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Wednesday, January 16, 2013

claim of the assessee for depreciation under Section 32 of the Income Tax Act, 1961 (for short “the Act”).The assessee is a public limited company, classified by the Reserve Bank of India (RBI) as a non-banking finance company. It is engaged in the business of hire purchase, leasing and real estate etc. The vehicles, on which depreciation was claimed, are stated to have been purchased by the assessee against direct payment to the manufacturers. The assessee, as a part of its business, leased out these vehicles to its customers and thereafter, had no physical affiliation with the vehicles. In fact, lessees were registered as the owners of the vehicles, in the certificate of registration issued under the Motor Vehicles Act, 1988 (hereinafter referred to as “the MV Act”). = where the business of the assessee consists of hiring out machinery and/ or where the income derived by the assessee from the hiring of such machinery is business income, the assessee must be considered as having used the machinery for the purpose of business. 40. In the present case, the business of the assessee consists of hiring out machinery and trucks where the income derived by the assessee from hiring of such machinery is business income. Therefore, the assessee- appellant viz. ICDS should be considered as having used the trucks for the purpose of business. 41. It was further brought to our notice that the Hon’ble Karnataka High Court in its judgment in ITRC No. 789 of 1998 for the asst. year 1986- 87 in the case of the assessee- appellant itself (viz. ICDS) has already decided the issue in question in favour of the assessee, confirming the decision of the CIT (A) and the ITAT holding that the assessee company is entitled to the investment allowance and additional depreciation. In this judgment of the Karnataka High Court the decision of the Supreme Court reported in 231 ITR 308 was relied upon. Therefore we have no hesitation to hold that the appellant- company is entitled to a higher rate of depreciation at 50% on the trucks leased out by it. We therefore, reverse the orders of the CIT (Appeals) on this issue.” 32. For the foregoing reasons, in our opinion, the High Court erred in law in reversing the decision of the Tribunal. Consequently, the appeals are allowed; the impugned judgments are set aside and the substantial questions of law framed by the High Court, extracted in para 6 (supra), are answered in favour of the assessee and against the Revenue. There will, however, be no order as to costs.


                                                  REPORTABLE
|IN THE SUPREME COURT OF INDIA                                     |
|CIVIL APPELLATE JURISDICTION                                      |
|CIVIL APPEAL  NO.3282 OF 2008                                     |
|                                                                  |
|M/S I.C.D.S. LTD.                  |—         |APPELLANT          |
|VERSUS                                                            |
|COMMISSIONER OF INCOME TAX, MYSORE |—         |RESPONDENTS        |
|& ANR.                             |          |                   |


                                    WITH


                        CIVIL APPEAL NO.3286 OF 2008,
                        CIVIL APPEAL NO.3287 OF 2008,
                        CIVIL APPEAL NO.3288 OF 2008,
                        CIVIL APPEAL NO.3289 OF 2008,
                                     AND
                        CIVIL APPEAL NO.3290 OF 2008


                               J U D G M E N T



D.K. JAIN, J.




1. In all these appeals, by grant of special  leave,  by  the  Revenue,  the
   common question  of  law  relates  to  the  claim  of  the  assessee  for
   depreciation under Section 32 of the Income Tax Act, 1961 (for short “the
   Act”).  The assessment years involved are 1991-1992 to 1996-1997.





2. The assessee is a public limited company, classified by the Reserve  Bank
   of India (RBI) as a non-banking finance company.
It is  engaged  in  the
   business of hire purchase, leasing and real estate etc. 
The vehicles,  on
   which depreciation was claimed, are stated to have been purchased by  the
   assessee against direct payment to the manufacturers. 
The assessee, as  a
   part of its business, leased out these  vehicles  to  its  customers  and
   thereafter, had no physical  affiliation  with  the  vehicles.  
In  fact,
   lessees were registered as the owners of the vehicles, in the certificate
   of registration issued under the Motor Vehicles  Act,  1988  (hereinafter
   referred to as “the MV Act”).





3.  In its return of income for the relevant assessment years, the  assessee
   claimed, among other heads, depreciation in relation to  certain  assets,
   (additions made to the  trucks)  which,  as  explained  above,  had  been
   financed by the assessee but registered in the name of third parties. The
   assessee also claimed depreciation at a higher rate on  the  ground  that
   the vehicles were used in the business of running on hire.





4.  The Assessing  Officer  disallowed  claims,  both  of  depreciation  and
   higher rate, on the ground that the assessee’s use of these vehicles  was
   only by way of leasing out to others  and  not  as  actual  user  of  the
   vehicles in the business of running them on hire.
It had merely financed
   the purchase of these assets and was neither the owner nor user of  these
   assets. Aggrieved, the assessee preferred appeals to the Commissioner  of
   Income Tax.   
In so far as the question of depreciation  at  normal  rate
   was concerned, the  Commissioner  (Appeals)  agreed  with  the  assessee.
   However, assessee’s claim for depreciation at higher rate  did  not  find
   favour with the Commissioner.





