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Income Tax Appellate Tribunal, DELHI BENCH ―C‖: NEW DELHI
Before: MS SUCHITRA KAMBLE & SHRI PRASHANT MAHARISHI
Per Prashant M Maharishi, Accountant Member
This is are the two appeals for two assessment years involving common grounds, argued together by both the parties, therefore, and disposed of by this common order. ITA number 1200/Del/2011 for assessment year 1999- 2000 2. This appeal is filed by IFCI Limited (‗the Appellant‘ ―Assessee) for assessment year 1999 -2000 against the common order of The Commissioner of Income Tax Appeals- XI, New Delhi ( Ld. CIT(A)) dated 30.12.2010 for assessment year 1999 – 2000 and 2000 – 2001. 3. Assessee has preferred following grounds of appeal:-
i. That the Commissioner of income tax (appeals) erred on facts and in law in upholding the action of the assessing officer in disallowing the deduction of ₹ 259,839,987/– claimed by the appellant on account of depreciation on plant and machinery given on lease to various parties. ii. That the Commissioner of income tax (appeals) erred on facts and in law in not appreciating that the order passed by the assessing officer is without jurisdiction and bad in law in as much as the assessing officer have not followed the binding instructions of the honourable ITAT. iii. That the Commissioner of income tax (appeals) erred on facts and in law in not appreciating that honourable ITAT restored back the matter to the file of the assessing officer for a limited purpose of examining whether the lease income earned by the appellant was treated as business income iv. That the Commissioner of income tax (appeals) erred on facts and in law in not appreciating that, the assessing officer himself has treated the activity of leasing of machinery as business carried on by the appellant and rental income there from as business income. v. That the Commissioner of income tax (appeals) erred on facts and in law in not appreciating that ownership of the assets given on lease remains vested with the appellant during the tenancy of lease agreement and no right broke option to purchase the leased assets is given to the lease in the lease agreement.
The Appellant is a public limited company engaged in the business of providing financial assistance. It assists enterprises in different modes including long term, short term loans; subscribing to, underwriting shares, debentures etc.; investing in securities and also through business of leasing and hire purchase finance by acquiring to provide on lease or to provide on hire purchase all types of industrial office plant and other assets required by various businesses.
The Appellant had filed a return declaring loss of Rs. 582,98,69,770/- which was later revised to loss of Rs. 610,69,00,770/-. Notice was issued under Section 143(2) of the Income Tax Act, 1961, (‗The Act‘) for the assessment year (AY 1999-2000) under consideration the Appellant offered income from operations including lease rentals to tax. The leased assets, namely, plant and machinery have been shown separately in the balance sheet and depreciation thereon of INR 25,98,39,387/- had been claimed. The Assessing Officer (Ld.AO‘) passed assessment order dated 28.03.2002 under Section 143(3) of The Act assessing the income at loss of Rs. 584,33,29,556/- disallowing the depreciation on leased assets claimed by the Appellant. The Ld.AO was of the view that the transaction was a finance transaction and stating that the depreciation had been disallowed in earlier years, the depreciation of the Appellant was disallowed for AY 1999-2000. 6. On Appeal, The Ld. CIT(A) had however allowed the deduction vide order dated 12.6.2002 following the decision of the Supreme Court in Shaan Finance (P) Ltd 231 ITR 308 (SC)and the orders in earlier assessment years. 7. On appeal by the department (respondents) the Hon‘ble Income Tax Appellate Tribunal in its order dated 08.03.2006 had remanded the matter to the Ld.AO stating that the order of coordinate bench of ITAT for assessment years wherein the ITAT had decided the issue in favour of the assessee following the decision of Supreme Court in Shaan Finance (P) Ltd(supra) that if leasing of machinery is the mode of business carried by the assessee and income thereof is treated as business income, depreciation would be allowable on such assets and directed that Ld.AO to verify if the Appellant was engaged in the business of leasing and eligible for claiming depreciation. 8. In the remand proceedings, the Ld.AO by order dated 31.12.2007 disallowed depreciation on the ground that the transaction was not of leasing of assets but of financing and sale of asset. Stating that the assessee had not produced any evidence of return of asset or sale, the Ld.AO disallowed the depreciation claimed. 9. The Ld. CIT (A) upheld the disallowance relying on facts and judicial precedents. Therefore, assessee is in appeal before us. All the grounds of appeal raised by the appellant relates to the allowability of depreciation on the leased assets. Therefore, assessee is in appeal before us.
