As per income tax Act, 1961, If the transaction is treated as a lease, the lessor shall be
eligible for depreciation on the asset. The entire lease rentals will be taxed
as income of the lessor. The lessee, correspondingly, will not claim any
depreciation and will be entitled to expense off the rentals
The draft Tax Accounting Standards (TAS) released by the Committee on TAS provide that in case of finance lease, depreciation is to be allowed to the lessee, even though the lessor is the owner of the assets. A finance lease has been defined as a lease that transfer substantially all the risks and rewards incidental to the ownership of an asset.
Lessee eligible for depreciation if lessor never claimed title or possession of leased asset; Supreme Court Upheld High Court’s ruling
When a person acquires interest, title or
ownership in a property subject to right of third party of which he has notice,
until such right is enforced transferee continues to be owner of property
against whole world. Assessee-company which was carrying on business of leasing
and finance, acquired a plant for certain period from a company SIL and leased
out same to WIPL. As per agreement, SIL had a right to purchase plant after
expiry of stipulated period of time. Assessee claimed depreciation under section
32. High Court by impugned order held that since SIL had neither claimed any
title or possession over plant nor claimed depreciation in respect thereof and
had also not exercised its option to purchase plant, ownership of assessee in
respect of plant could not be disputed for purpose of section 32 and,
therefore, assessee was entitled to avail benefit of section 32. On appeal by
revenue it was found that assessee had become owner of plant and machinery.
Lease rentals in entirety had been taxed as a revenue receipt/income accrued
and taxable. Therefore, final conclusion and decision of High Court could not
be interfered with. [In favour of assessee] – [CIT v. SBI Home Financer Ltd.
(2022) 447 ITR 659 : 145 taxmann.com 94 (SC)]
Depreciation not allowed on Leasehold Rights as same is not Intangible Assets
Assessee has
claimed Rs. 27491 Lakhs as depreciation on lease hold land under section
32(1)(ii) of the Income Tax Act, 1961 as the mining rights are in the nature of
intangible assets. Assessing Officer has disallowed the claim of such
depreciation on the ground that “it is not a right being similar in nature to
know-how, patents, copyrights, trademarks, licenses, franchisees or any other
business or commercial rights as per the provision made under section 32(1)(ii)
of the Income Tax Act 1961. Further the land is not a depreciable assets under
section 32 of the Income Tax Act, whether it is lease hold or free hold”.
ITAT hold that the lease hold rights are not eligible for depreciation under section 32(1)(ii) of the Act considering it as intangible rights and, accordingly, dismiss the ground of appeal of the assessee. (Related Assessment year : 2015-16) – [Mahanadi Coalfields Ltd. v. DCIT Appeal Number : ITA No. 174/CTK/2018 - Date of Judgement : 05.06.2020 (ITAT Cuttack)]
Improvements on leasehold premises - Capital expenditure - Entitle to depreciation
It was held that spirit and text of Explanation 1 to
section 32 was that any capital expenditure by assessee on a building not owned
by him, in which he carried on business, should be considered as building owned
by him for purposes of section 32, to extent of amounts spent on construction
of structure or doing of any work in or in relation to and by way of renovation
or extension or improvement to building. Accordingly, entitle to depreciation.
