C I T-1 JAIPUR vs. M/S RAJ BOMBAY TRANSPORT P LTD

By way of this appeal, the appellant has assailed the judgment and order of the tribunal whereby tribunal has allowed

Counsel for the appellant has framed following substantial questions of law:- “i) Whether on the facts and circumstances of the case and in law the Hon’ble Tribunal was justified in reversing the findings given by the Assessing Officer as well as CIT(A) and allowing depreciation of Rs.1,19,54,400/- to the assessee on the buses taken by it on lease from DMRC, ignoring that assessee has never been the owner of the asset and the assets were always in the ownership and title of M/s. DMRC Ltd., which is also contrary to Section 32 of the Act and the condition of the Lease Agreement dt. 24.10.2007?

The facts of the case are that the assessee is engaged in the business of transportation of goods and passengers. During the year under consideration, the assessee entered into a Metro Link Bus Service Lease Agreement dated 24-10-2007 with Delhi Metro Railway Corporation Ltd. (for short DMRC Ltd. ) for plying of feeder buses in Delhi to provide connectivity to Metro Stations. Alongwith Metro Link Bus Service Lease Agreement, a separate vehicle lease agreement for each vehicle was also entered into between the parties. Under the said agreement, the assessee acquired 87 buses from M/s. DMRC Ltd. for using and operating for a period of 05 years. The cost of each bus was Rs. 9,16,046/- and the total cost of these buses were amounting to Rs. 7,96,96002/- which was capitalized by the assessee in its books of account and the assessee claimed depreciation. The assessee was required to make upfront payment of 15% of the cost of each bus and balance in equal monthly instalment (for short EMI) for a period of 60 months calculated with yearly interest @ 12.5%. The assessee claimed interest charges in EMI and debited in the profit and loss account. The AO disallowed the claim of the assessee regarding depreciation on the cost of the buses on the ground that (3 of 11) [ITA-66/2014] ownership of the buses will be transferred to the assessee only after successful completion of the agreement and full payment of the cost of the buses. Till that time, DMRC Ltd. shall be the sole and absolute owner of the buses and therefore, the assessee is not entitled for depreciation on these leased buses.

Counsel for the appellant contended that the tribunal has committed serious error in setting aside the order passed by CIT(A).

1 Counsel for the appellant has taken us to the order of the AO which reads as under:- “Pursuant to the successful completion of the Agreement and full repayment of the cost of the Feeder Buses as mentioned above, the ownership of the Buses will be transferred to the Private Operator. However till the time the ownership of the Buses is not transferred in favour of the successful applicant/Private Operator, DMRC shall be the sole and absolute owner of the Buses and the successful applicant/Private Operator shall have no claim whatsoever against DMRC in respect of the ownership of the Buses.”

2 He has also taken us to the order of the CIT(A) which reads as under:- “On the basis of the above facts it is held that the depreciation claimed by the appellant of Rs.1,19,54,400/- cannot be allowed to the appellant because:- i. The ownership of the buses was not with the appellant during this A.Y. ii. On perusal of the audited accounts of DMRC Ltd. it is seen that they have already claimed depreciation on the cost of these buses as per the provisions of the contract. Deprecation cannot be claimed by two parties on same assets for the same period. As per the contract

