TaxTMI 
TaxTMI 
2007 (2) TMI 239
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....see for depreciation on leased assets. As per the revenue's appeal, the assessee is not entitled to depreciation on the leased assets while as per the assessee's appeal, the learned CIT(A) should have allowed the depreciation on the entire cost as against 50 per cent of the cost allowed by the learned CIT(A). Further, CIT(A) should have allowed the depreciation at the rate of 40 per cent instead of 25 per cent. 4. Brief facts giving rise to these appeals on this issue are these. The assessee had entered into an agreement with M/s. Sriram Investments Ltd. (in short "SIL") under which the assessee leased 97 vehicles for an invoice value aggregating Rs. 3,84,20,730/-. On this amount, the assessee claimed depreciation at the rate of 40 per cent since, according to the assessee, the vehicles were ultimately used for hiring purposes. In the course of assessment proceedings, the Assessing Officer examined the terms of the lease deed and found that 50 per cent of the invoice value was received as security deposit and rental value payable was fixed at the rate of 2.2 per cent per month of the invoice value for the lease period of 36 months. In para 7 of his order, he has mentione....
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.... lessor in the leased vehicles is jeopardised; (iv) Winding up or ceasure or substantial takeover or amalgamation of lessee's business (clause 12.1). (k) On the termination of the lease period, the lessor has the right to repossess the vehicles (clause 12.2). (l) The lessor is not the supplier or dealer of vehicles and that the essential function of the lessor in this lease transaction is to finance the vehicles selected by the lessee (clause 9a)." The Assessing Officer also examined Shri V. Kumar of SIL under section 131 of the Act. In the statement, as per the Assessing Officer, it was clearly stated that the assessee had authorised them to identify suitable purchasers for the leased assets and consequent to the sale of leased assets and remit the consideration arising thereon to the assessee. In the letter dated 13-2-1997, it was stated by the assessee that no leased assets had been sold. However, the Assessing Officer observed that it had not been denied that it intends to sell the assets on the expiry of lease. Thus, the assessee, according to him, will also receive consideration for the sale of leased assets i.e., its residual value on the ex....
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....residual value. (c) Payments in a single lease transaction would cover the cost of the asset as well as the interest (at reasonable rates) and hence the lease rent is appropriately speaking not a price for services but repayment of cost of asset including interest thereon. (d) No services are performed by the lessor in relation to the leased asset during the lease period. (e) The lease is non-cancellable except in certain specified conditions and hence right of disposal does not exist in lease period." Considering the above features, it was observed by him that nomenclature given to the agreement was not relevant but it is the essence which is relevant in deciding the issue. According to him, the essence of the transaction is hire-financing arrangement. In coming to this conclusion, the following reasons were given by him: "(a) There is no immediate nexus between the user of the vehicles and the business of the assessee which by assessee's own admission, is financing the purchase of such vehicles. (b) The assessee does not have any effective control over the leased vehicles to the extent that it does not have the right to terminat....
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....o a loss of Rs. 29.25 lakhs was also incorrect calculation since the correct calculation results in overall profit of Rs. 20.11 lakhs. (v) That the assessee has used the vehicles for the purpose of leasing business and thus there is a direct nexus between the use of the vehicles of the business of the assessee." The learned CIT (A) agreed with the submissions of the assessee to the extent that- (i) it was owner of the assets leased out and (ii) such leased assets were used for the purpose of business of leasing. He also opined that the case of assessee cannot be termed as a case of financial lease. Consequently, the assessee was entitled to depreciation. However, he was also of the view that the assessee is entitled to depreciation with reference to 50 per cent of the cost of the asset inasmuch as 50 per cent of the cost of the assessee was directly or indirectly made by other persons within the meaning of the definition of "actual cost" under section 43(1) of the Act. In coming to this conclusion, he took into consideration the facts- (i) that 50 per cent of the cost of the assets was received by the assessee by way of interest-free advance, (ii) the evidence recorded ....
