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TMI Blog2012 (3) TMI 212X X X X Extracts X X X X X X X X Extracts X X X X ..... f India & Ors (2010 - TMI - 78066 - Supreme Court Of India), and Asea Brown Boveri Limited v. IFCI (2004 - TMI - 106804 - Supreme Court Of India), lease agreement under consideration is that of finance lease and not operating lease. Only the lessee can be treated as owner of the asset in case of a finance lease and is entitled to claim depreciation as per law. No depreciation can be allowed to the lessor in case of a genuine finance lease. Reality Behind Present Lease Agreement – Held that:- A bare perusal of various clauses of the agreement clearly transpires that this lease agreement has been entered into with the sole purpose of enabling the assessee to artificially fulfill the twin requirements of ownership and user of the asset so as to claim depreciation, to which it was not otherwise entitled as per law and thereby reduce its income in a mala fide manner. The law permits tax planning and not tax avoidance. Therefore, it is held it was a case of mere advancing of loan by the assessee to Indo Gulf Fertilizers. There was, in fact, no genuine leasing of boiler, neither operating nor finance. In that view of the matter also no depreciation is admissible to the assessee-lessor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Rs. 19.45 crore; and Depreciation claimed in this year is Rs. 9.72 crore. On being called upon to substantiate the allowability of depreciation allowance on this lease transaction entered into with Indo Gulf Fertilisers and Chemical Corporation on 04.09.1997, the assessee furnished copy of Lease agreement, Purchase bills, Details of payment made to the supplier and also the details of Delivery challans. The assessee claimed that since he was the rightful owner of the asset, therefore, claim for depreciation was allowable. The Assessing Officer did not accept the assessee s contention for the reasons which can be summarized as under:- i. The assessee never got the possession of the asset, which is boiler in this case. It was a case of full payout. ii. The risk and rewards incidental to the ownership vested with the lessee. iii. The entire transaction was on paper for the purpose of claiming depreciation by the assessee. iv. The lease was for a fixed term and after the expiry of the lease period, the asset was sold back to the lessee. v. The assessee s only concern was to recover the periodic lease rentals. It was not interested in user of the asset in any manner. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cide the controversy, we need to appreciate the true meaning and purport of the term lease . Section 105 of the Transfer of Property Act, 1882 defines lease. It provides that a lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. From the above definition it can be seen that the fundamental characteristic of any lease is to separate the use from ownership of the assets. As per the above section 105 of TPA a person owning the asset, called the 'lessor , provides the asset for use for a certain period of time to another called the 'lessee for some consideration. In the present commercial world, there are different types of leases such as finance lease, operating lease, deferred lease, skip lease, sale and lease back etc. Presently we have been called upon to concentrate only on the finance and operating lease, as the assessee is claiming it to be a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. In this Accounting Standard a 'Finance lease has been defined as : 'a lease that transfers substantially all the risks and rewards incident to ownership of an asset and 'Operating lease as 'a lease other than finance lease . Para 6 of this Accounting Standard provides that a lease is classified as finance lease if it transfers substantially all the risks and rewards incident to ownership. Title may or may not eventually be transferred. Para 8 of this AS illustrates certain situations normally leading to a lease being classified as a finance lease, as under :- (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; (c) the lease term is for the major part of the economic life of the asset even if title is not transferred; (d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial lease period of 5 years. Due to certain illegal transactions, M/s. Fairgrowth Financial Services Limited became a notified party. The Central Government appointed IFCI as the Custodian over the properties belonging to Fairgrowth. ABB Ltd. continued to make payments to IFCI in place of Fairgrowth as per lease finance agreement. ABB sent a communication to IFCI clarifying that they would be entitled under the agreement to the amounts on account of security deposit and interest thereon at the time of buy back or purchase of leased asset. Certain amount was paid by ABB Ltd. to IFCI which squared up the liability for payment and demanded that the said 56 cars be transferred in its favour by IFCI which had taken over the properties of Fairgrowth. The Special Court refused to treat the transaction between ABB and Fairgrowth as one of lease finance and instead treated it to be a transaction of lease only i.e. ABB Ltd. holding 56 cars as lessee of Fairgrowth. The Hon ble Supreme Court, after analyzing the meaning of finance, finance lease and operating lease in great depth, directed to deliver the possession of cars to ABB Ltd. In reaching this conclusion, the Hon ble Summit Court thoro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one term or divided into two terms with clause for renewal. In either case, the lease is non-cancellable. 