Income Tax Appellate Tribunal - Mumbai
Sharyans Resources Ltd. vs Joint Commissioner Of Income-Tax on 7 September, 2001
Equivalent citations: [2002]83ITD340(MUM)
ORDER
S.C. Tiwari, Accountant Member
1. The only ground in this appeal filed by the assessee is directed against disallowance of the assessee's claim of depreciation on the leased assets. Facts of the case leading to this ground, briefly, are that the assessee purchased one Flameless Continuous Pusher Type Furnace on 30-8-1995 for a sum of Rs. 1,49,47,920 from M/s. Associated Engineers, Bhopal, and from the same date the said Furnace was leased to M/s. Duckfin International Ltd., Raisen. As per the lease agreement executed on 26-9-1995 the Furnace was leased to Duckfin for a period of five years on lease rentals of Rs. 9,52,000 per quarter payable in 20 instalments starting from 1-10-1995. In addition, the assessee charged lease management fee of Rs. 1,01,000. Secondly, the assessee-company purchased on 25-9-1995, 733 Compressed Gas Cylinders from Madras Machinery Trading Co., Coimbatore, at a price of Rs. 49,84,400 and from the said date these gas cylinders were leased to M/s. Miga Gases Pvt. Ltd., Bangalore. As per lease agreement executed on 25-9-1995, these gas cylinders were leased to Miga for a period of five years on lease rentals of Rs. 3,70,000 in 20 quarterly instalments starting from 1-10-1995. In addition, the assessee charged lease management fee of Rs. 35,000. During the course of assessment proceedings the assessee claimed that it was entitled to 100% depreciation on the cost of acquisition of these assets. The Assessing Officer however formed an opinion that the real intention behind these lease agreements was to hold these assets during the period of lease for the purpose of the security of the amounts of loans advanced by the assessee. The Assessing Officer therefore issued a show cause letter to the assessee on 15-3-1999 in which the Assessing Officer argued that while the assessee claimed, for the purposes of claiming depreciation under Section 32(1) of the Act, to be the absolute owner of these assets, there were terms in the alleged lease agreements which were contrary to the legal norms regarding mutual rights and liabilities of a lessor and a lessee. For this purpose, the Assessing Officer stressed the following points :-
(i) The payment for the assets has been made by you in the capacity of a financier and not as a real owner. The lessee is required to suffer the loss arising out of purchase of the assets and he is only amendable to all risks attached for the purchase of the assets. This leads to the conclusion that it was in reality, a security for the loan given.
(ii) Lessee is made liable to pay all costs, charges, damages etc., if lessee refuses or is unable to take delivery of the assets.
(iii) You do not assume any risk of ownership.
(iv) Lessor has been made liable to assets during transportation, delivery, installation and period of user.
(v) All the cost for maintenance of the assets and for making it eligible for users are to be borne by the lessor only.
(vi) The lessee has non-cancellable period of lease and option to further renew the same.
On the basis of these points the Assessing Officer confronted the assessee that real intention behind the lease agreements was to hold the assets during the period of lease for the purpose of the security for the loans advanced. The terms of lease agreement provided a shield to seize the assets in the event of non-payment by the lessees. The Assessing Officer therefore further asked the assessee to show cause as to why the assessee's claim of depreciation should not be disallowed as the assets were not really owned by the assessee and the transactions of the assessee were in the nature of finance such as described in the International Accounting Standard No. 17 (IAS No. 17). The Assessing Officer however admitted that the capital component of such rental included had to be excluded as a natural corollary of this finding. He therefore further requested the assessee to furnish such computation bifurcating the component of capital repayment and interest payment comprised in the lease rental without prejudice to the assessee's claim as otherwise.
2. The assessee as per its letter dated 22-3-1999 replied that there was no clause making the lessee liable to suffer the loss arising out of the purchase of the assets or making only him amenable to all risks attached for the purchase of the asset. As per Clause No. 11, insurance payments were the onus and liability of the assessee and there was also no specific clause making the lessee liable to pay all costs in case the lessee refused to take delivery of the assets. The assessee invited the attention of the Assessing Officer to Clause 9(e) and 9(f) of the lease agreements which provided that the equipment shall remain the personal property of the lessor and no right, title or interest shall pass to the lessee by virtue of the lease agreements. The assessee clarified that the lessor was made liable during transportation, delivery and installation for the simple reason that the original manufacturer was located close to the factory of the lessee and it did not make commercial sense to have the equipment first transported to the assessee's address in Mumbai and then reship the same to the lessee in Madhya Pradesh. The assessee further pointed out that normally where the assets required higher maintenance or had variable maintenance cost as in the present case, the expenses were borne by the lessee alone. Finally, the agreement did not have any non-cancellable period of lease.
