ACTUAL NATURE OF USE OF VEHICLE IS IMPORTANT – lessor is entitled to higher rate of depreciation when vehicle is used for running on hire, though by lessee.

[C.A. DEV KUMAR KOTHARI]

References and links:

Section 2(13), 2(24), 28,32  of the Income-tax Act, 1961.

Section 2(30) of the MV Act

M/S I.C.D.S. LTD. VERSUS COMMISSIONER OF INCOME TAX, MYSORE & ANR. 2013 (1) TMI 344 - SUPREME COURT dt. Dated - 14 January 2013

CIT Karnataka, Bangalore Vs. Shaan Finance (P) Ltd., Bangalore [1998 (3) TMI 8 - SUPREME COURT]

CIT v. Castle Rock Fisheries (1997 (4) TMI 13 - SUPREME COURT)

Higher rate of depreciation:

In some situations of working higher rate of depreciation is allowed. The purpose of higher rate is to provide for amortization at higher rate because according to use the vehicle (or any other asset) is supposed to suffer greater wear and tear.

Example of use and wear and tear:

A vehicle say truck or bus run for own business of transportation of goods or employees is likely to suffer lesser wear and tear than same bus used for public transportation as truck run on hire or bus run as a stage carriage bus.

The can be many reason of higher wear and tear. For example, some of reasons are:

1. Extensive use of bus as a public bus as against use as staff bus or school students bus. Or extensive use of a truck when used in business of running on hire as against use for transportation of own material by a manufacturer.
2. Reduced degree of care in use by public or use as a public transport as against use in private use. For example, a car used as personal vehicle will suffer less wear and tear as against car used to run on hire for public or even for a set of customers/passengers.

Ownership have no bearing on wear and tear:

Ownership of vehicle will not be much relevant when the matter of wear and tear due to use is under consideration and not other factors of wear and tear. A truck  owned by truck  driver himself as well as a truck  owned by some other owner and allowed to be run by truck driver will have similar use and extensity of use and therefore wear and tear due to use will be similar. Therefore, there is no logic not to allow applicable higher rate of depreciation to owner of truck when the owner himself is not directly using truck in business of running for hire.

A person may own truck and run himself in business of running for hire or he may allow say to a transport company to use truck in business of running for hire and owner may get a fixed rent or charge or rent or charge to be ascertained according to period and / use of truck measured by way of kilometer run or ton-kilometer run etc.

In both cases the truck remains working in business of ‘running on hire’.

Ultimate use is important:

Therefore, we can say that the ultimate use in which an asset is put to use is decisive of applicable rate of deprecation, in case different rates of depreciation are provided depending on use to which asset is put to use.

Like depreciation, some other allowances may also be allowed based on actual use of asset. For example if a plant and machinery is used in manufacturing of eligible item, it may be eligible for a particular deduction. Whereas if the same plant and machinery is used in manufacture of some item which is not eligible for deduction, then it will not be eligible for deduction. In past we found such condition in relation to deductions like development rebate, development allowance, investment allowance etc.

For such deductions also ultimate use is considered as relevant. Even if an asset is owned by one person and is used by another person in eligible business as lessee of asset, the owner may be entitled to deduction, because type of asset and use of asset are relevant consideration.

Applying the above general aspects deduction by way of incentive allowances was allowed in case of CIT Karnataka, Bangalore Vs. Shaan Finance (P) Ltd., Bangalore [1998 (3) TMI 8 - SUPREME COURT] to the owner of plant and machinery who purchased and leased plant and machinery to other manufacturer. As the Plant and Machinery was actually used in eligible business, though by lessee, Investment Allowance was allowed to the owner/lessor.

Ownership vis a vis Motor Vehicle Act:

The Motor Vehicle Act, really concerns registration of motor vehicles for levy of Road Tax and plying of vehicles on road. When a motor vehicle is owned by one person and leased out to other, MV Act requires that lessee should be registered as owner. When lease is over, the vehicle is again registered in name of the owner lessor. Therefore, lessee is registered as owner for limited purposes of Motor Vehicle Act. There is definite and directly linked purpose for such requirement. This is because in case of lease of vehicle, the lessee is having control over the vehicle, and he can only be held responsible for compliance of provisions pertaining to motor vehicles, plying on road, compliance of traffic rules etc. and also in case of any defaults and accidents. Therefore, lessee is not owner in general law but only for the purpose of Motor Vehicles act. 

Higher rate on vehicles in case used in running them on hire:

In spite of principals laid in Shaan Finance (supra.) which is equally applicable in relation to higher depreciation, revenue authorities raised dispute about allowability of higher rate of deprecation on vehicles owned by a lessor and allowed to be used in business of running vehicle for hire. As per actual use that is  ‘running on hire’, though by lessee, to which vehicle was put, higher wear and tear  has to took place, the vehicle were actually used in business of running them on hire, though  by lessee. Therefore, the revenue should have allowed higher depreciation to lessor also. However, controversy continued due to differences amongst High Courts also. Now it has been settled by the Supreme Court in favour of assessee in case of M/S I.C.D.S. LTD. VERSUS COMMISSIONER OF INCOME TAX, MYSORE & ANR.

In this case Tribunal has allowed higher rate of depreciation, however, the revenue challenged the order of Tribunal before High Court, under section 260A and the High Court framed the following substantial questions of law for its adjudication:-  

“Whether the Appellant (assessee) is the owner of the vehicles which are leased out by it to its customers and whether the Appellant (assessee) is entitled to the higher rate of depreciation on the said vehicles, on the ground that they were hired out to the Appellant’s customers.”  

As per question controversy involved was about ownership, this was due to provisions of Motor Vehicle Act and registration of vehicle which included name of lessee also and use of vehicle for running on hire.

From the question itself it is clear that the assessee leased out vehicles to other party/customers who used them by hiring out to their customers. Thus, ultimate use of vehicles in business by way of hiring is clear, the controversy was only because such use was by lessee and not the lessor who claimed deprecation as owner on the basis of vehicles used in business of leasing of vehicles and other plant and machinery.

However, the High Court answered the question in favor of revenue and against assessee, Therefore, the assessee preferred appeal before the Supreme Court.

The Supreme Court on consideration of provisions of Motor Vehicle Act, and all facts came to conclusion that the assessee was owner of vehicle who invested capital in vehicles and allowed lessee to use the vehicle in consideration of lease rent. The lease rent was his business income and lease rent paid by lessee was his business expenditure. The vehicle was actually used in business of running for hire, therefore assessee was entitled to deprecation at higher rate on such vehicles based on use of vehicle in business of running on hire.