In case of finance lease, lessor eligible to claim depreciation

L & T Finance Ltd. Vs. DCIT (ITAT Mumbai)

Depreciation in the case of finance lease is not admissible to the lessor who is simply a nominal and symbolic owner of the asset whereas the real owner who bears all the risks and rewards incidental to the ownership is the lessee.

In the judgment delivered subsequently in the case of I.C.D.S. Ltd. (supra), the Hon’ble Supreme Court has held that even in the case of finance lease, the lessor is eligible to claim depreciation.

In assessee’s own case in earlier years, the same issue arose before Tribunal, wherein the Tribunal held that in case of finance lease, the lessor was eligible to claim depreciation. Therefore, this issue was squarely covered in favour of the assessee. Hence, the claim of depreciation on earlier years transaction as well as in previous transaction was to be allowed.

Disallowance under section 14A—

When assessee’s own interest-free funds were more than investment, which yielded exempt income, then no dis allowance under section 14A on account of interest could be made.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

This appeal by the Assessee is arising out of the order of Commissioner (Appeals)-5, Mumbai, (in short CIT(A)) in appeal No. CIT(A)-5/DCIT-2(2)/IT-118/2006-07 dated 15-11-2011. The Assessment was framed by the Deputy Commissioner, Circle-2(2), Mumbai (in short DCIT) for the assessment year 2004-05 vide order even dated 18-12-2006 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).

2. The first issue in this appeal of assessee is against the order of Commissioner (Appeals) confirming the disallowance of depreciation on assets given on lease by treating the lease transaction as finance transaction and also earlier years least transactions. For this assessee has raised following ground No.1 & 2: –

“1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in confirming the dis allowance of depreciation on assets given under finance by treating the lease transaction as finance transaction.

2. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in confirming the dis allowance of depreciation in respect of assets given on lease by the appellant in earlier years.

3. At the outset, the learned Counsel for the assessee took us through page 2 of the assessment order and stated that the assessing officer relaying on the earlier years order for assessment year 1995-96 to assessment year 2003-04 disallowed the claim of depreciation on assets leased during the previous year amounting to Rs. 2,66,10,238 and also disallowed the depreciation in respect of the assets given on lease on earlier years to the tune of Rs. 11,58,10,481. Accordingly, the total depreciation disallowed by the assessing officer was Rs. 14,24,20,719. The learned Counsel for the assessee drew our attention to the following paragraphs of the assessment order: –

“The depreciation pertaining to lease transactions entered into during the previous year /is Rs. 2,66,10,2381- on various assets.

Based on the stands taken by the Department in assessment years 1995-96 to 2003-04, it can be concluded that the assessee is not entitled to any depreciation allowance under section 32 on the actual cost of the leased asset which was not really owned by it (actually owned by the lessee) but was held merely for the purpose of security of the loan given to the borrowers in the garb of lease transaction However, the capital or loan repayment component of lease rentals received during the previous year in respect of the lease alleged lease transactions which have been offered for taxation by the assessee in its return of income is being excluded from the assessed income.

Accordingly, the depreciation on assets leased during the previous year of Rs. 2,66,10,238 is also disallowed in its entirety. As a result against total depreciation claim of Rs. 15,09.82,3 161- on leased assets, depreciation of Rs. 14,24,20,719 Rs. 11,58,10,481 + Rs. 2,66,10,238 will be disallowed.”

4. The Commissioner (Appeals) also confirmed the action of the assessing officer by observing in Para 3.2 and 3.3 ad under: –

“3 2 With regard to depreciation pertaining to lease transactions entered into during the previous year was Rs. 2,66,10,238 on various assets, it was observed from the practice of leasing business of the assessee that the leased assets were of various types depending on the requirement of the lessee In all cases the lessee approached the assessee for lease finance to purchase assets required by him After making detailed discussion as made in the assessment order for assessment year 2002-03 and assessment year 2003-04 as well, the assessing officer concluded that the assessee was not entitled to any depreciation allowance under section 32 on the actual cost of the leased asset which was not really owned by it (actually owned by the lessee) but was held merely for the purpose of security of the loan given to the borrowers in the garb of lease transaction. Accordingly, the depreciation on assets leased during the previous year was also disallowed in its entirety.

3.3 It may be stated here that the issues in hand have already been adjudicated in appeals for assessment years 1995-96 to 1998-99 by the learned Commissioner (Appeals)-5, Mumbai: in separate appeal orders passed Reference could be made to the order nos. CPT(A)-5/DCIT-2(2)/IT-21 9/09-10, CIT(A)-5/DCIT-2(2)/IT-220/09-10. CI1(A)-5/ACIT-2(2)/IT-22 1/09-10 and ClT(A)-5IACIT-2(2)/lT-421/09-10. Similar dis allowances have been upheld in appeal for immediately preceding assessment year 20C3-04 vide order no CIT(A)-5/ACIT-2(2)/IT-56/09- 10 dated 11-8-2011. Accordingly, the grounds of appeal in the year being identical, the dis allowances made are upheld.”