3. In the assessment order the Assessing Officer has referred to certain portions of the lease agreements and observed that the assessee-company had received back the discounted value of the entire lease rentals from the lessee at a time and, therefore inescapable inference was that the assessee-company had entered into finance transaction instead of a genuine lease transaction. The fact that the assessee-company had received back lease rentals in advance was indicative that the assessee-company had received back its investments and still sought 100% deprecation. The Assessing Officer further observed that the entire transaction seemed to be a sham transaction. As the assessee had already taken back its investments in the name of security deposit, the assessee-company was not bothered about the status of the assets. It could therefore be inferred that the element of ownership was missing. The purchase of the assets was also not genuine inasmuch as there had been no acquisition of the assets in the physical sense of the term. The Assessing Officer further observed that the lessee wanted finance and the assessee-company was readily willing to come forward and for this purpose the leverage of depreciation was utilised to mutually benefit both the parties. In this manner, the lessee helped the assessee-company to reduce its taxable income. Irrespective of averments on paper, the essential characteristics of these transactions remained that of the financial transaction. The assessee-company was not concerned with the operational aspects of the equipment or loss or damage to equipment. In a true transaction of hire or lease, the owner must give warranty for the fitness, suitability etc., of the equipment and would be responsible for all loss or damage caused to the hirer, whereas in the instant case, it was the lessee who had taken upon itself the entire responsibility on that count. Such stipulations in the lease agreement established the fact that the assessee-company had not assumed the risk of ownership which was sine qua non for being actual owner. As the assessee had not fulfilled the requisite conditions of the owner of the assets and as the transaction of lease agreements was a collusive transaction, there was an attempt on the part of the assessee-company to defer its tax liability by claiming 100% depreciation. For this purpose the Assessing Officer referred to the decision of the Tribunal in the case of Centre for Monitoring Indian Economy v. Deputy CIT [IT Appeal No. 3820 (Bom.) of 1990 dated 29-4-1995]. The Assessing Officer therefore added back to the income as declared in the return of income filed by the assessee the entire depreciation on these two assets as claimed by the assessee. In addition, the Assessing Officer also added back repayment discount amounting to Rs. 15,79,612 and interest component of lease income estimated at Rs. 8,00,000. From the aggregate of these amounts the Assessing Officer reduced the lease income of the year amounting to Rs. 25,38,000 resulting into assessment of total income at Rs. 2,62,64,290 as against the returned income of Rs. 64,90,362.
4. Aggrieved by the assessment order, the assessee preferred appeal before the learned CIT(A). The assessee argued that lease agreements had been entered into by and between the parties which were unrelated to each other and these agreements had been entered into during the course of the assessee's regular leasing business. There was nothing unusual about nature of transactions which were common in India and world over and also recognised by insertion of Sub-clause (4A) to Section 43(1). All the payments in relation to the transactions had been made by account payee cheques. The assessee became owner of the assets by direct purchase from the vendor. Having acquired the assets in this manner, the assessee was entitled to deal with the same in the manner it liked. After purchase of the assets on outright basis the assessee had full ownership rights upon the same. The Assessing Officer's inferences that the assessee did not bear the risk of ownership were not correct. There was also no standard rule that these assets must necessarily have been delivered first at the premises of the assessee and thereafter at the doorstep of the lessee. The learned counsel for the assessee emphasised that there was no non-cancellable period in these lease agreements and these agreements also did not give any option to the lessee to purchase an asset at a predetermined notional price at the end of the term. Hence it was the case of an out and out lease transaction in the nature of an operating lease and not a finance lease. The learned counsel for the assessee relied upon the decision of the Tribunal in the case of Berolia Chemicals and also the judgment of Hon'ble Bombay High Court in the case of Prakash Industries Ltd. v. Development Credit Bank [Appeal No. 12 of 1999]. In addition, reliance was also placed on the Supreme Court judgment in the case of CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308'.
5. In the impugned order, the learned CIT(A) has observed at the outset that the lease transactions in question stand wrapped up in suspicions because the physical transfer of the assets in question had not taken place. As the issue regarding the physical delivery of the assets had not been established, the only inescapable inference was that the paper transaction had been entered into with the sole aim of claiming 100% depreciation. Referring to RBI's Circular No. FSCBC 18/24-01-001/93-94 dated 14-2-1994, the learned CIT(A) observed that according to that Circular also leasing activity was to be treated at par with loans and advances. It was also a fact that the assessee-company had got back the entire lease rentals in the form of security deposits and this fact also tilted the balance against the assessee-company. The lessee served its purpose by availing ready finance from the assessee-company. These essential characteristics of the transaction remained as that of finance transaction inasmuch as the only concern of the assessee-company was to recover the lease rentals and it was not concerned about the whereabouts or any functional aspects of the assets in question. The learned CIT(A) found this finding reinforced by Clauses 3.1, 3.2, 6.1, 8.q, 9, 10.1, 11.3 b, 13.1, 13.2, 14 and 15 as reproduced by the learned CIT(A) in the impugned order. According to the learned CIT(A), all these clauses went to establish the fact that the assessee-company had not assumed any risk of ownership of the asset which was contrary to the provisions of Section 26 of the Sale of Goods Act. The assessee had also not given any warranty for the fitness. Suitability or useability of the assets to the lessee which the assessee was required to give while hiring out the assets to the hirer. The lessee had been made liable to the lessor for any loss 6r damage during transportation, delivery, use or its failure to perform or operate etc. Under the law of hire the lessee could have been made liable only to such loss or damage which occurred due to his negligence or failure to take due care of assets. If the asset was damaged or lost due to no fault on the part of the lessee, the lessor as the owner of the asset must bear the loss. In the instant case, it was the lessee who was liable to bear the entire loss and, therefore, it was clear that the assessee-company was not the owner of the assets in question. The upshot of all these aspects, according to the learned CIT(A), was that the intention of the assessee-company did not emerge to be that of entering into a genuine lease transaction. On the other