TMI Blog2002 (1) TMI 274X X X X Extracts X X X X X X X X Extracts X X X X ..... the financing activity and not in leasing of vehicles and thereby confirming the disallowance of claim of depreciation on leased vehicles at Rs. 1,67,76,602. 2. Holding that assessee has tried to give colour of lease to the transactions whereas in fact it is a financial arrangement by drawing following wrong inferences/conclusions, which is contrary to the facts on records: (a) Lessee is full and legal owner under the IT Act simply because he is owner under Motor Vehicles Act. (b) On payment of instalment in time by lessee, lessor has no right whatsoever to repossess the vehicle. (c) The initial security along with monthly security equals the cost of vehicle. 3. Treating the transaction of lease of vehicles as finance activity and thereby taxing the lease rent as return on the finance on the one hand but not allowing the shortfall in the amount of alleged finance and the recovery of principal (by way of security deposit) as revenue expenditure. 4. Observing that depreciation on leased vehicle is allowable @ 30 per cent as against 40 per cent claimed by the assessee." 3. Grounds Nos. 1 to 4 being on the same controversy are consolidated and directed to be disposed of u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncreasing every month while the asset is depreciating. It in fact along with the initial security equals the cost of the vehicle at the end of the agreement period. Once the payment of instalment is made in time, the appellant has no right whatsoever to repossess the vehicle. All the vehicles are registered in the name of the parties concerned and they are in possession of vehicles, and also using them for their own purposes. They are full and legal owners under the Motor Vehicles Act and consequently rightful and beneficial owner for the purpose of depreciation. The applicant has no locus standi insofar as ownership is concerned so long as there is no default in payment of the instalment as per the agreement of finance. Applicant s case is fully covered by the decision of Hon ble Rajasthan High Court in case of Golecha Properties (P) Ltd. vs. CIT (1987) 166 ITR 259 (Raj). Learned CIT(A) has further observed that though no depreciation is allowable to appellant on leased vehicles as per his specific findings, for academic discussion, the rate of depreciation in respect of vehicles given on lease by assessee-company would be @ 30 per cent instead of 40 per cent as claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the case of R.B. Joharmal Kuthiala vs. CIT (1971) 82 ITR 570 (SC), it was held as under : "Real test to determine the ownership of an asset is to ascertain whether the assessee was entitled to the income from that asset in his own right or not." On the concept of user for the business, the assessee s counsel has made reference to various decisions and contends that in case of a person carrying on leasing business, any asset leased in such business by leasing it out shall fulfil the user test and, therefore, depreciation should be allowed thereon. For this purpose, reliance has been placed on the following decisions: K Co. vs. Dy. CIT (1996) 56 ITD 448 (Del) "The lessor is entitled to depreciation on the leased vehicles as soon as the lease agreement was concluded and physical possession of the vehicles was handed over irrespective of what the lessee did of the vehicle. Mularaj Dwarkadas Gokuldas vs. Dy. CIT (1994) 48 TTJ 531 (Bom) "In a leasing business, what is required before depreciation could be allowed is that the asset must have been formally introduced in the business of lease, it would be immaterial if the lessee had not plut to use the leased out assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, or if it cannot be negotiated, the assessee-lessor sells or otherwise disposes it off. In case of default in payment of lease payments, the assessee repossesses the vehicle as per the terms of lease agreement and then disposes it off by way of release or sale. It was further stated that important terms of lease agreement are narrated as under: 1. The assessee purchased the vehicle and agreed to lease the same. 2. Lessee to affix the plate on vehicle identifying the same as sole and exclusively property of assessee. 3. Lessee to act as bailee and not to have any proprietary right, title or interest in the vehicle. 4. In the event of failure on the part of lessee to get the vehicle repaired entitled to take back the possession of vehicle and to get the same repaired at lessee s cost. 5. Vehicle to be fully insured with assessee as the sole beneficiary. 6. Assessee entitled to inspect and examine the condition of vehicle at any time. 7. No alteration and addition to the vehicle without prior and written consent of assessee. 8. Lessee to indemnify the assessee in the event of loss of vehicle. 9. Lessee to indemnify the assessee in the event of seizure, fire etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties, independent of the lease agreement, where not only the transaction price is to be determined de hors of the lease agreement, but both the parties have equal right to accept or deny the transaction. It is for this reason that in case of sale of similar model in the same period, the negotiated rate differs on case to case basis. 