Page 1 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.3282 OF 2008

M/S I.C.D.S. LTD. — APPELLANT

VERSUS

COMMISSIONER OF INCOME

TAX, MYSORE & ANR.

— RESPONDENTS

WITH

CIVIL APPEAL NO.3286 OF 2008,

CIVIL APPEAL NO.3287 OF 2008,

CIVIL APPEAL NO.3288 OF 2008,

CIVIL APPEAL NO.3289 OF 2008,

AND

CIVIL APPEAL NO.3290 OF 2008

J U D G M E N T

D.K. JAIN, J.

1.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

1

Page 2 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)

2

Page 3 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.

3

Page 4 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.”

4

Page 5 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.

*** *** ***

… In the opinion of the CIT (Appeals), the language

used in the rules clearly specified that enhanced

depreciation allowance is available only when the

trucks are used in the business of running them on

hire also. The appellant has only a leasing

business and it does not run a business of hiring

trucks to the public. According to the department

the distinction is very clear and there is no case

for the appellant to claim the enhanced

depreciation on the business of hiring the trucks.”

6.Relying on the decision of this Court in Commissioner of

Income Tax, Karnataka, Bangalore Vs. Shaan

Finance (P) Ltd., Bangalore

1

, the Tribunal held that the

assessee, having used the trucks for the purpose of

1

(1998) 3 SCC 605

5

Page 6 business, was entitled to a higher rate of depreciation at

50% on the trucks leased out by it.

7.Being aggrieved, the revenue preferred an appeal to the

High Court under Section 260A of the Act. The High Court

framed the following substantial questions of law for its

adjudication:-

“Whether the Appellant (assessee) is the owner of

the vehicles which are leased out by it to its

customers and

Whether the Appellant (assessee) is entitled to the

higher rate of depreciation on the said vehicles, on

the ground that they were hired out to the

Appellant’s customers.”

8.Answering both the questions in favour of the revenue,

the High Court held that in view of the fact that the

vehicles were not registered in the name of the assessee,

and that the assessee had only financed the transaction, it

could not be held to be the owner of the vehicles, and

6

Page 7 thus, was not entitled to claim depreciation in respect of

these vehicles. Hence, these appeals by the assessee.

9.Section 32 of the Act on depreciation, pertinent for the

controversy at hand, reads as follows:

“32.(1) In respect of depreciation of—

(i) buildings, machinery, plant or furniture, being

tangible assets;

(ii) know-how, patents, copyrights, trade marks,

licences, franchises or any other business or

commercial rights of similar nature, being

intangible assets acquired on or after the 1st day

of April, 1998,

owned, wholly or partly, by the assessee and used

for the purposes of the business or profession, the

following deductions shall be allowed-

(i) in the case of assets of an undertaking

engaged in generation or generation and

distribution of power, such percentage on

the actual cost thereof to the assessee as

may be prescribed ;]

(ii)in the case of any block of assets, such

percentage on the written down value

thereof as may be prescribed

Provided that no deduction shall be allowed under

this clause in respect of—

(a) any motor car manufactured outside India,

where such motor car is acquired by the assessee

7

Page 8 after the 28th day of February, 1975 but before

the 1st day of April, 2001, unless it is used—

(i) in a business of running it on hire for

tourists ; or

(ii)outside India in his business or profession

in another country ; and

(b) any machinery or plant if the actual cost

thereof is allowed as a deduction in one or more

years under an agreement entered into by the

Central Government under section 42

Provided further that where an asset referred to in

clause (i) or clause (ii) or clause (iia) as the case

may be, is acquired by the assessee during the

previous year and is put to use for the purposes of

business or profession for a period of less than

one hundred and eighty days in that previous

year, the deduction under this sub-section in

respect of such asset shall be restricted to fifty per

cent of the amount calculated at the percentage

prescribed for an asset under clause (i) or clause

(ii) [or clause (iia)], as the case may be.”

