JUDGMENT
Nazir Ahmad, J. – A Statement of the case had been submitted by the ITAT, B Bench, Patna under s. 256(2) of the IT Act, 1961 (hereinafter referred to as the Act), in view of the directions of this Court, referring the following question of law for the opinion of this Court :
“Whether, on the facts and in the circumstances of the case the Tribunal was justified in law in holding that no disallowances can be made by the ITO from the full depreciation allowances claimed by the assessee firm even though the cars owned by the assessee firm were used by the partners of the firm for their personal purposes ?”
2. The relevant facts of the case may be called from the statement of the case and other documents on the record. The assessee is a registered firm and drives income from contract business. The assessee owned six cars on which the depreciation was calculated at Rs. 7,374. The ITO on the grounds that the cars were used for the personal use by the partners, disallowed the depreciation of 1/3rd at Rs. 2,453. A copy of the order of the ITO has been annexed and marked as Annexure A forming part of the statement of the case.
3. The assessee appealed before the AAC and the AAC observed that the cars were utilised for personal purposes of the partners and so he confirmed the disallowance. A copy of the order of the AAC has been annexed and marked as Annexure B forming part of the statement of the case.
4. On appeal before the Tribunal, the Tribunal held that the cars are owned by the assessee firm and they are entitled to the entire depreciation claimed. It was further held that no deduction can be made on the ground that the case were utilised partly for personal use. Accordingly, the Tribunal allowed the full depreciation claimed by the assessee and the assessees appeal was allowed in part. A copy of the order of the Tribunal has been annexed and marked as Annexure C forming part of the statement of the case.
5. To understand the facts of the case it is necessary to look the assessment order of the ITO (Annexure A) which is at PP 1 to 3 of the paper book. The assessment order of the ITO shows that he has disallowed Rs. 7,000 out of the car expenses on estimate for the personal use of the partners. He also allowed depreciation of Rs. 38.082 as per separate chart enclosed. The chart is not available in the paper book.
6. However, the order of the AAC at PP. 3 to 5 of the paper book given full facts of the case. He has pointed out that the objection of the assessee is against the ITO disallowing a sum of Rs. 7,000 out of the motor car expenses claimed by the appellant at Rs. 22,359. It was contended on behalf of the assessee before the AAC that since the assessee carried on its business at different places and has necessarily to maintain a large fleet of cars, the expenses claimed at Rs. 22,359 could not be considered to be excessive or not connected with the assessees business. It was, therefore, urged that the disallowances of Rs. 7,000 out of the motor car expenses at Rs. 22,359 is highly excessive and deserves to be reduced. The AAC found that the partners of the firm do not have their own cars and the firms cars were utilised for their personal purposes and so the AAC held that the entire claim made by the appellant should not be considered to be wholly admissible as a deduction. Looking to the past record of the appellant and the volume of business done by it during the year of account relevant for the assessment year under appeal, i.e. 1966-67, the AAC held that the disallowances of Rs. 7,000 made by the ITO which is little less than 1/3 of the total claim cannot be refused to interfere. He also considered the objection against the ITO disallowing 1/3 of the depreciation admissible to the appellant-assessee in respect of the motor cars. It was stated that the cars were entirely used for the purposes of business and no part of the depreciation admissible should have been disallowed. The AAC held that the cars were utilised for personal purposes of the partners and so the disallowances of depreciation to the extent of 1/3 cannot be considered to be excessive or unjustified.
7. The order of the Appellate Tribunal Annexure C shows in paragraph 4 that the assessee disputed the disallowances of Rs. 7,000 out of the motor car expenses claimed by the assessee. The Tribunal has also pointed out that the total claim in this account was Rs. 22,359 and about 1/3rd of the expenses was disallowed by the ITO which was confirmed by the AAC. The Tribunal held that when a number of cars are being maintained, the use of partners would not be to the extent of 1/3 in each of the cars. The Tribunal, therefore, allowed relief of Rs. 2,000 to the assessee. Thus, the disallowances out of the car expenses was sustained at Rs. 5,000 out of Rs. 22,359 which will roughly come to slightly more that 1/4th which means that the Tribunal sustained a disallowance of 1/4the out of the car expenses for six cars as mentioned in the statement of the case.