5. Being dissatisfied, both the assessee and the Revenue carried the  matter
   further in appeal before the Income-tax  Appellate  Tribunal  (for  short
   “the Tribunal”).  The Tribunal agreed  with  the  assessee  on  both  the
   counts.  On the question of claim for depreciation on  normal  rate,  the
   following observations by the Tribunal are very significant:





           “…In the present case the business of the assessee-appellant  is
      leasing and hiring of vehicles and other machinery.  It is  definitely
      not a hire purchase, as seen from the lease agreements, copies of some
      of which are on record.  Further, allowing only  depreciation  is  not
      the matter of dispute in the instant case.  The lower authorities have
      already allowed the depreciation,  of  course  in  the  normal  rates.
      Therefore, ownership of the  vehicles  and  its  use  is  not  at  all
      disputed at any stage before  the  Assessing  Officer  and  the  first
      appellate authority.






            Nothing is  brought  on  record,  whether  the  lessees  of  the
      vehicles have claimed the depreciation which were used by them.   From
      this the only inference that can be drawn is that the lessees have not
      claimed depreciation and it is the appellant alone who has claimed the
      depreciation being the actual owner of the vehicles.”





On  the  higher  rate  of  depreciation,  the  Tribunal   culled   out   the
observations of the Commissioner of Income Tax (Appeals) as under:

      “The CIT (Appeals) considered that the appellant has only financed  to
      purchase the trucks. Therefore, according  to  him,  leasing  out  the
      trucks or hiring them does not assume the character of doing  business
      of hiring the trucks. According to the  CIT  (Appeals)  the  appellant
      must use the trucks for its own business of running them  on  hire  to
      claim the higher rate of depreciation. But the main  activity  of  the
      appellant is to lease out or give the trucks on hire to others.

                   ***              ***               ***

      … In the opinion of the CIT (Appeals), the language used in the  rules
      clearly specified that enhanced depreciation  allowance  is  available
      only when the trucks are used in the business of running them on  hire
      also. The appellant has only a leasing business and it does not run  a
      business of hiring trucks to the public. According to  the  department
      the distinction is very clear and there is no case for  the  appellant
      to claim the enhanced depreciation  on  the  business  of  hiring  the
      trucks.”




6. Relying on the decision of this Court  in  Commissioner  of  Income  Tax,
   Karnataka, Bangalore  Vs.  Shaan  Finance  (P)  Ltd.,  Bangalore[1],  the
   Tribunal held that the assessee, having used the trucks for  the  purpose
   of business, was entitled to a higher rate of depreciation at 50% on  the
   trucks leased out by it.




7. Being aggrieved, the revenue preferred an appeal to the High Court  under
   Section 260A of the Act.  The High Court framed the following substantial
   questions of law for its adjudication:-


      “Whether the Appellant (assessee) is the owner of the  vehicles  which
      are leased out by it to its customers and




      Whether the Appellant (assessee) is entitled to  the  higher  rate  of
      depreciation on the said vehicles, on the ground that they were  hired
      out to the Appellant’s customers.”





8. Answering both the questions in favour of the  revenue,  the  High  Court
   held that in view of the fact that the vehicles were  not  registered  in
   the name of the assessee, and that the assessee  had  only  financed  the
   transaction, it could not be held to be the owner of  the  vehicles,  and
   thus, was  not  entitled  to  claim  depreciation  in  respect  of  these
   vehicles. Hence, these appeals by the assessee.




9. Section 32 of the Act on depreciation, pertinent for the  controversy  at
   hand,  reads as follows:
      “32.(1) In respect of depreciation of—
      (i)   buildings, machinery, plant or furniture, being tangible assets;


      (ii)   know-how,   patents,   copyrights,   trade   marks,   licences,
      franchises or any other  business  or  commercial  rights  of  similar
      nature, being intangible assets acquired on or after the  1st  day  of
      April, 1998,
      owned, wholly or partly, by the assessee and used for the purposes  of
      the business or profession, the following deductions shall be allowed-


           i) in the case of assets of an undertaking engaged in generation
              or generation and distribution of power, such  percentage  on
              the  actual  cost  thereof  to  the  assessee   as   may   be
              prescribed ;]


          ii) in the case of any block of assets, such  percentage  on  the
              written down value thereof as may be prescribed


      Provided that no deduction shall  be  allowed  under  this  clause  in
      respect of—


      (a)   any motor car manufactured outside India, where such  motor  car
      is acquired by the assessee after the 28th day of February,  1975  but
      before the 1st day of April, 2001, unless it is used—


           i) in a business of running it on hire for tourists ; or
          ii) outside India  in  his  business  or  profession  in  another
              country ; and


