Income Tax Appellate Tribunal - Delhi
Dy. Cit, Special Range 4 vs Volex Finance And Industries Ltd. on 17 November, 2006
ORDER
R.V. Easwar, Vice President
1. All these appeals relate to the same assessee and since they involve certain common issues, they were heard together and are being disposed of by a single order for the sake of convenience.
2. The assessee is a company incorporated in 1984. Its earlier name was Volex Electronics and Leasing Limited. As per the Memorandum and Articles of Association, it was engaged in the business of leasing and finance for several years. Its name was changed to Volex Finance and Industries Limited.
ASSESSMENT YEAR 1994-95
3. In this year, though two grounds have been taken by the department, the only effective ground is that the Commissioner (Appeals), erred in treating the transaction which is essentially a financing transaction, as leasing transaction and thus allowing the claim of depreciation to the assessee. The brief facts are these. In the return, the assessee declared income by way of lease rentals at Rs. 34,35,462 against which depreciation in respect of the leased asset was claimed at Rs. 32,44,024. It was the assessee's case that it owned the assets and they were leased out in the course of the assessee's business and therefore, the conditions of Section 32 were satisfied and it was eligible for the depreciation. The assessing officer negatived the claim on the ground that the assessee was actually engaged in providing finance to persons who wanted to purchase vehicles and the transaction was so documented as if the vehicles were owned by the assessee and leased out to the customers and hence it was in truth a financing transaction. According to him, the internal appraisals form which the assessee received from the customers containing columns which require the customers to show the finance required, period of loan, etc. The assessing officer also noted that the customers were required to place margin monies with the assessee which was nothing but the borrower's participation in the loan transaction. In almost all the cases, the assessee had transferred the assets to the customers at the end of lease period for an amount equivalent to the margin money, which was described in the balance sheet of the assessee as security deposit. From the copy of the lease deed, the assessing officer also noted that the customer was required to make an initial contribution, namely, the margin money or the security deposit. From a perusal of the documentation relating to the transactions which the assessee claimed to be lease transactions, the assessing officer drew the inference that the assessee cannot be considered to be the real owner of the assets and, therefore, no depreciation was allowable. The assessee was asked to bifurcate the so-called lease rental into principal and interest and on obtaining the figures the amount of interest was brought to tax as income. No depreciation was accordingly allowed.
4. The assessing officer also observed in the assessment order that in case, the assessee gets relief at the appellate level in respect of its claim for depreciation, even then depreciation will be allowed only after reducing the margin money contributed by the customer since under Section 43(l), the actual cost must be reduced by that portion of the cost which is met directly or indirectly by some other person. The assessing officer further observed that the assessee claimed depreciation at the rate of 40 per cent on certain vehicles which according to the assessee, were commercial vehicles and stated that since the assessee is not engaged in running the vehicles on hire which is a condition for allowing depreciation at the rate of 40 per cent as per the depreciation schedule, only the lower rate of 25 per cent will be allowed as a deduction. These were two observations made by the assessing officer but since he had treated the transaction as only the finance transaction and had brought the interest portion to tax, no effect could be given to the observations in the assessment order. In a sense, the assessing officer was reserving his rights to regulate the allowance of depreciation in case the assessee succeeded in appeals.
5. The assessee appealed against the disallowance of the depreciation who upheld the assessee's claim that it was engaged in the business of leasing and hire purchase and was the real owner of the asset leased out in the course of carrying on the business. As regards the claim of depreciation, the Commissioner (Appeals), held as under:
3.6 I find from the explanation submitted and the documentary evidence brought on record by the learned Counsel that the assessee-company satisfies all the above essential conditions for claiming depreciation i.e., depreciation has been claimed on specified leased assets which are owned by the company and has been used by the company for its primary business which is leasing. Therefore, I hold that for the year under consideration the assessee-company is entitled to the depreciation on the assets leased out and claim in its P&L Account/ computation of taxable income in reference to the workings furnished during the course of proceedings before the assessing officer and is taxable in respect of the lease rentals realised on the lessees during the year under consideration as accounted for by the company in its audited accounts on record. As a result of my this finding the addition of Rs. 10,13,355 made by the assessing officer by dividing the lease rentals into two i.e., the principal amount and the interest and disallowing the claim of the depreciation of the leased assets shall stand deleted."
