2008 (5) TMI 276 - HC - Income Tax

Reassessment under Sections 147/148 held unsustainable; depreciation under Section 32 allowed on operating leased assets

COMMISSIONER OF INCOME-TAX Versus SHREE RAJASTHAN SYNTEX LTD.

HC upheld the assessee's position, finding the reassessment under sections 147/148 unsustainable and allowing depreciation under section 32 on leased ... Validity of assumption of jurisdiction under sections 147 and 148 - Claim of Depreciation u/s 32 on leased goods - reassessment - HELD THAT:- In the financial statements of the assessee company, the leased assets have been separately shown and the accounts are audited by the statutory auditors and the same have been approved by the board of directors. With this, the learned Tribunal again reproduced/recapitulated various clauses of the lease deed, as considered by the learned Commissioner, and it was considered, that in this particular case, machines were received at the premises of the lessor company the same is recorded in the Central Excise record duly received and the assessee has claimed the Central Excise Modvat on these machines and then they were given on lease to the lessee company by issuance of Central Excise Gate-pass, and following Central Excise Rules prevalent at that time and considering the assessee to be the owner consequent benefits have been given. The assets were delivered to the lessee by truck transport and freight charges were paid by the assessee-company and were added in the amount of value of the assets. The assets were covered by transit insurance and insurance premium was paid by the assessee-company and the same were declared as the assets of leasing company to the insurance company. Then, complete details of machines given on lease in respect of assessment years showing respective amount, break-up, dates of lease, have been given. The customs duty, bank charges, freight charges were also paid by the assessee which also proved the assessee to be the owner. It is required to be considered that the basic distinguishing feature between the lease being finance lease or operating lease would be that in the case of finance lease, at some point of time, the ownership transfers to the lessee, or the lessee has the option to purchase the hired assets in consideration of a token price. Obviously, in that event, the lease rent or hire charges called by whatever name with passage of time partake of the character of the price of the asset in possession of the lessee or hirer under the finance lease agreement as distinct from the lease in question where there is a very specific stipulation in clause 8 that on termination of the lease the leased plant and machinery are to be returned to the lessor in the condition as they were taken except normal wear and tear. The controversy thus can very well be said to be standing concluded by the judgment of the hon'ble Supreme Court in Shaan Finance's case [1998] 231 ITR 308. Question No. 2 is also answered in the affirmative, i.e. in favour of the assessee and against the Revenue. All the four appeals are consequently dismissed. Issues Involved:1. Validity of assumption of jurisdiction under sections 147 and 148 of the Income-tax Act, 1961.2. Entitlement of the assessee to claim depreciation under section 32 on the assets claimed to be taken on lease, as owner of the assets.Detailed Analysis:Issue 1: Validity of Assumption of Jurisdiction under Sections 147 and 148The primary issue was whether the Income-tax Appellate Tribunal (ITAT) was justified in holding that the assumption of jurisdiction under sections 147 and 148 by the Assessing Officer (AO) was bad in law, leading to the quashing of reassessment proceedings.Legal Framework and Tribunal's Findings:- Section 147(1): Stipulates that the AO must have 'reason to believe' that any income chargeable to tax has escaped assessment.- Tribunal's Analysis: The Tribunal concluded that the AO did not have the jurisdiction to review his own order based on the opinion of another AO, deeming it 'borrowed satisfaction.' The Tribunal relied on various case laws to support its decision, including:- Joint CIT (Assessment) v. George Williamson (Assam) Ltd. [2002] 258 ITR 126 (Gauhati)- Mercury Travels Ltd. v. Deputy CIT [2002] 258 ITR 533 (Cal)- Garden Silk Mills Ltd. v. Deputy CIT (No. 2) [1996] 222 ITR 68 (Guj)- CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1 (Delhi)Court's Conclusion:- The Court upheld the Tribunal's view that the reassessment proceedings were initiated based on the opinion of another AO, which is not permissible under the law. The Court agreed that the reassessment proceedings were based on a change of opinion rather than new material evidence, thus answering the question in the affirmative, i.e., in favor of the assessee and against the Revenue.Issue 2: Entitlement to Depreciation under Section 32The second issue was whether the ITAT was justified in holding that the assessee is entitled to get depreciation under section 32 on the assets claimed to be taken on lease, as the owner of the assets.Tribunal's Findings:- The Tribunal found that the lease agreements in question were operating leases, not finance leases, and thus the lessor (assessee) remained the owner of the assets. Consequently, the assessee was entitled to claim depreciation under section 32.- Supporting Case Laws:- CIT v. Shaan Finance P. Ltd. [1998] 231 ITR 308 (SC)- CIT v. Maharashtra Apex Corporation Ltd. [2002] 254 ITR 98 (SC)- CIT v. Essan Investments Ltd. [2002] 254 ITR 83 (Mad)Court's Analysis:- The Court examined the lease agreements' clauses and found that they supported the Tribunal's conclusion that the agreements were operating leases. Clauses such as the non-cancelable nature of the lease, the lessee's obligation to maintain and insure the machinery, and the return of the machinery to the lessor at the end of the lease period indicated that the lessor retained ownership.- The Court referenced the Supreme Court's decision in CIT v. Shaan Finance P. Ltd. [1998] 231 ITR 308, which distinguished between operating leases and finance leases, affirming that the lessor in an operating lease remains the owner and is entitled to depreciation.Court's Conclusion:- The Court upheld the Tribunal's decision that the assessee is entitled to claim depreciation under section 32, answering this question in the affirmative, i.e., in favor of the assessee and against the Revenue.Final Judgment:All four appeals were dismissed, affirming the ITAT's decisions on both issues. The Court concluded that the reassessment proceedings were invalid and that the assessee was entitled to claim depreciation on the leased assets.