      (b) any machinery or plant if the actual cost thereof is allowed as  a
      deduction in one or more years under an agreement entered into by  the
      Central Government under section 42


      Provided further that where an asset referred  to  in  clause  (i)  or
      clause (ii) or clause (iia) as the case may be,  is  acquired  by  the
      assessee during the previous year and is put to use for  the  purposes
      of business or profession for a period of less than  one  hundred  and
      eighty days in that previous  year,  the  deduction  under  this  sub-
      section in respect of such asset shall be restricted to fifty per cent
      of the amount calculated at the percentage  prescribed  for  an  asset
      under clause (i) or clause (ii)  [or clause (iia)], as  the  case  may
      be.”
                                                         (Emphasis supplied)



10. Depreciation is the monetary equivalent of the wear  and  tear  suffered
   by a capital asset that is set aside to facilitate its  replacement  when
   the asset becomes dysfunctional.  In  P.K.  Badiani  Vs. Commissioner  of
   Income Tax,  Bombay[2],  this  Court  has  observed  that  allowance  for
   depreciation is to replace the value of an asset to  the  extent  it  has
   depreciated during the period of accounting relevant  to  the  assessment
   year and as the value has, to that extent, been lost,  the  corresponding
   allowance for depreciation takes place.

11. Black’s Law Dictionary (5th Edn.) defines ‘depreciation’ to mean,  inter
   alia:

      “A fall in value; reduction of worth. The deterioration or the loss or
      lessening in value, arising from age, use, and  improvements,  due  to
      better methods. A decline in value  of  property  caused  by  wear  or
      obsolescence and is usually measured by a set formula  which  reflects
      these elements over a given period  of  useful  life  of  property....
      Consistent gradual  process  of  estimating  and  allocating  cost  of
      capital investments over estimated useful life of asset  in  order  to
      match cost against earnings...”


The 6th Edition defines it, inter alia, in the following ways:

      “In accounting, spreading out the cost of a  capital  asset  over  its
      estimated useful life.

      A decline in the value of property caused by wear or obsolescence  and
      is usually measured by a set formula  which  reflects  these  elements
      over a given period of useful life of property.”




12. Parks in Principles & Practice of Valuation (Fifth Edn.,  at  page  323)
   states: As for building, depreciation is the measurement of  wearing  out
   through consumption, or use, or effluxion  of  time.  Paton  has  in  his
   Account's Handbook (3rd Edn.) observed that depreciation  is  an  out-of-
   pocket cost as any other costs. He has further observed-the  depreciation
   charge is merely the periodic operating aspect of fixed asset costs.

13. The provision on depreciation in the Act reads that the  asset  must  be
   “owned, wholly or partly, by the assessee and used for  the  purposes  of
   the business”. Therefore, it imposes a twin  requirement  of  ‘ownership’
   and ‘usage for business’ for a successful claim under Section 32  of  the
   Act.




14. The Revenue attacked both  legs  of  this  portion  of  the  section  by
   contending: (i) that the assessee is not the owner  of  the  vehicles  in
   question and (ii) that the assessee did  not  use  these  trucks  in  the
   course of its business. It was argued that depreciation can be claimed by
   an assessee only in a case where the assessee is both, the owner and user
   of the asset.




15. We would like to dispose of the  second  contention  before  considering
   the first.  Revenue argued that since the lessees were actually using the
   vehicles, they were the ones entitled to claim depreciation, and not  the
   assessee. We are not persuaded to agree with the  argument.  The  Section
   requires that the assessee must  use  the  asset  for  the  “purposes  of
   business”. It does not mandate usage of the asset by the assessee itself.
   As long as the asset is utilized for  the  purpose  of  business  of  the
   assessee,  the  requirement  of  Section   32   will   stand   satisfied,
   notwithstanding non-usage of the asset itself by  the  assessee.  In  the
   present case before us, the assessee is a leasing  company  which  leases
   out trucks that it purchases. Therefore, on a combined reading of Section
   2(13) and Section 2(24) of the Act, the income derived  from  leasing  of
   the trucks would be business income, or income derived in the  course  of
   business, and has been so assessed.  Hence,  it  fulfills  the  aforesaid
   second requirement of Section 32 of the Act viz. that the asset  must  be
   used in the course of business.