Aggrieved, now assessee is in appeal before us.

5. The learned Counsel for the assessee stated that the tribunal all along has confirmed the orders of the lower authorities disallowing the clam of depreciation from assessment year 1995-96, 1999-2000. But subsequently, in view of the decision of Hon’ble Supreme Court inI.C.D.S Ltd. (2013) 350 ITR 527 (SC), the tribunal in MA No. 420 to 422/Mum/2013 arising from ITA No. 2574 to 2576/Mum/2010 order dated 30-4-2014 allowed the claim of the assessee on the basis that the tribunal for assessment year 1995-96 to 1999-2000 has allowed the claim of depreciation of assessee by following the Supreme Court decision in the case of I.C.D.S Ltd. (supra). The Tribunal in MA No. 420-422/Mum/2013 arising out of ITA No.2574 to 2576/Mum/2010 for assessment year 1995-96 to 1997-98 vide order dated 30-4-2014 has allowed this claim vide Para 4 as under: –

“4. We have heard the arguments of both the sides and also perused the relevant material placed on record. It is observed that while disposing of the aforesaid appeals of the assessee vide a common order dated 9-5-2012, the dis allowance made by the assessing officer and confirmed by the learned Commissioner (Appeals) on account of assessee’s claim for depreciation on the assets purchased and given back on lease was sustained by the Tribunal relying on the decision of Special Bench of the tribunal in the case of M/s IndusInd Bank Ltd. v. Addl. CIT passed by the tribunal on 14-3-2012 wherein it was held that depreciation in the case of finance lease is not admissible to the lessor who is simply a nominal and symbolic owner of the asset whereas the real owner who bears all the risks and rewards incidental to the ownership is the lessee. In the judgment delivered subsequently in the case of I.C.D.S. Ltd. (supra), the Hon’ble Supreme Court has held that even in the case of finance lease, the lessor is eligible to claim depreciation. As pointed out by the learned Counsel for the assessee, the said decision of the Hon’ble Supreme Court in the case of I.C.D.S. Ltd. (supra) has been followed by the coordinate bench of this Tribunal in the case of M/s L&T Ltd. in its order dated 1-5-2013 passed in ITA No. 2200/Mum/02 and others for assessment years 1995-96 and 1996-97 to allow a similar claim of the assessee for depreciation in the case of sale and lease back transactions. The decision rendered by the Tribunal vide its order dated 9-5-2012 (supra) thus is contrary to the view expressed by the Hon’ble Supreme Court in the case of I.C.D.S. Ltd. (supra) rendered subsequently and this position has not been disputed even by the learned Departmental Representative  at the time of hearing before us. In the case of ACIT v. Saurashtra Kutch Stock Exchange Ltd. (2008) 305 ITR 227 (SC), the Hon’ble Supreme Court has held that even the judgment of the jurisdictional High Court, although rendered subsequently would give rise to a mistake apparent from record in the order of the Tribunal which is not in conformity with the said decision. Keeping in view the said decision of the Hon’ble Apex Court, which is squarely applicable in the present context, we rectify the order of the Tribunal dated 9-5-2012 (supra) and direct the assessing officer to allow the claim of the assessee for depreciation on the assets given under sale and lease back basis. The assessing officer is also directed to withdraw any corresponding benefit given to the assessee by excluding the value of capital component of the lease rent from the income of the assessee.”

6. In view of the above, the learned Counsel for the assessee stated that the issue is squarely covered in favour of assessee and against the Revenue, consistently in assessee’s own case. On query from the Bench, the learned Commissioner Departmental Representative fairly conceded the position. After hearing both the sides and going by the facts of the case, we find that this issue is squarely covered in favor of assessee and against Revenue by Tribunal’s decision in assessee’s own case in earlier years. Respectfully following the Tribunal’s decision and also Hon’ble Supreme Court in the case ofI.C.D.S Ltd. (supra), we allow the claim of depreciation on earlier years transactions as well as in previous years transactions. This issue of assessee’s appeal is allowed.

7. The next issue in this appeal of assessee is against the order of Commissioner (Appeals) confirming the action of the assessing officer in treating the notional gain arising on securitization of lease receivables as taxable receipt. For this assessee has raised following ground No.3: –

“3. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in confirming the action of the assessing officer to treat the notional gain on securitization of lease receivables as taxable receipt.”