(Emphasis supplied)

10.Depreciation is the monetary equivalent of the wear

and tear suffered by a capital asset that is set aside to

facilitate its replacement when the asset becomes

dysfunctional. In P.K. Badiani Vs. Commissioner of

Income Tax, Bombay

2

, this Court has observed that

allowance for depreciation is to replace the value of an

2

(1976) 4 SCC 562

8

Page 9 asset to the extent it has depreciated during the period of

accounting relevant to the assessment year and as the

value has, to that extent, been lost, the corresponding

allowance for depreciation takes place.

11.Black’s Law Dictionary (5

th

Edn.) defines ‘depreciation’

to mean, inter alia:

“A fall in value; reduction of worth. The

deterioration or the loss or lessening in value,

arising from age, use, and improvements, due to

better methods. A decline in value of property

caused by wear or obsolescence and is usually

measured by a set formula which reflects these

elements over a given period of useful life of

property.... Consistent gradual process of

estimating and allocating cost of capital

investments over estimated useful life of asset in

order to match cost against earnings...”

The 6

th

Edition defines it, inter alia, in the following ways:

“In accounting, spreading out the cost of a capital

asset over its estimated useful life.

A decline in the value of property caused by wear

or obsolescence and is usually measured by a set

formula which reflects these elements over a

given period of useful life of property.”

12.Parks in Principles & Practice of Valuation (Fifth Edn., at

page 323) states: As for building, depreciation is the

9

Page 10 measurement of wearing out through consumption, or

use, or effluxion of time. Paton has in his Account's

Handbook (3rd Edn.) observed that depreciation is an out-

of-pocket cost as any other costs. He has further

observed-the depreciation charge is merely the periodic

operating aspect of fixed asset costs.

13.The provision on depreciation in the Act reads that the

asset must be “owned, wholly or partly, by the assessee

and used for the purposes of the business”. Therefore, it

imposes a twin requirement of ‘ownership’ and ‘usage for

business’ for a successful claim under Section 32 of the

Act.

14.The Revenue attacked both legs of this portion of the

section by contending: (i) that the assessee is not the

owner of the vehicles in question and (ii) that the

assessee did not use these trucks in the course of its

business. It was argued that depreciation can be claimed

by an assessee only in a case where the assessee is both,

the owner and user of the asset.

10

Page 11 15.We would like to dispose of the second contention

before considering the first. Revenue argued that since

the lessees were actually using the vehicles, they were

the ones entitled to claim depreciation, and not the

assessee. We are not persuaded to agree with the

argument. The Section requires that the assessee must

use the asset for the “purposes of business”. It does not

mandate usage of the asset by the assessee itself. As long

as the asset is utilized for the purpose of business of the

assessee, the requirement of Section 32 will stand

satisfied, notwithstanding non-usage of the asset itself by

the assessee. In the present case before us, the assessee

is a leasing company which leases out trucks that it

purchases. Therefore, on a combined reading of Section

2(13) and Section 2(24) of the Act, the income derived

from leasing of the trucks would be business income, or

income derived in the course of business, and has been so

assessed. Hence, it fulfills the aforesaid second

11

Page 12 requirement of Section 32 of the Act viz. that the asset

must be used in the course of business.

16.In the case of Shaan Finance (P) Ltd. (supra), this

Court while interpreting the words “used for the purposes

of business” in case of analogous provisions of Section

32A(2) and Section 33 of the Act, dealing with Investment

Allowance and Development Rebate respectively, held

thus: -

“9. Sub-section (2) of Section 32-A, however,

requires to be examined to see whether there is

any provision in that sub-section which requires

that the assessee should not merely use the

machinery for the purposes of his business, but

should himself use the machinery for the purpose

of manufacture or for whatever other purpose the

machinery is designed. Sub-section (2) covers all

items in respect of which investment allowance

can be granted. These items are, ship, aircraft or

machinery or plant of certain kinds specified in

that sub-section. In respect of a new ship or a new

aircraft, Section 32-A(2)(a) expressly prescribes

that the new ship or the new aircraft should be

acquired by an assessee which is itself engaged in

the business of operation of ships or aircraft.

Under sub-section (2)(b), however, any such

express requirement that the assessee must

himself use the plant or machinery is absent.

Section 32-A(2)(b) merely describes the new plant

or machinery which is covered by Section 32-A.

