1. These appeals reiterate the claim of the assessee for the depreciation in respect of two cars owned by the assessee and used in its business.
2. The assessee is a registered firm. It was a dealer in tractors and implements manufactured by Tractor & Farm Equipments Ltd. (TAFE). That company had an impact prize scheme as an incentive to increase the sale of implements manufactured by that company. According to that scheme, at the end of each month that company was to issue prize point cheques, each point being equal to Rs. 500. But that scheme did not allow the dealer to encash the total number of points. The dealer was to select any prize article from a catalogue which detailed the description of the prize items together with a number of points against each. Under that scheme the assessee who had earned 148 points chose two ambassador cars as the prize items to which it was entitled. Accordingly, TAFE delivered two ambassador cars, valued at Rs. 76,000. It was conceded by the assessee that this sum of Rs. 76,000 was liable to be taxed as the income of the assessee under Section 28(iv) of the Income-tax Act, 1961 ('the Act'), which requires the value of any benefit arising from the business to be included in the computation of profits and gains of the business. The assessee had taken two cars as the business assets in its balance sheet and claimed depreciation thereon. The ITO disallowed the claim. The Commissioner (Appeals) also rejected the claim of the assessee.
3. In the appeal before us, it was contended on behalf of the assessee that since the cars were purchased on behalf of the assessee the value assessed as income must be taken to have been spent by the assessee for acquiring the cars and, therefore, that amount qualified for depreciation. In the alternative, it was submitted that the cars having been received as a gift, the value to the previous owner should be taken as the actual cost for granting depreciation. On the other hand, it was contended on behalf of the revenue that under Section 43(1) actual cost meant the cost of the asset as reduced by the cost, if any, which has been met directly or indirectly by any other person and, therefore, in the present case, the assessee was not entitled to any depreciation.
4. On a consideration of the rival submissions, we are of the opinion that the assessee is entitled to succeed on either of the alternative grounds taken by it. Depreciation may be defined as the permanent and continuing diminishment in the quality, quantity or the value of an asset used in the business of the assessee. The purchase of an asset generally is nothing more than a payment in advance for an expenditure.
That is the reason why Section 32 of the Act provides that in respect of depreciation of plant or machinery owned by the assessee and used for the purpose of business a deduction shall be given. The assessee, admittedly, fulfils these two conditions, viz., that the asset is owned by it and also used in its business. But while making the computation, the percentage of depreciation depends upon the actual cost of the asset. Section 43(1) of the Act defines actual cost to mean the actual cost as reduced by any portion of the cost met directly or indirectly by any other person. According to the revenue, the cost of the two cars has been met by TAFE and, therefore, the cost to the assessee is nil.
But we are unable to accept this contention on the face of the assessment of the value of the cars as the assessee's income. If the value of the two cars is the income of the assessee, the consistent position will be that, that income of the assessee has gone into the purchase of the two cars. Even the modus operandi of the acquisition of the car supports this view because the assessee instead of getting any cash was entitled only to choose the prize. It was the assessee who chose the cars and whatever cash value of the prize points was due to the assessee was investment by TAFE in the purchase of cars on behalf of the assessee. It follows that the acquisition of cars though by TAFE was thus on behalf of the assessee. As long as the amount spent for the purchase of the cars is treated and assessed as the income of the assessee, it cannot, at the same breath, be held that the cost was directly or indirectly met by the TAFE. The proviso to Section 43(1) also supports this view because according to that proviso, where the actual cost of an asset being a motor car which is acquired by the assessee between 31-3-1967 and 1-3-1975 and used in the business exceeds Rs. 25,000, the excess of the actual cost shall be ignored.
This lays emphasis on the acquisition of the car and as we have seen above the cars were acquired only by the assessee and not by TAFE and transferred to the assessee. In the alternative, even assuming that TAFE had purchased the cars and transferred to the assessee it was without consideration as it was given as a prize. Therefore, it was a gift and Explanation 2 to Section 43(1) would be attracted and the cost of the asset to the assessee would be the written down value as in the case of the previous owner or the market value on the date of acquisition whichever is less. The contention of the revenue is that it cannot be treated as a gift where the value is assessed as the income.
But then the assessment of the value as income is only because of the deeming provisions of Section 28. If the treatment of the value of the cars as income is to be ignored, then the real nature of the transaction cannot be ignored. If it is to be treated as income then it should be taken as having been spent for the acquisition of the car. If the treatment of the value of the car as the income is not to be taken into consideration, then the real nature of the transaction with respect to two cars as prize being a gift would operate and the value to the previous owner should be taken as the actual cost for the purpose of computing depreciation. In the circumstances, we are convinced that from any point of view, the value of the two cars owned by the assessee and used in its business must be taken into account in computing the depreciation. We direct accordingly. The ITO is directed to recompute the total income of the firm and we also authorise him to amend the assessments of the partners as a consequence. The appeals are allowed.