6. Aggrieved by the aforesaid decision of the Commissioner (Appeals), the department has filed the present appeal. In support of the appeal, the learned CIT (DR) Smt. Purnima Singh submitted as follows:
(a) The internal appraisal report contained columns showing finance required, amount of loan, etc. which clearly pointed out to the real intention of the parties which was that the transaction was a money lending transaction;
(b) The customer was required to place margin monies with the assessee which is normally done only in finance transactions. The margin money did not carry any interest which would have been normally the case; further the margin money is not to be repaid;
(c) The assessee cannot be treated as the owner of the vehicle since the actual control of the vehicles was with the user and for all practical purposes, it was the user who must be treated as the owner;
(d) The terms of the lease deed, if properly analyzed, show that it is a loan transaction and not a lease;
(e) The transaction at best may be called as a financial lease within the meaning of the accounting standards issued by the Institute of the Chartered Accountants of India but even then the conditions of Section 32 are not satisfied and, therefore, no depreciation is allowable. The learned CIT DR made it clear that it was not her case that it was a financial lease but her case was that even if it is to be considered a financial lease, no depreciation was allowable under Section 32.
(f) The user - hirer of the vehicle is the de facto,owner from the date of the delivery of the vehicle and, therefore, the assessee cannot be considered to be the owner;
(g) When the hirer is liable for the risk he must be considered to be the owner because risk always goes with ownership;
(h) The assessee's name was changed in 1984 and the word "Leasing" was dropped and, therefore, whatever be the position in the years prior to 1984, after 1984 the assessee cannot be considered to be engaged in the business of leasing. The inclusion of the word "Finance" in the assessee's name in 1984 is a clear pointer to the fact that its business was only in financing and not in leasing. In his view of the matter, even the judgment of the Supreme Court in the case of CIT v. Shaan Finance (P.) Ltd. is not applicable.
7. On the other hand, the learned representative for the assessee, besides strongly relying on the order of the Commissioner (Appeals), submitted that the assessee remained the owner of the vehicles throughout the transactions, that the ownership was never transferred to the customer, that even in the registration certificate issued under the Motor Vehicles Act the assessee was described as the owner, that a reading of the lease document as a whole clearly indicated that the legal relationship between the assessee and its customers was that of lessor and lessee and in these circumstances, it cannot be said that the conditions of Section 32 were not satisfied. He relied on the order of the Mumbai Bench of the Tribunal in the case of Dy. CIT v. Soni Capital Markets Ltd. (2004) 89 TTJ (Mum.) 10. He also filed copies of the assessment orders for the assessment years 1986-87 to 1989-90 in which the assessee's claim for depreciation has not been disallowed and pointed out that these orders were passed after scrutiny under Section 143(3) of the Act. The relevant clauses of the lease document were also highlighted in the course of his argument to show that the transactions were leases and cannot be construed as money-lending transactions.
8. We have carefully considered the facts and the rival contentions. We have also perused the lease document and the terms thereof. It is now well-settled that the taxing authority is entitled to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal the legal relation by a device, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the substance of the transaction. The true legal relation can be gathered from the formal document and if there is no formal document, the other oral and documentary evidence and the conduct of the parties may be taken into account. When a transaction is embodied in a document the liability to tax depends upon the meaning and the content of the language used in accordance with the ordinary rules of construction. These principles were settled in the following three cases:
(i) Bank of Chettinad Ltd. v. CIT (1940) 8 ITR 522 (Privy Council);
(ii) CIT v. Motors& General Stores (P.) Ltd. ; and
(iii) CIT v. B.M.Kharwar .
