TaxTMI 
TaxTMI 
TaxTMI 
2011 (11) TMI 72
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....ed from a company by the name M/s U B Pharmaceuticals Ltd. of Bangalore (hereinafter referred to as UBPL) under hire-purchase agreement entered into between the assessee and another company by name First Leasing Company of India Ltd. (FLCIL, for short). The assessee also submitted that the assets were leased back to UBPL. 2. In order to verify the claim for depreciation, the Assessing Officer called upon the assessee to furnish a copy of the lease agreement. The assessee filed the same. It was found to have been executed on 15.9.1994. The lease agreement was stated to have commenced on the date of delivery of equipment or payment to the supplier of the equipment, whichever is earlier. It was also stipulated in the lease agreement that the lease rentals will be payable by UBPL to the assessee in advance. The assets were to be installed and put to use before 30th September, 1994. On these facts, the Assessing Officer was of the view that the assets were already in the possession of and were being used by UBPL even before the date on which the assessee claimed to have purchased them from UBPL and this fact had also been admitted by the assessee in its letter dated 10.2.1998. He also ....
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....ded back the depreciation of Rs.38,50,000/- to the loss declared by the assessee. 3. The assessee appealed to the CIT(Appeals) and contended that the conditions of Section 32 of the Act were satisfied and that the assessee owned the assets on which depreciation was claimed and also used them for the purpose of its business. Several authorities were cited in support of the assessee's contention that it was entitled to the depreciation. It was pointed out that the assessee was in the leasing business and there was no condition that in order to be eligible for depreciation the assets should have been "used" by the assessee itself. The assessee also contested the finding of the Assessing Officer that the entire transaction was a colourable and non-genuine transaction entered into merely to reduce its tax liability. 4. The CIT(Appeals) took note of the aforesaid contentions of the assessee and also adverted to certain other facts. The assets had originally been acquired by a company by name U B Ltd. (UBL, for short), between 1990-95 for Rs.1,07,00,000/- and they were transferred to UBPL, which was its sister concern for Rs.1,04,00,000/-. These assets after two months of acquisition by....
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....gement with the assessee. According to the Tribunal, when even as late as 26.12.1994 the proposal to sell the assets of UBPL to the assessee and take them back on a lease had not been finalized, the earlier agreement dated 8.9.1994 under which UBPL agreed to transfer the assets to the assets at Rs.35.5 lakhs and the lease agreement entered into between FLCIL and the assessee on 15.9.1994 can only be considered to be proposals pending approval by the assessee company in its meeting of the Board of Directors. The Tribunal also examined the sale invoices for sale of the assets by UBPL and inferred that these invoices did not embody any actual sale of the assets which had materialized prior to the passing of the resolution by the Board of UBPL. According to the Tribunal these invoices were only in the nature of performa invoices. The physical or constructive delivery of the assets was not given to the assessee and no payment was received by UBPL till the date of resolution i.e. 26.12.1994. From these facts and findings, the Tribunal concluded that the assessee cannot held to be the owner of the assets at least before 26.12.1994 and therefore, any use of the assets by UBPL before that d....
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....e Tribunal was that since the assessee was in receipt of lease rentals which consisted of both the principal amount (towards cost of the assets) and interest element, only the interest element can be added as its income. The AO was directly to bring to tax the interest element alone. 9. It is against the above order of the Tribunal, particularly its decision that the assessee is not the owner of the assets and hence not entitled to the depreciation that the assessee is in further appeal before this court under Sec.260A of the Act. The following question of law was formulated by the Court on 13th February, 2006: "Whether on the facts and circumstances of the case, the ITAT was justified in holding that the appellant was not entitled to claim depreciation on the machinery bought by it on hire purchase basis and leased by it to a third party." 10. Before we proceed to deal with the appeal, we must mention that the question framed above appears to proceed on the assumption that the only issue to be decided is whether a hirer of an asset under a hire-purchase agreement is entitled to claim depreciation on the asset which it leases out to a third party. This issue poses little difficu....
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.... itself has claimed to have entered into a hire-purchase agreement with FLCIL on 4-1-1995 in which FLCIL has been shown to be the owner of the assets and the assessee only a hirer. The Tribunal has found that payment for the assets has been made directly by FLCIL on 12-1-1995. The cumulative effect of all these facts is that considerable doubt is thrown on the genuineness of the entire arrangement. If the assessee has hired the assets only in January, 1995 from FLCIL, there has to be an explanation as to how it can claim to be the owner of the assets at any time prior to that date. If the hire-purchase agreement is genuine, then the claim that the assessee acquired the assets from UBPL in September, 1994 cannot bear scrutiny. Nor can it be accepted that the assets so purchased from UBPL were leased back to it in September, 1994. On a question of fact, namely, as to at what point of time the assessee (if at all) became the owner of the asset, there can be no ambivalent stands taken by the assessee. If it had taken such stands - as the present assessee has - then there should be an explanation for the same which is lacking. It needs no reiteration that Sec.32 can be availed of by the....