The plant or machinery is described with reference

to its purpose. For example, sub-section (2)(b)(i)

12

Page 13 prescribes “the purposes of business of generation

or distribution of electricity or any other form of

power”. Sub-section (2)(b)(ii) refers to small-scale

industrial undertakings which may use the

machinery for the business or manufacture or

production of any article, and sub-section (2)(b)(iii)

refers to the business of construction,

manufacture or production of any article or thing

other than that specified in the Eleventh Schedule.

Sub-section 2(b), therefore, refers to the uses to

which the machinery can be put. It does not

specify that the assessee himself should use the

machinery for these purposes. In the present case,

the person to whom the machinery is hired does

use the machinery for specified purposes under

Section 32-A(2)(b)(iii). That person, however, is

not the owner of the machinery. The High Courts

of Karnataka and Madras have held that looking to

the requirements specified in Section 32-A the

assessees, in the present case, fulfil all the

requirements of that section, namely, ( 1) the

machinery is owned by the assessees; ( 2) the

machinery is used for the purpose of the

assessees' business and; (3) the machinery is as

specified in sub-section (2).

10. We are inclined to agree with this reasoning of

the High Courts of Karnataka and Madras.”

17.The same judgment commented on the analogous

nature of Section 33 on Development Rebate and clarified

that the phrase “used for the purpose of business” does

not necessarily require a usage of the asset itself. It held

thus:

13

Page 14 “11. The provisions relating to investment

allowance are akin to the provisions under Section

33 of the Income Tax Act, 1961 relating to

development rebate…

*** *** ***

12. Since the provisions of Section 33 dealing with

development rebate are similar to the provisions

of Section 32-A, it is necessary to look at cases

dealing with the grant of development rebate

under Section 33. In the case of CIT v. Castlerock

Fisheries (1980) 126 ITR 382 the Kerala High Court

considered the case of an assessee which

temporarily let out its cold-storage plant to a sister

concern. The income derived by such letting was

assessed by the Income Tax Officer in the hands of

the assessee as business income of the assessee

for the relevant accounting years. The assessee

claimed development rebate in respect of the

cold-storage plant. The High Court said that it was

accepted by the department that in letting out the

plant and machinery, the assessee was still doing

business and the hire charges which it had

received, had been assessed as business income

of the assessee. Hence the assessee had complied

with all the conditions for the grant of

development rebate including the condition that

the assessee had used the machinery for the

purposes of its business. The High Court said that

it must, therefore, necessarily be assumed that

the conditions laid down in Section 33(1)(a) that

the machinery or plant is wholly used for the

purposes of the business carried on by the

assessee, is duly satisfied and the assessee is

entitled to development rebate. In appeal before

this Court, a Bench of three Judges of this Court

upheld the decision of the Kerala High Court in the

above case in CIT v. Castle Rock Fisheries (1997)

10 SCC 77. This Court also held that since the

14

Page 15 department has proceeded on the explicit basis

that despite the fact that the plant had been

temporarily let out by the assessee to a sister

concern, the plant and machinery was

nevertheless being used by the assessee for its

business purpose by treating the income derived

by the assessee by such letting out as business

income of the assessee, the development rebate

must be considered as having been rightly

granted. Therefore, where the business of the

assessee consists of hiring out machinery and/or

where the income derived by the assessee from

the hiring of such machinery is business income,

the assessee must be considered as having used

the machinery for the purposes of its business.

13. A similar view has been taken by the Andhra

Pradesh High Court in the case of CIT v. Vinod

Bhargava (1988) 169 ITR 549 (AP) where Jeevan

Reddy, J. (as he then was) held that where leasing

of machinery is a mode of carrying on business by

the assessee the assessee would be entitled to

development rebate. The Court observed (p. 551):

“[O]nce it is held that leasing out of the

machinery is one mode of doing business by

the assessee and the income derived from

leasing out is treated as business income it

would be contradictory, in terms, to say that

the machinery is not used wholly for the

purpose of the assessee's business.”

