2013 (1) TMI 344 - SC - Income Tax

Depreciation u/s 32 - disallowance as assessee s use of vehicles was only by way of leasing out to others and not as actual user of the vehicles in the business of running them on hire - assessee is a public limited company engaged in the business of hire purchase, leasing and real estate - High Court allowed the appeal of revenue - 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 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) 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 second requirement of Section 32 viz. that the asset must be used in the course of business. See CIT Karnataka, Bangalore Vs. Shaan Finance (P) Ltd., Bangalore 1998 (3) TMI 8 - SUPREME COURT As decided in CIT v. Castle Rock Fisheries (1997 (4) TMI 13 - SUPREME COURT) the plant and machinery was nevertheless being used by the assessee for its business purpose by treating the income derived by the assessee by such letting out as business income of the assessee, the development rebate must be considered as having been rightly granted. Therefore, where the business of the assessee consists of hiring out machinery and/or where the income derived by the assessee from the hiring of such machinery is business income, the assessee must be considered as having used the machinery for the purposes of its business. Issue of ownership - if the assessee is the owner of the vehicles then only is entitled to the claim on depreciation - Held that - It is true that a lease of goods or rental or hiring agreement is a contract under which one party for reward allows another the use of goods. A hiring agreement or lease unlike a hire purchase agreement is a contract of bailment, plain and simple with no element of sale inherent. As in the present case it is clear that the transactions occurring in the business of the assessee are leases under agreement, but not hire purchase transactions. Even viewed from the angle of the author of Lease Financing and Hire Purchase , the transactions involved in the appellant business are nothing but lease transactions. The general opening words of the Section 2(30) of the MV Act 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. 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.Therefore, the MV Act mandates that during the period of lease, the vehicle be registered, in the certificate of registration, in the name of the lessee and, on conclusion of the lease period, the vehicle be registered in the name of lessor as owner. The Section leaves no choice to the lessor but to allow the vehicle to be registered in the name of the lessee, thus, no inference can be drawn from the registration certificate as to ownership of the legal title of the vehicle. As the entire lease rent received by the assessee is assessed as business income in its hands and the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hands of the lessee. This reaffirms the position that 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. Claim of the assessee for a higher rate of depreciation - The CBDT vide Circular No. 652, dated 14-6-1993 has clarified that the higher rate of 40% in case of lorries etc. plying on hire shall not apply if the vehicle is used in a non- hiring business of the assessee. This circular cannot be read out of its context to deny higher appreciation in case of leased vehicles when the actual use is in hiring business - import of the same term purposes of business , used in the second proviso to Section 32(1) of the Act gains significance the assessee fulfills even the requirements for a claim of a higher rate of depreciation - appeal in favour of assessee.

Summary

Issues Involved:
1. Ownership of the vehicles for depreciation claims.
2. Entitlement to higher rate of depreciation for leased vehicles.

Issue-wise Detailed Analysis:

Ownership of the Vehicles for Depreciation Claims:

1. Background: The assessee, a non-banking finance company, leased out vehicles purchased directly from manufacturers. The vehicles were registered in the names of the lessees under the Motor Vehicles Act, 1988 (MV Act). The assessee claimed depreciation on these vehicles under Section 32 of the Income Tax Act, 1961.

2. Revenue's Argument: The Assessing Officer disallowed the depreciation claim, arguing that the assessee was neither the owner nor the actual user of the vehicles. The vehicles were merely financed by the assessee and registered in the lessees' names.

3. Tribunal's Findings: The Tribunal found that the assessee was the owner of the vehicles and used them for business purposes, thus eligible for depreciation. It emphasized that the assessee's business involved leasing vehicles, and ownership was not disputed at any stage before the Assessing Officer and the first appellate authority.

4. High Court's Decision: The High Court ruled against the assessee, stating that since the vehicles were not registered in the assessee's name, it could not be considered the owner and thus not entitled to claim depreciation.

5. Supreme Court's Analysis: The Supreme Court held that the term "owner" under Section 32 of the Act does not necessarily align with the definition under the MV Act. It emphasized that ownership for depreciation purposes is based on legal title and control over the asset, not merely registration. The lease agreements indicated that the assessee retained ownership rights, including the right to repossess the vehicles upon default and the obligation of the lessee to return the vehicles at the end of the lease term.

6. Conclusion: The Supreme Court concluded that the assessee was the owner of the vehicles for the purposes of claiming depreciation under Section 32 of the Act. The vehicles were used in the course of the assessee's leasing business, satisfying the requirements of ownership and usage for business.

Entitlement to Higher Rate of Depreciation for Leased Vehicles:

1. Background: The assessee claimed a higher rate of depreciation on the leased vehicles, arguing that they were used in the business of running on hire.

2. Revenue's Argument: The Revenue contended that the higher rate of depreciation was not applicable as the vehicles were not used by the assessee itself in the business of running them on hire but were leased out to others.

3. Tribunal's Findings: The Tribunal ruled in favor of the assessee, stating that leasing out vehicles constituted a business activity and thus qualified for a higher rate of depreciation. It relied on the Supreme Court's decision in Commissioner of Income Tax, Karnataka, Bangalore Vs. Shaan Finance (P) Ltd., which held that leasing machinery for business purposes met the criteria for higher depreciation.

4. High Court's Decision: The High Court disagreed with the Tribunal, holding that the assessee must use the trucks for its own business of running them on hire to claim the higher depreciation rate.

5. Supreme Court's Analysis: The Supreme Court reiterated that the term "used for the purposes of business" does not require the assessee to physically use the asset. It is sufficient if the asset is used in the course of the assessee's business. The Court found that leasing vehicles was a business activity, and the income from leasing was assessed as business income. Thus, the vehicles were used for business purposes, fulfilling the requirement for higher depreciation.

6. Conclusion: The Supreme Court held that the assessee was entitled to claim a higher rate of depreciation on the leased vehicles. The vehicles were used in the business of running on hire, satisfying the conditions for higher depreciation under Section 32 of the Act.

Final Judgment:

The Supreme Court allowed the appeals, set aside the High Court's judgments, and ruled in favor of the assessee on both issues. The assessee was entitled to claim depreciation, including at a higher rate, on the leased vehicles. The substantial questions of law framed by the High Court were answered in favor of the assessee and against the Revenue. No order as to costs was made.