3 He further contended that the tribunal has committed error in observing as under:- “2.6 We have considered the rival submissions as well as material on record. We have also carefully gone through the agreements entered into by the parties. As per terms of the agreement, the assessee was to operate 87 buses as feeder buses for providing connectivity to the Metro Stations in (5 of 11) [ITA-66/2014] Delhi. These buses were though purchased by M/s. DMRC Ltd. but the entire cost of the buses was to be recovered from the assessee. Out of total cost, 15% was to be paid by the assessee as upfront payment and balance 85% of the cost of the buses was to be paid in 60 equal monthly instalments calculated with interest rate of 12.5% per annum. Thus it is clear from the terms of the contract that M/s. DMRC Ltd. has facilitated the finance of the buses and to secure repayment of the cost of the buses with interest, the buses would remain in the name of M/s. DMRC Ltd. till the entire repayment is made in 60 instalments. The period of repayment of the cost with interest in instalement and period of agreement is the same i.e. 05 years so that after successful completion of the agreement at the end of tenure of 5 years and full payment of the cost of the buses, the ownership of the buses will be transferred in the name of the assessee. It is well settled proposition of law of construction of documents what is material is the substance and contents of the documents which exhibits the intention of the parties and not nomenclature and form of the document. Therefore, in order to determine the real intention of the parties on the question whether the agreements in question are in substance of operating lease or finance lease, various features have to be tested. The Hon'ble Supreme Court in the case of Asea discussed as under:- ‘’Thus it is apparent that the broader guidelines laid down by the hon'ble Supreme Court in the case of ABB Ltd. have been reiterated in the latter case of Association of Leasing and Financial Services Companies v. Union of India [2010] 35 VST 549 (SC) ; [2010] 5 GSTR 326 (SC). On a fair reading of the aforenoted two judgments rendered by (6 of 11) [ITA-66/2014] the hon'ble Supreme Court in the light of the Guidance Note and the AS 19, we can draw the following broad features of finance lease : Such a lease is non-cancellable and there is a fixed obligation on the lessee for payment of lease money. In case lease is terminated prematurely by the lessee, the lessor is entitled to recover his investment with expected interest. Such a lease is always for a fixed period, which period is decided by taking into consideration the economic life of the asset. The initial lease period is settled in such a way so as to fully recover the investment of the lessor together with interest thereon. Lessor is always interested in the recoupment of his investment with interest in the shape of rentals over the period of lease and not the asset or its user. It is the responsibility of the lessee to bear all costs of insurance, repairs and maintenance and other related costs and expenses for the leased equipment. Though the equipment is chosen by the lessee but the payment to the supplier is made by the lessor. Thus it is the lessee who chooses the assets, takes delivery, enjoys the use of the asset, bears its wear and tear. It is the lessee who becomes the real owner of the asset. It is the lessee who pays taxes etc. in relation to such asset. The risks and rewards incidental to the ownership vest with the lessee. The features of bailment are absent in such a lease. The lessor simply holds the title of asset as his security till his investment and interest thereon is recouped. The lessor is only a symbolic owner during the period of lease and on the expiry of lease period, even such symbolic ownership comes to an end.’’

7 There is no dispute that in the case in hand, the so called lease in question is noncancellable / irrevocable and there is a fixed obligation on the assessee for repayment of lease money. Further in the (7 of 11) [ITA-66/2014] case of termination of premature lease, the lessor is entitled to recover his investment with accepted and agree interest. The lease period in the case has been settled which matches to the period of repayment of the cost of the buses in equal monthly instalment. Therefore, the lessor would fully recover the investment in buses with interest during the lease period itself. The primary object and interest of lessor is for recovery of his investment with interest during the lease period and not in the assets for its use. This fact is clear from the term of lease agreement where all precautionary measures are taken for recovery of the investment made by the lessor on completion of the tenure of lease period and full recovery of the investment and then the asset in question will be transferred to lessee. Moreover, the assessee has to bear the cost of insurance, maintenance, repairs and other related cost of expenses for buses. The assessee has also paid the taxes etc. in relation to the buses as per agreement and therefore, the risk and rewards incidental to the ownership of the assets vests with the assessee. Therefore, it is clear that M/s. DMRC Ltd. is simply having the title of the buses as a security against finance till the entire investment and interest there upon is recovered. In view of the facts and circumstances of the case and terms and conditions as stipulated in the agreements, we find that nature of lease / arrangement between the parties is finance lease and ownership / title of the buses was retained by M/s. DMRC Ltd. only with a view to secure the repayment of cost of the buses alongwith interest. Accordingly, the assessee is entitled for the depreciation on the buses for the period it has operated the buses. We may clarify that merely because depreciation is allowed on the same assets (buses) to M/s. DMRC Ltd. would not ipso facto disentitle the assessee to its rightful claim. Hence, we allow the claim of the assessee and set aside the orders of the authorities below qua this issue.

4 He further contended that the tribunal has wrongly relied upon the judgment of Mumbai Tribunal in Indus Bank Ltd. (supra).

5 Counsel of the appellant Mr. Singhi has relied upon the decision of Rajasthan High Court in Commissioner of Income Tax- I, Jaipur vs. Baid Leasing & Finance Co. Ltd. reported in (2013) 37 taxmann.com 420 (Raj.) wherein it has been held as under:- “13. The Hon'ble Apex Court in Industrial Credit And Development Syndicate Limited (supra) case considered the case of assessee, who was public limited company, classified by Reserve Bank of India (RBI) as a non-banking finance company. It was engaged in the business of hire purchase, leasing and real estate etc. The vehicles, on which depreciation was claimed, are stated to have been purchased by the assessee against direct payment to the manufacturers. The assessee, as a part of its business, leased out these vehicles to its customers and thereafter, had no physical affiliation with the vehicles. In fact, lessees were registered owners of the vehicles, in the certificate of registration issued under the Motor Vehicles Act, 1988 (hereinafter referred to as the MV Act). The assessee claimed depreciation, which was disallowed by Assessing Officer on the ground that the assessee's use of these vehicles was only by way of leasing out to others and not as actual user of the vehicles in the business of running them on hire. It had merely financed the purchase of these assets and was neither the owner nor user of these assets. The Commissioner of Income Tax (Appeals) affirmed the finding of the Assessing Officer. Thereafter, assessee preferred appeal before the Income Tax Appellate Tribunal, but the same was also dismissed. Thereafter assessee preferred appeal by way of Special Leave Petition before Hon'ble Apex Court. In para 8 of the judgment, the Hon'ble Apex Court referred the substantial questions of law, which were framed by High Court for its adjudication. Para 8 of the judgment is reproduced, as under :-

