Income Tax Appellate Tribunal - Mumbai
J.M. Shares And Stock Brokers vs Deputy Commissioner Of Income Tax on 15 February, 2007
Equivalent citations: [2007]109ITD329(MUM), (2007)109TTJ(MUM)311
ORDER
1. These cross-appeals by the assessee as well as Revenue which have been heard together are being disposed of by the common order for the sake of convenience.
2. Ground No. 1 arising from the appeal of assessee relates to disallowance of Rs. 2 lacs being the payment on account of stamp duty to registrar for increase in authorized capital while the ground No. 2 relates to disallowance of Rs. 68,096 under Section 35D of the IT Act, 1961 (Act). These grounds have not been pressed before us and, therefore, the same are being dismissed as "not pressed".
3. Ground No. 3 in assessee's appeal as well as ground No. 1 in the Revenue's appeal relate to the claim of the assessee for depreciation on leased assets. As per the Revenue's appeal, the assessee is not entitled to depreciation on the leased assets while as per the assessee's appeal, the learned CIT(A) should have allowed the depreciation on the entire cost as against 50 per cent of the cost allowed by the learned CIT(A). Further, CIT(A) should have allowed the depreciation @ 40 per cent instead of 25 per cent.
4. Brief facts giving rise to these appeals on this issue are these. The assessee had entered into an agreement with M/s Sriram Investments Ltd. (in short "SIL") under which the assessee leased 97 vehicles for an invoice value aggregating Rs. 3,84,20,730. On this amount, the assessee claimed depreciation @ 40 per cent since, according to the assessee, the vehicles were ultimately used for hiring purposes. In the course of assessment proceedings, the AO examined the terms of the lease deed and found that 50 per cent of the invoice value was received as security deposit and rental value payable was fixed @ 2.2 per cent per month of the invoice value for the lease period of 36 months. In para 7 of his order, he has mentioned the broad terms of the agreement which are being reproduced for the benefit of this order as under:
(a) The agreement of 18th Aug., 1993 is a master lease agreement wherein the lessor (the assessee) agrees to lease to the lessee (M/s Sriram Investments Ltd.) vehicles of the total value of Rs. 500 lacs. As and when the delivery of individual vehicles is taken, by the lessee, the lessor shall execute supplementary schedules and upon execution of the same, the lessor shall disburse an amount equivalent to the invoice value (Clause 1).
(b) The lessor shall deposit 50 per cent of the invoice value as security deposit at the time of executing the supplementary schedule (Clause 3).
(c) The lease is for a period of 36 months and the lease rental is 2.2 per cent per month of the asset value (Clause 4 and supplementary schedule).
(d) The lessor has right to sub-lease the vehicle to any prospective person (Clause 2).
(e) The lessee shall bear the entire risk of any loss or damage, whether partial or total, to the vehicles from any cause, natural or otherwise, whatsoever. The obligations of the lessee shall not be affected by any loss or damage of whatsoever nature to the vehicles (Clause 11).
(f) The lessor is totally indemnified against all and any defect in the vehicle apparent at the time of inspection and delivery. The lessee is to take all measures to see that vehicles are immediately roadworthy on delivery (Clause 6).
(g) Lessee (wrongly mentioned by AO as "lessor") is to punctually and duly pay taxes, rates, license fee, surcharges, registration charges and other outgoings payable in respect of use and operation of the vehicles (Clause 8d).
(h) The vehicles are to be insured by the lessee in the name of the lessor and the premium are to be paid by the lessee (Clause 10b).
(i) In case of loss or damage to the vehicles, where insurance proceeds are not adequate to meet the cost of such loss or damage, the shortfall shall be borne and paid by lessee. In case of surplus the same shall be appropriated by the lessee (Clause 10.3b).
(j) Termination of the agreement i.e., in the following events:
(i) Failure to pay lease rentals;
(ii) Failure to observe conditions specified in the agreement;
(iii) If the rights and interests of the lessor in the leased vehicles is jeopardised;
(iv) Winding up or ceasure or substantial takeover or amalgamation of lessee's business (Clause 12.1).
(k) On the termination of the lease period, the lessor has the right to repossess the vehicles (Clause 12.2).
(1) The lessor is not the supplier or dealer of vehicles and that the essential function of the lessor in this lease transaction is to finance the vehicles selected by the lessee (Clause 9a).
