Income Tax Appellate Tribunal - Delhi
Vls Finance Ltd. vs Dy. Cit, Spl. Range-10 on 31 August, 2005
Equivalent citations: [2006]5SOT362(DELHI)
ORDER
S.C. Tiwari, A.M. As certain common facts are involved in these three appeals the same were argued together by the learned counsel for the assessee and the learned departmental Representative We are deciding these appeals by this common order for convenience. Appeal in ITA Nos. 1754 and 1755 are the appeals filed by the assessee on 4-4-2001 against the orders of the learned Commissioner (Appeals)-XXVIII, New Delhi dated 28-2-2001 in the case of the assessee in relation to assessment orders under section 143(3) for assessment years 1995-96 and 1996-97. Appeal in ITA No. 1948 is the appeal filed by revenue on 14-5-2001 for assessment year 1997-98. The common point involved in these three appeals is as to whether the assessee is entitled to claim depreciation on certain assets under hire-purchase.
2. Facts of the case leading to these appeals briefly are that the assessee-company was engaged in these years in the business of leasing and other related financial activities. For assessment year 1995-96, the assessee claimed depreciation on hire-purchase assets to the tune of Rs. 2,46,03,665. The assessee explained that it was a financing company and assets owned by it were given on hire to various parties under hire-purchase agreements entered into with them. These agreements provided that on payment of all instalments and exercise of option by the hirer the title or interest in the property would pass to the hirer. Until then the assessee was the true owner of the assets and, therefore, the assessee was claiming depreciation in its returns of income though no provision had been made in the books of account. In support of this contention, the assessee relied on the judgments in Sardar Tara Singh v. CIT(1963) 47 ITR 756 (MP), CIT v. Hindustan Cold Storage & Retrigeration (P) Ltd. (1976) 103 ITR 455 (Del) and Addl. CIT v. Mercury General Corpn. (P.) Ltd. (1982) 133 ITR 525 (Delhi). The assessee argued that as per the provisions of section 32 depreciation was allowable on the assets owned by an assessee and used for that assessee's business. In the case of the assessee both the conditions were satisfied.
3. The learned assessing officer noticed that though the assessee claimed depreciation on vehicles the registration of those vehicles was in the name of hire-purchaser. The ownership of movable assets was governed by possession. He, therefore, asked the assessee to file confirmations from the hire-purchasers as to whether they had exercised option to purchase assets at the end of termination of hire-purchase agreement or not. In spite of opportunities given to the assessee failed to file such confirmation. On these facts the learned assessing officer held that the assessee's claim of depreciation was not allowable and he added the sum of Rs. 2,46,03,665 to the income declared by the assessee.
4. During the course of hearing before the learned Commissioner (Appeals) the assessee apart from the judgments relied upon before the assessing officer, further relied on the judgments in M.D. Narayan v. Agrl ITO (1974) 95 ITR 452 (Mys.) and CIT v. SarveshwarNath Nigam (1963) 48 ITR 853 (Punjab). The assessee also placed reliance on the orders of Commissioner (Appeals) in its own case for earlier assessment years 1990-91 to 1992-93 and 1994-95. The learned Commissioner (Appeals) held the view that the judgment of Hon'ble Delhi High Court in the case of Addl. CIT v. General Industries Corpn. (1985) 155 ITR 430 (Del) had not been considered by his predecessor in the earlier years. )it that judgment Hon'ble Delhi High Court had held that hire-purchase agreement could as well be regarded as sale on instalments. The learned Commissioner (Appeals) noticed that the views expressed by the Hon'ble Delhi High Court in Addl. CIT v. General Industries Corp". (1985) 155 ITR 430 (Del) were reiterated by Hon'ble High Court in the judgment in CIT v. Nagpur Golden Transport Co. (1998)_233 ITR 389 (Del). Respectfully following the judgments of' the jurisdictional High Court, the learned Commissioner (Appeals) upheld the disallowance of depreciation as made by the learned assessing officer.
5. For assessment year 1996-97 the assessee claimed depreciation on hire purchase assets to the tune of Rs. 13,46,01,830. The assessee furnished the same explanation as for assessment year 1995-96. The learned assessing officer held that the registration of vehicles was in the name of hire purchaser. In the case of movable assets ownership was governed by possession. The assessee-company was required to file confirmation from the hire-purchasers to confirm whether they had exercised option to purchase assets at the end of termination of hire-purchase agreement or not. The assessee failed to file such confirmation even after an opportunity had been given to him. Based on these facts the learned assessing officer disallowed the assessee's claim of depreciation.