In the present case, it is a fact that the assessing officer obtained from the assessee the "internal appraisal forms" where the following columns were found : "Finance required", "period of loan", "Interest rate", "Interest amount" etc. In the application for lease, there were words, such as, "Purpose of advance", "Finance charges", "Rate of interest", "Amount required" etc. It is also true that the customers were required to deposit margin monies with the assessee, which were referred to as security deposits in the assessee's balance sheet and that these monies did not carry any interest. Thus, the intention of the parties appears to us to be that of lending and borrowing monies and not to enter into a lease transaction, the security for the advance being the vehicle which would be registered in the assessee's name under the Motor Vehicles Act. The amount of finance required, the period of the loan, the rate of interest and the margin money all having been settled between the paries, what remained to be done was the documentation in a formal manner. However, while entering into the formal document, the parties chose to style the same as an "agreement of leasing" in which the usual terms of lease normally found in real lease documents were incorporated. Thus, though the intention of the parties was that it should be a finance transaction, the assessee being the lender of the money to the customer to enable the latter to acquire a vehicle and the customer being the borrower of the monies for interest, a document styled as a lease document was ultimately prepared. This is, therefore, not a case of the real intention of the parties being recorded in a formal document. What was recorded in the formal lease document was not the real intention. This case falls within the observations of the Supreme Court in the case of B.M. Kharwar (supra) wherein it was held that "if the parties have chosen to conceal by a device the legal relation, it is open to the taxing authority to unravel the device and to determine the true character of the relationship". This is not a case where the department is attempting to ignore the legal effect of a transaction by probing into the substance thereof. Here is a case in which the real intention of the parties is different from what is professed to be the intention in the lease document. We thus see force in the contentions of the learned CIT (DR) in this behalf. The additional facts in support of the department's contention are that the customer is required to pay a margin money or a security deposit which does not carry any interest and that the name of the assessee was changed by dropping the word "leasing" from its name and introducing the word "finance" thereto. The fact that in the registration certificate issued,under the Motor Vehicles Act, the assessee was shown as the owner cannot come to the assessee's aid as it is a neutral fact in the sense that even if the transaction was a money-lending transaction on the security of the vehicle, it is the assessee which would be shown as the registered owner so that its interests are safe and the customer who is in actual possession and control of the vehicle cannot transfer the vehicle without the knowledge of the assessee. The registration of the vehicle in the name of the assessee therefore accords with the real intention of the parties, contrary to what has been contended before us on behalf of the assessee. It should also be remembered that the assessee stood to gain, by way of obtaining an allowance for depreciation on the vehicles, only if it is shown that it was the owner thereof. Further, neither before the assessing officer nor before us has the assessee explained cogently why in the internal appraisal forms there were words and columns containing such details as finance required, period of loan, interest rate, interest amount etc. despite the fact that both in the assessment order and in the course of the arguments before us by the learned CIT (DR) this aspect was specifically raised. These are expressions which are more appropriate to a money-lending transaction than a lease transaction. It, therefore, seems to us that the assessing officer and the learned CIT (DR) are right in their contention. In the view we have taken about the lease document, namely, that it does not accord with the original intention of the parties, it is not necessary for us to examine in detail the terms thereof. Predictably, the terms incorporated in the lease document conform to the position that the assessee is the owner of the vehicles and that they have been leased out to the customers for lease rentals. It would be too naive on our part to expect the lease document to contain anything which would go contrary to the stand of the assessee. No useful purpose, in our humble view, would be served by dilating on the terms of the lease document.
