M/S Pkf Finance Ltd v. Commissioner Of Income Tax, Jalandhar

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 2. CWP No. 12373 of 2003 (O&M) PHF Leasing Ltd. ...Respondent ...Petitioner versus Asstt.Commissioner of Income Tax, Jalandhar & anr. 3. CWP No. 12374 of 2003 (O&M) PHF Leasing Ltd. versus Asstt. Commissioner of Income Tax, Jalandhar & anr. ...Respondents ...Petitioner ..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 ITA No. 158 of 2002 and connected matters CORAM: HON'BLE MR. JUSTICE HEMANT GUPTAHON'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.ANo.158 of 2002 as well as C.W.P No.12373 of 2003; C.W.P No.12374 of2003; C.W.P No.12375 of 2003 and C.W.P No.17776 of 2002. The saidcases have been filed by the similarly situated assessees, therefore, the sameare taken up for hearing together. In all proceedings, the Revenue has soughtto initiate reassessment proceedings in respect of depreciation claimed bythe assessee under Section 32 of the the Income Tax Act, 1961 (for short 'theAct'). However, for the facility of reference, the facts are being taken fromI.T.A No. 158 of 2002. The present appeal under Section 260A of the Act arises out ofan order passed by the Income Tax Appellate Tribunal, Amritsar Bench,Amritsar (for short 'the Tribunal) on 29.04.2002 in respect of assessmentyear 1995-96. The assessee has claimed the following substantial questionsof law: “1. That whether under the facts and circumstances of the case andtrue interpretation of the lease agreement and various otherdocuments, the Hon'ble Tribunal was justified in concurring with thefindings of the authorities below that the appellant is not entitled for a depreciation u/s 32 of the Income Tax Act amounting toRs.17,92,860/- being a leasing company and holding the appellantonly as a financier? Alternatively and without conceding in case the Hon'ble Courtconcurs with the findings of the Hon'ble Tribunal that the appellant isnot eligible to get the depreciation on the leased assets-the otherSubstantial Question of Law be formulated. 2. That whether the Hon'ble Tribunal and the authorities below arenot justified in not adjudicating on the issue of taxing only theinterest income in the hands of the appellant and not then totalamount of realisation as lease rental which have the component ofcapital 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 ofhire purchase & financing of vehicles etc. The assessee claimed that thevehicles i.e trucks were given on lease, therefore, the same are assets for thebusiness 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, thetaxable income of Rs.15,54,330/- was assessed as income of the assesse.An appeal against the said order was dismissed by the Commissioner ofIncome Tax (Appeals), Jalandhar on 18.08.1999 holding that transactionsshould be treated as finance transactions and not as lease transactions, asclaimed by the assessee nor the hire purchase transactions, as held by theAssessing 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 The Assessing Officer found that the assessee was not doing leasing business at all. After disallowing the claim of depreciation, thetaxable income of Rs.15,54,330/- was assessed as income of the assesse.An appeal against the said order was dismissed by the Commissioner ofIncome Tax (Appeals), Jalandhar on 18.08.1999 holding that transactionsshould be treated as finance transactions and not as lease transactions, asclaimed by the assessee nor the hire purchase transactions, as held by theAssessing 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 depreciation. The Tribunal noticed that in the Registration Certificate, the socalled lessor was shown to be the owner of the vehicle and that theinsurance has been obtained by individual customers. It has also beennoticed that the assessee has carried out the activities of business offinancing/hire purchase. Reference was made to definition of 'Owner'contained in Section 2(3) of the Motor Vehicle Act, 1988. The agreementproduced by the assessee was held to be document executed to give securityto the assessee for re-payment of the loan amount. It was also held thatthough the agreement prohibits the lessee from making anyalterations/additions or improvement to the chasis, but since the chasiscannot be put to use for any purpose, therefore, when the goods to be leasedout must be in a position to put to some purpose before depreciation isallowed. Considering the another clause of the agreement that lessee wouldbe entitled to full depreciation in case of theft and loss of vehicle, it washeld that the assessee is in the business of financing and not leasing. Inview of the said findings, the assessee has claimed the aforesaid questions oflaw. In a recent judgment reported as I.C.D.S Ltd. vs. Commissioner of Income Tax, (2013) 3 SCC 541, the Hon'ble SupremeCourt has examined the question as to whether the assessee is owner of thevehicle, which are leased out and is entitled to depreciation on the vehiclesleased out by him on the ground that they were hired out to