6. Arguments of the assessee and the findings of the learned Commissioner (Appeals) are the same as already enumerated by us in relation to assessment year 1995-96. As a matter of fact the learned Commissioner (Appeals) has passed on 28-2-2001 a consolidated order for assessment years 1995-96 and 1996-97.
7. For assessment year 1997-98 the assessee-company claimed depreciation of Rs. 11,73,13,134 on the vehicles supplied under hire-purchase finance agreements. Admittedly the assessee had not provided any depreciation on those assets in its books of account. However, during the course of assessment proceedings the assessee relied upon hire-purchase agreements and stated that till the payment of last instalment and exercise of option by the hirer, the title of the vehicles remained with the assessee. The assessee relied upon the judgments in Sardar Tara Singh v. CIT (1963) 47 ITR 756 (MP); CIT v. Sarveshwar Nath Nigam (1963) 48 ITR 853 (Punjab) and Chaganlal Automobiles v. CIT (1985) 156 ITR 58 (Raj.).
8. The learned assessing officer held that though hire-purchase agreements entered into by the assessee had been terryied as hire agreements, in effect they were sold on instalments. The instalments being paid by the hirers also included purchase price of the vehicles. The learned assessing officer referred to various CBDT circulars. He also relied upon the judgments of the Hon'ble Delhi High Court in Addl. CIT v. General Industries Corpn. (1985) 155 ITR 430 (Del) and CIT v. Nagpur Golden Transport Co. (1998) 233 ITR 389 (Del). Respectfully following the judgments, the learned assessing officer disallowed the assessee's claim of depreciation.
9. During the course of hearing before the learned Commissioner (Appeals) for assessment year 1997-98 the assessee reiterated its argument that the ownership was transferred only on the payment of the last instalment and exercise of option by the hirer to purchase the asset. The assessee relied upon the orders of the learned Commissioner (Appeals) in its own case for assessment years 1990-91 to 1994-95. He also relied on the judgment of Hon'ble Supreme Court in the case of CIT v. Shaan Finance (P) Ltd. ( 1998) 231 ITR 308 (SC) that where the income derived from hiring constituted business income, the lessor could be considered as having used the machinery for the purpose of its business and, therefore, qualified for investment allowance. According to the learned Commissioner (Appeals) as a natural corollary the depreciation also became admissible to the owner on the hired assets. According to the learned Commissioner (Appeals), the Hon'ble Supreme Court in CIT v. Shaan Finance Co. (P) Ltd. (1998) 231 ITR 308(SC) without considering the Delhi High Court judgment in the case of Addl. CIT v. General Industries Corpn. (supra) and CIT v. Nagpur Golden Transport Co. (supra) over-ruled those judgments. The Hon'ble Supreme Court had taken the view that in the business of hiring/leasing of assets, the assets were considered to be used in the business of hiring by the lessor. As the lessor continued to retain the ownership of the asset which was merely licensed to be used by the hirer in the capacity of a bailee with cut any right of ownership in the asset. The learned Commissioner (Appeals), therefore, held that there was no extinguishment of the ownership right of the lessor in the hired assets in the business of leasing. There was no element of sale and the assets belonged to the lessor on which depreciation was admissible to the lessor. The learned Commissioner (Appeals), therefore, directed the assessing officer to allow the assessee depreciation as claimed.
10. Aggrieved by the orders of the learned Commissioner (Appeals) for assessment years 1995-96 and 1996-97 the assessee is in appeal before us while for assessment year 1997-98 it is the revenue who is the appellant. The facts and issue involved in all these three appeals are, however, one and the same.
11. During the course of hearing before us the learned counsel for the assessee reiterated his contention that under the agreement the hirer could become owner of the vehicle only on payment of the last instalment and only after he exercised his option to purchase the vehicle. He argued till then the ownership vested in the assessee. In view of the judgment of Hon'ble Supreme Court in the case of Shaan Finance (P) Ltd. (supra), the assessee as an owner could claim depreciation of the vehicle on the ground that the same has been used by him for the purpose of its business of leasing vehicles. The learned counsel further emphasized that there was no sale possible if the hirer did not exercise his option. Referring to the judgment of Hon'ble Delhi High Court in the case of Addl. CIT v. General Industries Corpn. (supra), the learned counsel argued that in that case the question put to Hon'ble High Court was whether the Tribunal was correct in directing the Income Tax Officer to dispose of the contention of the assessee regarding admissibility of depreciation and development rebate in conformity with the instructions of the CBDT as contained in their circular relied on by the assessee. A reference had been filed at the instance of the revenue and the assessee had relied upon CBDT circular. That being so the Hon'ble Delhi High Court answered the question in the affirmative. The learned counsel also pointed out that even in that judgment Hon'ble Delhi High Court had held that it was a difficult question to be resolved. The Hon'ble Delhi High Court had in a way upheld the CBDT circular but it was settled legal position that While CBDT circulars are binding on revenue authorities, they are not binding on the assessee. The learned counsel referred to the judgment of Hon'ble Rajasthan High Court in the case of Chaganlal Automobiles v. CIT (1985) 156 ITR 58 (Raj) and argued that the judgment was squarely in favour of the assessee. In that case it was held that as the entire price was not paid the assessee was not entitled to claim depreciation. The learned counsel also pointed out that as per the terms of agreement the assessee as owner had reserved the right to rescind the agreement and to take possession of the vehicles for breach of any of the obligations by the hirer. The learned Counsel further argued that until assessment year 1994-95 the department had allowed the assessee's claim. Thereafter for assessment years 1997-98 to 2002-03 again depreciation had been allowed to the assessee. Rule of consistency demanded that the same treatment should be given in the assessment years 1995-96 and 1996-97 as well.
