As per income tax Act, 1961, If the transaction is treated as a lease, the lessor
shall be eligible for depreciation on the asset. The entire lease rentals will
be taxed as income of the lessor. The lessee, correspondingly, will not claim
any depreciation and will be entitled to expense off the rentals
The draft Tax Accounting Standards (TAS) released by the
Committee on TAS provide that in case of finance lease, depreciation is to be
allowed to the lessee, even though the lessor is the owner of the assets. A
finance lease has been defined as a lease that transfer substantially all the
risks and rewards incidental to the ownership of an asset.
Lessee eligible for depreciation if lessor never
claimed title or possession of leased asset; Supreme Court Upheld High Court’s
ruling
When a person acquires interest, title or ownership in a
property subject to right of third party of which he has notice, until such
right is enforced transferee continues to be owner of property against whole
world. Assessee-company which was carrying on business of leasing and finance,
acquired a plant for certain period from a company SIL and leased out same to
WIPL. As per agreement, SIL had a right to purchase plant after expiry of
stipulated period of time. Assessee claimed depreciation under section 32. High
Court by impugned order held that since SIL had neither claimed any title or
possession over plant nor claimed depreciation in respect thereof and had also
not exercised its option to purchase plant, ownership of assessee in respect of
plant could not be disputed for purpose of section 32 and, therefore, assessee
was entitled to avail benefit of section 32. On appeal by revenue it was found
that assessee had become owner of plant and machinery. Lease rentals in
entirety had been taxed as a revenue receipt/income accrued and taxable.
Therefore, final conclusion and decision of High Court could not be interfered
with. [In favour of assessee] – [CIT v. SBI Home Financer Ltd. (2022)
447 ITR 659 : 145 taxmann.com 94 (SC)]
Depreciation not allowed on Leasehold Rights as
same is not Intangible Assets
Assessee has claimed Rs. 27491 Lakhs as depreciation on lease
hold land under section 32(1)(ii) of the Income Tax Act, 1961 as the mining
rights are in the nature of intangible assets. Assessing Officer has disallowed
the claim of such depreciation on the ground that “it is not a right being
similar in nature to know-how, patents, copyrights, trademarks, licenses,
franchisees or any other business or commercial rights as per the provision
made under section 32(1)(ii) of the Income Tax Act 1961. Further the land is
not a depreciable assets under section 32 of the Income Tax Act, whether it is
lease hold or free hold”.
ITAT hold that the lease hold rights are not eligible for
depreciation under section 32(1)(ii) of the Act considering it as intangible
rights and, accordingly, dismiss the ground of appeal of the assessee. (Related
Assessment year : 2015-16) – [Mahanadi Coalfields Ltd. v. DCIT Appeal
Number : ITA No. 174/CTK/2018 - Date of Judgement : 05.06.2020 (ITAT Cuttack)]
Improvements on leasehold premises - Capital
expenditure - Entitle to depreciation
It was held that spirit and text of Explanation 1 to section
32 was that any capital expenditure by assessee on a building not owned by him,
in which he carried on business, should be considered as building owned by him
for purposes of section 32, to extent of amounts spent on construction of
structure or doing of any work in or in relation to and by way of renovation or
extension or improvement to building. Accordingly, entitle to depreciation.
