MAJOR LEAGUE BASEBALL PROPERTIES INC., NEW YORK VS ASSISTANT REGISTRAR OF TRADE MARKS, KARACHI, 1993 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1222 (1993)

(a) Income Tax Ordinance (XXXI of 1979)---

----S. 23(v) & Third Sched., R. 1, (1-A) (2) & (3)---Allowance of depreciation--- Motor-vehicle--- Claim of depreciation allowance ---Principles-- Assessee is entitled to claim depreciation allowance for an asset which is firstly owned by him and secondly that the said asset is wholly and actively used by him for the purposes of business during the assessment year ---Assessee may also claim proportionate depreciation allowance if asset is partly used by him but the emphasis is on "use" of an asset---If an assessee had purchased an old car prior to end of closing year and application for registration was made within stipulated period then use of car for the purpose of business under old registration would be permissible to claim depreciation allowance.

Depreciation allowance is permissible on assets which are employed in the earning of income and in order to prove their active employment as required under sub-rule (3) of rule 1 in the Third Schedule to the Income Tax Ordinance, apart from proof of ownership, some proof of actual use of such assets is necessary. Since depreciation is consequence of active use of an asset and if an asset is not actively used then depreciation allowance would not be permissible. There may be cases where asset is used for one year and is not used in subsequent years and in such a situation depreciation allowance would not be given in those years when the asset was not used. The emphasis is on the active use of an asset. In short, to claim depreciation allowance firstly an assessee must be owner of asset and secondly such asset must have been actively used wholly or partly during the year for the purposes of business.

In depreciation schedule the motor vehicles have been classified under the heading of machinery and plant and rate of depreciation of 20% has been mentioned therein.

An assessee can claim depreciation on machinery and plant which are owned by him and are used during the year for the purposes of business. In sub-Rule (3) of Rule 1, it is further clarified that no depreciation allowance shall be given unless such building, plant and machinery and furniture are so used for the purposes of business during the assessment year. Word "used" can widely be interpreted to include active as well as passive use but this sub-rule has been added to ensure that the asset is actively used during the year if depreciation allowance is claimed. Period of use is not defined under the Ordinance, therefore; it may be for a day, a month or whole year. The position, therefore, that emerges from the provision is that an assessee is entitled to claim depreciation allowance for an asset which is firstly owned by him and secondly the said asset is wholly and actively used by him for the purposes of business during the assessment year. The assessee may also claim proportionate depreciation allowance if asset is partly used by him. But the clear-cut emphasis is on "use" of an asset.

Suppose an old or used motor vehicle is purchased by an assessee one month before the closing of financial year and transfer of registration is applied within 30 days in view of section 32 of the Motor Vehicles Ordinance, but registration is granted after the close of financial year then in such a situation, if it is proved that the motor vehicle was used for the purposes of business then would the assessee be entitled to depreciation allowance? This peculiar situation requires minute verification and in such a situation the assessee is entitled to claim of depreciation as the legally permissible period for transfer of registration under the Motor Vehicles Ordinance seems to have been followed. No doubt this is an exceptional situation yet this factor cannot be discounted. An assessee is entitled to use an old car without registration for a period of 30 days and during this period he is required to apply for registration. Also he can use the motor vehicle for further period during which the registration procedure is completed by the Registering Authority. Therefore, if an assessee had purchased an old car prior to end of closing year and an application for registration was made within 30 days then use of car for the purposes of business under old registration would be permissible under the Motor Vehicles Ordinance and the assessee would be entitled to claim depreciation allowance.

(1983) 143 ITR 34 (Cal.); 1979 PTD 538 and (1954) 25 ITR 265 ref.

(b) Income Tax Ordinance (XXXIX of 1979)---

----S.23 (V) & Third Schedule, R.1, (1-A) (2) & (3)---Allowance of depreciation---Claim of depreciation allowance on motor vehicle---Ownership of such vehicle by assessee---Proof---Not necessary for assessee to prove the registration of motor vehicle, if the sale or purchase is made in accordance with the provisions of Sale of Goods Act, 1930---Assessee, for the purpose of ownership of a motor vehicle is not required that such motor vehicle has been registered under the Motor Vehicles Ordinance,1965---Assessing Officer can ascertain the use of motor vehicle even in cases where such motor vehicle is not registered with the Registering Authority.