The AO also examined Shri V. Kumar of SIL under Section 131 of the Act. In the statement, as per the AO, it was clearly stated that the assessee had authorised them to identify suitable purchasers for the leased assets and consequent to the sale of leased assets and remit the consideration arising thereon to the assessee. In the letter dt. 13th Feb., 1997, it was stated by the assessee that no leased assets had been sold. However, the AO observed that it had not been denied that it intends to sell the assets on the expiry of lease. Thus, the assessee, according to him, will also receive consideration for the sale of leased assets i.e., its residual value on the expiry of lease period. It was also observed by him that the assessee has no intention to re-acquire the leased assets on the expiry of the leased period. Thus, it was observed that the sale consideration on the expiry of lease along with interest earned on the security deposit in a period of 36 months would be sufficient to cover the refund of security deposit. At p. 7 of the order, the AO has given certain calculations for coming to the conclusion that assessee was realising the return of 26.28 per cent per annum. In view of the facts stated above, the AO formed the opinion that the agreement was in the nature of hire-financing instead of letting out of the assets on lease. Reliance was placed on the decision of the Tribunal, Mumbai Benches, in the case of Center for Monitoring Indian Economy v. Dy. CAT. The order is dt. 29th April, 1996.
5. A show-cause notice was issued by the AO to the assessee to explain why the agreement be not treated as hire-financing agreement. The assessee, vide letter dt. 23rd July, 1996, made a detailed reply distinguishing its case from the case relied upon by the AO. This discussion appears at pp. 8 and 10 of the order. The AO was not convinced with the reply of the assessee. He analyzed the basic features of real lease transaction and a finance transaction. Basic feature of real lease transactions were stated as under:
(a) Asset specification is important and the intention of the lessor is to reacquire for future lease;
(b) Lease period is short considering the economic life of an asset.
(c) No single lease need bear the entire price of an asset after considering the residual value of the asset leased. The payment for lease of an asset for the lease term is the "price" of its services as distinct from the cost of the asset.
(d) There is a continuous flow of services from the lessor to the lessee during the lease period.
(e) The lease is cancellable and hence right of disposal does exist in the lease period.
On the other hand, basic feature of finance transactions were stated as under:
(a) Asset specification is unimportant and there is no intention to re-acquire the leased asset.
(b) Lease period is broadly fixed with reference to the expected economic life of the asset and expected residual value.
(c) Payments in a single lease transaction would cover the cost of the asset as well as the interest (at reasonable rates) and hence the lease rent is appropriately speaking not a price for services but repayment of cost of asset including interest thereon.
(d) No services are performed by the lessor in relation to the leased asset during the lease period.
(e) The lease is non-cancellable except in certain specified conditions and hence right of disposal does not exist in lease period.
Considering the above features, it was observed by him that nomenclature given to the agreement was not relevant but it is the essence which is relevant in deciding the issue. According to him, the essence of the transaction is hire financing arrangement. In coming to this conclusion, the following reasons were given by him.
(a) There is no immediate nexus between the user of the vehicles and the business of the assessee which by assessee's own admission, is financing the purchase of such vehicles;
(b) The assessee does not have any effective control over the leased vehicles to the extent that it does not have the right to terminate the lease.
(c) The assessee is not in the business of letting assets on hire nor have the vehicles been leased in the course of business of letting. The assessee is merely the financier of vehicles let.
Proceeding further, he examined the net result of the transactions over a period of 36 months and found that assessee was benefited by not paying any tax on the lease rentals and on the contrary claimed the net loss of Rs. 29,25,716, as is apparent from the following chart:
Asst. yr. Lease Rental Depreciation Net Figure
1994-95 50,88,057 1,50,44,451 (-) 99,56,394
1995-96 1,01,43,072 93,50,511 7,92,561
1996-97 1,01,43,072 56,10,307 45,32,769
1997-98 50,71,536 33,61,184 17,05,353
(-) 29,25,716
Accordingly, the AO applied the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CIT (1985) 47 CTR (SC) 126 : (1995) 154 ITR 148 (SC), wherein it was held that if a colourable devise has been adopted by the assessee to avoid the tax, then such devise has to be ignored and the assessee should be taxed on real income.
Proceeding further, he also examined the claim of the assessee regarding 40 per cent rate on depreciation. It was found by him that neither there is any stipulation in the lease agreement that vehicles would only be used in the business on running them on hire nor there is any actual physical control of the assessee over the manner of utilization of the vehicles. In view of the same, he opined that in case depreciation is allowable, it should be allowed @ 25 per cent.