(Related Assessment years :2005-06, 2009-10 to 2013-14) - [Carrier
Air-Conditioning & Refrigeration Ltd. v. ACIT (2018) 195 TTJ 777 : 172 DTR
49 (ITAT Delhi)]
Lessee cannot claim depreciation under section 32
in the absence of legal ownership; to avail the benefit of depreciation lessee
has to undertake the construction activity himself as per Explanation 1 to
section 32(1)
In terms of Explanation 1 to section 32(1), it is
only when assessee holds a lease right or other right of occupancy and any
capital expenditure is incurred by it on construction or renovation or
improvement of building, assessee would be entitled to depreciation to extent
of such expenditure incurred. However, where construction is carried out by
owner-lessor and expenditure is only reimbursed by assessee-lessee, Explanation
1 to section 32(1) would not come to aid of assessee
Assessee - lessee not entitled to depreciation under section
32 absent execution of title transfer deed. Supreme Court dismisses assessee’s
(lessee) appeal, holds that assessee-company was not entitled to depreciation
on hospital building under section 32 absent ownership for Assessment year
1992-93; Pursuant to an agreement between the assessee and the erstwhile firm
it was agreed that the firm would hand over hospital building’s possession to
the assessee post completing its construction, on the condition that entire
cost of construction of the building would be borne by the assessee; Notes that
the building was constructed by the firm and not the assessee although the cost
of construction was reimbursed by the latter, further observes that it is only
when the assessee holds a lease right or other right of occupancy that it is
entitled to depreciation to the extent of capital expenditure incurred on
construction of the building under Explanation 1 to section
32; Thus rejects assessee’s argument that since it was the lessee of the
property and construction was made from its funds, it was entitled to claim
depreciation by virtue of Explanation 1 to section 32, holds
that “the explanation also would not come to the aid of the assessee”; Holds
that the title in the building cannot pass unless it is executed on a proper
stamp paper and is also duly registered with the sub-Registrar and thus “in the
absence thereof, it could not be said that the assessee had become the owner of
the property”.
Dismissing the appeal of the assessee, the Court held that;
title to immovable property cannot pass when its value is more than Rs. 100/-
unless it is executed on a proper stamp paper and is also duly registered with
the sub-Registrar. Accordingly, a lessee cannot be said to be the “owner” for
purposes of claiming depreciation. Under Explanation 1 to
section 32, the lessee is entitled to depreciation on the cost of construction
incurred by him but not on the cost incurred by the owner and reimbursed
by the lessee. [In favour of revenue] (Related Assessment year : 1992-93)
- [Mother Hospital (P) Ltd. v. CIT, Trichur, Kerala (2017) 392 ITR 628
: 294 CTR 25 : 247 Taxman 12 : 149 DTR 63 : 79 taxmann.com 375 :
[TS-119-SC-2017] (SC)]
Supreme Court lays down law on lease depreciation,
lessor also eligible for higher rate benefit
Assessee, ICDS, a NBFC is engaged in the business of hire
purchase, leasing and real estate etc. The assessee leased out vehicles to
third parties who were registered as the owners of those vehicles, as per the
certificate of registration issued under the Motor Vehicle Act, 1988 (MV Act).
The assessee claimed depreciation in relation to such vehicles which were
financed by the assessee but registered in the name of third parties. The
depreciation was claimed at a 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 others 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 user
of these assets.
The CIT(A), however partially accepting the claim, allowed
depreciation at regular rates. ITAT completely agreed with the assessee's
contention and allowed depreciation at a higher rate. High Court reversed the
ITAT decision and rejected the claim of depreciation itself. High Court opined
that the vehicles were not registered in the name of the assessee,
the assessee had only financed the purchase of such vehicles and hence, was not
entitled to depreciation. Aggrieved by the High Court decision, the assessee
was in appeal before Supreme Court.
Before Supreme Court, Revenue argued that the twin requirement
of ‘ownership’ and ‘usage for business’ for a successful claim of depreciation
under section 32 were not fulfilled in this case. The Revenue argued that since
the lessees were actually using the vehicles, they were entitled to claim
depreciation, and not the assessee. Revenue also contended that lessees were
the owners of the vehicles as per the provisions of MV Act.
Supreme Court rejected the Revenue’s argument that test of
ownership under the MV Act should be taken into account while deciding the
claim for depreciation. Thus, Supreme Court held that “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 is not a statement in general but only
for the purpose of the MV Ac. Perhaps, the repository of a general statement of
law on ownership may be the Sale of Goods Act ”
As regards deciding the ownership of assets, referring to the
Section 51(4) and 51(5) of the MV Act, Supreme Court observed that the vehicle
is to be registered in the name of the lessee during the lease period and in
the name of lessor on conclusion of the lease period. Thus, Supreme Court
observed that no inference could be drawn from the registration certificate as
to ownership of the legal title of the vehicle.
