D.b.income Tax Appeal v. M/S. Banswara Syntex Ltd

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN ATJODHPUR ::: JUDGMENT D.B.INCOME TAX APPEAL NO.54/2007 CIT, Udaipur Vs. M/s. Banswara Syntex Ltd. DATE OF JUDGMENT :::15[th] January 2013 PRESENT HON'BLE MR. JUSTICE DINESH MAHESHWARIHON’BLE MR. JUSTICE ARUN BHANSALI Mr.K.K.Bissa, for the appellant. Mr.Sanjeev Johari for the respondent . <><><> ReportableBY THE COURT:(Per Hon’ble Dinesh Maheshwari),J. This appeal under Section 260A of the Income Tax Act, 1961[‘the Act’] is directed against the order dated 22.09.2006 as passedin ITA No.806/JDPR/2005 whereby the Income Tax AppellateTribunal, Jodhpur Bench, Jodhpur [‘the Tribunal’] dismissed theappeal filed by the revenue and affirmed the order dated 18.10.2005as passed by the Commissioner of Income Tax (Appeals), Udaipur[‘the CIT(A)’], who had deleted the addition made by the AssessingOfficer [‘the AO’] of the lease rent of the machinery, said to havebeen taken on hire. The AO was of the view that the leaseagreement was that of financing and not of operational work andhence, the lease rent was not that of business expenditure. TheAppellate Authority, however, disagreed and held that lease rentalswere allowable as business expenditure in the case of assessee. The Tribunal endorsed the views of the Appellate Authority. Thisappeal, preferred in challenge to the orders so passed by theAppellate Authority and the Tribunal, has been admitted on thefollowing substantial question of law:- “Whether in the facts and circumstances of the case the learnedTribunal was justified in dismissing the appeal of the revenue andconfirming the order of the CIT(A) regarding deletion of addition ofRs.50,76,176 made by the AO on account of disallowance onlease rent ignoring the finding of the AO that lease agreement isthat of a financing and not of the operational work.” The facts and background aspects for the purpose of presentappeal could be noticed in the following: The assessee-companyderives the income from manufacture of yarn and fabric. In its returnfor the assessment year 2000-2001, the assessee-company, interalia, claimed in the profit and loss account an amount ofRs.58,18,153/- towards lease rental and interest in regard to themachinery, said to have been taken on hire. The AO, uponexamination of the lease agreements, formed the opinion that theywere only of finance lease and not of operational lease. The AOobserved that the risks incident to the ownership of the assets stood“substantially” transferred to the lessee although “apparently” the titleto the assets had not been transferred. However, according to theAO, the agreement had only been drawn up to ensure that the lessorrecovers the finance involved in acquiring the machines and thelease rentals were merely in the nature of repayment of capital loanand interest thereupon. The learned AO, inter alia, observed asunder:- “In view of the above it is clearly established that thealleged lease agreement is only a finance lease and not anoperating lease. The risks incident to the ownership of the assets stand substantially transferred to the lessee although apparentlythe title to the assets has not been transferred. Therefore, thesaid lease agreement being in the nature of finance lease cannotbe treated as normal operating lease as understood from thediscussion of above clauses. The agreement has been drawn uponly to ensure that the lessor recovers the finance involved inacquiring the machines. The lease rentals are merely in the natureof repayment of the capital loan and interest thereon.” “In view of the above it is clearly established that thealleged lease agreement is only a finance lease and not anoperating lease. The risks incident to the ownership of the assets stand substantially transferred to the lessee although apparentlythe title to the assets has not been transferred. Therefore, thesaid lease agreement being in the nature of finance lease cannotbe treated as normal operating lease as understood from thediscussion of above clauses. The agreement has been drawn uponly to ensure that the lessor recovers the finance involved inacquiring the machines. The lease rentals are merely in the natureof repayment of the capital loan and interest thereon.” Upon the considerations aforesaid, the AO held that theamount of alleged rental i.e., a sum of Rs.50,76,176/- had beenpaid towards repayment of the principal; and this amount wasdisallowed and added to the total income of the assessee. However,the other component of the payment, to the extent of Rs.5,41,977/-,was allowed, as being the payment of interest on the borrowed fundsfor acquisition of assets. In appeal, the learned CIT(A) re-examined the entire matterwith reference to the lease agreements and observed as under:- “I have considered facts of the case and contentions of the ld.AR of the appellant and found that the AO has disallowed thelease rent claimed by the appellant on the ground that the leaseagreement is financing one and not the operational treating thecost of the leased assets as loan amount and lease rentals asinterest. The AO has allowed interest part only and disallowedthe loan amount. It is seen from the submission of the appellantthat the appellant has taken leased assets from M/s. GujaratLease & Finance