6. The matter was carried in appeal before the learned CIT(A), before whom it was submitted as under:
(i) That the case of the appellant is not that of a finance lease. The company had purchased and had effected registration of vehicles in its own name.
(ii) The company had ensured in its lease agreement that ownership and control of the vehicles vested with the company with an idea that the lessee or sub-lessee could not claim depreciation thereof.
(iii) The working shown by the AO, to demonstrate that the lease instalments were only to recoup the cost of the assets as finance lease were incorrect.
(iv) That the conclusion of the AO that total effect of collection would result into a loss of Rs. 29.25 lacs was also incorrect calculation since the correct calculation results in overall profit of Rs. 20.11 lacs.
(v) That the assessee has used the vehicles for the purpose of leasing business and thus there is a direct nexus between the use of the vehicles of the business of the assessee.
The learned CIT (A) agreed with the submissions of the assessee to the extent that--(i) it was owner of the assets leased out and (ii) such leased assets were used for the purpose of business of leasing. He also opined that the case of assessee cannot be termed as a case of financial lease. Consequently, the assessee was entitled to depreciation. However, he was also of the view that the assessee is entitled to depreciation with reference to 50 per cent of the cost of the asset inasmuch as 50 per cent of the cost of the assessee was directly or indirectly made by other persons within the meaning of the definition of "actual cost" under Section 43(1) of the Act. In coming to this conclusion, he took into consideration the facts--(i) that 50 per cent of the cost of the assets was received by the assessee by way of interest-free advance, (ii) the evidence recorded showed that immediately on termination of lease, the assessee had sold out all the vehicles, (iii) though the assessee claimed to have returned the advances, it was found that even the return of the advance was subject to the recovery of Rs. 96 lacs recoverable on termination of lease. In other words, the return of deposit received in advance was more of a nature of book entry and necessarily carried out only after adjustment. Thus, the assessee had never paid even a rupee more than 50 per cent of the cost of acquisition of the asset. Accordingly, the assessee was entitled to depreciation to the extent of 50 per cent of the cost of assets.
7. Regarding rate of depreciation, the learned CIT(A) observed that apart from the certificate given by SIL, there was no other evidence to show that the vehicles were actually run on hire. Further, SIL itself did not use the trucks since the same has been sub-leased to other parties. Consequently, it was held that assessee was entitled to depreciation only @ 25 per cent.
Aggrieved by the aforesaid order of the learned CIT(A), both, assessee as well as Revenue are in appeal before the Tribunal.
8. Both the parties have been heard at length. The learned Departmental Representative has vehemently challenged the finding of the learned CIT(A) submitting that lease of vehicles effected by the assessee was by way of financial lease and, therefore, the assessee cannot be said to be the owner of the assets so leased in view of the recent judgment of the apex Court in the case of Asea Brown Boveri Ltd. v. Industrial Finance Corporation of India (2006) 154 Taxman 512 (SC) (in short "ABB's case"). He drew our attention to the features of financial lease as pointed out by the apex Court in the above case at p. 519 of the report which are being reproduced as under:
1. The asset is use-specific and is selected for the lease specifically. Usually, the lessee is allowed to select it himself.
2. The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset.
3. Therefore, the lessee bears the risk of obsolescence.
4. The lessor is interested in his rentals and not in the asset. He must get his principal back along with interest. Therefore, the lease is non-cancellable by either party.
5. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period.
6. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation.
7. The lessor is typically a financial institution and cannot render specialized service in connection with the asset.
8. The lease is usually full pay out, that is, the single lease repays the cost of the asset together with the interest.
Since all these features were present in the lease agreement before the Hon'ble Supreme Court, it was held by the Court that the lessor could not be said to be the owner of the leased vehicles and consequently the said lessor could not take back the assets on account of non-payment of lease rental by the lessee. In such cases, the lessor could only recover the amount due from the lessee. In view of this legal position, it has been contended by the learned Departmental Representative that in the case of financial lease, the lessor cannot be said to be the owner and consequently, depreciation cannot be allowed. Proceeding further, he drew our attention to various clauses of the agreement to contend that all the features of the financial lease are present in the present case. He also relied on the decision of the Tribunal in the case of Dy. CLT v. Housing Development and Finance Corpon. Ltd. (2006) 99 TTJ (Mumbai) 1188 : (2006) 98 ITD 319 (Mumbai), wherein it has been held that if the transaction is really a financial arrangement between the parties, then the depreciation cannot be allowed to the so-called lessor. Further reliance is placed on the decision of the Special Bench in the case of Mid East Portfolio Management Ltd. v. Dy. CIT (2003) 81 TTJ (Mumbai)(SB)37 : (2003) 87 LTD 537 (Mumbai)(SB).