8. However, the Tribunal considered depreciation in paragraph 8 of the order where 1/3rd of the depreciation on the vehicles maintained by the assessee had been disallowed. The Tribunal took then view that the cars were owned by the assessee firm and they are entitled to the entire depreciation claimed and no deduction can be made on the ground that the cars were utilised partly for personal use. The Tribunal, therefore, allowed the entire depreciation claimed by the assessee.
9. Mr. B. P. Rajgarhia, senior standing counsel appearing on behalf of the revenue, has referred to s. 38(2) of the Act which lays down that where any plant is not exclusively used for the purpose of business or profession, the deductions under s. 32(1)(ii) shall be restricted to a fair proportionate part thereof which the ITO may determine, having regard to the user of such plant for the purpose of the business or profession. Mr. Palkhiwala in the took entitled Law and Practice of Income-tax by N. A. Palkhiwala and B. A. Palkhiwala in the 7th Edition in Volume I at 506 in the commentary has pointed out where any plant is not exclusively used for business of the assessee but is also used for other purposes, the depreciation allowance should not be the full allowance due under s. 32, but should be confined under this sub-section, to an amount proportionate to the business user and that this sub-section cuts down the allowances where user is only partly for business purposes, but is does not apply to cases where the assets are used exclusively for business purposes but only for part of the accounting year.
10. Rule 5 of the IT Rules, 1962 clearly lays down that depreciation has to be allowed in full where assets are used for the purpose of the business or profession of the assessee at any time during the previous year. However, where s. 38(2) of the Act applies, rule 5 of the IT Rules, 1962 will not be applicable. Thus, it cannot be doubted and partly used for non-business purposes then the disallowance in depreciation has to be made proportionately.
11. Mr. K. N. Jain on behalf of the assessee-opposite party, has submitted that there are no materials to show that the assessee has used cars for non-business purposes and if so what will be the fair proportions which should be disallowed for personal use. He, has not disputed that the vehicles are plant, as s. 43(3) of the Act shows that “plant” includes vehicles and it cannot be doubted that the motor cars are vehicles. As regards this argument it cannot be doubted that the Tribunal has sustained a disallowance out of the motor car expenses to the extent of a little more than 1/4th for personal use of the cars by the partners. This portion of the order has become final. Sec. 254 (4) of the Act lays down that save as provided in s. 256, orders passed by the Appellate Tribunal on appeal shall be final. It cannot be doubted that no reference under s. 256 of the Act has been made relating to the disallowance of motor car expenses and so it has to be held that the order of the Tribunal disallowing about 1/4th of the expenses relating to the motor cars in question has become final and a proportion has been fixed by the Tribunal. On that very basis 1/4th of the depreciation should have been disallowed by the Tribunal in view of s. 38(2) of the Act.
12. Finding the position difficult in this respect, an ingenious argument has been advanced by Mr. K. N. Jain. He has referred to s. 4(1) of the Act which lays down that there any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or previous years, as the case may be, of every person. He has also referred to s. 2(31) which shows that “person” includes an individual and a firm. On this basis he has argued that the individuals and firm are two different entities. He has then referred to s. 32 of the Act where depreciation is allowable to an assessee who owns the motor expenditure laid out or expended wholly or exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head “profits and gains of business or profession.”
13. It cannot be doubted that under s. 37(1) the expenses which are not far business purposes are not allowed and on this very basis disallowance was made on account of the car expenses to the extent of 1/4th for use of the motor cars for non-business purposes.
14. Mr. K. N. Jain has submitted that in view of the finding of the Tribunal the partners were using the cars for their private purposes and the assessee firm was not will be no disallowances of depreciation to the assessee. Thus argument may be ingenious but it has to be rejected.
15. Sec. 4 of the Indian Partnership Act, 1932 lays down that “partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all and that the persons are called individually “partners” and collectively “a firm” and the name under which their business is carried on is called the “Firm name.” From the comments in the book entitled “The Indian Partnership Act, 1932” published by the Delhi Law House in 1982 at p. it is evident that the concept of partnership law is that a firm is not an entity or a person in law but only a compendious mode of designating person who have agreed to carry on the business in partnership and that it is clear that a partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm has no separate rights of its own in the partnership assets and when one talks of the firms property or firms assets, all that is meant is the property or assets in which all the partners have joint and common interest. In the comments reliance has been placed on the case of CIT, Andhra Pradesh v. G. P. Naidu and Sons AIR 1980 AP 158 at p. 164 and also on the case of M/s. Malabar Fisheries Co. v. CIT, Kerala AIR 1980 SC 176 at p. 183. It has also been held in the vase of CIT/EPT v. Official Liquidator (1973) 90 ITR 380 (Bom) that a partnership is constituted under law if he following three requirements are fulfilled – (1) there is an agreement entered into by all the persons concerned; (2) the agreement is to share the profits of a business; and (3) the business is carried on by all or any one of the persons concerned acting for all.
