TMI Blog2007 (8) TMI 494X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Ltd. The Assessing Officer accepted the assessee s contention that the transaction was not a sham one. However, the Assessing Officer asked the assessee as to why depreciation be not disallowed, as, according to the Assessing Officer, the assessee was only the hirer and not the owner of the windmills. 3. The assessee submitted that as per CBDT s Circular No. 19 dated 12-5-1943, depreciation was allowable to the hirer in a hire purchase transaction. 4. The Assessing Officer, however, disallowed the depreciation claimed by the assessee at Rs. 1.50 crores, holding as follows: "As per the hire-purchase agreement the assessee (hirer) has not become the owner from the time the hire-purchase agreement became effective. The assessee had an option to become owner at the end of the hire period. Therefore, clause ( iii ) of the Board s circular is applicable and not clause ( ii ) in the case of the assessee. The learned counsel accepted that clause ( iii ) is applicable in this case. However, the learned counsel contended that depreciation will be allowable from the time hire-purchase agreement was made [just like in clause ( ii )]. I do not accept the contention of the counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to be falling under clause ( ii ) of the Circular. 7. The learned counsel for the assessee, on the other hand, supporting the impugned order, has submitted that the transaction per se was not in doubt; that in substance, the hire purchase agreement between the assessee and M/s. Garden Finance Ltd. (copy at pages 18 to 41 of the assessee s paper book - "APB" for short), was an agreement for passing on title; that this agreement provided the hirer with an option to acquire the asset at the end of the hire terms by exercising the option in this regard; that the assessee, in the transaction under consideration, is the hirer; that as is available from para 4.1 of the agreement (APB 22), the machinery was placed with the assessee at the risk of the assessee; that a perusal of the agreement shows that in fact, for all acts, the risk is that of the assessee, as is available, inter alia, from para 6.5 to para 6.7 of the agreement; that the insurance also entails the risk of the assessee; that the depreciation was not claimed by the owner; that the issue concerning grant of depreciation of assets taken under hire purchase has been dealt with by the Hon ble jurisdictional High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment, and ( ii )payment on account of purchase, to be treated as capital outlay, depreciation being allowed to the lessee on the initial value ( i.e., the amount for which the hired subject would have been sold for cash at the date of agreement). The allowance to be made in respect of hire should be the difference between the aggregate amount of the periodical payments under the initial value (as described above), the amount of this allowance being spread over the terms of agreement. If, however, the agreement were terminated either by outright purchase of the equipment of its return to the owner, deduction should cease as from the date of termination. The assessee claiming this deduction should be asked to furnish a certificate from the vendor or other satisfactory evidence, of the initial value (as described above). Where, no certificate of satisfactory evidence is forthcoming the initial value should be arrived at by computing the present value of the amount payable under the agreement at an appropriate rate per annum. In doubtful cases the facts should be reported to the Board." 9. As per the hire-purchase agreement: "4.1If the Hirer duly pays all sums payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 26-6-1959 (APB-16), while holding that development rebate, like depreciation, may also be granted in the first year itself, on the full initial value of the asset. Again, vide Instruction No. 1097 dated 19-9-1977 (APB-17), the ITOs were directed to continue to follow allowing of depreciation on plant and machinery purchased on hire-purchase system, as per the Board s Circular No. 19 of 1943 dated 23-3-1943 ( supra ) and the Board s letter F.No. 27(20)-IT/59 dated 26-6-1959 ( supra ). 12. In " General Industries Corpn. s case ( supra ), the assessee had acquired certain assets under hire-purchase, in which, the ownership was to be transferred to him, like in the present case, after the payment of all the instalments, on exercising the option available. The Hon ble jurisdictional High Court held the assessee to be entitled to depreciation in the year of entering into the hire-purchase transaction/agreement. It was further held that undoubtedly, the payments made by the hirer to the owner were for business purposes and allowable as a revenue expenditure, till the hirer exercised the option to acquire the asset; that once the hirer exercised the option to acquire asset, the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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