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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 18TH DAY OF JUNE, 2021
PRESENT
THE HON'BLE MR. JUSTICE SATISH CHANDRA SHARMA
AND
THE HON'BLE MR. JUSTICE NATARAJ RANGASWAMY
ITA NO.27/2019 BETWEEN
THE PR. COMMISSIONER OF INCOME TAX CIT (A), 5TH FLOOR, BMTC BUILDING,
80 FEET ROAD, KORMANGALA, BENGALURU 560 095.
THE ADDL.COMMISSIONER OF INCOME TAX
SP. RANGE -2 2ND FLOOR, BMTC BUILDING,
80 FEET ROAD, KORMANGALA, BENGALURU 560 095.
... APPELLANTS (BY SRI K V ARAVIND, ADVOCATE)
AND:
M/S CISCO SYSTEMS CAPITAL (INDIA) PVT. LTD., BRIGADE SOUTH PARADE, NO.10, MAHATMA GANDHI ROAD, BENGALURU 560 025 PAN AACCC 4552A.
... RESPONDENT (BY SRI NAGESWAR RAO, ADVOCATE)
THIS ITA IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW, ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO.849/BANG/2015 DATED 7.9.2018 AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE
ADDL.COMMISSIONER OF INCOME TAX, SP. RANGE-2, BENGALURU.
THIS ITA COMING ON FOR HEARING ON 11.6.2021 AND HAVING BEEN HEARD AND RESERVED FOR JUDGMENT, THIS DAY SATISH CHANDRA SHARMA J., PRONOUNCED THE FOLLOWING:
JUDGMENT
The present appeal is arising out of the order dated 7.9.2018 passed in ITA No.849/Bang/2015 by the Income Tax Appellate Tribunal, Bengaluru, for the assessment year 2008- 2009.
The facts of the case reveal that the assessee/company is engaged in the business of leasing and finance under the licence granted from RBI as non-banking finance company. The assessee/company filed its return of income for the assessment year 2008-2009 on 9.9.2009. The assessee/company was selected for scrutiny and notice under Sections 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act of 1961) was issued. The assessee filed its reply to the notice and appeared before the authorities. The assessing officer visited the office of the assessee on 19.7.2011 and recorded the statement on oath of one Sri.Eswar Hariharan, Lease Accounts Manager, who had been authorized to give statement on behalf of the company.
The statement of Sri Eswar Hariharan has been approved by Sri.Shrihari Varnasi, Manager Taxation. The assessment was completed under Section 143(3) read with Section 144(C) of the Act of 1961 on 12.10.2012, wherein the assessing officer has disallowed the excess depreciation claimed on networking equipments.
The Principal Commissioner of Income Tax, Bengaluru, thereafter issued a notice under Section 263 of the Act of 1961 on 5.3.2015 and called upon the assessee to explain as to why the assessment order passed by the assessing officer under Section 143(3) of the Act of 1961 should not be revised. The Principal Commissioner of Income Tax proposed to revise the assessment order under Section 263 of the Act of 1961 on the ground that the assessment order passed by the assessing officer is erroneous, prejudicial to the interests of the revenue on account of the wrong claim of depreciation on leased assets. It was further stated by the Principal Commissioner of Income Tax that the assessing officer has wrongly allowed the depreciation on assets leased under finance lease without appreciating the facts in the light of the provisions of Section 32 of the Act of 1961 and therefore, the same has resulted in prejudicial to the interests of the revenue.
The assessee did file a reply to the notice issued by the Principal Commissioner of Income Tax and submitted that the order passed by the assessing authority under Section 143(3) of the Act of 1961 dated 12.10.2012 is neither erroneous nor prejudicial to the interests of the revenue as the assessing officer has examined the issue of depreciation claimed on networking equipments and audio streamlining equipments etc., leased to the customers and after being satisfied with the explanation and after conducting an enquiry, keeping in view the Circular No.2/2001 dated 9.2.2001 issued by the CBDT and also keeping in view the judgment delivered in the case of M/s ICDS Ltd., v. CIT in Civil Appeal No.3282/2008, decided on 14.1.2013 has rightly allowed the claim of depreciation on leased assets. Hence, the order passed by the assessing officer cannot be called as erroneous insofar as it is prejudicial to the interests of the revenue. The assessee further submitted that for the purpose of invoking the provisions under Section 263 of the Act of 1961 the Principal Commissioner of Income Tax on examining the record should be satisfied that the order passed by the assessing officer is erroneous and prejudicial to the interests of the revenue.