18.Hence, the assessee meets the second requirement

discussed above. The assessee did use the vehicles in the

course of its leasing business. In our opinion, the fact that

15

Page 16 the trucks themselves were not used by the assessee is

irrelevant for the purpose of the section.

19.We may now advert to the first requirement i.e. the

issue of ownership. No depreciation allowance is granted

in respect of any capital expenditure which the assessee

may be obliged to incur on the property of others.

Therefore, the entire case hinges on the question of

ownership; if the assessee is the owner of the vehicles,

then he will be entitled to the claim on depreciation,

otherwise, not.

20.In Mysore Minerals Ltd., M.G. Road, Bangalore Vs.

Commissioners of Income Tax, Karnataka,

Bangalore

3

, this Court said thus:

“…authorities shows that the very concept the

depreciation suggests that the tax benefit on

account of depreciation legitimately belongs to

one who has invested in the capital asset is

utilizing the capital asset and thereby losing

gradually investment caused by wear and tear,

and would need to replace the same by having

lost its value fully over a period of time.”

3

(1999) 7 SCC 106

16

Page 17 21.Black’s Law Dictionary (6

th

Edn.) defines 'owner' as

under:

“Owner. The person in whom is vested the

ownership, dominion, or title of property;

proprietor. He who has dominion of a thing, real or

personal, corporeal or incorporeal, which he has a

right of enjoy and do with as he pleases, even to

spoil or destroy it, as far as the law permits, unless

he be prevented by some agreement or covenant

which restrains his right.

The term is, however, a nomen generalissimum,

and its meaning is to be gathered from the

connection in which it is used, and from the

subject-matter to which it is applied. The primary

meaning of the word as applied to land is one

who owns the fee and who has the right to

dispose of the property, but the terms also

included one having a possessory right to land or

the person occupying or cultivating it.

The term "owner" is used to indicate a person in

whom one or more interests are vested his own

benefit. The person in whom the interests are

vested has ‘title’ to the interests whether he

holds them for his own benefit or the benefit of

another. Thus the term “title” unlike “owner”..”

It defines the term 'ownership' as –

"Collection of right to use and enjoy property,

including right to transmit it to others.... The right

of one or more persons to possess or use a thing

to the exclusion of others. The right by which a

thing belongs to some one in particular, to the

exclusion of all other persons. The exclusive right

of possession, enjoyment or disposal; involving as

17

Page 18 an essential attribute the right to control, handle,

and dispose."

The same dictionary defines the term “own” as ‘To have a

good legal title’.

These definitions essentially make ownership a function of

legal right or title against the rest of the world. However, as

seen above, it is “nomen generalissimum, and its meaning is

to be gathered from the connection in which it is used, and

from the subject-matter to which it is applied.”

22.A scrutiny of the material facts at hand raises a

presumption of ownership in favour of the assessee. The

vehicle, along with its keys, was delivered to the assessee

upon which, the lease agreement was entered into by the

assessee with the customer. Moreover, the relevant

clauses of the agreement between the assessee and the

customer specifically provided that:

(i)The assessee was the exclusive owner of the

vehicle at all points of time;

18

Page 19 (ii)If the lessee committed a default, the

assessee was empowered to re-possess the

vehicle (and not merely recover money

from the customer);

(iii)At the conclusion of the lease period, the

lessee was obliged to return the vehicle to

the assessee;

(iv)The assessee had the right of inspection of

the vehicle at all times.

For the sake of ready reference, the relevant clauses of the

lease agreement are extracted hereunder:-

“2. Lease Rent

The lessee shall, during the period of lease

punctually pay to the lessor free of any deduction

whatsoever as rent for the assets the sum of

moneys specified in the Schedule ‘B’ hereto. All

rents shall be paid at the address of the Lessor

shown above or as otherwise directed by the

Lessor in writing. The rent shown in Schedule ‘B’

shall be paid month on 1

st

day of each month and

the first rent shall be paid on execution thereof.

4. Ownership

The assets shall at all times remain the sole and

exclusive property of the lessor and the lessee

shall have no right, title or interest to mortgage,

hypothecate or sell the same as bailee

9. Inspection

19

Page 20 The Lessor shall have the right at all reasonable

time to enter upon any premises where the assets

is believed to be kept and inspect and/or test the

equipment and/or observe its use.