9. in the order of the Mumbai Bench of the Tribunal in the case of Soni Capital Markets Ltd. (supra) authored by one of us (the Vice President), there was no evidence to show that the real intention of the parties was to treat it as a money lending transaction. In that case, the departmental ,authorities attempted to displace the legal effect of the lease document by probing into the substance of the transaction, which was prohibited by the judgment of the Supreme Court in the case of B.M. Kharwar (supra). No evidence had been found in that case by the income-tax authorities, as had happened in the present case, to show that the real intention of the parties was to lend monies for interest. The departmental authorities in that case tried to read and interpret the lease document in favour of their stand that it was a money-lending transaction in substance. The Tribunal did not approve of the attempt. In the present case, on the other hand, there is evidence to show (which we have adverted to) that the real intention of the parties was to lend and borrow monies for interest. Thus, the aforesaid order is not applicable to the present case. The other authorities cited on behalf of the assessee (in the index of case law) have been perused by us. They turned on different facts. It is a question of intention of the parties and whether the document on the basis of which the claim is made before the income-tax authorities reflects the true intention of the parties. The facts found in the case before us indicate that the lease document professed a different intention than the real intention of the parties and since the assessee's claim for depreciation was based on the lease document, the same cannot be given effect to.
10. For the above reasons, we accept the contentions of the department, reverse the decision of the Commissioner (Appeals) on this point and restore that of the assessing officer. In the view we have taken, it is not necessary for us to refer to the observations made by the assessing officer with regard to the rate and quantification of the depreciation, if found allowable by the appellate authorities, nor to the arguments addressed before us on the question of the rate of depreciation and the quantification thereof.
11. Accordingly, the appeal of the department is allowed.
ASSESSMENT YEAR 1995-96
12. For this year, there are two,appeals by the department, one arising from the assessment order passed under Section 143(3) and the other arising from the order passed by the assessing officer under Section 154 of the Act.
13. We first take up the appeal arising out of the assessment order. The first ground is that the Commissioner (Appeals) erred in directing the assessing officer to treat the transactions which are in the nature of financing transactions to be treated as lease transactions. This ground is identical to the ground taken by the revenue in its appeal for the assessment year 1994-95. It is not in dispute that the facts relating to the ground are the same as in the assessment year 1994-95. Therefore, in line with our decision in the appeal for the assessment year 1994-95, we reverse the decision of the Commissioner (Appeals), and restore that of the assessing officer. The ground is allowed.
14. The second ground is that the Commissioner (Appeals), erred in holding that the assessee was entitled to higher rate of depreciation at 40 per cent in respect of lease assets as claimed in the profit and loss account. This ground is consequential to our decision in respect of the first ground wherein we have held that the transaction is a finance transaction and not a lease transaction. If it is a finance transaction, there is no question of allowing any depreciation. Therefore, we reverse the decision of the Commissioner (Appeals), and restore that of the assessing officer.
15. The third ground is that the Commissioner (Appeals), erred in holding that the assessee was entitled to depreciation of Rs. 1,31,17,203 and that the amount of only Rs. 46,96,093 which represented lease rentals was to be taken as income. It is agreed between the parties that the claim of depreciation mentioned in this ground is in respect of further vehicles acquired by the assessee during the relevant previous year on which depreciation was claimed on the footing that they were leased out to the customers under lease agreements. The nature of the transaction is the same as in the assessment year 1994-95. In a sense, this ground is related to ground No. 1. Whereas ground No. 1 is worded somewhat generally, ground No. 3 has brought out the amounts involved. Otherwise, both the grounds are in substance the same. In line with our decision for the assessment year 1994-95 and in respect of ground No. I herein, we reverse the decision of the Commissioner (Appeals), allowing depreciation and restore that of the assessing officer. The ground is allowed.
16. The fourth ground is that the Commissioner (Appeals), erred in allowing Rs. 94,22,217 as public rights issue expenses as revenue expenditure. It is agreed by both the sides that this ground is to be decided in favour of the department following the judgments of the Supreme Court in the following cases:
(i) Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 7921 (SC); and -
(ii) Brooke Bond India Ltd. v. CIT Since both the parties are agreed as above, respectfully following the aforesaid judgments, we reverse the decision of the Commissioner (Appeals), and restore that of the assessing officer. The ground is allowed.
