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TMI Blog2020 (10) TMI 529X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed deduction of interest paid to assessee. Moreover, the assessee has produced the certificates from the lessee that they have not claimed any depreciation on these assets, which are owned by the assessee. No material contrary to the above facts was shown by the revenue. We direct the learned assessing officer to delete the disallowance of depreciation on plant and machinery as claimed by the appellant on plant and machinery given and leased various parties. - Decided in favour of assessee. - 1200/DEL/2011, 1201/Del/2011 - - - Dated:- 31-8-2020 - MS SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For the Assessee : Shri saurav Sood Adv, Shri Shahsnk Sharma Adv Ms Subhshree Rao Adv For the Revenue : Shri Samar Bhadra CIT DR ORDER Per Prashant M Maharishi, Accountant Member 1. This is are the two appeals for two assessment years involving common grounds, argued together by both the parties, therefore, and disposed of by this common order. ITA number 1200/Del/2011 for assessment year 1999- 2000 2. This appeal is filed by IFCI Limited ( the Appellant ―Assessee) for assessment year 1999 -2000 again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year (AY 1999-2000) under consideration the Appellant offered income from operations including lease rentals to tax. The leased assets, namely, plant and machinery have been shown separately in the balance sheet and depreciation thereon of INR 25,98,39,387/- had been claimed. The Assessing Officer (Ld.AO ) passed assessment order dated 28.03.2002 under Section 143(3) of The Act assessing the income at loss of ₹ 584,33,29,556/- disallowing the depreciation on leased assets claimed by the Appellant. The Ld.AO was of the view that the transaction was a finance transaction and stating that the depreciation had been disallowed in earlier years, the depreciation of the Appellant was disallowed for AY 1999-2000. 6. On Appeal, The Ld. CIT(A) had however allowed the deduction vide order dated 12.6.2002 following the decision of the Supreme Court in Shaan Finance (P) Ltd 231 ITR 308 (SC)and the orders in earlier assessment years. 7. On appeal by the department (respondents) the Hon ble Income Tax Appellate Tribunal in its order dated 08.03.2006 had remanded the matter to the Ld.AO stating that the order of coordinate bench of ITAT for assessment years wherein the ITAT had decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed-] (Emphasis supplied) B.2 From the above provision, it can be inferred that in order to be eligible to claim depreciation, the asset must be either a tangible asset as per Section 32(1)(i) or an intangible asset as per Section 32(1)(ii); the asset must be owned wholly or partly by the assessee the asset must be used for the purpose of business or profession B.3 In the instant case, assets in respect of which depreciation is claimed are tangible assets and there is no dispute as regards the nature of assets. B.4 The second condition to be satisfied is that the assessee (Appellant herein) must be the owner of the asset. B.5 The common understanding of the term owner is a person who has a legal title to the assets and has the right to dispose the asset as per his will. Ownership is also understood in terms of the control, the owner may have over the object. B.6 Savigny used the terms corpus possessionis or effective control and animus domini or intention to hold as owner, to explain possession as being the culmination of both. B.7 While possession may give rise to presumption that the person in possession of the property is the owner, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the property to the exclusion of all others, such person would be owner. B.13 Further, there may be a case of a de jure owner or a owner in law with valid legal title; or a de facto owner, a owner in fact, by means of possession or control though he may not have a title to the property. For purposes of Section 32, so long as the assessee is owner either a de jure or a de facto owner and using the asset for purpose of business, he would be eligible for depreciation. B.14 In the case of the Appellant, it is the owner by title exercising effective control and at all times exercising rights as owner to sell, hypothecate, create interest which may be against the lessee and at no time the lessee can assert/claim any right except that to possession for use as permitted by the Appellant. B.15 The third condition to be satisfied is that the assessee should have used the asset for the purpose of business or profession. B.16 It is pertinent to note that the words used in the statute are use for purpose of business or profession . It is to be inferred that the assets must be used by the assessee claiming the depreciation for the purpose of its business income from which is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat where leasing of machinery is a mode of carrying on business by the assessee, the assessee would be entitled to development rebate. The Court observed, (p. 551): . . . Once it is held that leasing out of the machinery is one mode of doing business by the assessee and the income derived from leasing out is treated as business income it would be contradictory in terms to say that the machinery is not used wholly for the purposes of assessee's business. B.21 The Apex Court further held that that in case of transaction of hire which is not preparatory to sale, the owner/person letting property on hire would be eligible to claim depreciation. It referred to the earlier judgement of the Apex Court in Damodar Valley Corpn. v. State of Bihar AIR 1961 SC 440 wherein while examining whether the contract under consideration was one of hire purchase or hire it was stated that ―It is well-settled that a mere contract of hiring, without more, is a species of the contract of bailment, which does not create a title in the bailee.