Ltd. and M/s ITC Classic Finance Ltd. whichare reputed lease and finance companies. The fact ofownership of the lessor namely GLFL and ITCCFL is supportedby following clauses of the agreement: i)Re-delivery of equipment by the lessee on termination ii)Lessors right to assign the receivables etc. iii)Lessee to affix the name plate. iv)Lessee not to part with the possession v)Lessee not to have any right in equipment except bailee. vi)Lessee to ensure the equipments. vii)Lessee not to transfer or dispose off equipments forinterest in the lease. viii)Lessee not to make alterations in the equipments,additions belong to lessors ix)Seizure confiscate of the equipment not to claim andrelief, allowance etc. x)Sale of the equipment by the lessor, sale through theagency of the lessee and the lessees reward.” The learned CIT(A) further referred to the submissions that therelevant considerations were to examine whether the leasetransactions were unreal or sham or made only to evade the tax; andwhether the lessor was legally the owner of assets. The CIT(A)observed that if the agreements were real and genuine, they had tobe accepted as they stood. The CIT(A) further noticed the fact thatthe lease rentals had been allowed as business expenditure in thecase of the appellant for the assessment years 1996-1997 to 1999-2000 but the AO deviated from the stand taken by his predecessorwithout any change of facts. The CIT(A) referred to the decision ofthis Court in Rajshree Roadways Vs. Union of India & Ors.: 263 ITR206 (Raj.) and of the Tribunal in Shree Rajasthan Syntex Ltd. Vs. ACIT and ultimately held as under:- “Thus, it is crystal clear on the facts of the case that theappellant is a lessee in real sense and has taken assets onlease and paid lease rentals. Accordingly, appellant claimed thesame as business expenditure. The lessor has been the actualowner during the lease period and after that also when the leaseperiod has expired and the lease assets have gone back to thelessor. The lessor has claimed depreciation on these leasedassets in its books of account and has been allowed also. ACIT and ultimately held as under:- “Thus, it is crystal clear on the facts of the case that theappellant is a lessee in real sense and has taken assets onlease and paid lease rentals. Accordingly, appellant claimed thesame as business expenditure. The lessor has been the actualowner during the lease period and after that also when the leaseperiod has expired and the lease assets have gone back to thelessor. The lessor has claimed depreciation on these leasedassets in its books of account and has been allowed also. Further the decision in the case of Shree Rajasthan Syntex Ltd.quoted above also applies fully in the case of the appellant.Respectfully following the order in the above case by the Hon'bleITAT, Jopdhpur Bench, the claim the appellant for lease rent isallowed. The disallowance is deleted and the appeal is allowedon this point.” The Tribunal endorsed the reasons and findings of CIT(A) and dismissed the revenue’s appeal while observing as under:- CIT, Udaipur Vs. M/s. Banswara Syntex Ltd. “4.Ground No. 1 of the appeal relates to deletion of Rs.50,66,176/- added on account of disallowance of lease rent.The Assessing Officer has disallowed the lease rent claimed bythe assessee on the ground that the lease agreement is that of afinancing one and not the operational, treating the cost of theleased assets as loan amount and lease rentals as interest. TheAssessing Officer has allowed the interest part only anddisallowed the loan amount. The assessee took leased assetsfrom M/s Gujarat Lease and Finance Limited and M/s ITCClassic Finance Limited, which are reputed lease and financecompanies. It is not the case of the revenue that the leasetransactions or not real or are sham transactions. The lesser islegally owner of the assets, and lessee is the actual owner forbusiness purposes. Therefore, the ld. CIT (A), allowed the leaserent on the force of the reasoning that the lease rentals havebeen allowed as business expenditure in the case of thisassessee in A.Ys. 1996-97 and 1999-2000. This issue standscovered by the decision of the Hon'ble Rajasthan High Court inthe case of Rajshree Roadways Vs. Union of India reported in263 ITR 206 [Raj.] and also in the case of Shri Rajasthan SyntexVs. Assistant Commissioner of Income-tax [ITAT JodhpurBench]. Thus, this ground also stands covered in favour of theassessee, therefore, we confirm the findings of the ld. CIT (A)and dismiss ground No. 1 of the appeal either.” Questioning the orders aforesaid, it is submitted that whether alease is a finance lease or an operational lease depends on thesubstance of the agreement rather than its form. According to theappellants, as per the lease agreements, the obligation to pay rentalis absolute and not conditional whereas in the operational lease, therental should be related to actual use of machinery. Then, thelessee was responsible for quality, cost, delivery, condition, durabilityand insurance of machinery; the fact of damage or loss to themachinery would not be affecting the payment of lease rent; andthe lessee was also required to pay all rates, tax, licence, fee,registration charges and other outgoing payable in respect ofequipments. It is contended that