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TMI Blog2007 (2) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... the normal lease and financial lease . If the agreement is a financial lease, then the consequences would be governed by the decision of the Hon'ble Supreme Court in ABB's case but if it is a case of normal lease, then consequences would be governed by the earlier judgment of the Hon'ble Supreme Court in the case of Shaan Finance (P.) Ltd.[ 1998 (3) TMI 8 - SUPREME COURT] . It may also be mentioned that the learned counsel for the assessee has argued to the effect that the learned CIT(A) was not justified in allowing depreciation to the extent of 50 per cent only. He has also argued that the rate of depreciation should have been 40 per cent instead of 25 per cent allowed by the learned CIT(A). Thus, the order of the CIT(A) is set aside on this issue and consequently the disallowance of depreciation made by the Assessing Officer is restored. The grounds raised by the assessee are, therefore, dismissed while the ground raised by the revenue is allowed. Disallowance in respect of repairs and maintenance - HELD THAT:- We find that the learned CIT(A) has passed a sketchy order without giving any reason in support of his conclusion. He has also not discussed anyth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or an invoice value aggregating Rs. 3,84,20,730/-. On this amount, the assessee claimed depreciation at the rate of 40 per cent since, according to the assessee, the vehicles were ultimately used for hiring purposes. In the course of assessment proceedings, the Assessing Officer examined the terms of the lease deed and found that 50 per cent of the invoice value was received as security deposit and rental value payable was fixed at the rate of 2.2 per cent per month of the invoice value for the lease period of 36 months. In para 7 of his order, he has mentioned the broad terms of the agreement which are being reproduced for the benefit of this order as under: (a) The agreement of 18-8-1993 is a master lease agreement wherein the lessor (the assessee) agrees to lease to the lessee (M/s. Sriram Investments Ltd.) vehicles of the total value of Rs. 500/- lakhs. As and when the delivery of individual vehicles is taken, by the lessee, the lessor shall execute supplementary schedules and upon execution of the same, the lessor shall disburse an amount equivalent to the invoice value (clause 1). (b) The lessor shall deposit 50 per cent of the invoice value as security deposit at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets and consequent to the sale of leased assets and remit the consideration arising thereon to the assessee. In the letter dated 13-2-1997, it was stated by the assessee that no leased assets had been sold. However, the Assessing Officer observed that it had not been denied that it intends to sell the assets on the expiry of lease. Thus, the assessee, according to him, will also receive consideration for the sale of leased assets i.e., its residual value on the expiry of lease period. It was also observed by him that the assessee has no intention to re-acquire the leased assets on the expiry of the leased period. Thus, it was observed that the sale consideration on the expiry of lease along with interest earned on the security deposit in a period of 36 months would be sufficient to cover the refund of security deposit. At p. 7 of the order, the Assessing Officer has given certain calculations for coming to the conclusion that assessee was realising the return of 26.28 per cent per annum. In view of the facts stated above, the Assessing Officer formed the opinion that the agreement was in the nature of hire-financing instead of letting out of the assets on lease. Reliance was plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. In coming to this conclusion, the following reasons were given by him: (a) There is no immediate nexus between the user of the vehicles and the business of the assessee which by assessee's own admission, is financing the purchase of such vehicles. (b) The assessee does not have any effective control over the leased vehicles to the extent that it does not have the right to terminate the lease. (c) The assessee is not in the business of letting assets on hire nor have the vehicles been leased in the course of business of letting. The assessee is merely the financier of vehicles let. Proceeding further, he examined the net result of the transactions over a period of 36 months and found that assessee was benefited by not paying any tax on the lease rentals and on the contrary claimed the net loss of Rs. 29,25,716/-, as is apparent from the following chart: Asst. yr. Lease Rental Depreciation Net Figure 1994-95 50,88,057 1,50,44,451 (-) 99,56,394 1995-96 1,01,43,072 93,50,511 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business of leasing. He also opined that the case of assessee cannot be termed as a case of financial lease. Consequently, the assessee was entitled to depreciation. However, he was also of the