16. In the case  of  Shaan  Finance  (P)  Ltd.  (supra),  this  Court  while
   interpreting the words “used for the purposes of  business”  in  case  of
   analogous provisions of Section 32A(2) and Section 33 of the Act, dealing
   with Investment Allowance and Development Rebate respectively, held thus:
   -

      “9. Sub-section (2) of Section 32-A, however, requires to be  examined
      to see whether there  is  any  provision  in  that  sub-section  which
      requires that the assessee should not merely use the machinery for the
      purposes of his business, but should himself use the machinery for the
      purpose of manufacture or for whatever other purpose the machinery  is
      designed. Sub-section  (2)  covers  all  items  in  respect  of  which
      investment allowance can be granted. These items are,  ship,  aircraft
      or machinery or plant of certain kinds specified in that  sub-section.
      In respect of a  new  ship  or  a  new  aircraft,  Section  32-A(2)(a)
      expressly prescribes that the new ship or the new aircraft  should  be
      acquired by an assessee which is itself engaged  in  the  business  of
      operation of ships or aircraft. Under sub-section (2)(b), however, any
      such express requirement that the assessee must himself use the  plant
      or machinery is absent. Section 32-A(2)(b) merely  describes  the  new
      plant or machinery which is covered by  Section  32-A.  The  plant  or
      machinery is described with reference to its purpose. For example, sub-
      section (2)(b)(i) prescribes “the purposes of business  of  generation
      or distribution of electricity or  any  other  form  of  power”.  Sub-
      section (2)(b)(ii) refers to small-scale industrial undertakings which
      may use the machinery for the business or manufacture or production of
      any article, and sub-section (2)(b)(iii) refers  to  the  business  of
      construction, manufacture or production of any article or thing  other
      than that  specified  in  the  Eleventh  Schedule.  Sub-section  2(b),
      therefore, refers to the uses to which the machinery can  be  put.  It
      does not specify that the assessee himself should  use  the  machinery
      for these purposes. In the  present  case,  the  person  to  whom  the
      machinery is hired does use the machinery for specified purposes under
      Section 32-A(2)(b)(iii). That person, however, is not the owner of the
      machinery. The High Courts of Karnataka  and  Madras  have  held  that
      looking to the requirements specified in Section 32-A  the  assessees,
      in the present case, fulfil all  the  requirements  of  that  section,
      namely, (1) the machinery is owned by the assessees; (2) the machinery
      is used for the purpose  of  the  assessees'  business  and;  (3)  the
      machinery is as specified in sub-section (2).


      10. We are inclined to agree with this reasoning of the High Courts of
      Karnataka and Madras.”



17. The same judgment commented on the analogous nature  of  Section  33  on
   Development Rebate and clarified that the phrase “used for the purpose of
   business” does not necessarily require a usage of the  asset  itself.  It
   held thus:

      “11. The provisions relating to investment allowance are akin  to  the
      provisions under Section 33 of the Income Tax Act,  1961  relating  to
      development rebate…


                         ***         ***        ***

      12. Since the provisions of Section 33 dealing with development rebate
      are similar to the provisions of Section 32-A, it is necessary to look
      at cases dealing with the grant of development  rebate  under  Section
      33. In the case of CIT v. Castlerock Fisheries (1980) 126 ITR 382  the
      Kerala High Court considered the case of an assessee which temporarily
      let out its cold-storage plant to a sister concern. The income derived
      by such letting was assessed by the Income Tax Officer in the hands of
      the assessee as business income  of  the  assessee  for  the  relevant
      accounting years. The assessee claimed development rebate  in  respect
      of the cold-storage plant. The High Court said that it was accepted by
      the department that in  letting  out  the  plant  and  machinery,  the
      assessee was still doing business and the hire charges  which  it  had
      received, had been assessed as business income of the assessee.  Hence
      the assessee had complied with all the conditions  for  the  grant  of
      development rebate including the condition that the assessee had  used
      the machinery for the purposes of its business. The  High  Court  said
      that it must, therefore, necessarily be assumed  that  the  conditions
      laid down in Section 33(1)(a) that the machinery or  plant  is  wholly
      used for the purposes of the business carried on by the  assessee,  is
      duly satisfied and the assessee is entitled to development rebate.  In
      appeal before this Court, a Bench of three Judges of this Court upheld
      the decision of the Kerala High Court in the  above  case  in  CIT  v.
      Castle Rock Fisheries (1997) 10 SCC 77.  This  Court  also  held  that
      since the department has proceeded on the explicit basis that  despite
      the fact that the plant had been temporarily let out by  the  assessee
      to a sister concern, the plant and machinery  was  nevertheless  being
      used by the assessee for its business purpose by treating  the  income
      derived by the assessee by such letting out as business income of  the
      assessee, the development rebate must be  considered  as  having  been
      rightly  granted.  Therefore,  where  the  business  of  the  assessee
      consists of hiring out machinery and/or where the  income  derived  by
      the assessee from the hiring of such machinery is business income, the
      assessee must be considered as  having  used  the  machinery  for  the
      purposes of its business.


      13. A similar view has been taken by the Andhra Pradesh High Court  in
      the case of CIT v. Vinod Bhargava   (1988)  169  ITR  549  (AP)  where
      Jeevan Reddy, J. (as he then was) held that where leasing of machinery
      is a mode of carrying on business by the assessee the  assessee  would
      be entitled to development rebate. The Court observed (p. 551):


          “[O]nce it is held that leasing out of the machinery is  one  mode
          of doing business by the assessee  and  the  income  derived  from
          leasing  out  is  treated  as  business   income   it   would   be
          contradictory, in terms, to say that the  machinery  is  not  used
          wholly for the purpose of the assessee's business.”