Further, Supreme Court noted the fact that the lessee
made no claim for depreciation and had claimed the lease rentals as revenue
expenditure in their books. This made it clear that the assessee was the real
owner of the assets as per Section 32. Also, from the perusal of the lease
agreement, it was evident the assessee was the exclusive owner and was entitled
to repossess the vehicle if default committed. Further, the lessee was required
to return the asset to the assessee at the end of lease period. Supreme Court
held that 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.
As regards the use for “purposes of business” test, Supreme
Court relied on the Supreme Court ruling in CIT v. Shaan Finance (P)
Ltd. (1998) 231 ITR 308 : (1998) 3 SCC 605 (SC). Supreme Court held
that Section 32 does not mandate usage of the asset by the assessee itself and
actual use of trucks by the assessee itself is not relevant for the purpose
claiming depreciation. Supreme Court further observed that on a combined reading
of Section 2(13) and Section 2(24), the income derived from leasing of trucks
would be regarded as business income, or income derived in the course of
business.
Supreme Court reverses High Court ruling; Lessor (an NBFC)
leasing vehicles to customers is ‘owner’ as well as ‘user’ for the purpose of
claiming depreciation under section 32 of Income Tax Act; Use of asset ‘for
purpose of business’ as prescribed under section 32 does not mean usage by
assessee itself; Lease of vehicles for earning rental income is held as ‘asset
used in course of business’ by lessor; Lessor is ‘owner’ of business even
though vehicles registered in lessee’s name as per provisions of Motor Vehicles
Act, 1988; As long as assessee has right to retain legal title of vehicle
against rest of the world, it would be ‘owner’ of vehicle in eyes of law;
Ownership provisions under Motor Vehicles Act are deeming provisions and not
statement of law on ownership in general; Lessor also eligible for ‘higher
depreciation’ rate available on commercial vehicles. In our opinion, the High
Court erred in law in reversing the decision of the Tribunal.
Consequently, the appeals are allowed; the impugned judgments are set aside and
the substantial questions of law framed by the High Court are answered in
favour of the assessee and against the Revenue. – [In favour of assesse]
– [I CDS. Ltd. v. CIT, Mysore &
Anr. [TS-8-SC-2013] – Date of Judgement : 14.01.2013 (SC)]
In case of operating lease, it is lessor who can
claim depreciation whereas in case of finance lease, lessee is entitled to
depreciation in respect of asset leased out
In case of operating lease, it is lessor who is real owner of
asset, but in case of finance lease, it is lessee who is to be regarded as real
owner of asset. Therefore, only lessor can claim depreciation in case of an
operating lease and lessee in a case of finance lease. Assessee-bank entered
into a lease agreement with a company, namely, Indo Gulf Ltd. As per terms of
agreement assessee was to lease out a boiler to Indo Gulf Ltd. for a specific
period subject to payment of certain lease rent. Assessee claimed depreciation
on boiler leased out. Assessing Officer came to hold that assessee was not
owner of asset and, hence, ineligible for depreciation.
On appeal, the Commissioner (Appeals) upheld the order of
Assessing Officer. The assessee thus, filed instant appeal wherein it claimed
to have leased out boiler to Indo Gulf Fertilizers by maintaining that it was
the owner of the asset and, hence, entitled to depreciation. The case of the
revenue was that it was not a case of operating lease and, hence, the assessee
lessor could not be granted depreciation.
It was apparent from records that lease was not cancellable
prior to expiry period of seven years. Further, cost of repairs and insurance
was to be borne by lessee. Sum total of lease rentals by lessee recouped amount
invested by lessor plus interest. There was a clause in lease agreement that
after expiry of lease period, boiler would be sold to lessee at a predetermined
value. Moreover, it was lessee who had to bear loss due to obsolescence and all
other risks and rewards associated with boiler also vested with lessee. In view
of aforesaid, it could be concluded that transaction in question was a simple
advancing of loan, what to talk of even a finance lease and, thus, authorities
below were justified in rejecting assessee’s claim for depreciation. [In favour
of revenue] (Related Assessment years : 1998-99 and 1999-2000) – [IndusInd
Bank Ltd. v. Additional Commissioner of Income-tax, Special Range, Mumbai
(2012) 145 TTJ 409 : 135 ITD 165 : 19 taxmann.com 173 : 15 ITR(T) 89 (ITAT
Mumbai) (SB)]
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