16. It has been held in the case of S. Magnus v. CIT, Bombay City II (1958) 33 ITR 538 (Bom) that a partner in a partnership cannot be an employee of that partnership. It has been clearly pointed out at PP. 544 and 545 of this decision that in point of law, a partner cannot be employed by his firm for a man cannot be his own employer. It has been further held in this decision that an arrangement by which a partner himself works and receives sums which are called wages, it really does not create the relation of the employer and employee, but is, in truth, a mode of adjusting the amount that must be taken to have been contributed to the partnership assets by a partner who has made what is really a contribution in kind, and does not affect his relation to the other partners, which is that of co-adventurer and not employee and that such a partner cannot put himself in the position of not being a partner when he is one, or of being a workman employed, when that position would involve that he would be both employer and employee.
17. Thus it is evident that the partners cannot be considered as a separate entity from the firm and the argument of Mr. K. N. Jain that a partner should be considered as a separate entity from the firm cannot be accepted.
18. Under such circumstances when about 1/4th of the motor car expenses had been disallowed the fair proportion for disallowance of depreciation should be 1/4th for use of the motor cars for private purposes. In this view I am supported by a decision in the case of CIT, Patna v. Sobharam Jokhiram (1960) 39 ITR 299 (Pat). In this decision to a car newly purchased by the assessee in the accounting year, the AAC, taking into account that the car was used for private purposes also, allowed only Rs. 1,200 as initial depreciation for the car. On appeal the Appellate Tribunal was of the view that in calculating initial depreciation allowance for the car the question of personal use was not material and allowed the sum of Rs. 2,400 claimed by the assessee to be deducted in full. It was under those circumstances that Ramaswami, C.J. and Choudhary, J. of his Court held that the allowance of initial depreciation under s. 10(2) (vi) of the Indian IT Act, 1922 was controlled by the language of s. 10(3) of the Act which expressely restricted the allowance to a fair proportional part of the amount which would be allowable if the machinery was wholly used for the purposes of the business, in the case where the machinery was not wholly used for the purpose of the business but was used both for the purpose of the business and for private purposes. This court, therefore, held that the view taken by the Appellate Tribunal was erroneous and the assessee was entitled only to an allowance of Rs. 1,200 as initial depreciation in accordance with the view of the AAC. Sec. 10(3) of the Indian IT Act, 1922 is similar to s. 38(2) of the Act with slight modification. Under such circumstances this decision is binding on this Court and it has to be held that the Appellate Tribunal was not justified in allowing the entire depreciation claimed by the assessee when the Tribunal had held in paragraph 4 that all the motor cars were used for business purposes as well as for private purposes.
19. The view taken by the Division Bench of the Patna High Court has also been taken in the case of Allied Publishers Private Limited v. CIT, Bombay City I (1968) 68 ITR 546 (Bom) where it has been held that on proper construction of the provisions of s. 10(2) (vi), 10(3) and 10(5) of the Indian IT Act, 1922, where an asset is partially used for the purposes of business and partly for non-business purposes, proportionate depreciation should be calculated, not by taking proportionate part of the cost of the assets, but by deducting from the original cost of the asset the actual depreciation allowed for part user.
20. In the present case there is no difficulty in fixing as to how much of the depreciation should be disallowed for use of the motor cars for non-business purposes. The Tribunal has already restricted the disallowance to Rs. 5,000 out of the motor car expenses at Rs. 22,359 which roughly comes to about 1/4th of the expenses. Under such circumstances disallowance of depreciation should be restricted to 1/4th of the depreciation claimed. We, therefore, should be restricted to 1/4th of the total depreciation claimed for use of the six motor cars for non-business purposes.
21. In view of my findings above, I hold that the Tribunal was not justified in law in holding that no disallowance can be made by the ITO from the full-depreciation allowance claimed by the assessee firm even though the motor cars owned by the assessee firm were used by the partners of the firm for their personal purposes. The question is, therefore, answered in the negative and in favour of the department were in the negative and in favour of the department and against the assessee. However, the parties will bear their own costs.