18. Default

If the lessee shall make default in payment of

moneys or rent payable under the provisions of

this agreement, the Lessee shall pay to the Lessor

on the sum or sums in arrears compensation at

the rate of 3% per month until payment thereof,

such compensation to run from the day to day

without prejudice to the lessor’s rights under any

terms, conditions and agreements herein

expressed or implied. All costs incurred by the

Lessor in obtaining payment of such arrears or in

endeavoring to trace the whereabouts of the

equipments or in obtaining or endeavouring to

obtain possession thereof whether by action, suit

or otherwise, shall be recoverable from the lessee

in addition to and without prejudice to the lessors

right for breach of this lease.

19. Expiration of Lease:

Upon the expiration of this Lease, the Lessee shall

deliver to the Lessor the assets at such place as

the Lessor may specify in good repair, condition

and working order. As soon as the return of the

asset the Lessor shall refund the amount of

security deposit. If the lessee fails to deliver the

equipment to the Lessor in accordance with any

direction given by the Lessor, the Lessee shall be

deemed to be the tenant of the assets at the same

rental and upon the same terms herein expressed

and such tenancy may be terminated by the

Lessor immediately upon default by the lessee

20

Page 21 hereunder or upon 7 days notice previously

given..”

23.The Revenue’s objection to the claim of the assessee is

founded on the lease agreement. It argued that at the end

of the lease period, the ownership of the vehicle is

transferred to the lessee at a nominal value not exceeding

1% of the original cost of the vehicle, making the assessee

in effect a financer. However we are not persuaded to

agree with the Revenue. As long as the assessee has 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. A scrutiny of the sale agreement cannot be

the basis of raising question against the ownership of the

vehicle. The clues qua ownership lie in the lease

agreement itself, which clearly point in favour of the

assessee. We agree with the following observations of the

Tribunal in this regard:

“20.It is evident from the above that after the

lessee takes possession of the vehicle under a

lease deed from

the appellant-company it (sic.) shall be paying

lease rent as prescribed in the schedule. The

ownership of the vehicles would vest with the

21

Page 22 appellant-company viz., ICDS as per clause (4) of

the agreement of lease. As per clause (9) of the

Lease agreement, M/s. ICDS is having right of

inspection at any time it wants. As per clause (18)

of the Lease agreement, in case of default of lease

rent, in addition to expenses, interest etc. the

appellant company is entitled to take possession

of the vehicle that was leased out. Finally, as per

clause (19), on the expiry of the lease tenure, the

lessee should return the vehicle to the appellant

company in working order.

21.It is true that a lease of goods or rental or

hiring agreement is a contract under which one

party for reward allows another the use of goods.

A lease may be for a specified period or in

perpetuity. A lease differs from a hire purchase

agreement in that lessee or hirer, is not given an

option to purchase the goods. A hiring agreement

or lease unlike a hire purchase agreement is a

contract of bailment, plain and simple with no

element of sale inherent. A bailment has been

defined in S.148 of the Indian Contract Act, as “the

delivery of goods by one person to another for

some purpose, upon a contract that they shall,

when the purpose is accomplished, be returned or

otherwise disposed of according to the directions

of the person delivering them.

22.From the above discussion, it is clear that the

transactions occurring in the business of the

assessee-appellant are leases under agreement,

but not hire purchase transactions. In fact, they

are transactions of ‘hire’. Even viewed from the

angle of the author of ‘Lease Financing and Hire

Purchase’, the views of whom were discussed in

pages 16 and 17 of this order, the transactions

involved in the appellant business are nothing but

lease transactions.

22

Page 23 23.As far as the factual portion is concerned now

we could come to a conclusion that leasing of

vehicles is nothing but hiring of vehicles. These

two aspects are one and the same. However, we

shall discuss the case law cited by both the parties

on the point.”

24.The only hindrance to the claim of the assessee, which

is also the lynchpin of the case of the Revenue, is Section

2(30) of the MV Act, which defines ownership as follows: -

““owner” means a person in whose name a motor

vehicle stands registered, and where such person

is a minor, the guardian of such minor, and in

relation to a motor vehicle which is the subject of

a hire-purchase agreement, or an agreement of

lease or an agreement of a hypothecation, the

person in possession of the vehicle under that

agreement.”

