. This decision could also lead to taxability of perquisite in the form of interest free loans in the hands of the directors.