Sale of any movable property is controlled by the provisions contained in Sale of Goods Act, 1930 and according to such provisions "sale simpliciter" is the exchange of property for money price. Sale can be either cash or credit. In case of cash sale a person can obtain delivery of goods by making payment of price to the seller; whereas in case of credit sale a person/buyer can obtain delivery of goods and may make payment on some future date. Therefore, in order to prove ownership of a car it is not necessary to prove its registration because the ownership of a car/motor vehicle, which is a movable property, can be independently proved if the sale or purchase is made in accordance with the provisions contained in the Sale of Goods Act, 1930. For the purpose of ownership of a motor vehicle an assessee is not required to prove that such motor vehicle has been registered under the Motor Vehicles Ordinance.

Normally the motor vehicle or car is sold by a car dealer or by an owner himself. The classification of car can be brand new or old but the purchase, and sale procedure is the same. If a person intends to buy a brand new car then he would buy it from a car dealer on cash payment or on credit. In case of old or used car the buyer would approach either the car dealer or the owner directly. Therefore, the sale and purchase of a brand new or old car is completed without any question of registration and the ownership of a car can be proved without its registration.

For the purposes of proving ownership of a motor vehicle it is not necessary to prove that such motor vehicle is registered under the Motor Vehicles Ordinance, for the purpose of proving whether such motor vehicle was actively used for the purposes of business or not, the registration of motor vehicle would be one of the definite proofs, which could justify, prima facie, the claim of depreciation. This does not mean that use of a motor vehicle cannot be proved otherwise and registration is the only criterion of judging whether such motor vehicle was used or not for the purposes of business. The Assessing Officer can ascertain the use of motor vehicle even in cases where such motor vehicle is not registered with the Registering Authority in so far as there may be cases where an owner might have used a motor vehicle for the purposes of business without getting the same registered with the Registering Authority. Registration of a motor vehicle is not a prerequisite for proof of ownership, but the claim of depreciation of assessee would be on strong footing if the vehicle is registered under the Motor Vehicles Ordinance. However, an assessee who is owner of a motor vehicle can use such motor vehicle for the purposes of business without following the procedure of registration laid down under the Motor Vehicles Ordinance. Of course that would be subject to penal consequence provided under the Motor Vehicles Ordinance.

(c) Income Tax Ordinance (XXXI of 1979)---

----S. 23(v) & Third Sched., Rr. 1, (1-A) (2) & (3)---Allowance of depreciation---Motor vehicle---Claim of depreciation allowance ---Assessee claimed to have purchased an old motor vehicle prior to close of financial year though the registration of the same was granted to the assessee after the close of the financial year---Heavy burden, in such a situation would be on assessee to prove firstly that the assesee had acquired ownership of motor vehicle prior to closing of assessment year and secondly that the motor vehicle was used for the purposes of business during the period prior to close of the assessment year---If the assessee was in a position to prove such facts, then the assessee was entitled to claim depreciation allowance---Where the assessee had failed to give full details of these facts to the I.T.O. and C.I.T. (Appeal) but supplied the details to the Income Tax Appellate Tribunal in appeal which required further investigation or verification to ascertain whether the assessee had acquired the ownership of the motor vehicle during the assessment year and also the fact that it was also used during the assessment year, Tribunal remanded the case to I.T.O. to consider the claim of assessee for depreciation allowance.

Qamaruddin, D.R. for Appellant.

Salman Pasha for Respondent.

Date of hearing: 5th June, 1993.

ORDER

In this Departmental appeal relating to assessment year 1991-92 the Department is aggrieved by the order of the learned CIT (A) Zone II, Karachi dated 11-1-1993, whereby he has directed the ITO to allow depreciation on car which was registered in assessee's name after the close of the income year:

2. The brief facts necessary for the disposal of this appeal are that during the assessment year the assessee purchased a "Mitsubishi Gallant Car" for Rs.4,46,000. This car was registered with the Registration Authorities in January, 1991 after the close of the income year on 31st December, 1990. The ITO considering this fact disallowed the amount of Rs.50,000 being the depreciation allowance claimed by the assessee on this car. On appeal preferred by the assessee, the learned CIT (A) directed the ITO to allow depreciation on car as per the depreciation rules.