customers. Itwas held after examining the definition of 'Owner' given in the MotorVehicle Act, 1988 that the assessee is owner of the vehicle and that the that it must use the asset for the purposes of business. It does not mandateusage of the asset by the assessee itself. As long as the asset is utilized forthe purpose of business of the assessee, the requirement of Section 32 wouldstand satisfied. The Supreme Court held to the following effect. “15. We would like to dispose of the second contention beforeconsidering the first. Revenue argued that since the lessees wereactually using the vehicles, they were the ones entitled to claimdepreciation, and not the assessee. We are not persuaded to agree withthe argument. The Section requires that the assessee must use the assetfor the purposes of business. It does not mandate usage of the asset bythe assessee itself. As long as the asset is utilized for the purpose ofbusiness of the assessee, the requirement of Section 32 will standsatisfied, notwithstanding non-usage of the asset itself by the assessee.In the present case before us, the assessee is a leasing company whichleases out trucks that it purchases. Therefore, on a combined reading ofSection 2(13) and Section 2(24) of the Act, the income derived fromleasing of the trucks would be business income, or income derived inthe course of business, and has been so assessed. Hence, it fulfills theaforesaid second requirement of Section 32 of the Act viz. that the assetmust be used in the course of business. 25. The general opening words of the Section say that the owner of amotor vehicle is the one in whose name it is registered, which, in thepresent case, is the lessee. The subsequent specific statement on leasingagreements states that in respect of a vehicle given on lease, the lesseewho is in possession shall be the owner. The Revenue thus, argued thatin case of ownership of vehicles, the test of ownership is the registrationand certification. Since the certificates were in the name of the lessee,they would be the legal owners of the vehicles and the ones entitled toclaim depreciation. Therefore, the general and specific statements onownership construe ownership in favour of the lessee, and hence, are infavour of the Revenue. 26. We do not find merit in the Revenue's argument for more than onereason: (i) Section 2(30) is a deeming provision that creates a legalfiction of ownership in favour of lessee only for the purpose of the MVAct. It defines ownership for the subsequent provisions of the MV Act, not for the purpose of law in general. It serves more as a guide to whatterms in the MV Act mean. Therefore, if the MV Act at any point usesthe term owner in any Section, it means the one in whose name thevehicle 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 theSale of Goods Act; (ii) Section 2(30) of the MV Act must be read inconsonance 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 theassessee. Therefore, the MV Act mandates that during the period of lease,the vehicle be registered, in the certificate of registration, in the name ofthe lessee and, on conclusion of the lease period, the vehicle beregistered in the name of lessor as owner. The Section leaves no choiceto the lessor but to allow the vehicle to be registered in the name of thelessee Thus, no inference can be drawn from the registration certificateas to ownership of the legal title of the vehicle; and (iii) if the lesseewas in fact the owner, he would have claimed depreciation on thevehicles, which, as specifically recorded in the order of the AppellateTribunal, was not done. It would be a strange situation to have no claimof depreciation in case of a particular depreciable asset due to a vacuumof ownership. As afore-noted, the entire lease rent received by theassessee is assessed as business income in its hands and the entire leaserent paid by the lessee has been treated as deductible revenueexpenditure in the hands of the lessee. This reaffirms the position thatthe assessee is in fact the owner of the vehicle, in so far as Section 32 ofthe Act is concerned. 29. Therefore, in the facts of the present case, we hold that the lessori.e. the assessee is the owner of the vehicles. As the owner, it used theassets in the course of its business, satisfying both requirements ofSection 32 of the Act and hence, is entitled to claim depreciation inrespect of additions made to the trucks, which were leased out.” In view of the aforesaid judgment, the vehicles leased by theassessee are the assets of the assessee used during the course of its businessand thus, entitled to depreciation under Section 32 of the Act. Accordingly, the first question of law is answered in favour of the assessee and against theRevenue. In view of decision on question No.1, we do not find thatquestion No.2 arises for consideration and in fact, it was rightly not pressedby the counsel for the appellant. Consequently, the present appeal as well as the writ petitionsare allowed. (HEMANT GUPTA) JUDGE (RITU BAHRI) JUDGE May 13, 2013G.Arora/Vimal