Case Law Details
PCIT Vs ALD Automotive Pvt Ltd (Bombay High Court)
Summary: The Bombay High Court held that the Revenue’s challenge to the ITAT’s order on depreciation claimed on vehicles given on operating lease did not give rise to any substantial question of law. The Court noted that the assessee had claimed depreciation on vehicles leased under operating lease agreements, asserting ownership under the Master Lease Agreements, while the Assessing Officer had disallowed the claim principally because the vehicles were registered in the customers’ names and the issue had been raised in earlier assessment years. The CIT(A) deleted the disallowance, and the ITAT affirmed that decision by following its earlier orders in the assessee’s own case and relying on the Supreme Court’s decision in I.C.D.S. Ltd. The High Court found the facts similar to the Supreme Court decision and declined to entertain Questions (A) to (C). However, it observed that the ITAT had failed to decide the Revenue’s ground relating to deletion of disallowance of deferred maintenance charges of Rs.1,14,48,078/-. Accordingly, the matter was remanded to the ITAT only for the limited purpose of deciding that additional ground.
Core Issue. The principal issue before the Bombay High Court was whether the assessee, engaged in the business of leasing vehicles under operating lease arrangements, was entitled to depreciation under section 32 despite the registration certificates of the vehicles standing in the names of the lessees, and whether the Tribunal’s failure to adjudicate the Revenue’s ground relating to deferred maintenance charges warranted remand.
Facts. The assessee was engaged in the business of operating lease of motor vehicles, resale of used vehicles and fleet management services. It claimed depreciation of ₹74.14 crore on vehicles leased to customers. During scrutiny assessment, the Assessing Officer disallowed the depreciation primarily on the ground that the vehicles were registered in the names of the customers and that the assessee had failed to establish that the lessees had not claimed depreciation. The assessee explained that under the Master Lease Agreements it remained the absolute owner of the vehicles, while the customers merely enjoyed a contractual right to use them. The vehicles were registered in the customers’ names only to comply with the Motor Vehicles Act. The CIT(A) allowed the claim following earlier appellate orders in the assessee’s own case, and the Tribunal affirmed the CIT(A)’s order relying upon the Supreme Court decision in ICDS Ltd. The Revenue carried the matter before the Bombay High Court.
Submissions of the Parties
The Revenue contended that the Tribunal erred in allowing depreciation without remanding the matter to the Assessing Officer for verification and without ensuring that the lessees had not claimed depreciation on the same vehicles. It was further argued that the Tribunal had adopted inconsistent standards in different assessment years regarding the Assessing Officer’s satisfaction on this aspect. In addition, the Revenue pointed out that although it had specifically challenged the deletion of disallowance of deferred maintenance charges, the Tribunal had failed to adjudicate that ground altogether.
The assessee’s case, as accepted by the appellate authorities, was that the Master Lease Agreements unequivocally established its ownership of the leased vehicles and merely conferred a right of use upon the customers. Registration of the vehicles in the names of the customers was only a statutory requirement under the Motor Vehicles Act and did not alter the legal ownership of the vehicles. Since the assessee remained the owner and had used the vehicles in the course of its leasing business, it was entitled to depreciation under section 32 in accordance with the law laid down by the Supreme Court in ICDS Ltd.
Findings and Determination of the High Court
The Bombay High Court held that the controversy relating to depreciation was squarely covered by the judgment of the Supreme Court in ICDS Ltd. v. CIT. The Court observed that the Revenue had never disputed that under the Master Lease Agreements the assessee continued to be the absolute owner of the leased vehicles and that the customers merely enjoyed the right to use them during the lease period. The mere fact that the registration certificates stood in the names of the customers did not divest the assessee of ownership, nor did it disentitle the assessee from claiming depreciation. Registration under the Motor Vehicles Act is intended to regulate use of the vehicle and is not determinative of ownership for the purposes of section 32 of the Income-tax Act.
The Court further rejected the Revenue’s contention that the assessee was not entitled to depreciation because the vehicles were used by the customers. It held that in an operating lease business, the lessor commercially exploits its assets by leasing them to customers, and such user by the lessee constitutes use of the assets for the lessor’s business. Accordingly, the Tribunal had correctly followed the binding decision of the Supreme Court, and the Revenue’s proposed questions relating to depreciation did not give rise to any substantial question of law.
However, the Court found merit in the Revenue’s grievance regarding deferred maintenance charges. It noticed that although the Revenue had specifically raised a ground before the Tribunal challenging the deletion of disallowance of deferred maintenance charges amounting to ₹1,14,48,078, the Tribunal had inadvertently failed to adjudicate that ground and had confined its decision only to the depreciation issue. Since the Tribunal had omitted to render any finding on an issue specifically raised before it, the matter required reconsideration to that limited extent. Without expressing any opinion on the merits of the deferred maintenance issue, the High Court remanded the matter to the Tribunal solely for adjudication of that undecided ground.
