In case of assest acquired by way of gift, depreciation would be allowed on the WDV to the previous donor

The issue raised in this appeal is against the confirmation of disallowance of depreciation amounting to Rs.45,909/- on fixed assets.

Briefly stated, the facts of the case are that the assessee is engaged in the business of Software Management consultancy and trading in Futures and Options (F&O). A return was filed declaring total income of Rs.1.23 crore. During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee claimed depreciation on new additions amounting to Rs.2,08,761/-. Since the assessee failed to furnish proof of the purchase of new fixed assets, the AO disallowed the depreciation on such additions.

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 gift of Swift car amounting to Rs.3,06,059/- received from the assessee’s brother, Sh. Rajesh Ekbote. The assessee submitted that the gift of car was recorded in his books at the written down value (WDV) in the hands of his brother. The ld. CIT(A) affirmed the action of the AO on the ground that no depreciation could be allowed as the assessee had not spent any amount on its purchase.

ITAT in its order stated that 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 respect of any previous year commencing before the 01-04-1988 and the amount of depreciation that would have been allowable to the assessee if the asset was the only asset in the assessment year commencing on or after 01-04-1988.

This shows that the written-down value of the asset in the hands of the donor is considered as the ‘actual cost’ of the asset in the hands of the donee for the purpose of allowing depreciation. The assessee furnished necessary details before the ld. CIT(A) to the effect that the actual cost of the car received as a gift from his brother was recorded at its written down value in the hands of the donor. The ld. CIT(A) has admitted this fact but refused to allow depreciation on the ground that there was no `actual cost’ as the car was received as a Gift. In view of the clear mandate of Explanation 2 to section 43(1), it holds that the authorities below were not justified in disallowing depreciation on fixed assets to the extent of Rs. 45,909/-. The impugned order is overturned.

To Read Judgment Download PDF Given Below: