2025 (6) TMI 462 - AT - Income Tax

Depreciation claimed on lease-hold asset treating the same as asset owned by the assessee company - actual owner of the said assets and user tests - According to the AO the assets which had been leased to the assessee were not eligible for depreciation u/s 32 - CIT(A) deleted the addition by holding that the lessor here has no commercial right title or interest in the asset after the termination of lease period meaning thereby that this is purely a financial lease - HELD THAT - Hon ble apex court in the judgment rendered in the case of ICDS Ltd. 2013 (1) TMI 344 - SUPREME COURT has held that if the assets in question are utilized for the purpose of business of the assessee the requirement of the section stands satisfied notwithstanding non usage of the assets itself by the assessee. The assessee company being a lessee is not eligible to claim the benefit of depreciation. The AO had correctly disallowed the same. We therefore uphold the disallowance and in result appeal of the Revenue is allowed. Alternative claim as assessee would be at least be entitled for deduction of principal component of lease rental - There is merit in the contention of the assessee that once its claim of depreciation is rejected in the alternative in respect of lease rentals it is entitled to deduction u/s 37 of the Act as revenue expenditure. However it is noticed that this ground of appeal though was before the CIT(A), he has not deliberated on it. Since this claim has not been examined previously either by the AO or the CIT(A) we consider it appropriate to remit the matter to the file of the ld.CIT(A) to examine allowability of this claim of deduction in accordance with the provisions of the Act after allowing adequate opportunity of hearing to the assessee in this regard. Subject to this direction the Cross objection-II is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the assessee company, as a lessee under a lease agreement with Hewlett Packard Financial Services (HPFS), is entitled to claim depreciation on leasehold assets under Section 32 of the Income Tax Act, 1961, when HPFS, the lessor, also claims depreciation on the same assets, resulting in double depreciation claims;

(b) Whether the reassessment proceedings initiated under Section 147 of the Act were valid and justified, particularly whether the Assessing Officer had sufficient 'reasons to believe' that income had escaped assessment to reopen the case;

(c) In the event the assessee is not entitled to depreciation claim on leased assets, whether the assessee is entitled to claim deduction of lease rentals, including the principal component, as revenue expenditure under Section 37 of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Entitlement to Depreciation on Leasehold Assets Claimed by the Lessee

Relevant Legal Framework and Precedents: Section 32 of the Income Tax Act permits depreciation deduction on tangible assets used for business or profession. The twin requirements are ownership of the asset and its use for business purposes. The landmark Supreme Court decision in I.C.D.S. Ltd. vs. CIT clarified that the lessor, as owner and user of leased assets in the course of its leasing business, is entitled to claim depreciation. The Court emphasized that ownership for tax purposes is determined by the terms of the lease agreement, not merely by registration or legal title under other statutes such as the Motor Vehicles Act. The Court also held that the use of the asset by the lessor's business suffices, even if the asset is physically used by the lessee. The decision in Commissioner of Income Tax vs. Shaan Finance (P) Ltd. was cited approvingly to support this principle. Additionally, CBDT Circular No. 2/2001 clarified that ownership for depreciation purposes depends on the contract terms and that either lessor or lessee may claim depreciation depending on ownership.

Court's Interpretation and Reasoning: The Tribunal examined the terms of the lease agreement, which indicated that the assessee had possession and use of the asset, was responsible for maintenance, insurance, and bore risks of loss or damage. The lease term covered substantially the entire life of the asset, and ownership/title passed to the assessee at lease end without further payment. Despite these factors, the Tribunal found that the lessor HPFS retained ownership rights during the lease term, as supported by the Supreme Court's reasoning in I.C.D.S. Ltd. and related precedents.

Key Evidence and Findings: The Assessing Officer received information that both HPFS and the assessee claimed depreciation on the same assets, indicating double claim. The AO noted absence of bifurcation between leased and owned assets in the assessee's records. The assessee argued that the lease was a financial lease, with substantial risks and rewards transferred, and cited the Apex Court decision in ABB Ltd vs. IFCI (though the Tribunal distinguished this case as unrelated to depreciation). The CIT(A) relied on the BSE Ltd. ITAT decision, which allowed depreciation to the owner lessor in similar circumstances.

Application of Law to Facts: The Tribunal applied the principles from the Supreme Court's I.C.D.S. decision, emphasizing that ownership for depreciation is determined by contractual terms and that the lessor engaged in leasing business is owner for tax purposes. The Tribunal held that the assessee, being lessee, was not the owner and thus not entitled to depreciation under Section 32. The Tribunal also noted that the AO's disallowance was consistent with the principle that depreciation cannot be claimed twice on the same asset.