25.The general opening words of the Section say that the

owner of a motor vehicle is the one in whose name it is

registered, which, in the present case, is the lessee. The

subsequent specific statement on leasing agreements

states that in respect of a vehicle given on lease, the

lessee who is in possession shall be the owner. The

Revenue thus, argued that in case of ownership of

vehicles, the test of ownership is the registration and

23

Page 24 certification. Since the certificates were in the name of the

lessee, they would be the legal owners of the vehicles and

the ones entitled to claim depreciation. Therefore, the

general and specific statements on ownership construe

ownership in favour of the lessee, and hence, are in favour

of the Revenue.

26.We do not find merit in the Revenue’s argument for

more than one reason: (i) 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 defines

ownership for the subsequent provisions of the MV Act,

not for the purpose of law in general. It serves more as a

guide to what terms in the MV Act mean. Therefore, if the

MV Act at any point uses the term owner in any Section, it

means the one in whose name the vehicle is registered

and in the case of a lease agreement, the lessee. That is

all. It is not a statement of law on ownership in general.

Perhaps, the repository of a general statement of law on

ownership may be the Sale of Goods Act; (ii) Section 2(30)

of the MV Act must be read in consonance with sub-

24

Page 25 sections (4) and (5) of Section 51 of the MV Act, which

were referred to by Mr. S. Ganesh, learned senior counsel

for the assessee. The provisions read as follows: -

“(4) No entry regarding the transfer of ownership

of any motor vehicle which is held under the said

agreement shall be made in the certificate of

registration except with the written consent of the

person whose name has been specified in the

certificate of registration as the person with whom

the registered owner has entered into the said

agreement.

(5) Where the person whose name has been

specified in the certificate of registration as the

person with whom the registered owner has

entered into the said agreement, satisfies the

registering authority that he has taken possession

of the vehicle from the registered owner owing to

the default of the registered owner under the

provisions of the said agreement and that the

registered owner refuses to deliver the certificate

of registration or has absconded, such authority

may, after giving the registered owner an

opportunity to make such representation as he

may wish to make (by sending to him a notice by

registered post acknowledgment due at his

address entered in the certificate of registration)

and notwithstanding that the certificate of

registration is not produced before it, cancel the

certificate and issue a fresh certificate of

registration in the name of the person with whom

the registered owner has entered into the said

agreement:

25

Page 26 Provided that a fresh certificate of registration

shall not be issued in respect of a motor vehicle,

unless such person pays the prescribed fee:

Provided further that a fresh certificate of

registration issued in respect of a motor vehicle,

other than a transport vehicle, shall be valid only

for the remaining period for which the certificate

cancelled under this sub-section would have been

in force.”

Therefore, the MV Act mandates that during the period of

lease, the vehicle be registered, in the certificate of

registration, in the name of the lessee and, on conclusion of

the lease period, the vehicle be registered in the name of

lessor as owner. The Section leaves no choice to the lessor

but to allow the vehicle to be registered in the name of the

lessee Thus, no inference can be drawn from the registration

certificate as to ownership of the legal title of the vehicle;

and (iii) if the lessee was in fact the owner, he would have

claimed depreciation on the vehicles, which, as specifically

recorded in the order of the Appellate Tribunal, was not

done. It would be a strange situation to have no claim of

depreciation in case of a particular depreciable asset due to

a vacuum of ownership. As afore-noted, the entire lease rent

26

Page 27 received by the assessee is assessed as business income in

its hands and the entire lease rent paid by the lessee has

been treated as deductible revenue expenditure in the

hands of the lessee. This reaffirms the position that the

assessee is in fact the owner of the vehicle, in so far as

Section 32 of the Act is concerned.

27.Finally, learned senior counsel appearing on behalf of

the assessee also pointed out a large number of cases,

accepted and unchallenged by the Revenue, wherein the

lessor has been held as the owner of an asset in a lease

agreement. [Commissioner of Income-Tax Vs. A.M.

