2002 (11) TMI 76 - HC - Income Tax

Business Of Leasing Out Commercial Vehicles - Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was entitled to depreciation allowance under section 32 of the Act at 40 per cent. in respect of the commercial vehicles, owned by it but leased out to a third party? - in some of the cases, the Tribunal has remanded the matters back to the Assessing Officers to examine whether the leased out vehicles had been actually used by the lessee in the business of hire. In the light of the view taken by us, we do not find any infirmity in such a direction. As a matter of fact, wherever there is a doubt it must be examined whether the leased out vehicles are actually being used in the business of hiring. Only in such a situation depreciation at the higher rate of 40 per cent. or 50 per cent., as the case may be, is to be allowed under the relevant entry in Appendix I to the Rules. - For the foregoing reasons, we do not find any infirmity in the view taken by the Tribunal on the question formulated above.

Summary

Issues Involved:
1. Entitlement to depreciation allowance under section 32 of the Income-tax Act at 40% for commercial vehicles leased out to third parties.
2. Interpretation of "used for the purposes of the business or profession of the assessee" in Rule 5 of the Income-tax Rules.
3. Applicability of higher depreciation rates for leased vehicles.
4. Examination of actual use of leased vehicles in the business of hiring.
5. Differentiation between leasing and hiring for the purpose of depreciation.

Issue-wise Detailed Analysis:

1. Entitlement to Depreciation Allowance at 40%:
The primary issue is whether the assessee, a finance company engaged in leasing commercial vehicles, is entitled to claim depreciation at 40% under section 32 of the Income-tax Act for vehicles leased out to third parties. The Tribunal allowed the higher depreciation rate, relying on the Andhra Pradesh High Court's decision in CIT v. A.M. Constructions [1999] 238 ITR 775. The Revenue contended that the assessee, not being directly involved in running the vehicles on hire, should not be eligible for the higher rate.

2. Interpretation of "Used for the Purposes of the Business or Profession of the Assessee":
The Revenue argued that the nature of the assessee's business is crucial in determining the depreciation rate, emphasizing that the vehicles must be used by the assessee in their business of running them on hire. The court, however, noted that the statutory language does not necessitate that the assessee himself use the vehicles for running them on hire. The plain language of the statute and Appendix I of the Rules indicates that the end use of the vehicles is the determining factor.

3. Applicability of Higher Depreciation Rates:
The court analyzed Section 32 and Rule 5, noting that higher depreciation is admissible if the vehicles are used in a business of running them on hire. The court rejected the Revenue's interpretation that the vehicles must be used by the assessee for running them on hire, stating that leasing out vehicles is a legitimate business activity that qualifies for higher depreciation.

4. Examination of Actual Use of Leased Vehicles:
The court acknowledged that in some cases, the Tribunal remanded the matters to the Assessing Officers to verify if the leased vehicles were actually used by the lessee in the business of hiring. The court found no issue with this direction, emphasizing that actual use in hiring is a requisite for higher depreciation.

5. Differentiation Between Leasing and Hiring:
The court referred to the Supreme Court's decision in CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308, which distinguished between the use of machinery by the assessee and the purpose for which the machinery is used. The court concluded that leasing vehicles is tantamount to hiring, aligning with the Supreme Court's interpretation that the statutory language does not require the assessee to use the vehicles themselves for hiring.

Conclusion:
The court dismissed the Revenue's appeals, upholding the Tribunal's decision that the assessees are entitled to higher depreciation rates for leased vehicles. The judgment emphasized that the statutory language and the nature of the business activity (leasing) qualify the assessees for the higher depreciation rate, provided the vehicles are used in the business of hiring. The court also supported the Tribunal's remand directions to verify actual use in hiring where necessary.