Facts
IndusInd Bank (the taxpayer) is in the business of banking and had leased out assets to another company during assessment years (AY) 1998-99 and 1999-00.
For AY 1998-99, the taxpayer claimed depreciation of ` 25.70 crores in its return of income.
The details of asset purchased and leased during the year is as follows:
Name of the supplier
Thermax Limited
Name of the taxpayer / lessor
IndusInd Bank Limited
Name of the lessee
Indo Gulf Fertilizers and Chemical Corporation
Description of the asset
Boiler
Lease Agreement
4 September 1997
Cost of the asset
` 19.45 crores
Depreciation claimed by the taxpayer for AY 1998-99
` 9.72 crores (being 50% of the cost of the asset, since leased for less than 6 months)
Depreciation claimed by the taxpayer for AY 1999-00
` 9.72 crores
The taxpayer claimed depreciation on the ground that it was the rightful owner of the asset purchased and the lease was in the nature of an operating lease.
The AO concluded that it was a case of finance lease and the taxpayer was not the owner of the asset. Consequently, depreciation of ` 9.72 crores on the leased asset was disallowed by him interalia on the following grounds:
‒ Taxpayer never got the possession of the asset and it was a case of full payout;
‒ Risks and rewards incidental to ownership vested with the lessee;
‒ The risks and rewards incidental to ownership vests with the lessee and it is the lessee who pays taxes etc. in relation to the asset leased;
‒ Features of bailment are absent in a finance lease;
‒ Lessor simply holds the title of the asset as his security till his investment and interest thereon is recouped.
‒ Lessor is only the symbolic owner during the lease period and on the expiry of the lease period, such ownership ends.
An analysis of the relevant clauses of the lease agreement entered into by the taxpayer, reveals that all the criteria of finance lease are fully satisfied. The factors indicate that the lessee is the actual or the real owner and the taxpayer is the symbolic or the so called, perceived owner.
However, some clauses in the lease agreement indicate that the agreement is in the nature of an operating lease whereas others largely indicate it to be a finance lease On considering all the cumulative factors for and against the operating lease,in pith and substance, the agreement was a “finance lease”. The Circular issued by the Reserve Bank of India2 which is binding on the taxpayer also provides that equipment leasing activity should be treated by banks on par with loans and advances.
In order to allow depreciation, the twin conditions of ownership and use of the asset for business purpose are to be satisfied cumulatively.
In the facts of the present case, the lessee had chosen the type of asset, model, other special features required and had negotiated with the supplier about the delivery, installation and purchase price.
The taxpayer‟s role was only to provide finance. The title of the taxpayer in the asset is only symbolic, which serves no purpose other than a security for the recoupment of his investment with interest in the shape of lease rentals. Such nominal ownership ceases with the end of the lease period.
It is the lessee who is the real owner of the asset and is in possession of the property exercising control over the asset. Apart from exercising control over the asset and having full right to use, there is prior understanding with the taxpayer that after the expiry of the lease period, the asset will be transferred to it at a predetermined value. The taxpayer has absolutely no control over the property during the lease period.
In a finance lease, it is the lessee who is the owner of the property and for all practical purposes entitled to depreciation as per law and not the lessor.
Only the right person entitled under law, can get the benefit of depreciation. Parties cannot, in disregard to law, mutually decide as to who out of them will be allowed the depreciation. The fact that the lessee has not claimed depreciation is inconsequential when the point for determination is the admissibility of depreciation to the taxpayer.
If a deduction has not been allowed to a right person, it does not mean that the same deduction should be allowed to a wrong person.
The sanction letter issued by the taxpayer amply proves that it was a case of mere loan granted by it to the lessee and later on the lease agreement was formally executed to give such a loan transaction, the colour of lease.
The law permits tax planning and not tax avoidance. A simple loan transaction was made to adorn the garb of lease to avoid the rightful tax due to the exchequer.
Conclusion
If the conditions laid down in the judgment of the SC in Asea Brown Boveri are satisfied in a lease agreement, it will be a finance lease.
In case of a finance lease, the lessee is to be treated as the owner of the asset and only the lessee can claim depreciation.
In the present case, it was a mere advancing of loan and neither operating nor finance lease. Hence, depreciation is not admissible to the taxpayer.
