TaxTMI 
TaxTMI 
2025 (6) TMI 480
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....ppeal for AY 2016-17 as a 'Lead case'. 2. The only ground of appeal is as under:- ITA No. 3332/MUM/2023 (A.Y. - 2016-17) Whether on the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in directing AO to delete the addition made by the AO on account of depreciation claimed by the assessee company of Rs. 2,68,86,339/- on lease-hold asset treating the same as asset owned by the assessee company, when the facts are that owner of the lease hold asset i.e. M/s Hewlett Packard Financial Services (I) Pvt. (HPFS) has also claimed such depreciation, which was allowed to it by the department in its case in ITA No. 2845/Mum/2013 dated 23/03/2016. 3. Factual matrix of the case is that information was received by the ld.AO in the past years that in the case of Hewlett Packard Financial Services (I) Pvt. Ltd. (herein after referred as HPFS), a lease arrangement existed between HPFS and the assessee. Further, it was also found that both the companies were claiming depreciation on the leased assets which led to double claim of deduction on account of depreciation. The assessee had got certain assets on lease from HPFS and had claimed depreciation on them. According to ....
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.... in your favour to you for the Total Term any warranties provided to us by the supplier of any equipment. You may take whatever action you think appropriate to enforce any equipment warranties given by a supplier but must do so at your own expense. If you must return any equipment to us or we can repossess any equipment under this agreement or any lease, any warranties in connection with that equipment which we assigned to you or novated in your favour are reassigned to us or novated in our favour and you shall execute any necessary documents/communications that may be required for such reassignment or novation." Clause 10: Equipment Ownership: "We are the owner of all Equipment. Your only rights to the Equipment are as a lessee under this agreement and under the leases. You shall hold the Equipment as lessee and shall not contest our sale and exclusive ownership thereof. You must not make any representation to any person which is inconsistent with our ownership of the Equipment. You must not allow to be placed on any equipment any markings which are inconsistent with our ownership of the equipment. You must not grant any person any right to the equipment or any form of securit....
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....urchased under the agreement free of any and all encumbrances alongwith all of part of rights, and benefits under the purchase documents. Upon novation, HPFS shall acquire the same rights as regard the equipments as they would have acquired and assumed had they been an original party to the purchase documents. The assessee has to return the equipment to HPFS or HPFS can repossess any equipment under this agreement or any lease, any warranties in connection with that equipment. HPFS are the owner of all equipment. The assessee's only rights to the Equipment are as a lessee and the assessee shall not contest HPFS's sale and exclusive ownership thereof. Assessee must not make any representation to any person which is inconsistent with the ownership of HPFS in regards to the Equipment. The assessee must not sell, mortgage, charge, sub-let or otherwise dispose of any land or building on or in which the equipment is stored, installed, used or operated or enter into any agreement or arrangement to do any of the aforesaid. The equipment remained the property of HPFS whether or not it is fixed to any other property. The equipment must not be attached to property without prior written consen....
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....onsible for the loss occurring due to such casualty. If on disposal of asset by the lessor, there was an excess amount as computed under the terms of the agreement received by HPFS, the same shall be paid to the assessee. 5. The ld.CIT(A), deleted the addition by holding that the lessor here had no commercial right, title or interest in the asset, after the termination of lease period, meaning thereby, that this was purely a financial lease. He relied on Mumbai ITAT order in ITA No.: 1048/Mum/2020 AY: 2015-16 in Deputy Commissioner of Income Tax Circle - 2 (1)(1), Mumbai Vs. M/s. BSE Ltd. quoting the relevant extracts as below. ..... "12. Briefly the facts are, in course of assessment proceedings, the assessing officer noticed that the assessee had claimed depreciation of Rs. 1,14,26,646/- on a 'server' taken on financial lease. Noticing that similar claim made by the assessee in Assessment Year 2012-13 was disallowed, the assessing officer called upon the assessee to explain why similar disallowance should not be made. Though, the assessee objected to the proposed disallowance; the assessing officer, relying upon the decision of Hon'ble Supreme Court in the case of ICDS Ltd, he....
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.... that HPFS has claimed depreciation on the said asset not only in this year but in subsequent years. The assessee before us explained that the Income Tax Department for AY 2009-10 has already disallowed the claim of depreciation in the hands of the HPFS. We noted that in the very first year i.e. AY 2011-12, the depreciation has already allowed the claim of depreciation We noted that in the income tax code, there is a provision/ concept of block of asset and once any asset enters into block asset and claim of depreciation in very first year is allowed, in subsequent year deprecation cannot be disallowed in case the first year is not disturbed. We noted that even in subsequent years, the Revenue is allowing the claim of the assessee as noted in above chart. Hence, we allow the claim of depreciation on the issue of consistency. This issue of assessee's appeal is allowed." 6. Before us, the ld.CIT(DR) relied on the assessment order claiming that depreciation was correctly disallowed. He primarily relied upon the Tribunal's decision in the case of HPFS cited in the ground of appeal for AY 2009-10 and stated that in the said decision, the Tribunal already allowed depreciation u/s. 3....