9. On the other hand, the learned Counsel for the assessee has strongly relied on the order of the learned CIT(A) to the extent it has held that assessee is the owner of asset and used the same for the purpose of business. It is submitted by him that vehicles were purchased by the assessee and the same were also registered in the name of assessee. He also pointed out that the invoices were raised by the sellers in the name of assessee and payments were made by the assessee. These facts are not in dispute and, therefore, it cannot be contended by the Revenue that assessee was not the owner of the vehicles. He also submitted that lessees have not claimed any depreciation but had claimed deduction in respect of lease rentals. A certificate from the lessee i.e. Shri Ram Investment Ltd., is already on record. He also pointed out that the lessee in its statement under Section 131 of the Act has submitted that transaction was that of lease. Proceeding further, it has been submitted that judgment of the Hon'ble Supreme Court in the case of McDowell & Co. (supra) was not applicable to the facts of the case as there was no colourable device. On the other hand, it has been submitted that tax avoidance through bona fide transactions is permissible in law in view of the later judgment of the Hon'ble Supreme Court in the case of CWT v. Arvind Narottam (1988) 72 CTR (SC) 94 : (1988) 173 LTR 479 (SC). Proceeding further, it has been submitted by him that the decision of the Special Bench cannot be applied to the facts of the present case. He pointed out the distinction between the facts of both the cases. He also submitted that assessee has paid lease tax in respect of the lease effected by the assessee. If the transaction is lease by virtue of one enactment of State Government it cannot be said that it is not lease for income-tax purpose. He also distinguished the case of the Tribunal in the case of HDFC by pointing out the different facts. Regarding the Supreme Court judgment in the case of ABB's case, (supra) it has been submitted that the said judgment was not rendered under the IT Act. That judgment was rendered in a different context i.e. in the light of Trial of Offences Relating to Transactions in Securities Act, 1992 (TORT Act). The Court was not concerned with the issue regarding allowability of depreciation under Section 32 of the Act. Hence that decision cannot be applied to the present case. Lastly, he relied on the CBDT Circular No. 2, dt. 9th Feb., 2001 [(2001) 165 CTR (St) 25] which classifies that depreciation cannot be allowed in respect of such lease.
10. Rival submissions of the parties have been considered carefully. The question for our consideration is whether the assessee is entitled to depreciation under Section 32 of the Act. There is no dispute to the legal position that ownership of the asset is a condition precedent for allowing the depreciation under Section 32. In the case of CIT v. Shaan Finance (P) Ltd. , the Hon'ble Supreme Court had held that where the assessee is engaged in the business of leasing, then the lessor is entitled to depreciation/investment allowance. In that case, the disallowance was made by the tax authorities on the ground that lessor could not be said to have used the asset for the purpose of manufacturing since it was the lessee who used the asset in the process of manufacture. The Hon'ble Supreme Court held that since the assessee was engaged in the business of leasing, then the asset could be said to be used by the assessee for the purpose of business and no adverse inference could be drawn merely because the asset was used by the lessee in the process of manufacture. On the basis of this judgment, the depreciation/investment allowance is being allowed by the various High Courts and the Tribunal to the lessor where the assessee is found to be engaged in the business of leasing.
11. However, a sea change has taken place by delivery of the judgment by the Hon'ble Supreme Court in the case of ABB Ltd. v. Industrial Finance Corporation of India (supra) wherein it has been held that in case of finance lease, it is the lessee who, for all practical purposes, owner of the assets and not the lessor. This legal position would have an impact on the question posed before us. Therefore, it would be appropriate to go through the facts of that case and the legal findings and the scope of finance lease discussed in that order.