hand, it floated to the surface that this was an out and out finance transaction. The learned CIT(A) held that it was settled legal position that whether a particular transaction is lease or not is to be decided from the circumstances of each case and for this purpose substance and essence of the agreement mattered and not merely the form. For this proposition the learned CIT(A) relied upon judgments reported in the cases of Board of Revenue v. A.M. Ansari 3 SCC 512; Sohanlal Naraindas v. Laxmidas 67 Bom. LR, 400; Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178; CED v. Aloke Ultra [1980] 126 ITR 599' (SC) and Workmen, Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC). He also referred to CBDT Circular No. 760 dated 18-1 -1998. Applying these principles to the instant case, the learned CIT(A) held that the intention of the assessee-company was simply to reduce the taxable income by way of claiming 100% depreciation. The assessee-company did not become the owner of the assets in question and entered into only paper transaction. The transaction was pure and simple finance transaction and the nomenclature given to it by the parties was only to disguise true nature and effect. As the lessor did not assume risk, it was the lessee who appeared to be the real owner. The assessee-company also did not observe its obligation under Section 31 of the Sale of Goods Act which stipulated the duty of the seller to deliver the goods and of the buyer to accept and pay for them in accordance with the contract of sale. In the instant case, the goods were never handed over and only the paper document was entered into. Hon'ble Supreme Court in the case of CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 6252 stated that full right of owner consisted of (a) power of enjoyment, (b) possession which includes the right to exclude others, (c) power to alienate or to charge security, and (d) power to leave the rest by will. In the instant case, the assessee-company was bereft of the power and enjoyment in respect of the leased assets because the assessee-company had simply entered into a paper transaction and did not have possession which included the right to exclude others. Considering these arguments and the reasons given by the Assessing Officer, the learned CIT(A) gave the finding that the transactions between the assessee-company and the other two parties were finance transaction and no leasing actually took place. The disallowance of depreciation was therefore proper and on this score the order passed by the Assessing Officer did not call for any interference. The learned CIT(A) sought support to these findings from the order of IT AT, Mumbai, in the case of Centre for Monitoring Indian Economy. The decision of Hon'ble Supreme Court in the case of Shaan Finance (P.) Ltd. (supra) was also not applicable because in the said decision the matter related to the investment allowance and the business of that assessee was of leasing only. The decision of the Tribunal in the case of Berolia Chemicals Ltd. had been given within the parameters of its facts and should not be held to be squarely applicable to the facts of the assessee. In that case, revenue had not brought out clearly that the transaction was out and out finance transaction. Similarly, in the case of Prakash Industries Ltd., the decision of the Bombay High Court had been delivered, on altogether different facts and circumstances. In that case, Hon'ble High Court was concerned with debt and not with allowance of depreciation. Aggrieved by these orders, the assessee is in appeal before us.
6. The learned counsel for the assessee argued before us that there was complete transparency about transactions of the assessee which were well supported by necessary documentation. He referred to the papers from pages 6 to 11 of the paper book and pointed out that the assessee purchased two different sets of equipments from two completely identifiable manufacturers whose full addresses and bills and vouchers had been given and the assessee's payments were made to them by account payee cheques. Complete description along with technical specifications of the equipments were also given. Lease of the assets to lessees was based on fairly elaborate lease agreements which covered all aspects of the matters and the copies of lease agreements at pages 12 to 44 of the paper book had been given to the authorities below. The lessees were fully identifiable, their complete names and addresses were given and they had made all payments to the assessee through account payee cheques only. From the facts it followed that the assessee purchased two highly sophisticated equipments from two different manufacturers. Those two equipments were leased to two different parties in terms of separate lease agreements. The assessee was neither connected with either manufacturer nor with the either party to whom the equipments were given on lease. It was a clear case of leasing which was one of the main businesses of the assessee-company. Genuineness of the transactions has not been doubted by the Assessing Officer as well as the learned CIT(A). The assessee's claim of depreciation had been rejected by the authorities below mainly on the ground that the assessee entered into a finance lease. In support of this basis, the learned CIT(A) cited CBDT Circular No. 760 dated 18-1-1998 which merely advised that whether a transaction is in the nature of hire purchase or in the nature of a loan should be determined on the basis of the substance of the transaction. As against this, CBDT had issued two more Circulars viz., Instruction No. 1978 dated 31-12-1999 and Circular No. 2 of 2001 dated 9-2-2001.
In CBDT Instruction No. 1978, the Board advised its subordinate officers in the following words :
3. In order to have a consistent approach in the assessments of any lessor or lessee, their cases should be, wherever feasible, assigned to the same Assessing Officer and where it is not feasible, the Assessing Officers of the lessor and the lessee should coordinate with each other to ensure consistency of approach in the assessment of the lessor and the lessee the two parties to the same transaction. It will also ensure that the claim of depreciation is not disallowed both to the lessor and lessee.
The learned counsel argued that even in this Instruction of CBDT, it was clearly held that it should be ensured that the claim of depreciation is not disallowed both in the hands of the lessor as well as the lessee. As far as the case of the assessee before us was concerned both the lessees had given certificates that they had not claimed any depreciation allowance on the assets in question, which certificates were at pages 132 and 135 of the paper book. The result of the impugned orders in the case of the assessee was a negation of depreciation allowance both in the hands of the lessor as well as the lessee which was clearly against law, as admitted in CBDT Circular as well. The learned counsel also referred to CBDT Circular No. 2 of 2001 and pointed out that para 2 reads as under :
2. The Central Board of Direct Taxes vide Instruction No. 1978 dated 31-12-1999 F. No. 225/190/98/IT (A-II) has laid down the line of investigation in such cases. In cases where assets are factually nonexistent, having been created by hawala transaction, the question of allowance of depreciation does not arise. In cases of sale and lease-back of assets without any alteration in the situation of assets and its working, the denial of depreciation claimed has to be considered keeping in view the principle laid down by the Supreme Court in the case of McDowell & Co. Limited.
