TMI Blog2001 (9) TMI 1146X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 49,84,400 and from the said date these gas cylinders were leased to M/s. Miga Gases Pvt. Ltd., Bangalore. As per lease agreement executed on 25-9-1995, these gas cylinders were leased to Miga for a period of five years on lease rentals of ₹ 3,70,000 in 20 quarterly instalments starting from 1-10-1995. In addition, the assessee charged lease management fee of ₹ 35,000. During the course of assessment proceedings the assessee claimed that it was entitled to 100% depreciation on the cost of acquisition of these assets. The Assessing Officer however formed an opinion that the real intention behind these lease agreements was to hold these assets during the period of lease for the purpose of the security of the amounts of loans advanced by the assessee. The Assessing Officer therefore issued a show cause letter to the assessee on 15-3-1999 in which the Assessing Officer argued that while the assessee claimed, for the purposes of claiming depreciation under section 32(1) of the Act, to be the absolute owner of these assets, there were terms in the alleged lease agreements which were contrary to the legal norms regarding mutual rights and liabilities of a lessor and a lessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lessee liable to pay all costs in case the lessee refused to take delivery of the assets. The assessee invited the attention of the Assessing Officer to clause 9(e) and 9(f) of the lease agreements which provided that the equipment shall remain the personal property of the lessor and no right, title or interest shall pass to the lessee by virtue of the lease agreements. The assessee clarified that the lessor was made liable during transportation, delivery and installation for the simple reason that the original manufacturer was located close to the factory of the lessee and it did not make commercial sense to have the equipment first transported to the assessee s address in Mumbai and then reship the same to the lessee in Madhya Pradesh. The assessee further pointed out that normally where the assets required higher maintenance or had variable maintenance cost as in the present case, the expenses were borne by the lessee alone. Finally, the agreement did not have any non-cancellable period of lease. 3. In the assessment order the Assessing Officer has referred to certain portions of the lease agreements and observed that the assessee-company had received back the discounted val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore added back to the income as declared in the return of income filed by the assessee the entire depreciation on these two assets as claimed by the assessee. In addition, the Assessing Officer also added back repayment discount amounting to ₹ 15,79,612 and interest component of lease income estimated at ₹ 8,00,000. From the aggregate of these amounts the Assessing Officer reduced the lease income of the year amounting to ₹ 25,38,000 resulting into assessment of total income at ₹ 2,62,64,290 as against the returned income of ₹ 64,90,362. 4. Aggrieved by the assessment order, the assessee preferred appeal before the learned CIT(A). The assessee argued that lease agreements had been entered into by and between the parties which were unrelated to each other and these agreements had been entered into during the course of the assessee s regular leasing business. There was nothing unusual about nature of transactions which were common in India and world over and also recognised by insertion of sub-clause (4A) to section 43(1). All the payments in relation to the transactions had been made by account payee cheques. The assessee became owner of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not concerned about the whereabouts or any functional aspects of the assets in question. The learned CIT(A) found this finding reinforced by clauses 3.1, 3.2, 6.1, 8.q, 9, 10.1, 11.3 b, 13.1, 13.2, 14 and 15 as reproduced by the learned CIT(A) in the impugned order. According to the learned CIT(A), all these clauses went to establish the fact that the assessee-company had not assumed any risk of ownership of the asset which was contrary to the provisions of section 26 of the Sale of Goods Act. The assessee had also not given any warranty for the fitness. Suita-bility or useability of the assets to the lessee which the assessee was required to give while hiring out the assets to the hirer. The lessee had been made liable to the lessor for any loss or damage during transportation, delivery, use or its failure to perform or operate etc. Under the law of hire the lessee could have been made liable only to such loss or damage which occurred due to his negligence or failure to take due care of assets. If the asset was damaged or lost due to no fault on the part of the lessee, the lessor as the owner of the asset must bear the loss. In the instant case, it was the lessee who was liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d assets because the assessee-company had simply entered into a paper transaction and did not have possession which included the right to exclude others. Considering these arguments and the reasons given by the Assessing Officer, the learned CIT(A) gave the finding that the transactions between the assessee-company and the other two parties were finance transaction and no leasing actually took place. The disallowance of depreciation was therefore proper and on this score the order passed by the Assessing Officer did not call for any interference. The learned CIT(A) sought support to these findings from the order of ITAT, Mumbai, in the case of Centre for Monitoring Indian Economy. The decision of Hon ble Supreme Court in the case of Shaan Finance (P.) Ltd. (supra) was also not applicable because in the said decision the matter related to the investment allowance and the business of that assessee was of leasing only. The decision of the Tribunal in the case of Berolia Chemicals Ltd. had been given within the parameters of its facts and should not be held to be squarely applicable to the facts of the assessee. In that case, revenue had not brought out clearly that the transaction was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 