(Related Assessment years :2005-06, 2009-10 to 2013-14) - [Carrier Air-Conditioning & Refrigeration Ltd. v. ACIT (2018) 195
TTJ 777 : 172 DTR 49 (ITAT Delhi)]
Lessee cannot claim depreciation under section 32 in the absence of legal ownership; to avail the benefit of depreciation lessee has to undertake the construction activity himself as per Explanation 1 to section 32(1)
In terms of Explanation 1
to section 32(1), it is only when assessee holds a lease right or other right
of occupancy and any capital expenditure is incurred by it on construction or
renovation or improvement of building, assessee would be entitled to
depreciation to extent of such expenditure incurred. However, where
construction is carried out by owner-lessor and expenditure is only reimbursed
by assessee-lessee, Explanation 1 to section 32(1) would not come to aid of
assessee
Assessee - lessee not entitled to depreciation under
section 32 absent execution of title transfer deed. Supreme Court dismisses
assessee’s (lessee) appeal, holds that assessee-company was not entitled to
depreciation on hospital building under section 32 absent ownership for
Assessment year 1992-93; Pursuant to an agreement between the assessee and the
erstwhile firm it was agreed that the firm would hand over hospital building’s
possession to the assessee post completing its construction, on the condition
that entire cost of construction of the building would be borne by the assessee;
Notes that the building was constructed by the firm and not the assessee
although the cost of construction was reimbursed by the latter, further
observes that it is only when the assessee holds a lease right or other right
of occupancy that it is entitled to depreciation to the extent of capital
expenditure incurred on construction of the building under Explanation 1
to section 32; Thus rejects assessee’s argument that since it was the lessee of
the property and construction was made from its funds, it was entitled to claim
depreciation by virtue of Explanation 1 to section 32, holds that “the
explanation also would not come to the aid of the assessee”; Holds that the
title in the building cannot pass unless it is executed on a proper stamp paper
and is also duly registered with the sub-Registrar and thus “in the absence
thereof, it could not be said that the assessee had become the owner of the
property”.
Dismissing the appeal of the assessee, the Court held
that; title to immovable property cannot pass when its value is more than Rs.
100/- unless it is executed on a proper stamp paper and is also duly registered
with the sub-Registrar. Accordingly, a lessee cannot be said to be the “owner” for
purposes of claiming depreciation. Under Explanation 1 to section 32,
the lessee is entitled to depreciation on the cost of construction incurred by
him but not on the cost incurred by the
owner and reimbursed by the lessee. [In favour of revenue] (Related Assessment
year : 1992-93) - [Mother Hospital (P) Ltd. v. CIT, Trichur, Kerala (2017)
392 ITR 628 : 294 CTR 25 : 247 Taxman 12 : 149 DTR 63 : 79 taxmann.com 375 :
[TS-119-SC-2017] (SC)]
Supreme Court lays down law on lease depreciation, lessor also eligible for higher rate benefit
Assessee, ICDS, a NBFC is engaged
in the business of hire purchase, leasing and real estate etc. The assessee
leased out vehicles to third parties who were registered as the owners of those
vehicles, as per the certificate of registration issued under the Motor Vehicle
Act, 1988 (MV Act). The assessee claimed depreciation in relation to such
vehicles which were financed by the assessee but registered in the name of
third parties. The depreciation was claimed at a higher rate on the ground that
the vehicles were used in the business of running on hire. 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.
The CIT(A), however partially accepting the claim, allowed depreciation at regular rates. ITAT completely agreed with the assessee's contention and allowed depreciation at a higher rate. High Court reversed the ITAT decision and rejected the claim of depreciation itself. High Court opined that the vehicles were not registered in the name of the assessee, the assessee had only financed the purchase of such vehicles and hence, was not entitled to depreciation. Aggrieved by the High Court decision, the assessee was in appeal before Supreme Court.
Before Supreme Court, Revenue argued that the twin requirement of ‘ownership’ and ‘usage for business’ for a successful claim of depreciation under section 32 were not fulfilled in this case. The Revenue argued that since the lessees were actually using the vehicles, they were entitled to claim depreciation, and not the assessee. Revenue also contended that lessees were the owners of the vehicles as per the provisions of MV Act.
Supreme Court rejected the Revenue’s argument that test of ownership under the MV Act should be taken into account while deciding the claim for depreciation. Thus, Supreme Court held that “Section 2(30) is a deeming provision that creates a legal fiction of ownership in favour of lessee only for the purpose of the MV Act. It is not a statement in general but only for the purpose of the MV Ac. Perhaps, the repository of a general statement of law on ownership may be the Sale of Goods Act ”
As regards deciding the ownership of assets, referring to the Section 51(4) and 51(5) of the MV Act, Supreme Court observed that the vehicle is to be registered in the name of the lessee during the lease period and in the name of lessor on conclusion of the lease period. Thus, Supreme Court observed that no inference could be drawn from the registration certificate as to ownership of the legal title of the vehicle.
