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Before: SHRI NARENDER KUMAR CHOUDHRY & SHRI PRABHASH SHANKAR
Per Bench:
The present appeal preferred by the Revenue and Cross Objections of the assessee emanate from the order dated 21.07.2023
2 CO.No.20/Mum/2024 Α.Υ. 2011-12 M/s Aditya Birla Financial Shared Services Limited. of the National Faceless Appeal Centre, Delhi (hereinafter referred to as “CIT(A)”], passed w.r.t. assessment order u/s 143(3) r.w.s.147 of the Income Tax Act, 1961 [hereinafter referred to as “Act”]. Since the issues are common and interlinked, and also the fact that the appeals were heard together, they are being taken up together for adjudication vide this composite order for the sake of brevity. We take up Revenue's appeal in ITA No.3333/MUM/2023 first as below:
The grounds of Appeal are as under: -
Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing AO to delete the addition made by the AO on account of depreciation claimed by the assessee company of Rs. 2,75,24,307/- 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 (1) Pvt. (HPFS) has also claimed such depreciation, which was allowed to it by the department in its case in ITA No. 2845/Mum/2013 dated 23/03/2016. 3. Facts of the case are that subsequent to the order u/s 143(3) of the Act passed on 04.03.2014, information was received by the ld.AO from the Dy. Commissioner of Income Tax 2(1)(2), Mumbai that during the course of the assessment proceedings, in the case of Hewlett Packard Financial Services (I) Pvt. Ltd. (herein after referred as HPFS), a lease arrangement existed between HPFS and the assessee. Further, it was found that both the companies were claiming depreciation on the leased assets which led to double claim of deduction on account of depreciation. On perusal of the records, it was noted by him that the assessee company had claimed depreciation of Rs. 2,75,24,307/- on the fixed assets. Further, the assessee had got assets on lease from HPFS and had claimed depreciation on these assets. Further, there was no bifurcation of lease assets and owned assets on the record. According to the AO, the assets which had 3 CO.No.20/Mum/2024 Α.Υ. 2011-12 M/s Aditya Birla Financial Shared Services Limited. been leased to the assessee were not eligible for depreciation u/s 32 of the Act,. Hence, notice u/s 148 of the Act was issued. The AO opined that depreciation could be claimed only on the asset owned by an entity, and thus, if HPFS was claiming to be the owner of the asset and was claiming depreciation, then on the same assets depreciation was not allowable to the assessee. The AO has concluded that the assets which have been leased to the assessee were not eligible for depreciation u/s 32 of the Act. Consequently, he disallowed the depreciation of Rs.2,75,24,307/- claimed on leased assets by the assessee.
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: a) The selection of the asset/equipment is made by the appellant itself without any assistance of HPFS. The assets shall be delivered to it and Appellant is liable to inspect the same. b) The Appellant is solely responsible for installation, operation and maintenance of assets. c) The Appellant is liable to pay the 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. d) The Appellant has the sole right to enforce any warranties against the Supplier at his own expense. e) The assets taken on lease are to be repaired and maintained by the Appellant at its own cost. f) The Appellant is responsible for insuring the assets and maintaining them in working condition. g) In case the asset under lease is lost, destroyed, stolen or damaged beyond repair, then the Appellant is solely responsible for the loss occurring due to such casualty. h) If on disposal of asset by the lessor, there is an excess amount (as computed under the terms of the agreement) received by HPFS, the same shall be paid to the Appellant.
4 CO.No.20/Mum/2024 Α.Υ. 2011-12 M/s Aditya Birla Financial Shared Services Limited.
1 It was further submitted that lease is generally for substantially the entire life of an asset. Also, at the end of the lease term, the ownership of the asset i.e. the title and all its interests in the asset are transferred to the Appellant on an “AS IS, WHERE IS” basis without any further payment as is evident from letter from HPFS on termination of the lease.
The ld.CIT(A), deleted the addition by holding that the lessor here has no commercial right, title or interest in the asset, after the termination of lease period, meaning thereby, that this is purely a financial lease. He relied on Mumbai ITAT order in ITA No.: 1048/Mum/2020 Assessment year: 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 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 5 CO.No.20/Mum/2024 Α.Υ. 2011-12 M/s Aditya Birla Financial Shared Services Limited.
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:
“8. We noted that the assessee company has installed servers at a cost of 25 crores from HPFS during the financial year 2010- 11 under finance lease scheme. The assessee as per AS- 19 capitalized the said amount in the books of account. The assessee claimed depreciation on the cost of acquisition in earlier years which were allowed by the Assessing Officer. It was claimed that the assessee company is the owner of the server and they have to take out insurance policy and paid the insurance premium to cover various risks attach to it and assessee company is the only user of the server. In term of the above facts, the assessee claimed depreciation on the WDV at the rate applicable to fixed assets. It was claimed that the assessee company has not claimed any amount of revenue expenditure except interest paid to HPFS amounting to 1,03,70,798/- and this was claimed under the head of finance cost. We noted that the AO has disallowed depreciation of 6 crores on the ground that HPFS has claimed depreciation on the said asset not only in this year but in subsequent years. The assessee before us explained that the Income Tax Department for AY 2009-10 has already disallowed the claim of depreciation in the hands of the HPFS. We noted that in the very first year i.e. AY 2011-12, the depreciation has already allowed the claim of depreciation We noted that in the income tax code, there is a provision/ concept of block of asset and once any asset enters into block asset and claim of depreciation in very first year is allowed, in subsequent year deprecation cannot be disallowed in case the first year is not disturbed. We noted that even in subsequent years, the Revenue is allowing the claim of the assessee as noted in above chart. Hence, we allow the claim of depreciation on the issue of consistency. This issue of assessee's appeal is allowed."