The learned authorised representative submitted that claim for depreciation is well founded in view of the following: 1. Conditions to be satisfied to claim depreciation under the Act as provided under Section 32 have been duly fulfilled by the Appellant 2. Classification of transaction based on the accounting treatment is not relevant to decide ownership and use 3. Errors in the order of lower authorities based on erroneous understanding of law and facts B.1 Conditions to be satisfied to claim depreciation under the Act as provided under Section 32 have been duly fulfilled by the Appellant: The claim of depreciation is mandatory under the Act, and the assessee cannot choose to defer the claim or not record any depreciation in the books of account. The provision for depreciation is allowed as a deduction over the useful life of the asset. Section 32 of the Act provides as below: 32. (1) [In respect of depreciation of— (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—] (Emphasis supplied)
B.2 From the above provision, it can be inferred that in order to be eligible to claim depreciation, the asset must be either a tangible asset as per Section 32(1)(i) or an intangible asset as per Section 32(1)(ii); the asset must be owned wholly or partly by the assessee the asset must be used for the purpose of business or profession Page | 4 B.3 In the instant case, assets in respect of which depreciation is claimed are tangible assets and there is no dispute as regards the nature of assets. B.4 The second condition to be satisfied is that the assessee (Appellant herein) must be the owner of the asset. B.5 The common understanding of the term ‗owner‘ is a person who has a legal title to the assets and has the right to dispose the asset as per his will. Ownership is also understood in terms of the control, the owner may have over the object. B.6 Savigny used the terms ‗corpus possessionis’ or effective control and ‗animus domini’ or intention to hold as owner, to explain possession as being the culmination of both. B.7 While possession may give rise to presumption that the person in possession of the property is the owner, as between the owner and the possessor, it is the owner who has all rights flowing from ownership. Thus ‗animus domini’ is one important test to determine ownership. B.8 In the case of the Appellant, it exercises effective control by restricting the lessee from transferring or creating any right or interest, or creating a sub-lease, parting with possession or permitting any other person to use the equipment (asset which is leased).Thus, seen in this light, the Appellant is effectively in possession of the property. This is despite the fact that the property (equipment) may be located in the premises of the lessee, however, the Appellant has right of inspection at all times. B.9 As per the terms of the lease agreement, the lessor would be the owner of the equipment. In addition, the lessor (Appellant) may at any time without any notice to the lessee assigns any right or create any charge, encumbrance, or hypothecation of the equipment. Also, the Appellant-lessor can sell, release or otherwise dispose the equipment without any account or notice to the lessee. B.10 Thus, in the case of the Appellant the lessee is allowed to have the possession of the equipment, only for using in its business and at all times the Appellant is recognized as the owner of the equipment and exercises effective control over the same.
B.11 Further, Black's Law Dictionary (6th edition), defines "owner" as under: "Owner, the person in whom is vested the ownership, dominion, or title of property; proprietor. He who has dominion of a thing, real or personal, corporeal or incorporeal, which he has a right to enjoy and do with as he pleases, even to spoil or destroy it, as far as the law permits, unless he be prevented by some agreement or covenant which restrains his right.” B.12 In Mysore Minerals Ltd v. Commissioner of Income tax, [1999] 106 Taxman 166 (SC), the Supreme Court held that a person who had paid part price of the property and has been put in possession as owner would be treated as owner for purposes of Section 32(1) of the Act. The asesssee in question was in a position to claim the property as his own in rem since as against the rest of the world including the erstwhile owner (transferor), the assessee was the owner of the property and entitled to collect rent from them. Thus, regardless of formal registration if a person can exercise his dominion over the property to the exclusion of all others, such person would be owner. B.13 Further, there may be a case of a de jure owner or a owner in law with valid legal title; or a de facto owner, a owner in fact, by means of possession or control though he may not have a title to the property. For purposes of Section 32, so long as the assessee is owner – either a de jure or a de facto owner and using the asset for purpose of business, he would be eligible for depreciation. B.14 In the case of the Appellant, it is the owner by title exercising effective control and at all times exercising rights as owner to sell, hypothecate, create interest which may be against the lessee and at no time the lessee can assert/claim any right except that to possession for use as permitted by the Appellant. B.15 The third condition to be satisfied is that the assessee should have used the asset for the purpose of business or profession. B.16 It is pertinent to note that the words used in the statute are use ‗for purpose of business or profession‘. It is to be inferred that the assets must be used by the assessee claiming the depreciation for the purpose of its business – income from which is offered to tax. It is quite possible that the assessee will put the asset to use through a job worker, sister concern etc. However, the fact that the assessee himself is not operating the equipment or asset will not militate against the claim of depreciation. B.17 Another important factor to be kept in mind while examining use for purpose of business is that the section is of wide import and cannot be construed in a narrow manner to state, for instance, that only if the asset in question directly contributes to the output of the business it can be said to be used for the purpose of business. B.18 In Commissioner of Income-tax v. Kalyani Spg. Mills Ltd, [1981] 6 Taxman 50 (Calcutta), the High Court of Calcutta while holding that roads constructed