JOINT COMMISSIONER OF INCOME TAX (OSD) v. INDIAN MANAGEMENT ADVISOR & LEASING (P) LTD
[Citation -2007-LL-0817-9]

Citation 2007-LL-0817-9
Appellant Name JOINT COMMISSIONER OF INCOME TAX (OSD)
Respondent Name INDIAN MANAGEMENT ADVISOR & LEASING (P) LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 17/08/2007
Assessment Year 1996-97
Judgment View Judgment
Keyword Tags hire purchase transaction • hire purchase agreement • depreciation allowance • plant and machinery • revenue expenditure • capital expenditure • development rebate • outright purchase • purchase price • revenue nature • hire period
Bot Summary: 12th May, 1943, depreciation was allowable to the hirer in a hire purchase transaction. In such a situation also as per the learned counsel s argument, the hirer would have already claimed depreciation at the beginning of the hire period without being owner of the asset at any point of time. Where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction should be regarded as one of the hire purchase. In such cases the periodical payments made by the hirer should for tax purposes be regarded as made up of: consideration for hire, to be allowed as deduction in the assessment, and payment on account of purchase, to be treated as capital outlay, depreciation being allowed to the lessee on the initial value. If the hirer wishes to exercise its option so as to purchase the products, the hirer shall, within 15 days of the completion of the hire period give notice in writing in that behalf to the owner and pay a sum of Re. 1 to the owner and thereupon the owner will at the request and cost of the hirer, transfer and assign the owner s right, title and interest in the products to the hirer and the hirer shall become the owner of the products. Unless the products are purchased by the hirer in terms of this agreement, upon completion of the hire period, the hirer shall at its own costs and expenses forthwith deliver the products to the owner in good repair, order and condition at such time and place as may be specified by the owner. Of the circular, where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction is to be regarded as one of hire purchase.


This is Department s appeal for asst. yr. 1996-97 against order dt. 4th Aug., 2003 passed by learned CIT(A)-VIII, New Delhi. Department pleads that learned CIT(A) has erred in directing AO to allow depreciation on windmills @ 100 per cent as claimed by assessee, as if assessee s case is covered by provisions of cl. (ii) of CBDT s Circular No. 19 dt. 12th May, 1943, where depreciation is allowable in first year of period, although assessee s case falls in cl. (iii) of said circular. assessee entered into hire-purchase agreement for three years with M/s Garden Finance Ltd. for obtaining three windmills and in turn assessee gave these windmills on lease to M/s Wipro Finance Ltd. AO accepted assessee s contention that transaction was not sham one. However, AO asked assessee as to why depreciation be not disallowed, as, according to AO, assessee was only hirer and not owner of windmills. assessee submitted that as per CBDT s Circular No. 19 dt. 12th May, 1943, depreciation was allowable to hirer in hire purchase transaction. AO, however, disallowed depreciation claimed by assessee at Rs. 1.50 crores, holding as follows: "As per Hire-purchase Agreement assessee (hirer) has not become owner from time Hire-purchase Agreement became effective. assessee had option to become owner at end of hire period. Therefore, cl. (iii) of Board s circular is applicable and not cl. (ii) in case of assessee. learned counsel accepted that cl. (iii) is applicable in this case. However, learned counsel contended that depreciation will be allowable from time hire-purchase agreement was made [just like in cl. (ii)]. I do not accept contention of counsel as cl. (iii) merely states that depreciation will be allowable, but does not indicate from when. To analyse this, let us take hypothetical situation wherein hirer had option to become owner at end of hire period as per Hire-purchase Agreement and hirer opts out to become owner at end of hire period. In such situation also as per learned counsel s argument, hirer would have already claimed depreciation at beginning of hire period without being owner of asset at any point of time. Definitely this is not intention with which CBDT circular was issued. circular relates only to method of calculation of depreciation allowance and it does not lay down, contrary to provisions of Act, that hirer who is not owner of asset is entitled to depreciation allowance [Chaganlal Automobiles vs. CIT (1985) 49 CTR (Raj) 54: (1985) 156 ITR 58 (Raj)]. learned counsel stated that as per circular dt. 26th June, 1959, depreciation is to be allowed from first year itself. I reject contention of counsel as he is presuming that circular dt. 26th June, 1959 relates to cl. (iii) of 1943 circular but I hold that it relates to cl. (ii) of 1943 circular. Therefore, I hold that depreciation is to be allowed as per cl. (iii) of Board s circular at end of hire period. In view of this depreciation amount of Rs. 1,50,00,000 claimed by assessee in first year of hire period is disallowed." learned CIT(A) having accepted assessee s claim of depreciation, by virtue of impugned order, Department is aggrieved