DCIT-2(3)(1), MUMBAI vs. NTT GLOBAL DATA CENTERS CLOUD INFRASTRUCTURE INDIA PVT LTD, MUMBAI

Thus, in the aforesaid application, the AO submitted that due to other official assignments, including filing submissions/replies before the Hon’ble High Court within the stipulated time, which required his attention and also due to inadequate strength of manpower/officials, the present appeal could not be filed within the limitation period. Accordingly, the AO prayed for condonation of delay in filing the present appeal.

We find that the reasons stated by the AO for seeking condonation of delay fall within the parameters for grant of condonation laid down by the Hon’ble Supreme Court in the case of Collector Land Acquisition, Anantnag Vs. MST Katiji and others: 1987 SCR (2) 387. It is well established that rules of procedure are handmaid of justice. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. In the present case, the Revenue did not stand to benefit from the late filing of the appeal. In view of the above and having perused the affidavit, we are of the considered view that there exists sufficient cause for not filing the present appeal within the limitation period and therefore, we condone the delay in filing the appeal by the Revenue and we proceed to decide the appeals on merits.

In this appeal, the Revenue has raised the following ground: – “Whether on the facts and in the circumstances of the case and in the law, the Ld. CIT (A) justified deleting disallowance of Finance Lease Rental Payments, when the same is part of Capital Expenditure for payment of Finance Lease Rental Payments."

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of providing remote infrastructure management, remote helpdesk, remote network monitoring services and other services for foreign customers. For the year under consideration, the assessee filed its return of income on 29/11/2015, declaring a total loss of Rs.90,08,075. Subsequently, the assessee filed its revised return of income on 30/03/2017, declaring a total loss of Rs.95,75,594. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, inter- alia, upon perusal of the details filed by the assessee, it was noticed that the assessee has reduced a sum of Rs.6,47,09,747 in the computation of income, claiming it to be ‘Finance Lease Rental Payment’ capitalised in the books of accounts as per AS-19. Accordingly, the assessee was asked to justify the claim with supporting. In response, the assessee submitted that as per AS-19 and CBDT Circular No.2 of 2001, dated 09/02/2001, the assessee has claimed the entire lease rental as an expenditure allowable under section 37(1) of the Act. Further, as per the Act, the assessee has added back the depreciation claimed on the leased asset as per the Companies Act, 1956, since the assessee is not the owner of the leased asset for tax purposes. It was further submitted that lease rentals (principal amount as well as interest component) paid are claimed as Revenue expenditure, and only the interest portion in lease rental payment is debited to the profit and loss account. Hence, the portion which is not debited in the profit and loss account, i.e. Rs.6,47,09,747, is claimed as a deduction computation of income. In support of the aforesaid submission, the assessee placed reliance upon the decision of the Hon’ble Supreme Court in ICDS v/s CIT, reported in (2013) 350 ITR 527.

In its appeal before the learned CIT(A), the assessee raised grounds not only claiming that the Finance Lease Rental Payment is allowable under section 37(1) of the Act but also raised an alternative ground that if the expenses incurred are considered as capital expenditure for acquisition of assets, depreciation on such assets were to be allowed to the assessee being the lessee. The learned CIT(A), vide impugned order, allowed the alternative plea of the assessee pertaining to the claim of depreciation on such assets. Being aggrieved, the Revenue is in appeal before us.

During the hearing, the learned Departmental Representative vehemently relied upon the order passed by the AO and submitted that the learned CIT(A) erred in allowing the depreciation on assets, as the assessee is not the legal owner of the assets.

On the contrary, the learned Authorised Representative, at the outset, submitted that the coordinate bench of the Tribunal in the assessee’s appeal allowed the main plea of the assessee allowing the Finance Lease Rental Payment as expenditure under section 37(1) of the Act.

We have considered the submissions of both sides and perused the material available on record. We find that the coordinate bench of the Tribunal in the assessee’s own case in NTT Global Data Centres and Cloud Infrastructure India Private Limited v/s NeAC, in ITA No. 2784/Mum./2023, for the assessment year 2015-16, vide order dated 07/02/2024, inter-alia, after considering the decision of the Hon’ble Karnataka High Court, wherein the claim of deduction of depreciation in case of lessor, i.e. Cisco Systems (India) Private Ltd, was allowed, accepted the main plea of the assessee and allowed the claim of deduction of Finance Lease Rental Payment under section 37(1) of the Act. The relevant findings of the Tribunal, in the aforesaid decision, are reproduced as follows: -

The learned counsel for the Income Tax Department has vehemently relied upon the judgments delivered in the case of Malabar Industrial Co.Ltd., (supra) as well as in the case of Amitabh Bachchan (supra) on the issue that the order passed by the assessing officer is prejudicial to the interests of the revenue. In the considered opinion of this Court as rightly held by the Income Tax Appellate Tribunal every loss of revenue as a consequence of an order of the assessing officer cannot be treated as prejudicial to the interests of the revenue and in case two views are possible and the assessing officer has taken one view with which the Commissioner of Income Tax did not agree cannot be treated as an erroneous order and prejudicial to the interests of the revenue.

