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2014 (1) TMI 281 - AT - Income TaxDisallowance of Depreciation on lease buses – Nature of lease – Operating lease OR Finance Lease – Held that:- It is clear from the terms of the contract that M/s. DMRC Ltd. has facilitated the finance of the buses and to secure repayment of the cost of the buses with interest, the buses would remain in the name of M/s. DMRC Ltd. till the entire repayment is made in 60 instalments - The period of repayment of the cost with interest in instalement and period of agreement is the same i.e. 05 years so that after successful completion of the agreement at the end of tenure of 5 years and full payment of the cost of the buses, the ownership of the buses will be transferred in the name of the assessee - what is material is the substance and contents of the documents which exhibits the intention of the parties and not nomenclature and form of the document - in order to determine the real intention of the parties on the question whether the agreements in question are in substance of operating lease or finance lease, various features have to be tested – in Association of Leasing and Financial Services Companies vs. Union of India [2010 (10) TMI 4 - SUPREME COURT OF INDIA ] various tests has laid down for determination of the real nature of the lease whether finance lease or operating lease. The lessor would fully recover the investment in buses with interest during the lease period itself - The primary object and interest of lessor is for recovery of his investment with interest during the lease period and not in the assets for its use - This fact is clear from the term of lease agreement where all precautionary measures are taken for recovery of the investment made by the lessor on completion of the tenure of lease period and full recovery of the investment and then the asset in question will be transferred to lessee - the assessee has to bear the cost of insurance, maintenance, repairs and other related cost of expenses for buses - The assessee has also paid the taxes etc. in relation to the buses as per agreement – thus, the risk and rewards incidental to the ownership of the assets vests with the assessee - M/s. DMRC Ltd. is simply having the title of the buses as a security against finance till the entire investment and interest there upon is recovered – thus, the nature of lease / arrangement between the parties is finance lease and ownership / title of the buses was retained by M/s. DMRC Ltd. only with a view to secure the repayment of cost of the buses alongwith interest - the assessee is entitled for the depreciation on the buses for the period it has operated the buses - merely because depreciation is allowed on the same assets (buses) to M/s. DMRC Ltd. would not ipso facto disentitle the assessee to its rightful claim – Decided in favour of Assessee.
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