5.8 The learned AR strongly objected to the lower authorities rejecting assessee s claim of depreciation on leased assets under the Income-tax Act, 1961 (hereinafter also referred to as the ' Act ) by taking support from the proposition laid down in the case of Asea Brown Boveri Limited (supra). He argued that this case has been decided under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992, which is an altogether different enactment, not in pari materia with the Act. He submitted that there is no definition of operating lease or finance lease under the Act so as to mark distinction between the two. Referring to Direct Tax Code Bill, 2010, the learned AR stated that clause 314(101) specifically defines finance lease to mean a lease transaction satisfying certain conditions as expressly provided. He further referred to clause 37(4) of the Code in which it has been provided that a business capital asset shall be deemed to be owned by the person if he is lessee in terms of a financial lease. In the absence of any such definition under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration of relevant aspects of the matter, has laid down guiding principles for deciding as to whether a particular lease is operating or finance. The meaning to the finance lease so ascribed by the Hon ble Supreme Court in the case of Asea Brown Boveri Limited (supra) is of universal application except where it has been otherwise defined in any statute. In such a situation we do not find any reason to observe departure from the general concept of finance lease as laid down by the Hon ble Supreme court in ABB Limited (supra) under the Income-tax Act, 1961. 5.10 There is no dearth of judicial precedents holding that the general meaning of a word or phrase or expression as assigned by the Hon ble Supreme Court under one enactment without reference to any specific provision therein is binding under another enactment which again does not specifically define such word or phrase or expression. One such case is the judgment of the Hon ble jurisdictional High Court in Avinash Bhosale v. Union of India Ors. [(2010) 322 ITR 381 (Bom.)]. In that case the petitioner was carrying dutiable goods on which duty was not paid. He was arrested by the Directorate of Revenue Intelligence. The bail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted with power to seize documents. While interpreting section 104 of the Criminal Procedure Code, which categorically deals with power of the court to impound documents, it is held that document does not include a passport. If by an interpretative process the apex court has held that even a court cannot impound a passport, then, it would be highly inappropriate to interpret the term "documents" used in section 131(3) of the Income-tax Act, so as to enable the executive authorities to impound the passport. 5.11 From the above judgment of the Hon ble jurisdictional High Court, it is apparent that when the Hon ble Supreme Court has interpreted or explained a particular term or phrase under one enactment, it cannot lie in the mouth of the lower authorities to interpret such term or phrase in a different manner under another enactment unless the context of such other enactment otherwise requires. Coming back to the facts of the instant case, it is noticed that the Hon ble Supreme Court in the case of Asea Brown Boveri Limited (supra) has given a meaning to the concept of finance lease . Further such meaning has been given without any definition of finance lease in the Special Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven though the title may or may not be eventually transferred to the lessee. In the case of finance lease the lessee could use the asset for its entire economic life and thereby acquires risks and rewards incidental to the ownership of such assets. In substance, finance lease is a financial loan from the lessor to the lessee. On the other hand an operating lease is a lease other than the finance lease. Accounting of a finance lease is under AS-19, which as stated above, is mandatory for NBFCs. It is a completely different regime. According to Chitty on Contract, a hirepurchase agreement is a vehicle of instalment credit. It is an agreement under which an owner lets chattels out on hire and further agrees that the hirer may either return the goods and terminate the hiring or elect to purchase the goods when the payments for hire have reached a sum equal to the amount of the purchase price stated in the agreement or upon payment of a stated sum. The essence of the transaction is Bailment of goods by the owner to the hirer and the agreement by which the hirer has the option to return the goods at some time or the other. Further, in the bailment termed hire the bailee receives bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d other related costs and expenses for the leased equipment. - Though the equipment is chosen by the lessee but the payment to the supplier is made by the lessor. Thus it is the lessee who chooses the assets, takes delivery, enjoys the use of the asset, bears its wear and tear. It is the lessee who becomes the real owner of the asset. - It is the lessee who pays taxes etc. in relation to such asset. - The risks and rewards incidental to the ownership vest with the lessee. - The features of bailment are absent in such a lease. - The lessor simply holds the title of asset as his security till his investment and interest thereon is recouped. The lessor is only symbolic owner during the period of lease and on the expiry of lease period, even such symbolic ownership also comes to an end. 5.15 Now we will proceed to examine the nature of present lease agreement which was entered into on 4th September, 1997 