12. In the case of ABB Ltd. (supra), the appellant company took 56 cars on lease from Fair Growth Financial Services Ltd. (Fair Growth), for which, the appellant deposited total security of Rs. 20,97,447 with the lessor and the total rent payable by the appellant for 5 years' period amounted to Rs. 85,35,379. The total purchase price of these cars was Rs. 84,80,664. As per the terms of lease finance agreement, the appellant company was required to pay 25 per cent of the purchase price of the cars as security deposit carrying interest @ 5 per cent per annum. It is in pursuance of the terms of this agreement that assessee had to deposit Rs. 20,97,447 as mentioned above and against the balance amount, the assessee was required to pay Rs. 85,35,379 as lease rental during the period of 5 years. Fair Growth became a notified party under Sub-section 2 of Section 3 of Special Court (TORT in Securities) Act, 1992, due to certain illegal transactions, and the Industrial Finance Corporation of India (IFCI) became the custodian of the assets belonging to Fair Growth. The appellant company continued to make the payment to IFCI in place of Fair Growth as per the lease finance agreement. An amount of Rs. 30,96,948 was paid by the appellant to Fair Growth till December, 1992 while the amount of Rs. 44,61,273 was paid to the custodian, IFCI. The appellant made a communication to the custodian clarifying that the appellant would be entitled under the agreement to the amounts on account of security deposit and interest accrued thereon at the time of buyback of purchase of leased assets. Accordingly, it forwarded a cheque of Rs. 17,800 in favour and final settlement of the dues under the lease agreement. The Special Court under Section 10 of the Special Court (TORT in Securities) Act, 1992, passed an order dt. 28th July, 1998 to handover the possession of all the 26 cars to the custodian within one week from the date of the order since the appellant had failed to make the payment as per the lease agreement. It appears from para 5 of the judgment of the Hon'ble Supreme Court that the assessee had taken a plea before the Special Court that it was a case of lease finance but the said plea had been rejected by the Special Court on the ground that in the pleadings the assessee had termed the agreement as "lease agreement". The matter was carried in appeal before the Hon'ble Supreme Court.
13. The Hon'ble Supreme Court posed the question for adjudication as to whether the agreement between the parties was a finance lease or not. The Hon'ble Supreme Court referred to;
(i) Following dictionary meaning of lease finance" according to Accounting and Finance by R. Brockington (Pitman Publishing, Universal Book Trader, 1996, at p. 136):
A finance lease is one where the lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is thus a disguised way of purchasing the asset with the help of a loan. SSAP 23 required that assets held under a finance lease be treated on the balance sheet in the same way, as if they had been purchased and a loan had been taken out to enable this.
(Emphasis, italicised in print, supplied)
(ii) Following dictionary meaning of "lease finance" in Lease Financing & Hire Purchase by Dr. J.C. Verma (4th Edn., 1999 at p. 33):
Financial lease is a longer-term lease on fixed assets, it may not be cancelled by either party. It is a source of long-term funds and serves as an alternative of long-term debt financing. In financial lease, the leasing company buys the equipment and leases it out to the use of a person known as the lessee. It is a full payout lease involving obligatory payment by the lessee to the lessor that exceeds the purchase price of the leased property and finance cost.
Financial lease has been defined by International Accounting Standards Committee as a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred. Lessor is only a financier and is not interested in the assets. This is the reason that financial lease is known as full payout lease where contract is irrevocable for the primary lease period and the rentals payable during which period are supposed to be adequate to recover the total investment in the asset made by the lessor.
(iii) Following dictionary meaning of "lease finance" in Lease Financing and Hire Purchase by Vinod Kothari (Second Edn., 198, at pp. 6 and 7):
A financial lease is a contract involving payment over an obligatory period of specified sums sufficient in total to amortise the capital outlay of the lessor and give some profit.
An operating lease is any other type of lease that is to say, where the asset is not wholly amortised during the non-cancellable period, if any, of the lease and where the lessor does not rely for his profit on the rentals in the non-cancellable period.
After considering the aforesaid definitions of lease finance, the Hon'ble Supreme Court observed that following are the features of the financial lease.
1. The asset is use-specific and is selected for the lease specifically. Usually, the lessee is allowed to select it himself.
2. The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset.
3. Therefore, the lessee bears the risk of obsolescence.
4. The lessor is interested in his rentals and not in the asset. He must get his principal back along with interest. Therefore the lease is non-cancellable by either party.
5. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period.
6. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation.
