ACIT-6(1)(1), MUMBAI, MUMBAI vs. ADITYA BIRLA FINANCIAL SHARED SERVICES LIMITED, MUMBAI

In the subsequent appeal before the ld.CIT(A), the assessee contested the disallowance by claiming that as per the terms of agreement, it was clear that the selection of the asset/equipment was made by the assessee itself without any assistance of HPFS. The assets shall be delivered to it and it was liable to inspect the same. It was solely responsible for installation, operation and maintenance of assets and is liable to pay the CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. lease rentals unconditionally i.e. it shall be bound to pay rentals notwithstanding any defect, breakdown or destruction of any Equipment or Financed Items or any force majeure event. The assessee had the sole right to enforce any warranties against the supplier at its own expense. The assets taken on lease were to be repaired and maintained by it at its own cost. It was responsible for insuring the assets and maintaining them in working condition. In case the asset under lease was lost, destroyed, stolen or damaged beyond repair, then the assessee was solely responsible for the loss occurring due to such casualty. If on disposal of asset by the lessor, there was an excess amount as computed under the terms of the agreement received by HPFS, the same shall be paid to the assessee.

The ld.CIT(A), deleted the addition by holding that the lessor here had no commercial right, title or interest in the asset, after the termination of lease period, meaning thereby, that this was purely a financial lease. He relied on Mumbai ITAT order in ITA No.: 1048/Mum/2020 AY: 2015-16 in Deputy Commissioner of Income Tax Circle – 2 (1)(1), Mumbai Vs. M/s. BSE Ltd. quoting the relevant extracts as below. ….. “12. Briefly the facts are, in course of assessment proceedings, the assessing officer noticed that the assessee had claimed depreciation of Rs.1,14,26,646/- on a ‘server’ taken on financial lease. Noticing that similar claim made by the assessee in Assessment Year 2012-13 was disallowed, the assessing officer called upon the assessee to explain why similar disallowance should not be made. Though, the assessee objected to the proposed disallowance; the assessing officer, relying upon the decision of Hon’ble Supreme Court in the case of ICDS Ltd, held that the assessee not being the owner of the asset, depreciation cannot be allowed. Though, the CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. assessee contested the aforesaid disallowance before learned Commissioner of Income Tax (Appeals), however, it was unsuccessful.

The learned counsel for the assessee submitted, as far as the depreciation claimed on old server costing Rs.25 crores taken on financial lease, the asset had entered into the relevant block of assets in Assessment Year 2011-12. He submitted, as an owner of the asset, assessee had incurred the entire cost and put the asset to use. The assessee had also insured the asset. Therefore, the assessee is eligible to claim depreciation on the asset. Further, he submitted, the assessing officer himself has allowed depreciation in Assessment Years 2013-14, 2016-17 and 2017- 18. Further, he submitted, though in Assessment Year 2015-16 the assessing officer did not allow depreciation, but, learned Commissioner of Income Tax (Appeals) has allowed assessee’s claim. ……….

We have considered rival submissions and perused materials on record. As far as the depreciation claimed on the old server, it has entered the block of assets in Assessment Year 2011-12. It is observed, the Tribunal while deciding identical issue in assessee’s own case in Assessment Year 2012-13 vide ITA No.6224/Mum/2017 & Ors dated 21-08-2019, has allowed assessee’s claim of depreciation holding as under:

Before us, the ld.CIT(DR) relied on the assessment order claiming that depreciation was correctly disallowed. He primarily relied upon the Tribunal's decision in the case of HPFS cited in the ground of appeal for AY 2009-10 and stated that in the said decision, the Tribunal already allowed depreciation u/s. 32 to HPFS for the reason of it being the lessor. Thereafter, he also referred to Clause 8 i.e., Equipment Return Requirements of the Master agreement between assessee and HPFS and stated that as per the said clause, the assessee is contractually obliged to return the equipment to HPFS upon the conclusion of the lease term. He also referred to Equipment Ownership of the Clause 10 i.e., agreement and submitted that, ownership of the leased equipments lies with HPFS. He also also relied on Clause 11 on Additions and Alterations to Equipment and on Clause 21 on Equipment Return. Based on these clauses, the Ld. DR submitted that the lease under consideration is not a ‘finance lease’. He further submitted that two persons cannot claim depreciation and reiterated that in AY 2009-10, HPFS has been allowed the claim of depreciation on finance lease being the lessor and therefore, HPFS has considered themselves as the ‘owner’. The Ld. DR also stated that the onus is on the assessee to prove that HPFS has not CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. claimed depreciation for which, audited financial statements of HPFS should have been produced by the assessee.