and is in appeal. Challenging impugned order, learned Departmental Representative has submitted that learned CIT(A) has erred in directing AO to allow depreciation to assessee on windmills, @ 100 per cent; that case of assessee is covered by provisions of cl. (iii) of CBDT s Circular No. 19 dt. 12th May, 1943; that learned CIT(A) has erroneously taken assessee s case to be covered under cl. (ii) of said circular; that assessee did not become owner of windmills at all, till exercise of option, as laid down in agreement; that assessee itself accepted before AO that its case fell under cl. (iii) of circular; that as such, it cannot now take somersault to claim its case to be falling under cl. (ii) of circular. learned counsel for assessee, on other hand, supporting impugned order, has submitted that transaction per se was not in doubt; that in substance, hire purchase agreement between assessee and M/s Garden Finance Ltd. (copy at pp. 18 to 41 of assessee s paper book "APB" for short), was agreement for passing on title; that this agreement provided hirer with option to acquire asset at end of hire terms by exercising option in this regard; that assessee, in transaction under consideration, is hirer; that as is available from para 4.1 of agreement (APB 22), machinery was placed with assessee at risk of assessee; that perusal of agreement shows that in fact, for all acts, risk is that of assessee, as is available, inter alia, from para 6.5 to para 6.7 of agreement; that insurance also entails risk of assessee; that depreciation was not claimed by owner; that issue concerning grant of depreciation of assets taken under hire purchase has been dealt with by Hon ble jurisdictional High Court in case of "Addl. CIT vs. General Industries Corporation (1986) 50 CTR (Del) 87: (1985) 155 ITR 430 (Del); that there also, as in present case, assessee had acquired certain assets under hire purchase, in which, ownership of assessee was to be transferred to him after payment of instalments on exercising option available; that it was held that assessee was entitled to depreciation in year of entering into hire purchase transaction; that it was also held that CBDT circular is binding on taxing authorities; that as per Sch. II (APB 40) of hire purchase agreement, cost of asset is Rs. 1.50 crores; that amount financed was Rs. 1.2 crores; that this grew to total contract value of Rs. 1,54,91,520; that initial value of asset was Rs. 1.50 crores; that depreciation had been claimed at this Rs. 1.50 crores; and that there is no force in appeal of Department, which is liable to be rejected. We have heard parties and have perused material on record. CBDT Circular No. 19 dt. 12th May, 1943 runs as follows: "Allowances in assessing business income Depreciation allowance Plant and machinery acquired on Hire-purchase Agreement. following instructions are issued for dealing with cases in which asset is being acquired under on what is known as, Hire-purchase Agreement: (i) In every case of payment purporting to be for hire purchase, production of agreement under which payment is made should be insisted on. (ii) Where effect of agreement is that ownership of subject is at once transferred to lessee (e.g., where lessor obtains right to sue for arrear instalments but no right to recovery of asset), transaction should be regarded as one of purchase by instalments and no deduction in respect of hire should be made. Depreciation should be allowed to lessee on entire purchase price as per agreement. (iii) Where terms of agreement provide that equipment shall eventually become property of hirer or confer on hirer option to purchase equipment, transaction should be regarded as one of hire purchase. In such cases periodical payments made by hirer should for tax purposes be regarded as made up of: (i) consideration for hire, to be allowed as deduction in assessment, and (ii) payment on account of purchase, to be treated as capital outlay, depreciation being allowed to lessee on initial value (i.e., amount for which hired subject would have been sold for cash at date of agreement). allowance to be made in respect of hire should be difference between aggregate amount of periodical payments under initial value (as described above), amount of this allowance being spread over terms o f agreement. If, however, agreement were terminated either by outright purchase of equipment of its return to owner, deduction should cease as from date of termination. assessee claiming this deduction should be asked to furnish certificate from vendor or other satisfactory evidence, of initial value (as described above). Where, no certificate of satisfactory evidence is forthcoming initial value should be arrived at by computing present value of amount payable under agreement at appropriate rate per annum. In doubtful cases facts should be reported to Board." As per hire-purchase agreement: "4.1 If hirer duly pays all sums payable by hirer to owner hereunder and duly performs and observes all terms and conditions hereunder to be performed and observed by hirer, then on completion of hereunder to be performed and observed by hirer, then on completion of hire period hire shall come to end and hirer shall have option to purchase products. If hirer wishes to exercise its option so as to purchase products, hirer