IndusInd Bank (the taxpayer) is in the business of banking and had leased out assets to another company during assessment years (AY) 1998-99 and 1999-00.
For AY 1998-99, the taxpayer claimed depreciation of ` 25.70 crores in its return of income.
The details of asset purchased and leased during the year is as follows:
Name of the supplier
Thermax Limited
Name of the taxpayer / lessor
IndusInd Bank Limited
Name of the lessee
Indo Gulf Fertilizers and Chemical Corporation
Description of the asset
Boiler
Lease Agreement
4 September 1997
Cost of the asset
` 19.45 crores
Depreciation claimed by the taxpayer for AY 1998-99
` 9.72 crores (being 50% of the cost of the asset, since leased for less than 6 months)
Depreciation claimed by the taxpayer for AY 1999-00
` 9.72 crores
The taxpayer claimed depreciation on the ground that it was the rightful owner of the asset purchased and the lease was in the nature of an operating lease.
The AO concluded that it was a case of finance lease and the taxpayer was not the owner of the asset. Consequently, depreciation of ` 9.72 crores on the leased asset was disallowed by him interalia on the following grounds:
‒ Taxpayer never got the possession of the asset and it was a case of full payout;
‒ Risks and rewards incidental to ownership vested with the lessee;
‒ The risks and rewards incidental to ownership vests with the lessee and it is the lessee who pays taxes etc. in relation to the asset leased;
‒ Features of bailment are absent in a finance lease;
‒ Lessor simply holds the title of the asset as his security till his investment and interest thereon is recouped.
‒ Lessor is only the symbolic owner during the lease period and on the expiry of the lease period, such ownership ends.
An analysis of the relevant clauses of the lease agreement entered into by the taxpayer, reveals that all the criteria of finance lease are fully satisfied. The factors indicate that the lessee is the actual or the real owner and the taxpayer is the symbolic or the so called, perceived owner.
However, some clauses in the lease agreement indicate that the agreement is in the nature of an operating lease whereas others largely indicate it to be a finance lease On considering all the cumulative factors for and against the operating lease,in pith and substance, the agreement was a “finance lease”. The Circular issued by the Reserve Bank of India2 which is binding on the taxpayer also provides that equipment leasing activity should be treated by banks on par with loans and advances.
In order to allow depreciation, the twin conditions of ownership and use of the asset for business purpose are to be satisfied cumulatively.
In the facts of the present case, the lessee had chosen the type of asset, model, other special features required and had negotiated with the supplier about the delivery, installation and purchase price.
The taxpayer‟s role was only to provide finance. The title of the taxpayer in the asset is only symbolic, which serves no purpose other than a security for the recoupment of his investment with interest in the shape of lease rentals. Such nominal ownership ceases with the end of the lease period.
It is the lessee who is the real owner of the asset and is in possession of the property exercising control over the asset. Apart from exercising control over the asset and having full right to use, there is prior understanding with the taxpayer that after the expiry of the lease period, the asset will be transferred to it at a predetermined value. The taxpayer has absolutely no control over the property during the lease period.
In a finance lease, it is the lessee who is the owner of the property and for all practical purposes entitled to depreciation as per law and not the lessor.
Only the right person entitled under law, can get the benefit of depreciation. Parties cannot, in disregard to law, mutually decide as to who out of them will be allowed the depreciation. The fact that the lessee has not claimed depreciation is inconsequential when the point for determination is the admissibility of depreciation to the taxpayer.
If a deduction has not been allowed to a right person, it does not mean that the same deduction should be allowed to a wrong person.
The sanction letter issued by the taxpayer amply proves that it was a case of mere loan granted by it to the lessee and later on the lease agreement was formally executed to give such a loan transaction, the colour of lease.
The law permits tax planning and not tax avoidance. A simple loan transaction was made to adorn the garb of lease to avoid the rightful tax due to the exchequer.
Conclusion
If the conditions laid down in the judgment of the SC in Asea Brown Boveri are satisfied in a lease agreement, it will be a finance lease.
In case of a finance lease, the lessee is to be treated as the owner of the asset and only the lessee can claim depreciation.
In the present case, it was a mere advancing of loan and neither operating nor finance lease. Hence, depreciation is not admissible to the taxpayer.
No comments:
Post a Comment