7. The lessor is typically a financial institution and cannot render specialized service in connection with the asset.
8. The lease is usually full payout, that is, the single lease repays the cost of the asset together with the interest.
Finally, their Lordships expressed their opinion at p. 520 of the report as under:
10. In our opinion, financial lease is a transaction current in the commercial world, the primary purpose whereof is the financing of the purchase by the financier. The purchase of assets or equipments or machinery is by the borrower. For all practical purposes, the borrower becomes the owner of the property inasmuch as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use of occupation of the property, bears the wear and tear, maintains and operates the machinery/equipment, undertakes indemnity and agrees to bear the risk of loss or damage, if any. He is the one who gets the property insured. He remains liable for payment of taxes and other charges and indemnity. He cannot recover from the lessor, any of the abovementioned expenses. The period of lease extends over and covers the entire life of the property for which is may remain useful divided either into one term or divided into two terms with clause for renewal. In either case, the lease is non-cancellable.
14. Perusal of the above observations clearly reveals that in case of financial lease, it is the lessee who becomes the owner of the property. In view of this judgment, the depreciation cannot be allowed to the lessor in case of finance lease.
15. In the present case, we have gone through the lease agreement between the assessee (lessor) and SIL (lessee). In our opinion, all the features of the finance lease exist in the said lease agreement, as is apparent from the following:
(i) Clause 9(a) shows that the lessor is not the supplier or dealer of the vehicles and that the essential function of the lessor in the lease transaction is to finance the vehicles selected by the lessee from the designated vehicle dealers. It is further seen that lessor has partly financed as 50 per cent of the invoice price is received from the lessee as deposit which is not the feature of the normal lease. It has also been found by the CIT(A) that on the expiry of lease period, the vehicles have been sold to the lessees and the deposit amount has been adjusted against the residual sale value. Thus it is clear that financial arrangement was made in guise of the lease agreement.
(ii) The lease rentals were fixed @ 2.2 per cent of the invoice value p.m. which is nothing but the interest.
(iii) The details of the leased assets along with specimen invoice appearing at pp. 58 to 62 of the paper book and forming part of the lease agreement shows that vehicles were purchased at the instance of the sub-lessee since in the invoice raised by Bafna Motors Ltd., the lessor is shown as the assessee while the lessee is shown Mr. Sukha Singh Darshan Singh, instead of SIL. It appears that SIL worked merely as a conduit for obtaining lumpsum finance from the assessee;
(iv) Clause 5 of the agreement provides that it is the lessee who shall be liable to pay all taxes, cesses and charges, etc., in respect of the leased vehicles. In case, the same are paid by the lessor, the same shall be reimbursed by the lessee.
(v) Clause 6 of the agreement provides that the lessor is totally indemnified against all and any defects in the vehicles apparent at the time of inspection and delivery. It further provides that lessee shall take all necessary measures to ensure that vehicle is roadworthy immediately upon delivery.
(vi) Clause 8 provides that during the subsistence of the lease, the lessee shall;
(a) if so required under any law, have these presents registered at the lessee's cost and expenses with the relevant Government authorities;
(b) punctually and duly paid or cause to be paid all rates, taxes, license fees, surcharge, registration charges and other outgoings payable in respect of use and operation of the vehicles;
(c) insure the vehicles as provided hereafter. It is provided in Clause 10 that if the lessee fails to insure or keep insured the vehicles, it will be open to the lessor to insure the vehicles and in that event the lessee shall reimburse the same to the lessor along with 2 per cent per month interest for the period of delay. In the event of any loss or damage to any vehicle, the insurance money received under the insurance policy in respect of such loss or damage shall be utilized for carrying out the repairs so as to ensure that the vehicle is restored to and brought into same condition. In case, insurance proceeds are not adequate to meet such loss or damage, then the shortfall will be borne by the lessee. Similarly, in the case of total loss, if the insurance proceeds are insufficient to cover the loss, then lessee shall be responsible to pay such amount to the lessor.
(vii) Clause 11 further provides that the lessee shall bear the entire risk of any loss or damage whether partial or total from any cause entirely or otherwise whatsoever.
(viii) The lessor is only a financial institution since it does not render any specialized service in connection with the leased asset. Further, it does not bear the cost of repair.
(ix) The conduct of the assessee shows that it was not interested in taking back the vehicles from the lessee on the expiry of the lease period inasmuch as it has been found that the lease vehicles were ultimately sold to the lessee.