12. The learned Departmental Representative argued that (the verdict of Hon'ble Delhi High Court was quite clear both by the judgment in Addl. CIT v. General Industries Corpn. (Supra) as well as CIT v. Nagpur Golden Transport Co. (Supra). The view taken by Hon'ble Delhi High Court was also supported by the judgment of Hon'ble Supreme Court in Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC) and CIT v. Mirza Alaullaha Baig (1993) 202 ITR 291 (Bom.). As to the rule of consistency the learned Departmental Representative said that for assessment year 1997-98 the revenue was in appeal and there was no reason to hold that the revenue had given up its stand.
13. We have carefully considered the rival submissions. In our opinion, the issue stands squarely covered in favour of revenue and against the assessee by the judgments of Hon'ble Delhi High Court. In the case of' General Industries Corpn. (supra) the Hon'ble Delhi High Court decided upon the issue in the following words :-
"On a careful examination of the nature of the hire-purchase agreement, it can be said that though it is worded as a hiring agreement which matures into a sale, it can also be regarded as a sale on instalments. The property passes in such agreements on the payment of the last instalment. However, during the period of hire, the purchaser is also paying the price, so virtually it is a sale on instalments. The circulars of the Central Board of Direct Taxes only serve to overcome a greater difficulty in computing how the various allowances have to be given to the assessee. It the payments towards the hire-purchase are not treated as being capital payments, they will have to be allowed as revenue payments, because the payments are certainly for business purposes and yet, if they are not treated as capital payments, they will necessarily be amounts expended towards the carrying out of the business. On the other hand, if the property passes at the time of the last instalment, then the entire revenue payment will be transformed into a capital payment at that stage. To meet this obvious difficulty, the Central Board of Direct Taxes has issued circulars at various times directing that assets purchased on hire-purchase basis should be treated as belonging to the assessee. The various documents filed along with the statement of case show that this position has been continuing for a very long time. Circular No. 9 dated 23-3-1943, issued by the Central Board of revenue directed that the periodical payments should be treated as (a) the consideration for hire to be allowed as a revenue deduction, and (b) a payment on account of purchase to be treated as a capital layout. It is also mentioned in that circular that depreciation should be allowed on the initial value, i.e., the amount for which the hired object could be purchased in cash on the date of the agreement. The same view was reiterated by the Central Board of revenue in its circular dated 26-6-1959. The Central Board of revenue again reiterated its instructions in November, 1962, and again on 15-7-1963. In the technical instructions of November, 1962, it is pointed out that if depreciation is not allowed to the user the same cannot also be granted to the owner because he is not using the object for the business, i.e., the result would be that neither the owner nor the hirer would get the allowance. This document points out that it is the person who runs the business who should get the allowance and not the formal owner.
As we see it, there is a real difficulty in determining who is to get the allowance and how much, which has been resolved by the circulars."
In the case of Nagpur Golden Transport Co. (supra), the question was raised whether the Tribunal was right in law in allowing depreciation on trucks purchased by the assessee on hire-purchase basis. Relying upon the earlier judgment in the case of General industries Corpn. (supra), Hon'ble Delhi High Court answered the question in the affirmative in favour of the assessee and against the revenue. Thus, both in the case of General Industries Corpn. (supra) as well as Nagpur Golden Transport Co. (supra), Delhi High Court has held that in a hire-purchase scheme, the hirer would be entitled to claim depreciation. These judgments clearly go against the contention of the learned counsel for the assessee that until the last instalment was paid, the ownership vested in the assessee and not in the hirer. It would go without saying that the same assets cannot be liable to depreciation allowance in the hands of two different assessees at the same time. Either the lessor- cum-seller or the hirer- cum buyer could be entitled to depreciation allowance. As Hon'ble High Court have held the hirer-cum purchaser to be rightly entitled to depreciation allowance, as a corollary it follows that the assessee is not entitled to claim any depreciation allowance.