17. The fifth and last ground in the appeal is that the Commissioner (Appeals), erred in deleting the addition of Rs. 1,19,248. It is stated in the ground that the assessee failed to substantiate its claim fully and the mode of payment was clear. This issue is discussed in paragraph 7 of the assessment order. The assessee was asked to furnish a break up of the miscellaneous expenses debited in the profit and loss account in the break up furnished, an amount of Rs. 1,19,248 was shown as purchase of garments. When the assessee was asked as to how this expenditure was related to its business, the assessee submitted that it represented purchase of garments as samples for developing exports. On the ground that no evidence was furnished in support of the claim, the same was disallowed.
18. On appeal, the Commissioner (Appeals), examined the assessment record and found that the company by its resolution dated 11-10-1994 decided to develop export market in terms of Clause 87 of its Memorandum of Association and in accordance with the resolution purchased knitted woollen garments for export and sent them abroad as samples. He further found that the relevant details of expenditure and explanations were available in the assessment record. On this basis, the Commissioner (Appeals), allowed the expenditure.
19. The revenue is in appeal. The objection of the learned CIT (DR) was that there was no evidence in support of the purchase of the woollen garments and hence the Commissioner (Appeals), was not right in allowing the same as a deduction. The Commissioner (Appeals), has examined the record and found that the expenditure was authorized by a resolution of the Board and the garments had also been sent abroad. In this situation, it is somewhat difficult to accept the contention of the learned CIT (DR) that no evidence for the purchase of the garments was available. We, therefore, uphold the decision of the Commissioner (Appeals), and dismiss the ground.
20. In the result, the appeal is partly allowed.
21. We now take up the appeal arising out of the order of the assessing officer under Section 154 of the Act. The ground taken is that the Commissioner (Appeals), erred in cancelling the order passed under Section 154 and thereby deleting the disallowance of Rs. 7,88,693 on account of right-cumpublic issue expenses. The actual expenditure was Rs. 1,02,10,910 . This was treated by the assessing officer as capital expenditure in the assessment order. However, in the computation, the amount disallowed was only Rs. 94,22,217.By means of a rectification order under Section 154, the assessing officer disallowed the balance of Rs. 7,88,693. The Commissioner (Appeals), following his decision in the appeal filed against the assessment order, cancelled the order under Section 154 by which the further amount of Rs. 7,88,693 was disallowed. In the appeal filed by the department arising from the assessment made under Section 143(3), we have restored the disallowance of Rs. 94,22,217 following the judgments of the Suprerne court in the case of Brooke Bond India Ltd. (supra) and Punjab State Industrial Development Corporation Ltd. (supra). The ground taken in this appeal is consequential to our decision in the appeal arising out of the assessment order. Accordingly, we set aside the order of the Commissioner (Appeals), and restore the order passed by the assessing officer under Section 154. The appeal is allowed.
ASSESSMENT YEARS 1996-97 AND 1997-98
22. In these appeals, the grounds taken are three and four in number respectively but the sum and substance of the grounds is that the Commissioner (Appeals), erred in directing the assessing officer to allow depreciation in respect of the vehicles allegedly leased out by the assessee to its customers. As in the earlier years, the case of the department is that the vehicles were registered in the assessee's name only as security for the advance given by the assessee to the users of the vehicles and the transaction was thus only a finance transaction in respect of which the assessee is chargeable to tax on the interest and no depreciation in respect of the vehicles was allowable as claimed. The facts relating to the grounds are admittedly the same as in the earlier years. Therefore, following our decision in respect of the earlier years, we reverse the decision of the Commissioner (Appeals), restore that of the assessing officer for both the years and allow the appeals filed by the department.
23. Arguments were advanced before us by both the sides in all the appeals on the question as to whether the assessee would be entitled to depreciation on the amount of margin monies/security deposits placed by the customers with the assessee in the context of the definition of the expression "actual cost" under Section 43(l) of the Act. In the view we have taken, namely, that the assessee is not entitled to the depreciation, we do not consider it necessary to deal with those arguments.
24. To sum up, whereas the appeal filed by the department for assessment year 1995-96 (ITA No.2991 /Delhi /99) is partly allowed, all the other appeals filed by the department are allowed. No costs.