all such features establish beyonddoubt that the risks incident to the ownership of the assets stoodsubstantially transferred to the lessee even if ownership as such hadnot been transferred. It is submitted that the AO, after examining D.B.INCOME TAX APPEAL NO.54/2007 CIT, Udaipur Vs. M/s. Banswara Syntex Ltd. the lease agreements, rightly held it to be a matter of finance leasenot an operational lease as claimed by the assessee and thus, rightlydisallowed the alleged lease rentals. It is further submitted that asper the ratio of the decision in Rajshree Roadways, the question asto whether a lease is a financial one or an operational one is to bedecided on the facts of the lease agreement and its contents andthus, the said case could not have been directly applied. D.B.INCOME TAX APPEAL NO.54/2007 CIT, Udaipur Vs. M/s. Banswara Syntex Ltd. the lease agreements, rightly held it to be a matter of finance leasenot an operational lease as claimed by the assessee and thus, rightlydisallowed the alleged lease rentals. It is further submitted that asper the ratio of the decision in Rajshree Roadways, the question asto whether a lease is a financial one or an operational one is to bedecided on the facts of the lease agreement and its contents andthus, the said case could not have been directly applied. On the other hand, the learned counsel for the respondent-assessee has duly supported the order impugned and, inter alia,pointed out that present one and other connected appeals wereadmitted with reference to admission of D.B.Income Tax AppealNo.23/2005 that has already been decided against the revenue bythis Court in the decision reported as Commissioner of Income-TaxVs. Shree Rajasthan Syntex Ltd.: (2009) 313 ITR 231 After having given thoughtful consideration to the rivalsubmissions and having examined the record, we are clearly of theview that this appeal remains bereft of merit and deserves to bedismissed. The facts of the case make it clear that the respondent-assessee had taken the machinery on lease from Gujarat Lease &Finance Ltd. and ITC Classic Finance Ltd. It has not been the caseof revenue that the lease transactions were not genuine or weresham. The CIT(A) in his appellate order has clearly noticed thesalient features of the lease agreements whereby it was establishedbeyond doubt that the ownership of the machinery concernedremained only with the lessor company and not with the assessee,who was the lessee for the purpose. The observations as made by the AO that the risks incident to the ownership of the assets stood“substantially” transferred to the lessee though “apparently” the titleto the assets had not been transferred, in our view, had been of notviewing the case in its correct perspective. The CIT(A) has rightlyobserved that once the agreements were accepted as real andgenuine, they were required to be accepted and there was no reasonto treat the assessee as the owner of the machinery. For such nature agreements and their legal implication, theprinciples of law expounded and explained by the Hon'ble SupremeCourt in CIT Vs. Shaan Finance (P.) Ltd.: (1998) 231 ITR 308 couldbe noticed, for being of direct application to the present case, asunder:- “Neither of these cases deals with an agreement of hire ofmachinery in contradistinction to an agreement of hire purchase.When the machinery is given on hire by the owner to the hirer onpayment of hire charges, the income derived by the owner isbusiness income. The owner is also entitled to depreciationon the machinery so hired out. The hirer, on the other hand,who pays hire charges, is entitled to claim these as revenueexpenditure. The hirer has not acquired any new asset. Atransaction of hire is, therefore, of bailment of the machinery.There is no extinguishment of any right of the owner in themachinery. There is merely a licence given to the hirer to use, fora temporary period, the machinery so hired……” (emphasis supplied) In the case of Rajshree Roadways (supra), this Courtconsidered the matter where the lessee had the option of purchasingthe trucks on payment of 1% of lease money at the end of the leaseperiod but as regards the lease period, this Court found the lessor tobe the owner of the trucks and the lessee having no right to transferor alienate. Further, it had been agreed that the lessor would beentitled to claim depreciation as would be permissible under the Act,being the owner of the trucks. It was noticed that the depreciation had indeed been allowed to the lessor. In the given fact situation ofthe case of Rajshree Roadways (supra), this Court observed andheld as under:- (emphasis supplied) In the case of Rajshree Roadways (supra), this Courtconsidered the matter where the lessee had the option of purchasingthe trucks on payment of 1% of lease money at the end of the leaseperiod but as regards the lease period, this Court found the lessor tobe the owner of the trucks and the lessee having no right to transferor alienate. Further, it had been agreed that the lessor would beentitled to claim depreciation as would be permissible under the Act,being the owner of the trucks. It was noticed that the depreciation had indeed been allowed to the lessor. In the given fact situation ofthe case of Rajshree Roadways (supra), this Court observed andheld as