TMI Blog2012 (5) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... issue and controversy has not been examined - An order of remand directing the tribunal to examine the controversy afresh - in favour of the Revenue - INCOME TAX APPEAL NO. 442/2007 - - - Dated:- 17-4-2012 - MR. JUSTICE SANJIV KHANNA, MR. JUSTICE R.V. EASWAR, JJ. For Appellant: Mr. Sanjeev Sabharwal, Sr. Standing Counsel. SANJIV KHANNA, J.: This appeal by the Revenue in the case of Installment Supply Limited, the assessee pertains to the assessment year 1994-95. The impugned order passed by the Income Tax Appellate Tribunal (Tribunal) in ITA No.1156 /Del/2002 is dated 22nd September, 2006. 2. The present appeal was admitted to hearing vide order dated 15th September, 2010 and the following substantial question of law was framed: Whether the ITAT was correct in law in deleting addition of Rs.39,33,333/- made by the Assessing Officer by disallowing claim of depreciation in respect of assets allegedly leased to M/s. H.C.L. Hewlett Packard Ltd.? 3. In view of what was highlighted during the course of arguments, we are inclined to reformulate the substantial question of law mentioned above and the same should reads as under: Whether the Income Tax Appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the transaction was a finance transaction, but had been given colour of a lease transaction. The assessee had advanced Rs.40 lacs to HCL Hewlett Packard Limited and had agreed to receive back this amount along with the interest over a period of six years, but the item/parts were described as a lease property. He relied upon decision of the tribunal in the case of Goel Gases Private Limited, ITA No. 8105/Del/1992, A.Y. 1989-90, decided vide order dated 22nd October, 1993. 7. The CIT(Appeals) affirmed the said decision after recording that the items included spare parts of computers, printers, networking and items like key board, RAM, logic cards, adapter cards, power supply etc. It was observed that these spare parts purchased and leased back could not function as an independent machine. The assessee had not submitted details how these spare parts were leased back to HCL Hewlett Packard Limited. In the absence of the details, the normal presumption would be that the HCL Hewlett Packard Limited would have utilized the spare parts in manufacture of computers etc. or manufacture of machines sold by them. It was held that the alleged lease agreement was a collusive device to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. The exact reasoning given by the tribunal reads as under: 7.8 So far as the issue of user of the leased assets is concerned, the learned CIT(Appeals) has taken a technical view. In the case of Multican Builders Ltd. Vs. CIT (2005) 278 ITR 142, after making reference to the decisions in the cases of CIT Vs. Oriental Coal Co. Ltd. (1994) 206 ITR 682 (Cal.); CIT Vs. Geo Tech Construction Corpn. (2000) 244 ITR 452 (Ker.); CIT Vs. Kanoria General Dealers P. Ltd. 159 ITR 524 (Cal.); and Hindustan Gas and Industries Ltd. Vs. CIT 79 Taxman 151, the Hon‟ble Calcutta High Court has concluded as under: From the above discussion, it is clear that the claim of depreciation is not dependent on the actual use or the asset being put to use. It is dependent on the question of being used for the purpose of the business. When the leasing is the business, giving of a vehicle in lease even if it may not be used by the lessee on the date of the agreement but from the date of registration of the vehicle or thereafter even then it would be an use for the purpose of the leasing business of the assessee. It is the use of the vehicle by the lessor for the purpose of his business, which is mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be transferred‟. Lessor is only a financier and is not interested in the assets. This is the reason that financial lease is known as full payout lease where contract is irrevocable for the primary lease period and the rentals payable during which period are supposed to be adequate to recover the total investment in the asset made by the lessor. (emphasis supplied) 15. According to Lease Financing Hire Purchase by Vinod Kothari (2nd Edn., 1986 at pp. 6 7), a finance lease, also called a capital lease, is nothing but a loan in disguise. It is only an exchange of money and does not result in creation of economic services other than that of intermediation. The learned author has quoted T.M. Clark, one of the most authentic writers on the subject who defines lease and operating lease in the undergoing words: A financial lease is a contract involving payment over an obligatory period of specified sums sufficient in total to amortise the capital outlay of the lessor and give some profit. * * * An operating lease is any other type of lease that is to say, where the asset is not wholly amortised during the non-cancellable period, if any, of the lease and where the lessor doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 65(12) and 65(105)(zn) by Finance Act, 2001, which underwent some changes by Finance Act, 2004 and 2007. Referring to the difference between the two agreements/transactions, the Supreme Court has held: 34. In this connection, as and by way of illustration we need to give an illustration which brings out the distinction between a finance lease and operating lease . A finance lease transfers all the risks and rewards incidental to ownership, even 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. 35. According to Chitty on Contract, a hire-purchase 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion of the chattel and the right to use it in return for remuneration. On the other hand, equipment leasing is long-term financing which helps the borrower to raise funds without outright payment in the first instance. Here the interest element cannot be compared to consideration for lease/hire which is in the nature of remuneration (consideration) for hire. 14. The aforesaid distinction was elucidated earlier also in a litigation in which the assessee was involved (see In re Instalment Supply (P) Limited versus Union of India and Others, AIR 1962 SC 63 and Instalment Supply Limited versus STO, (1974) 4 SCC 739). 15. In Sundaram Finance Limited versus State of Kerala, AIR 1966 SC 1178 it was observed as under: 24. The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In each case, the Court has, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of the documents. An owner of goods who purports absolutely to convey or acknowledges to have conveyed goods and subsequently purports to hire them under a hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Re Watson Ex parte Official Receiver in Bankruptcy it was held that in adjudging the true nature of a transaction purporting to be a sale of personal chattels, followed by a hiring and purchase agreements, whereby the vendor agreed to hire the chattels from the purchaser and to pay quarterly sums for such hire until a certain amount was paid, when the chattels were to become again the property of the vendor, and power was given to the purchaser to take possession of the chattels on default of payment, the form of the transaction cannot be given undue importance. The Court held that no sale or hiring of the chattel was intended, the object in truth being to create a security for a loan of money to the supposed vendor from the supposed purchaser. The transaction was therefore one of loan. Lord Esher, M.R., observed at p. 37: .... when the transaction is in truth merely a loan transaction, and the lender is to be repaid his loan and to have a security upon the goods, it will be unavailing to cloak the reality of the transaction by a sham purchase and hiring. It will be a question of fact in each case whether there is a real purchase and sale complete before the hiring agreement. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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