16. A combined reading of the above terms of the lease agreement clearly reveals that all the features of the finance lease exist in the agreement between the parties Therefore, respectfully following the judgment of Hon'ble Supreme Court in ABB's case, (supra) it is held that 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 is not entitled to any depreciation.
17. The contention of the learned Counsel for the assessee that the aforesaid judgment of the Hon'ble Supreme Court is distinguishable on the ground that it was rendered under a different enactment, cannot be accepted. What is relevant is the legal position in respect of a particular transaction. Therefore, in our opinion, in a case of finance lease the lessor cannot be treated as owner under any enactment unless expressly provided otherwise. As far as other judgments of the High Court and Tribunal are concerned, the same stand distinguished inasmuch as the judgment of the Hon'ble Supreme Court in the case of ABB Ltd. (supra) was either not available at the time when such decisions were given or not referred to or considered by the High Court or the Tribunal, as the case may be. The judgment of the Hon'ble Supreme Court is binding under Article 141 of the Constitution of India and, therefore, the case is to be decided in accordance with the same.
18. Before parting with this issue, we may mention that arguments were raised to the effect that assessee adopted a colourable device in order to reduce its tax liability. These arguments are not being dealt with by us since we have proceeded on the assumption that agreements between the parties were legal. The issue whether there was a colourable device or not has become academic and therefore need not be decided.
19. It may be clarified that even after the judgment of the Hon'ble Supreme Court in ABB's case (supra) a clear distinction has to be made between the normal lease and financial lease. If the agreement is a financial lease, then the consequences would be governed by the decision of the Hon'ble Supreme Court in ABB's case (supra) but if it is a case of normal lease, then consequences would be governed by the earlier judgment of the Hon'ble Supreme Court in the case of Shaan Finance (P) Ltd. (supra).
20. It may also be mentioned that the learned Counsel for the assessee has argued to the effect that the learned CIT(A) was not justified in allowing depreciation to the extent of 50 per cent only. He has also argued that the rate of depreciation should have been 40 per cent instead of 25 per cent allowed by the learned CIT(A). Since the main issue has been decided by us against the assessee, it is not necessary for us to adjudicate upon these issues since such issues have become academic only.
21. In view of the above discussion, the order of the CIT(A) is set aside on this issue and consequently the disallowance of depreciation made by the AO is restored. The grounds raised by the assessee are therefore dismissed while the ground raised by the Revenue is allowed.
22. Ground No. 4 which is the last ground in the assessee's appeal as well as ground No. 2 in Revenue's appeal, relates to disallowance of loss of Rs. 2,50,55,749 on the sale of non-convertible portion (Part-B) of partly convertible debentures. The relevant facts have been given in detail in the assessment order in paras 8 to 8.2, which are being reproduced as under:
8. Summary of debentures under buyback scheme During the year under consideration, M/s Chambal Fertilizers and Chemicals Ltd., C.F.C.L) made a public issue of partly convertible debentures of Rs. 200 each. The issue opened on 14th April, 1993 and the earliest closure was 20th April, 1993. The final closure of the issue was on 26th April, 1993. The issue was promoted to Zuari Agro Chemicals Ltd., Goa. The following were some of the features of the said issue:
(a) The issue was of 2 parts; Part-A and Part-B, each part being of the value of Rs. 100. Part-A was converted into 10 equity shares of Rs. 10 at par on allotment and Part-B of Rs. 100 per debenture was to be redeemed in three equal instalments at the end of the 7th, 8th and 9th year, from the day of allotment.
(b) According to the prospectus, Rs. 132 was payable by the applicant as application money out of which Rs. 50 would be appropriated towards Part-A and Rs. 84 towards Part-B.
(c) CFCL had finalized a scheme of buyback or Part-B of the debentures with J.M. Financial and Investment Consultancy Services Ltd., on behalf of UTI under which Part-B of each debenture of face value Rs. 100 and paid-up on application, to the extent of Rs. 84 may be offered for sale at net price of Rs. 50 to UTI.
(d) The applicant may make the aforesaid offer by signing the declaration to this effect at the appropriate place in the application form and upon such an act, the applicant shall be deemed to have authorized an official of the CFCL to execute a transfer deed for Part-B of the debenture that may be allotted to him.
(e) In case the debenture holder exercises an option of sale of non-convertible portion of debenture (Part-B) to the UTI, the amount of Rs. 50 received on such sale would be received by CFCL on behalf of the debenture holder and appropriated towards allotment money due to Part-A of the debenture. Hence, no further amount would be payable by the applicant towards Part-A of the debenture.