view that the assessee is entitled to depreciation with reference to 50 per cent of the cost of the asset inasmuch as 50 per cent of the cost of the assessee was directly or indirectly made by other persons within the meaning of the definition of actual cost under section 43(1) of the Act. In coming to this conclusion, he took into consideration the facts- (i) that 50 per cent of the cost of the assets was received by the assessee by way of interest-free advance, (ii) the evidence recorded showed that immediately on termination of lease, the assessee had sold out all the vehicles, (iii) though the assessee claimed to have returned the advances, it was found that even the return of the advance was subject to the recovery of Rs. 96 lakhs recoverable on termination of lease. In other words, the return of deposit received in advance was more of a nature of book entry and necessarily carried out only after adjustment. Thus, the assessee had never paid even a rupee more than 50 per cent of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the Hon'ble Supreme Court, it was held by the Court that the lessor could not be said to be the owner of the leased vehicles and consequently the said lessor could not take back the assets on account of non-payment of lease rental by the lessee. In such cases, the lessor could only recover the amount due from the lessee. In view of this legal position, it has been con tended by the learned Departmental Representative that in the case of financial lease, the lessor cannot be said to be the owner and consequently, depreciation cannot be allowed. Proceeding further, he drew our attention to various clauses of the agreement to contend that all the features of the financial lease are present in the present case. He also relied on the decision of the Tribunal in the case of Dy. CIT v. Housing Development Finance Corpn. Ltd. (HDFC Ltd.) [2006] 8 ITD 319 (Mum.), wherein it has been held that if the transaction is really a financial arrangement between the parties, then the depreciation cannot be allowed to the so-called lessor. Further reliance is placed on the decision of the Special Bench in the case of Mid East Portfolio Management Ltd. v. Dy. CIT [2003] 87 ITD 537 (Mum.)(SB) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied to the present case. Lastly, he relied on the CBDT Circular No. 2, dated 9-2-2001 [(2001) 165 CTR (St.) 25] which classifies that depreciation cannot be allowed in respect of such lease. 10. Rival submissions of the parries have been considered carefully. The question for our consideration is whether the assessee is entitled to depreciation under section 32 of the Act. There is no dispute to the legal position that ownership of the asset is a condition precedent for allowing the depreciation under section 32. In. the case of CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308, the Hon'ble Supreme Court had held that where the assessee is engaged in the business of leasing, then the lessor is entitled to depreciation/investment allowance. In that case, the disallowance was made by the tax authorities on the ground that lessor could not be said to have used the asset for the purpose of manufacturing since it was the lessee who used the asset in the process of manufacture. The Hon'ble Supreme Court held that since the assessee was engaged in the business of leasing, then the asset could be said to be used by the assessee for the purpose of business and no adverse inferen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of purchase of leased assets. Accordingly, it forwarded a cheque of Rs. 17,800/- in favour and final settlement of the dues under the lease agreement. The Special Court under section 10 of the Special Court (TORT in Securities) Act, 1992, passed an order dated 28-7-1998 to handover the possession of all the 26 cars to the custodian within one week from the date of the order since the appellant had failed to make the payment as per the lease agreement. It appears from para 5 of the judgment of the Hon'ble Supreme Court that the assessee had taken a plea before the Special Court that it was a case of lease finance but the said plea had been rejected by the Special Court on the ground that in the pleadings the assessee had termed the agreement as lease agreement . The matter was carried in appeal before the Hon'ble Supreme Court. 