31-12-1999 and Circular No. 2 of 2001 dated 9-2-2001. In CBDT Instruction No. 1978, the Board advised its subordinate officers in the following words : 3. In order to have a consistent approach in the assessments of any lessor or lessee, their cases should be, wherever feasible, assigned to the same Assessing Officer and where it is not feasible, the Assessing Officers of the lessor and the lessee should coordinate with each other to ensure consistency of approach in the assessment of the lessor and the lessee the two parties to the same transaction. It will also ensure that the claim of depreciation is not disallowed both to the lessor and lessee. The learned counsel argued that even in this Instruction of CBDT, it was clearly held that it should be ensured that the claim of depreciation is not disallowed both in the hands of the lessor as well as the lessee. As far as the case of the assessee before us was concerned both the lessees had given certificates that they had not claimed any depreciation allowance on the assets in question, which certificates were at pages 132 and 135 of the paper book. The result of the impugned orders in the case of the assessee was a n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and the actual users were totally different parties and there was absolutely no doubt about physical existence of the equipments. 7. The learned counsel argued that both the Assessing Officer as well as the learned CIT(A) have proceeded on the basis of their inferences which were self-contradictory. In the one breath they argued that it was a case of a finance lease simpliciter and should be regarded as loan advanced against the security of equipments. In the next breath they themselves argued that the amounts spent by the assessee for purchase of assets were received back by the assessee-company in the form of lease rentals in advance. Referring to page 8 of the impugned order, the learned counsel pointed out that according to them whatever the assessee-company had invested had been received back in the shape of advance lease rentals. The learned counsel further argued that the authorities below also confused themselves about the facts of the case as well as the terms of lease agreements as well. Referring to page 13 of the impugned order, the learned counsel argued that there was no option reserved in favour of the lessee to purchase the equipments at any predetermined pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso placed reliance on a host of Tribunal decisions viz., Karam Chand Thaper Bros. v. Dy. CIT [1998] 66 ITD 39 (Cal.); Unimed Technologies Ltd. v. Dy. CIT [2000] 73 ITD 150 (Ahd.); Newdeal Finance Investment Ltd. v. Dy. CIT [2000] 74 ITD 469 (Chennai); Amar Structure (P.) Ltd. v. Asstt. CIT [1997] 57 TTJ (Ahd.) 508 and Bombay Burmah Trading Corpn. Ltd. [IT Appeal No. 4766 (Bom.) of 1990] (Paper book pages 88 to 109), and pointed out that on similar facts the Tribunal had upheld the assessee s claim of depreciation allowance and the facts of the assessee s case were rather superior. 9. The learned Departmental Representative argued that the assessee was not entitled to place any reliance on CBDT Instruction No. 1978 because the same was internal instructions and not a public Circular. As far as Circular No. 2 of 2001 was concerned, that too also clarified that the ownership of the asset is determined by the terms of contract between the lessor and the lessee. There was no thumb rule that the depreciation has to be given to the lessor only. The learned DR took us closely through the lease agreement between the assessee and M/s. Duckfin International Ltd. and tried to argue tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in substance the lessor s title over the asset is only a matter of his security; he has otherwise to transfer to the lessee all the risks and rewards of ownership. The rentals are so structured as to repay the lessor s principal as well as interest during the desired payback period of the lessor. The rest of the lease period is nothing but paper transaction wherein peppercorn rentals are paid just to prolong the lease agreement till the asset loses its economic utility. The residual scrap then reverts to the lessor, but its value is negligible. The learned DR then took us to the tabular comparison of financial and operating leases given in the book and pointed out that most of the ingredients of financial lease were satisfied in the instant case. The asset was use-specific and was selected for the lessee specifically. The risks and rewards incidental to ownership were passed on to the lessee and the assessee only remained legal owner of the asset. The assessee was interested in its rentals and not in the asset. It was interested in getting its principal back along with interest. The assessee entered into the transaction only as a financier and did not bear the cost of operation. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT, Mumbai Bench A , Mumbai, in the case of Centre for Monitoring Indian Economy (supra) and pointed out that in that case disallowance of depreciation was upheld. He also placed reliance on the judgment of Hon ble Karnataka High Court in the case of Gowri Shankar Finance Ltd. v. CIT [2001] 248 ITR 713 1. 12. In support of the contention that in the case of finance lease depreciation should not be allowed to the lessor, the learned DR placed reliance upon para 18 of Accounting Standard 19 issued by the Institute of Chartered Accountants. He also argued that such an approach would be justified because the assessee had received back its investment, as mentioned by the Assessing Officer in para 9 of the assessment order. The status of these amounts was not clear. The lease agreement did not enumerate the amount as well as the treatment to be given to the security deposit. There was no clause even that security amount is to be refunded to the lessees. This aspect of the matter appeared to be deliberately kept vague. However, the fact remained that when substantial part of the value of the leased assets had been received upfront by the assessee, it showed that the transaction was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue