I.C.D.S. Ltd. vs. CIT & Anr. (2013) 350 ITR 527 (SC)
The assessee a public limited company, classified by the Reserve Bank of India (RBI) as a non-banking finance company was engaged in the business of hire purchase, leasing and real estate, etc. The vehicles, on which depreciation was claimed, were stated to have been purchased by the assessee against direct payment to the manufactures. The assessee as a part of its business, leased out their vehicles to its customers and therefore, had no physical affiliation with the vehicles. In fact, lesse were registered as the owners of the vehicles, in the certificate of registration issued under the Motor Vehicles Act, 1988 (hereinafter referred to as “the MV Act”).
In its return of income for the relevant assessment years, the assessee claimed, among other heads, depreciation in relation to certain assets, (additions made to the trucks) which, as explained above, had been financed by the assessee but registered in the name of third parties. The assessee also claimed depreciation at the higher rate on the ground that the vehicles were used in the business of running on hire.
The Assessing Officer disallowed claims, both of depreciation and higher rate, on the ground that the assessee’s use of these vehicles was only by way of leasing out to other and not as actual user of the vehicles in the business of running them on hire. It had merely financed the purchase of these assets and was neither the owner nor used of these assets. Aggrieved, the assessee preferred appeals to the Commissioner of Income-tax (Appeals). In so far as the question of depreciation at normal rate was concerned, the Commissioner (Appeals) agreed with the assessee. However, the assessee’s claim for depreciation at higher rate did not find favour with the Commissioner.
Being aggrieved, both the assessee and the Revenue carried the matter further in appeal before the Income-tax Appellate Tribunal (for short “the Tribunal”). The Tribunal agreed with the assessee on both the counts.
Being aggrieved, the Revenue preferred an appeal to the Bombay High Court u/s. 260A of the Act. The High Court framed the following substantial questions of law for its adjudication :
“Whether the appellant (assessee) is the owner of the vehicles which are leased out by it to its customers and whether the appellant (assessee) is entitled to the higher rate of depreciation on the said vehicles, on the ground that they were hired out to the appellant’s customers.”
Answering both the questions in favour of the Revenue, the High Court held that in view of the fact that the vehicles were not registered in the name of the assessee, and that the assessee had only financed the transaction, it could not be held to be the owner of the vehicles, and thus, was not entitled do claim depreciation in respect of these vehicles.
On an appeal to the Supreme Court by the assessee, it was held that the provision on depreciation in the Act reads that the asset must be “owned, wholly or partly, by the assessee and used for the purposes of the business”. Therefore, it imposes a twin requirement of “ownership” and “usage for business” for a successful claim u/s. 32 of the Act.
Before the Supreme Court, the Revenue attacked both legs of this portion of the section by contending: (i) that the assessee is not the owner of the vehicles in question, and (ii) that the assessee did not use these trucks in the course of its business. It was argued that depreciation can be claimed by an assessee only in a case where the assessee is both the owner and user of the asset.
The Supreme Court dealt with the second contention before considering the first. The Revenue argued before the Supreme Court that since the lessees were actually using the vehicles, they were the ones entitled to claim depreciation and not the assessee. The Supreme Court was not persuaded to agree with the argument. According to the Supreme Court, the section requires that the assessee must use the asset for the “purposes of business”. It does not mandate usage of the asset by the assessee itself. As long as the asset is utilised for the purpose of business of the assessee, the requirement of section 32 will stand satisfied notwithstanding non-usage of the asset itself by the assessee. The Supreme Court held that in the present case, the assessee was a leasing company which leased out trucks that it purchased. Therefore, on a combined reading of section 2(13) and section 2(24) of the Act, the income derived from leasing of the trucks would be business income or income derived in the course of business, and has been so assessed. Hence, it fulfilled the aforesaid second requirement of section 32 of the Act, viz., that the asset must be used in the course of business. The assessee did use the vehicles in the courses of its leasing business. In the opinion of the Supreme Court, the fact that the trucks themselves were not used the assessee was irrelevant for the purpose of the section.
Dealing with the first requirement, i.e., the issue of ownership, the Supreme Court held that no depreciation allowance is granted in respect of any capital expenditure which the assessee may be obliged to incur on the property of other. Therefore, the entire case hangs on the question of ownership. If the assessee is the owner of the vehicles, then he will be entitled to the claim on depreciation, otherwise, not.
The Supreme Court noted that definitions of ‘owner’, ‘ownership’ and ‘own’ given in Black’s Law Dictionary (Sixth Edition) and observed that these definitions essentially made ownership a function of legal right or title against the rest of the world. However, as seen therein, it is “nomen generalissimum, and its meaning is to be gathered from the connection in which it is used, and from the subject-matter to which it is applied.”
According to the Supreme Court scrutiny of the material facts at hand raised a presumption of ownership in favour of the assessee. The vehicle, along with its keys, was delivered to the assessee upon which, the lease agreement was entered into by the assessee with the customer.
