TMI Blog2004 (3) TMI 326X X X X Extracts X X X X X X X X Extracts X X X X ..... were directly sent by Beta Securities located in Indore to Beta Napthol located in Vapi, Gujarat. The payment for the assets were made by the assessee as follows: Date Amount (Rs.) 22.3.1996 25,00,000 25.3.1996 25,00,000 27.3.1996 10,00,000 29.3.1996 10,00,000 29.3.1996 3,74,375 9.7.1996 24,58,125 Total 98,32,500 4. On 21st March, 1996, before the payments were made, the assessee entered into a lease agreement with Beta Naphthol (hereinafter referred to as "BN") under which the aforesaid assets were leased to the latter company. The assessee received lease rentals of Rs. 10,80,000 during the year. In the return, the assessee claimed depreciation of Rs. 49,16,250 in respect of the assets leased. The AO, on a perusal of the various clauses of the lease agreements came to the conclusion that the entire arrangement was only a finance transaction and there was no lease involved. According to him, the assessee was not the owner of the assets, but it was BN which was the owner and the effect of the arrangement was that the assets were offered as security for the amount adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as right in directing the AO to allow the depreciation. 7. We have carefully considered the rival submissions and the material on record. The assessee is a company engaged in the business of leasing and hire-purchase. Under s. 32 of the Act, two conditions have to be satisfied before the assessee can get an allowance in respect of depreciation. The first is that he should be the owner of the assets and the second is that the assets should be used in the business of the assessee. There is no dispute about the second condition. The dispute is only with reference to the first condition, namely, ownership. A perusal of the lease document shows the following terms. Under cl. 2.3, there is no security deposit. As per cl. 2.4, the assets have to be delivered to the assessee after the lease term. The learned counsel for the assessee clarified that the lease was renewed till 1999, and thereafter the assets were sold for Rs. 5 lakhs which was the residual value, to the lessee. Clause 2.7 provided for the rights of the lessor during the period before delivery of the equipment. The assets were directly delivered by the manufacturer to BN and it was agreed that the entire risk, cost or any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall affix a name plate or other mark on the equipment identifying the sole and exclusive ownership thereof of the lessor by putting the following in block letters, viz., "UNDER LEASE FROM SONI CAPITAL MARKETS LIMITED" and not to remove the same or deface it. Clause 4.2 prohibits the lessee (BN) from parting with possession and control of the equipment leased without the prior written consent of the lessor (assessee). Clause 4.3 prohibits the lessee from affixing the equipment permanently to any immovable property or to impair the identifiability, ascertainability, severability and redeliverability of the equipment nor to affect the value of the equipment when severed or redelivered to the lessor. These clauses, in our opinion, are consistent with the claim that the equipment was owned by the lessor. 9. Clause 4.7 of the lease deed was relied upon by the Department. According to this clause, BN was to keep the equipment insured. But we find that cl. 4.7.1 says that the insurance policy shall be in the name of the assessee to be described therein as the owner of the equipment and as the loss payee. Further, the agreement is that the insurance shall be made by the lessee for and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed by the assessee because as bailee of the equipment, BN is expected to take reasonable care of the equipment while in its possession. 12. Clause 8.2.1, which relates to the rights of the lessor (assessee) and the obligations of the lessee (BN) on termination of the lease, says that on termination of the lease, the lessor has the right, without any notice or permission, to remove or repossess the equipment and to enter upon the land or building owned by the lessee, for that purpose. It further says that the lessee hereby gives a licence to the lessor to remove or dismantle the equipment and the damage, if any, caused shall not be the responsibility of the lessor. When the lessor is given the right to repossess the equipment on termination of the lease, it reiterates the claim for ownership. 13. Clauses 4.15 and 4.16 were relied upon by the Department. These clauses link the lease rentals to the bank lending rate and the rates of depreciation. These are normally taken into consideration by the lessors while fixing the lease rentals and no motive to avoid tax can be spelt from them, merely because they have been of considerable force in fixing the lease rentals. The transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is allowed to enjoy a portion of the excess, after deduction of certain expenses and benefits as mentioned in cls. 8.2.2.(c) and (d). These amounts are (i) all amounts other than lease rentals due under the lease deed together with interest and (ii) costs and expenses on repairs to the equipment. In our opinion, there is nothing in cl. 8.2.4 which militates against the claim of ownership of the equipment vesting with the assessee. 15. Reference was made by the Department to cl. 8.2.2.(b) which provides for recovery by the lessor from the lessee, in case of termination of the lease, of the "entire amount of lease rentals for the unexpired period of the lease discounted at a rate not more than 18 per cent per annum". But this is only in the nature of penalty as per the Explanation to s. 74 of the Contract Act which says that a stipulation for increased interest from the date of default may be a stipulation by way of penalty. This does not mean that the transaction is only a loan for interest. 16. The learned counsel for the assessee made a reference to the order of the Mumbai Bench of the Tribunal in Sharyans Resources Ltd. vs. Jt. CIT (2002) 83 ITD 340 (Mumbai) and submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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