In the ITAT Delhi Bench ‘F’

Joint Commissioner of Income-tax (OSD), New Delhi

v.

Indian Management Advisor & Leasing (P.) Ltd.*

Joginder Pall, Accountant Member

And A.D. Jain, Judicial Member

IT Appeal No. 5085 (Delhi) of 2003

[Assessment year 1996-97]

August 17, 2007

Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/Rate of - Assessment year 1996-97 - Whether an assessee who has acquired an asset on hire-purchase agreement, is entitled to depreciation on asset in year of entering into hire-purchase agreement, notwithstanding that he would become owner of asset, once he makes payment of all instalments and exercises option to acquire assets - Held, yes

Circulars and Notifications : Circular No. 19, dated 12-5-1943

Facts

The assessee-company entered into a hire purchase agreement for three years with a company for obtaining three windmills. As per the agreement, if the hirer duly paid all sums payable to the owner, then on completion of the hire period, the hire shall come to an end and the hirer shall have an option to purchase the products. The Assessing Officer disallowed the depreciation claimed by the assessee on the ground that the assessee had not become the owner from the time the hire-purchase agreement became effective. The Commissioner (Appeals), however, allowed the depreciation claimed.

On revenue’s appeal :

Held

It is evident from the CBDT Circular No. 19 dated 12-5-1943, that in the case of hire-purchase transaction, the payment comprises of the payment towards cost of the asset and payment towards hire thereof. The question here was as to the period of allowability of the depreciation on the asset. As per clause (iii) of the said Circular, where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction is to be regarded as one of hire-purchase. In such cases, the periodical payments made by the hirer are, for tax purposes, to be regarded as made up of consideration for hire and payment on account of purchase. The latter is to be treated as a capital outlay and the depreciation has to be allowed on the initial value, i.e., the amount for which the asset would have been sold for cash on the date of the agreement. [Para 10]

This position was reiterated by the Board  vide its letter F.No. 27 (20)-IT/59, dated 26-6-1959 (APB-16), while holding that the 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). [Para 11]

In Chhotelal Rai v. ITO [1986] 17 ITD 652, the Jabalpur Bench of the Tribunal has held that an assessee who has acquired an asset on hire-purchase agreement, is entitled to depreciation on the asset in the year of entering into the hire-purchase agreement, notwithstanding that he would become the owner of the asset, once he makes the payment of all the instalments and exercises the option to acquire the assets. [Para 13]

The Supreme Court in CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308/97 Taxman 435 has taken note of the Board’s Circular No. 19 of 1943 (supra) and has accepted that in case of a hire-purchase agreement, there is an element of sale and that depreciation is allowable to the hirer of the assets. [Para 14]

Undoubtedly, the agreement of the assessee with the said company was an agreement of passing on title. Evidently, the transfer of the asset depended upon the sweet-will of the hirer and the payment involved was of Re. 1 only. In effect, the asset would stand transferred to the lessee at once, as envisaged under clause (ii) of the CBDT Circular No. 19 of 1943 (supra) as correctly held by the Commissioner (Appeals). [Para 16]

Thus, it actually made no difference to the case of the assessee whether its case fell within clause (ii) or clause (iii) of the Circular (supra). According to CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308/97 Taxman 435 (SC), depreciation is allowable to the hirer of the asset. As per the above Board Circulars and the decision of the jurisdictional High Court in the case of Addl. CIT v. General Industries Corpn. [1985] 155 ITR 403/23 Taxman 347 (Delhi), depreciation was allowable to the assessee in the initial year itself. [Para 17]

In view of the above, respectfully following  General Industries Corporation’s case (supra), the order of the Commissioner (Appeals) was upheld and the grievance raised by the department was rejected as shorn of merits. [Para 18]

In the result, the appeal was to be dismissed.