The learned counsel argued that two situations were envisaged in CBDT Circular No. 2 of 2001, first, the cases where the assets were non-existent and, second, where there was sale and lease-back of assets without any alteration in the situation of assets and its working. None of these two situations envisaged in CBDT Circular pertained to the facts of the assessee's case. There was no question of any doubt about existence of leased assets in the case of the assessee. It was also not the case of sale and lease-back of assets inasmuch as the assessee purchased assets from regular manufacturers and the assets were leased to actual users. Vendors of the assets were totally unconnected parties with the assessee as well as the lessees and, therefore, it was not the case of sale and lease-back of assets. However, both the Assessing Officer as well as the learned CIT(A) failed to appreciate the basic distinction between the facts of the assessee's case and the cases where the Department by its experience considered it necessary to probe deep into the matter. The Assessing Officer was guided by the sole fact that 100% depreciation was claimed on leased assets. The learned CIT(A) erroneously observed at page 11 of the impugned order in para 9 that it was a case of sale and lease-back transactions. This shows that the authorities below unjustifiably confused themselves with the subject-matter of various departmental Circulars without realising that the assessee's case was a straight transaction where the suppliers of the equipments and the actual users were totally different parties and there was absolutely no doubt about physical existence of the equipments.
7. The learned counsel argued that both the Assessing Officer as well as the learned CIT(A) have proceeded on the basis of their inferences which were self-contradictory. In the one breath they argued that it was a case of a finance lease simpliciter and should be regarded as loan advanced against the security of equipments. In the next breath they themselves argued that the amounts spent by the assessee for purchase of assets were received back by the assessee-company in the form of lease rentals in advance. Referring to page 8 of the impugned order, the learned counsel pointed out that according to them whatever the assessee-company had invested had been received back in the shape of advance lease rentals. The learned counsel further argued that the authorities below also confused themselves about the facts of the case as well as the terms of lease agreements as well. Referring to page 13 of the impugned order, the learned counsel argued that there was no option reserved in favour of the lessee to purchase the equipments at any predetermined price at the end of the term. As per both the lease agreements after the expiry of lease, the equipments reverted to the assessee. Referring to page 15 of the impugned order, the learned counsel stated that it was not correct statement that the assessee-company had got back the entire lease rentals in the form of security deposits or for that matter the assessee-company had received back the entire investment in equipments by way of advance lease rentals. The authorities below also misconstrued the provisions of lease agreements. The risk of ownership had been retained by the assessee and it was not completely passed on to the lessees. There was also no non-cancellable period in these lease agreements. The learned counsel argued that there was also no force in the argument of the authorities below that the assets had not been taken physical delivery of by the assessee itself and the same had been delivered at the premises of the lessees. It was so done as the suppliers in both cases were situated closer to the lessees rather than the assessee-company and it would have made no commercial sense at all to bear the double cost of transportation. There was no legal requirement even under Sale of Goods Act that the delivery of the equipment could not be made at the premises of the lessee as per the instructions of the assessee-company.
8. Coming to the case laws relied upon by the learned CIT(A), the learned counsel pointed out that both the Assessing Officer and the learned CIT(A) had made reference to a Tribunal decision in the case of Centre for Monitoring Indian Economy (supra) but the copy of the said order was not available anywhere.
The other judgments relied upon by the learned CIT(A) merely stated that whether a transaction is lease or not has to be inferred from the circumstances of each case and for that purpose the substance and essence of the agreement and not merely the form should be looked into. However, there was nothing in these decisions which otherwise went against the assessee. As against this, Hon'ble Bombay High Court had in the case of Prakash Industries Ltd. (supra) as per paper book pages 10 to 20 held that the property belongs to the lessor-purchaser even in the cases where it is claimed that the agreement of lease was a financing agreement. Hon'ble Supreme Court had thereafter rejected the SLP filed in that case. The learned counsel also placed reliance on a host of Tribunal decisions viz,, Karam Chand Thaper & Bros. v. Dy. CIT[1998] 66 ITD 39 (Cal); Unimed Technologies Ltd. v. Dy. CIT[2000] 73 ITD 150 (Ahd.); Newdeal Finance & Investment Ltd. v. Dy. CIT[2000] 74 ITD 469/(Chennai); Amar Structure (P.) Ltd. v. Asstt. CIT[1997] 57 TTJ (Ahd.) 508' and Bombay Burmah Trading Corporation Ltd. [IT Appeal No. 4766 (Bom.) of 1990] (Paper book pages 88 to 109), and pointed out that on similar facts the Tribunal had upheld the assessee's claim of depreciation allowance and the facts of the assessee's case were rather superior.