Being aggrieved, the revenue preferred an appeal to the High Court under Section 260A of the Act. The High Court framed the following substantial questions of law for its adjudication:

1 Whether the appellant (assessee) is the owner of the vehicles which are leased out by it to its customers?

2 Whether the appellant (assessee) is entitled to the higher rate of depreciation on the said vehicles, on the ground that they were hired out to the Appellant's customers.

The Hon'ble Apex Court considered the various judgments, the dictionary meaning of the word owner, the provisions of Income Tax Act and the Motor Vehicles Act and answered both the questions framed in para 8 in favour of assessee and against the revenue. Para 34 of the judgment of the Apex Court is reproduced, as under :- For the foregoing reasons, in our opinion, the High Court erred in law in reversing the decision of the Tribunal. Consequently, the appeals are allowed; the impugned judgments are set aside and the substantial questions of law framed by the High Court, extracted in para 8 (supra), are answered in favour of the assessee and against the Revenue. There will, however, be no order as to costs.

The only hindrance to the claim of the assessee, which is also the lynchpin of the case of the Revenue, is Section2(30)of the MV Act, which defines ownership as follows: "2.(30) 'owner' means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and in relation to a motor vehicle which is the subject of a hire-purchase agreement, or an agreement of lease or an agreement of a hypothecation, the person in possession of the vehicle under that agreement;

From the submissions of learned counsel for the parties, the facts and reasons assigned in the judgment of the Tribunal, it is clear that Hon'ble Apex Court has held that lessor is an owner and thus is entitled to depreciation under Section 32(1) of the Act, and the present case is fully covered by decision of Hon'ble Apex Court in case of (10 of 11) [ITA-66/2014] Industrial Credit And Development Syndicate Limited (supra) and, therefore, question framed above is answered in favour of assessee and against the revenue.”

Counsel for the respondent Mr. Siddharth Ranka has relied upon the decision of Rajasthan High Court in Commissioner of Income Tax, Jaipur-II vs. Jawahar Kala Kendra reported in (2014) 43 taxmann.com 159 (Raj.) wherein it has been held as under:- “11. It is an admitted fact that the assessee- society is constituted as an autonomous body and by an order dt.11/08/2003 issued by the Governor of Rajasthan to preserve and promote art and culture of Rajasthan and to contribute to the social and cultural development of the people of the State. It is also an admitted fact that subsequent to the said order of the Governor of Rajasthan, the assessee-society came to be formed and was registered under the Societies Registration Act and the Commissioner of Income Tax had granted registration u/s 12A to the assessee- society. It is also an admitted fact that depreciation stood charged by the assessee- society from the assessment year 2005-06 and also was charged in the assessment year 2006-07 and in both the years, the claim was allowed by the AO and during the previous year relevant to the year under appeal, it is an admitted fact that the assets remained the same on which depreciation was already allowed by the AO in the assessment year 2005-06 and later. In this backdrop, we have to consider as to whether merely because title or registration under the Indian Registration Act has not passed, would it be fatal to disallow depreciation. It is also not disputed by the revenue that possession over the property is being enjoyed by the assessee-respondent and no claim of reclaiming the assets have been made by the State Govt. subsequent to transfer. In our view, merely because title is not transferred or registration under the Indian Registration Act is not obtained, depreciation cannot be disallowed.

In our view, on the face of record, we are of the clear opinion that the assessee-society had rightly been allowed depreciation by the CIT(A) and the ITAT as the assessee-society became owner of the said assets and was actually using the property in its own right as an owner on and from the date of order of the Governor and formation of society.“

We have heard counsel for the parties.

Taking into consideration the fact that the depreciation is allowed for the use of property which is under the ownership.

In our considered opinion, while considering the matter, tribunal has relied upon the decision of Mumbai Tribunal which is not disputed by the department before the tribunal. Apart from that the insurance, maintenance and repair for all practical purpose is ownership for the income tax purpose and admittedly the ownership was with the assessee. The original owner was holding title only for the purpose of security, therefore, the observations made by the tribunal in para no.2.6 which we have reproduced are just and proper.

We are of the opinion that the tribunal has not committed any error in passing the order.

Hence, no substantial questions of law arises.

The appeal stands dismissed. (MAHENDRA MAHESHWARI)J. (K.S.JHAVERI)J. Brijesh 1.