Further, Supreme Court noted the fact that the lessee made no claim for depreciation and had claimed the lease rentals as revenue expenditure in their books. This made it clear that the assessee was the real owner of the assets as per Section 32. Also, from the perusal of the lease agreement, it was evident the assessee was the exclusive owner and was entitled to repossess the vehicle if default committed. Further, the lessee was required to return the asset to the assessee at the end of lease period. Supreme Court held that as long as the assessee had a right to retain the legal title of the vehicle against the rest of the world, it would be the owner of the vehicle in the eyes of law.
As regards the use for “purposes of business” test, Supreme Court relied on the Supreme Court ruling in CIT v. Shaan Finance (P) Ltd. (1998) 231 ITR 308 : (1998) 3 SCC 605 (SC). Supreme Court held that Section 32 does not mandate usage of the asset by the assessee itself and actual use of trucks by the assessee itself is not relevant for the purpose claiming depreciation. Supreme Court further observed that on a combined reading of Section 2(13) and Section 2(24), the income derived from leasing of trucks would be regarded as business income, or income derived in the course of business.
Supreme Court reverses High Court ruling; Lessor (an NBFC) leasing vehicles to customers is ‘owner’ as well as ‘user’ for the purpose of claiming depreciation under section 32 of Income Tax Act; Use of asset ‘for purpose of business’ as prescribed under section 32 does not mean usage by assessee itself; Lease of vehicles for earning rental income is held as ‘asset used in course of business’ by lessor; Lessor is ‘owner’ of business even though vehicles registered in lessee’s name as per provisions of Motor Vehicles Act, 1988; As long as assessee has right to retain legal title of vehicle against rest of the world, it would be ‘owner’ of vehicle in eyes of law; Ownership provisions under Motor Vehicles Act are deeming provisions and not statement of law on ownership in general; Lessor also eligible for ‘higher depreciation’ rate available on commercial vehicles. In our opinion, the High
Court erred in law in reversing the
decision of the Tribunal. Consequently, the appeals are allowed; the impugned
judgments are set aside and the substantial questions of law framed by the High
Court are answered in favour of the assessee and against the Revenue. – [In
favour of assesse] – [I CDS. Ltd. v. CIT, Mysore &
Anr. [TS-8-SC-2013] – Date of Judgement : 14.01.2013 (SC)]
In case of operating lease, it is lessor who can claim depreciation whereas in case of finance lease, lessee is entitled to depreciation in respect of asset leased out
In case of operating lease, it is
lessor who is real owner of asset, but in case of finance lease, it is lessee
who is to be regarded as real owner of asset. Therefore, only lessor can claim
depreciation in case of an operating lease and lessee in a case of finance
lease. Assessee-bank entered into a lease agreement with a company, namely,
Indo Gulf Ltd. As per terms of agreement assessee was to lease out a boiler to
Indo Gulf Ltd. for a specific period subject to payment of certain lease rent.
Assessee claimed depreciation on boiler leased out. Assessing Officer came to
hold that assessee was not owner of asset and, hence, ineligible for
depreciation.
On appeal, the Commissioner (Appeals) upheld the order of Assessing Officer. The assessee thus, filed instant appeal wherein it claimed to have leased out boiler to Indo Gulf Fertilizers by maintaining that it was the owner of the asset and, hence, entitled to depreciation. The case of the revenue was that it was not a case of operating lease and, hence, the assessee lessor could not be granted depreciation.
It was apparent from records that lease was not cancellable prior to expiry period of seven years. Further, cost of repairs and insurance was to be borne by lessee. Sum total of lease rentals by lessee recouped amount invested by lessor plus interest. There was a clause in lease agreement that after expiry of lease period, boiler would be sold to lessee at a predetermined value. Moreover, it was lessee who had to bear loss due to obsolescence and all other risks and rewards associated with boiler also vested with lessee. In view of aforesaid, it could be concluded that transaction in question was a simple advancing of loan, what to talk of even a finance lease and, thus, authorities below were justified in rejecting assessee’s claim for depreciation. [In favour of revenue] (Related Assessment years : 1998-99 and 1999-2000) – [IndusInd Bank Ltd. v. Additional Commissioner of Income-tax, Special Range, Mumbai (2012) 145 TTJ 409 : 135 ITD 165 : 19 taxmann.com 173 : 15 ITR(T) 89 (ITAT Mumbai) (SB)]
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