The Principal Commissioner of Income Tax has finally passed an order on 30.3.2015 against the assessee and thereafter, an appeal was preferred before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal, after taking into account the assessment order passed by the assessing officer dated 12.10.2012 and the subsequent order passed by the Principal Commissioner of Income Tax dated 30.3.2015, has allowed the appeal by an order dated 7.9.2018 and the revenue being aggrieved by the order passed by the Income Tax Appellate Tribunal has preferred the present appeal on the following grounds; (a) That the Income Tax Appellate Tribunal erred in setting aside the order passed by the Principal Commissioner of Income Tax under Section 263 of the Act of 1961 by relying upon the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd., v. CIT even when the said authority passed the order under Section 263 of the Act of 1961 in terms of parameters of said section and as the order of assessment passed by assessing authority was erroneous and prejudicial to the interests of the revenue and as the assessing authority ignored the issue of ownership of
assets to ascertain that whether assessee is eligible to claim depreciation or not; and (b) That the Income Tax Appellate Tribunal ought to have seen that the order passed by the Principal Commissioner of Income Tax under Section 263 of the Act of 1961 was in accordance with the principles laid down by the Apex Court and the High Courts and the Income Tax Appellate Tribunal failed to consider the decisions relied upon by the revenue. 6. This Court has admitted the appeal on the following substantial question of law;
“Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the order passed by the Pr.Commissioner of Income Tax under Section 263 of the Act by Tribunal relying on the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd., v/s. CIT even when the said authority passed the 263 order in terms of parameters of said section and as the order of assessment passed by assessing authority was erroneous and prejudicial to the interests of the Revenue as the assessing authority ignored the issue of ownership of assets to ascertain that whether assessee is eligible to claim depreciation or not?”
Sri Aravind, learned counsel for the Income Tax Department has argued before this Court that the order passed by the Income Tax Appellate Tribunal deserves to be set aside as
the Principal Commissioner of Income Tax has rightly passed the order under Section 263 of the Act of 1961 especially in the light of the fact that the assessing officer has failed to conduct required enquiries on the issue of depreciation claimed on assets leased under finance lease transactions in the light of the provisions of Section 32 of the Act of 1961. He has laid great emphasis on the fact that for invoking the provisions of Section 32 a claim has to be made only by the assessee, in case he is the owner of the assets. He has further argued that the assessing officer while passing the order of assessment dated 12.10.2012 has completely ignored the issue of ownership of assets to ascertain that whether the assessee is eligible to claim depreciation or not and in those circumstances, the Principal Commissioner of Income Tax has rightly exercised suo motu power to revise the assessment proceedings, keeping in view Section 263 of the Act of 1961. He has further argued that the facts of the case reveal that the assessing officer has not applied his mind on the issue in the right perspective and therefore, the Principal Commissioner of Income Tax was justified in revising the assessment order passed by the assessing officer under Section 143(3) of the Act of 1961.
Sri Aravind, learned counsel for the department has vehemently argued before this Court that the assessee was not the owner of the assets. There was a Lease Deed executed between the Lessor and the Lessee and the assessee was a mere Lessor and therefore, the Principal Commissioner of Income Tax was justified in passing an order and the Income Tax Appellate Tribunal has ignored the fact that the assessee was a Lessor and not the owner of the assets. He has placed reliance upon a judgment delivered in the case of Malabar Industrial Co.Ltd., v. Commissioner of Income Tax, reported in (2000) 109 Taxman 66 (SC) as well as upon a judgment delivered in the case of Commissioner of Income Tax, Mumbai v. Amitabh Bachchan, reported in (2016) 69 taxmann.com 170(SC).
On the other hand, learned counsel for the respondent/assessee has vehemently argued before this Court that the Principal Commissioner of Income Tax has erred in law and in facts in initiating the proceedings under Section 263 of the Act of 1961 without appreciating the fact that the proceedings under Section 263 of the Act of 1961 can be initiated only if the order passed by the assessing officer is erroneous and prejudicial to the interests of the revenue. He has also argued that a detailed and an exhaustive enquiry was
held in the matter. The assessing officer has applied his mind on the issue of allowability of the depreciation on the leased assets on finance lease arrangement and has adopted a particular view which is evident from the order passed by the assessing officer and therefore, a mere change of view, on the part of the Principal Commissioner of Income Tax, will not entitle him to initiate proceedings under Section 263 of the Act of 1961.