within the factory would be assets used for the purpose of business stated that ―It is true that these are not directly used for the purpose of the business but there is no warrant to restrict the meaning of the expression " used for the purpose of business ". If anything is necessary for the purpose of any building - necessary for the purpose of carrying on the business - then it is for the purpose of the business.” B.19 In the case of the Appellant, the assets are being used by it in the business of leasing. The Appellant has offered the income derived from leasing as business income and the same has been accepted in the assessment of income. B.20 InCommissioner of Income-tax v. Shaan Finance (P.) Ltd, [1998] 97 Taxman 435 (SC), the Hon‘ble Apex Court was examining the eligibility to claim investment allowance wherein the assessee had leased out certain machinery which was being used for manufacture by the lessee. The revenue department argued that as per the provisions, investment allowance can be claimed only by an assessee who is the owner of the asset and who uses it in the business carried on by him. The Apex Court held that the section does not require that the assessee himself must be engaged in manufacture or production and leasing being a mode of carrying on business, the lessor assessee would be eligible to claim investment allowance. It approved the following reasoning of the High Court of Andhra Pradesh: 10. A similar view has been taken by the Andhra Pradesh High Court in the case of CIT v. Vinod Bhargava [1988] 169 ITR 549/ 37 Taxman 100 where Jeevan Reddy, J. (as he then was) held that where leasing of machinery is a mode of carrying on business by the assessee, the assessee would be entitled to development rebate. The Court observed, (p. 551): ". . . Once it is held that leasing out of the machinery is one mode of doing business by the assessee and the income derived from leasing out is treated as business income it would be contradictory in terms to say that the machinery is not used wholly for the purposes of assessee's business." B.21 The Apex Court further held that that in case of transaction of hire which is not preparatory to sale, the owner/person letting property on hire would be eligible to claim depreciation. It referred to the earlier judgement of the Apex Court in Damodar Valley Corpn. v. State of Bihar AIR 1961 SC 440 wherein while examining whether the contract under consideration was one of hire purchase or hire it was stated that ―It is well-settled that a mere contract of hiring, without more, is a species of the contract of bailment, which does not create a title in the bailee.‖. Thus, in the case of a lease transaction, the lessor would continue to hold title in the goods as owner and if, he uses the same in his business, the lessor should be eligible for claiming depreciation as per Section 32 of the Act. B.22 In I.C.D.S. Ltd. v. Commissioner of Income-tax, Mysore [2013] 29 taxmann.com 129 (SC), the Hon‘ble Apex Court followed the reasoning in Mysore Minerals Ltd. v. CIT [1999] 106 Taxman 166 (SC) and held that a person who has invested the capital is entitled to depreciation and the person in whom dominion is vested would be the owner. B.23 The Apex Court opined that a successful claim for depreciation rested on two tests, as below:
The provision on depreciation in the Act reads that the asset must be "owned, wholly or partly, by the assessee and used for the purposes of the business". Therefore, it imposes a twin requirement of 'ownership' and 'usage for business' for a successful claim under Section 32 of the Act. (Emphasis supplied) B.24 Useful reference may be made to the exposition of the Apex Court on the issue as follows: 20. In Mysore Minerals Ltd. v. CIT [1999] 106 Taxman 166 (SC), this Court said thus: "…authorities shows that the very concept the depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset is utilizing the capital asset and thereby losing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time."
Black's Law Dictionary (6th Edn.) defines 'owner' as under: "Owner. The person in whom is vested the ownership, dominion, or title of property; proprietor. He who has dominion of a thing, real or personal, corporeal or incorporeal, which he has a right of enjoy and do with as he pleases, even to spoil or destroy it, as far as the law permits, unless he be prevented by some agreement or covenant which restrains his right. The term is, however, a nomengeneralissimum, and its meaning is to be gathered from the connection in which it is used, and from the subject- matter to which it is applied. The primary meaning of the word as applied to land is one who owns the fee and who has the right to dispose of the property, but the terms also included one having a possessory right to land or the person occupying or cultivating it. The term "owner" is used to indicate a person in whom one or more interests are vested his own benefit. The person in whom the interests are vested has 'title' to the interests whether he holds them for his own benefit or the benefit of another. Thus the term "title" unlike "owner".."
B.25 In I.C.D.S Ltd. (Supra) the revenue department sought to deny depreciation to the assessee who leased vehicles on the ground that the i. transaction was a finance transaction; ii. the assessee (lessor) was not the owner of the vehicle since they were registered in the name of the lessee under the Motor Vehicles Act, 1988; as per terms of the agreement, the lessee could purchase the same at the end of the lease term; iii. the assessee did not use the vehicles himself, B.26 The Apex Court however held that the relevant factors to determine ownership were to be seen from the agreement itself i.e. the intention of the parties at the time of entering into the agreement. It determined that the assessee was the owner of the vehicles in view of the following clauses in the contract: Moreover, the relevant clauses of the agreement between the assessee and the customer specifically provided that: (i) The assessee was the exclusive owner of the vehicle at all points of time; (ii) If the lessee committed a default, the assessee was empowered to re- possess the vehicle (and not merely recover money from the customer); (iii) At the conclusion of the lease period, the lessee was obliged to return the vehicle to the assessee; (iv) The assessee had the right of inspection of the vehicle at all times.
