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2012 (3) TMI 212 - AT - Income TaxFinance lease vs Operating lease – whether lessor is entitled to depreciation on assets leased by it in finance lease – assessee, a bank, purchased a boiler and gave it on lease to Indo-Gulf Fertilisers and claimed depreciation on it on the basis that it was the owner thereof – Revenue contended that it is not a case of operating lease and hence no granting of depreciation – Held that:- Finance lease is for a fixed period & non-cancellable. Lessee uses the asset for its entire economic life & all risks and rewards incidental to ownership are transferred to the lessee even though title may or may not be eventually transferred to him. There is a fixed obligation on the lessee for payment of lease money. On facts, the assessee’s lease agreement had all the characteristics of a finance lease. Further, RBI Circular No.FSCBC 18/24-01- 001/93-94 dated 14.02.1994 states that equipment leasing activity should be treated by banks “on par with loans and advances”. Therefore, in view of decision in case of Association of Leasing & Financial Services Companies v. Union of 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 – Decided against the assessee.
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