TaxTMI 
TaxTMI 
2020 (10) TMI 529
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.... action of the assessing officer in disallowing the deduction of Rs. 259,839,987/- claimed by the appellant on account of depreciation on plant and machinery given on lease to various parties. ii. That the Commissioner of income tax (appeals) erred on facts and in law in not appreciating that the order passed by the assessing officer is without jurisdiction and bad in law in as much as the assessing officer have not followed the binding instructions of the honourable ITAT. iii. That the Commissioner of income tax (appeals) erred on facts and in law in not appreciating that honourable ITAT restored back the matter to the file of the assessing officer for a limited purpose of examining whether the lease income earned by the appellant was treated as business income iv. That the Commissioner of income tax (appeals) erred on facts and in law in not appreciating that, the assessing officer himself has treated the activity of leasing of machinery as business carried on by the appellant and rental income there from as business income. v. That the Commissioner of income tax (appeals) erred on facts and in law in not appreciating that ownership of the asse....
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....Ld.AO to verify if the Appellant was engaged in the business of leasing and eligible for claiming depreciation. 8. In the remand proceedings, the Ld.AO by order dated 31.12.2007 disallowed depreciation on the ground that the transaction was not of leasing of assets but of financing and sale of asset. Stating that the assessee had not produced any evidence of return of asset or sale, the Ld.AO disallowed the depreciation claimed. 9. The Ld. CIT (A) upheld the disallowance relying on facts and judicial precedents. Therefore, assessee is in appeal before us. All the grounds of appeal raised by the appellant relates to the allowability of depreciation on the leased assets. Therefore, assessee is in appeal before us. 10. The learned authorised representative submitted that claim for depreciation is well founded in view of the following: 1. Conditions to be satisfied to claim depreciation under the Act as provided under Section 32 have been duly fulfilled by the Appellant 2. Classification of transaction based on the accounting treatment is not relevant to decide ownership and use 3. Errors in the order of lower authorities based on erroneous understan....
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.... the Appellant, it exercises effective control by restricting the lessee from transferring or creating any right or interest, or creating a sub-lease, parting with possession or permitting any other person to use the equipment (asset which is leased). Thus, seen in this light, the Appellant is effectively in possession of the property. This is despite the fact that the property (equipment) may be located in the premises of the lessee, however, the Appellant has right of inspection at all times. B.9 As per the terms of the lease agreement, the lessor would be the owner of the equipment. In addition, the lessor (Appellant) may at any time without any notice to the lessee assigns any right or create any charge, encumbrance, or hypothecation of the equipment. Also, the Appellant-lessor can sell, release or otherwise dispose the equipment without any account or notice to the lessee. B.10 Thus, in the case of the Appellant the lessee is allowed to have the possession of the equipment, only for using in its business and at all times the Appellant is recognized as the owner of the equipment and exercises effective control over the same. B.11 Further, Black's ....
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.... fact that the assessee himself is not operating the equipment or asset will not militate against the claim of depreciation. B.17 Another important factor to be kept in mind while examining use for purpose of business is that the section is of wide import and cannot be construed in a narrow manner to state, for instance, that only if the asset in question directly contributes to the output of the business it can be said to be used for the purpose of business. B.18 In Commissioner of Income-tax v. Kalyani Spg. Mills Ltd, [1981] 6 Taxman 50 (Calcutta), the High Court of Calcutta while holding that roads constructed within the factory would be assets used for the purpose of business stated that "It is true that these are not directly used for the purpose of the business but there is no warrant to restrict the meaning of the expression " used for the purpose of business ". If anything is necessary for the purpose of any building - necessary for the purpose of carrying on the business - then it is for the purpose of the business." B.19 In the case of the Appellant, the assets are being used by it in the business of leasing. The Appellant has off....
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....f the Act. B.22 In I.C.D.S. Ltd. v. Commissioner of Income-tax, Mysore [2013] 29 taxmann.com 129 (SC), the Hon'ble Apex Court followed the reasoning in Mysore Minerals Ltd. v. CIT [1999] 106 Taxman 166 (SC) and held that a person who has invested the capital is entitled to depreciation and the person in whom dominion is vested would be the owner. B.23 The Apex Court opined that a successful claim for depreciation rested on two tests, as below: The provision on depreciation in the Act reads that the asset must be "owned, wholly or partly, by the assessee and used for the purposes of the business". Therefore, it imposes a twin requirement of 'ownership' and 'usage for business' for a successful claim under Section 32 of the Act. (Emphasis supplied) B.24 Useful reference may be made to the exposition of the Apex Court on the issue as follows: 20. In Mysore Minerals Ltd. v. CIT [1999] 106 Taxman 166 (SC), this Court said thus: "...authorities shows that the very concept the depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset is uti....
