TMI Blog2014 (1) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a period of 60 months calculated with yearly interest @ 12.5%. The assessee claimed interest charges in EMI and debited in the profit and loss account. The AO disallowed the claim of the assessee regarding depreciation on the cost of the buses on the ground that ownership of the buses will be transferred to the assessee only after successful completion of the agreement and full payment of the cost of the buses. Till that time, DMRC Ltd. shall be the sole and absolute owner of the buses and therefore, the assessee is not entitled for depreciation on these leased buses. 2.2 On appeal, the assessee has also raised additional ground being an alternative plea that if the depreciation on buses is not allowed then the claim of the entire lease money paid to DMRC Ltd. should be allowed as Revenue expenditure. 2.3 The ld. CIT(A) disallowed both the claim of the assessee while passing the impugned order. The claim of the depreciation was disallowed by the ld. CIT(A) mainly on the ground that DMRC Ltd. has already claimed depreciation on the cost of these buses. Therefore, depreciation cannot be claimed by two parties on the same assets for the same period and further the payment made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e), however till that time the ownership of the buses is not transferred in favour of the operator (assessee), M/s. DMRC Ltd. shall be the sole and absolute owner of the buses. Thus there is a mandatory provision in the agreement that on successful completion of the agreement and on full payment of the cost of the buses, the ownership of the buses will be transferred to the assessee. Hence, the ld. AR of the assessee has submitted that in substance the lease agreement in question is financial lease and not operating lease because the payment in the name of the lease payment is only the repayment of the cost of the buses with 12.5% of interest , partly upfront payment and partly in equal monthly instalemnt for a period of 05 years which is also a period of agreement. Therefore, after the completion of 05 years successful completion and repayment of the entire cost with interest, the buses will be finally recouped by the assessee. Alternatively, the ld. AR of the assessee submitted that if the lease is treated as operating lease then the assessee is entitled for the deduction of lease rentals as Revenue expenditure. In support of his contention, he relied upon the decision of Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. It is well settled proposition of law of construction of documents 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. Therefore, 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. The Hon'ble Supreme Court in the case of Asea Brown Boveri Ltd. (2005) 126 Comp Cas 332 (SC) and in the case of Association of Leasing and Financial Services Companies vs. Union of India (2010) 35 VST 549 has laid down various tests for determination of the real nature of the lease whether finance lease or operating lease. The broad features for a finance lease can be drawn as discussed by the Special Bench of the Tribunal in the case of Indus Bank Ltd. vs. Addl. CIT 15 (Trib) 89 (Mumbai) wherein the special Bench has discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case has been settled which matches to the period of repayment of the cost of the buses in equal monthly instalment. Therefore, 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. Moreover, 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 and therefore, the risk and rewards incidental to the ownership of the assets vests with the assessee. Therefore, it is clear that 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. In view of the facts and circumstances o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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