shall, within 15 days of completion of hire period (or such extended periods as owner may permit) give notice in writing in that behalf to owner and pay sum of Re. 1 to owner and thereupon owner will at request and cost of hirer, transfer and assign owner s right, title and interest in products to hirer and hirer shall become owner of products. It is agreed and clarified that unless and until hirer exercises its option so as to purchase products in terms of this agreement and until and unless hirer becomes owner of products as mentioned in proceeding clause, products shall at all times be and remain absolute property of owner. Unless products are purchased by hirer in terms of this agreement, upon completion of hire period, hirer shall at its own costs and expenses forthwith deliver products to owner in good repair, order and condition at such time and place as may be specified by owner." As is evident from CBDT Circular No. 19 dt. 12th May, 1943, in case of hire purchase transaction, payment comprises payment towards cost of asset and payment towards hire thereof. question here is as to period of allowability of depreciation on asset. As per cl. (iii) of circular, where terms of agreement provide that equipment shall eventually become property of hirer or confer on hirer option to purchase equipment, transaction is to be regarded as one of hire purchase. In such cases, periodical payments made by hirer are, for tax purposes, to be regarded as made up of consideration for hire and payment on account of purchase. latter is to be treated as capital outlay and depreciation has to be allowed on initial value, i.e., amount for which asset would have been sold for cash on date of agreement. This position was reiterated by Board vide its F. No. 27(20)-IT/59, dt. 26th June, 1959 (APB-16), while holding that development rebate, like depreciation, may also be granted in first year itself, on full initial value of asset. Again, vide Instruction No. 1097 dt. 19th Sept., 1977 (APB-17), ITOs were directed to continue to follow allowing of depreciation on plant and machinery purchased on hire purchase system, as per Board s Circular No. 19 of 1943 dt. 23rd March, 1943 (supra) and Board s letter F. No. 27(20)- IT/59 dt. 26th June, 1959 (supra). In "General Industries Corpn. s case (supra), assessee had acquired certain assets under hire purchase, in which, ownership was to be transferred to him, like in present case, after payment of all instalments, on exercising option available. Hon ble jurisdictional High Court held assessee to be entitled to depreciation in year of entering into Hire-purchase Transaction/Agreement. It was further held that undoubtedly, payments made by hirer to owner were for business purposes and allowable as revenue expenditure, till hirer exercised option to acquire asset; that once hirer exercised option to acquire asset, Revenue nature of expenditure would cease to exist and it would become capital expenditure; that, therefore, in order to avoid complications, CBDT had issued circular to effect that in case of Hire-purchase Transaction, depreciation should be allowed to assessee on cost of asset in year of entering into transaction and hire component is to be allowed as revenue expenditure on year to year basis; that if depreciation was not allowed to hirer, same could not be allowed to owner as well and that, therefore, it would be situation where neither owner nor hirer would get depreciation. In Chhotelal Rai vs. ITO (1986) 17 ITD 652 (JB), Jabalpur Bench of Tribunal has held that assessee who has acquired asset on Hire-purchase Agreement, is entitled to depreciation on asset in year of entering into Hire-purchase Agreement, notwithstanding that he would become owner of asset, once he makes payment of all instalments and exercises option to acquire assets. Hon ble Supreme Court in CIT vs. Shaan Finance (P) Ltd. (1998) 146 CTR (SC) 110: (1998) 231 ITR 308 (SC) has taken note of Board s Circular N o . 19 of 1943 (supra) and has accepted that in case of Hire-purchase Agreement, there is element of sale and that depreciation is allowable to hirer of assets. No decision to contrary has been cited before us by Department. Undoubtedly, agreement of assessee with M/s Garden Finance Ltd. is agreement of passing on title. Evidently, transfer of asset depends upon sweetwill of hirer and payment involved is of Re. 1 only. In effect, asset would stand transferred to lessee at once, as envisaged under cl. (ii) of CBDT Circular, as correctly held by learned CIT(A). Thus, it actually makes no difference to case of assessee whether its case falls within cl. (ii) or cl. (iii) of circular. According to Shaan Finance (P) Ltd. s case (supra) depreciation is allowable to hirer of asset. As per above Board Circulars and decision of Hon ble jurisdictional High Court in case of "General Industries Corpn. s case (supra) is allowable to assessee in initial year itself. In view of above, respectfully following General Industries Corpn. s case (supra), order of learned CIT(A) is upheld and grievance raised by Department is rejected as shorn of merits. In result, appeal of Department stands dismissed. *** JOINT COMMISSIONER OF INCOME TAX (OSD) v. INDIAN MANAGEMENT ADVISOR & LEASING (P) LTD.
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