2012 (5) TMI 59 - HC - Income Tax

High Court remands case on depreciation claim to tribunal for fresh examination

COMMISSIONER OF INCOME TAX DELHI-VI Versus THE INSTALMENT SUPPLY LIMITED

The High Court found in favor of the Revenue, remanding the case back to the tribunal for a fresh examination. The tribunal's decision to delete the ... Claim of depreciation in respect of assets allegedly leased - assessee purchased assets and leased back to the same company claiming 100% depreciation as a lessor - ITAT deleted addition made by the AO - Held that:- The appellants are carrying on the business of financiers, they are not dealing in motor-vehicles and the motor-vehicle purchased by the customer is registered in the name of the customer - letter taken from the customer agreeing to keep the vehicle insured recited that the vehicle has been given as security for the loan advanced by the appellants - right of the appellants may be extinguished by payment of the amount due to them under the terms of the hire-purchase agreement even before the dates fixed for payment - the intention of the appellants in obtaining the hire-purchase and the allied agreements was to secure the return of loans advanced to their customers and no real sale of the vehicle was intended – considered merely financing transactions -The matter has not been examined and considered by the tribunal from the right perspective as the real issue and controversy has not been examined - An order of remand directing the tribunal to examine the controversy afresh - in favour of the Revenue Issues Involved:1. Whether the ITAT was correct in law in deleting the addition made by the Assessing Officer by disallowing the claim of depreciation in respect of assets allegedly leased to HCL Hewlett Packard Ltd.2. Whether the lease agreement in question was a finance agreement or an operating lease.Issue-Wise Detailed Analysis:1. Deletion of Addition by ITAT:The Revenue appealed against the ITAT's decision to delete the addition of Rs. 39,33,333/- made by the Assessing Officer by disallowing the claim of depreciation on assets allegedly leased to HCL Hewlett Packard Ltd. The assessee had claimed 100% depreciation on 1614 items/parts of computer systems, asserting that each item cost less than Rs. 5,000/-. The Assessing Officer deemed the transaction as a finance transaction rather than a bona fide lease, implying that the assessee advanced Rs. 40 lacs to HCL Hewlett Packard Ltd. and received it back with interest over six years. The CIT(Appeals) upheld this decision, noting that the spare parts could not function independently and were likely used in manufacturing by HCL Hewlett Packard Ltd. However, the ITAT reversed these findings, stating that the lease agreement satisfied all conditions of a valid lease and that the transaction was not a sham. The ITAT also noted that the title of the computer parts was transferred to the assessee, supported by an invoice from HCL Hewlett Packard Ltd.2. Nature of the Lease Agreement:The core issue was whether the agreement was a finance lease or an operating lease. The tribunal did not adequately consider the surrounding circumstances and the nature of the asset. The distinction between finance and operating leases was elaborated using various judicial precedents and definitions. A finance lease transfers all risks and rewards incidental to ownership to the lessee, essentially functioning as a loan. In contrast, an operating lease does not transfer these risks and rewards and is more akin to a rental agreement. The Supreme Court in Asea Brown Boveri Ltd. vs. Industrial Finance Corporation of India and Others and Association of Leasing and Financial Service Companies vs. Union of India provided detailed distinctions between the two types of leases. The tribunal failed to examine whether the transaction was merely a financing arrangement disguised as a lease, considering factors like the lease period, the lessee's responsibility for maintenance, and the lessor's role as a financier.Conclusion:The High Court found that the tribunal did not consider the legal position and the real nature of the transaction properly. The substantial question of law was answered in favor of the Revenue, and the case was remanded to the tribunal for a fresh examination, considering the legal principles discussed. The tribunal was directed to reassess the controversy without being influenced by its previous order.