18. Hence, the assessee meets the second requirement  discussed  above.  The
   assessee did use the vehicles in the course of its leasing business.   In
   our opinion, the fact that the trucks themselves were  not  used  by  the
   assessee is irrelevant for the purpose of the section.

19. We may now advert to the first requirement i.e. the issue of  ownership.
   No  depreciation  allowance  is  granted  in  respect  of   any   capital
   expenditure which the assessee may be obliged to incur on the property of
   others.  Therefore, the entire case hinges on the question of  ownership;
   if the assessee is the owner of the vehicles, then he will be entitled to
   the claim on depreciation, otherwise, not.

20. In Mysore Minerals Ltd.,  M.G.  Road,  Bangalore  Vs.  Commissioners  of
   Income Tax, Karnataka, Bangalore[3], this Court said thus:

      “…authorities shows that the very concept  the  depreciation  suggests
      that the tax benefit on account of depreciation  legitimately  belongs
      to one who has invested in the capital asset is utilizing the  capital
      asset and thereby losing gradually investment caused by wear and tear,
      and would need to replace the same by having lost its value fully over
      a period of time.”



21. Black’s Law Dictionary (6th Edn.) defines 'owner' as under:

      “Owner. The person in whom is vested the ownership, dominion, or title
      of property; proprietor. He who has  dominion  of  a  thing,  real  or
      personal, corporeal or incorporeal, which he has a right of enjoy  and
      do with as he pleases, even to spoil or destroy it, as far as the  law
      permits, unless he be prevented by some agreement  or  covenant  which
      restrains his right.

      The term is, however, a nomen generalissimum, and its meaning is to be
      gathered from the connection in which it is used, and from the subject-
      matter to which it is applied. The primary  meaning  of  the  word  as
      applied to land is one who owns the fee  and  who  has  the  right  to
      dispose of the property, but the terms  also  included  one  having  a
      possessory right to land or the person occupying or cultivating it.

      The term "owner" is used to indicate a person  in  whom  one  or  more
      interests are vested his own benefit. The person in whom the interests
      are vested has ‘title’ to the interests whether he holds them for  his
      own benefit or the benefit of another. Thus the  term  “title”  unlike
      “owner”..”

It defines the term 'ownership' as –

      "Collection of right to use and enjoy  property,  including  right  to
      transmit it to others.... The right of one or more persons to  possess
      or use a thing to the exclusion of others. The right by which a  thing
      belongs to some one in particular,  to  the  exclusion  of  all  other
      persons. The exclusive right of  possession,  enjoyment  or  disposal;
      involving as an essential attribute the right to control, handle,  and
      dispose."





The same dictionary defines the term “own” as ‘To have a good legal  title’.


These definitions essentially make ownership a function of  legal  right  or
title against the rest of the world. However, as seen above,  it  is  “nomen
generalissimum, and its meaning is to be gathered  from  the  connection  in
which it is used, and from the subject-matter to which it is applied.”


22. A scrutiny of the  material  facts  at  hand  raises  a  presumption  of
   ownership in favour of the assessee.  The vehicle, along with  its  keys,
   was delivered to the assessee upon which, the lease agreement was entered
   into by the assessee with the customer. Moreover, the relevant clauses of
   the agreement between the assessee and the customer specifically provided
   that:

      (i)   The assessee was the exclusive  owner  of  the  vehicle  at  all
           points of time;


      (ii)  If the lessee committed a default, the assessee was empowered to
           re-possess the vehicle         (and  not  merely  recover  money
           from the customer);

         iii) At the conclusion of the lease period, the lessee was obliged
              to return the vehicle to the assessee;

          iv) The assessee had the right of inspection of  the  vehicle  at
              all times.

For the  sake  of  ready  reference,  the  relevant  clauses  of  the  lease
agreement are extracted hereunder:-

      “2. Lease Rent

      The lessee shall, during the period of lease  punctually  pay  to  the
      lessor free of any deduction whatsoever as rent for the assets the sum
      of moneys specified in the Schedule ‘B’ hereto.  All  rents  shall  be
      paid at the address of the Lessor shown above or as otherwise directed
      by the Lessor in writing. The rent shown in Schedule ‘B’ shall be paid
      month on 1st day of each month and the first rent  shall  be  paid  on
      execution thereof.

      4. Ownership

      The assets shall at all times remain the sole and  exclusive  property
      of the lessor and the lessee shall have no right, title or interest to
      mortgage, hypothecate or sell the same as bailee

      9. Inspection

      The Lessor shall have the right at all reasonable time to  enter  upon
      any premises where the assets is  believed  to  be  kept  and  inspect
      and/or test the equipment and/or observe its use.