The Supreme Court noted that the Revenue’s objection to the claim of the assessee was founded on the lease agreement. It argued that at the end of the lease period, the ownership of the vehicle is transferred to the lessee at a nominal value not exceeding 1 per cent of the original cost of the vehicle, making the assessee in effect a financier. However, the Supreme Court was not persuaded to agree with the Revenue. According to the Supreme Court as long as the assessee had a right to retain the legal title of the vehicle against the rest of the world, it would be the owner of the vehicle in the eyes of law. A scrutiny of the sale agreement could not be the basis of raising question against the ownership of the vehicle. The clues qua ownership lie in the lease agreement itself, which clearly pointed in favour of the assessee.
The Supreme Court observed that the only hindrance to the claim of the assessee, which was also the lynchpin of the case of the Revenue, was section 2(30) of the Motor Vehicles Act, which defines ownership as follows:
‘Owner’ means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and in relation to a motor vehicle which is the subject or hire-purchase agreement, or a agreement of lease or an agreement of a hypothecation, the person in possession of the vehicle under that agreement.”
The Supreme Court noted that the general open-ing words of the aforesaid section 2(30) say that the owner of a motor vehicle is the one in whose name it is registered, which, in the present case, is the lessee. The subsequent specific statement on leasing agreements states that in respect of a vehicle given on lease, the lessee who is in possession shall be the owner. The Revenue before the Supreme Court thus, argued that in case of ownership of vehicles, the test of ownership is the registration and certification. Since the certificates were in the name of the lessee, they would be the legal owners of the vehicles and the ones entitled to claim deprecation. Therefore, the general and specific statements on ownership construe ownership in favour of the lessee, and, hence, were in favour of the Revenue.
According to the Supreme Court, there was no merit in the Revenue’s arguments for more than one reason:
(i) Section 2(30) is a deeming provision that creates a legal fiction of ownership in favour of lessee only for the purpose of the Motor Vehicles Act. It defines ownership for the subsequent provisions of the Motor Vehicles Act, not for the purpose of law in general. It serves more as a guide to what terms in the Motor Vehicles Act mean. Therefore, if the Motor Vehicles Act at any point uses the term owner in any section, it means the one in whose name the vehicle is registered and in the case of a lease agreement, the lessee. That is all. It is not a statement of law on ownership in general. Perhaps, the repository of a general statement law on ownership may be the Sale of Goods Act;
ii) Section 2(30) of the Motor Vehicles Act must be read in consonance with s/s. (4) and (5) of section 51 of the Motor Vehicles Act. The Motor Vehicles Act in terms of s/s. (4) and (5) of section 51 mandates that during the period of lease, the vehicle be registered, in the certificate of registration, in the name of the lessee and, on conclusion of the lease period, the vehicle be registered in the name of the lessor as owner. The section leaves no choice to the lessor but to allow the vehicle to be registered in the name of the lessee. Thus, no inference can be drawn from the registration certificate as to ownership of the legal title of the vehicle; and
(iii) If the lessee was in fact the owner, he would have claimed depreciation on the vehicles, which, as specifically recorded in the order of the Appellate Tribunal, was not done. It would be a strange situation to have no claim of depreciation in case of particular depreciable asset due to a vacuum of ownership. The entire lease rent received by the assessee is assessed as business income in its hands and the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hands of the leassee. This reaffirms the posision that the assessee is in fact that owner of the vehicle, in so far as section 32 of the Act is concerned.
Therefore, in the facts of the present case, the Supreme Court held that the lessor, i.e., the assessee was the owner of the vehicles. As the owner, it used the assets in the course of its business, satisfying both requirements of section 32 of the Act, and, hence, was entitled to claim depreciation in respect of additions made to the trucks, which were leased out.
With regard to the claim of the assessee for a higher rate of depreciation, the Supreme Court held that the import of the same term “purposes of business”, used in the second proviso to section 32(1) of the Act gained significance. According to the Supreme Court the interpretation of these words would not be any different from that which it ascribed to them earlier, u/s. 32(1) of the Act. Therefore, the assessee fulfilled even the requirements for a claim of a higher rate of depreciation, and hence, was entitled to the same.
In this regard, the Supreme Court inter alia endorsed the following observations of the Tribunal, which clinched the issue in favour of the assessee.
“15. The Central Board of Direct Taxes, vide Circular No.652, dated 14th June, 1993, has clarified that the higher rate of 40 per cent in case of lorries, etc., plying on hire shall not apply if the vehicle is used in a non-hiring business of the assessee. This circular cannot be read out of its context to deny higher appreciation in case of leased vehicles when the actual use in hiring business.
Perhaps, the author meant that when the actual use of the vehicle is in hire business, it is entitled for depreciation at a higher rate.”