‖. Thus, in the case of a lease transaction, the lessor would continue to hold title in the goods as owner and if, he uses the same in his busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hom the interests are vested has 'title' to the interests whether he holds them for his own benefit or the benefit of another. Thus the term title unlike owner .. B.25 In I.C.D.S Ltd. (Supra) the revenue department sought to deny depreciation to the assessee who leased vehicles on the ground that the i. transaction was a finance transaction; ii. the assessee (lessor) was not the owner of the vehicle since they were registered in the name of the lessee under the Motor Vehicles Act, 1988; as per terms of the agreement, the lessee could purchase the same at the end of the lease term; iii. the assessee did not use the vehicles himself, B.26 The Apex Court however held that the relevant factors to determine ownership were to be seen from the agreement itself i.e. the intention of the parties at the time of entering into the agreement. It determined that the assessee was the owner of the vehicles in view of the following clauses in the contract: Moreover, the relevant clauses of the agreement between the assessee and the customer specifically provided that: (i) The assessee was the exclusive owner of the vehicle at all points of time; (ii) If the lesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the classification adopted by an assessee. However as clarified by the CBDT the accounting treatment cannot determine the eligibility to claim depreciation under the Act. B.31 Thus, in order to determine eligibility under the Act to claim depreciation in the case of a lease transaction, the terms of the agreement would be relevant. In layman terms, a lease is a transaction wherein the lessee (user) pays for use of the asset and there is no transfer involved. It is not a transaction of sale. B.32 A hire purchase transaction is one wherein the owner (dealer, manufacturer of goods) offers the goods for use in exchange for payment of hire charges and the hirer has an option to purchase the goods on payment of last installment of the hire purchase price, which may include interest charges. A hire purchase transaction has element of bailment and sale. The title in goods would pass only after the hire purchase price is paid. B.33 In case there is no transfer, the contract would be one of hire and not hire purchase. According to Ramanatha Aiyer s Law Lexicon, 4th Edition, 2010, a hiring contract is one by which one gives to another the temporary possession and use of property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the property remains the owner. An element of sale or permanent transfer may be combined with hire or lease as part of a transaction to provide financial support to a person who cannot or does not wish to acquire the asset. This may take the form of a loan simpliciter, a loan with charge on property to secure repayment or recovery of outlay. B.39 The Ld. AO and CIT (A) have classified the transaction as a hire purchase cum finance transaction. The transaction between the Appellant and the lessee is one of leasing and not a purely financing activity. The lease agreement envisages return of the property/ asset at the end of the lease period. The Appellant may at the end of term sell or dispose the assets. Such buyer may or may not be the lessee itself. However, transfer of the asset after the lease period or the amount Appellant may earn from the lease transaction cannot make it a pure finance or loan transaction. B.40 In Simpson and General Finance Co. Ltd v. Deputy Commissioner of Income-tax, Co. Circle -I(2), [2014] 44 taxmann.com 7 (Madras), the High Court of Madras held that the lease transaction was not a pure finance transaction based on the following terms in the agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting that the lessor is the owner thereof and that the lessee would not remove the same. Upon termination of the lease period, the lessee shall immediately return the said property to Lessor in as good condition and received less normal wear, tear and depreciation. Clause 34 speaks about the Modification to rental payments during lease tenor. One of the Clauses under this head reads as follows: .... Without prejudice to the above, it is hereby agreed that at the option of the LESSOR the Lease Agreement will be reviewed if there is any material changes in the provisions of the Income Tax Act regarding leasing transaction. This review will also include, apart from changes in the rentals, cancelling of the Lease Agreement and replacing it with Hire Purchase transaction on mutually agreed terms. It is further agreed that if the LESSOR is refused allowances or their claims are disallowed by the Income Tax Authorities on account of the failure on the part of the LESSEE to furnish any particulars/declaration required for this purpose, the LESSEE shall reimburse the LESSOR tax, interest, penalty or any outgo accruing or arising to the LESSOR on this account. 