      18. Default

      If the lessee shall make default in payment of moneys or rent  payable
      under the provisions of this agreement, the Lessee shall  pay  to  the
      Lessor on the sum or sums in arrears compensation at the  rate  of  3%
      per month until payment thereof, such compensation to run from the day
      to day without prejudice to  the  lessor’s  rights  under  any  terms,
      conditions and agreements  herein  expressed  or  implied.  All  costs
      incurred by the Lessor in obtaining payment  of  such  arrears  or  in
      endeavoring to trace the whereabouts of the equipments or in obtaining
      or endeavouring to obtain possession thereof whether by  action,  suit
      or otherwise, shall be recoverable from the lessee in addition to  and
      without prejudice to the lessors right for breach of this lease.







      19. Expiration of Lease:

      Upon the expiration of this Lease, the Lessee  shall  deliver  to  the
      Lessor the assets at such place as the  Lessor  may  specify  in  good
      repair, condition and working order. As soon  as  the  return  of  the
      asset the Lessor shall refund the amount of security deposit.  If  the
      lessee fails to deliver the equipment to the Lessor in accordance with
      any direction given by the Lessor, the Lessee shall be  deemed  to  be
      the tenant of the assets at the same rental and upon  the  same  terms
      herein expressed and such tenancy may  be  terminated  by  the  Lessor
      immediately upon default by the lessee hereunder or upon 7 days notice
      previously given..”




23. The Revenue’s objection to the claim of the assessee is founded  on  the
   lease agreement. It argued that at the  end  of  the  lease  period,  the
   ownership of the vehicle is transferred to the lessee at a nominal  value
   not exceeding 1% of the original cost of the vehicle, making the assessee
   in effect a financer. However we are not  persuaded  to  agree  with  the
   Revenue. As long as the assessee has a right to retain the legal title of
   the vehicle against the rest of the world, it would be the owner  of  the
   vehicle in the eyes of law.  A scrutiny of the sale agreement  cannot  be
   the basis of raising question against the ownership of the  vehicle.  The
   clues qua ownership lie in the  lease  agreement  itself,  which  clearly
   point in favour of the assessee. We agree with the following observations
   of the Tribunal in this regard:
      “20.  It is evident  from  the  above  that  after  the  lessee  takes
      possession   of   the   vehicle    under    a    lease    deed    from

                                             the appellant-company it (sic.)
      shall be paying  lease  rent  as  prescribed  in  the  schedule.   The
      ownership of the vehicles would vest with the appellant-company  viz.,
      ICDS as per clause (4) of the agreement of lease.  As per  clause  (9)
      of the Lease agreement, M/s. ICDS is having right of inspection at any
      time it wants.  As per clause (18) of the Lease agreement, in case  of
      default of lease rent, in addition  to  expenses,  interest  etc.  the
      appellant company is entitled to take possession of the  vehicle  that
      was leased out.  Finally, as per clause (19), on  the  expiry  of  the
      lease tenure, the lessee should return the vehicle  to  the  appellant
      company in working order.

      21.   It is true that a lease of goods or rental or  hiring  agreement
      is a contract under which one party for reward allows another the  use
      of goods.  A lease may be for a specified period or in perpetuity.   A
      lease differs from a hire purchase agreement in that lessee or  hirer,
      is not given an option to purchase the goods.  A hiring  agreement  or
      lease unlike a hire purchase agreement  is  a  contract  of  bailment,
      plain and simple with no element of sale  inherent.   A  bailment  has
      been defined in S.148 of the Indian Contract Act, as “the delivery  of
      goods by one person to another for some purpose, upon a contract  that
      they shall, when the purpose is accomplished, be returned or otherwise
      disposed of according to the directions of the person delivering them.

      22.   From the above discussion, it is  clear  that  the  transactions
      occurring in the business of the assessee-appellant are  leases  under
      agreement, but not hire purchase  transactions.   In  fact,  they  are
      transactions of ‘hire’.  Even viewed from the angle of the  author  of
      ‘Lease Financing and Hire Purchase’, the views of whom were  discussed
      in pages 16 and 17 of this order, the  transactions  involved  in  the
      appellant business are nothing but lease transactions.

      23.   As far as the factual portion is concerned now we could come  to
      a conclusion that  leasing  of  vehicles  is  nothing  but  hiring  of
      vehicles.  These two aspects are one and the same.  However, we  shall
      discuss the case law cited by both the parties on the point.”



24. The only hindrance to the claim of  the  assessee,  which  is  also  the
   lynchpin of the case of the Revenue, is Section  2(30)  of  the  MV  Act,
   which defines ownership as follows: -

      ““owner”  means  a  person  in  whose  name  a  motor  vehicle  stands
      registered, and where such person is a minor,  the  guardian  of  such
      minor, and in relation to a motor vehicle which is the  subject  of  a
      hire-purchase agreement, or an agreement of lease or an agreement of a
      hypothecation, the person in possession  of  the  vehicle  under  that
      agreement.”