The Division Bench of this Court in similar circumstances while dealing with similar type of lease in the case of Hewlett Packard India Sales Pvt. Ltd., (supra) in paragraphs 6, 7 and 8 has held as under; “6. We have considered the submissions made by learned counsel for the parties and have perused the record. The clauses of the agreement in the case before the Supreme Court in I.C.D.S Ltd. supra and in the case of the assessee with regard to ownership, inspection, re possession of the vehicle of the equipment on default, delivery of equipment on expiration of lease and ownership at the end of the lease period are similar. From perusal of clause 8.1 of the agreement, it is evident that the lessee has to ensure the equipment showing the assessee's name as owner and in terms of clause 11 no alteration or improvements to the equipment can be made by the lessee without prior consent from the assessee. Thus, the assessee alone can claim the depreciation allowance. The aforesaid clauses have been interpreted by the Supreme Court in I.C.D.S. Ltd. supra and it has been held that the assessee is entitled to benefit of depreciation on leased assets under Section 32 of the Act. Thus, the questions of law involved in the appeal are no longer res integra and are squarely covered by the decision of the Supreme Court in I.C.D.S. Ltd. supra.

In view of preceding analysis, the substantial questions of law are answered against the revenue and in favour of the assessee. In the result, the order of the Tribunal dated 09.1.2012 in so far as it pertains to the rejection of the claim of the assessee for depreciation in respect of leased assets under Section 32 of the Act is hereby quashed and the assessee is held entitled to depreciation in respect of leased assets under Section 32 of the Act. Accordingly, the appeal is allowed.”

The Division Bench of this Court has placed reliance upon a judgment delivered in the case of M/s ICDS Ltd (supra), wherein again the same issue was involved. Paragraphs 26 to 32 of the judgment delivered by the Hon’ble Supreme Court in M/s ICDS Ltd’s case are reproduced as under; “26. We do not find merit in the Revenue’s argument for more than one reason: (i) Section 2(30) is a deeming provision that creates a legal fiction of ownership in favour of lessee only for the purpose of the MV Act. It defines ownership for the subsequent provisions of the MV Act, not for the purpose of law in general. It serves more as a guide to what terms in the MV Act mean. Therefore, if the MV Act at any point uses the term owner in any Section, it means the one in whose name the vehicle is registered and in the case of a lease agreement, the lessee. That is all. It is not a statement of law on ownership in general. Perhaps, the repository of a general statement of law on ownership may be the Sale of Goods Act; Section 2(30) of the MV Act must be read in consonance with sub-sections (4) and (5) of Section 51 of the MV Act, which were referred to by Mr. S. Ganesh, learned senior counsel for the assessee. The provisions read as follows: - “(4) No entry regarding the transfer of ownership of any motor vehicle which is held under the said agreement shall be made in the certificate of registration except with the written consent of the person whose name has been specified in the certificate of registration as the person with whom the registered owner has entered into the said agreement. (5) Where the person whose name has been specified in the certificate of registration as the person with whom the registered owner has entered into the said agreement, satisfies the registering authority that he has taken possession of the vehicle from the registered owner owing to the default of the registered owner under the provisions of the said agreement and that the registered owner refuses to deliver the certificate of registration or has absconded, such authority may, after giving the registered owner an opportunity to make such representation as he may wish to make (by sending to him a notice by registered post acknowledgment due at his address entered in the certificate of registration) and notwithstanding that the certificate of registration is not produced before it, cancel the certificate and issue a fresh certificate of registration in the name of the person with whom the registered owner has entered into the said agreement: Provided that a fresh certificate of registration shall not be issued in respect of a motor vehicle, unless such person pays the prescribed fee: Provided further that a fresh certificate of registration issued in respect of a motor vehicle, other than a transport vehicle, shall be valid only for the remaining period for which the certificate cancelled under this sub- section would have been in force.” Therefore, the MV Act mandates that during the period of lease, the vehicle be registered, in the certificate of registration, in the name of the lessee and, on conclusion of the lease period, the vehicle be registered in the name of lessor as owner. The Section leaves no choice to the lessor but to allow the vehicle to be registered in the name of the lessee Thus, no inference can be drawn from the registration certificate as to ownership of the legal title of the vehicle; and if the lessee was in fact the owner, he would have claimed depreciation on the vehicles, which, as specifically recorded in the order of the Appellate Tribunal, was not done. It would be a strange situation to have no claim of depreciation in case of a particular depreciable asset due to a vacuum of ownership. As afore- noted, 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.

