Case: M/S. I.C.D.S. Ltd Vs. Commissioner Of Income Tax

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 assessment years involved are2. The assessee is a public limited company, classified by the Reserve Bank of India (RBI) as afinance 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 as3. 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 theuse 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,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 theAppellate Tribunal (for short. 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 verythe present case the business of theis 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 thethe higher rate of depreciation, the Tribunal culled out the observations of the Commissioner of Income Tax (Appeals) asCIT (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.Relying on the decision of this Court in Commissioner of Income Tax, Karnataka, Bangalore Vs. Shaan Finance (P) Ltd., Bangalore [(1998) 3 SCC 605] , 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 itsthe Appellant (assessee) is the owner of the vehicles which are leased out by it to its customers andWhether 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. 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.

Reasoning: 26. We do not find merit in theargument for more than oneSection 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(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 asNo 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 thiswould have been inthe 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 aforenoted, 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 ofVs. A.M. Constructions [(1999) 238 ITR 775 (AP)]; Commissioner of IncomeTax Vs. Bansal Credits Ltd. [(2003) 259 ITR 69 (Del) ]; Commissioner ofVs. M.G.F. (India) Ltd. [(2006) 285 ITR 142 (Del.)]; Commissioner ofVs. Annamalai Finance Ltd. [(2005) 275 ITR 451 (Mad)]]. 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 theownership 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 termused 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.