2013 (1) TMI 344 - SC - Income Tax

Leasing company entitled to claim depreciation on leased vehicles under Section 32 despite registration in lessee's name

M/s ICDS. LTD. Versus COMMISSIONER OF INCOME TAX. MYSORE & ANR.

M/s ICDS. LTD. Versus COMMISSIONER OF INCOME TAX. MYSORE & ANR. - [2013] 350 ITR 527, 2013 (3) SCR 1082, 2013 (3) SCC 541, 2013 (1) JT 396, 2013 (1) SCALE ... ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:Whether the appellant (assessee) is the owner of the vehicles leased out to its customers for the purpose of claiming depreciation under Section 32 of the Income Tax Act, 1961.Whether the appellant is entitled to claim a higher rate of depreciation on the vehicles leased out, on the ground that they were used in the business of running on hire.ISSUE-WISE DETAILED ANALYSISOwnership of VehiclesRelevant legal framework and precedents: Section 32 of the Income Tax Act requires that the asset must be 'owned, wholly or partly, by the assessee and used for the purposes of the business or profession.' The Court referenced the case of Mysore Minerals Ltd., which emphasized that depreciation benefits belong to the entity that has invested in and is utilizing the capital asset.Court's interpretation and reasoning: The Court interpreted 'ownership' to mean having a legal right or title against the rest of the world. It held that the lease agreement's terms, which granted the assessee exclusive ownership rights, supported the assessee's claim of ownership.Key evidence and findings: The lease agreement specified the assessee as the exclusive owner, with rights to repossess the vehicle upon default and inspect it at any time. The lessee was obligated to return the vehicle at the lease's conclusion.Application of law to facts: Despite the vehicles being registered in the lessee's name under the Motor Vehicles Act, the Court found that the legal title remained with the assessee, satisfying the ownership requirement of Section 32.Treatment of competing arguments: The Revenue argued that registration under the Motor Vehicles Act determined ownership. The Court rejected this, stating that the Act's definition of ownership was a legal fiction for its purposes and did not apply to the Income Tax Act.Conclusions: The Court concluded that the assessee was the owner of the vehicles for the purposes of claiming depreciation under the Income Tax Act.Entitlement to Higher Rate of DepreciationRelevant legal framework and precedents: The Court referred to the case of Shaan Finance (P) Ltd., which interpreted 'used for the purposes of business' to include assets used in leasing, qualifying for higher depreciation rates.Court's interpretation and reasoning: The Court held that the term 'used for the purposes of business' does not necessitate direct usage by the assessee. Leasing the vehicles constituted use for business purposes, thus meeting the requirement for higher depreciation.Key evidence and findings: The Court noted that the income from leasing was assessed as business income, reinforcing the business use of the vehicles.Application of law to facts: The Court applied the precedent from Shaan Finance to determine that leasing constitutes business use, entitling the assessee to a higher rate of depreciation.Treatment of competing arguments: The Revenue's argument that only direct usage by the assessee qualifies for higher depreciation was dismissed. The Court emphasized that business use includes leasing.Conclusions: The Court concluded that the assessee was entitled to a higher rate of depreciation on the leased vehicles.SIGNIFICANT HOLDINGSThe Court held that 'ownership' for the purposes of Section 32 of the Income Tax Act is determined by the legal title and rights conferred by the lease agreement, not by registration under the Motor Vehicles Act.The interpretation of 'used for the purposes of business' includes leasing activities, allowing the assessee to claim depreciation and a higher rate of depreciation on leased vehicles.Verbatim quote: 'As long as the assessee has a right to retain the legal title of the vehicle against the rest of the world, it would be the owner of the vehicle in the eyes of law.'The Court set aside the High Court's judgment, affirming the Tribunal's decision in favor of the assessee, allowing depreciation claims under Section 32 and at the higher rate applicable.