Finally, learned senior counsel appearing on behalf of the assessee also pointed out a large 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. [Commissioner of Income-Tax Vs. A.M. Constructions, reported in (1999) 238 ITR 775 (AP); Commissioner of Income- Tax Vs. Bansal Credits Ltd., reported in (2003) 259 ITR 69 (Del); COMMISSIONER of Income-Tax Vs. M.G.F. (India) Ltd. reported in (2006) 285 ITR 142 (Del); Commissioner of Income-Tax Vs. Annamalai Finance Ltd., reported in (2005) 275 ITR 451 (Mad)]. 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.

There was some controversy regarding the invoices issued by the manufacturer – whether they were issued in the name of the lessee or the lessor. For the view we have taken above, we deem it unnecessary to go into the said question as it is of no consequence to our final opinion on the main issue. From a perusal of the lease agreement and other related factors, as discussed above, we are satisfied of the assessee’s ownership of the trucks in question.

Therefore, in the facts of the present case, we hold that the lessor i.e. the assessee is the owner of 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.

With regard to the claim of the assessee for a higher rate of depreciation, the import of the same term “purposes of business”, used in the second proviso to Section 32(1) of the Act gains significance. We are of the view that the interpretation of these words would not be any different from that which we ascribed to them earlier, under Section 32 (1) of the Act. Therefore, the assessee fulfills even the requirements for a claim of a higher rate of depreciation, and hence is entitled to the same.

In this regard, we endorse the following observations of the Tribunal, which clinch the issue in favour of the assessee. “15. The CBDT vide Circular No. 652, dated 14-6-1993 has clarified that the higher rate of 40% in case of lorries etc. plying on hire shall not apply if the vehicle is used in a non- hiring business of the assessee. This circular cannot be read out of its context to deny higher appreciation in case of leased vehicles when the actual use is in hiring business. (Emphasis supplied) Perhaps, the author meant that when the actual use of the vehicle is in hire business, it is entitled for depreciation at a higher rate. *** *** *** 39. The gist of the decision of the apex court in the case of Shaan Finance (P) Ltd. is that 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. 40 In the present case, the business of the assessee consists of hiring out machinery and trucks where the income derived by the assessee from hiring of such machinery is business income. Therefore, the assessee- appellant viz. ICDS should be considered as having used the trucks for the purpose of business. 41 It was further brought to our notice that the Hon’ble Karnataka High Court in its judgment in ITRC No. 789 of 1998 for the asst. year 1986- 87 in the case of the assessee- appellant itself (viz. ICDS) has already decided the issue in question in favour of the assessee, confirming the decision of the CIT (A) and the ITAT holding that the assessee company is entitled to the investment allowance and additional depreciation. In this judgment of the Karnataka High Court the decision of the Supreme Court reported in 231 ITR 308 was relied upon. Therefore we have no hesitation to hold that the appellant- company is entitled to a higher rate of depreciation at 50% on the trucks leased out by it. We therefore, reverse the orders of the CIT (Appeals) on this issue.” 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 7 (supra), are answered in favour of the assessee and against the Revenue. There will, however, be no order as to costs. “ 18. This Court has minutely scanned the entire record and the clauses of agreement in the case before the Supreme Court in M/s ICDS Ltd., (supra) as well as in the case of Hewlett Packard India Sales Pvt Ltd., (supra) and in the case of the assessee, in the present case, with regard to the ownership, inspection, repossession of the equipment on default, delivery of equipment on expiry of lease and ownership at the end of the lease period, are similar and therefore, it is the assessee alone who can claim depreciation, as rightly held by the assessing officer. The clauses relating to lease have already been interpreted by the Supreme Court in the case of M/s ICDS Ltd., (supra) and it has been held that the assessee is entitled to the benefit of depreciation on leased assets under Section 32 of the Act of 1961 and therefore, the substantial question of law involved in the present appeal is no longer res integra and is squarely covered by the decision of the Hon’ble Supreme Court in M/s ICDS Ltd., (supra) as well as the judgment delivered by the Division of this Court in Hewlett Packard India Sales Pvt. Ltd., (supra). Resultantly, the substantial question of law is answered in favour of the assessee and against the revenue.”

Respectfully following the above decision, the same set of transaction on which lessor (Cisco Systems Capital (India) Private Limited) was allowed to claim the deduction/depreciation in their computation and the resultant of the same transaction i.e., in the case of lessee (i.e. assessee), revenue cannot take a different view. Therefore, in our considered view the claim made by the assessee is on the same lease, therefore, we respectfully following decisions of the Hon’ble Karnataka High Court and Hon’ble Supreme Court in the case of ICDS Limited v. CIT (supra) we are inclined to allow the claim of the assessee to claim the lease rent as an expenditure in their computation. This case being peculiar we are inclined to allow the ground raised by the assessee. Accordingly, ground raised by the assessee is allowed.”

In the result, the appeal by the Revenue is dismissed. Order pronounced in the open Court on 04/02/2025