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....des with the economic life of the asset and may be broken into primary and secondary period. 6. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation. 7. The lessor is typically a financial institution and cannot render specialized service in connection with the asset. 8. The lease is usually full payout, that is, the single lease repays the cost of the asset together with the interest." Since all these features were present in the lease agreement before the Hon'ble Supreme Court, it was held by the Court that the lessor could not be said to be the owner of the leased vehicles and consequently the said lessor could not take back the assets on account of non-payment of lease rental by the lessee. In such cases, the lessor could only recover the amount due from the lessee. In view of this legal position, it has been con tended by the learned Departmental Representative that in the case of financial lease, the lessor cannot be said to be the owner and consequently, depreciation cannot be allowed. Proceeding further, he drew our attention to various clauses of the agreement to conten....
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.... distinguished the case of the Tribunal in the case of HDFC Ltd. by pointing out the different facts. Regarding the Supreme Court judgment in the case of ABB's case, it has been submitted that the said judgment was not rendered under the Income-tax Act. That judgment was rendered in a different context i.e., in the light of Trial of Offences Relating to Transactions in Securities Act, 1992 (TORT Act). The Court was not concerned with the issue regarding allowability of depreciation under section 32 of the Act. Hence, that decision cannot be applied to the present case. Lastly, he relied on the CBDT Circular No. 2, dated 9-2-2001 [(2001) 165 CTR (St.) 25] which classifies that depreciation cannot be allowed in respect of such lease. 10. Rival submissions of the parries have been considered carefully. The question for our consideration is whether the assessee is entitled to depreciation under section 32 of the Act. There is no dispute to the legal position that ownership of the asset is a condition precedent for allowing the depreciation under section 32. In. the case of CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308, the Hon'ble Supreme Court had held that where the as....
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....me the custodian of the assets belonging to Fair Growth. The appellant-company continued to make the payment to IFCI in place of Fair Growth as per the lease finance agreement. An amount of Rs. 30,96,948/- was paid by the appellant to Fair Growth till December, 1992 while the amount of Rs. 44,61,273/- was paid to the custodian, IFCI. The appellant made a communication to the custodian clarifying that the appellant would be entitled under the agreement to the amounts on account of security deposit and interest accrued thereon at the time of buyback of purchase of leased assets. Accordingly, it forwarded a cheque of Rs. 17,800/- in favour and final settlement of the dues under the lease agreement. The Special Court under section 10 of the Special Court (TORT in Securities) Act, 1992, passed an order dated 28-7-1998 to handover the possession of all the 26 cars to the custodian within one week from the date of the order since the appellant had failed to make the payment as per the lease agreement. It appears from para 5 of the judgment of the Hon'ble Supreme Court that the assessee had taken a plea before the Special Court that it was a case of lease finance but the said plea had ....
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....icient in total to amortise the capital outlay of the lessor and give some profit. An operating lease is any other type of lease that is to say, where the asset is not wholly amortised during the non-cancellable period, if any, of the lease and where the lessor does not rely for his profit on the rentals in the non-cancellable period." After considering the aforesaid definitions of lease finance, the Hon'ble Supreme Court observed that following are the features of the financial lease: "1. The asset is use-specific and is selected for the lease specifically. Usually, the lessee is allowed to select it himself. 2. The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset. 3. Therefore, the lessee bears the risk of obsolescence. 4. The lessor is interested in his rentals and not in the asset. He must get his principal back along with interest. Therefore the lease is non-cancellable by either party. 5. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period. 6. The lessor enters into the tran....