9. The learned Departmental Representative argued that the assessee was not entitled to place any reliance on CBDT Instruction No. 1978 because the same was internal instructions and not a public Circular. As far as Circular No. 2 of 2001 was concerned, that too also clarified that the ownership of the asset is determined by the terms of contract between the lessor and the lessee. There was no thumb rule that the depreciation has to be given to the lessor only. The learned DR took us closely through the lease agreement between the assessee and M/s. Duckfin International Ltd. and tried to argue that it is the lessee who would appear to be the owner of the asset on the basis of the substance of the transaction between them. He pointed out that as per Clause 3.1, the lessee agreed unconditionally and irrevocably to pay to the lessor the lease rentals upon the dates and as provided in item 6 of the Schedule. Thus there was non-cancellable lease period. Clause 6 of the agreement provided that all spade work in relation to the equipment had been done by the lessee itself, and it was lessee who made Representations and warranties to the lessor as per Clauses 7 and 8 of the lease agreement. From Clause 9(d), it was clear that all the specifications of the asset were as per the requirements of the lessee. Under Clause 11, the insurance was to be taken by the lessee. Under Clauses 13 and 14, the lessee indemnified the lessor and accordingly lessee assumed all the risks and liabilities in relation to the equipments. According to the learned DR, all these clauses showed that as far as the lessor was concerned, it was interested in rental only. Everything else in connection with the purchase and upkeep of the equipments had been fastened upon the lessee only. Further, under the agreement it was lessor only who had the right to terminate the lease. How could then the assessee argue that the lease was not non-cancellable? Clause 17.1(o) of the lease agreement further gave lessee wide discretion. The only thing not mentioned was that the lessor could terminate the lease at "will" but all the sub-clauses of Clause 17 put together amounted to the same. The learned DR referred to Clause 18 and pointed out that it was significant that there was no mention at all in this Clause that security deposit given by the lessee shall be refunded to the lessee nor was any time limit laid down in that respect. Clause 18 did not even specify the amount of security deposit to be given by the lessee. In substance, the learned DR argued, the lease agreement had been so devised as to put the entire risk of ownership in relation to equipments on the lap of the lessee.
10. The learned DR thereafter took us to certain extracts taken by him from "Lease Financing and Hire Purchase" by Vimal Kothari (4th Edition 1996). As per the learned author, there were three types of leases, viz., financial, operating and conveyance. In the opinion of the learned author, in the case of financial lease, in substance the lessor's title over the asset is only a matter of his security; he has otherwise to transfer to the lessee all the risks and rewards of ownership. The rentals are so structured as to repay the lessor's principal as well as interest during the desired payback period of the lessor. The rest of the lease period is nothing but paper transaction wherein peppercorn rentals are paid just to prolong the lease agreement till the asset loses its economic utility. The residual scrap then reverts to the lessor, but its value is negligible. The learned DR then took us to the tabular comparison of financial and operating leases given in the book and pointed out that most of the ingredients of financial lease were satisfied in the instant case. The asset was use-specific and was selected for the lessee specifically. The risks and rewards incidental to ownership were passed on to the lessee and the assessee only remained legal owner of the asset. The assessee was interested in its rentals and not in the asset. It was interested in getting its principal back along with interest. The assessee entered into the transaction only as a financier and did not bear the cost of operation. It was typically a financier and was not in a position to render specialised service in connection with the asset.
The learned DR fairly conceded that he was not in a position to establish that the lease period coincided with the economic life of the asset but the fact remained that for, the equipment purchased by the assessee-company for about Rs. 1.90 crore, lease rentals received as per agreement amounted to approximately Rs. 1.5 crore. If the benefit derived by the assessee-company on account of 100% depreciation is added, there did not remain any gap between what the assessee paid for and what was received by it from the lessee. The learned DR emphasised the findings of the learned CIT(A) in para 11 of the impugned order.
11. The learned DR referred to the judgment of Hon'ble Supreme Court in the case of Podar Cement (P.) Ltd. (supra) and read before us observations of the Hon'ble Apex Court at page 642. He pointed out that Hon'ble Supreme Court had noted that "all ground realities" as well as "objectives of income-tax law" have to be taken into consideration and, therefore, the person who enjoys the benefits of the property should be treated as owner of the property irrespective of the strict position under general law. Referring to the judgment of Hon'ble Bombay High Court in the case of Prakash Industries Ltd. (supra), relied upon by the assessee's counsel, the learned DR argued that this judgment had not been delivered in the context of Income-tax Act. The only word common in that judgment was "finance lease". Otherwise, the entire judgment had been delivered in a different context. Furthermore, the judgment of Hon'ble Supreme Court in the case of Podar Cement (P.) Ltd. (supra) was not even cited in that case. As far as the certificates given by the lessees at pages 132 and 135 of the paper book were concerned, the same were, according to the learned DR, self-serving documents. The very fact that the lessees had not claimed depreciation allowance could not automatically result into the assessee becoming entitled to depreciation allowance. The choice in this respect did not rest with the parties. In this respect, the learned DR placed reliance on the decision of ITAT, Mumbai Bench 'D' in the case of Mandhana Exports (P.) Ltd. [IT Appeal No. 3689 (Mum. of 1999), dated 14-3-2001]. The learned DR also submitted the copy of the decision of ITAT, Mumbai Bench 'A', Mumbai, in the case of Centre for Monitoring Indian Economy (supra) and pointed out that in that case disallowance of depreciation was upheld. He also placed reliance on the judgment of Hon'ble Karnataka High Court in the case of Gowri Shankar Finance Ltd. v. CIT [2001] 248 ITR 713.