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....e; (ii) If the lessee committed a default, the assessee was empowered to repossess the vehicle (and not merely recover money from the customer); (iii) At the conclusion of the lease period, the lessee was obliged to return the vehicle to the assessee; (iv) The assessee had the right of inspection of the vehicle at all times. B.27 It is submitted that as per the terms of the lease agreement between the Appellant and its lessee, all points mentioned above namely; Lessor being exclusive owner, right to repossess, obligation of the lessee to return the property and right of inspection are satisfied and hence the Appellant is the owner of the asset. B.28 Thus, the Appellant satisfies the test of ownership as well as use for purpose of business and the jurisprudence in this regard also supports the claim of the Appellant. It is humbly submitted that since both the tests of ownership and use test have been met, the Appellant's claim for deprecation is well founded. B.29 Classification of transaction based on the accounting treatment is not relevant to decide ownership and use: As regards the statutory framework in the Act, in re....
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....tract is one by which one gives to another the temporary possession and use of property other than money for reward and the latter agrees to return the same to the former at a future time. B.34 A finance transaction is a transaction of lending of money wherein the lender will seek to earn interest and as per the Ld.AO, the Appellant is earning only interest income and there is no use of the asset in business. B.35 There can a combination of some of the above elements and we have transactions of hire purchase finance wherein there is a dealer and a buyer who transacts for the goods and a financier extends the loan facility to the buyer to enable him to buy the goods. The dealer would get the consideration in effect from the financier and the buyer takes possession of the goods, with a charge or /hypothecation to the financier and would pay the installments - towards principal and interest to the financier. B.36 Also, in case of lease transactions, one or more features of different types of lease may be found in the contract between a lessor and lessee. However, the classification under other laws cannot be relied on by the authorities to determine the cate....
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....he High Court of Madras held that the lease transaction was not a pure finance transaction based on the following terms in the agreement: 8. A reading of the sample lease agreement placed before this Court with the Madras Advertising Co. Pvt. Ltd., dated 28.08.2008 show that in respect of lease of a car, the terms of lease was stated to be three years, with monthly rentals and total rentals payable. The terms of the lease agreement further point out that the lessor takes on lease the goods described in the Schedule on terms and conditions set forth in the Schedule. Clause 2 of the agreement relates to Delivery of Equipment. Clause 3 on rent payments and Clause 4 on ownership, which reads as under: "The Equipment shall at all times remain the sole and exclusive property of the Lessor and the Lessee shall have no right, title or interest therein except as Lessee". The agreement further states that during the currency of the lease, the lessee shall insure the subject of lease and protect it from any risk. Clause 10 of the agreement states that without the prior written consent of the lessor, the lessee shall not make any alterations, additions or improvement....
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....s purpose, the LESSEE shall reimburse the LESSOR tax, interest, penalty or any outgo accruing or arising to the LESSOR on this account." 9. On a reading of the terms of the agreement, we find that the agreement is a lease agreement sample and that there is nothing in the agreement to speak about mere financing for the purchase of an equipment as it had been contended by the assessee. *** 10. Learned counsel for the assessee however, submitted that the equipment leased out is one which the lessee had purchased. Consequently, the agreement has to be seen only as a finance agreement. We do not find any justification to accept this as a ground for holding the agreement as a finance lease agreement. If in effect the agreement is finance agreement, the question of returning the leased item back to the assessee will not arise at all. Further, the question of again affixing the name of the assessee on the property also does not arise. The fact that the equipment is delivered by the supplier to the location of the assessee thus by itself, will not make the agreement, the Finance Agreement and the terms thus seen are matters of arrangement between the parties, whic....