8. On account of the reason that in case of a lease, the risks and rewards of ownership absolutely vests with the lessor, the rate of return on investment of assessee is much higher than in the case of hire-purchase. This is being indicated in the statements placed at paper book pp. 181A-183 and 184 to 191. Further, in case of lease transactions, the sale consideration at the time of termination of agreement, invariably in all cases, is less than the cost of the vehicle. This deficit is on account of assessee, as it is he who is the owner and, therefore, obliged to bear the same. The charge of higher rate of return is only for the reason that the said deficit is on his account. 9. It has also been stated that the AO has alleged that the lease agreements are colourable devices but this allegation is without any basis. Lease agreements of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered owner. Secondly, the application for registration itself shows that the vehicle under registration is subject to the lease agreement. Not only this, the provisions of the Motor Vehicle Act recognise the practice of registration in the name of lessee and for that reason only they require a mention about the lease agreement and the lessor (owner). Thus, the registration of vehicle in the name of lessee does not imply that there is no lease agreement or lessor is not the owner or the lease agreement does not reflect real transaction. Rather it supports the case of the assessee that the lease transactions are real because the fact of lease transaction is apparent from the application for registration itself, which has been made the basis for allegation against the assessee. 13. In any case when it is being alleged that the apparent is not real, the burden is on the person so alleging in the present case on the Revenue who is alleging that the lease agreements do not reflect the real transaction. Merely on the basis of suspicion a document cannot be disbelieved and the apparent has to be considered as real. The Revenue in the present case has failed to establish that the lease a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ambit of the term owner under s. 32(1), there was no need to enact a separate sub-section for allowing depreciation to the limited owner. It is respectfully submitted that the said case rather helps and supports the case of the appellant where appellant is not the limited owner but is the absolute owner, being entitled to depreciation. In the present case lessee can, at best, be regarded as a limit owner, i.e., for the purposes of the Motor Vehicles Act who is obliged to hand over the vehicle after a stipulated period on expiry of the lease term. Further, the terms of the lease agreement, the transactions between the parties, subsequent termination of agreements and independent sale transactions are evidencing these facts. In view of the above and according to the aforementioned Rajasthan High Court judgment, the appellate would be entitled to depreciation under s. 32. 19. The CIT(A) and the AO have also raised certain other matters and the clarifications thereon have been furnished by the assessee s counsel on various other matters. 19.1 At the time of applying for registration the assessee-company in Form No. 20 declares the existence of lease agreement and declares itse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be denied on account of such reason of wrong claims made by lessees. 20. The assessee s counsel contends that the findings of the learned CIT(A) are factually incorrect that lessee is paying full cost of vehicle by way of initial security deposit and monthly security deposits. In fact, the aggregate of initial security deposit and monthly security deposits is much less than the initial cost of vehicle and the same is either refunded at the end of lease period or adjusted against the sale price of vehicle where at the end of lease period, the agreement is arrived at between lessor and lessee to sale/purchase the vehicle at the agreed rate. This position may be examined from the chart submitted separately. 21. Further, he contends that cl. 31 of the lease agreement fully empowers the assessee to repossess the vehicle even if there has been no default in payment in instalments. The said clause is reproduced as under: "31. Notwithstanding anything to the contrary herein contained the lessor shall be at liberty to terminate this agreement at any time giving to the lessee 90 days prior notice in writing without assigning any reason. Upon such termination the lessee shall ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned CIT(A) s order as per the arguments of the assessee. Further, meaning of financing and leasing is given as per Oxford English Dictionary is as under: Finance : Pay or put to rensom; engage in or manage financial operations; provide one-self with capital; provide money. Lease : The contract between parties by which one conveys property to the other for a prescribed