12. In support of the contention that in the case of finance lease depreciation should not be allowed to the lessor, the learned DR placed reliance upon para 18 of Accounting Standard 19 issued by the Institute of Chartered Accountants. He also argued that such an approach would be justified because the assessee had received back its investment, as mentioned by the Assessing Officer in para 9 of the assessment order. The status of these amounts was not clear. The lease agreement did not enumerate the amount as well as the treatment to be given to the security deposit.
There was no clause even that security amount is to be refunded to the lessees. This aspect of the matter appeared to be deliberately kept vague. However, the fact remained that when substantial part of the value of the leased assets had been received upfront by the assessee, it showed that the transaction was a disguised sale of the nature held by the Tribunal in the case of Centre for Monitoring Indian Economy (supra).
13. During this stage of arguments, Shri Anand Kedia, the learned DR, also intervened and provided us certain working on the basis of a mathematical formula and pointed out that as per the agreement between the assessee and the lessees, if the returns of the assessee were worked out on the assumption of the cost of capital at 16% per annum, the assessee incurred a loss of Rs. 20,15,500 in its transactions with Duckfin International Ltd. The question for consideration was as to why the assessee should be willing to suffer this loss. This could be understood only in terms of the benefit derived by the assessee in terms of 100% depreciation allowance claimed by the assessee in the course of assessment, which is subject-matter before us. Shri Kedia argued that the assessee clearly resorted to a device of tax planning and its case was hit by the judgment of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148.
14. The learned counsel for the assessee, in his rejoinder, argued that CBDT in its Circulars have maintained that depreciation allowance has to be granted either to the lessor or to the lessee. For that purpose, CBDT directed that a co-ordinated approach should be made between the assessments of the lessor and the lessee. In the assessee-company's case, the lessees had clearly declared that they did not treat themselves to be the owners of the assets and for that reason they did not claim depreciation allowance. There was otherwise no reason as to why they should not avail of the benefit of depreciation if in law they should be regarded as owner of the assets. The Department completely misdirected itself in treating the leases under consideration to be finance lease. The assessee-company leased the equipments for a short-term of five years only. No renewal right was unequivocally conferred on the lessees. On the contrary, on expiry of the lease the assets had to revert to the assessee-company. No right or option to purchase these assets at the end of the lease term was reserved in favour of the lessees. There was also no material on record to show that after expiry of the lease, the assets would be worth scrap only. In the face of these material facts it was not understandable at all as to how the revenue could still plead the leases in question as finance lease. There was also no substance in the objection of revenue to the assessee having collected huge amounts from the lessees by way of security. Shri Trivedi took us through para 7.2 of Shri Vinod Kothari's book (supra) and pointed out that where the value of the leased assets is large enough, running into crores, most leases are leveraged. The assessee could have obtained finance from banks etc., on interest on the security of these assets. Instead, the assessee agreed to accept discounted value of lease rentals from the lessee itself. If the lease terminates for any reason before the expiry of full-term, the amount received was refundable and to that extent the advance lease rentals in turn was received by the assessee by way of security. It was not correct that the assessee had received back its entire investment by way of advance lease rentals. The amounts received were much less than the assessee's investment and it was yet another major flaw in the reasoning of the authorities below.
15. The learned counsel for the assessee took us closely through the various clauses of lease agreement to oppose the case of revenue that the lease agreement was merely a camouflage and that all the risks and rewards of ownership had been transferred to the lessee. He stressed that lease bound the lessee for a period of five years only and there again lessee was bound with reference to the payment and not in respect of lease itself. As the assessee-company had purchased the assets at the suggestion of the lessee, it was natural on the part of the lessor to ask the lessee to completely satisfy himself about suitability of the equipment and to bind himself in respect thereto. From that it did not follow that risks and rewards of ownership were passed on to the assessee. Shri Trivedi pointed out to Clause 8(d) of the lease agreement which required that the lessee shall "Hold the equipment as the bailee of the Lessor and not claim any right, title or interest in the equipment". He also referred to Clauses 9(e), 9(f), 10.2, 11, 14, 16, 17, 18.2 etc., of the lease agreement.
16. The learned counsel argued that the judgment of Hon'ble Supreme Court in the case of Podar Cement (P.) Ltd. (supra) relied upon by the learned DR was out of context. In that case, the assessee had all the attributes of ownership, except a duly registered conveyance deed. That was not the case between a lessor and a lessee. There is nothing in that judgment by virtue of which a tenant may become owner of the property. Even if a tenant is in possession of the property for umpteen number of years at paltry rent, the tenant does not become owner. The provisions of general law cannot be altogether disregarded in income-tax proceedings. Similarly, other decisions relating to hire purchase were not relevant. In the instant case, the lessees had no chance of becoming owner of the assets at any stage. They were bound to return the assets to the assessee-company. For this reason, various cases relating to hire purchase should not be mixed up with term-lease agreements.