3. In support of this appeal the learned D.R. has submitted that as the car was registered with the Registration Authorities under Motor Vehicles Ordinance after the close of the income year, therefore, the assessee was not in a position to prove the use of the car for the purposes of business, which is essential for the claim of depreciation. allowance and since the use of car for the purposes of business was not proved, therefore, the assessee was not entitled to depreciation allowance as per depreciation rules.

In reply the learned counsel for the assessee has submitted that registration of motor vehicle is not necessary to prove the ownership of a car and secondly he has submitted that the ITO has not taken any pains to verify whether the car was used for the purposes of business during the assessment year or not and without any adverse findings on this point, the assessee is entitled for the deprecation allowance. In support of his contention he has also referred to an Indian case-law reported as (1983) 143 ITR 34 (Cal.).

4. Before dilating upon the issue it would be proper if a cursory glance at the relevant provisions of depreciation is made. Depreciation is an allowable expenditure under section 23 (1) (v) read with Rules in Third Schedule to the Income Tax Ordinance. The relevant provi6ons are as under: ''

Section 23(1)(v)

In respect of depreciation of any such building, machinery, plant, furniture or fittings, being the property of the assessee, the allowance admissible under the Third Schedule."

Rule 1 of Third Schedule states as under:--

Rules for the Computation of Depreciation Allowance:

(1)Allowances for depreciation.---(1) Where in any income year, any building, machinery, plant or furniture owned by an assessee is used for purposes of any business or profession carried on by him, or in any income year commencing on or after the first day of July, 1982, any machinery or plant is given on lease by the assessee, being a scheduled bank, a financial institution or such Modaraba or leasing company as is approved by the Central Board of Revenue for purposes of this Schedule, on such conditions as may be specified, an allowance for depreciation shall be made in computing the profits and gains of the business or profession of the assessee -in the manner hereinafter provided.

(1-A)The provisions of sub-rule (1) shall in the like manner apply to a building given on lease in any income year, commencing on or after the first day of July, 1986 provided that the said building is used by the lessee for the purpose of his business or profession.

(2)Where any such building, machinery, plant or furniture is not wholly used for the purpose of the business or profession the allowance under sub-rule (1) shall be restricted to the fair proportional part of the amount which would be admissible if such building, machinery, plant or furniture were wholly so used.

(3)No allowance under this rule shall be made unless--

(a) at the time of filing a return of total income such particulars as may be prescribed and such further information or documents as the Income Tax Officer may require, are furnished; and

(b) such building, machinery, plant or furniture has been so used during the income year:'

(Only relevant portion has been reproduced).

In depreciation schedule the motor vehicles have been classified under the heading of machinery and plant and rate of depreciation of 20% has been mentioned therein.

5. From the careful reading of the above provisions it would appear that an assessee can claim depreciation on machinery and plant which are owned by him and are used during the year for the purposes of business. In sub-rule (3) of rule 1, it is further clarified that no depreciation allowance shall be given unless such building, plant and machinery and furniture are so used for the purposes of business during the assessment year. It would not be out of place to mention here that prior to introduction of this rule, there was plethora of case-law, Pakistani as well as Indian; whereby the word "use" was widely interpreted to include active as well as passive, but this sub-rule has been added to ensure that the asset is actively used during the year if depreciation allowance is claimed. Period of use is not defined under the Ordinance, therefore, it may be for a day, a month or whole year. The position, therefore, emerges from the above provision is that an assessee is entitled to claim depreciation allowance for an asset which is firstly owned by him and secondly the said asset is wholly and actively used by him for the purposes of business during the assessment year. The assessee may also claim proportionate depreciation allowance if asset is partly used by him. But the clear-cut emphasis is, on "use" of an asset.