Cases Relied Upon
The High Court principally relied upon ICDS Ltd. v. Commissioner of Income Tax [(2013) 350 ITR 527 (SC); 2013 (1) TMI 344 (SC)]. The Court also noted that the Tribunal had consistently followed its earlier decisions in the assessee’s own case reported in DCIT v. ALD Automotive Pvt. Ltd. [2016 (7) TMI 1722 – ITAT Mumbai], ALD Automotive Pvt. Ltd. v. DCIT [2016 (8) TMI 1093 – ITAT Mumbai], and DCIT v. ALD Automotive Pvt. Ltd. [2017 (3) TMI 1980 – ITAT Mumbai].
Outcome The Bombay High Court declined to entertain the Revenue’s challenge to the allowance of depreciation, holding that the assessee, being the owner of the leased vehicles under the Master Lease Agreements, was entitled to depreciation notwithstanding that the vehicles were registered in the names of the customers. The Court held that no substantial question of law arose on the depreciation issue. However, since the Tribunal had failed to adjudicate the Revenue’s specific ground relating to deferred maintenance charges, the matter was remanded to the Tribunal exclusively for determination of that limited issue, and the appeal was disposed of accordingly.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. The above Appeal has been filed by the Appellant-Revenue taking exception to the order dated 10th April 2019 passed by the Income Tax Appellate Tribunal (ITAT). The Assessment Year in question is A.Y.2012-13.
2. According to the Revenue the above Appeal gives rise to the following three questions of law :-
A. Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was dismissing the Revenue’s appeal without remitting the issue to the file of AO for fresh consideration?
B. Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in dismissing Revenue appeal though the AO has recorded categorically in Assessment Order that the assessee has not discharged its onus to prove that the other party has not claimed any depreciation?
C. Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT is consistent in deciding the issue that the satisfaction of AO is mandatory that there is no claim of depreciation by the other party as decided in appeals pertaining to 2010-11 & not in 2007-08, 2008-09?
3. Over and above aforesaid questions, Mr. Chhotaray, the learned advocate appearing on behalf of the Revenue submitted that the impugned order also gives rise to an additional question which has been missed out in the present Appeal filed before us. He, therefore, submitted that an additional question be framed as under:-
(i) Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the disallowance of Rs.1,14,48,078/- being Deferred Maintenance Charges without appreciating the fact that providing for future expenses which escalate with time is nothing but provision for unascertained liabilities which is not allowable as per the I.T. Act, 1961?
4. Facts of this case reveal that the Assessee Company filed its Return of Income on 29th September 2012 declaring its taxable income at Rs.11,56,67,769/-. The case of the Assessee was selected for scrutiny and statutory Notices under Section 143(2) and 142(1) were issued. In response to those Notices the authorized representative from the Assessee attended and furnished details in support of the income declared and explained the case. One of the issues raised in the scrutiny assessment was the depreciation on vehicles. The Assessing Officer noted that the Assessee Company had stated that it was engaged in the business of giving motor vehicles on lease, resale of used motor vehicles, and fleet management of vehicles given on lease. The Assessing Officer further noticed that the Assessee had shown income of Rs.135,19,92,359/- as lease rent, and Rs.30,22,37,218/- as fleet management income, besides other income of Rs.16,70,984/-. The total expenses claimed in the Profit and Loss Account was Rs.163,02,07,110/-out of which an amount of Rs.74,14,49,570/- was claimed as depreciation on vehicles.
5. The Assessing Officer noted that the Assessee was giving vehicles on an operating lease basis and accordingly it is claiming depreciation on the vehicles leased. Since this depreciation was disallowed in the previous years the Assessing Officer called upon the Assessee to give details with evidence and justify their claim. In response thereto, the Assessee stated that all vehicles given on lease are reflected in the balance sheet of the Company and the rental income from these vehicles is offered to tax. Further, the Master Lease Agreement with all the client companies which were furnished to the Assessing Officer clearly mentioned that the Assessee Company is the absolute owner of the vehicles given on lease, and all rights and interest vested with the Assessee Company only, and the customer only got the right to use the vehicle. The Assessee also explained that though it was the real owner of the vehicles, for the sake of convenience the name of the user, namely the customer, was mentioned in the R.C. Book as per the Motor Vehicles Act.
6. All these contentions of the Assessee were perused by the Assessing Officer. The Assessing Officer noted that for the years 200708 and 2008-09, when the Assessing Officer had denied the depreciation to the Assessee Company, the same was overturned by the CIT (Appeals). The Assessing Officer was of the view that since the Revenue had not accepted the order of the CIT (Appeals) and had preferred Appeals before the Tribunal (for A.Y.2007-08 and 2008-09), for the same reasons as discussed in the Assessment Order passed for A.Y.2007-08 and 2008-09, the addition was also made in the present year.
