STANROSE MAFATLAL INVESTMENTS AND FINANACE LTD,MUMBAI vs. ITO RG 3(3)(3), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य, राजे�� के अनुसार लेखा सद�य राजे�� के अनुसार/ PER Rajendra A.M.- लेखा सद�य लेखा सद�य राजे�� के अनुसार राजे�� के अनुसार Challenging the orders dated 23/07/2009 of the CIT(A)- XXXII,Mumbai,the Assessee has filed present appeal.Assessee-company,engaged in business of investment and trading in shares,leasing and hire purchase and Corporate lending and financing, filed its return of income on 30/10/2004,declaring total Loss at Rs.2.723 lakhs.The Assessing Officer(AO) completed the assessment u/s.143(3) of the Act,on 27.12.2006, determining its income at Rs. 55.29 lakhs.First Ground of appeal,being general in nature,is not being adjudicated. 2.Second Ground of appeal is about disallowance of depreciation on leased assets of Rs.6.20 lakhs,that a further amount of Rs.3.33 lakhs was claimed in computation of income on account of lease equalisation.After analysing the transaction, he held that, the assessee was arranging the lease transactions in such a way that it remained the legal owner of the assets, yet never came to possess the same,that the good were never returned to the assessee at the end of the lease period,that the title in the assets would pass to the customer at the end of lease period for a nominal residual consideration,that right in the beginning the total cost was appropriated in the form of security deposit,that the transactions entered into by it in reality were financial transactions,that it possessed the ownership over the assets only for name sake, that the lessee who took delivery would enjoy use and occupation of property, that the lessee would maintain and operate the machinery,that it would also get property insured and also pay necessary taxes and other charges.Referring to judgment of M/s. Gowri Shanker Finances 5440/M/09- Stanrose Mafatlal Investments & Finance Ltd.

Ltd.(248 ITR 713),he held that the assessee had wrongly claimed the depreciation amounting to Rs.6.20 lakhs and added the same to its income. 2.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA)and made elaborate submissions.It also relied on certain case laws. After considering available material,the FAA held that the lease agreement in the case of the assessee were non cancelable at the instance of lessee.However, for all practical purposes the lessee was owner of the property and that he was solely responsible in respect of the property and the assessee was only a titular owner, that the lease transactions of the assessee were same as financial transactions.Finally,he upheld the disallowance of depreciation made by the AO.He further held that residual sale price of leased assets was in the nature of revenue receipts and addition of Rs.1.67 lakhs had to be upheld. With regard to lease equalisation charges,he held that same did not represent any real income,that it was only in the nature of adjustment entry representing recovery of capital amount inherent in lease rentals.Therefore,the addition of Rs.3.33.lakhs in respect of lease equalisation was deleted. 2.2.Before us,the Authorised Representative(AR)stated that the assessee owned the assets, that it had leased out the assets in normal course of its business,that there was no justification for not allowing depreciation on assets of the assessee,that transfer of assets to lessees should not have been the deciding factor for rejecting the claim He further stated that no additions was made by the AO,under the heads ‘disallowance of depreciation on leased assets’ and disallowance of lease equalisation,while passing the scrutiny orders,u/s.143(3)of the Act,for the AY.s.2002-03,2003-04,2006-07,2007-08,2008-09.He referred to the case of I.C.D.S Ltd. (29 taxmann.com129). The DR relied upon the cases of the Instalment Supply Limited (Income tax Appeal No. 442/ 2007,dated17/4/2012)of Hon'ble Delhi High Court, Asia Brown Boveri Ltd.(Appeal (Civil) 3574of1998,dtd.27/10/2004)of Hon'ble Supreme Court and IndusInd Bank Ltd.(135 ITD 165). 2.3.We have heard the rival submissions and perused the material before us.We find that in the case of I.C.D.S.(supra),the Hon'ble Supreme Court has deliberated upon the issue of depreciation of the leased assets in details.So,we would like to reproduce the relevant portion of the judgment.Facts of the case were noted by the Hon’ble Court as follow: “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 5440/M/09- Stanrose Mafatlal Investments & Finance Ltd. 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 ; (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. 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 on both 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: “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 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. 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 Actthe 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 5440/M/09- Stanrose Mafatlal Investments & Finance Ltd. 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. (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-1).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 consi -deration.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. 3.Third ground deals with addition of residual sale price of leased assets amounting to Rs. 1.67 lakhs.The FAA confirming the order of the AO had held that the AO had rightly disallowed deprecitation,that residual sale price of leased assets was in nature of revenue receipt. 3.1.While deciding the earlier ground,we have held that the assessee was entitled to claim depreciation on assets leased out,that it was engaged in business of leasing and hire purchase as well as corporate lending and financing.Considering the above,we are of the opinion that order of the FAA cannot be endorsed with regard to addition of residual sale price of leased assets.So,reversing the same,we decide third ground of appeal in favour of the assessee.