between the assessee and M/s. Indo Gulf Fertilizer Chemical Corporation Limited, a copy of which is available at pages 91 onwards of the paper book, to determine whether or not it substantially satisfies the conditions of finance lease. a. Lease agreement is non-cance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rore. When we compare the cost of the asset vis- -vis lease rental over the period of lease period, it becomes absolutely clear that the period of lease is equal to or very close of the economic life of the asset and the assessee has recovered its principal amount along with interest within the lease period of 7 years. In order to ensure that there is no difficulty in recovering the cost of the asset plus interest over a period of 7 years, the assessee has obtained post-dated cheques towards lease rentals. c. Sale of asset to lessee at the end of lease period at a pre-determined price. It is further relevant to note that it has been decided between the assessee and Indo Gulf that the asset would be sold to the latter at the end of the lease period at a fixed residual value equal to 1% of the cost of the asset. This pre-determined residual value clause has been inserted to ensure that the assessee must necessarily part with its formal ownership of the boiler at the end of the lease period so that the lessee becomes absolute legal owner apart from the existing real owner. It can be noticed from the Synopsis given by the ld. AR that on 29.03.2005 i.e. at the end of the lease period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to return such amount to lessee or adjust the amount so received towards lease rentals etc. It indicates that the onus of paying the insurance premium in respect of the boiler has been put on the lessee and not the lessor. e. It is the lessee who has to choose the equipment. The lessor has no role in the selection of equipment or supplier or to settle other terms and conditions including warranties etc. In this regard Clause 15.1of the agreement is relevant which reads as under:- The Lessor hereby appoints the Lessee as its agent to inspect and receive delivery and installation of the Equipment from the Acceptance of manufacturer. By accepting the Equipment, Lessee shall be deemed to have examined the Equipment and to have found it complete, in proper order and condition and entirely fit for its purpose and the Lessee does not and will not, at any time, have any claim against the Lessor in respect of or arising out of the Equipment. From the above clause it is apparent that not only the equipment to be leased shall be finalized by the lessee but it is the lessee who has undertaken to inspect and receive the delivery and installation of equipment directly from the manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rstood as not being covered under the existing Sales-tax Law but it has been agreed that in case sales-tax becomes payable on this transaction under any circumstance, it will be the liability of the lessee and not the lessor. In case lessor is forced to pay such salestax, he shall be entitled to recover it from the lessee. Further all rates and taxes, licenses, fees, surcharge, registration charges etc. in respect of equipment shall be paid by the lessee. It is important to note that apart from paying all taxes, it is the lessee who shall be responsible to obtain and keep alive all necessary licenses, permissions etc. in connection with installation and usage of the equipment. It is, therefore, abundantly borne out that the lessee has been made responsible to pay all taxes and obtain all the licenses and permissions in connection with the equipment. g. Elements of bailment missing Operating lease can be well equated with the bailment. Section 148 of the Indian Contract Act, 1872 defines 'Bailment as : the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... damage Destruction or to or the destruction of the Equipment or any of damage to the its integral parts due to any reason or cause Equipment whatsoever or due to its or any of its parts being rendered unfit for use or operation for any reason whatsoever and no such loss of or damage to or destruction of the Equipment or any of its parts shall impair / release or discharge the Lessee of its obligation to duly pay the lease rentals and observe and perform the terms and conditions herein contained. In the event of such loss or damage, the Lessee shall after obtaining the Lessor s prior consent in that behalf, at his (Lessee s) cost, replace the Equipment or the parts thereof as the case may be of Equipment or parts thereof of the same or like design and make, which in the opinion of the Lessor, are in good working order and condition and in all respect, comparable to the one to which loss / damage occurred or which are rendered unfit for the use or operation . 14. The Lessee shall indemnify and keep indemnified the Lessor, at all times, against any loss or seizure of the Equipment under distress, execution or other legal process or destruction or damage to Third Party Claim the Eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be observed that it is the lessee alone who has the right to use the asset not only during the period of lease of seven years but after that also as the agreement itself provides for sale of the boiler to Indo Gulf after the expiry of the lease period at a pre-determined value of 1% of the cost of asset. The assessee cannot cancel the lease period at his option and repossess the asset at any time. It is only the lessee who has to decide about the user of the asset. He has got the exclusive right to use the asset. Irrespective of the fact whether the boiler is used or not or