7. Being aggrieved by the order passed by the Assessing Officer the Assessee preferred an Appeal before the CIT (Appeals). The CIT (Appeals), by its order dated 25th July 2017, noted the detailed contentions of the Appellant [from paragraph 4.1 onwards] and thereafter, in paragraph 5, after carefully considering the facts of the case, the Assessment Order, as well as the relevant case laws, came to the conclusion that the disallowance of depreciation amounting to Rs.74,14,49,570/- was wrongly disallowed and therefore set aside the Assessing Officer’s order to that extent. In coming to this conclusion the CIT (Appeals) noted the earlier orders passed by the CIT (Appeals) in the Assessee’s own case for A.Y.2007-08, A.Y.2008-09, A.Y.2009-10 and for A.Y.2010-11. The CIT (Appeals) also noted that the Hon’ble ITAT, Mumbai in their order dated 25th July 2016 for A.Ys. 2008-09 and 2007-08 as well as the order dated 18th July 2016 for A.Y. 2009-10 had dismissed the Appeal filed by the Income Tax Department against the orders of the CIT (Appeals) and affirmed the stand taken by the CIT (Appeals) that the Assessee is entitled for the claim of the depreciation.
8. Being aggrieved by the order of the CIT (Appeals), the Revenue approached the ITAT. The ITAT, after noting the orders passed by it in the earlier years in the Assesse’s own case dismissed the Appeal of the Revenue. In doing so, the ITAT also relied upon the judgment of the Hon’ble Supreme Court in the case of C.D.S. Ltd V/S Commissioner of Income Tax & Anr. [(2013) 350 ITR 527 (SC)].
9. Having heard Mr.Chhotaray, the learned advocate appearing on behalf of the Revenue, and after perusing the record before us, we are clearly of the view that the present case is squarely covered by the decision of the Hon’ble Supreme Court in the case of I.C.D.S. Ltd (supra). In the facts of the present case, it has never been the case of the Revenue that under the operating lease entered into by the Assessee Company with all its client companies it was not the owner of the vehicles leased, or that the leased vehicles absolutely belonged to the Assessee Company, and the customer only got the right to use the leased vehicles. In fact, one of the main reasons why the Assessing Officer disallowed the depreciation was that the concerned vehicle was not registered in the name of the Assessee Company but was registered in the name of the customer. Further it appears that the Assessing Officer may have been under the impression that since the vehicle is not used by the Assessee Company it is not entitled to the depreciation. We find that these issues are squarely covered by the judgment of the Hon’ble Supreme Court in I.C.D.S. Ltd (supra). In this decision, the Hon’ble Supreme Court has inter alia noted the provisions in the Income Tax Act, 1961 regarding depreciation and thereafter came to the conclusion that in leases like present one, though the R.C. Book may be in the name of the lessee, nonetheless, the ownership of the vehicle is of the lessor. In the facts of the present case also the Assessing Officer noted the submission of the Assessee Company that the Master Lease Agreement entered into by it with all the client companies, and which was furnished to the Assessing Officer, clearly mentioned that the Assessee Company is the absolute owner of the vehicles given on lease and it was only for the sake of convenience that the name of the user of the vehicle was mentioned in the R. C. Book as per the provisions of the Motor Vehicles Act.
10. We find that the fact situation in the present case is very similar to the case before the Hon’ble Supreme Court in C.D.S. Ltd (supra). Once we are of this view, we find that questions (A) to (C) raised by the Revenue do not give rise to any substantial question of law. Hence, they are not entertained.
11. As far as the additional question is concerned, we find from the impugned order itself that the aforesaid question was specifically raised by the Revenue before the ITAT. This can be found at page 47 of the paper book. Despite noting the aforesaid ground, we find that the ITAT, inadvertently has not decided that ground at all and has only decided the ground whether the CIT(Appeals) had erred in deleting the disallowance of Rs.74,14,49,570/-, being the claim for depreciation on vehicles given on operating lease without appreciating the facts that the vehicles were not registered in the name of the Assessee but in the name of the parties using it.
12. Once we find that the additional question raised by Mr.Chhotaray before us was also a question of law before the ITAT, and on which no finding is given whatsoever, we are of the view that the above matter deserves to be remanded back to the ITAT only for the limited purpose of determining the additional question as framed by us in this order. It is accordingly so ordered.
13. The Appeal is disposed of in the aforesaid terms. However, there shall be no order as to costs.
14. This order will be digitally signed by the Private Secretary/ Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.
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