Before us, the ld.DR relied on the assessment order claiming that depreciation was correctly disallowed. On the other hand, the ld.Authorised Representative relied on the appellate order. A paper book was also filed incorporating written submissions made before him. It is noticed from the written submission made before the ld.CIT(A) as made by the assessee that it claimed depreciation on above grounds a also by placing reliance on the hon'ble Apex Court 'actual owner' of the said assets and 'user' tests have been held to be the key elements
6 CO.No.20/Mum/2024 Α.Υ. 2011-12 M/s Aditya Birla Financial Shared Services Limited. in deciding this issue which is intrinsically a factual issue based on the terms of agreement between the lessor and the lessee.
1 In this respect, it will be worthwhile to examine the landmark decision in the case of I.C.D.S. Ltd. vs. CIT & Anr. (2013) 350 ITR 527 (SC) which has lays 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 into question 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 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 Income Tax Appellate Tribunal and the Tribunal 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, 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:
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 7 CO.No.20/Mum/2024 Α.Υ. 2011-12 M/s Aditya Birla Financial Shared Services Limited. 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 Minerals Ltd., M.G. Road, Bangalore vs. Commissioners of Income Tax, Karnataka, 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.
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 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”.
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.
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”.
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.
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.
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 CO.No.20/Mum/2024 Α.Υ. 2011-12 M/s Aditya Birla Financial Shared Services Limited.
Thus, we find that Hon'ble apex court in the judgment rendered in the case of to be mentioned that the judgment of the Hon'ble Apex Court relied on by the assessee on the case of ABB (supra) does not have application to the instant case. In the case of ABB, the issue involved was relating to "offences relating to transactions in securities" and not connected to Income-tax 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.
1 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 on 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 material available on record. The Coordinate Bench of the Tribunal while deciding the issue of disallowance of depreciation claimed on vehicle on finance lease in Assessee's own case for the Assessment Year 2011-12 in ITA No. 857/Del/2019 vide order dated 12/05/2023 held as under:-
"
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 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)."
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
9 CO.No.20/Mum/2024 Α.Υ. 2011-12 M/s Aditya Birla Financial Shared Services Limited. 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.
C.O. No. 20/MUM/2024( Assessee)
CROSS-OBJECTION-I:
“On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO of initiating reassessment and in upholding the validity of the order passed u/s.147."
It is noticed that the AO has discussed the issue in detail in the assessment order inter alia holding that this is not case of change of opinion. Moreover, the assessment was reopened within four years from the relevant assessment year and what was important is 'Reasons To Believe' which was apparently there in existence. He has also relied on the decision of hon'ble Supreme Court in the case of CIT vs Rajesh Jhaveri Stock Brokers P.Ltd 291 ITR 500 in which the court held that all that is required for issue of notice u/s 147 is reasons to believe that some income has escaped assessment. In this case, information received regarding double claim of deprecation was enough for drawing this belief.
It is seen that the ld.CIT(A) has affirmed the conclusion drawn by the AO in this regard. We have also considered the relevant facts and find no merit in the contentions of the assessee. Therefore, the Cross objection-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.”
10 CO.No.20/Mum/2024 Α.Υ. 2011-12 M/s Aditya Birla Financial Shared Services Limited.
The ld.AR has pleaded that assessee would be at least be entitled for deduction of principal component of lease rental ignoring fact that depreciation, if any that ought to be considered for disallowance shall be restricted to depreciation on leased assets at Rs.44,89,996/- and not to depreciation on total fixed assets of Rs. 2,75,24,307/- as on 31-03-2011. He has placed reliance on various case laws in support of the contention.
We find that the issue raised by the assessee deserves due consideration since the claim of depreciation has already been decided against it in the preceding paras above. There is merit in the contention of the assessee that once its claim of depreciation is rejected, in the alternative, in respect of lease rentals it is entitled to deduction u/s 37 of the Act as revenue expenditure. However,it is noticed that this ground of appeal though was before the ld.CIT(A),he has not deliberated on it. Since, this claim has not been examined previously either by the AO or 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 Act after allowing adequate opportunity of hearing to the assessee in this regard. Subject to this direction, the Cross objection-II is allowed for statistical purposes.
11 CO.No.20/Mum/2024 Α.Υ. 2011-12 M/s Aditya Birla Financial Shared Services Limited.
In the result, appeal of the Revenue is allowed and Cross objections of the assessee are partly allowed.
Order pronounced in the open court on 04/03/2025. NARENDER KUMAR CHOUDHRY (न्यायिक सदस्य/JUDICIAL MEMBER) PRABHASH SHANKAR (लेखाकार सदस्य/ACCOUNTANT MEMBER)
Place: मुंबई/Mumbai दिनांक / Date 04.03.2025 Lubhna Shaikh / Steno
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