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TMI Blog2012 (5) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Appellate Tribunal has rightly examined the facts and the issue in question while allowing the appeal of the assessee and holding that the addition of Rs.39,33,333/- towards depreciation of assets leased to HCL Hewlett Packard Limited should be allowed?" We had heard counsel for the parties on the said question. 4. The assessee is a company and for the assessment year 1994-95 had filed its return of income on 30th November, 1994 declaring income of Rs.6,09,610/-. The return of the assessee was not taken up for scrutiny and no notice under Section 143(2) of the Income Tax Act, 1961 (Act, for short) was issued within the prescribed time. Subsequently, information was received from Additional Director of Income Tax (Investigation) that a bio gas plant purchased from and leased back to Western Pacques (India) Limited, Pune was not to be found at the site, where it was stated to be installed. Accordingly, notice for reopening was issued on 28th July, 1995. In response, the assessee filed a return declaring same income and the proceedings continued. 5. Subsequently, on 30th March, 1998, the assessee made a declaration under the Voluntary Disclosure of Income Scheme, 1997(VDIS, 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evice to avoid payment of tax. The CIT(Appeals) also held that the title was never transferred to the assessee. 8. On further appeal, the tribunal has reversed the findings of the Assessing Officer/CIT(Appeals), inter alia, recording as under: "7.6 The next objection of the learned CIT(Appeals) is that the spare parts were not capable to function independently as a machine. It was pointed out by the learned counsel for the assessee that each item is excisable and is covered within the definition of machine. The learned counsel made reference to the decision of Hon‟ble Supreme Court in the case of CIT Vs. Mir Mohammad Ali (1964) 53 ITR 165 and submitted that the term "machinery" and „installed‟ should not be taken in narrow sense. After going through the decision of Hon‟ble Supreme Court in the case of Mir Mohd. Ali (supra), we find force in the submission of the assessee. 7.7 We have also examined the lease agreement. On going through this agreement, it is found that the conditions of a valid lease are fully satisfied. The assessee has also proved necessary conditions for claiming depreciation which are: (1) that it was owner of the assets leased out; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which is material. It is the use of the vehicle for the purpose of leasing which is material." 11. We have elucidated and reproduced the relevant reasoning given by the tribunal. The real issue and question involved in the present case is, whether or not the agreement in question was a finance agreement or an operating lease. The aforesaid question cannot be decided by merely looking at the title of the agreement itself or the nomenclature given to the said agreement. The terms and conditions mentioned in the agreement may be relevant but we have to also take into account the surrounding circumstances as well as the type and nature of the asset. It is this aspect which has been ignored and not given due credence. 12. The two types of transactions i.e. finance agreement and operational lease are different. Explaining this difference in Asea Brown Boveri Limited versus Industrial Finance Corporation of India and Others, (2004) 12 SCC 570 it has been observed: "13. What is a lease finance? According to Dictionary of Accounting & Finance by R. Brockington (Pitman Publishing, Universal Book Traders, 1996 at p. 136): "A finance lease is one where the lessee uses the asset for substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lessor does not rely for his profit on the rentals in the non-cancellable period." 16. The features of the financial lease, according to the learned author are as under: "1. The asset is use-specific and is selected for the lessee specifically. Usually, the lessee is allowed to select it himself. 2. The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset. 3. Therefore, the lessee bears the risk of obsolescence. 4. The lessor is interested in his rentals and not in the asset. He must get his principal back along with interest. Therefore, the lease is non-cancellable by either party. 5. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period. 6. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation. 7. The lessor is typically a financial institution and cannot render specialised service in connection with the asset. 8. The lease is usually full payout, that is, the single lease repays the cost of the asset together with the interest." 17. In our opinion, financial le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 (see Paras 36.242 and 36.243). Further, in the bailment termed "hire" the bailee receives both possession of the chattel and the right to use it in return for remuneration to be paid to the bailor (see Para 32.045). Further, under the head "equipment leasing", it is explained that it is a form of long-term financing. In a finance lease, it is the lessee who selects the equipment to be supplied by the dealer or the manufacturer, but the lessor (finance company) provides the funds, acquires the title to the equipment and allows the lessee to use it for its expected life. During the period of the lease the risk and rewards of ownership are transferred to the lessee who bears the risks of loss, destruction and depreciation or malfunctioning. The bailment which underlies finance leasing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-purchase agreement is not estopped from proving that the real bargain was a loan on the security of the goods. If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction, even though the reason for which it was entered into was to raise money. If the real transaction is a loan of money secured by a right of seizure of the goods, the property ostansibly passes under the documents embodying the transaction, but subject to the terms of the hiring agreement, which become part of the buyer's title, and confer a licence to seize. When a person desiring to purchase goods and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will unquestionably be a loan transaction. The real character of the transaction would not be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due against delivery of goods. But a hire-purchase agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there be such a purchase and sale in fact and afterwards the goods are hired, the case is not within the Bills of Sale Act. The document itself must be looked at as part of the evidence; but it is only part, and the Court must look at the other facts, and ascertain the actual truth of the case." 16. Majority further elucidated and explained the legal position as under: "28. In the light of these principles the true nature of the transactions of the appellants may now be stated. The appellants are carrying on the business of financiers: they are not dealing in motor-vehicles. The motor-vehicle purchased by the customer is registered in the name of the customer and remains at all material times so registered in his name. In the letter taken from the customer under which the latter agrees to keep the vehicle insured, it is expressly recited that the vehicle has been given as security for the loan advanced by the appellants. As a security for repayment of the loan, the customer executes a promissory-note for the amount paid by the appellants to the dealer of the vehicle. The so-called "sale letter" is a formal document which is not made effective by registering the vehicle in the na ..... X X X X Extracts X X X X X X X X Extracts X X X X
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