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ALD Automotive Pvt. Ltd. Versus Dy. CIT, Circle 3 (1) , Mumbai and Vica-Versa

2016 (8) TMI 1093 - ITAT MUMBAI

Claim for depreciation on the leased vehicles - Held that:- The economic life of the vehicle depends also on its’ user, and that a period of five years, coupled with extensive user, may exhaust the life of a vehicle and, in any case, with reference to a particular (standard) operating efficiency. Even so, the fact remains that the assessee extends various lease terms to its’ clients and, two, a higher term opted by a lessee would necessarily imply a low salvage/sale value, so that the assessee i .....

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s the obligation of the lessor, whose name is shown therein as the beneficiary. Confirmation from all major clients also stands furnished before the AO. In our view, therefore, the finding by the ld. CIT(A) of the character of the lease as an operating lease cannot, under the circumstances, be faulted, and the assessee, accordingly, entitled to it’s claim for depreciation on the leased vehicles. - Transfer (of a part) of fleet management charges to maintenance accounts - Held that:- We obser .....

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purportedly followed) as well. Reference to the said rule, we may add, is only toward the assessee following a scientific basis in allocating the revenue over the term of the lease and, accordingly would stand to be examined by the A.O., and the allowance of the assessee’s claim by us is subject to his returning positive findings. We decide accordingly. - I.T.A. Nos. 907 & 109/Mum/2013, I.T.A. Nos. 2179 & 601/Mum/2013 - Dated:- 25-7-2016 - SHRI SANJAY ARORA, AM AND SHRI AMIT SHUKLA, JM For The A .....

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ther by the Revenue, i.e., with regard to: a) Depreciation on lease assets; and b) Transfer (of a part) of fleet management charges to maintenance accounts 2. The assessee is in the business of providing vehicles of different types on, as stated, operating lease basis, to its customers. Apart there-from, it provides allied services like repairing, maintaining, insuring, providing drivers, providing relief vehicles and emergency break-down services. Its other activities include distribution and w .....

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see is in appeal. We shall take up the two in seriatim. 3. As regards depreciation, which is the subject matter of the Revenue s appeal, the same stood disallowed as the invoices and delivery notes (of the vehicles leased) are also in the name of the party using the vehicle (lessee), whose name appears on the vehicle registration certificate. Clearly, it was this party which is the owner of the vehicle, with the assessee being only a financer. Further, the assessee could produce confirmations as .....

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ssee being allowed only the right to user and concomitant possession. He, accordingly, directed allowance of depreciation, relying on Mysore Minerals Ltd. vs. CIT [1999] 239 ITR 775 (SC). Aggrieved, the Revenue is in appeal, raising the following Ground: 1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) was justified in allowing depreciation to the assessee on vehicles given on lease without appreciating the fact that the vehicles were not registered in the name of .....

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e Motor Vehicles Act, 1988. Reliance is placed before us on I.C.D.S Ltd. vs. CIT [2013] 350 ITR 527 (SC) and Mysore Minerals Ltd. (supra). The ownership clause unequivocally states the intent that the vehicle shall be at all material times the property of the lessor. And, further, that the lessee shall be fully liable and responsible for all the obligations, liabilities and duties as per the Motor Vehicles Act or under any other law or instrument pertaining to the use of the vehicles. One of the .....

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ee. Further, along with the principal transaction of lease, other specified, incidental services may be provided, again, as per the requirement of the lessee. The same are clearly offered as a package, contractually, by way of value-added services, toward providing vehicle (commutation) solutions to the customers. The same though would not detract from ascertaining whether the lease under reference is an operating or a financial lease. The Revenue s concern, as we understand, is that the lessees .....

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mations could be provided, however, only by a few customers. The moot question, however, is whether such a claim by the lessee/s, assuming so, valid and, as a corollary, would invalidate the assessee s claim. It is the correct legal position that is relevant, and not the view that the parties may take of their rights in the matter [refer: CIT v. C. Parakh & Co. (India) Ltd. [1956] 29 ITR 661 (SC); Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)]. Notwithstanding, therefore, a clai .....

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e lease rentals would include the profit element as well and, thus, be in excess of depreciation, worked out w.r.t. the cost of the asset. The law being well settled, it is the correctness of the assessee s claim on facts, on which it s claim therefore hinges. By all indica, it is an operating lease, guidance for which may be had from the Accounting Standard (AS) 19 (by ICAI). The vehicle, at the end of the lease term, is not returned to the customer (lessee), but sold in the market, returning t .....

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ssee extends various lease terms to its clients and, two, a higher term opted by a lessee would necessarily imply a low salvage/sale value, so that the assessee is entitled to recover the principal (along with profit), so that its claim for depreciation - which is a charge toward the capital consumed, would be in any case exigible; the only caveat being that in such a case, i.e., where the depreciation is preferred on the basis of the accounting theory, the same shall have to be on a systematic .....

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itled to it s claim for depreciation on the leased vehicles. The Revenue s appeal is accordingly dismissed. 5. We, next, take up the assessee s appeal. The assessee s claim is that the repair and maintenance costs are not period costs, but rise gradually with time, while the recovery thereof (which is along with a margin thereon) is made at a uniform rate, i.e., equally over the term of the lease. The higher (than proportionate) amount received in the initial years of the contract is to be regar .....

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dependent unit of assessment. During hearing, the ld. AR was queried by the Bench that in that case an appropriation would be equally justified in respect of lease rentals, also charged uniformly, while the capital charge (for depreciation), being on WDV basis, is higher for the initial years. He conceded, would though submit that depreciation is a charge/allowance at the rates provided under the Act, so that the same, irrespective of the assessee s method of accounting in respect thereof, is to .....

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osts, is not the basis of the charge, what is? It is not the character of the receipt as revenue that is in dispute, but the extent to which it, in the facts and circumstances of the case, can in law be considered as allocable to/arising for a particular year, i.e., considering the year-wise profile of such expenditure, and given that incurring of the cost is itself the basis of the charge. The amount credited to the reserve account has to be reversed (for each vehicle) over the term of the cont .....

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#8377; 24,000 (i.e., EMI of ₹ 2000). The assessee s empirical data suggests that only ₹ 8000 (say) is liable to be incurred in the first year, which would carry a concomitant charge of ₹ 9,600/-. The excess ₹ 14,400/- (Rs.24,000 - ₹ 9,600) is transferred to the reserve account. In the latter years, where the normative cost is higher than the average, at ₹ 30,000 (say), the shortfall in the proportionate revenue for that year (Rs.36,000), is accounted by write .....

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d ₹ 1.20 lacs (going by our example), being the aggregate cost and the corresponding charge respectively, are based on or approximate the amounts actually obtaining, and is demonstrable. We, accordingly, approve the accounting treatment - which forms the basis for returning income qua the said service, in principle. True, the excess amount received in the initial years cannot be called or said to be an advance proper - which could only be so in terms of the contract, and neither the amount .....

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