Treatment of Competing Arguments: The assessee's argument that the lease was a financial lease transferring ownership at term end was acknowledged but found insufficient to establish ownership during the lease term. The Tribunal distinguished the ABB case cited by the assessee as unrelated to income tax depreciation issues. The Tribunal also rejected the assessee's reliance on prior years' allowance of depreciation, emphasizing consistency with the first year allowance principle only applies if the initial claim is not disturbed. The Tribunal relied on authoritative precedents and CBDT Circular to uphold AO's view.

Conclusions: The Tribunal concluded that the assessee, as lessee, was not entitled to claim depreciation on leased assets under Section 32 of the Act. The AO's disallowance was upheld and the Revenue's appeal allowed on this issue.

Issue (b): Validity of Reassessment Proceedings under Section 147

Relevant Legal Framework and Precedents: Section 147 permits reopening of assessment if the AO has 'reasons to believe' that income has escaped assessment. The Supreme Court in CIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. held that the AO's subjective satisfaction based on tangible material is sufficient. Reopening cannot be based on mere change of opinion.

Court's Interpretation and Reasoning: The AO reopened the assessment after receiving information from the Dy. Commissioner of Income Tax about double depreciation claims by the assessee and HPFS. This information constituted tangible material leading to 'reasons to believe' that income had escaped assessment.

Key Evidence and Findings: The reassessment was initiated within four years of the original assessment year. The AO articulated reasons based on the double claim of depreciation. The CIT(A) affirmed the validity of the reassessment.

Application of Law to Facts: The Tribunal found that the AO's initiation of reassessment was justified and not based on change of opinion but on credible information indicating escaped income.

Treatment of Competing Arguments: The assessee contended that reassessment was invalid, but the Tribunal found no merit in this contention.

Conclusions: The Tribunal dismissed the assessee's cross-objection challenging the reassessment proceedings and upheld the validity of the AO's action under Section 147.

Issue (c): Allowability of Lease Rentals as Deduction under Section 37

Relevant Legal Framework: Section 37 allows deduction of any expenditure (not being capital expenditure) incurred wholly and exclusively for business purposes. Lease rentals paid for use of assets are generally deductible as revenue expenditure.

Court's Interpretation and Reasoning: The Tribunal noted that the issue of allowability of lease rentals as deduction was raised by the assessee as an alternative ground if depreciation claim was disallowed. However, this issue was not examined by the AO or CIT(A).

Key Evidence and Findings: The assessee contended that at least the principal component of lease rentals should be deductible ignoring the depreciation component disallowed. The Tribunal found merit in this contention.

Application of Law to Facts: Since the issue was not adjudicated earlier, the Tribunal remitted the matter to the CIT(A) for fresh consideration after giving the assessee opportunity of hearing.

Treatment of Competing Arguments: The Revenue did not specifically contest this remand.

Conclusions: The Tribunal allowed the cross-objection for statistical purposes and directed fresh adjudication on allowability of lease rentals under Section 37.

3. SIGNIFICANT HOLDINGS

The Tribunal made the following crucial legal determinations:

"The only issue of claim of depreciation on leased assets revolves around the 'actual owner' of the said assets and 'user' tests have been held to be the key elements in deciding this issue which is intrinsically a factual issue based on the terms of agreement between the lessor and the lessee."

"Section 32 of the Income Tax Act lays down twin requirements of 'ownership' and 'usage for business' for a successful claim under Section 32 of the Act."

"The income tax law requires the use of the asset by the assessee for 'the purpose of business'; it does not mandate the use of the asset by the assessee itself. The lessor, in the instant case, is a leasing company, engaged in the business of leasing trucks it purchases. Therefore, it satisfies the criteria of 'usage for business' as it used the vehicles in the course of its leasing business."

"The entire lease rent received by the assessee is assessed as business income in its hands and the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hands of the lessee. This reaffirms the position that the assessee is in fact the owner of the vehicle, in so far as Section 32 of the Act is concerned."

"The test of ownership is discernible only on interpretation of various clauses in the lease agreement."

"In view of the factual matrix of the present case and in light of the legal proposition emerging from the cited decisions above in our considered opinion, the assessee company being a lessee, is not eligible to claim the benefit of depreciation. The AO had correctly disallowed the same."

"All that is required for issue of notice u/s 147 is reasons to believe that some income has escaped assessment. In this case, information received regarding double claim of depreciation was enough for drawing this belief."

"Once its claim of depreciation is rejected, in the alternative, in respect of lease rentals it is entitled to deduction u/s 37 of the Act as revenue expenditure."

"Since this claim has not been examined previously either by the AO or the ld.CIT(A), we consider it appropriate to remit the matter to the file of the ld.CIT(A) to examine allowability of this claim of deduction in accordance with the provisions of the Act after allowing adequate opportunity of hearing to the assessee in this regard."