C I T JAIPUR vs. BAID LEASING and FINANCE CO LTD

This Court while admitting the appeals framed the following substantial questions of law: DB INCOME TAX APPEAL NO.245/2005 “(i) Whether

The counsel for the respondent Mr. Jhanwar submits that two issues are squarely covered by the decision of this Court in the case of same assessee in Commissioner of Income Tax (I) Jaipur Vs. Baid Leasing & Finance Company Ltd., D.B. Income Appeal No.116/2003 decided on 1.7.2013 wherein it has been held as under:-

The facts of the case are not in dispute between the parties. The assessee-company is engaged in the business of leasing the vehicles. The assessee claimed depreciation, being lessor of the vehicles. However, the same was disallowed by the Assessing Officer and the same was upheld by Commissioner of Income Tax (Appeals) also. Learned Income Tax Appellate Tribunal considered various aspects of the case and provisions of law and came to a conclusion that assessee was entitled to depreciation under Section 32(1) of the Act.

Learned counsel for respondent/assessee submitted that the controversy involved in the present case is fully covered by latest decision of Hon'ble Apex Court in Industrial Credit And 541. He submitted that Hon'ble Apex Court in similar circumstances allowed depreciation under Section 32(1) of the Act to lessor. He also submitted that Hon'ble Apex Court has also held that lessor is owner and, therefore, is entitled for depreciation under Section 32(1) of the Act.

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

1 Whether the appellant (assessee) is the owner of the vehicles which are leased out by it to its customers? And 8.2 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”.

It is also relevant to mention that the Hon'ble Apex Court has considered two submissions of Revenue regarding owner of the vehicle and use of 5 the vehicle in the course of its business and both the submissions were negatived by the Hon'ble Apex Court. Para 15 and 16 of the judgment are reproduced, as under :-

The Revenue attacked both legs of this portion of the section by contending: (i) that the assessee is not the owner of the vehicles in question and (ii) that the assessee did not use these trucks in the course of its business. It was argued that depreciation can be claimed by an assessee only in a case where the assessee is both, the owner and user of the asset.

We would like to dispose of the second contention before considering the first. The Revenue argued that since the lessees were actually using the vehicles, they were the ones entitled to claim depreciation, and not the assessee. We are not persuaded to agree with the argument. The section requires that the assessee must use the asset for the "purposes of business". It does not mandate usage of the asset by the assessee itself. As long as the asset is utilised for the purpose of business of the assessee, the requirement of Section 32 will stand satisfied, notwithstanding non- usage of the asset itself by the assessee. In the present case before us, the assessee is a leasing company which leases out trucks that it purchases. Therefore, on a combined reading of Section 2(13) and Section 2(24) of the Act, the income derived from leasing of the trucks would be business income, or income derived in the course of business, and has been so assessed. Hence, it fulfills the aforesaid second requirement of Section 32 of the Act viz. that the asset must be used in the course of business”.

The Hon'ble Apex Court also considered that the lessor is owner of the Vehicle. Section 2(30) of the Motor Vehicles Act was also considered for the purpose of registered owner of the vehicle. Relevant paragraphs i.e. paras 23, 27, 29 and 31 are also reproduced, as under:-

A scrutiny of the material facts at hand raises a presumption of ownership in favour of the assessee. The vehicle, along with its keys, was delivered to the assessee upon which, the lease agreement was entered into by the assessee with the customer. Moreover, the relevant clauses of the agreement between the assessee and the customer specifically provided that:

The only hindrance to the claim of the assessee, which is also the lynchpin of the case of the Revenue, is Section 2(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;” The general opening words of the Section say that the owner of a motor vehicle is the one in whose name it is registered, which, in the present case, is the lessee. The subsequent specific statement on leasing agreements states that in respect of a vehicle given on lease, the lessee who is in possession shall be the owner. The Revenue thus, argued that in case of ownership of vehicles, the test of ownership is the registration and certification. Since the certificates were in the name of the lessee, they would be the legal owners of the vehicles and the ones entitled to claim depreciation. Therefore, the general and specific statements on ownership construe ownership in favour of the lessee, and hence, are in favour of the Revenue.

Finally, the learned Senior Counsel appearing on behalf of the assessee also pointed out a larger number of cases, accepted and unchallenged by the Revenue, wherein the lessor has been held as the owner of an asset in a lease agreement. [CIT v. A.M. Constructions, CIT v. Bansal Credits Ltd., CIT v. M.G.F. (India) Ltd., CIT v. Annamalai Finance Ltd.] In each of these cases, the leasing company was held to be the owner of the asset, and accordingly held entitled to claim depreciation and also at the higher rate applicable on the asset hired out. We are in complete agreement with these decisions on the said point.

Therefore, in the fact of the present case, we hold that the lessor i.e. the assessee is the owner of 7 the vehicles. As the owner, it used the assets in the course of its business, satisfying both requirements of Section 32 of the Act and hence, is entitled to claim depreciation in respect of additions made to the trucks, which were leased out”.

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 Industrial Credit And Development Syndicate Limited (supra) and, therefore, question framed above is answered in favour of assessee and against the revenue.” 4. has been held as under: “In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income Tax authorities have approached the matter from 8 an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section 36(1)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to Section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.”

