Facts of the Case

  • The assessee company operated a restaurant and bar business.
  • During Assessment Year 2001-02, it entered into an arrangement with M/s Moet’s Kababs.
  • Under the arrangement, 85% of the daily restaurant and bar sales were transferred to Moet’s Kababs in lieu of materials and labour supplied by it.
  • No written agreement was executed between the parties.
  • The Assessing Officer observed that the assessee had not purchased raw materials, had not deployed manpower for operating the restaurant and bar, and that Moet’s Kababs effectively managed the business activities.
  • The sale bills reflected the names of Moet’s Restaurant and Moet’s Kababs.
  • The Assessing Officer concluded that the assessee had effectively allowed Moet’s Kababs to use its premises and assets and therefore restricted depreciation under Section 38(2).
  • The Commissioner of Income Tax (Appeals) allowed the assessee’s appeal.
  • The Income Tax Appellate Tribunal reversed the CIT(A)’s order and restored the Assessing Officer’s view.
  • The assessee challenged the Tribunal’s decision before the Delhi High Court.

Issues Involved

  1. Whether the assessee was entitled to full depreciation under Section 32(1) of the Income-tax Act, 1961.
  2. Whether Section 38(2) was applicable where the fixed assets were not exclusively used for the assessee’s own business purposes.
  3. Whether the arrangement with M/s Moet’s Kababs amounted to shared use of business assets, thereby justifying proportionate restriction of depreciation.

Petitioner’s Arguments

The assessee contended that:

  • The assets were owned by the assessee and were used for business purposes.
  • M/s Moet’s Kababs merely acted as a caterer supplying and servicing food.
  • Moet’s Kababs did not bring any independent assets, furniture, fixtures, or infrastructure.
  • The assessee’s own assets were used for operating the restaurant and bar business.
  • All statutory licences and registrations were held by the assessee.
  • Depreciation had been wrongly restricted even in respect of bar operations, which were undisputedly conducted by the assessee.
  • The entire turnover of the restaurant and bar business had been assessed in the hands of the assessee under the Haryana General Sales Tax Act.
  • Therefore, full depreciation under Section 32(1) ought to be allowed. 

Respondent’s Arguments

The Revenue argued that:

  • The assessee was not actually operating the restaurant and bar business.
  • No purchases of raw materials or deployment of manpower had been made by the assessee.
  • M/s Moet’s Kababs carried out the operational activities.
  • There was no written agreement establishing that Moet’s Kababs was merely a caterer.
  • The assessee had little or no control over the day-to-day business operations.
  • The arrangement effectively allowed Moet’s Kababs to use the assessee’s premises and assets.
  • Since the assets were not exclusively used for the assessee’s own business, Section 38(2) squarely applied.
  • Consequently, depreciation was rightly restricted on a proportionate basis. 

Court Findings

The Delhi High Court examined Sections 32(1) and 38(2) of the Income-tax Act.

The Court observed that:

  • Section 32(1) permits depreciation where assets are owned by the assessee and used for business purposes.
  • Section 38(2) specifically restricts depreciation where assets are not exclusively used for the assessee’s business.
  • The assessee itself admitted that M/s Moet’s Kababs received 85% of the gross receipts from restaurant and bar operations.
  • The arrangement demonstrated that the assessee’s fixed assets were not being used exclusively for its own business purposes.
  • The contention that Moet’s Kababs merely provided catering services was inconsistent with the substantial share of revenue transferred to it.
  • The Assessing Officer’s finding that the assessee lacked effective control over the business operations remained unrebutted.
  • The factual findings established shared use of the assets. 

Court Order

  • The Delhi High Court upheld the order of the Income Tax Appellate Tribunal.
  • It held that Section 38(2) was correctly invoked by the Assessing Officer.
  • The restriction of depreciation was legally justified because the assets were not exclusively used for the assessee’s own business.
  • No substantial question of law arose for consideration under Section 260A.
  • The appeal filed by the assessee was dismissed 

Important Clarification

The judgment clarifies that ownership of assets alone is insufficient for claiming full depreciation under Section 32(1). Where business assets are shared, utilized, or made available in a manner showing that they are not exclusively used for the assessee’s own business activities, Section 38(2) empowers the Assessing Officer to proportionately restrict depreciation. The substance of the commercial arrangement and actual control over business operations will be relevant in determining eligibility for full depreciation.

Sections Involved

  • Section 32(1) of the Income-tax Act, 1961 – Depreciation on business assets
  • Section 38(2) of the Income-tax Act, 1961 – Restriction of depreciation where assets are not exclusively used for business purposes
  • Section 260A of the Income-tax Act, 1961 – Appeal before High Court

Link to download the order -
https://delhihighcourt.nic.in/app/case_number_pdf/2008:DHC:884-DB/VBG10032008ITA1412008.pdf

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