term or at will usually in consideration of periodic payment. This will also help in understanding the assessee s business with reference to the findings given in the assessment order and the learned CIT(A). The learned Departmental Representative further stated that the main factors of treating the assessee simply a financier, are discussed as mentioned in the assessment order and in the appellate order. The AO has clearly brought out the facts on pp. 2 and 3 of his order that the assessee is simply a financier on the basis of purchase invoices/bills produced before him and he has simply arranged the affairs of providing the vehicles to the purchasers who approached the assessee on sample basis. The dealer issues an invoice/bill in the name of the purchaser and also mentions the name of the assessee as h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed representative has relied on the decision in the case of Addl. CIT vs. U.P. State Agro Industrial Corpn. Ltd. In this decision delay in transfer of title by the U.P. State Agro Industrial Corpn. Ltd. for claiming the depreciation under s. 32 when the asset was already in use. This favours the Revenue as the user is the purchaser irrespective of the title. 27. The assessee has also relied upon the Supreme Court decision in the case of Mysore Minerals Ltd. vs. CIT. The facts decided by the Hon ble Supreme Court in the said case are altogether different with the present case as Mysore Minerals Ltd. purchased the property for its employees which was in use by the employees though the part payment was made. In this case also the facts are different with the assessee s case that the purchaser is using the vehicle on making part payment. 28.1 The assessee has also relied upon the decision in the case of R.B. Joharmal Kuthiala. This case has already been considered by the AO and otherwise also this strengthens the case of the Department instead of the assessee, as the purchaser is using vehicle. Similarly, the assessee has also relied upon decisions of Bombay High Court and Kerala H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cier (assessee) and supplier (dealer). The assessee is providing finances to the persons (purchasers) and they approach the financier for purchasing the vehicles. In this process, the financier (assessee) takes the purchaser to the dealer for facilitating the purchase of vehicle. The dealer also does his business in the earlier scheme and the vehicle is sold for a lump sum consideration including interest component. The purchaser pays the entire insurance premium and initial payment of instalment and uses the vehicle. He also earns income by plying the vehicle and it is not necessary that the instalment payment is made by the purchaser from the income so earned. Therefore, the assessee does not get the instalment from that particular vehicle and the decision of Hon ble Supreme Court in the case of R.B. Jodhamal Kuthiala does not apply in the assessee s case at all. Considering all the facts, the decision of the Hon ble Supreme Court in the case of Sumati Dayal vs. CIT (1995) 125 CTR (SC) 124 : (1995) 214 ITR 801 (SC) is squarely applicable in the surrounding circumstances and human probabilities. 32. Further, the learned Departmental Representative submitted vide letter dt. 10th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes have already been enclosed along with my written submissions filed on 18th Oct., 2001, which may kindly be perused and considered. 5. There are various forms to be filled up by the financier/lessor/purchaser for getting the registration of vehicles under such schemes. These are mentioned as below: (i) Form No. 27: Application for assignment of new transport mark to motor vehicle (r. 54) to be made in triplicate if the vehicle is held under an agreement of hire-purchase/lease/hypothecated. (ii) Form No. 28: Application for grant of no objection certificate [(rr. 54, 58(1), (3) (4)]. This is to be made in quadruplicate if the vehicle is held under an agreement of hire-purchase/lease/hypothecated. (iii) Form No. 30: Application for intimation and transfer of ownership of motor vehicle [(r. 55(2) (3)]. This is to be made in triplicate if the vehicle is held under an agreement of hire-purchase/lease/hypothecated. (iv) Form No. 31: Application for transfer of ownership in the name of person succeeding to the possession of vehicle [(r. 56(2)]. This is to be made in duplicate if the vehicle is held under an agreement of hire-purchase/lease/hypothecated. (v) Form No. 33: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettled that there cannot be two owners of the property simultaneously and in the same sense of the term. The intention of the legislature in enacting s. 