1996 (8) TMI 71 - HC - Income Tax

Court allows depreciation claim on motor trucks under Income-tax Act, 1961; ownership retained for business use

The court held in favor of the assessee, ruling that they were entitled to claim depreciation on the motor trucks under section 32 of the Income-tax Act, ... Investment Allowance Issues Involved:1. Whether the assessee is entitled to depreciation on motor trucks under section 32 of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Entitlement to Depreciation on Motor TrucksFacts and Background:The assessee, a public limited company, purchased trucks and claimed depreciation allowance for various assessment years. The trucks were delivered to contractors under agreements stipulating their exclusive use for transporting the assessee's materials. The contractors were required to make deposits and instalment payments, maintain the trucks, and ensure they remained roadworthy. The assessee retained ownership of the trucks until the contractors fulfilled the agreement terms, after which ownership could be transferred.Legal Provisions:Section 32 of the Income-tax Act, 1961, allows depreciation on buildings, machinery, plant, or furniture owned by the assessee and used for business purposes. The conditions for depreciation are:1. Ownership of the asset by the assessee.2. Use of the asset for the business or profession of the assessee.Contentions:- The Income-tax Department argued that the agreements were analogous to hire purchase agreements, implying the contractors were the owners, not the assessee.- The assessee contended that it remained the owner of the trucks until the property was transferred to the contractors upon fulfilling the agreement terms.Court's Analysis:The court examined the terms of the agreements, emphasizing that the assessee retained ownership and had the right to repossess the trucks if the contractors violated the terms. The contractors had an option, not an obligation, to purchase the trucks, and they could return the trucks during the contract period.Case References:1. K L. Johar and Co. v. Deputy CTO [1965] 16 STC 213 (SC): The Supreme Court held that a hire purchase agreement involves bailment and a potential sale, with the sale occurring upon exercising the purchase option.2. Damodar Valley Corporation v. State of Bihar [1961] 12 STC 102 (SC): The court distinguished between mere hiring and hire purchase agreements, emphasizing the hirer's option to purchase and the right to return the goods.3. S. P. B. P. Srirangacharyulu v. CIT [1965] 58 ITR 95 (AP): The court considered all facts and circumstances to determine ownership under a hire purchase agreement.4. CIT v. Steelcrete (P.) Ltd. [1983] 142 ITR 45 (Cal): The court held that the assessee was the owner of machinery used for construction, despite the Government of India's involvement in the import and payment process.Conclusion:The court concluded that the assessee satisfied both conditions of section 32 of the Income-tax Act, 1961. The assessee was the owner of the trucks and used them for business purposes. Therefore, the assessee was entitled to claim depreciation on the trucks.Judgment:The court answered the question of law in the affirmative, in favor of the assessee and against the Revenue. The reference cases were accordingly answered.