2011 (11) TMI 72 - HC - Income Tax

Court denies depreciation claim on assets bought on hire-purchase, rules against taxpayer.

M/s SAI INDUSTRIES LTD. Versus ACIT COMPANY CIRCLE 3(1).

The High Court affirmed the Tribunal's decision that the assessee was not entitled to claim depreciation on assets purchased on a hire-purchase basis and ... Claim of depreciation - ownership of assets - AO observed that the transactions entered into by the assessee vis-à-vis the assets on which the depreciation was claimed was not genuine. - Held that:- On a question of fact, namely, as to at what point of time the assessee (if at all) became the owner of the asset, there can be no ambivalent stands taken by the assessee. If it had taken such stands – as the present assessee has – then there should be an explanation for the same which is lacking. It needs no reiteration that Sec.32 can be availed of by the assessee only if he can show and establish that he is the owner of the asset. In the present case the Tribunal after examining the factual matrix on preponderance of probabilities has held that the appellant-assessee is not the owner. The said finding is a finding of fact, which is not under challenge. It is not a finding which is perverse.The agreement between the appellant and FLCIL - The said agreement has been given the nomenclature of hire-purchase agreement. The judgments relied upon by the appellant would show and establish that FLCIL is the owner of the assets and not the appellant. If FLCIL is the owner, they are entitled to depreciation and it does not matter if FLCIL had not claimed depreciation. - Claim of depreciation disallowed - decided against the assessee. Issues Involved:1. Ownership of assets for the purpose of claiming depreciation.2. Genuineness of the transaction between the assessee and UBPL.3. Compliance with Section 32 of the Income Tax Act, 1961.4. Tribunal's findings on the factual matrix.Issue-wise Detailed Analysis:Ownership of Assets for Depreciation Claim:The primary issue was whether the assessee was the owner of the assets on which it claimed depreciation. The Assessing Officer (AO) noted that the assets were already in use by UBPL before the claimed purchase date and remained stationary at UBPL's premises. The AO concluded that the transaction was a paper transaction and UBPL was the actual owner. The Tribunal supported this view, finding that the assessee was not the owner of the assets as the hire-purchase agreement with FLCIL described FLCIL as the owner and the assessee as the hirer. Thus, the Tribunal disallowed the depreciation claim.Genuineness of the Transaction:The AO and the Tribunal questioned the genuineness of the transaction. The AO observed that the transaction was a colorable device to avoid tax liability, referencing the Supreme Court's ruling in McDowell & Co. Limited vs. CTO. The Tribunal found that the board resolution from UBPL dated 26.12.1994 indicated that the sale and leaseback arrangement was still under negotiation, casting doubt on the genuineness of the earlier agreements and invoices. The Tribunal concluded that the transactions were not genuine and were aimed at reducing tax liability.Compliance with Section 32 of the Income Tax Act, 1961:Section 32 of the Income Tax Act mandates that the assessee must be the owner of the asset and use it for business purposes to claim depreciation. The Tribunal found that the assessee did not satisfy the ownership condition. The Tribunal's findings indicated that the assessee was at no point in time the owner of the assets, as the hire-purchase agreement with FLCIL and the direct payment by FLCIL to UBPL contradicted the assessee's claim of ownership.Tribunal's Findings on the Factual Matrix:The Tribunal's findings were based on the factual matrix and the preponderance of probabilities. It noted that the assessee's claim of acquiring the assets in September 1994 was inconsistent with the hire-purchase agreement dated 4.1.1995 and the payment date of 21.1.1995. The Tribunal emphasized that the assessee's ambivalent stands and lack of credible evidence undermined its claim of ownership. The Tribunal's decision was upheld as it was based on factual findings and was not perverse.Conclusion:The High Court affirmed the Tribunal's decision, holding that the assessee was not entitled to claim depreciation on the machinery bought on a hire-purchase basis and leased to a third party. The substantial question of law was answered in favor of the revenue and against the assessee, with costs assessed at Rs.20,000/-.