Higher vehicle depreciation depends on real ownership and genuine hire or lease arrangements, not mere financing or hypothecation.
Higher depreciation for motor vehicles used in the business of running them on hire depends on the claimant proving actual ownership and a genuine hire, lease or hire-purchase arrangement. Mere financing of vehicle purchases, or a hypothecation entry, does not by itself establish ownership or entitlement to the higher rate under section 32 of the Income-tax Act. The real character of the transaction must be examined on its substance, not its label; if it is only a loan secured by hypothecation, the borrower remains the owner. The Tribunal's orders were set aside and the matters remanded for verification of ownership and the true nature of the transactions before depreciation is allowed, if otherwise admissible.
Issues: (i) Whether the assessees, who financed vehicle purchases, were entitled to higher rate of depreciation applicable to motor vehicles used in the business of running them on hire; (ii) whether the true nature of the transaction was a loan transaction or a hire-purchase or lease arrangement conferring ownership for depreciation purposes.
Issue (i): Whether the assessees, who financed vehicle purchases, were entitled to higher rate of depreciation applicable to motor vehicles used in the business of running them on hire.
Analysis: Depreciation under section 32 of the Income-tax Act, 1961 is available to the owner who uses the asset in business. The entitlement to the higher rate depends on whether the assessee is in fact the owner of the vehicles and has leased them out or given them on hire in the course of its business. Mere financing, even if described as hire purchase or lease, does not by itself establish such ownership or user.
Conclusion: The assessees were not shown to be entitled to the higher rate of depreciation on the material placed before the Tribunal.
Issue (ii): Whether the true nature of the transaction was a loan transaction or a hire-purchase or lease arrangement conferring ownership for depreciation purposes.
Analysis: The character of the arrangement had to be ascertained from the real transaction and not from the nomenclature used in the documents. Under section 2(30) of the Motor Vehicles Act, 1988, the owner is the registered owner, and in the case of hire-purchase, lease or hypothecation, the person in possession under that agreement. The financiers were neither the registered owners nor in possession of the vehicles, and the hypothecation entry under section 51 did not make them owners. If the arrangement was only a loan secured by hypothecation, the borrowers remained the owners and any depreciation claim belonged, if at all, to them.
Conclusion: The transactions required factual verification to determine whether they were only loan transactions or genuine lease or hire-purchase arrangements.
Final Conclusion: The orders of the Tribunal were set aside and the matters were remanded to the assessing officers for verification of ownership and the true nature of the vehicle transactions before allowing depreciation, if otherwise admissible.
Ratio Decidendi: For claiming depreciation on motor vehicles at the higher rate applicable to vehicles used on hire, the claimant must establish actual ownership and a genuine hire or lease arrangement; a mere financing or hypothecation transaction does not confer such entitlement.