17. We have carefully considered the rival submissions. Depreciation allowance under the Income-tax Act is governed by the provisions of Section 32 of the Act which lay down only two essential requirements for grant of depreciation, viz., the asset should be owned by the assessee and the asset must be put to use for the purpose of business of the assessee during the previous year. As far as the second requirement is concerned, in respect of assessment year 1996-97 there is no doubt that in the cases of business of leasing, the lessor can claim to have put the leased asset to use for the purpose of its business. This legal position stands above dispute after the judgment of the Apex Court in the case of Shaan Finance (P.) Ltd. (supra). The case of revenue is entirely made out on the basis that in view of the nature of the agreement between the assessee-company and its lessees the assessee should be treated to have ceased to be the owner of the assets for the purpose of depreciation allowance. In support of this contention it is argued that the agreements the assessee entered into were finance leases whereunder the assessee only held the assets in question as a security for the amounts of loans advanced by the assessee to the lessees. The case of the assessee on the other hand is that the lease agreements did not contain any such provisions whereby its ownership over the assets could be substantially whittled down. As the assessee's ownership over the assets remained intact all along, there was no reason to deny depreciation allowance as claimed by the assessee. During the course of hearing before us, references were made to "International Accounting Standard : Accounting for Leases (IAS-17)". This Accounting Standard states as under:-
Examples of situations where a lease would normally be classified as a finance lease are :
(a) The lease transfers ownership of the asset to the lessee by the end of the lease term, (b) The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the rate the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised, (c) The lease term is for the major part of the useful life of the asset. Title may or may not eventually be transferred. (d) The present value at the inception of the lease of the minimum lease payments is greater than or equal to substantially all of the fair value of the leased asset net of grants and tax credits to the lessor at that time. Title may or may not eventually be transferred.
If applied to the facts of the leases under consideration by us, we find that lease agreements entered into by the assessee cannot be said to be finance lease. There is nothing in these agreements to transfer ownership of these assets to the lessees. The revenue has also not brought even an Iota of material on record to suggest that the lease-term was for the major part of the useful life of the assets and that on the expiry of the lease period, the assets were rendered to be of nominal value only. As long as these important aspects remained unproved, we do not see justification for denial of depreciation allowance to the assessee. In the case of a finance lease, whether or not the lessor forfeits its right to claim depreciation allowance is not being decided upon by us because we find on the facts and the circumstances of the case before us that there is no finance lease at all. In the orders of the authorities below and during the course of hearing before us in the arguments of the learned DR, several portions of lease agreements were, recited to support the contention that these agreements contained clauses whereby the risk of ownership was transferred to the lessees. However, no argument has been advanced on the issue of reward of ownership being transferred to the lessees. In support of the argument that the assessee should be deemed to have ceased to be the owner for the purposes of Section 32, the onus was heavily cast upon revenue to establish that the entire arrangement was a disguise to hide the transfer of assets in favour of the lessees. Merely because in the perception of the Assessing Officer, certain clauses of the lease agreements were unreasonable or even incongruous, it could not be concluded that the assessee had not entered into these agreements as a lessor-owner of the assets in the ordinary course of its business of leasing. It is well-settled position in law that Court cannot rewrite an agreement for the parties. Further, an agreement is to be read and construed as a whole, effect being given to all the parts thereof, and no part of it should be ignored unless it is so inconsistent with the rest of it that no meaning can be given to it.
18. On reading of the lease agreements in question as a whole, we do not find them inconsistent with the contention of the assessee that it was the owner of the assets, its intention being to lease out the assets for a limited term without parting with its rights as an absolute owner over these assets. Clause 8(d) of the agreement provided that the lessee shall "Hold the equipment as the bailee of the Lessor and not claim any right, title or interest in the equipment other than that of a Lessee or contest the Lessor's sole and exclusive ownership thereof". Again, as per Clause 9(e) and (f), the lessee confirmed as under:-
e. As between the Lessor and the Lessee and their representative successors in the title, the equipment shall remain the personal property of and shall continue to be in the ownership of the Lessor;
f. No right, title or interest in the equipment shall pass to the lessee by virtue of these presents. The lessor and the lessee hereby confirm that their intent is that the equipment shall at all times remain the property of the lessor alone and the lessee shall have a right to use the equipment subject to and in accordance with the terms and conditions of the agreement.
The fact that the assessee has not covenanted with the lessee to part with its ownership over the assets is reinforced by Clause 16, which read as under:-
16. Delivery of the Equipment on Determination of Lease:
16.1 Upon expiration or sooner determination of the lease on account of default committed by the Lessee, or otherwise howsoever, the Lessee shall deliver to the Lessor the equipment at such place as the Lessor may require at the cost and expenses of the Lessee in good repairs, and condition and working order, ordinary wear and tear resulting from proper use thereof along being excepted.
16.2 If the Lessor upon the termination of the lease by afflux of time or termination by default shall not be able to recover possession of the equipment then without prejudice to the other amounts payable to the Lessee hereunder the Lessee shall forthwith pay to the Lessor by way of liquidated and ascertained damages to the Lessor having regard to the residual value of the equipment. Such sums shall be twice the amount of lease rentals payable for the duration of the term of the lease and which shall be paid until such time as the Lessor is able to get possession of the equipment.
It is also not the case of revenue that these assets had very short useful life which coincided with the term of lease. It is also not the case of revenue that the lessees at their sweet will could renew the period of lease for as long as they wanted. In these circumstances, merely by lifting some Clauses here and there, cannot alter the basic character of the transaction between the assessee-company and its lessees. In our opinion, on reading of these agreements as a whole, it cannot be said, as held by the authorities below, that terms of lease agreements are contrary to the legal norms regarding mutual rights and liabilities of a lessor and lessee. We also do not find it correct to say that by these agreements the assessee was reduced to a mere title-holder over the assets.
