PKF Finance Ltd. and PHF Leasing Ltd. and Punjab Reliable Investments Pvt. Ltd. V. Commissioner of Income Tax, Jalandhar and Asstt. Commissioner of Income Tax, Jalandhar

ITA/158/2002

AI Insights

The case involves M/s PKF Finance Ltd., the appellant, contesting the denial of depreciation claims on leased vehicles by the Income Tax Department. The core legal issue was whether the assessee, a leasing company, was entitled to depreciation on vehicles leased out, under Section 32 of the Income Tax Act, 1961. The Income Tax Appellate Tribunal and lower authorities had previously ruled against the assessee, categorizing the transactions as finance transactions rather than lease transactions. However, the High Court, referencing a recent Supreme Court decision, overturned these rulings, establishing that the assessee was indeed the owner of the vehicles for the purpose of claiming depreciation.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 795955 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 13-05-2013
• Assessment Year: misc
• Other Referred Cases: I.C.D.S Ltd. vs. Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961, Motor Vehicle Act, 1988
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: VIVEK SETHI
• Assessee Lawyers: ROHIT SUD
• Keywords: Depreciation; Financing; Income Tax; Lease agreement; Reassessment
• Section: 32; 2(13); 2(24); 2(3); 2(30); 51(4); 51(5)

Judgement Text

"ITA No. 158 of 2002 and connected matters -1- IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH Date of decision: 13.05.2013 1. ITA No.158 of 2002 (O&M) M/s PKF Finance Ltd. ...Appellant versus Commissioner of Income Tax, Jalandhar ...Respondent 2. CWP No. 12373 of 2003 (O&M) PHF Leasing Ltd. ...Petitioner versus Asstt.Commissioner of Income Tax, Jalandhar & anr. ...Respondents 3. CWP No. 12374 of 2003 (O&M) PHF Leasing Ltd. ...Petitioner versus Asstt. Commissioner of Income Tax, Jalandhar & anr. ..Respondents 4. CWP No. 12375 of 2003 (O&M) PHF Leasing Ltd. ...Petitioner versus Asstt. Commissioner of Income Tax, Jalandhar & anr. ...Respondents 5. CWP No. 17776 of 2002 (O&M) Punjab Reliable Investments Pvt. Ltd. ...Petitioner versus Asstt. Commissioner of Income Tax, Jalandhar & anr. ...Respondents Kumar Vimal 2013.05.24 11:27 I attest to the accuracy and integrity of this document Chandigarh ITA No. 158 of 2002 and connected matters -2- CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA HON'BLE MS. JUSTICE RITU BAHRI Present: Mr. Rohit Sud, Advocate, for the appellant. Mr. Vivek Sethi, Advocate, for the respondent. HEMANT GUPTA, J. (Oral) This order shall dispose of aforementioned cases i.e I.T.A No.158 of 2002 as well as C.W.P No.12373 of 2003; C.W.P No.12374 of 2003; C.W.P No.12375 of 2003 and C.W.P No.17776 of 2002. The said cases have been filed by the similarly situated assessees, therefore, the same are taken up for hearing together. In all proceedings, the Revenue has sought to initiate reassessment proceedings in respect of depreciation claimed by the assessee under Section 32 of the the Income Tax Act, 1961 (for short 'the Act'). However, for the facility of reference, the facts are being taken from I.T.A No. 158 of 2002. The present appeal under Section 260A of the Act arises out of an order passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (for short 'the Tribunal) on 29.04.2002 in respect of assessment year 1995-96. The assessee has claimed the following substantial questions of law: “1. That whether under the facts and circumstances of the case and true interpretation of the lease agreement and various other documents, the Hon'ble Tribunal was justified in concurring with the findings of the authorities below that the appellant is not entitled for Kumar Vimal 2013.05.24 11:27 I attest to the accuracy and integrity of this document Chandigarh ITA No. 158 of 2002 and connected matters -3- a depreciation u/s 32 of the Income Tax Act amounting to Rs.17,92,860/- being a leasing company and holding the appellant only as a financier? Alternatively and without conceding in case the Hon'ble Court concurs with the findings of the Hon'ble Tribunal that the appellant is not eligible to get the depreciation on the leased assets-the other Substantial Question of Law be formulated. 2. That whether the Hon'ble Tribunal and the authorities below are not justified in not adjudicating on the issue of taxing only the interest income in the hands of the appellant and not then total amount of realisation as lease rental which have the component of capital receipt also?” The aforesaid questions of law in the present appeal arise out of the fact that the assessee has filed its return of income from the business of hire purchase & financing of vehicles etc. The assessee claimed that the vehicles i.e trucks were given on lease, therefore, the same are assets for the business of the assessee and, thus, the assessee is entitled to depreciation. The Assessing Officer found that the assessee was not doing leasing business at all. After disallowing the claim of depreciation, the taxable income of Rs.15,54,330/- was assessed as income of the assesse. An appeal against the said order was dismissed by the Commissioner of Income Tax (Appeals), Jalandhar on 18.08.1999 holding that transactions should be treated as finance transactions and not as lease transactions, as claimed by the assessee nor the hire purchase transactions, as held by the Assessing Officer. In further appeal before the Tribunal, a finding was returned that the assessee was not owner of the vehicle and that mere possession under