On the other hand, the ld.Authorised Representative has vehemently argued that the impugned transaction was Financial lease. He drew attention to paras 3 and 8 of Accounting Standard 19 emphasizing that the determination of whether a lease constitutes a finance lease or an operating lease is governed by the substance of the transaction rather than the form of the contract. He claimed that the laptops leased from HPFS are actually scrapped/ discarded at a nominal value of Rs. 2,000/- to Rs. 3,000/- per laptop by the Assessee after the expiry of the lease period. This practice, in itself, supports the contention of the Assessee that the Assessee was the ‘real owner’ of the leased assets from the inception of the lease, despite HPFS being the ‘legal owner’ for all formal purposes. Further, HPFS leases such assets for a period of 48 months (ie., four years) which indicated that the lease period covers a substantial portion of the economic life of the asset. Besides, the lease rentals paid by the assessee to HPFS for leased assets are much higher than the fair value of that asset. In nutshell, it is claimed that the assessee satisfied all the requisite conditions as per applicable Accounting Standards for the relevant years and therefore, it had appropriately accounted the lease transactions CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. with HPFS as a ‘finance lease’ in its books of account. He also relied on Income Computation and Disclosure Standard I relating to Accounting Policies (“ICDS I”), as notified by CBDT vide Notification No. S.O. 892 (E) dated March 31, 2015, which became applicable from AY 2016-17 stating that that ICDS-I also contemplates that the treatment and presentation of transactions and events should be governed by their substance rather than their mere legal form. 7.1 It is further submitted that the entitlement to claim depreciation rests with the ‘real owner’ i.e., the person who actually bears the risks incidental to ownership and utilizes the capital asset for the purpose of its business. In support of this proposition, reliance was placed on certain judicial precedents in CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 (SC),Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 (SC)and Dalmia Cement (Bharat) Ltd. v. CIT [2001] 247 ITR 267 (SC).It is also submitted that the assessee is the real owner of the leased assets as it makes the choice of asset to be purchased, takes delivery of the asset, maintains and operates the assets, undertakes indemnity and bears the risk of loss or damage and gets the property insured. Reliance was also placed on the decision in the case of Asea Brown Boveri Ltd. v. Industrial Finance Corpn. of India [2006] 154 Taxman CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. 512 (SC), wherein the Hon'ble Apex Court has held that if all the above said indicators are present in the transaction entered into by the lessee, then nothing more was needed to be done to vest the lessee with the ownership of the assets taken on lease. Further, it was submitted that the decision rendered by the Hon’ble Juri ictional Mumbai Tribunal in the case of HPFS, as per the order 2845/Mum/2013, pertains dated March 23, 2016 in ITA No. specifically to AY 2009-10. However, in the present case, the assessee entered into the agreement with HPFS on July 17, 2009, which clearly becomes relevant from AY 2010-11. Therefore, the said decision is not directly applicable or relevant to the years under consideration. Reliance was also placed reliance on the judgement of the Hon’ble Juri ictional Mumbai Tribunal in the following cases, wherein, under similar factual circumstances, depreciation was held to be allowed to Bombay Stock Exchange, being the lessee, in respect of assets leased from HPFS under a finance lease:  BSE Ltd v. ACIT (ITA No. 6292/Mum/2017 and ITA No. 693/Mum/2019) (AY 12-13)  DCIT v. M/s Bombay Stock Exchange Ltd (ITA No. 4693/Mum/2019) (AY 2014-15)  DCIT v. M/s. BSE Ltd (ITA No. 1048/Mum/2020) (AY 2015-16) CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. 7.2 Attention was also invited to Circular No. 9 [R. DIS. NO. 27(4)-IT/43] issued by the CBDT pertaining to hire purchase arrangements. The circular clarifies that in cases where ownership of the leased asset ultimately vests with the lessee, the claim for depreciation should rightfully be allowed in the hands of the lessee.