even kept idle for a fairly long period, the assessee cannot compel him in any manner either to use the boiler or return it. Whether there is any appreciation or depreciation in the value of boiler, it is only the lessee who has to share the benefit or take the risk. The assessee-lessor has no authority whatsoever to lease out the boiler to anybody else during or after the lease period of 7 years. Any other benefit such as the right to claim damages, warrantees, etc. from the supplier also vest with the lessee alone. The assessee can in no case claim any subsidiary or other benefit attached to the ownership of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or shall be deemed to be the agent of the Lessor for any purpose and no liability shall attach to the Lessor for any conditions, warranties or representations made by such dealer or supplier or persons in their employment . The above clauses make it clear that any loss to the boiler even in the transit shall be borne by the lessee and not by the assessee-lessor. It is further important to note clauses 9.1 and 9.2 of the agreement as extracted above to the effect that the lessee shall bear all rates, taxes and other charges and if by any reason whatsoever any further statutory liability arises, it shall be the lessee alone who shall pay such taxes and if the lessor has already paid it shall be reimbursed to him. From the above, it becomes clear that the risks and rewards of the ownership of the asset vest with the lessee and the assessee-lessor is not entitled to any reward or liable for any risk attaching to the boiler. 5.16 The above discussion in the light of the relevant clauses of the agreement fairly indicates that all the criteria of finance lease are fully satisfied in this case. Lease agreement is non-cancellable for a period of seven years and thereafter the leased a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards certain clauses of the agreement which in his opinion go to prove that it is a case of operating lease and not finance lease agreement. i. The preamble of the agreement provides that the lessor has agreed to purchase and let on lease the equipment to the lessee subject to the conditions stated in agreement. As per the learned AR it is the lessor who agreed to purchase the boiler ; in fact purchased; and thereafter let it on lease to the lessee. ii. As per clause 3.4 the lessee shall not claim depreciation but it shall be the lessor who will be entitled to claim such allowances. It was argued that only an owner of an asset can claim depreciation. Since the agreement unequivocally states that the depreciation shall be claimed by the lessor and not the lessee, it was put forth that it showed the lessor as the real owner. iii. Clause 3.5 of the agreement clearly mandates that 'the lessee is not the owner of the Equipment . iv. Clause 5 states that lessee shall affix a name plate or other mark on the equipment identifying the sole and identification exclusive ownership thereof of the lessor and not allow or permit the same to be removed or defaced. v. Clause 6 states ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest. d. Operating lease is cancellable, whereas finance lease is always noncancellable. In a case of finance lease, the lessor is interested in lease rentals and not the asset. e. In the case of an operating lease, substantial risks and rewards of ownership of the asset remain with the lessor, whereas in the case of finance lease these ab initio vest with the lessee. f. In the case of an operating lease, the fixation of lease rental bear no symmetry with the economic life of the asset and the possibility of the asset reverting back to the lessor can never be ruled out. However in the case of a finance lease, the lease period is ordinarily equal to the economic life of the asset and lease rentals are fixed in such a way so as to recover the investment with interest during the lease period itself. The possibility of the asset reverting back to the lessor is never there. g. In the case of an operating lease, the asset is ordinarily common use utility whereas in case of finance lease the asset is normally selected by the lessee himself so as to suit his particular requirements. h. Normally an operating lease is non payout whereas a finance lease is full payout. Full payout ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease agreement as a whole, we find that except for naming the lessor as owner at some places in the agreement and inserting certain cosmetic clauses to give the colour of operating lease, there is nothing in substance which satisfies the inherent requisites of operating lease. It can be observed that the lease is not cancellable prior to the expiry period of seven years. The cost of repairs and insurance is to be borne by the lessee. Sum total of the lease rentals by the lessee recoups the amount invested by the lessor plus interest. There is a clause that after the expiry of seven years period, the boiler will be sold to the lessee at predetermined value. It is the lessee who has to bear the loss due to obsolescence. All the risks and rewards vest with the lessee. When we consider the cumulative effect of all the factors for and against the operating lease, it can be easily found out that if one has to choose between the finance lease and operating lease, there can be no difficulty in reaching the irresistible conclusion that it is a case of finance lease agreement. In pith and substance this agreement is nothing but a finance lease. 