B.27 It is submitted that as per the terms of the lease agreement between the Appellant and its lessee, all points mentioned above namely; Lessor being exclusive owner, right to repossess, obligation of the lessee to return the property and right of inspection are satisfied and hence the Appellant is the owner of the asset. B.28 Thus, the Appellant satisfies the test of ownership as well as use for purpose of business and the jurisprudence in this regard also supports the claim of the Appellant.
It is humbly submitted that since both the tests of ownership and use test have been met, the Appellant‘s claim for deprecation is well founded.
B.29 Classification of transaction based on the accounting treatment is not relevant to decide ownership and use: As regards the statutory framework in the Act, in respect of depreciation, Circular No.2/2001 dated 9.2.2001 is relevant. This Circular was issued by the CBDT to state that in all leasing transactions the owner is entitled to the depreciation if the same is used in business. The ownership of the asset is determined by the terms of the contract between the lessor and the lessee. It was further clarified in the circular that the new ‗Accounting Standard on Leases‘ issue by the Institute of Chartered Accountants of India (ICAI) which require capitalization of the asset by lessee in financial lease transaction would not have any implication on the allowance of depreciation on assets under the provisions of the Income-Tax Act. B.30 An assessee may classify the transaction in terms of accounting standards as a finance lease which is defined as an arrangement which ensures recovery of full value of the cost of the asset for the lessor, whereas in an operating lease being a lease which is akin to letting out an asset and may not ensure recovery of entire investment. A hire purchase transaction as defined under the Hire Purchase Act, 1972 or purely as a finance transaction like sale on installment method. The accounting treatment, income offered to tax, depreciation claims etc., would therefore flow from the classification adopted by an assessee. However as clarified by the CBDT the accounting treatment cannot determine the eligibility to claim depreciation under the Act. B.31 Thus, in order to determine eligibility under the Act to claim depreciation in the case of a lease transaction, the terms of the agreement would be relevant. In layman terms, a lease is a transaction wherein the lessee (user) pays for use of the asset and there is no transfer involved. It is not a transaction of sale.
B.32 A hire purchase transaction is one wherein the owner (dealer, manufacturer of goods) offers the goods for use in exchange for payment of hire charges and the hirer has an option to purchase the goods on payment of last installment of the hire purchase price, which may include interest charges. A hire purchase transaction has element of bailment and sale. The title in goods would pass only after the hire purchase price is paid. B.33 In case there is no transfer, the contract would be one of hire and not hire purchase. According to Ramanatha Aiyer‘s Law Lexicon, 4th Edition, 2010, a hiring contract is one by which one gives to another the temporary possession and use of property other than money for reward and the latter agrees to return the same to the former at a future time. B.34 A finance transaction is a transaction of lending of money wherein the lender will seek to earn interest and as per the Ld.AO, the Appellant is earning only interest income and there is no use of the asset in business. B.35 There can a combination of some of the above elements and we have transactions of hire purchase finance wherein there is a dealer and a buyer who transacts for the goods and a financier extends the loan facility to the buyer to enable him to buy the goods. The dealer would get the consideration in effect from the financier and the buyer takes possession of the goods, with a charge or /hypothecation to the financier and would pay the installments - towards principal and interest to the financier. B.36 Also, in case of lease transactions, one or more features of different types of lease may be found in the contract between a lessor and lessee. However, the classification under other laws cannot be relied on by the authorities to determine the category of the transaction. For instance, as per RBI regulations, equipment leasing is treated as a financial service. This classification by RBI set outs permissible activities for NBFC and is not conclusive for purposes of income tax. Under the erstwhile Service Tax law, irrespective of the classification, the test for taxability and value to be taxed depended on whether the transaction fell within the definition of the specific provisions like transfer of right to use goods and is not relevant to decide claim of depreciation under the Act. B.37 According to Section 105 of the Transfer of Property Act, 1882 , lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. In the case of equipment leasing, the property is generally movable property. However, it can be inferred from the above definition that a lease essentially is providing a right to possess and/ use certain property. Lease is at best a partial transfer of certain rights. B.38 In case of hire or lease, there is no transfer of ownership and the lessor or person letting the property remains the owner. An element of sale or permanent transfer may be combined with hire or lease as part of a transaction to provide financial support to a person who cannot or does not wish to acquire the asset. This may take the form of a loan simpliciter, a loan with charge on property to secure repayment or recovery of outlay. B.39 The Ld. AO and CIT (A) have classified the transaction as a hire purchase cum finance transaction. The transaction between the Appellant and the lessee is one of leasing and not a purely financing activity. The lease agreement envisages return of the property/ asset at the end of the lease period. The Appellant may at the end of term sell or dispose the assets. Such buyer may or may not be the lessee itself. However, transfer of the asset after the lease period or the amount Appellant may earn from the lease transaction cannot make it a pure finance or loan transaction. B.40 In Simpson and General Finance Co. Ltd v. Deputy Commissioner of Income-tax, Co. Circle -I(2), [2014] 44 taxmann.com 7 (Madras), the High Court of Madras held that the lease transaction was not a pure finance transaction based on the following terms in the agreement:
A reading of the sample lease agreement placed before this Court with the Madras Advertising Co. Pvt. Ltd., dated 28.08.2008 show that in respect of lease of a car, the terms of lease was stated to be three years, with monthly rentals and total rentals payable. The terms of the lease agreement further point out that the lessor takes on lease the goods described in the Schedule on terms and conditions set forth in the Schedule. Clause 2 of the agreement relates to Delivery of Equipment. Clause 3 on rent payments and Clause 4 on ownership, which reads as under: "The Equipment shall at all times remain the sole and exclusive property of the Lessor and the Lessee shall have no right, title or interest therein except as Lessee". The agreement further states that during the currency of the lease, the lessee shall insure the subject of lease and protect it from any risk. Clause 10 of the agreement states that without the prior written consent of the lessor, the lessee shall not make any alterations, additions or improvements to the equipment and all additions, replacements, attachments and improvements of whatever kind or nature made to the equipment shall be deemed to be parts of the property of the lessor and shall be subject to all the terms and conditions of the agreement. Clause 13 speaks about the surrender of the lease equipment upon the expiration of earlier termination of the lease agreement. It also gives the option for renewal on year to year basis on mutually agreed terms and conditions. Clause 15 deals with payment by lessor and Clause 20 is to the effect of the expiration of the lease, which stipulates that on expiration of the lease term, if the lessee fails to deliver the equipment to the lessor in accordance with any direction given by the Lessor, the lessee shall be deemed to be the monthly tenant of the equipment and upon the same terms expressed in the agreement and the tenancy should be terminated by the lessor immediately upon default committed by the lessee by serving seven (7) days notice. Clause 19 speaks about the default clause and the termination by default under Clause 24. Clause 33 speaks about the Assignment rights stating that no title or right in the property shall be passed to the lessee except the lease rights expressly granted to the lessee. It also stipulates that plates or other marking shall be fixed indicating that the lessor is the owner thereof and that the lessee would not remove the same. Upon termination of the lease period, the lessee shall immediately return the said property to Lessor in as good condition and received less normal wear, tear and depreciation. Clause 34 speaks about the Modification to rental payments during lease tenor. One of the Clauses under this head reads as follows: ".... Without prejudice to the above, it is hereby agreed that at the option of the LESSOR the Lease Agreement will be reviewed if there is any material changes in the provisions of the Income Tax Act regarding leasing transaction. This review will also include, apart from changes in the rentals, cancelling of the Lease Agreement and replacing it with Hire Purchase transaction on mutually agreed terms. It is further agreed that if the LESSOR is refused allowances or their claims are disallowed by the Income Tax Authorities on account of the failure on the part of the LESSEE to furnish any particulars/declaration required for this purpose, the LESSEE shall reimburse the LESSOR tax, interest, penalty or any outgo accruing or arising to the LESSOR on this account."
On a reading of the terms of the agreement, we find that the agreement is a lease agreement sample and that there is nothing in the agreement to speak about mere financing for the purchase of an equipment as it had been contended by the assessee. *** 10. Learned counsel for the assessee however, submitted that the equipment leased out is one which the lessee had purchased. Consequently, the agreement has to be seen only as a finance agreement. We do not find any justification to accept this as a ground for holding the agreement as a finance lease agreement. If in effect the agreement is finance agreement, the question of returning the leased item back to the assessee will not arise at all. Further, the question of again affixing the name of the assessee on the property also does not arise. The fact that the equipment is delivered by the supplier to the location of the assessee thus by itself, will not make the agreement, the Finance Agreement and the terms thus seen are matters of arrangement between the parties, which in effect clearly points out that it is only a simple lease agreement and not a finance agreement. (Emphasis supplied) B.41 Further, the difference between a transaction of hiring and a mere financing arrangement was elucidated by the Apex Court in Association of Leasing and Financial Companies v. UOI,2010 (20) S.T.R. 417 (S.C.), as follows.