We have carefully considered the rival submissions and also perused the materials on record and the findings given by the CIT(A) as well as by the ld.AO. The only issue of claim of deprecation on leased assets revolves around the ‘actual owner’ of the said assets and ‘user’ tests which are the key elements in deciding this issue which is intrinsically a factual issue based on the terms of agreement between the lessor and the lessee. We have carefully gone through various clauses of the ‘Master Agreement’ which are decisive in deciding the issue in hand. The ld.AO has rightly observed that in terms of clause 7 and 8 of the agreement, the assessee had to unconditionally and irrevocably novate in favour of HPFS all of right, title and interest in and to the equipment purchased under the agreement free of any and all encumbrances alongwith all of part of rights, and benefits under the purchase documents. Upon novation, HPFS shall acquire the same rights as regard the equipments as they would have acquired and assumed had they been an original party to the purchase documents. Moreover,it had to return the equipment to HPFS or HPFS can repossess any equipment under this agreement or any lease, any warranties in connection CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. with that equipment. HPFS are the owner of all equipment. The assessee’s only rights to the Equipment are as a lessee and the assessee shall not contest HPFS’s sale and exclusive ownership thereof. We also find sufficient merits in the arguments of the ld.DR that clauses 8/10/11 and 12 of the above agreement make it amply clear the actual owner of the assets under consideration is HPFS and not the assessee. Besides, the terms of conditions make it fairly evident that this not a case of Finance Lease as is being claimed by the assessee.. 8.1 In this respect, it will be relevant to examine the landmark decision in the case of I.C.D.S. Ltd. vs. CIT & Anr. (2013) 350 ITR 527 (SC) which has laid down various parameters which are decisive in such matters. ICDS is an NBFC engaged in the business of hire purchase, leasing and real estate etc. The issue came up for consideration when ICDS (the lessor or the assessee) claimed depreciation on the assets leased out by it, i.e. financed by it but registered in the name of the lessee (under the Motor Vehicles Act, 1988). Further, the depreciation was claimed at a higher rate on the ground that the vehicles were used in the business on running them on hire. The Assessing Officer outrightly rejected the claim of depreciation holding that the assessee was not the actual owner and user of the vehicles and was not using the vehicles “in the business of running them on hire”, but only by way of leasing out to others. On an appeal being made, the Commissioner of Income Tax though accepted the claim of depreciation, but only at normal rates. Then the matter reached ITAT and which CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. decided in favour of the assessee, and allowed depreciation at higher rates relying on the decision taken by the Hon’ble Supreme Court in Civil Appeal Nos. 7077-78 of 1993 in Commissioner of Income Tax, Karnataka, Bangalore vs. Shaan Finance (P) Ltd., Bangalore. An appeal was then preferred to the High Court, which ruled out the decision of ITAT on the basis that the vehicles were not registered in the name of the assessee and having only financed the transaction, the lessor cannot be said to be the actual owner of the vehicles; therefore, no depreciation can be allowed to the assessee. It was how the matter reached the Apex Court. The important observations made by the hon’ble Supreme Court are: 1. Section 32 of the Income Tax Act lays down twin requirements of “ownership” and “usage for business” for a successful claim under Section 32 of the Act.

The income tax law requires the use of the asset by the assessee for “the purpose of business”; it does not mandate the use of the asset by the assessee itself. The lessor, in the instant case, is a leasing company, engaged in the business of leasing trucks it purchases. Therefore, it satisfies the criteria of “usage for business” as it used the vehicles in the course of its leasing business.

