2014 (1) TMI 281 - AT - Income Tax

Disallowance of Depreciation on lease buses Nature of lease Operating lease OR Finance Lease Held that - It is clear from the terms of the contract that M/s. DMRC Ltd. has facilitated the finance of the buses and to secure repayment of the cost of the buses with interest, the buses would remain in the name of M/s. DMRC Ltd. till the entire repayment is made in 60 instalments - The period of repayment of the cost with interest in instalement and period of agreement is the same i.e. 05 years so that after successful completion of the agreement at the end of tenure of 5 years and full payment of the cost of the buses, the ownership of the buses will be transferred in the name of the assessee - what is material is the substance and contents of the documents which exhibits the intention of the parties and not nomenclature and form of the document - in order to determine the real intention of the parties on the question whether the agreements in question are in substance of operating lease or finance lease, various features have to be tested in Association of Leasing and Financial Services Companies vs. Union of India 2010 (10) TMI 4 - SUPREME COURT OF INDIA various tests has laid down for determination of the real nature of the lease whether finance lease or operating lease. The lessor would fully recover the investment in buses with interest during the lease period itself - The primary object and interest of lessor is for recovery of his investment with interest during the lease period and not in the assets for its use - This fact is clear from the term of lease agreement where all precautionary measures are taken for recovery of the investment made by the lessor on completion of the tenure of lease period and full recovery of the investment and then the asset in question will be transferred to lessee - the assessee has to bear the cost of insurance, maintenance, repairs and other related cost of expenses for buses - The assessee has also paid the taxes etc. in relation to the buses as per agreement thus, the risk and rewards incidental to the ownership of the assets vests with the assessee - M/s. DMRC Ltd. is simply having the title of the buses as a security against finance till the entire investment and interest there upon is recovered thus, the nature of lease / arrangement between the parties is finance lease and ownership / title of the buses was retained by M/s. DMRC Ltd. only with a view to secure the repayment of cost of the buses alongwith interest - the assessee is entitled for the depreciation on the buses for the period it has operated the buses - merely because depreciation is allowed on the same assets (buses) to M/s. DMRC Ltd. would not ipso facto disentitle the assessee to its rightful claim Decided in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on leased buses.
2. Alternative claim for deduction of lease payments as revenue expenditure.

Detailed Analysis:

1. Disallowance of Depreciation on Leased Buses:
The primary issue revolves around whether the assessee is entitled to claim depreciation on buses leased from Delhi Metro Railway Corporation Ltd. (DMRC). The assessee, engaged in the transportation business, entered into a Metro Link Bus Service Lease Agreement with DMRC for plying feeder buses. Under this agreement, the assessee acquired 87 buses, capitalized their cost, and claimed depreciation. The Assessing Officer (AO) disallowed this claim, stating that ownership of the buses would transfer to the assessee only after the successful completion of the agreement and full payment. Until then, DMRC retained ownership, making the assessee ineligible for depreciation.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that DMRC had already claimed depreciation on these buses. Additionally, the CIT(A) noted that payments made by the assessee were advances for acquiring capital assets in the future, thus not eligible for depreciation.

2. Alternative Claim for Deduction of Lease Payments as Revenue Expenditure:
The assessee alternatively argued that if depreciation was disallowed, the lease payments made to DMRC should be treated as revenue expenditure. The CIT(A) partially accepted this, allowing the interest component of the lease payments as revenue expenditure but disallowing the principal component, considering it a capital advance.

Tribunal's Findings:
The Tribunal examined the nature of the lease agreement to determine whether it constituted a financial lease or an operating lease. Key considerations included:
- The lease was non-cancellable with a fixed obligation for lease payments.
- The lease period matched the repayment period of the buses' cost.
- The assessee bore all costs related to insurance, maintenance, repairs, and taxes, indicating that risks and rewards of ownership vested with the assessee.

The Tribunal referenced the Supreme Court's guidelines and the Special Bench's observations in similar cases, concluding that the lease was a financial lease. Consequently, DMRC retained the title of the buses merely as security for repayment, and the assessee was deemed the real owner for tax purposes.

Judgment:
The Tribunal allowed the assessee's claim for depreciation on the leased buses, setting aside the lower authorities' orders. Given this decision, the alternative claim for treating lease payments as revenue expenditure became redundant.

Conclusion:
The appeal was allowed, granting the assessee the right to claim depreciation on the leased buses. The Tribunal's decision emphasized the substance over the form of the lease agreement, recognizing it as a financial lease and thus entitling the assessee to depreciation. The alternative plea for revenue expenditure was rendered moot due to the favorable ruling on depreciation.