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent. To take the case at hand it is the appellant-assessee who having paid part of the price, has been placed in possession of the houses as an owner and is using the buildings for the purpose of its business in its own right. Still the assessee has been denied the benefit of s. 32. On the other hand, the housing board would be denied the benefit of s. 32 because inspite of its being the legal owner it was not using the building for its business or profession. We do not think such a benefit-to-none situation could have been intended by the legislature. The finding of fact arrived at in the case at hand is that though a document of title was not executed by housing board in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Karnataka High Court in the case of Gowri Shanker Finance Ltd. vs. CIT (2001) 166 CTR (Kar) 137 : (2001) 248 ITR 713 (Kar), it has been held that even in the lease agreement cases in consumer durables namely, TV/VCR/refrigerators and scooters, the consumers are the real owners of the goods purchased. In this case, Their Lordships have decided that the assessee provided finance for the purchase of goods and all the books of accounts, the customers became indebted to the entire cost of goods along with interest or lease rent payable thereon. The agreements were drawn up in such a manner that the assessee would remain the owner of goods till the full payment was made. Thereafter the ownership of the goods would pass on from the assessee to the customers and they would not be required to return the goods to the assessee. On these findings, the Tribunal held that the assessee was not entitled to the depreciation and this view of the Tribunal has been upheld by Their Lordships in this case. The facts of the case decided by the Hon ble Karnataka High Court are identical to the facts of the present case and all the facts have been with by the Hon ble High Court in detail which may be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of 'Finance lease still is a lease. If a lease is a finance lease, it does not mean that lessee becomes owner, although the objective of finance leases is financing the asset. The lessor can exercise all the rights of ownership, he is entitled to earn income on account of his ownership of the asset and the lessee is entitled to use the asset only because lessor has granted such right for limited period of him. Thus, he is the absolute owner to the exclusion of all others and accordingly entitled to depreciation 2. A lease and financing arrangement (the terms as being referred to by Departmental Representative in his arguments) are not mutually exclusive; in many cases the contract of lease is also a financing arrangement as the lessee may go for lease for the reason that he does not have funds to finance the asset. However, such reasons would not make the lessee as the owner of the assets. Thus, if there may be financing arrangements in the form of lease but that would not mean that there is no lease at all. The rights and obligations and if under a financing arrangement, one party is the owner/lessor and other party is lessee, who is entitled to use the asset only b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. In the present case, however, not only the leased assets have been shown in balance-sheet but there arises either profit or loss in all transactions of disposal of vehicle whether to lessee or otherwise, because transfer of ownership is not automatic and is by way of a separate independent transaction." 36. In the case reported at (2001) 248 ITR 713 (Kar), the facts were that the assessee never came to possess the assets leased. In the present case, not only there is a legal right to repossess as stipulated in cl. 31 of the lease agreement, but there are instances of repossession also. This also shows that in the present case the transfer of ownership was not automatic and was independent of the transaction of lease. 37. In the case reported at (2001) 248 ITR 713 (Kar), the facts were that the assessee would remain the owner till the full payments are made and after making full payment the ownership of the goods would pass on to the customer. In the present case, there is no stipulation in the lease agreement that after making full payment the ownership would pass on to the lessee. On the contrary, there is a right to the lessor to repossess the vehicle by giving not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same cannot be doubted without bringing any evidence to the contrary. The volume of documentation cannot negate the authenticity thereof. For example, in case of an income-tax search, a number of documents, inventory seized, Panchanama, annexures, etc. are got signed from the assessee and it cannot be said that the signatures do not have any significance because he was required to sign on so many pages, if any assessee wants to claim that he has to show that either coercion was used or the signatures were made in ignorance. In the present case, Department should not doubt the agreement in absence of any material to the effect that the same was signed under ignorance or coercion. 42. Reliance is also placed on the following decisions: (i) the burden to prove that apparent is not real is on the party alleging the same (1983) 144 ITR 352 (Kar) and (1983) 142 ITR 6 (SC). (ii) Where the AO has not rebutted evidence produced by the allegation, there was no justification for making additions as undisclosed income (1997) 94 Taxman 226 (Mag) (Nagpur Bench). (iii) Where the AO does not have any material to discard documentary evidence tendered by assessee, amount cannot be include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to vehicle is on account of assessee PB pp. 238 to 259. 