5.24 Our view is fortified by the RBI Circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rental should not be taken to the bank s income account. Only the interest component being the finance charge should be taken to the income account and the second component being charge towards recovery of the cost representing the replacement cost of the asset should be carried to the balance sheet in the form of a provision for depreciation. Para 1(vi) states that as a prudent measure full depreciation should be provided for during the preliminary lease period of the asset. It is impermissible to read para 1(vi) of the Circular in isolation to support the contention that the RBI permits claiming depreciation on the leased assets. It is in fact not so because the Circular as a whole treats the activity of equipment leasing as that of loans and advances and the reference to full depreciation in para 1(vi) should be read in juxtaposition to para 1(v) which talks of the second component of the lease rental being the replacement cost of the asset. When we read this Circular in entirety, there remains no doubt that the activity of equipment leasing has to be considered by a bank on par with the loans and advances. 5.26 In view of the above circular we do not find any scope for argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of section 32, being the ownership and user of the asset, have been satisfied by the assessee in the instant case, he urged that there can be no question of denying depreciation to the assessee. He further invited our attention towards a Circular of CBDT mandating that an integrated approach should be adopted so that the depreciation is not denied to both the parties. It was put forth that since the lessee had not claimed any depreciation, the assessee s right to such depreciation on the leased asset cannot be justifiably denied. Per contra, the ld. DR relied on the orders of the authorities below in support of his contention that the depreciation has been rightly not allowed. 6.2 We have heard the rival submissions on this issue and perused the relevant material on record. In the earlier part of the order we have held, on the perusal of terms and conditions of the agreement, that it is an agreement of finance lease and not operating lease. Now the question which looms large is - Whether any depreciation can be allowed to lessor in case of a genuine finance lease ? Allowability of depreciation is governed by section 32. The twin conditions of ownership and user of asset for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was held to be owner of the property as it was he who was entitled to receive income from the property in his own right . From the above judgment of the Hon ble Supreme Court it can be observed that the charge u/s 22 has been held to be attracted on a person who is entitled to receive the income from the property in his own right albeit he may not be a legal owner of such property. At the same time it is equally true that while reaching this conclusion, the Hon ble Supreme Court took into consideration the deeming provision contained in section 27(iii) to (iiib) as regards owner of house property. At this stage it will be relevant to consider the crux of the judgment reproduced as under:- We are conscious of the settled position that under the common law, owner means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of section 22 of the Income-tax Act, having regard to the ground realities and further having regard to the object of the Income-tax Act, namely, to tax the income , we are of the view, owner is a person who is entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income in the hands of the person who is entitled to receive income in his own right, has been applied on the question of allowing depreciation to a person who is entitled to hold the property to the exclusion of others though he is not a legal owner. There can be hardly any difficulty in finding an owner of a property when the person using the property in his own right as owner (i.e. real owner) also happens to be the legal owner. In such a case the real owner is both a de facto and also de jure owner of an asset. But the problem arises in a case when there are apparently two simultaneous owners of the same property at the same time, viz, the de facto owner and de jure owner. Difference between the de facto owner and de jure owner has been highlighted by the Hon ble Supreme court in the above two cases. The crux of these judgments is that in such a case it is the de facto owner, entitled to hold the property in his own right and entitled to receive income therefrom in his own right, who is to be treated as the real owner of the asset for the purposes of the Income-tax Act, unless stated otherwise in relevant provision, in preference to the one who is simply a de jure owner, not e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e asset in sale and lease back transactions. It is pertinent to note that Sale and lease back is a transaction in which the asset is transferred to the lessor first and the seller of the asset becomes lessee subsequently. It is in contradistinction to the finance lease in which there is no such transfer of the same asset first to the lessor. The asset is purchased by the lessee but the finance is provided by the lessor. The lessor holds only the symbolic ownership of the asset, which is in essence a security for the return of his investment. The position of depreciation in case of finance lease on one hand and on sale and lease back on the other, is quite different. Section 43(1) defines "actual cost" to mean ' the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority .. . Explanation 4A provides that : 'Where before the date of acquisition by the assessee (hereinafter referred to as the first mentioned person), the assets were