could still plead the leases in question as finance lease. There was also no substance in the objection of revenue to the assessee having collected huge amounts from the lessees by way of security. Shri Trivedi took us through para 7.2 of Shri Vinod Kothari s book (supra) and pointed out that where the value of the leased assets is large enough, running into crores, most leases are leveraged. The assessee could have obtained finance from banks etc., on interest on the security of these assets. Instead, the assessee agreed to accept discounted value of lease rentals from the lessee itself. If the lease terminates for any reason before the expiry of full-term, the amount received was refundable and to that extent the advance lease rentals in turn was received by the assessee by way of security. It was not correct that the assessee had received back its entire investment by way of advance lease rentals. The amounts received were much less than the assessee s investment and it was yet another major flaw in the reasoning of the authorities below. 15. The learned counsel for the assessee took us closely through the various clauses of lease agreement to oppose the case of revenue th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -97 there is no doubt that in the cases of business of leasing, the lessor can claim to have put the leased asset to use for the purpose of its business. This legal position stands above dispute after the judgment of the Apex Court in the case of Shaan Finance (P.) Ltd. (supra). The case of revenue is entirely made out on the basis that in view of the nature of the agreement between the assessee-company and its lessees the assessee should be treated to have ceased to be the owner of the assets for the purpose of depreciation allowance. In support of this contention it is argued that the agreements the assessee entered into were finance leases whereunder the assessee only held the assets in question as a security for the amounts of loans advanced by the assessee to the lessees. The case of the assessee on the other hand is that the lease agreements did not contain any such provisions whereby its ownership over the assets could be substantially whittled down. As the assessee s ownership over the assets remained intact all along, there was no reason to deny depreciation allowance as claimed by the assessee. During the course of hearing before us, references were made to International ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ast upon revenue to establish that the entire arrangement was a disguise to hide the transfer of assets in favour of the lessees. Merely because in the perception of the Assessing Officer, certain clauses of the lease agreements were unreasonable or even incongruous, it could not be concluded that the assessee had not entered into these agreements as a lessor-owner of the assets in the ordinary course of its business of leasing. It is well-settled position in law that Court cannot rewrite an agreement for the parties. Further, an agreement is to be read and construed as a whole, effect being given to all the parts thereof, and no part of it should be ignored unless it is so inconsistent with the rest of it that no meaning can be given to it. 18. On reading of the lease agreements in question as a whole, we do not find them inconsistent with the contention of the assessee that it was the owner of the assets, its intention being to lease out the assets for a limited term without parting with its rights as an absolute owner over these assets. Clause 8(d) of the agreement provided that the lessee shall Hold the equipment as the bailee of the Lessor and not claim any right, title or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. In our opinion, on reading of these agreements as a whole, it cannot be said, as held by the authorities below, that terms of lease agreements are contrary to the legal norms regarding mutual rights and liabilities of a lessor and lessee. We also do not find it correct to say that by these agreements the assessee was reduced to a mere title-holder over the assets. 19. During the course of hearing before us, the learned DR relied upon the following clause 18 of Accounting Standard 19 issued by the Council of the Institute of Chartered Accountants of India to come into effect in respect of all assets leased during accounting periods commencing on or after 1-4-2001 : 18. A finance lease gives rise to a depreciation expense for the asset as well as a finance expense for each accounting period. The depreciation policy for a leased asset should be consistent with that for depreciable assets which are owned, and the depreciation recognised should be calculated on the basis set out in Accounting Standard (AS) 6, Depreciation Accounting. If there is no reasonable certainty that the lessee will obtained ownership by the end of the lease term, the asset should be fully depreciated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluding the assessee itself. There have been alteration in the situation of asset inasmuch as the assets have been transported from the premises of the manufacturers to the premises of the lessees for which elaborate provisions have been made in the lease agreements, some of which have been adversely commented upon by the authorities below. We find that the authorities below have confused the facts of this case resulting into certain factual inaccuracies in their observations. The Assessing Officer in his show cause letter dated 15-3-1999 mentioned that the lessee had non-cancellable period of lease and option to further renew the same. Both the Assessing Officer and the learned CIT(A) have assumed without enquiring that the assessee had parted with the possession of the equipments for good without there being any material to support such an assumption. This assumption has been strongly refuted by the learned counsel of the assessee before us. Secondly, both the Assessing Officer as well as the learned CIT(A) have repeatedly asserted that advance lease rentals received by the assessee resulted into the assessee-company having received back its investments. During the course of hea ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