19. During the course of hearing before us, the learned DR relied upon the following clause 18 of Accounting Standard 19 issued by the Council of the Institute of Chartered Accountants of India to come into effect in respect of all assets leased during accounting periods commencing on or after 1-4-2001 :
18. A finance lease gives rise to a depreciation expense for the asset as well as a finance expense for each accounting period. The depreciation policy for a leased asset should be consistent with that for depreciable assets which are owned, and the depreciation recognised should be calculated on the basis set out in Accounting Standard (AS) 6, Depreciation Accounting. If there is no reasonable certainty that the lessee will obtained ownership by the end of the lease term, the asset should be fully depreciated over the lease term or its useful life, whichever is shorter.
We find that this Clause 18 should not be read in isolation but along with the following Clause 11 :
11. At the inception of a finance lease, the lessee should recognize the lease as an asset and a liability. Such recognition should be at an amount equal to the fair value of the leased asset at the inception of the lease. However, if the fair value of the leased asset exceeds the present value of the minimum lease payments from the standpoint of the lessee, the amount recorded as an asset and a liability should be the present value of the minimum lease payments from the standpoint of the lessee. In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee's incremental borrowing rate should be used.
It would be seen that the aforesaid Clause 18, which is, however, applicable in the case of finance lease only, relates only to the financial statements of lessees and from that it Cannot be inferred that even in the case of a finance lease, the depreciation allowance has to be necessarily disallowed to the lessor.
20. Before parting, we may also make some observations in-relation to the arguments of the learned counsel for the assessee that it is a case far different from other cases of depreciation allowance which became subject-matter of hot controversy in the last few years. It is a well-known fact that the Department came across a large number of cases where the liberal provisions of 100% depreciation allowance were misused by way of modus operandi involving leases. CBDT Circular No. 2 of 2001 has pointed out two types of cases in this behalf. First, where the assets were found to be factually non-existent, having been created by hawala transaction. It has never been the case of revenue before us that the case of the assessee falls in this category. The second mention is of cases of sale and lease-back of assets without any alteration in the situation of assets and its working. We do not find revenue successful to bring in the case of the assessee before us even in this second category. It is not the case of sale and lease-back of assets in the first instance. The assessee's vendors and the assessee's lessees are different parties, unconnected with each other, including the assessee itself. There have been alteration in the situation of asset inasmuch as the assets have been transported from the premises of the manufacturers to the premises of the lessees for which elaborate provisions have been made in the lease agreements, some of which have been adversely commented upon by the authorities below. We find that the authorities below have confused the facts of this case resulting into certain factual inaccuracies in their observations. The Assessing Officer in his show cause letter dated 15-3-1999 mentioned that the lessee had non-cancellable period of lease and option to further renew the same. Both the Assessing Officer and the learned CIT(A) have assumed without enquiring that the assessee had parted with the possession of the equipments for good without there being any material to support such an assumption. This assumption has been strongly refuted by the learned counsel of the assessee before us. Secondly, both the Assessing Officer as well as the learned CIT(A) have repeatedly asserted that advance lease rentals received by the assessee resulted into the assessee-company having received back its investments. During the course of hearing before us, it was pointed out that as per the facts mentioned in the assessment order itself, the assessee-company had purchased Flameless Furnace for Rs. 1,49,47,920 but the amount received upfront from Duckfin International Ltd. amounted to Rs. 1,19,55,959. Similarly, gas cylinders were purchased for the sum of Rs. 49,84,400, whereas the amount received from Miga Gases Pvt. Ltd. was Rs. 39,84,927 only. There remained large enough gap in respect of both the equipments and it could not therefore be said that the assessee had received back the entire investments by way of advance lease rentals. Both the Assessing Officer as well as the learned CIT(A) have found that lease agreements heavily tilted in favour of the assessee-company and rather lamented that too many risks had been fastened upon the lessees. At the same time, both the Assessing Officer as well as the learned CIT(A) have given the finding that the assessee-company was not concerned with the operational aspects of the equipment or loss or damage to equipment without realising the apparent contradiction in their arguments. If that were so, there would have been no need to fasten any obligation in this behalf on the lessees. Further, both the Assessing Officer as well as the learned CIT(A) have treated the fact that the physical delivery of the equipments was not made at the premises of the assessee-company but that of the lessees to be a major lacuna in the claims of the assessee. We do not however find anything unusual or improper about the same. The assessee purchased assets which were user-specific and, therefore, required the lessees to satisfy themselves with the suitability of the equipments and proper delivery of the same at their premises. We are unable to appreciate as to how this aspect can be held out against the assessee.
21. During the course of hearing before us, an argument was raised that the assessee entered into these transactions only for taking the advantage of 100% depreciation. We may mention that apart from some working given to us at the last minute of hearing that the assessee should be deemed to have incurred a loss of Rs. 20,15,500 if the cost of the assessee's capital was assumed to be 16% per annum, the authorities below have not made any such observations in their orders. Be that as it may, as long as it is not the case of revenue that some part of lease consideration was unofficially received by the assessee from the lessees which has not been disclosed, the mere fact that the assessee in their opinion settled for smaller lease consideration keeping in mind 100% depreciation allowance cannot render the transaction to be a mere colourable device. Fact of the matter remains that a substantial transaction of enormous value was indeed entered into and physically executed. Hence the benefit of depreciation conferred by the statute rightfully belonged to the assessee.
22. In view of the discussion in the foregoing paragraphs, we hold that the authorities below have rejected the assessee's claim of depreciation allowance on the two equipments in question without proper justification. We therefore reverse their orders in this respect and direct the Assessing Officer to allow the assessee depreciation as permissible under rules in respect of both the assets for assessment year 1996-97.
23. In the result, this appeal is allowed.