9. On a reading of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in obtaining the hire purchase and the allied agreements were to secure the return of the loan advanced to its customer the transaction would be merely a financing transaction. [See page 75]. (Emphasis supplied) B.42 It is submitted that the Appellant has correctly reported the transaction as one of lease and offered lease rentals to income tax. The arrangement is not loan arrangement or mere finance transaction as opined by the Ld. AO and Ld. CIT (A). B.43 In the previous year relevant to AY 1999-00, the Appellant has classified the lease as a financial lease and accounted for the same accordingly. However even in the case of a financial lease if the test of ownership and use is satisfied, depreciation can be claimed. In I.C.D.S (supra), the terms of the lease agreement provided for transfer of the asset to the lessee on payment of a nominal sum at the end of the lease. However, the Apex Court applied only the tests as discussed in Para B.26 to decide the allowability of the claim of depreciation. B.44 Errors in the order of lower authorities based on erroneous understanding of facts and law: The revenue authorities analysis of the nature of the transaction in order t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of stock in trade. However, the agreement between the assessee and the buyer/lessee was termed to be a lease agreement. It is submitted that in the case of the Appellant the assets form part of block of asset and income from sales is duly recorded. The lease agreement is not a camouflage and the leased assets are not stock in trade. B.50 The case of DCIT v. M.K. Jinachandran205 ITR 328 (Ker) and Sardar Tara Singh v CIT 47 ITR 756 (MP) pertained to claim of depreciation by the hirer in a hire purchase agreement which was disallowed since the assessee (hirer) was not owner of the asset. B.51 In J.M.Share Stock Brokers v DCIT 109 ITD 329(Mum) the assessee (lessor) received security deposit to cover about 50% of the cost of the asset and the agreement between the assessee(lessor) and lessee ( who further sublet the asset) mentioned clearly that the intention is only to finance the asset. The facts are quite different from that of the present Appellant assessee wherein the objective is not to merely finance purchase of an asset but the intention is to repossess the asset and even in case of sale, the sale is recorded separately. Further, till such point of sale, the lessor-ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease of assets, whichever is higher. In schedule number XI of income from operations, the assessee has shown the lease rental income of ₹ 1 771.59 millions. At page number, 42 50 the assessee has also submitted the copies of the certificate from third parties wherein they have confirmed that they have taken certain plant and machinery on lease from the assessee and during the tendency of the lease. They have not claimed any depreciation u/s 32 of the income tax act as the ownership of the assets remained with the assessee. Assessee has also produced the copy of lease agreement placed at page number six 41 of the paper book, which has certain specific clauses tabulated by the assessee also in its return submission. 14. According to clause number 2.4 of the lease agreement it is agreed that upon termination of the agreement by a flux of time or otherwise, the lessee shall, at its own cost and expenses, forthwith deliver or cause to be delivered to the lessor the equipment, such time and place as may be directed by the lessor, in good repair, order and conditions subject to normal wear and tear. As per the article IV four of the agreement the lessee was to maintain and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spection Permit the Lessor and all person authorised by the Lessor at all reasonable times (immediately in case of an emergency) to inspect, view and examine the state and condition of the equipment Article IV 4.10 Permission to alter or improve equipment and ownership of the same Not to make any alteration, addition or improvement without prior consent of the Lessor Provided,however that all such additions, improvements and attachments of any nature what so ever, when made to the equipment by the Lessee (whether or not at its own cost or not and whether with or without approval of Lessor) shall belong to the Lessor Article IV 4.12 Lessee not to claim depreciation which is available to Lessor being owner Not to claim any relief by way of depreciation or nay other deduction allowance or grant available to the Lessor as the owner of the equipment Article IV 4.17 Lessee is agent of Lessor for purpose of taking delivery The Lessor hereby appoints the Lessee as its agent to deliver, inspect, receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of income tax (280 ITR 6) wherein the assessee was carrying on the business of leasing and finance and Co approached the assessee for release or finance for a plant which was being set up at the premises of a company. Assessee acquired the said plant and leased out to the other party upon making a symbolic possession. As per the agreement the third party had a right to purchase the plant after expiry of the stipulated period of time. The assessee claimed depreciation u/s 32 which was denied to the assessee. The honourable High Court in para number six held that assessee was the owner of the plant for the purpose of Section 32 and by leasing it out to the other party the assessee has used the plant only for the purposes of with its business for the purpose of carrying on the business of leasing and as such the income earned thereon by way of rental of the plant was a business income. Therefore the honourable court held that the ingredients of ownership and user of the plant in business as required Under the provisions of Section 32 of the act have been fulfilled by the assessee and therefore it is entitled to depreciation available to it u/s 32 of the act. 18. Further in Cosmo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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