8. At the outset, the learned Counsel for the assessee stated that this issue is covered against assessee and in favour of Revenue by Tribunal’s decision in assessee’s own case for assessment years 2000-01 to 2003-04 inITA No. 6691 to 6694/Mum/2011 vide order dated 5-5-2015, whereby tribunal has considered this issue as under: –

“14. As could be noticed from the para 8 of the learned Commissioner (Appeals)’s order the assessee accounted for receipt as income in its books whereas it is contended that it was notional income. Learned Commissioner (Appeals) observed that the approach of the assessee is self contradictory. The company entered into lease securitization of lease receivables with Development Credit Bank for the purpose of availing finance. There is a gain to the assessee representing the difference between the amount financed and the amount shown as outstanding in the loans and advance account. The assessee deferred the said gains over a period of two years and credited Rs. 1.68 crores for assessment year 2002-03 (Rs. 4.75 crores for assessment year 2003-04) to the profit and loss account of the years under consideration. Since it is not the case of the assessee that the said sum represents capital receipt, learned Commissioner (Appeals) concluded that the said sum should be treated as having been earned in the course of business activities carried on by the assessee and it is therefore revenue in nature.

15. Learned counsel merely relied upon the arguments advanced before the tax authorities and did not place any material to contradict the findings of learned Commissioner (Appeals). 16. Having regard to the circumstances of the case, we do not find any infirmity in the order passed by learned Commissioner (Appeals) and therefore ground No. 3 for both the years are rejected.”

9. The learned Counsel for the assessee fairly conceded this issue. In view of the Tribunal’s order in assessee’s own case, we dismiss this ground of assessee’s appeal.

10. The learned Counsel for the assessee raised additional ground vide application dated 14-9-2016 that amount of Rs. 88.54 lacs, which has been taxed twice i.e. in the assessment year and in subsequent assessment years 2005-06 to 2009-10. Therefore, the same should be taxed either in the year under consideration or in subsequent years, but only once. The assessee has raised following grounds: –

“4. Without prejudice to ground No.3, taxing the amount of Rs. 88.54 lakhs as income has resulted in double taxation of the same income, as the whole amount of Rs. 18.56 crs. has been assessed to tax in subsequent years 2005-06 to 2009-10.”

11. On query from the Bench, the learned Counsel for the assessee stated that this issue can be remitted back to the file of the assessing officer for verification of figures and facts and this should be taxed as the assessee itself offered income. We find that the plea of the assessee is quite reasonable and we direct the assessing officer to allow the relief in response to double taxation of the same income. Learned Commissioner Departmental Representative also agreed to the proposal and stated that the issue can be remitted back to the file of the assessing officer for verification of figures and consequentially allow relief to the assessee. We direct the assessing officer accordingly. This additional ground is admitted and remanded back to the file of the assessing officer and allowed for statistical purposes.

12. The next issue raised by assessee by way of additional ground is as regards to the order of Commissioner (Appeals) confirming the action of the assessing officer in disallowing expenses relatable to exempt income by invoking the provisions of section 14A of the Act. For this assessee has raised following additional grounds: –

“without prejudice to ground No. taxing the amount of Rs. 88.54 lakhs as income has resulted in double taxation of the dame income, as the whole amount of Rs. 18.56 crs. has been assessed to tax in subsequent years 2005-06.”.”

13. We have heard the rival contentions and gone through the facts and circumstances of the case on this issue. Brief facts are that the assessee has earned dividend income and claim the same as exempt amounting to Rs. 87,33,559 . The assessing officer has noted the total borrowed funds, owned funds, investment in shares as under: –

But the assessing officer disallowed interest attributable to exempt income on borrowed funds at Rs. 39.84 lakhs and Commissioner (Appeals) also confirmed the action of the assessing officer.

14. Before us, the learned Counsel for the assessee stated that the total owned funds of the assessee are to the tune of Rs. 11973.58 lakhs and investment in shares is to the tune of Rs. 657.01 crores, which is much less than the total owned interest free funds. As the learned Counsel for the assessee referred to the decision of Hon’ble Bombay High Court in the case ofHDFC Limited (2014) 366 ITR 505 (Bom), wherein it is held that the presumption is in favour of assessee that in case assessee’s own interest free funds are more than investment which yielded exempt income than no disallowance under section 14A of the Act on account of interest can be made. In the present case, the assessing officer has simply adopted formula and made disallowance under section 14A of the Act. In view of the decision of the Hon’ble Bombay High Court in the case of HDFC (supra), we allow this additional ground of the assessee’s appeal.

15. In the result, the appeal of assessee is allowed.