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....e claim of depreciation. B.44 Errors in the order of lower authorities based on erroneous understanding of facts and law: The revenue authorities' analysis of the nature of the transaction in order to decide if assessee is owner of the asset precedes on the basis that if there is any element of financing, the assessee ceases to be the owner of the asset. The revenue authorities have tried to place the Appellant in the category of finance leasing by incorrect understanding of facts and erroneously denied depreciation to the Appellant. B.45 The authorities have not considered the evidence furnished by the assessee in proper perspective and brushed aside the same, on the erroneous premise that the transaction is a finance transaction; the assessee is not entitled to depreciation and had claimed the same wrongfully. B.46 The Ld.AO and the LD.CIT(A) have ignored the direction of the Hon'ble ITAT in its order dated 08.03.2006 to examine the factual aspects in light of the approved legal principle that if leasing is a mode of business of the assessee and it is the owner, depreciation is to be allowed on leased assets. In the said order dated 08.03.2006, the Trib....
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....the present Appellant assessee wherein the objective is not to merely finance purchase of an asset but the intention is to repossess the asset and even in case of sale, the sale is recorded separately. Further, till such point of sale, the lessor-assessee-Appellant is the owner of the asset using it in the business of equipment leasing. B.52 It is humbly reiterated that the Appellant has not made a wrong claim nor is there an error on its part in understanding the applicable legal provisions under the Income Tax Act, 1961. The claim of depreciation on leased assets has been made on satisfaction of the test of ownership and use. The Appellant has entered into a transaction of leasing equipment as a business transaction and not a mere finance transaction so as to disentitle it from claiming depreciation as owner of the asset. Thus, in light of the above submissions, the Appellant humbly prays before the Hon'ble Tribunal that depreciation on leased assets be allowed and the impugned order of Ld. CIT(A) for AY 1999-2000 be set aside." 11. The learned authorised representative further submitted that learned CIT appeal recorded in his order that the assessee had prod....
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.... or cause to be delivered to the lessor the equipment, such time and place as may be directed by the lessor, in good repair, order and conditions subject to normal wear and tear. As per the article IV four of the agreement the lessee was to maintain and keep the equipment however to show with Mark that assessee is the soul and the exclusive owner of those assets. 15. Further, the learned authorised representative has also tabulated the relevant conditions of the lease agreement as Under:- Features Words in the agreement Article/clause no. Intention of parties "Lease ...have the commercial connotations and only means the hiring or licensing of Plant..." "Let on lease the equipment..." Article I Definitions 1.4 Article I - 1.7 Schedule Return of equipment/lease property "Upon termination of this agreement by efflux of time or otherwise Lessee shall at its own cost and expense forthwith deliver or cause to be delivered to the lessor..." Article II -2.4 Payment for equipment "Lessee has requested the Lessor to make advance payments towards the cost of the equipment" Article II -2.5(a Lessee warrantee indicating that the ....
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....ssor is not the manufacturer or dealer or supplier of the equipment and has only purchased the equipment selected by the Lessee from the manufacturer or dealer or supplier designated by the Lessee" "The Lessor has not at any time, made nor does it hereby make any representation or warranty, whatsoever with respect to the merchantability, quality....or performance of the equipment." Article VI - 6.2, 6.3 Ownership recognized by successors in title "As between the Lessor and the Lessee and their respective successors in title, the equipment shall remain moveable property of and shall continue to be in the ownership of the Lessor" Article VI - 6.7 Right of Lessor to create other interest, assign property "The Lessor shall be entitled to, without giving any notice to the Lessee, assign to any person any of its rights title or interest under this agreement or create any charge, lien, encumbrance or hypothecate the equipment or nay part thereof and the person(s) to or on who, such are assigned or conferred shall be entitled to the full benefits of this Agreement" Article VIII - 8.1 Right to repossess "On termination of this Lease, pursuant to clause 9.1 abov....
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....The honourable High Court held that once it is established that the ownership of the said equipment is that of the assessee, then it is clear that the respondent/assessee would be entitled to claim depreciation. 20. Further, in the present case lease rental is received regularly and has been shown in the Profit & Loss A/c. The other parties who are paying lease rentals to the assessee have shown lease rental paid to the assessee. The department has not brought a single case on record that the parties who had paid lease rental has not shown/claimed the deduction on account of lease rental but has claimed deduction of interest paid to assessee. Moreover, the assessee has produced the certificates from the lessee that they have not claimed any depreciation on these assets, which are owned by the assessee. No material contrary to the above facts was shown by the revenue. 21. In view of above facts, we direct the learned assessing officer to delete the disallowance of depreciation on plant and machinery of Rs. 259,839,987/- as claimed by the appellant on plant and machinery given and leased various parties. 22. In the result ITA number, 1200/del/2011 filed by the assessee for a....