6. Now having the above proposition of law in mind I revert to arguments of both the Representatives. Let me first analyse the contention of the learned counsel for the assessee. The contention of the learned counsel for the assessee is that the ownership of motor vehicle has no nexus with the registration of the said vehicle under the West Pakistan Motor Vehicles Ordinance, 1965. According to him the ownership of motor vehicle can be proved without its registration. Prima facie this submission has some force in so far as sale of any movable property is controlled by the provisions contained in Sale of Goods Act, 1930 and according to such provisions "sale simpliciter" is the exchange of property for money price. Sale can be either on cash or credit. In case of cash sale a person can obtain delivery of goods by making payment of price to the seller; whereas in case of credit sale a person/buyer can obtain delivery of goods and may make payment on some future date. Therefore, it is correct that in order to prove ownership of a car it is not necessary to prove its registration because the ownership of a car/motor vehicle, which is a movable property, can be independently proved if the sale or purchase is made in accordance with the provisions contained in the Sale of Goods Act, 1930. The contention of the learned counsel for the assessee is, therefore, correct that for the purpose of ownership of a motor vehicle an assessee is not required to prove that such motor vehicle has been registered under the Motor Vehicles Ordinance. The case-law relied upon by the learned counsel for the assessee also supports this proposition.

7. To elucidate further it would be pertinent to consider the manner of sale of motor vehicles in our country. Normally the motor vehicle or car is sold by a car dealer or by an owner himself. The classification of car can be brand new or old but the purchase and sale procedure is the same as explained above. If a person intends to buy a brand new car then he would buy it from a car dealer on cash payment or on credit. In case of old or used car the buyer would approach either the car dealer or the owner directly. Therefore, the sale and purchase of a brand new or old car is completed without any question of registration and the ownership of a car can be proved without its registration. Now the question arises is as to what is the purpose of registration of a vehicle under the Motor Vehicles Ordinance. In this respect section 23 of the West Pakistan Motor Vehicles Ordinance 1965 can be referred and which is as under:--

"23.Motor vehicles not to be driven without registration: --(1) No person shall drive any motor-vehicle and no owner of a motor vehicle shall cause or permit the vehicle to be driven in any place unless the vehicle is registered in accordance with this Chapter and the vehicle carries a registration mark displayed in the prescribed manner. (Extraordinary November 3, 1969 Subs. by Ordinance VIII of 1978).

Explanation: -A motor vehicle shall not be deemed to be registered in accordance with this Chapter if the certificate of registration, has been suspended or cancelled.

(2) Nothing in this section shall apply to a motor vehicle while being driven within the limits of jurisdiction of a registering authority to or from appropriate place of registration for the purpose of being registered under sections 24, 26, 40, or to a motor-vehicle exempted from the provisions of this Chapter while, in the possession of a dealer in motor vehicles."?

The above section clearly mentions that no motor vehicle can be used or driven unless such vehicle is registered in accordance with the Rules of the said Ordinance. This provision is applicable in case of new car, as a car is register-able only once and thereafter that registration is transferable to other owners. This transfer of ownership procedure is mentioned in section 32 of the same Ordinance and which is reproduced as under:-

"Transfer of ownership.---(1) Within thirty days of the transfer of ownership of any motor vehicle registered under this chapter, the transferee shall report the transfer to the Registering Authority within whose jurisdiction he ordinarily resides and shall forward the certificate of registration of the vehicle to that Registering Authority together within the prescribed fee in order that particulars of the transfer of ownership may be entered therein."

8. The combined effect of sections 23 and 32 is that no new motor vehicle can be used or driven by an owner if it is not registered with the Registering Authority provided under the Motor Vehicles Ordinance and secondly if a registered vehicle is resold then a new owner is required to get this registration transferred in his name within 30 days, otherwise the new owner would be subject to penal consequences provided in the said Ordinance. In short a brand new motor vehicle cannot be used for any purposes if it is not registered with the Registering Authority. In case of old car Or motor, vehicle, new owner can use it without transfer of registration but it would be incumbent upon him to apply for transfer of registration within 30 days with the Registering Authority. Therefore while agreeing with the learned counsel for the assessee that for the purposes of proving ownership of a motor vehicle it is not necessary to prove that such motor vehicle is registered under the Motor Vehicles Ordinance, I would observe that for the purpose of proving whether such motor vehicle was actively used for the purposes of business or not, the registration of motor vehicle would be one of the definite proofs, which could justify, prima facie, the claim of depreciation. This does not mean that use of a motor vehicle cannot be proved otherwise and registration is only criterion of judging whether such motor vehicle was used or not for the purposes of business. The ITO can ascertain the use of motor vehicle even in cases where such motor vehicle is not registered with the Registering Authority in so far as there may be cases where an owner might have used a motor vehicle for the purposes of business without getting the same registered with the Registering Authority. I would like to observe that registration of a- motor vehicle is not a prerequisite for proof of ownership, bin the claim of depreciation of assessee would be on strong footing if the vehicle is registered under the Motor Vehicles Ordinance. However, an assessee who is owner of a motor vehicle can use such motor vehicle for the purposes of business without following the procedure of registration laid down under the Motor Vehicles Ordinance. Of course that' would be subject to penal consequence provided under the Motor Vehicles Ordinance. In view of this the contention of the learned D.R. has no force.

