IN THE ITAT MUMBAI BENCH ‘J’

J.M. Shares & Stock Brokers

v.

Deputy Commissioner of Income-tax, Special Range 22, Mumbai

Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/Rate of - Whether in case of financial lease, depreciation cannot be allowed to lessor, as it is lessee who becomes owner of property in such lease - Held, yes - Pursuant to an agreement, assessee-company leased out 97 vehicles to SIL for certain consideration on which it claimed depreciation at rate of 40 per cent - As per terms of lease agreement, lessee was liable to pay all taxes, cesses and charges, etc., in respect of leased vehicle; to insure vehicles; and to bear entire risk of any loss or damage, etc., to vehicles and assessee (lessor) was totally indemnified against all and any defects in vehicles - It was further apparent that 50 per cent of invoice price was received from lessee and that assessee intended to sell leased assets on expiry of lease period and was not interested in taking back vehicles from lessee - Whether on facts, it could be said that all features of a financial lease existed in agreement between parties - Held, yes - Whether, therefore, assessee could not be said to be owner of leased vehicles and, consequently, it was not entitled to any depreciation - Held, yes

Facts

The assessee-company entered into an agreement with SIL, whereunder it leased out vehicles for certain value. On the amount so received, the assessee claimed depreciation at the rate of 40 per cent on the reasoning that the vehicles were being used for hiring purposes. The Assessing Officer observed that the assessee intended to sell the leased assets on the expiry of lease period, without any intention to re-acquire them. Thus, according to him, on the expiry of the lease, the assessee would also receive consideration for sale of leased assets. In view thereof, the Assessing Officer opined that the lease agreement was in the nature of hire-financing instead of letting out of the assets on the lease and, consequently, the assessee was not entitled to depreciation. He further held that in the absence of any stipulation in the agreement that vehicles would only be used in the business for running them on hire and without any actual physical control of the assessee over the manner of utilization of the vehicles, the depreciation, in case it was allowable, was to be allowed at 25 per cent. The Commissioner (Appeals) gave part relief to the assessee and held it to be entitled to depreciation at the rate of 25 per cent with reference to 50 per cent of the cost of assets.

On cross appeal :

Held

The Supreme Court in the case of Asea Brown Boveri Ltd. v. Industrial Finance Corpn. of India [2006] 154 Taxman 512 had held that in the case of financial lease, it is the lessee who becomes the owner of the property and, therefore, depreciation cannot be allowed to the lessor.

As per the terms of the lease agreement between the assessee (lessor) and SIL (lessee), SIL was liable to pay all taxes, cesses and charges, etc., in respect of leased vehicles, to insure vehicles, to bear entire risk of any loss or damage, etc., to vehicles and the assessee was totally indemnified against all and any defects in the vehicles. It was further apparent that 50 per cent of the invoice price was received from the lessee and that the assessee intended to sell leased assets at the expiry of lease period and was not interested in taking back vehicles from the lessee. Thus, the terms of the lease agreement clearly revealed that all the features of the financial lease existed in the agreement between the parties. Therefore, in view of the judgment of the Supreme Court in Asea Brown Boveri Ltd.’s case (supra), it was to be held that the assessee was not the owner of the leased vehicles as the impugned agreement was an agreement of financial lease and not the normal lease. Consequently, the assessee was not entitled to any depreciation.

The contention of the assessee that the aforesaid judgment of the Supreme Court was distinguishable on the ground that it was rendered under a different enactment, could not be accepted. What is relevant is the legal position in respect of a particular transaction. Therefore, in a case of financial lease the lessor cannot be treated as owner under any enactment unless expressly provided otherwise.

In view thereof, the order of the Commissioner (Appeals) was to be set aside and, consequently, the disallowance of depreciation made by the Assessing Officer was to be restored.