2002 (1) TMI 274 - AT - Income Tax

Assessee granted depreciation entitlement, Revenue's appeal rejected, relief on profit from vehicle sales upheld.

The Tribunal partially allowed the assessee's appeal, acknowledging the genuine nature of the lease agreements and granting depreciation entitlement. The ... - Issues Involved:1. Whether the assessee is engaged in financing activity or leasing of vehicles.2. Whether the transactions are financial arrangements or genuine lease agreements.3. The applicability of depreciation on leased vehicles.4. The rate of depreciation applicable to leased vehicles.5. The levy of interest under Sections 234B and 234C.6. The relief granted by CIT(A) on the profit on sale of vehicles.Issue-wise Detailed Analysis:1. Financing Activity vs. Leasing of Vehicles:The primary issue was whether the assessee was engaged in financing activities or leasing vehicles. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] contended that the assessee was merely a financier and not involved in leasing vehicles. The AO disallowed the depreciation claim of Rs. 1,67,76,602 on leased vehicles, asserting that the vehicles were registered in the names of the lessees, making them the legal owners under the Motor Vehicles Act.2. Financial Arrangements vs. Genuine Lease Agreements:The AO argued that the lease agreements were financial arrangements and not genuine leases. The CIT(A) upheld this view, noting that the lessees paid an amount equal to the cost of the vehicle through initial and monthly security deposits, and the vehicles were not repossessed by the assessee if installments were paid on time. The assessee countered that the lease agreements were genuine, citing various clauses in the agreements that indicated the assessee's ownership and control over the vehicles.3. Depreciation on Leased Vehicles:The Tribunal examined the conditions for allowing depreciation under Section 32 of the Income-tax Act, which requires the asset to be owned by the assessee and used for business purposes. The assessee argued that it retained ownership of the vehicles during the lease period and that the vehicles were used for business purposes. The Tribunal agreed with the assessee, noting that the lease agreements were genuine and that the assessee had control over the vehicles, fulfilling the conditions for depreciation.4. Rate of Depreciation:The CIT(A) had observed that the rate of depreciation on leased vehicles should be 30% instead of the 40% claimed by the assessee, based on the decision in Soma Financing Leasing Ltd. vs. CIT. However, since the CIT(A) did not pass a substantive order on this issue, the Tribunal did not address it further.5. Levy of Interest under Sections 234B and 234C:The assessee contended that interest under Sections 234B and 234C should not be levied as the disallowance of depreciation was not anticipated at the time of filing the return. The Tribunal upheld the charging of interest, noting that the provisions were mandatory but directed the AO to recompute the interest based on the returned income.6. Relief on Profit on Sale of Vehicles:The Revenue challenged the relief of Rs. 3,25,533 granted by the CIT(A) on the profit on the sale of vehicles, arguing that the assessee did not make this claim before the AO. The Tribunal found no error in the CIT(A)'s relief, noting that the CIT(A)'s powers are co-terminus with those of the AO.Conclusion:The Tribunal allowed the assessee's appeal partly, recognizing the genuineness of the lease agreements and the entitlement to depreciation. The Revenue's appeal was dismissed, upholding the CIT(A)'s relief on the profit on the sale of vehicles.