2013 (1) TMI 344 - SC - Income Tax

Interpretation of statutes - Expression depreciation - twin requirement of ownership and usage for business for a successful claim u/s 32 - claim for depreciation at a higher rate - Used vehicles - business of running on hire - Question of ownership of the vehicles - leasing. HELD THAT - As long as the asset is utilized for the purpose of business of the assessee the requirement of Section 32 will stand satisfied notwithstanding non-usage of the asset itself by the assessee. In the present case before us the assessee is a leasing company which leases out trucks that it purchases. Therefore on a combined reading of Section 2(13) and Section 2(24) of the Act the income derived from leasing of the trucks would be business income or income derived in the course of business and has been so assessed. Hence it fulfills the aforesaid second requirement of Section 32 of the Act viz. that the asset must be used in the course of business. The general opening words of the Section 2(30) of the MV Act say that the owner of a motor vehicle is the one in whose name it is registered which in the present case is the lessee. The subsequent specific statement on leasing agreements states that in respect of a vehicle given on lease the lessee who is in possession shall be the owner. The Revenue thus argued that in case of ownership of vehicles the test of ownership is the registration and certification. Since the certificates were in the name of the lessee they would be the legal owners of the vehicles and the ones entitled to claim depreciation. Therefore the general and specific statements on ownership construe ownership in favour of the lessee and hence are in favour of the Revenue. We do not find merit in the Revenue s argument for more than one reason (i) Section 2(30) is a deeming provision that creates a legal fiction of ownership in favour of lessee only for the purpose of the MV Act. It defines ownership for the subsequent provisions of the MV Act not for the purpose of law in general. It serves more as a guide to what terms in the MV Act mean. Therefore if the MV Act at any point uses the term owner in any Section it means the one in whose name the vehicle is registered and in the case of a lease agreement the lessee. That is all. It is not a statement of law on ownership in general. Perhaps the repository of a general statement of law on ownership may be the Sale of Goods Act; (ii) Section 2(30) of the MV Act must be read in consonance with sub-sections (4) and (5) of Section 51 of the MV Act. Therefore in the facts of the present case we hold that the lessor i.e. the assessee is the owner of the vehicles. As the owner it used the assets in the course of its business satisfying both requirements of Section 32 of the Act and hence is entitled to claim depreciation in respect of additions made to the trucks which were leased out. Higher rate of depreciation the import of the same term purposes of business used in the second proviso to Section 32(1) of the Act gains significance. We are of the view that the interpretation of these words would not be any different from that which we ascribed to them earlier under Section 32 (1) of the Act. Therefore the assessee fulfills even the requirements for a claim of a higher rate of depreciation and hence is entitled to the same. The business of the assessee consists of hiring out machinery and trucks where the income derived by the assessee from hiring of such machinery is business income. Therefore the assessee- appellant viz. ICDS should be considered as having used the trucks for the purpose of business. Following the judgment of the Karnataka High Court in ICDS 2007 (2) TMI 181 - KARNATAKA HIGH COURT the decision of the Supreme Court in CASTLE ROCK FISHERIES 1997 (4) TMI 13 - SUPREME COURT was relied upon. Therefore we have no hesitation to hold that the appellant- company is entitled to a higher rate of depreciation at 50% on the trucks leased out by it. We therefore reverse the orders of the CIT (Appeals) on this issue. Thus the High Court erred in law in reversing the decision of the Tribunal. Consequently the appeals are allowed; the impugned judgments are set aside and the substantial questions of law framed by the High Court are answered in favour of the assessee and against the Revenue.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the appellant (assessee) is the owner of the vehicles leased out to its customers for the purpose of claiming depreciation under Section 32 of the Income Tax Act, 1961.
• Whether the appellant is entitled to claim a higher rate of depreciation on the vehicles leased out, on the ground that they were used in the business of running on hire.

ISSUE-WISE DETAILED ANALYSIS

Ownership of Vehicles

• Relevant legal framework and precedents: Section 32 of the Income Tax Act requires that the asset must be "owned, wholly or partly, by the assessee and used for the purposes of the business or profession." The Court referenced the case of Mysore Minerals Ltd., which emphasized that depreciation benefits belong to the entity that has invested in and is utilizing the capital asset.
• Court's interpretation and reasoning: The Court interpreted "ownership" to mean having a legal right or title against the rest of the world. It held that the lease agreement's terms, which granted the assessee exclusive ownership rights, supported the assessee's claim of ownership.
• Key evidence and findings: The lease agreement specified the assessee as the exclusive owner, with rights to repossess the vehicle upon default and inspect it at any time. The lessee was obligated to return the vehicle at the lease's conclusion.
• Application of law to facts: Despite the vehicles being registered in the lessee's name under the Motor Vehicles Act, the Court found that the legal title remained with the assessee, satisfying the ownership requirement of Section 32.
• Treatment of competing arguments: The Revenue argued that registration under the Motor Vehicles Act determined ownership. The Court rejected this, stating that the Act's definition of ownership was a legal fiction for its purposes and did not apply to the Income Tax Act.
• Conclusions: The Court concluded that the assessee was the owner of the vehicles for the purposes of claiming depreciation under the Income Tax Act.

Entitlement to Higher Rate of Depreciation

• Relevant legal framework and precedents: The Court referred to the case of Shaan Finance (P) Ltd., which interpreted "used for the purposes of business" to include assets used in leasing, qualifying for higher depreciation rates.
• Court's interpretation and reasoning: The Court held that the term "used for the purposes of business" does not necessitate direct usage by the assessee. Leasing the vehicles constituted use for business purposes, thus meeting the requirement for higher depreciation.
• Key evidence and findings: The Court noted that the income from leasing was assessed as business income, reinforcing the business use of the vehicles.
• Application of law to facts: The Court applied the precedent from Shaan Finance to determine that leasing constitutes business use, entitling the assessee to a higher rate of depreciation.
• Treatment of competing arguments: The Revenue's argument that only direct usage by the assessee qualifies for higher depreciation was dismissed. The Court emphasized that business use includes leasing.
• Conclusions: The Court concluded that the assessee was entitled to a higher rate of depreciation on the leased vehicles.

SIGNIFICANT HOLDINGS

• The Court held that "ownership" for the purposes of Section 32 of the Income Tax Act is determined by the legal title and rights conferred by the lease agreement, not by registration under the Motor Vehicles Act.
• The interpretation of "used for the purposes of business" includes leasing activities, allowing the assessee to claim depreciation and a higher rate of depreciation on leased vehicles.
• Verbatim quote: "As long as 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."
• The Court set aside the High Court's judgment, affirming the Tribunal's decision in favor of the assessee, allowing depreciation claims under Section 32 and at the higher rate applicable.