As regards “ownership”, the Apex Court cited the observations made in Mysore Bangalore; definition of the term “owner” in the Black’s Law Dictionary, and the various clauses of the lease agreement that established the lessor to be the “exclusive owner” of the vehicles at all points of time and that the lessee was under an obligation to return the vehicles to the lessor on expiration of the lease. 3. 1. The ownership of the vehicle was transferred to the lessee at the end of the lease term, that too at a nominal value of 1% of the original cost of the vehicle: this particular provision in the lease agreement made the Income Tax department hold the assessee (the lessor) to be a mere financier. The Court ruled out this contention since “the assessee has a CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. right to retain the legal title of the vehicle against the rest of the world, it would be the owner of the vehicle in the eyes of law”. 3. 2. Agreeing to the observations made by the Tribunal relying on the views of author of “Lease Financing and Hire Purchase”, the Supreme Court accepted that the transactions in question are not hire purchase transactions, rather these are lease transactions. 3. 3. As far as the provisions of the Motor Vehicles Act pertaining to “ownership” is concerned, it was held that the said Act creates a legal fiction of ownership in favour of the lessee only for the purpose of the said Act: “It is not a statement of law on ownership in general”. 3. 4. The entire lease rent received by the assessee is assessed as business income in its hands and the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hands of the lessee. This reaffirms the position that the assessee is in fact the owner of the vehicle, in so far as Section 32 of the Act is concerned. 3. 5. In cases like Commissioner of Income-Tax Vs. A.M. Constructions; Commissioner of Income- Tax Vs. Bansal Credits Ltd.; Commissioner of Income-Tax Vs. M.G.F. (India) Ltd.; Commissioner of Income- Tax Vs. Annamalai Finance Ltd., the leasing company was held to be the owner of the asset and held to be entitled to the claim of depreciation, that too at higher rates applicable on the assets hired out. On the basis of the above, the lessor was held to the actual owner of the asset; thereby satisfying the twin requirements of Section 32 of the Income Tax Act to claim depreciation. 3.6 As the case of Shaan Finance P Ltd. suggests, where the business of the assessee consists of hiring out machinery and/ or where the income derived by the assessee from the hiring of such machinery is business income, the assessee must be considered as having used the machinery for the purpose of business. Based on the grounds discussed, the decision was rendered in favour of the lessor: depreciation claim was allowed to the lessor and at a higher rate. 8.2 Thus, we find that Hon’ble Apex court in the judgment rendered in the case of ICDS Ltd. vs. CIT(supra)has held that if the assets in question are utilized for the purpose of business of the assessee, the requirement of the section stands satisfied notwithstanding non CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. usage of the assets itself by the assessee. It may be mentioned that the judgment of the Hon'ble Apex Court relied on by the assessee on the case of Asea Brown Boveri Ltd. v. Industrial Finance Corpn. of India (supra) does not have application to the instant case. In this case, the issue involved was relating to "offences relating to transactions in securities" and not connected to the Act and the claim of depreciation, whereas, the facts in the case of ICDS (supra) are more similar to the facts of the instant case. Moreover, CBDT Circular No.2 dated 09.02.2001 has clearly mentioned that the claim of depreciation is dependent on the test of ownership. The test of ownership is discernible only on interpretation of various clauses in the lease agreement. 8.3 In this connection, reference could be made of the decision of the coordinate Bench of ITAT ,Delhi in the case of Religare Finvest Ltd., New Delhi vs Dcit, Circle- 21(1), New Delhi dated 13 July, 2023 in ITA NO.4796/Del/2023.The relevant paras are reproduced for the sake of clarity as below:

We have heard both the parties and perused the records. We find that the Ld CIT(A) has duly taken the note that after issuance of AS-19 issued by the ICAI, the CBDT vide Circular No. 2/2001 dated 9 February 2011 has clarified that capitalization of assets acquired under the finance lease by the lessees in their books of account will not have any bearing on the allowance of depreciation on those assets under Section 32 of the Income Tax Act and also states that the ownership of the asset is determined by the terms of contract between the lessor and the CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. lessee. Further, as per the above circular the owner is entitled to depreciation, whether he is lessee or lessor, depending upon the terms of the contract.

1 Further, the Ld. CIT(A) has taken the note of the Hon'ble Supreme Court in the case of ICDS Ltd. vs. CIT. The Hon'ble Supreme Court has reaffirmed the position that in a leasing transaction it is the lessor and not the lessee, who is entitled to claim deprecation on the leased assets. Hence, we are of the opinion that the order of the Ld. CIT(A) is in accordance with law, in the facts and circumstances of the case. We find no reason to interfere with the order of the ld. CIT(A)." 8.4 The above decision in para 4 above clearly lays down that ownership of the asset is determined by the terms of contract and not by accounting entries in the books of account.

In view of the factual matrix of the present case and in light of the legal proposition emerging from the cited decisions above, in our considered opinion, the assessee company being a lessee, is not eligible to claim the benefit of depreciation. The AO had correctly disallowed the same. We therefore, uphold the disallowance and in result, appeal of the Revenue is allowed.

ITA No. 3331/MUM/2023 (A.Y.2017-18) The only ground of appeal reads as under: “Whether on the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in directing Ld. AO to delete the addition made by the Ld. AO on account of depreciation claimed by the assessee company of Rs. 1,93,52,547/- on lease hold asset treating the same as asset owned by the assessee company, when the facts are that owner of the lease hold asset i.e. M/s Hewlett Packard Financial Services (I) Pvt. (HPFS) has also claimed such depreciation, whi ch was allowed to it by the department in its case in ITA No. 2845/Mum/2013 dated 23/03/2016.”

Facts being identical as also the grounds of appeal ,our decision in para-9 above in ITA No. 3332/MUM/2023 is applicable mutatis mutandis to this appeal also. Accordingly, appeal of the Revenue is allowed.