It was further argued that the assessing officer as reflected from the order of assessment has examined the witnesses as requisitioned and has gone into complete details on record including the finance lease agreement entered into by the assessee and therefore, as a detail and exhaustive enquiry was held, the question of initiating proceedings under Section 263 of the Act of 1961 does not arise. He has argued that the Income Tax Appellate Tribunal was justified in setting aside the order passed by the Principal Commissioner of Income Tax under Section 263 of the Act of 1961.
Learned counsel for the assessee has also drawn the attention of this Court towards the CBDT Circular No.2/2001 dated 9.2.2001, wherein it has been clarified that for the purpose of taxation there is no difference between the operating
lease and finance lease to claim depreciation. He has also argued that the assessing officer has taken into account all the evidence on record while passing the assessment order, that too, after being satisfied with the explanations offered by the assessee and therefore, his prayer is that the question of interference with the order passed by the Income Tax Appellate Tribunal does not arise and the Income Tax Appellate Tribunal was justified in allowing the appeal preferred by the assessee. The respondent/assessee has placed reliance upon the judgments delivered in the case of Hewlett Packard India Sales Pvt. Ltd., v. The Commissioner of Income Tax and another, passed in ITA No.142/2013, decided on 30.11.2020 and in the case of M/s ICDS Ltd., v. Commissioner of Income Tax, Mysore and another, passed in Civil Appeal No.3282/2008, decided on 14.1.2013.
Heard the learned counsel for the parties at length and perused the record.
The relevant statutory provisions which are necessary for adjudication of the present Income Tax Appeal are reproduced as under;
13.1 Section 32 of the Act of 1961 reads as under; “32. (1) In respect of depreciation of— (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, 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— (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed10; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed11: Provided that no deduction shall be allowed under this clause in respect of— (a) any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975 but before the 1st day of April, 2001, unless it is used— (i) in a business of running it on hire for tourists ; or (ii) outside India in his business or profession in another country ; and (b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42 : Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is
acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be : Provided also that where an asset referred to in clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (iia) for that previous year, then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset: Provided also that where an asset being commercial vehicle is acquired by the assessee on or after the 1st day of October, 1998 but before the 1st day of April, 1999 and is put to use before the 1st day of April, 1999 for the purposes of business or profession, the deduction in respect of such asset shall be allowed on such percentage on the written down value thereof as may be prescribed. Explanation.—For the purposes of this proviso,— (a) the expression "commercial vehicle" means "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle" and "medium passenger motor vehicle" but does not include "maxi-cab", "motor-cab", "tractor" and "road-roller"; (b) the expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle", "medium
passenger motor vehicle", "maxi-cab", "motor- cab", "tractor" and "road roller" shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988): Provided also that, in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991: Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know- how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. Explanation 1.—Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the
construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. Explanation 2.—For the purposes of this sub- section "written down value of the block of assets" shall have the same meaning as in clause* (c) of sub-section† (6) of section 43. Explanation 3.—For the purposes of this sub- section, the expression "assets" shall mean— (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. Explanation 4.—For the purposes of this sub- section, the expression "know-how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto). Explanation 5.—For the removal of doubts, it is hereby declared that the provisions of this sub- section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; (iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) :
Provided that where an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal, and acquires and installs any new machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, the provisions of clause (iia) shall have effect, as if for the words "twenty per cent", the words "thirty-five per cent" had been substituted : Provided 13[further] that no deduction shall be allowed in respect of— (A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or (C) any office appliances or road transport vehicles; or (D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year; (iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof : Provided that such deficiency is actually written off in the books of the assessee.
Explanation.—For the purposes of this clause,— (1) "moneys payable" in respect of any building, machinery, plant or furniture includes— (a) any insurance, salvage or compensation moneys payable in respect thereof; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold, so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso; (2) "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company or in a scheme of amalgamation of a banking company, as referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a banking institution as referred to in sub-section (15) of section 45 of the said Act, sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of that Act, of any asset by the banking company to the banking institution. (iv) [***] (v) [***] (vi) [***] (1A) [***]
(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub- section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.”