8.1 The said issue was underwritten by the underwriters and sub-underwriters. 13,22,360 debentures devolved on 110 sub-underwriters, as the issue was not fully subscribed. The assessee company entered into an arrangement with sub-underwriters, whereby it took over the responsibility of subscribing to 13,22,380 debentures for which it received a consideration of Rs. 14 per debenture from the sub-underwriters. It thereafter made an application to CFCL for such debentures and also by signing the application form at the appropriate place, gave authority to CFCL to transfer the Part-B of such debentures to UTI at Rs. 50 each. In respect of Part-A of the said debentures, shares were duly received by the assessee.
8.2 In the return of income, the assessee has shown a loss of Rs. 2,50,55,749 on the sale of Part-B of the aforesaid debentures as short-term capital loss. In working out the cost of the debenture the assessee company has taken into account the sum of Rs. 14 per debenture received by it as consideration from sub-underwriters, for taking over the responsibility of subscribing to the devolved debentures.
After examining the facts of the case, the AO did not dispute the genuineness of the loss but on facts, it was held that such loss was assessable as a speculation business loss instead of short-term capital loss inasmuch as the assessee could not bring on record the evidence to prove the factum of delivery of the said debentures.
23. The matter was carried in appeal before the learned CIT(A), before whom it was contended that actual delivery had taken place but due to certain reasons, the necessary evidence could not be produced before the AO. The said evidence was confronted before the AO by the learned CIT(A) and his comments were asked for but the AO did not respond. Accordingly, the learned CIT(A) admitted the evidence under r. 46A of the IT Rules, 1962. After examining such evidence, he found that the debentures were actually allotted to the assessee and the assessee company has subsequently transferred them to UTI. In view of the same, it was held that loss could not be treated as loss from speculation business. However, he was of the view that the entire exercise was to acquire the shares and, therefore, the amount in dispute should be added to the cost of the shares. Aggrieved by this part of the order, the assessee is in appeal before the Tribunal.
24. After hearing both the parties, we find that similar issue arose before the Tribunal, Calcutta Bench, in the case of Karamchand Thapar & Bros (Coal Sales) Ltd. v. Dy. CIT (2003) 78 TTJ (Cal) 825 : (2002) 83 ITD 171 (Cal), wherein it was held that there was no scope for considering the loss incurred by the assessee in acquiring and disposing of the Part B portion of the partly convertible debenture under consideration to be contributing to the direct cost of acquiring the Part-A portion. Accordingly, it was held that the loss arising on the sale of Part-B portion was allowable as loss. No contrary decision has been brought before us by the learned Departmental Representative. Therefore, following the same, the issue is decided in favour of the assessee. The order of the learned CIT(A) is, therefore, modified and consequently the AO is directed to allow the loss as business loss.
25. The only issue which remains for our consideration relates to disallowance of Rs. 19,02,171 in respect of repairs and maintenance, arising from ground No. 3 of the Revenue's appeal. This issue has been discussed by the AO in para 10 at p. 28 of the assessment order. After examining the details, the AO was of the view that expenditure was capital in nature and, therefore, in view of Expln. 1 to Section 32 of the Act, such expenditure is to be treated for allowing depreciation. Accordingly, the claim of the assessee for deduction as revenue expenditure was disallowed but the depreciation thereon was allowed by the AO. On appeal, the claim of the assessee has been allowed by the learned CIT(A) by holding the expenditure as revenue in nature. Aggrieved by the same, the Revenue is in appeal before the Tribunal.
26. After hearing both the parties, we find that the learned CIT(A) has passed a sketchy order without giving any reason in support of his conclusion. He has also not discussed anything about the Expln. 1 to Section 32 of the Act which provides that where the business of the assessee is carried on in a building not owned by him and any capital expenditure incurred for the purpose of business on the construction of any structure or do any work in/or relation to and by way of renovation or extension of or improvement to the building, then provisions of Section 32 shall apply as if the said structure or work is a building owned by the assessee. When the AO had invoked such provisions, it was the duty of the learned CIT(A) to have adjudicated the matter in the light of the above provisions. In view of the same, we set aside the order of the learned CIT(A) on this issue and restore the matter to his file for fresh adjudication after examining the evidence on record or as may be filed by the assessee before him.
27. In the result, both the appeals stand partly allowed.