C.O. No. 17 /MUM/2024/2016-17 CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. CROSS-OBJECTION “On the facts and circumstances of the case and in law, in case the Department's appeal is wholly or partly allowed, the Cross obj ector prays that entire lease rentals including the principal component should be allowed as a deduction.”

According to the assessment order, the assessee during the course of assessment proceedings, claimed that deduction in respect of lease rentals (principal component) should be allowed, since the asset had been wholly and exclusively used for the purpose of business. In this regard, he observed that the payments made by the assessee to HPFS were the installment of repayment of the Finance given by HPFS including interest thereon for acquiring of a particular asset. The rate of interest, term of finance and installments was decided by a separate agreement. During the term of lease, the assessee company had to pay the installments and on completion of the payment of installments, the agreement is terminated and HPFS would transfer all of its interest and title to the equipment to the assessee on “AS-IS, WHERE-IS, WITH ALL FAULTS” basis. What appears from the agreement is that the assessee has to repay the principal loan amount alongwith interest and the composite installment derived may also have rent component on the assets till the period of lease expires. The assessee has not furnished any details of the Rent amount paid to HPFS. Further, in case of rent paid, if any, the provisions of section 40(a)(ia) of the Act, needs to be fulfilled. In view of the aforesaid facts and circumstances, the claim of the assessee company to allow the lease rental i.e. principal component, as deduction was rejected by the AO. CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited.

Before us, it was contented by the ld.AR that that the assessee has raised an alternative plea in its Cross objection that, if departmental appeal is to be allowed, then whole of the lease rentals (including the principal component) should be allowed to the assessee, although it was reiterated that based on various evidences, it qualifies as the ‘real owner’ of the assets leased from HPFS and is, therefore, entitled to claim depreciation on the said assets.

We notice that the assessee preferred appeal on its alternative claim of deduction of the principal components on following ground before ld.CIT(A) claiming that, “i)On the facts and in the circumstances of the case and in law, the Ld. AO has erred in not considering our submission dated 19.07.2018 and not allowing the principal component of lease rental of Rs.13,696,086 paid on the assets acquired as revenue expenditure. The Learned AO failed to appreciate that the appellant shall be eligible to claim the lease rentals on assets acquired, either as capital expenditure (depreciation) or as revenue expenditure. ii) On the facts and in the circumstances of the case and in law, the Ld. AO erred in not accepting the contention of the appellant and erred in not given opportunity of being heard in relation to furnishing details of rent amount paid (principal portion of leas e rentals) to HPFS. The appellant pray that contention of the appellant may please be accepted and opportunity of being heard may please be provided to submit the same.”

1 However, we notice that the ld.CIT(A) has not adjudicated above grounds at all as the appellate order passed is silent in this regard. Since, this claim has not been examined previously by the ld.CIT(A), we consider it appropriate to remit the matter to the file of the ld.CIT(A) to examine allowability of this claim of deduction in accordance with the provisions of the CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited. Act after allowing adequate opportunity of hearing to the assessee in this regard. Subject to this direction, the Cross objection is allowed for statistical purposes.

C.O. No. 18 /MUM/2024/AY 2017-18 CROSS-OBJECTION-I “On the facts and the circumstances of the case the ld.CIT(A) erred in upholding the action of the ld.AO in passing order u/s 143(3) of the Act without giving a fair and reasonable opportunity of hearing to it, thus violating the principles of natural justice”.

We do not find any merit in this ground since the assessee has not brought on record any infirmity in the appellate order in so far as the claim of lack of reasonable opportunity allowed by him is concerned. Accordingly, the CO-I is dismissed. CROSS-OBJECTION-II “On the facts and circumstances of the case and in law, in case the Department's appeal is wholly or partly allowed, the Cross objector prays that entire lease rentals including the principal component should be allowed as a deduction.”

In the CO for AY 2016-17 as per para 15.1 above, the issue has been remitted to the file of the ld.CIT(A) to examine allowability of this claim of deduction in accordance with the provisions of the Act after allowing adequate opportunity of hearing to the assessee in this regard. Accordingly, subject to this direction, the Cross objection is allowed for statistical purposes. CO.No.17, 18/Mum/2024 A.Y. 2016-17, 2017-18 M/s Aditya Birla Financial Shared Services Limited.

In the result, both the appeals of the Revenue are allowed and Cross objections I and II of the assessee are partly allowed.