under:- “It is true that there was a clause that the assessee had anoption to purchase the trucks on payment of one per cent. of thelease money on termination of the lease period and the lesseecan become the owner of the truck but we are concerned withthe lease period and terms of the lease. As we have referredabove, in the terms and conditions of the agreement, when KeyLeasing and Finance Ltd., both the parties agreed that duringthe lease period, the lessor, Key Leasing and Finance Ltd., shallbe the owner of the trucks and the lessee, i.e., the assessee, willhave no right to transfer or alienate to other party in any form.Not only that the lessee as well as the lessor both have agreedthat the depreciation which is permissible under the Income-taxAct, being the owner of the trucks, the lessor will have that rightand benefit and it will get the benefit of depreciation on thesetrucks during this lease period, i.e., during the assessment years1991-92, 1992-93 and 1993-94. It is also pertinent to note that the lessor has claimed this benefitand that has been allowed by the Department to the lessor, i.e., tothe Key Leasing and Finance Ltd. Once under the sameagreement when the lessor, Key Leasing and Finance Ltd., hasbeen treated as the owner of these trucks and has been allowedthe depreciation permissible under the provisions of the Income-tax Act, there is no justification to treat the assessee also as theowner of these trucks during this period. There cannot be twoowners indisputedly of the same property. In our view, theTribunal has committed an error in restoring the view of theAssessing Officer. Therefore, considering the terms andconditions of the lease agreement and the fact that depreciationon these trucks has been allowed to the lessor, Key Leasing andFinance Ltd., now there is no justification to deny the claim of theassessee that his lease rent should be allowed as revenueexpenditure. In our view, the Commissioner of Income-tax(Appeals) has rightly allowed the claim of the assessee.” In the present case too, the assessee had no right to transferor alienate the machinery in any form, was obliged to re-deliver theequipment upon termination of lease agreement, was not to partwith possession and not to make alteration in the equipments withthe stipulation that additions would belong to the lessor; and thelessor was entitled to claim depreciation during the lease period.Looking to the explicit terms and stipulations, the findings of the AO D.B.INCOME TAX APPEAL NO.54/2007 CIT, Udaipur Vs. M/s. Banswara Syntex Ltd. about so-called “substantial” transfer of ownership though “apparent”non-transfer of title, in our view, could not have been countenancedand have rightly been reversed by the Appellate Authority. In the present case too, the assessee had no right to transferor alienate the machinery in any form, was obliged to re-deliver theequipment upon termination of lease agreement, was not to partwith possession and not to make alteration in the equipments withthe stipulation that additions would belong to the lessor; and thelessor was entitled to claim depreciation during the lease period.Looking to the explicit terms and stipulations, the findings of the AO D.B.INCOME TAX APPEAL NO.54/2007 CIT, Udaipur Vs. M/s. Banswara Syntex Ltd. about so-called “substantial” transfer of ownership though “apparent”non-transfer of title, in our view, could not have been countenancedand have rightly been reversed by the Appellate Authority. It may also be observed that the present appeal and otherconnected appeals were admitted with reference to the fact ofadmission of D.B.Income Tax Appeal No.23/2005. The said appealhas been decided by this Court alognwith cognate cases on06.05.2008 in the decision referred by the learned counsel for therespondent, reported as Commissioner of Income-Tax Vs. ShreeRajasthan Syntex Ltd.: (2009) 313 ITR 231. Therein, this Courtconsidered the case of the assessee who had given the machineryon hire to another concern by way of different agreements; and theassessee claimed depreciation as being the owner of the machinery.This Court upheld the claim of depreciation as made by the lessor,particularly with reference to the decision in Shaan Finance’s case(supra). As a necessary corollary it follows, and has been laid downby the Hon'ble Supreme Court in no uncertain terms, that the hirer,who pays hire charges, is entitled to claim those charges as revenueexpenditure. In the ultimate analysis, in the present case where therespondent-assessee has been found to be essentially a hirer afterappreciation of evidence on record, in our view, no interference inthe findings on the mixed question of law and facts as rendered bythe Appellate Authority and the Tribunal is called for. The features asnoticed by the CIT(A) in his order make it clear that the lease rentalspaid on the hired machinery were allowable as business expenditurefor the year in question. cpgoyal/- D.B.INCOME TAX APPEAL NO.54/2007 CIT, Udaipur Vs. M/s. Banswara Syntex Ltd. Accordingly and in view of the above, the answer to theformulated question of law is in the affirmative i.e., against therevenue and in favour of the assessee. Consequently, the appeal fails and is, therefore, dismissed. No costs. (ARUN BHANSALI),J. (DINESH MAHESHWARI), J.