at any time used by any other person (hereinafter referred to as the second mentioned person) for the purposes of his business or profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. VS. CIT (2009) 309 ITR 434 (SC). In that case there were two transactions of lease. The facts of the first transaction of lease dated February 15, 1991 were that during the year in question, the assessee lessor had bought 5,46,000 soft drink bottles from G. These bottles were directly supplied to C (the lessee) in terms of lease dated February 15, 1991. Vide assessment order dated March 28, 1994, the Assessing Officer found that C had received only 42,000 bottles out of the total of 5,46,000 bottles receivable by them from the assessee and that the remaining bottles stood received after March 31, 1991. Consequently, the Assessing Officer allowed depreciation only on 42,000 bottles and consequently disallowed the depreciation on remaining bottles. The CIT(Appeals) after formulating the user test remanded the matter to the Assessing Officer, who on remand held that all 5,46,000 bottles stood paid for and dispatched before March 31, 1991, and, therefore, the assessee was entitled to 100 per cent depreciation on all 5,46,000 bottles. This finding was given when the appeal was pending before the Income-tax Appellate Tribunal. The Revenue did not challenge this finding of the AO on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing lease and not in any financial arrangement, which resembles with the finance lease. 6.10 There was also a second transaction of lease dated March 15, 1991 in that case before the Hon ble Supreme Court in which the assessee lessor entered into a lease agreement with lessee A and such lessee entered into sub-lease agreement with U. The Assessing Officer came to the conclusion that the transaction dated March 15, 1991, was not proved by the assessee and, therefore, the assessee was not entitled to depreciation. He disallowed depreciation to that extent. This finding was accepted by the Tribunal and the High Court. Apart from claiming that it was a genuine transaction, the assessee also contended before the Hon ble Supreme Court that that, if the said transaction was a financial arrangement, as held by the Department, then the assessee could be taxed only on interest embedded in the amount of lease rentals received from the lessee. Repelling both the contentions, Their Lordships held that the transaction dated March 15, 1991, was not proved. Therefore, the Assessing Officer was right in disallowing depreciation to that extent. From the above discussion it can be noticed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be seen that the act of the lessor in leasing the property to the lessee has been held to be satisfying the second condition of user of property. This judgment in no way decides the question of the lessor s ownership in the context of finance lease. Rather it was a case of operating lease. It is only when the first condition for the allowability of u/s 32(1), being the ownership of an asset is satisfied, that there can arise any question of considering the second condition, being user of asset for business purpose. In the instant case the assessee-lessor cannot be described as the actual and real owner of the property. His ownership is only nominal or perceived. Due to non-satisfaction of the first condition itself, being the ownership of property by the lessor, in our considered opinion, no depreciation can be allowed to the assessee u/s 32(1). 6.12 The learned AR also argued that the Board Circular talks of adopting an integrated approach in the case of leasing and in any case depreciation has to be allowed either to the lessor or to the lessee. It was argued that since the lessee had not claimed any depreciation, the lessor should be granted depreciation on the leased asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be allowed to a wrong person. The judgment in the case of Mysore Minerals (supra) recognizes a person as an owner who is in possession of property in his own right exercising such dominion over the property as would enable others being excluded there from. In a lease transaction also there can be only one owner of the asset, that is, either the lessor or lessee and not both of them or either of them at their discretion. Whereas in the case of operating lease, it is the lessor who is the real owner of the asset, but in case of finance lease, it is the lessee who is to be regarded as the real owner of the asset. Ex consequenti only the lessor can claim depreciation in case of an operating lease and the lessee in a case of finance lease. There is no question of deciding between the lessor and the lessee, as to who should be conferred the benefit of depreciation allowance. Adverting to the facts of the instant case, it can be seen that it is a case of finance lease agreement. The only and the inescapable conclusion which in our considered opinion follows is that the real owner of the leased property is Indo Gulf Fertilizer Chemical Corporation Limited and not the assessee. We, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1955 amounted to a joint venture for the distribution of profit. The Hon ble High Court decided in favour of the assessee by holding that the payments amounted to a legitimate deduction. When the matter came up before the Hon ble Supreme Court, it considered clause no.7 of the agreement which talked of commission at 1 % on the net proceeds of sales of all goods and 50% commission of the net profit of the worsted plant. It was observed that the conduct of the agent in sharing half of the net profit did not appear to be consistent with the payments