According to Sale of Goods Act by Mulla [6th Edition] a common method of selling goods is by means of an agreement commonly known as a hire-purchase agreement which is more aptly described as a hiring agreement coupled with an option to purchase, i.e., to say that the owner lets out the chattel on hire and undertakes to sell it to the hirer on his making certain number of payments. If that is the real effect of the agreement there is no contract of sale until the hirer has made the required number of payments and he remains a bailee till then. But some so-called hire-purchase agreements are in reality contracts to purchase, the price to be paid by installments and in those cases the contract is a contract of sale and not of hiring. It depends on the terms of the contract whether it is to be regarded as a contract of hiring or a contract of sale. A hire-purchase agreement partakes of the nature of a contract of bailment with an element of sale added to it. However, if the intention of the financing party in obtaining the hire purchase and the allied agreements were to secure the return of the loan advanced to its customer the transaction would be merely a financing transaction. [See page 75]. (Emphasis supplied) B.42 It is submitted that the Appellant has correctly reported the transaction as one of lease and offered lease rentals to income tax. The arrangement is not loan arrangement or mere finance transaction as opined by the Ld. AO and Ld. CIT (A). B.43 In the previous year relevant to AY 1999-00, the Appellant has classified the lease as a financial lease and accounted for the same accordingly. However even in the case of a financial lease if the test of ownership and use is satisfied, depreciation can be claimed. In I.C.D.S (supra), the terms of the lease agreement provided for transfer of the asset to the lessee on payment of a nominal sum at the end of the lease. However, the Apex Court applied only the tests as discussed in Para B.26 to decide the allowability of the claim of depreciation.
B.44 Errors in the order of lower authorities based on erroneous understanding of facts and law: The revenue authorities‘ analysis of the nature of the transaction in order to decide if assessee is owner of the asset precedes on the basis that if there is any element of financing, the assessee ceases to be the owner of the asset. The revenue authorities have tried to place the Appellant in the category of finance leasing by incorrect understanding of facts and erroneously denied depreciation to the Appellant. B.45 The authorities have not considered the evidence furnished by the assessee in proper perspective and brushed aside the same, on the erroneous premise that the transaction is a finance transaction; the assessee is not entitled to depreciation and had claimed the same wrongfully. B.46 The Ld.AO and the LD.CIT(A) have ignored the direction of the Hon‘ble ITAT in its order dated 08.03.2006 to examine the factual aspects in light of the approved legal principle that if leasing is a mode of business of the assessee and it is the owner, depreciation is to be allowed on leased assets. In the said order dated 08.03.2006, the Tribunal directed the Ld.AO to comply with the observations and directions of the Tribunal given in the order dated 31.5.2005 in respect of Assessment Year 1995-96. B.47 In the assessment post remand, the Ld.AO merely stated that no evidence has been furnished though the treatment of assets, sale of assets were duly reflected in the books of accounts. The order of the CIT(A) records that the documents namely, the correspondence between the assessee and VST Tillers Tractors Limited dated 03.08.1998, 08.03.1999, Sri Chamundeshwari Sugars were furnished in respect of AY 1999-2000. However, without advancing any reason as to why the said documents do not prove that the assessee was owner of the asset till date of sale and hence eligible for depreciation, the order of the CIT(A) proceeds to follow the decision in respect of AY 2005-06. B.48 The case laws relied upon by the CIT (A) to reach the erroneous conclusion of denial of depreciation are distinguishable on facts and hence the ratio is not applicable to the case of the Appellant. B.49 The case of Gowri Shankar Finance Limited v. CIT, 248 ITR 713, the assessee debited the entire cost of goods and interest in the form of lease rent against the customer such that the cost of asset (consumer durables) purchased was taken out of books. The assets were not reflected in the balance sheet and the assessee never took back the assets which were in nature of stock in trade. However, the agreement between the assessee and the buyer/lessee was termed to be a lease agreement. It is submitted that in the case of the Appellant the assets form part of block of asset and income from sales is duly recorded. The lease agreement is not a camouflage and the leased assets are not stock in trade. B.50 The case of DCIT v. M.K. Jinachandran205 ITR 328 (Ker) and Sardar Tara Singh v CIT 47 ITR 756 (MP) pertained to claim of depreciation by the hirer in a hire purchase agreement which was disallowed since the assessee (hirer) was not owner of the asset. B.51 In J.M.Share& Stock Brokers v DCIT 109 ITD 329(Mum) the assessee (lessor) received security deposit to cover about 50% of the cost of the asset and the agreement between the assessee(lessor) and lessee ( who further sublet the asset) mentioned clearly that the intention is only to finance the asset. The facts are quite different from that of the present Appellant assessee wherein the objective is not to merely finance purchase of an asset but the intention is to repossess the asset and even in case of sale, the sale is recorded separately. Further, till such point of sale, the lessor-assessee-Appellant is the owner of the asset using it in the business of equipment leasing.
B.52 It is humbly reiterated that the Appellant has not made a wrong claim nor is there an error on its part in understanding the applicable legal provisions under the Income Tax Act, 1961. The claim of depreciation on leased assets has been made on satisfaction of the test of ownership and use. The Appellant has entered into a transaction of leasing equipment as a business transaction and not a mere finance transaction so as to disentitle it from claiming depreciation as owner of the asset.
Thus, in light of the above submissions, the Appellant humbly prays before the Hon‘ble Tribunal that depreciation on leased assets be allowed and the impugned order of Ld. CIT(A) for AY 1999-2000 be set aside.‖
The learned authorised representative further submitted that learned CIT appeal recorded in his order that the assessee had produced confirmatory letters from certain lessees that they had not claimed depreciation and that the assessee had reduced the written down value of the assets by the amount of sale consideration.
