STAROSE MAFATLAL INVESTMENTS & FINANCE LTD,MUMBAI vs. DCIT CIR 3(3), MUMBAI

Per D.T. Garasia, Judicial Member:

1. Disallowance of depreciation of Rs.1,84,593/- on leased assets.

2. Not allowing set off of brought forward long term capital loss against the long term capital gains earned during the year under consideration.

3. Disallowance of Rs.9,39,062/- u/s.14A of the Income-tax Act, 1961

2 & 3247/M/2012 M/s. Stanrose Mafatlal Investments and Finance Limited 3. The brief facts of the case are that the assessee company is domestic company and is engaged in business of providing assets on lease. The assessee has block assets contain various assets classified as plant & machinery which was purchased in earlier years for the purpose of providing them on lease. The assessee while computing the taxable income under the head “Profit and gain from the business and profession” claimed under section 32 of the Act. The assets so purchased were provided on lease based on condition mentioned in lease covenant. The lease covenant assigned all the rights of ownership to the assessee. The equipment was in the name of the assessee having name plate of the company. The lessee agree to hold the equipment as a bailee of the assessee. The lease covenant also confirmed that the lease equipment at all times will remain the property of the assessee. The assessee has right to repossess the leased assets. The assessee has also followed AS-19 accounting standard of Institute of Chartered Accountants of India.

"The assessee was a non-banking finance company engaged, inter alia, in the business of hire Purchase and leasing. The assessee purchased vehicles against direct payment to the manufacturers and, as a part of its business, leased out these vehicles to its customers and thereafter, had no physical affiliation with the vehicles. The lessees were registered as the owners of the vehicles. 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 (ü) 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. In its return of income for the assessment years 1991-92 to 1996-97, the assessee claimed depreciation in relation to the vehicles financed by the assessee but registered in the name of third parties. The assessee also claimed depreciation at the higher rate on the ground that the vehicles were used in the business of running on hire. The Assessing Officer disallowed the claims, both of depreciation and higher rate, on the ground that the assessee's use of these vehicles was only by way of leasing out to others and not actual user of the vehicles in the business of running them on hire. On appeals, the Commissioner (Appeals) agreed with the assessee but did not allow its claim for depreciation at the higher rate and on appeals by both the assessee and the Department the Tribunal agreed with the assessee oil the counts recording a finding that the business of the assessee was leasing and hiring of vehicles and other machinery and not a hire purchase. On appeal the High Court held against the assessee on both counts." On appeal, reversing the judgment of the Hon'ble Karnataka High Court, the Apex Court held as under:

4 & 3247/M/2012 M/s. Stanrose Mafatlal Investments and Finance Limited "The provision on depreciation in the Income-tax Act, 1961, 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. The section requires that the assessee must use the asset for the "purposes of business". It does not mandate usage of the asset by the assessee itself. As long as the asset is utilized for the purpose of business of the assessee, the requirement of section 32 will stand satisfied, notwithstanding non-usage of the asset itself by the assessee. The definitions of "ownership" essentially make ownership a function of legal right or title against the rest of the world. However, it is "nomen generalissimnumn ", 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. Section 2(30) of the Motor Vehicles Act, 1988,is a deeming provision that creates a legal fiction of ownership in favour of the lessee only for the purpose of that Act, not for the purpose of law in general. It must be read in consonance with sub-sections (4) and (5) of section 51 of that Act, which 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 the 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. ..the assessee was a leasing company which leased out the trucks that it purchased. Therefore, on a combined reading of section 2(13) and (24) of the Act the income derived from leasing of the trucks would be business income, or income derived in the course of business, and had been so assessed. Hence, it fulfilled the requirement of section 32 of the Act, that the asset must be used in the course of business. The assessee did use the vehicles in the course of its leasing business. The fact that the trucks themselves were not used by the assessee was irrelevant for the purpose of the section. (ii) That a scrutiny of the material facts at hand raised a presumption of ownership in favour of the assessee. The vehicle, along with its keys, was delivered to the assessee upon which, the lease agreement was entered into by the assessee with the customer. The fact that at the end of the lease period, the ownership of the vehicle was transferred to the lessee at a nominal value did not make the assessee in effect a financier. No inference could be drawn from the registration certificate as to ownership of the legal title of the vehicle, 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 Tribunal, was not the case.

5 & 3247/M/2012 M/s. Stanrose Mafatlal Investments and Finance Limited (iii)That the entire lease rent received by the assessee was assessed as business income in its hands and the entire lease rent paid by the lessee had been treated as deductible revenue expenditure in the hands of the lessee. This reaffirmed the position that the assessee was in fact the owner of the vehicle, in so far as section 32 of the Act is concerned. (iv)That, therefore, the assessee was 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, was entitled to claim depreciation in respect of additions made to the trucks, which were leased out. (v)That for purposes of the assessee's claim to the higher rate of depreciation, the interpretation of the term "purposes of business", used in the second proviso to section 32(1) of the Act would not be any different from that ascribed to it under section 32(1) of the Act. Therefore, the assessee fulfilled even the requirements for a claim of a higher rate of depreciation and was entitled thereto.

We find that as per the AO the assessee was engaged in business of leasing and hire purchase as well as corporate lending and financing(Assessment order pg-l).Considering the fact that the assessee is in the business of leasing and finance and that the AO in the subsequent and in the earlier years had allowed depreciation of leased assets, we are of the opinion that the FAA was not justified in denying the claim of depreciation to the assessee for the year under consideration. Rule of consistency stipulates that until and unless new facts are brought on record the AO should not disturb the findings of earlier year/(s). In the case under consideration, the AO/FAA has not discussed anything that proves that the facts of the earlier years had materially changed during the year to that extent that there was no other way than to reject the claim of the assessee. We have considered the orders/judgments relied upon by the DR. In our opinion after judgment of Hon'ble Apex Court in the case of ICDS the issue of allowing depreciation on leased assets of a finance company stands settled. Considering the above, we decide second ground of appeal in favour of the assessee.”

16. Respectfully following the same, we allow this ground of the appeal of the assessee.

17. The last ground relates to the loss disallowance under section 14A of the Act. The short facts of the case are that the AO observed that assessee has claimed the dividend income as exempt income. However, no expenses claimed to have been incurred against dividend income. The AO held that as per section 14A no deduction shall be allowed in respect of expenditure incurred by the company in relation to income which does not form part of total income under the Income Tax Act. The assessee has contended that assessee has not incurred any expenditure but AO has disallowed the expenditure of Rs.15,20,977/- in A.Y. 2005-06 and Rs.9,39,062/- for A.Y. 2006- 07. During the course of hearing, the Ld. A.R. submitted that issue

8 & 3247/M/2012 M/s. Stanrose Mafatlal Investments and Finance Limited in controversy is covered by the decision of assessee’s own case for A.Y. 2004-05 and appeal may be decided accordingly.

Order pronounced in the open court on 14.02.2018.