IMPORTANT POINT
Lease financing of vehicles. Lessor whether owner and whether the vehicles are used for purpose of business.

JUDGMENT

D.K. Jain, J.:- In all these appeals, by grant of special leave, by the Revenue, the common question of law relates to the claim of the assessee for depreciation under Section 32 of the Income Tax Act, 1961 (for short “the Act”). The assessment years involved are 1991-1992 to 1996-1997.

2. The assessee is a public limited company, classified by the Reserve Bank of India (RBI) as a non-banking finance company. It is engaged in the business of hire purchase, leasing and real estate etc. The vehicles, on which depreciation was claimed, are stated to have been purchased by the assessee against direct payment to the manufacturers. The assessee, as a part of its business, leased out these vehicles to its customers and thereafter, had no physical affiliation with the vehicles. In fact, lessees 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”).

3. 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 a higher rate on the ground that the vehicles were used in the business of running on hire.

4. 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. Aggrieved, the assessee preferred appeals to the Commissioner of Income Tax. In so far as the question of depreciation at normal rate was concerned, the Commissioner (Appeals) agreed with the assessee. However, assessee’s claim for depreciation at higher rate did not find favour with the Commissioner.

5. Being dissatisfied, 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. On the question of claim for depreciation on normal rate, the following observations by the Tribunal are very significant:

“…In the present case the business of the assessee-appellant is leasing and hiring of vehicles and other machinery. It is definitely not a hire purchase, as seen from the lease agreements, copies of some of which are on record. Further, allowing only depreciation is not the matter of dispute in the instant case. The lower authorities have already allowed the depreciation, of course in the normal rates. Therefore, ownership of the vehicles and its use is not at all disputed at any stage before the Assessing Officer and the first appellate authority.

Nothing is brought on record, whether the lessees of the vehicles have claimed the depreciation which were used by them. From this the only inference that can be drawn is that the lessees have not claimed depreciation and it is the appellant alone who has claimed the depreciation being the actual owner of the vehicles.”

On the higher rate of depreciation, the Tribunal culled out the observations of the Commissioner of Income Tax (Appeals) as under:

“The CIT (Appeals) considered that the appellant has only financed to purchase the trucks. Therefore, according to him, leasing out the trucks or hiring them does not assume the character of doing business of hiring the trucks. According to the CIT (Appeals) the appellant must use the trucks for its own business of running them on hire to claim the higher rate of depreciation. But the main activity of the appellant is to lease out or give the trucks on hire to others.

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… In the opinion of the CIT (Appeals), the language used in the rules clearly specified that enhanced de