the term of an agreement to purchase, shall not entitle the assessee to Kumar Vimal 2013.05.24 11:27 I attest to the accuracy and integrity of this document Chandigarh ITA No. 158 of 2002 and connected matters -4- depreciation. The Tribunal noticed that in the Registration Certificate, the so called lessor was shown to be the owner of the vehicle and that the insurance has been obtained by individual customers. It has also been noticed that the assessee has carried out the activities of business of financing/hire purchase. Reference was made to definition of 'Owner' contained in Section 2(3) of the Motor Vehicle Act, 1988. The agreement produced by the assessee was held to be document executed to give security to the assessee for re-payment of the loan amount. It was also held that though the agreement prohibits the lessee from making any alterations/additions or improvement to the chasis, but since the chasis cannot be put to use for any purpose, therefore, when the goods to be leased out must be in a position to put to some purpose before depreciation is allowed. Considering the another clause of the agreement that lessee would be entitled to full depreciation in case of theft and loss of vehicle, it was held that the assessee is in the business of financing and not leasing. In view of the said findings, the assessee has claimed the aforesaid questions of law. In a recent judgment reported as I.C.D.S Ltd. vs. Commissioner of Income Tax, (2013) 3 SCC 541, the Hon'ble Supreme Court has examined the question as to whether the assessee is owner of the vehicle, which are leased out and is entitled to depreciation on the vehicles leased out by him on the ground that they were hired out to customers. It was held after examining the definition of 'Owner' given in the Motor Vehicle Act, 1988 that the assessee is owner of the vehicle and that the assessee did use the trucks in business. The assessee satisfied the condition Kumar Vimal 2013.05.24 11:27 I attest to the accuracy and integrity of this document Chandigarh ITA No. 158 of 2002 and connected matters -5- that it 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 utilized for the purpose of business of the assessee, the requirement of Section 32 would stand satisfied. The Supreme Court held to the following effect. “15. We would like to dispose of the second contention before considering the first. Revenue argued that since the lessees were actually using the vehicles, they were the ones entitled to claim depreciation, and not the assessee. We are not persuaded to agree with the argument. 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 utilized 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. In the present case before us, the assessee is a leasing company which leases out trucks that it purchases. 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 fulfills the aforesaid second requirement of Section 32 of the Act viz. that the asset must be used in the course of business. xxx xxx xxx 25. The general opening words of the Section 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 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 depreciation. Therefore, the general and specific statements on ownership construe ownership in favour of the lessee, and hence, are in favour of the Revenue. 26. We do not find merit in the Revenue's argument 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 MV Act. It defines ownership for the subsequent provisions of the MV Act, Kumar Vimal 2013.05.24 11:27 I attest to the accuracy and integrity of this document Chandigarh ITA No. 158 of 2002 and connected matters -6- not for the purpose of law in general. It serves more as a guide to what terms in the MV Act mean. Therefore, if the MV 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 of law on ownership may be the Sale of Goods Act; (ii) Section 2(30) of the MV Act must be read in consonance with sub-sections (4) and (5) of Section 51 of the MV Act, which were referred to by Mr. S. Ganesh, learned senior counsel for the assessee. Therefore, the MV Act 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 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 a particular depreciable asset due to a vacuum of ownership. As afore-noted, 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 lessee. This reaffirms the position that the assessee is in fact the owner of the vehicle, in so far as Section 32 of the Act is concerned. xxx xxx xxx 29. Therefore, in the facts of the present case, we hold that the lessor i.e. the assessee is 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, is entitled to claim depreciation in respect of additions made to the trucks, which were leased out.” In view of the aforesaid judgment, the vehicles leased by the assessee are the assets of the assessee used during the course of its business and thus, entitled to depreciation under Section 32 of the Act. Accordingly, Kumar Vimal 2013.05.24 11:27 I attest to the accuracy and integrity of this document Chandigarh ITA No. 158 of 2002 and connected matters -7- the first question of law is answered in favour of the assessee and against the Revenue. In view of decision on question No.1, we do not find that question No.2 arises for consideration and in fact, it was rightly not pressed by the counsel for the appellant. Consequently, the present appeal as well as the writ petitions are allowed. (HEMANT GUPTA) JUDGE (RITU BAHRI) JUDGE May 13, 2013 G.Arora/Vimal Kumar Vimal 2013.05.24 11:27 I attest to the accuracy and integrity of this document Chandigarh "