Depreciation to be allowed even when asset is acquired as a Gift: ITAT

Mangesh Krishnath Ekbote Vs. DCIT

(Order pronounced in the Open Court on 25th May, 2022)

The assessee is engaged in the business of Software Management consultancy and trading in Futures and Options (F&O). A return was filed declaring the total income of Rs.1.23 crore. During assessment proceedings, the assessee claimed depreciation on new additions amounting to Rs. 2,08,761. The AO disallowed the depreciation on such additions as the assessee failed to furnish proof of the purchase of new fixed assets.

Appeal before CIT(A): During the first appellate proceedings, the assessee submitted necessary details of additions to fixed assets. The ld. CIT(A) called for the remand report from the AO. One of the additions to the fixed assets was a gift of a Swift car amounting to Rs.3,06,059 received from his brother. The ld. CIT(A) refused to allow depreciation on the ground that there was no `actual cost’ as the car was received in Gift so, no depreciation could be allowed as the assessee had not spent any amount on its purchase

Appeal before ITAT: Section 43(1) defines the term ‘actual cost’ in relation to assets. Explanation 2 to section 43(1) states that where an asset is acquired by the assessee by way of gift, the actual cost of the asset to the assessee shall be the actual cost to the previous owner, as reduced by the amount of depreciation actually allowed. In view of the clear mandate of Explanation 2 to section 43(1), the tribunal held that the authorities below were not justified in disallowing depreciation on fixed assets to the extent of Rs. 45,909. The impugned order was overturned to this extent.

With respect to the other issue that is against treating profit on sale and purchase of shares amounting to Rs. 34,62,194 as ‘Business income’ which the assessee had shown as a short-term capital gain.  Since the income from purchase and sale of shares had been treated by the assessee as `Business income’ in the immediately preceding and subsequent assessment years and nothing has been shown, except their depiction in the balance sheet as Investment, as to how, the shares were held, the tribunal held that the ld. CIT(A) was justified in treating income from share trading as ‘Business income’. This ground of appeal thus failed. Hence the appeal was partly allowed.

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