2016 (8) TMI 1093 - AT - Income Tax

Claim for depreciation on the leased vehicles - Held that - The economic life of the vehicle depends also on its user and that a period of five years coupled with extensive user may exhaust the life of a vehicle and in any case with reference to a particular (standard) operating efficiency. Even so the fact remains that the assessee extends various lease terms to its clients and two a higher term opted by a lessee would necessarily imply a low salvage/sale value so that the assessee is entitled to recover the principal (along with profit) so that its claim for depreciation which is a charge toward the capital consumed would be in any case exigible; the only caveat being that in such a case i.e. where the depreciation is preferred on the basis of the accounting theory the same shall have to be on a systematic basis and not necessarily at the rates as defined under the Act. The insurance premium though recovered from the lessee (as part of fleet management charges) is the obligation of the lessor whose name is shown therein as the beneficiary. Confirmation from all major clients also stands furnished before the AO. In our view therefore the finding by the ld. CIT(A) of the character of the lease as an operating lease cannot under the circumstances be faulted and the assessee accordingly entitled to it s claim for depreciation on the leased vehicles. Transfer (of a part) of fleet management charges to maintenance accounts - Held that - We observe several expenses forming part of the fleet management services viz. providing relief vehicles drivers emergency breakdown services door to door services etc. and which are essentially period costs so that all such costs which do not exhibit a pronounced increase with time i.e. in relation to the age of the corresponding vehicle would not be subject to such appropriation. The AO s finding shall further include that in respect of reversal of the credit (on the basis of the rule being purportedly followed) as well. Reference to the said rule we may add is only toward the assessee following a scientific basis in allocating the revenue over the term of the lease and accordingly would stand to be examined by the A.O. and the allowance of the assessee s claim by us is subject to his returning positive findings. We decide accordingly.

Summary

Issues Involved:
1. Depreciation on lease assets
2. Transfer of a part of fleet management charges to maintenance accounts

Issue-wise Detailed Analysis:

1. Depreciation on lease assets:

The assessee, engaged in providing vehicles on an operating lease basis, claimed depreciation on the leased vehicles. The Assessing Officer (A.O.) disallowed this claim, arguing that the vehicles were registered in the name of the lessee, indicating ownership by the lessee. The CIT(A) allowed the claim, determining that the lease agreements were operating leases, making the assessee the real owner of the vehicles. The Revenue appealed, contending that the vehicles were not registered in the assessee's name and were delivered directly to the lessees.

The Tribunal examined the nature of the lease agreements, referencing the Master Lease Agreement (MLA) and operating lease agreements, and concluded that the leases were indeed operating leases. The Tribunal noted that the vehicles' registration in the lessees' names was for compliance with the Motor Vehicles Act, 1988, and did not affect the ownership status. The Tribunal relied on the legal principle that the substance of the transaction, not its form, determines ownership. It was established that the lessees did not claim depreciation, and even if they did, it would be disadvantageous for them as lease rentals include a profit element exceeding depreciation.

The Tribunal upheld the CIT(A)'s decision, affirming that the leases were operating leases, and the assessee was entitled to claim depreciation on the leased vehicles. The Revenue's appeal was dismissed.

2. Transfer of a part of fleet management charges to maintenance accounts:

The assessee argued that repair and maintenance costs increase over time, while revenue from fleet management charges is collected uniformly throughout the lease term. The assessee proposed that the excess revenue received in the initial years should be treated as an advance and appropriated to a reserve account, aligning with Accounting Standard (AS) 9. The Revenue disagreed, stating that the received amount did not carry any concomitant obligation, and each year's income should be assessed independently.

The Tribunal considered the assessee's method of accounting, which involved calibrating receipts to match anticipated future costs. This method was found to be in line with AS-9, as it matched revenue recognition with the incurrence of costs. The Tribunal provided an example to illustrate the process, where excess revenue in the initial years was transferred to a reserve account and later reversed when actual costs exceeded the average charge.

The Tribunal approved the assessee's accounting treatment in principle, subject to verification by the A.O. The A.O. was instructed to ensure that the reserve account was reversed over the lease term and that the costs logged vehicle-wise matched the revenue appropriated. The Tribunal emphasized that the method should only apply to costs that increase with time and not to period costs like providing relief vehicles or emergency services. The assessee's appeal was allowed for statistical purposes, pending verification by the A.O.

Conclusion:

In conclusion, the Tribunal upheld the assessee's claim for depreciation on leased vehicles, confirming the leases as operating leases. The Tribunal also approved the assessee's method of accounting for fleet management charges, subject to verification by the A.O. The Revenue's appeals were dismissed, and the assessee's appeals were allowed for statistical purposes.