25. The general opening words of the Section say that the owner of  a  motor
   vehicle is the one in whose name it is registered, which, in the  present
   case, is  the  lessee.  The  subsequent  specific  statement  on  leasing
   agreements states that in respect of a vehicle given on lease, the lessee
   who is in possession shall be the owner. The Revenue thus, argued that in
   case of ownership of vehicles, the test of ownership is the  registration
   and certification. Since the certificates were in the name of the lessee,
   they would be the legal owners of the vehicles and the ones  entitled  to
   claim depreciation. Therefore, the general  and  specific  statements  on
   ownership construe ownership in favour of the lessee, and hence,  are  in
   favour of the Revenue.

26. We do not find merit  in  the  Revenue’s  argument  for  more  than  one
   reason: (i) Section 2(30) is a deeming provision  that  creates  a  legal
   fiction of ownership in favour of lessee only for the purpose of  the  MV
   Act. It defines ownership for the subsequent provisions of  the  MV  Act,
   not for the purpose of law in general. It serves more as a guide to  what
   terms in the MV Act mean. Therefore, if the MV Act at any point uses  the
   term owner in any Section, it means the one in whose name the vehicle  is
   registered and in the case of a lease agreement, the lessee. That is all.
   It is not a statement of  law  on  ownership  in  general.  Perhaps,  the
   repository of a general statement of law on ownership may be the Sale  of
   Goods Act; (ii) Section 2(30) of the MV Act must be  read  in  consonance
   with sub-sections (4) and (5) of Section 51 of the  MV  Act,  which  were
   referred to by Mr. S. Ganesh, learned senior counsel  for  the  assessee.
   The provisions read as follows: -

      “(4) No entry regarding the transfer of ownership of any motor vehicle
      which  is  held  under  the  said  agreement  shall  be  made  in  the
      certificate of registration except with the  written  consent  of  the
      person  whose  name  has  been  specified  in   the   certificate   of
      registration as the person with whom the registered owner has  entered
      into the said agreement.


      (5) Where the person whose name has been specified in the  certificate
      of registration as the person  with  whom  the  registered  owner  has
      entered into the said agreement, satisfies the  registering  authority
      that he has taken possession of the vehicle  from the registered owner
      owing to the default of the registered owner under the  provisions  of
      the said agreement and that the registered owner  refuses  to  deliver
      the certificate of registration or has absconded, such authority  may,
      after  giving  the  registered  owner  an  opportunity  to  make  such
      representation as he may wish to make (by sending to him a  notice  by
      registered post acknowledgment due  at  his  address  entered  in  the
      certificate of registration) and notwithstanding that the  certificate
      of registration is not produced before it, cancel the certificate  and
      issue a fresh certificate of registration in the name  of  the  person
      with whom the registered owner has entered into the said agreement:


      Provided that a fresh certificate of registration shall not be  issued
      in respect of a motor vehicle, unless such person pays the  prescribed
      fee:


      Provided further that a fresh certificate of  registration  issued  in
      respect of a motor vehicle, other than a transport vehicle,  shall  be
      valid  only  for  the  remaining  period  for  which  the  certificate
      cancelled under this sub-section would have been in force.”


Therefore, the MV Act mandates that during the period of lease, the  vehicle
be registered, in the certificate  of  registration,  in  the  name  of  the
lessee and, on conclusion of the lease period, the vehicle be registered  in
the name of lessor as owner. The Section leaves no choice to the lessor  but
to allow the vehicle to be registered in the name of  the  lessee  Thus,  no
inference can be drawn from the registration certificate as to ownership  of
the legal title of the vehicle; and (iii) if the  lessee  was  in  fact  the
owner, he would  have  claimed  depreciation  on  the  vehicles,  which,  as
specifically recorded in the order of the Appellate Tribunal, was not  done.
It would be a strange situation to have no claim of depreciation in case  of
a particular depreciable asset due to  a  vacuum  of  ownership.  As  afore-
noted, the entire lease  rent  received  by  the  assessee  is  assessed  as
business income in its hands and the entire lease rent paid  by  the  lessee
has been treated as deductible revenue  expenditure  in  the  hands  of  the
lessee. This reaffirms the position that the assessee is in fact  the  owner
of the vehicle, in so far as Section 32 of the Act is concerned.

27. Finally, learned senior counsel appearing  on  behalf  of  the  assessee
   also pointed out a large number of cases, accepted  and  unchallenged  by
   the Revenue, wherein the lessor has been held as the owner of an asset in
   a lease agreement. [Commissioner of Income-Tax Vs. A.M. Constructions[4];
   Commissioner of Income- Tax Vs. Bansal Credits Ltd.[5];  Commissioner  of
   Income-Tax        Vs. M.G.F. (India) Ltd.[6]; Commissioner of  Income-Tax
                  Vs. Annamalai Finance Ltd.[7]]. 
 In each of  these  cases,
   the leasing  company  was  held  to  be  the  owner  of  the  asset,  and
   accordingly held entitled to claim depreciation and also  at  the  higher
   rate applicable on the asset hired out. 
We are in complete agreement with
   these decisions on the said point.