13. The Hon'ble Supreme Court posed the question for adjudication as to whether the agreement between the parties was a finance lease or not. The Hon'ble Supreme Court referred to; (l) Following dictionary meaning of lease finance according to Accounting and Finance by R. Brockington: A finance lease is one where the lessee uses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 specialized 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. Finally, Their Lordships expressed their opinion at p. 520 of the report as under: 10. In our opinion, financial lease is a transaction current in the commercial world, the primary purpose whereof is the financing of the purchase by the financier. The purchase of assets or equipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lessor is shown as the assessee while the lessee is shown Mr. Sukha Singh Darshan Singh, instead of SIL. It appears that SIL worked merely as a conduit for obtaining lump sum finance from the assessee; (iv) Clause 5 of the agreement provides that it is the lessee who shall be liable to pay all taxes, cesses and charges, etc., in respect of the leased vehicles. In case, the same are paid by the lessor, the same shall be reimbursed by the lessee; (v) Clause 6 of the agreement provides that the lessor is totally indemnified against all and any defects in the vehicles apparent at the time of inspection and delivery. It further provides that lessee shall take all necessary measures to ensure that vehicle is roadworthy immediately upon delivery. (vi) Clause 8 provides that during the subsistence of the lease, the lessee shall; (a) if so required under any law, have these presents registered at the lessee's cost and expenses with the relevant Government authorities; (b) punctually and duly paid or cause to be paid all rates, taxes, licence fees, surcharge, registration charges and other outgoings payable in respect of use and operation of the vehicles; (c) insure th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erwise. As far as other judgments of the High Court and Tribunal are concerned, the same stand distinguished inasmuch as the judgment of the Hon'ble Supreme Court in the case of ABB Ltd. was either not available at the time when such decisions were given or not referred to or considered by the High Court or the Tribunal, as the case may be. The judgment of the Hon'ble Supreme Court is binding under article 141 of the Constitution of India and, therefore, the case is to be decided in accordance with the same. 18. Before parting with this issue, we may mention that arguments were raised to the effect that assessee adopted a colourable device in order to reduce its tax liability. These arguments are not being dealt with by us since we have proceeded on the assumption that agreements between the parties were legal. The issue whether there was a colourable device or not has become academic and, therefore, need not be decided. 19. It may be clarified that even after the judgment of the Hon'ble Supreme Court in ABB's case, a clear distinction has to be made between the normal lease and financial lease. If the agreement is a financial lease, then the consequences woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CL had finalized a scheme of buyback or Part-B of the debentures with J.M. Financial and Investment Consultancy Services Ltd., on behalf of UTI under which Part-B of each debenture of face value Rs. 100/- and paid-up on application, to the extent of Rs. 84 may be offered for sale at net price of Rs. 50/- to UTI. (d) The applicant may make the aforesaid offer by signing the declaration to this effect at the appropriate place in the application form and upon such an act, the applicant shall be deemed to have authorized an official of the CFCL to execute a transfer deed for Part-B of the debenture that may be allotted to him. (e) In case the debenture holder exercises an option of sale of non-convertible portion of debenture (Part-B) to the UTI, the amount of Rs. 50/- received on such sale would be received by CFCL on behalf of the debenture holder and appropriated towards allotment money due to Part-A of the debenture. Hence, no further amount would be payable by the applicant towards Part-A of the debenture. 8.1 The said issue was underwritten by the underwriters and sub-underwriters. 13,22,360 debentures devolved on 110 sub-underwriters, as the issue was not fully subscrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal, Calcutta Bench, in the case of Karamchand Thapar Bros. (Coal Sales) Ltd. v. Dy. CIT [2002] 83 ITD 171, wherein it was held that there was no scope for considering the loss incurred by the assessee in acquiring and disposing of the Part-B portion of the partly convertible debenture under consideration to be contributing to the direct cost of acquiring the Part-A portion. Accordingly, it was held that the loss arising on the sale of Part-B portion was allowable as loss. No contrary decision has been brought before us by the learned Departmental Representative. Therefore, following the same, the issue is decided in favour of the assessee. The order of the learned CIT(A) is, therefore, modified and consequently the Assessing Officer is directed to allow the loss as business loss. 25. The only issue which remains for our consideration relates to disallowance of Rs. 19,02,171/- in respect of repairs and maintenance, arising from ground No. 3 of the revenue's appeal. This issue has been discussed by the Assessing Officer in para 10 at p. 28 of the assessment order. After examining the details, the Assessing Officer was of the view that expenditure was capital in nature an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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