The learned departmental representative vehemently supported the orders of the lower authorities, submitted that the assessee has financed the assets involved, and therefore is not an owner of the asset. Therefore, the depreciation claim has rightly been denied. 13. We have carefully considered the rival contentions and also perused the relevant order is placed before us. We also considered the paper book filed by the assessee. On perusal of the balance sheet filed by the assessee placed at page number 51/98 of the paper book it is apparent that assessee has a gross block of assets leased of plant and machinery is on 31st of March 1999 amounting to ₹ 4 897.27 millions. As per schedule XVI , note number 2.4 while recognizing the revenue the significant accounting policy followed by the assessee shows that rental on leased the said is accounted for from the commencement date, as prescribed in the lease agreement entered with the lessees. As per note number, five related to the fixed assets and depreciation in note number 5.2 it is stated that depreciation on assets acquired in the course of leasing business is provided on straight-line method at the rates prescribed under schedule XIV of the companies act, 1956 or over the primary. Of lease of assets, whichever is higher. In schedule number XI of income from operations, the assessee has shown the lease rental income of ₹ 1 771.59 millions. At page number, 42 – 50 the assessee has also submitted the copies of the certificate from third parties wherein they have confirmed that they have taken certain plant and machinery on lease from the assessee and during the tendency of the lease. They have not claimed any depreciation u/s 32 of the income tax act as the ownership of the assets remained with the assessee. Assessee has also produced the copy of lease agreement placed at page number six – 41 of the paper book, which has certain specific clauses tabulated by the assessee also in its return submission.
According to clause number 2.4 of the lease agreement it is agreed that upon termination of the agreement by a flux of time or otherwise, the lessee shall, at its own cost and expenses, forthwith deliver or cause to be delivered to the lessor the equipment, such time and place as may be directed by the lessor, in good repair, order and conditions subject to normal wear and tear. As per the article IV four of the agreement the lessee was to maintain and keep the equipment however to show with Mark that assessee is the soul and the exclusive owner of those assets.
Further, the learned authorised representative has also tabulated the relevant conditions of the lease agreement as Under:-
Features Words in the agreement Article/clause no. Intention of ―Lease …have the commercial Article I – parties connotations and only means the Definitions 1.4 hiring or licensing of Plant…‖ ―Let on lease the equipment…‖ Article I - 1.7 - Schedule Return of ―Upon termination of this agreement Article II -2.4 equipment/lease by efflux of time or otherwise Lessee property shall at its own cost and expense forthwith deliver or cause to be delivered to the lessor…‖ Payment for ―Lessee has requested the Lessor to Article II -2.5(a) equipment make advance payments towards the cost of the equipment‖ Page | 20 Lessee warrantee ―Lessee would have been eligible and Article III- 3.4 indicating that the could have claimed depreciation….if it Lessor is owner had bought the equipment and was operating the same as the owner thereof‖ Right of possession ―Keep the equipment at all times in its Article IV – 4.1 with restriction on possession and control at the location subletting or shown herein… and shall not remove assignment therefrom sublet or assign the same without prior written consent of Lessor‖ Exclusive ―Affix a name plate or other Article IV – ownership of the distinguishing mark identifying the sole 4.1, 4.2, 4.3, Lessor and exclusive ownership thereof of the 4.11 Lessor and not allow or permit the same to be removed or defaced‖ ―Nor do or cause to do any act whereby it become impossible for the Lessor to take possession of the equipment on the termination of the agreement by any nature whatsoever.‖ ―Hold the equipment as bailee…‖ ―Not sell, transfer, assign, lease, let out or otherwise dispose…part with the possession or permit any other person to make use of the equipment or part thereof‖ Right of inspection ―Permit the Lessor and all person Article IV – 4.10 authorised by the Lessor at all reasonable times (immediately in case of an emergency) to inspect, view and examine the state and condition of the equipment…‖ Permission to ―Not to make any alteration, addition Article IV – 4.12 alter or improve or improvement without prior consent equipment and of the Lessor… Provided,however that ownership of the all such additions, improvements and same attachments of any nature what so ever, when made to the equipment by the Lessee (whether or not at its own cost or not and whether with or without approval of Lessor) shall belong to the Lessor ― Lessee not to claim ―Not to claim any relief by way of Article IV – 4.17 depreciation which depreciation or nay other deduction is available to allowance or grant available to the Lessor being owner Lessor as the owner of the equipment‖ Lessee is agent of ―The Lessor hereby appoints the Article V – 5.1 Lessor for Lessee as its agent to deliver, inspect, purpose of taking receive deliver/obtain clearance from Page | 21 delivery port/customs authorities and installation of the equipment from/by the manufacturer and /or its agents‖ Equipment is not ―The Lessor is not the manufacturer or Article VI – stock in trade of dealer or supplier of the equipment and 6.2, 6.3 the Lessor has only purchased the equipment selected by the Lessee from the manufacturer or dealer or supplier designated by the Lessee‖ ―The Lessor has not at any time, made nor does it hereby make any representation or warranty, whatsoever with respect to the merchantability, quality….or performance of the equipment.‖ Ownership ―As between the Lessor and the Lessee Article VI – 6.7 recognized by and their respective successors in title, successors in title the equipment shall remain moveable property of and shall continue to be in the ownership of the Lessor‖ Right of Lessor to ―The Lessor shall be entitled to, without Article VIII - create other giving any notice to the Lessee, assign 8.1 interest, assign to any person any of its rights title or property interest under this agreement or create any charge, lien, encumbrance or hypothecate the equipment or nay part thereof and the person(s) to or on who, such are assigned or conferred shall be entitled to the full benefits of this Agreement‖ Right to repossess ―On termination of this Lease, pursuant Article IX – 9.2 to clause 9.1 above: - The Lessor shall, without any notice be entitled to remove and repossess the equipment…‖
Honourable Supreme Court ICDS Ltd versus CIT (350 ITR 527) has also held that definitions of ―ownership‖ essentially make ownership a function of legal right or title against the rest of the world. However, it is ―nomen generalissimum‖, and its meaning is to be gathered from the connection in which it is used, and from the subject matter to which it is applied. As long as the assessee has a right to retain the legal title against the rest of the world, it would be the owner of the asset in the eyes of law.