28. There  was  some  controversy  regarding  the  invoices  issued  by  the
   manufacturer – whether they were issued in the name of the lessee or  the
   lessor.  For the view we have taken above, we deem it unnecessary  to  go
   into the said question as it is of no consequence to our final opinion on
   the main issue. From a perusal of the lease agreement and  other  related
   factors, as discussed above, we are satisfied of the assessee’s ownership
   of the trucks in question.

29. Therefore, in the facts of the present case, we  hold  that  the  lessor
   i.e. the assessee is the owner of the vehicles. As the owner, it used the
   assets in the course of its business,  satisfying  both  requirements  of
   Section 32 of the Act and hence, is entitled  to  claim  depreciation  in
   respect of additions made to the trucks, which were leased out.

30. With regard  to  the  claim  of  the  assessee  for  a  higher  rate  of
   depreciation, the import of the same term “purposes of business”, used in
   the second proviso to Section 32(1) of the Act gains significance. 
We are
   of the view that the interpretation of  these  words  would  not  be  any
   different from that which we ascribed to them earlier, under  Section  32
   (1) of the Act. 
Therefore, the assessee fulfills  even  the  requirements
   for a claim of a higher rate of depreciation, and hence  is  entitled  to
   the same.

31. In this regard, we endorse the following observations of  the  Tribunal,
   which clinch the issue in favour of the assessee.
      “15.  The CBDT vide Circular No. 652, dated  14-6-1993  has  clarified
      that the higher rate of 40% in case of lorries  etc.  plying  on  hire
      shall not apply if the vehicle is used in a non-  hiring  business  of
      the assessee. This circular cannot be read out of its context to  deny
      higher appreciation in case of leased vehicles when the actual use  is
      in hiring business.
                                                         (Emphasis supplied)


      Perhaps, the author meant that when the actual use of the  vehicle  is
      in hire business, it is entitled for depreciation at a higher rate.

                         ***         ***        ***

      39. The gist of the decision of the apex court in the  case  of  Shaan
      Finance (P) Ltd. is that 
where the business of the  assessee  consists
      of hiring out machinery and/  or  where  the  income  derived  by  the
      assessee from the hiring of such machinery  is  business  income,  the
      assessee must be considered as  having  used  the  machinery  for  the
      purpose of business.

      40. In the present case, the business  of  the  assessee  consists  of
      hiring out machinery and  trucks  where  the  income  derived  by  the
      assessee from hiring of such machinery is business income.  Therefore,
      the assessee- appellant viz. ICDS should be considered as having  used
      the trucks for the purpose of business.

      41. It was further brought to our notice that  the  Hon’ble  Karnataka
      High Court in its judgment in ITRC No. 789 of 1998 for the asst.  year
      1986- 87 in the case of the assessee- appellant itself (viz. ICDS) has
      already decided the issue in  question  in  favour  of  the  assessee,
      confirming the decision of the CIT (A) and the ITAT holding  that  the
      assessee  company  is  entitled  to  the  investment   allowance   and
      additional depreciation. In this judgment of the Karnataka High  Court
      the decision of the Supreme Court reported in 231 ITR 308  was  relied
      upon. Therefore we have no hesitation  to  hold  that  the  appellant-
      company is entitled to a higher rate of depreciation  at  50%  on  the
      trucks leased out by it. We therefore, reverse the orders of  the  CIT
      (Appeals) on this issue.”



32.   For the foregoing reasons, in our opinion, the  High  Court  erred  in
law in reversing the decision of the Tribunal.   Consequently,  the  appeals
are allowed; the impugned  judgments  are  set  aside  and  the  substantial
questions of law framed by the High Court, extracted in para 6 (supra),  are
answered in favour of the assessee and against  the  Revenue.   There  will,
however, be no order as to costs.




|                            |……..………………………………….                      |
|                            |(D.K. JAIN, J.)                         |
|                            |                                        |
|                            |                                        |
|                            |……..………………………………….                      |
|                            |(JAGDISH SINGH KHEHAR, J.)              |
|                                                                     |
|NEW DELHI,                  |                                        |
|JANUARY  14, 2013           |                                        |


ARS

-----------------------
[1]    (1998) 3 SCC 605

[2]    (1976) 4 SCC 562

[3]    (1999) 7 SCC 106

[4]    (1999) 238 ITR 775 (AP)
[5]    (2003) 259 ITR 69 (Del)
[6]    (2006) 285 ITR 142 (Del.)
[7]    (2005) 275 ITR 451 (Mad)


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