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....tely accounted the lease transactions with HPFS as a 'finance lease' in its books of account. He also relied on Income Computation and Disclosure Standard I relating to Accounting Policies ("ICDS I"), as notified by CBDT vide Notification No. S.O. 892 (E) dated March 31, 2015, which became applicable from AY 2016-17 stating that that ICDS-I also contemplates that the treatment and presentation of transactions and events should be governed by their substance rather than their mere legal form. 7.1 It is further submitted that the entitlement to claim depreciation rests with the 'real owner' i.e., the person who actually bears the risks incidental to ownership and utilizes the capital asset for the purpose of its business. In support of this proposition, reliance was placed on certain judicial precedents in CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 (SC),Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 (SC)and Dalmia Cement (Bharat) Ltd. v. CIT [2001] 247 ITR 267 (SC).It is also submitted that the assessee is the real owner of the leased assets as it makes the choice of asset to be purchased, takes delivery of the asset, maintains and operates the assets, undertakes indemnity and....
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....use 7 and 8 of the agreement, the assessee had to unconditionally and irrevocably novate in favour of HPFS all of right, title and interest in and to the equipment purchased under the agreement free of any and all encumbrances alongwith all of part of rights, and benefits under the purchase documents. Upon novation, HPFS shall acquire the same rights as regard the equipments as they would have acquired and assumed had they been an original party to the purchase documents. Moreover,it had to return the equipment to HPFS or HPFS can repossess any equipment under this agreement or any lease, any warranties in connection with that equipment. HPFS are the owner of all equipment. The assessee's only rights to the Equipment are as a lessee and the assessee shall not contest HPFS's sale and exclusive ownership thereof. We also find sufficient merits in the arguments of the ld.DR that clauses 8/10/11 and 12 of the above agreement make it amply clear the actual owner of the assets under consideration is HPFS and not the assessee. Besides, the terms of conditions make it fairly evident that this not a case of Finance Lease as is being claimed by the assessee.. 8.1 In this respect, it will be....
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....n Mysore Minerals Ltd., M.G. Road, Bangalore vs. Commissioners of Income Tax, Karnataka, Bangalore; definition of the term "owner" in the Black's Law Dictionary, and the various clauses of the lease agreement that established the lessor to be the "exclusive owner" of the vehicles at all points of time and that the lessee was under an obligation to return the vehicles to the lessor on expiration of the lease. 3.1. The ownership of the vehicle was transferred to the lessee at the end of the lease term, that too at a nominal value of 1% of the original cost of the vehicle: this particular provision in the lease agreement made the Income Tax department hold the assessee (the lessor) to be a mere financier. The Court ruled out this contention since "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". 3.2. Agreeing to the observations made by the Tribunal relying on the views of author of "Lease Financing and Hire Purchase", the Supreme Court accepted that the transactions in question are not hire purchase transactions, rather these are lease transactions. 3.3. As far as the provi....
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.... (supra) are more similar to the facts of the instant case. Moreover, CBDT Circular No.2 dated 09.02.2001 has clearly mentioned that the claim of depreciation is dependent on the test of ownership. The test of ownership is discernible only on interpretation of various clauses in the lease agreement. 8.3 In this connection, reference could be made of the decision of the coordinate Bench of ITAT,Delhi in the case of Religare Finvest Ltd., New Delhi vs Dcit, Circle- 21(1), New Delhi dated 13 July, 2023 in ITA NO.4796/Del/2023.The relevant paras are reproduced for the sake of clarity as below: "15. We have heard both the parties and perused the material available on record. The Coordinate Bench of the Tribunal while deciding the issue of disallowance of depreciation claimed on vehicle on finance lease in Assessee's own case for the Assessment Year 2011-12 in ITA No. 857/Del/2019 vide order dated 12/05/2023 held as under:- "4. We have heard both the parties and perused the records. We find that the Ld CIT(A) has duly taken the note that after issuance of AS-19 issued by the ICAI, the CBDT vide Circular No. 2/2001 dated 9 February 2011 has clarified that capitalization of assets....
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....016-17 CROSS-OBJECTION "On the facts and circumstances of the case and in law, in case the Department's appeal is wholly or partly allowed, the Cross objector prays that entire lease rentals including the principal component should be allowed as a deduction." 13. According to the assessment order, the assessee during the course of assessment proceedings, claimed that deduction in respect of lease rentals (principal component) should be allowed, since the asset had been wholly and exclusively used for the purpose of business. In this regard, he observed that the payments made by the assessee to HPFS were the installment of repayment of the Finance given by HPFS including interest thereon for acquiring of a particular asset. The rate of interest, term of finance and installments was decided by a separate agreement. During the term of lease, the assessee company had to pay the installments and on completion of the payment of installments, the agreement is terminated and HPFS would transfer all of its interest and title to the equipment to the assessee on "AS-IS, WHERE-IS, WITH ALL FAULTS" basis. What appears from the agreement is that the assessee has to repay the principal lo....