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....y the CIT(A) that on the expiry of lease period, the vehicles have been sold to the lessees and the deposit amount has been adjusted against the residual sale value. Thus it is clear that financial arrangement was made in guise of the lease agreement. (ii) The lease rentals were fixed at the rate of 2.2 per cent of the invoice value p.m. which is nothing but the interest. (iii) The details of the leased assets along with specimen invoice appearing at pp. 58 to 62 of the paper book and forming part of the lease agreement shows that vehicles were purchased at the instance of the sub-lessee since in the invoice raised by Bafna Motors Ltd., the lessor is shown as the assessee while the lessee is shown Mr. Sukha Singh Darshan Singh, instead of SIL. It appears that SIL worked merely as a conduit for obtaining lump sum finance from the assessee; (iv) Clause 5 of the agreement provides that it is the lessee who shall be liable to pay all taxes, cesses and charges, etc., in respect of the leased vehicles. In case, the same are paid by the lessor, the same shall be reimbursed by the lessee; (v) Clause 6 of the agreement provides that the lessor is totally ....
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....udgment of Hon'ble Supreme Court in ABB's case, it is held that assessee was not the owner of the leased vehicles as the impugned agreement was an agreement of financial lease and not the normal lease. Consequently, the assessee is not entitled to any depreciation. 17. The contention of the learned counsel for the assessee that the aforesaid judgment of the Hon'ble Supreme Court is distinguishable on the ground that it was rendered under a different enactment, cannot be accepted. What is relevant is the legal position in respect of a particular transaction. Therefore, in our opinion, in a case of finance lease the lessor cannot be treated as owner under any enactment unless expressly provided otherwise. As far as other judgments of the High Court and Tribunal are concerned, the same stand distinguished inasmuch as the judgment of the Hon'ble Supreme Court in the case of ABB Ltd. was either not available at the time when such decisions were given or not referred to or considered by the High Court or the Tribunal, as the case may be. The judgment of the Hon'ble Supreme Court is binding under article 141 of the Constitution of India and, therefore, the case is t....
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....n 14-4-1993 and the earliest closure was 20-4-1993. The final closure of the issue was on 26-4-1993. The issue was promoted to Zuari Agro Chemicals Ltd., Goa. The following were some of the features of the said issue: (a) The issue was of 2 parts; Part-A and Part-B, each part being of the value of Rs. 100/-. Part-A was converted into 10 equity shares of Rs. 10/- at par on allotment and Part-B of Rs. 100 per debenture was to be redeemed in three equal instalments at the end of the 7th, 8th and 9th years, from the day of allotment. (b) According to the prospectus, Rs. 132/- was payable by the applicant as application money out of which Rs. 50/- would be appropriated towards Part-A and Rs. 84/- towards Part-B. (c) CFCL had finalized a scheme of buyback or Part-B of the debentures with J.M. Financial and Investment Consultancy Services Ltd., on behalf of UTI under which Part-B of each debenture of face value Rs. 100/- and paid-up on application, to the extent of Rs. 84 may be offered for sale at net price of Rs. 50/- to UTI. (d) The applicant may make the aforesaid offer by signing the declaration to this effect at the appropriate place in the applic....
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....T(A) and his comments were asked for but the Assessing Officer did not respond. Accordingly, the learned CIT(A) admitted the evidence under rule 46A of the Income-tax Rules, 1962. After examining such evidence, he found that the debentures were actually allotted to the assessee and the assessee-company has subsequently transferred them to UTI. In view of the same, it was held that loss could not be treated as loss from speculation business. However, he was of the view that the entire exercise was to acquire the shares and, therefore, the amount in dispute should be added to the cost of the shares. Aggrieved by this part of the order, the assessee is in appeal before the Tribunal. 24. After hearing both the parties, we find that similar issue arose before the Tribunal, Calcutta Bench, in the case of Karamchand Thapar & Bros. (Coal Sales) Ltd. v. Dy. CIT [2002] 83 ITD 171, wherein it was held that there was no scope for considering the loss incurred by the assessee in acquiring and disposing of the Part-B portion of the partly convertible debenture under consideration to be contributing to the direct cost of acquiring the Part-A portion. Accordingly, it was held that the loss aris....