made to the agent for the services rendered. The clause regarding such payment was found to be peculiar to the agreement alone and it was held that : the Court in order to construe an agreement has to look to the substance or the essence of it rather than to its form. The party cannot escape the consequences of the law merely by describing an agreement in a particular form though in essence and in substance it may be a different transaction . Similarly in the case of Controller of Estate Duty v. Aloke Mitra [(1980) 126 ITR 599 (SC)] the Hon ble Supreme Court has held that : In applying the Act to any particular transaction, regard mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease agreement it has been held above that such agreement is in essence of finance lease and not operating lease. This case has certain exciting facts which cannot be lost sight of. Copy of the lease agreement dated 4th September, 1997 is available in the paper book. The opening para of the lease agreement reads as under:- AND WHEREAS the Lessor has agreed to purchase and let on lease the Equipment to the Lessee upon and subject to the following terms and conditions. 7.5 Further clause 15.1 provides that the lessor hereby appoints the lessee as its agent to inspect and receive delivery and installation of the equipment from the acceptance of manufacturer. 7.6 When we consider the above parts of the lease agreement dated 4th September, 1997, it becomes clear that the lessor agreed to purchase and let on lease the boiler to the lessee. A simple and plain reading of the above portions of the lease agreement makes it crystal clear that all the units of boiler were to be purchased on or after entering into this agreement on 4th September, 1997. On reading the above clauses, one can never contemplate that such boiler could have been purchased and leased to lessee even before ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as made prior to the date of the lease agreement then how it could have been mentioned in the lease agreement that the lessor has agreed to purchase and let on lease the equipment to the lessee. The further fact that initially short term loan of Rs. 19.00 crore was sanctioned by the assessee to Indo Gulf Fertilizer Chemical Corporation Limited which as per the learned AR s version was later on converted into lease, evidently destroys the theory of genuine lease. In fact, it amply proves that it was a case of mere loan granted by the assessee to the Indo Gulf Fertilizer Chemical Corporation Limited and later on the lease agreement was formally executed to give such a loan transaction the colour of lease. Let us further consider the relevant part of clauses 3.3 and 3.4 of the agreement as under:- 3.3 Under the applicable provisions of the Income Tax Act, 1961 and the rules made thereunder and the relevant Finance Act as prevalent at present, the Lessee would have been entitled to and could have claimed depreciation at the rates prescribed thereunder if it had bought the Equipment and was using and operating the same as the owner thereof. 3.4 The Lessee shall not be liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This contention of the ld. AR appears attractive at the first blush but, on closer examination, falls to the ground. It can be observed from the assessment order that the assessee filed its return declaring total income of Rs. 100.78 crore after claiming the said depreciation. On the other hand, the so called lessee i.e. Indo Gulf Fertilizer Chemical Corporation Limited had accumulated brought forward losses and they filed loss return. This fact is apparent from para 2.21 of the assessment order. The learned AR was fair enough to concede that Indo Gulf Fertilizer Chemical Corporation Limited had brought forward losses and there was no positive income for the year. The hard realities of the case cannot be lost sight of and the Tribunal cannot act as a mute spectator to this ongoing by ignoring the glaring reality which can be seen even with the naked eyes. The attending circumstances of the case run in complete contradistinction to the cloak of lease agreement which has been used by the assessee in connivance with Indo Gulf Fertilizer Chemical Corporation Limited as a dubious way to mitigate the rightful tax liability. When we find that the tax neutrality argument as neutral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated as owner of the asset in case of a finance lease. It is he who is entitled to claim depreciation as per law. No depreciation can be allowed to the lessor in such a case of a genuine finance lease. (iii) The facts and circumstances of the present case show that it was a case of mere advancing of loan by the assessee to Indo Gulf Fertilizers. There was, in fact, no genuine leasing of boiler, neither operating nor finance. In that view of the matter also no depreciation is admissible to the assessee-lessor. 10. Before parting with this appeal, we record our deep appreciation for illuminating arguments put forth on behalf of the learned counsel from both the sides on the issue in appeal. Further we want to make it clear that the ratio decidendi of all the decisions relied on by both the sides has been duly taken into consideration while passing this order. However, we have desisted from specifically referring to certain cases relied on by both the sides in the present order either due to their irrelevance or of the repetitive nature. 11. Having answered both the questions in the above terms, we direct the listing of these two appeals before the Division Bench for disposing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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