13.2 Section 143(3) of the Act of 1961 reads as under; “(3) [On the day specified in the notice issued under] sub- section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment: Provided that in the case of a— (a) research association referred to in clause (21) of section 10; (b) news agency referred to in clause (22B) of section 10; (c) association or institution referred to in clause (23A) of section 10; (d) institution referred to in clause (23B) of section 10; (e) fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub- clause (via) of clause (23C) of section 10,
which is required to furnish the return of income under sub- section (4C) of section 139, no order making an assessment of the total income or loss of such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, shall be made by the Assessing Officer, without giving effect to the provisions of section 10, unless— (i) the Assessing Officer has intimated the Central Government or the prescribed authority the contravention of the provisions of clause (21) or clause (22B) or clause (23A) or clause (23B) or sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, by such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, where in his view such contravention has taken place; and (ii) the approval granted to such research association or other association or fund or trust or institution or university or other educational institution or hospital or other medical institution has been withdrawn or notification issued in respect of such news agency or fund or trust or institution has been rescinded : Provided further that where the Assessing Officer is satisfied that the activities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university, college or other institution was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university, college or other institution, recommend to the Central Government to withdraw the approval and that Government may by order, withdraw the approval and forward a copy of the order to the concerned university, college or other institution and the Assessing Officer: Provided also that notwithstanding anything contained in the first and the second provisos, no effect shall be given by the Assessing Officer to the provisions of clause (23C) of section 10 in the case of a trust or institution for a previous year, if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in such previous year, whether or not the approval granted to such trust or institution or notification issued in respect of such trust or institution has been withdrawn or rescinded.
(3A) The Central Government may make a scheme, by notification in the Official Gazette, for the purposes of making assessment of total income or loss of the assessee under sub- section (3) so as to impart greater efficiency, transparency and accountability by— (a) eliminating the interface between the Assessing Officer and the assessee in the course of proceedings to the extent technologically feasible; (b) optimising utilisation of the resources through economies of scale and functional specialisation; (c) introducing a team-based assessment with dynamic jurisdiction. (3B) The Central Government may, for the purpose of giving effect to the scheme made under sub-section (3A), by notification in the Official Gazette, direct that any of the provisions of this Act relating to assessment of total income or loss shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in the notification: Provided that no direction shall be issued after the 31st day of March, 2020. (3C) Every notification issued under sub-section (3A) and sub- section (3B) shall, as soon as may be after the notification is issued, be laid before each House of Parliament.”
13.3 Section 263 of the Act of 1961 reads as under; “263. (1) The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation 1.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—
(a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include— (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120; (b) "record" shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal Commissioner or Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal Commissioner or Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the
jurisdictional High Court or Supreme Court in the case of the assessee or any other person. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”
This Court has carefully gone through the assessment order passed by the assessing officer and the order passed by the Principal Commissioner of Income Tax. The order passed by the Principal Commissioner of Income Tax reveals that he has exercised jurisdiction under Section 263 of the Act of 1961 on the ground that although there was an enquiry by the assessing officer, the enquiry conducted by the assessing officer was inadequate and the assessing officer has ignored the vital facts resulting in loss to the revenue. However, the order passed by the assessing officer reveals that he has called for necessary evidence on the issue of depreciation claimed on assets leased under finance lease transactions by issuing show
cause notice. The assessee has filed all relevant documents including the copies of agreements entered with the customers and the assessee has also referred to the Circulars issued by the CBDT clarifying the legal position to claim depreciation on assets under operating lease as well as finance lease. The assessing officer being satisfied with the explanation and after conducting a thorough enquiry has allowed the depreciation claimed on assets under lease transactions, but disputed the rate of depreciation claimed by the assessee and therefore, by no stretch of imagination it can be held that the assessment order passed by the assessing officer was erroneous within the meaning of Section 263 of the Act of 1961.
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 equipmentshowing the assessee's name as owner and in terms ofclause 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.
For yet another reason the substantial questions of law have to be answered in favour of the assessee. The Supreme Court in RADHASOAMI SATSANG Vs. COMMISSIONER OF INCOME-TAX’ (1992) 60 TAXMAN 248 (SC) has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has been found as the fact
one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. In the instant case, the revenue has accepted the claim of the assessee for depreciation under Section 32 of the Act for the Assessment Year 2002-03 and 2003-04. Therefore, the revenue cannot be allowed to take a different stand for the Assessment Year 2004-05.
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;
(ii) 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 (iii) 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. 27. 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. 28. 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. 29. 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. 30. 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. 31. 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.” 32. 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. “
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.
The net result is that the appeal is dismissed.
No orders as to costs.
Sd/- JUDGE
Sd/- JUDGE