9.. While summing up it would be pertinent to observe that depreciation allowance is permissible on assets which are employed in the earning of income and in order to prove their active employment as required under sub -rule (3) of rule 1 in the Third Schedule to the Income Tax Ordinance, apart from proof of ownership, some proof of actual use of such assets is necessary. Since depreciation is consequence of active use of an asset and if an asset is not actively used then depreciation allowance would not be permissible. There may be cases where asset is used for one year and is not used in subsequent years and in such a situation depreciation allowance would not be given in those years when the asset was not used. The emphasis is on the active use of an asset., In short, to claim depreciation allowance firstly an assessee must be owner of asset and secondly such asset must have been actively used wholly or partly during the year for the purposes of business. In this respect an observation from a case-law reported as 1979 PTD 538 can be referred:--

" ... .... It is not the actual depreciation of the machinery which entitles the owner thereof to claim depreciation. Similarly, it is not the mere accrual of income while possessed of such machinery that entitles one to depreciation. It is the use of the machinery which does.... "

So, is the position in Indian Supreme Court case reported as (1954) 25 ITR 265:--

" ... ...It is, however, clear that in order to attract the operation of clauses (v), (vi) and (vii) the machinery and plant must be such as were used, in whatever sense that word is taken, at least for a part of the accounting year. If the machinery and plant have not at all been used at any time during the accounting year no allowance can be claimed under clause (vii) in respect of them and the second proviso also does not come into operation..."

10. I would also like to mention a peculiar situation which may arise and which is also observable from the facts of this case. Suppose an old or used motor vehicle is purchased by an assessee one month before the closing of financial year and transfer of registration is applied within 30 days in view of section 32 of the Motor Vehicles Ordinance, but registration is granted after the close of financial year then in such a situation, if it is proved that the motor vehicle was used for the purposes of business then would the assessee be entitled for depreciation allowance? This peculiar situation requires minute verification and in my opinion in such a situation the assessee is entitled to claim of depreciation as the legally permissible period for transfer of registration under the Motor Vehicles Ordinance seems to have been followed. No doubt this is an exceptional situation yet this factor cannot be discounted. An assessee is entitled to use an old car without registration for a period of 30 days and during this period he is required to apply for registration. Also he can use the motor vehicle for further period during which the registration procedure is completed by the Registering Authority. Therefore, if an assessee had purchased an old car prior to end of closing year and an application for registration was made within 30 days then use of car for the purposes of business under old registration would be permissible under the Motor Vehicles Ordinance and the assessee would be entitled to claim depreciation allowance. In some cases it is also possible that an assessee may use a vehicle without following the procedure laid down in Motor Vehicles Ordinance, but there is no point in dilating upon that situation because in this case there is no cause for it.

11. Now I revert to facts of this case. In this case the assessee claims to have purchased an old car prior to close of financial year though the registration was granted to, the assessee after the close of the year, therefore, in such a situation the heavy burden would be on the assessee to prove; firstly that the assessee had acquired ownership of car prior to closing of assessment year and secondly the fact that the car was used for the purposes of business during the period prior to close of the assessment year. If the assessee is in a position to prove these facts then in my opinion the assessee is entitled to claim depreciation allowance. I have gone through the records and I find that no details were provided by the assessee to the ITO nor to the learned CIT(A). The learned counsel for the assessee has supplied these details to me but m my opinion these details require further investigation or verification to ascertain whether the assessee had acquired the ownership of the car during the assessment year and also the fact that it was also used during the assessment year.

12. In view of the above, the order of the learned CIT(A) is set aside and the case is remanded back to the ITO to consider the claim of depreciation allowance of the assessee in the light of above observations.

13. In terms of above, this Departmental appeal is disposed of.

M.BA./2416/TOrder accordingly.