Constructions

4

; Commissioner of Income- Tax Vs.

Bansal Credits Ltd.

5

; Commissioner of Income-Tax

Vs. M.G.F. (India) Ltd.

6

; Commissioner of Income-

Tax Vs. Annamalai Finance Ltd.

7

]. In each

of these cases, the leasing company was held to be the

owner of the asset, and accordingly held entitled to claim

depreciation and also at the higher rate applicable on the

4

(1999) 238 ITR 775 (AP)

5

(2003) 259 ITR 69 (Del)

6

(2006) 285 ITR 142 (Del.)

7

(2005) 275 ITR 451 (Mad)

27

Page 28 asset hired out. We are in complete agreement with these

decisions on the said point.

28.There was some controversy regarding the invoices

issued by the manufacturer – whether they were issued in

the name of the lessee or the lessor. For the view we

have taken above, we deem it unnecessary to go into the

said question as it is of no consequence to our final

opinion on the main issue. From a perusal of the lease

agreement and other related factors, as discussed above,

we are satisfied of the assessee’s ownership of the trucks

in question.

29.Therefore, in the facts of the present case, we hold that

the lessor i.e. the assessee is the owner of the vehicles. As

the owner, it used the assets in the course of its business,

satisfying both requirements of Section 32 of the Act and

hence, is entitled to claim depreciation in respect of

additions made to the trucks, which were leased out.

30.With regard to the claim of the assessee for a higher

rate of depreciation, the import of the same term

28

Page 29 “purposes of business”, used in the second proviso to

Section 32(1) of the Act gains significance. We are of the

view that the interpretation of these words would not be

any different from that which we ascribed to them earlier,

under Section 32 (1) of the Act. Therefore, the assessee

fulfills even the requirements for a claim of a higher rate

of depreciation, and hence is entitled to the same.

31.In this regard, we endorse the following observations of

the Tribunal, which clinch the issue in favour of the

assessee.

“15. The CBDT vide Circular No. 652, dated 14-6-

1993 has clarified that the higher rate of 40% in

case of lorries etc. plying on hire shall not apply if

the vehicle is used in a non- hiring business of the

assessee. This circular cannot be read out of its

context to deny higher appreciation in case of

leased vehicles when the actual use is in hiring

business.

(Emphasis supplied)

Perhaps, the author meant that when the actual

use of the vehicle is in hire business, it is entitled

for depreciation at a higher rate.

*** *** ***

39. The gist of the decision of the apex court in the

case of Shaan Finance (P) Ltd. is that where the

business of the assessee consists of hiring out

machinery and/ or where the income derived by

29

Page 30 the assessee from the hiring of such machinery is

business income, the assessee must be considered

as having used the machinery for the purpose of

business.

40. In the present case, the business of the

assessee consists of hiring out machinery and

trucks where the income derived by the assessee

from hiring of such machinery is business income.

Therefore, the assessee- appellant viz. ICDS

should be considered as having used the trucks for

the purpose of business.

41. It was further brought to our notice that the

Hon’ble Karnataka High Court in its judgment in

ITRC No. 789 of 1998 for the asst. year 1986- 87 in

the case of the assessee- appellant itself (viz.

ICDS) has already decided the issue in question in

favour of the assessee, confirming the decision of

the CIT (A) and the ITAT holding that the assessee

company is entitled to the investment allowance

and additional depreciation. In this judgment of

the Karnataka High Court the decision of the

Supreme Court reported in 231 ITR 308 was relied

upon. Therefore we have no hesitation to hold that

the appellant- company is entitled to a higher rate

of depreciation at 50% on the trucks leased out by

it. We therefore, reverse the orders of the CIT

(Appeals) on this issue.”

32.For the foregoing reasons, 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, extracted in para 7 (supra), are

30

Page 31 answered in favour of the assessee and against the

Revenue. There will, however, be no order as to costs.

……..………………………………….

(D.K. JAIN, J.)

……..………………………………….

(JAGDISH SINGH KHEHAR, J.)

NEW DELHI,

JANUARY 14,

2013

ARS

31