47. Rival submissions have been heard in the light of material brought on record and precedents relied upon. The appellant s claim for depreciation on leased assets has not been accepted by the AO alleging that the appellant has never put to use these vehicles. The assessee s counsel has stated that the appellant s business is comprised of two activities, one being of hire-purchase and the other being that of lease which is under consideration in the dispute before us. In the business activity of hire-purchase it has been claimed that the parties enter into agreement of sale of vehicle on the day one while in the activity of its leasing the vehicles, the agreement is made for use of the asset only for the contracted period. Before the AO the appellant in its letter dt. 5th Jan., 2000 submitted that : "At the first instance user of vehicle is identified, who further selects vehicle as per his requirements and need. The company then purchases the vehicle from the dealer and makes the payment thereof. In the purchase bill the status of the company as lessor is mentioned along with the name of the lessee. The company then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o whom they have sold the vehicle and whether the instructions to fill in the name in the invoice is at the instance of the assessee before us as his agent or otherwise the transaction is undependent one by the supplier with the other person and not with the assessee-appellant. In any case, there is no dispute to the fact that the supplier of vehicle after giving the delivery of vehicle has no role to play and it is at this stage, the supplier is divested of the title in goods/property for a consideration admittedly paid by the appellant. Hereafter remain only two parties whose relations are governed by the lease agreement executed between them. These agreements have been acted upon by the parties in both letter and spirit. Assessee claims and Revenue also admits that the title in vehicle is transferred only after the full payment thereto has been received by the appellant during the currency of this agreement. The person in whose name the vehicle stands in the records of transport authority as a registered owner, has no right to transfer or dispose of the vehicle at his discretion or direction while the appellant has a liberty to terminate the agreement with him by giving a notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of lease agreement, etc. is nothing but a device to avoid proper payment of tax. Merely because some of the persons under lease have claimed depreciation in defiance of the agreement shall not lead to the conclusion that the agreement is a device. The other vital facts are that the appellant was entitled to income from these vehicles which the lessee was regularly plying besides affixing the plate on the vehicle that the same was exclusive property of the appellant, its entitlement to take back the possession of the vehicle, vehicle to be insured with assessee as sole beneficiary, right to inspect the vehicle, restrictions on transfer, indemnity clause and certain other rights and control having been exercised by the appellant on the strength of such agreement do convey that the appellant had the prefect control in its own right of ownership. No material has been brought on record that the agreement and other documents were a device or a collusive arrangement. The allegation of colourful device, therefore, has not been proved. A reference to s. 2(30) of Motor Vehicles Act for the registration of the vehicle in the name of the lessee reveals that even a person in possession is con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in the case of CIT vs. Shaan Finance (P) Ltd. (1998) 146 CTR (SC) 110 : (1998) 231 ITR 308 (SC), CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) and South India Viscose Ltd. vs. CIT (1997) 141 CTR (SC) 374 : (1997) 227 ITR 286 (SC) by observing as under: "From the ratio of the above decision of the Supreme Court it is seen that where an assessee leased out its machinery to manufacturers, the assessee continues to be the owner of the machinery and the said machinery was used for the purpose of its business. It is, therefore, entitled to depreciation as well as investment allowance." The CIT(A) has, therefore, erred in confirming the disallowance of claim of depreciation on vehicles to the appellant. As regards the rate of depreciation on the vehicles, the CIT(A) made only an academic discussion. No substantive order was passed thereon. Accordingly, we do not consider it necessary to pass any order on the ground No. 4 of the assessee. With this the assessee s grounds Nos. 1 to 4 stand disposed of. 48. Ground No. 5 in assessee s appeal relates to the levy of interest under ss. 234B and 234C. The assessee s counsel has contended that in this cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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