Counsel for the respondent Mr. Jhanwar has relied upon decision of Gujarat High Court in Commissioner of Income Tax (I) Vs. Arihant Avenue & Credit Ltd., [2013] 36 taxmann.com 14(Gujarat) holding as under:

1 In view of the above, the Tribunal did not commit any error in dismissing the appeal of the Revenue and upholding the deletion of the addition in question. The present appeal is devoid of merits. No substantial question of law arises for consideration of this court.” 8. [2013] 36 taxmann.com 275(Gujarat) The Tribunal on noting these details, in terms held that there was nothing contrary that could be brought on record by the Department. The assessee's equity share capital Rs.3.85 cores and reserve and surplus of Rs.5.52 crores also were noted by the Tribunal. It found that the interest free fund available with the assessee was far greater than the loan advanced to the sister concerns and as a corollary to that, it concluded that the borrowed money was not utilized for the purpose of advance to the sister concerns, as had been noted by the Assessing Officer. What had weighed with the Tribunal is the fact that the entire interest free funds included owner's own capital and accumulated profits and other interest free credits and loans and if the total interest free advances including the debit balance of the partners did not exceed the total interest free funds available with the assessee,interest was not disallowable merely on account of the utilization of the funds for non- business purposes.

Decision of the Supreme Court in Munjal Sales Corporation Vs. Commissioner of Income Tax, Ludhiana [2008] 18 taxman 43 (SC) wherein also it has been held: “For the AYs 1995-96 and 1996-97, Tribunal held that during the said years, no interest free advances to sister concerns were made and, therefore, there was no nexus between "interest bearing loans" taken and "interest free advances". However, the 10 Tribunal found that there was no material to show that advances were made to sister concerns out of the firm's own income and, therefore, the assessee was not entitled to deduction under Section 40(b)(iv) of the 1961 Act. Before concluding, we may mention that the importance of the judgment is the clarification which we were required to give in the context of deductions under Sections 30 to 38 to be read with the limitation prescribed under Section 40. Since there was some confusion with regard to the status of Section 40, particularly, after enactment of Finance Act 1992, we have explained the law in the context of deductions under Chapter IV-D of the 1961 Act. We have wherein it has been held as under:- “17. It is not in dispute that the assessee- company had advanced a sum of Rs. 17.19 lakhs to its sister-concern, M/s Rampur International (P) Ltd., in the year 1985. It had not charged any interest from the said company whereas it had been charging interest from other debtors. It had borrowed huge sum from the banks and the financial institutions. In the present assessment year, the AO had disallowed the amount towards proportionate interest on the said advances. The Tribunal after examining the balance sheet for the year ending 31st Dec., 1985, had come to the conclusion that the assessee-company was having sufficient fund on account of share capital, share application money, reserve and surplus, and was having sufficient fund at its disposal out of which a small sum of Rs. 17.19 lakhs could easily be diverted. It is well-settled that if an amount has been borrowed not for the business purposes but for some private purposes, then the interest on such borrowings cannot be allowed as a deduction under Section 36(1)(ii) of the Act. The apex Court in the case of Madhav Prasad Jatia (supra) while considering the provision of Section 10(2)(iii) of the Indian IT 11 Act, 1922, which is analogous to Section 36(1)(ii) of the Act, has held that for claiming a deduction under Section 10(2)(iii) of the 1922 Act, three conditions are required to be satisfied in order to enable the assessee to claim a deduction on interest on borrowed capital, namely : (a) that the money (capital) must have been borrowed by the assessee; (b) that it must have been borrowed for the purpose of business; and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. The apex Court has held that the expression 'for the purpose of business' is wider in scope than the expression 'for the purposes of earning income profits or gains' and has held that the expenditure incurred shall be for carrying of the business and the assessee shall incur it in the capacity as a person carrying on the business. If the borrowing was made to meet the personal obligation and not the obligation of the business, such expenditure incurred by the assessee by way of payment of interest thereon was not for carrying on business and such expenditure can, by no stretch of imagination, be regarded as business expenditure.

In the case of Marolia & Sons (supra), this Court has held as follows : "Section 36(1)(iii) of the IT Act deals with the deduction on the amount of interest paid in respect of capital borrowed for the purposes of business or profession. It would be found from Clause (iii) of Sub-section (1) of Section 36 of the Act that three conditions must be established by an assessee for getting the benefit under the aforesaid clause : (1) interest should have been payable, (2) there should be a borrowing, and (3) capital must have been borrowed or taken for business purposes. If the capital borrowed is not utilized for the purposes of the business, the assessee will not be entitled to deduction under this clause. In case, after having borrowed the capital for business purposes, the firm gives the same to its partners for their personal use or utilization, the firm would not be entitled to claim deduction on the amount diverted for utilization for other purposes or by other persons. This question has been the subject-matter of decisions by several High Courts. It appears to be settled that an assessee-firm cannot be entitled to claim

Taking into account the decision of the Supreme Court, we are of the opinion that it was not interest which was from the borrowed fund which was running from the finance which is justified by CIT learned Tribunal.

We are in complete agreement with the view taken by the Tribunal. The issue is decided in favour of the assessee against the Department. The appeals are accordingly dismissed.