Further identical issue arose before the honourable Calcutta High Court in case of SBI Home Finance Ltd versus Commissioner of income tax (280 ITR 6) wherein the assessee was carrying on the business of leasing and finance and Co approached the assessee for release or finance for a plant which was being set up at the premises of a company. Assessee acquired the said plant and leased out to the other party upon making a symbolic possession. As per the agreement the third party had a right to purchase the plant after expiry of the stipulated period of time. The assessee claimed depreciation u/s 32 which was denied to the assessee. The honourable High Court in para number six held that assessee was the owner of the plant for the purpose of Section 32 and by leasing it out to the other party the assessee has used the plant only for the purposes of with its business for the purpose of carrying on the business of leasing and as such the income earned thereon by way of rental of the plant was a business income. Therefore the honourable court held that the ingredients of ownership and user of the plant in business as required Under the provisions of Section 32 of the act have been fulfilled by the assessee and therefore it is entitled to depreciation available to it u/s 32 of the act.
Further in Cosmo films private limited versus CIT [2011] 12 taxmann.com 217 (Delhi)/[2011] 200 Taxman 384 (Delhi)/[2011] 338 ITR 266 (Delhi)/[2011] 245 CTR 23 (Delhi), the honourable Delhi High Court has dealt with a question that "Whether the Tribunal was justified in law in allowing depreciation on the assets for which the Assessing Officer had treated the transaction as that of finance and not of leasing?" 19. The honourable High Court held that once it is established that the ownership of the said equipment is that of the assessee, then it is clear that the respondent/assessee would be entitled to claim depreciation. 20. Further, in the present case lease rental is received regularly and has been shown in the Profit & Loss A/c. The other parties who are paying lease rentals to the assessee have shown lease rental paid to the assessee. The department has not brought a single case on record that the parties who had paid lease rental has not shown/claimed the deduction on account of lease rental but has claimed deduction of interest paid to assessee.
Moreover, the assessee has produced the certificates from the lessee that they have not claimed any depreciation on these assets, which are owned by the assessee. No material contrary to the above facts was shown by the revenue.
21. In view of above facts, we direct the learned assessing officer to delete the disallowance of depreciation on plant and machinery of ₹ 259,839,987/– as claimed by the appellant on plant and machinery given and leased various parties.
In the result ITA number, 1200/del/2011 filed by the assessee for assessment year 1999 – 2000 is allowed. ITA number 1201/Del/2011 for assessment year 2000-2001
This appeal is filed by the assessee against the order of the Commissioner of income tax (appeals) –XI dated 30 December 2010 being a common order for assessment year 1999 – 2000 and 2000 – 2001 wherein identical issue with respect to the claim of depreciation on the leased assets denied by the learned assessing officer amounting to ₹ 3 29127058/– was confirmed.
The assessee has raised identical arguments as were raised in appeal for assessment year 1999 – 2000 except the change in the amount of claim of depreciation. 25. The facts of the present appeal are identical to the facts of the appeal for assessment year 1999 – 2000. The arguments of parties are also similar. Both the parties also confirmed that the facts are identical to the issue in that appeal. 26. On careful consideration of the relevant orders, argument of the parties, the relevant documents placed before us in the form of paper book, and for the reasons given by us in our order for assessment year 1999 – 2000, we reverse the order of the lower authorities and allow the claim of the assessee for the depreciation of Rs. 329,127,058/–. 27. Accordingly, appeal for assessment year 2000 – 2001 in ITA number 1201/del/2011 filed by the assessee is allowed.