14. This view is amply justified on the facts and circumstances of the case of the assessee before us. Though during the course of hearing before us much emphasis has been laid on the last instalment being paid and the hirer exercising his option, the fact of the matter is that during the course of assessment proceedings in spite of opportunities being provided the assessee, could not furnish instances where the vehicles in large numbers reverted to the assessee at the end of hire-purchase agreement. It appears that almost in every case the transactions resulted into the vehicles finally being transferred to the hirer. The assessing officer has recorded the finding that from the beginning these vehicles were registered in the names of the hirer and that finding of fact has not been challenged before us. Thus, for all practical purposes the assessee carried out sale of vehicles on instalment. The instalments being received though named as hire-charges for technical reasons represented two components viz., purchase price and interest on deferred purchase price being paid by the hirer. The right to recover possession was reserved in favour of the assessee only to have check over errant hirer. Otherwise for all practical purposes the ownership rights were liable to be exercised by the hirer from the beginning. This aspect is clear from following clause IV of the model hire-purchase agreement entered into by the assessee with a customer :-
"Clause IV: If the hirer shall duly perform and observe all the terms and conditions in this Agreement contained and on his part to be performed and observed and shall in manner aforesaid pay to the Owners monthly sums by way of rent amounting together with the said sum of Rs . ............... (*A) so paid on the execution of the Agreement as aforesaid to the sum of Rs . (*B) and shall also pay to the Owners all other sums of money which may become payable to them by the hirer under this Agreement the hiring shall come to an end and the equipment shall, at the option of the hirer, to be exercised by him in writing, then become his property and the Owners will assign and make over all their right, title and interest in the same to the hirer, but until such payments as aforesaid have been made, the equipment together with any accession, improvements and additions thereto by the Hirer, shall remain the absolute property of the owners."
It is seen that as long as the hirer discharge his obligation be had an uninterrupted right over the vehicles and the assessee was eventually to loose all right, title and interest in the vehicle.
15. The view taken by the assessing officer in the assessment orders is amply supported by the judgment of Hon'ble Supreme Court in the case of Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC). In that judgment the assessee was in possession of a building on part payment of price. The building not registered in the name of the assessee was not considered to be a circumstance coming in the way of the assessee being treated as owner of building for purposes of section 32. For all purposes the assessee's case is hit by the judgment in the case of Mysore Minerals Ltd. (supra). The only difference is that in that case it was an immovable property; whereas in the present case the asset in question is a movable property. In that judgment Hon'ble Supreme Court held as under :-
"It is well-settled that there cannot be two owners of the property simultaneously and in the same sense of the term. The intention of the Legislature in enacting section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent. To take the case at hand it is the appellant assessee who having paid part of the price, has been placed in possession of the houses as an owner and is using the buildings for the purpose of its business in its own right. Still the assessee has been denied the benefit of section 32. On the other hand, the Housing Board would be denied the benefit of section 32 because in spite of its being the legal owner it was not using the building for its business or profession. We do not think such a benefit to none situation could have been intended by the Legislature. The finding of fact arrived at in the case at hand is that though a document of title was not executed by the Housing Board in favour of the assessee, but the houses were allotted to the assessee by the Housing Board, part payment received and possession delivered so as to confer dominion over the property on the assessee whereafter the assessee had in its own right allotted the quarters to the staff and they were being actually used by the staff of the assessee. It is common knowledge, under the various schemes floated by bodies like housing boards, houses are constructed on a large scale and allotted on part payment to those who have booked. Possession is also delivered to the allottee so as to enable enjoyment of the property. Execution of documents transferring title necessarily follows if the schedule of payment is observed by the allottee. If only the allottee may default the property may revert back to the Board. That is a matter only between the Housing Board and the allottee. No third person intervenes. The part payments made by allottee are with the intention of acquiring title. The delivery of possession by the Housing Board to the allottee is also a step towards conferring ownership. Documentation is delayed only with the idea of compelling the allottee to observe the schedule of payment."
This judgment is a direct authority that there cannot be two owners of a property simultaneously. Hence once Hon'ble Delhi High Court have held that hirers to be treated as owners of the property for the purpose of depreciation allowance, the same position cannot be claimed by the assessee also.
16. In view of the discussion in the foregoing paragraphs, while the assessee's appeals in ITA Nos. 1754 and 1755 (Del.)/2001 are dismissed, the revenue's appeal in ITA No. 1948 (Del.)/2001 is allowed and the disallowance of depreciation as made by the assessing officer in the assessment order is restored.