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Gowri Shankar Finance Ltd. v. Commissioner Of Income-Tax
Structured Summary of the Opinion (Ashok Bhan, J.) — Tribunal Reference under s.256(1), Income‑Tax Act
Factual and Procedural Background
The reference arises from the Income‑Tax Appellate Tribunal, Bangalore Bench's order in I.T.A. No. 457.B of 1994 dated 12 September 1994. The assessee is a non‑banking company engaged in hire purchase of vehicles and in leasing of consumer durables. For assessment year 1991–92 the assessee declared a loss and subsequently underwent assessments after notices under sections 143(2) and 142(1).
The factual dispute concerns the leasing business: the assessee claimed depreciation under section 32 on consumer durables (TVs, VCRs, refrigerators, scooters, etc.) that it purportedly leased to customers. The assessing authority denied depreciation holding that the assessee was neither the actual owner nor did it put the assets to commercial use; the goods were not physically possessed by the assessee, not shown in the balance‑sheet schedule, and scrap value was never declared. The assessing authority characterized the transactions as not genuine leases because goods were not returned but effectively became the customers' property.
The assessee appealed to the Commissioner of Income‑Tax (Appeals), who dismissed the appeal, and then to the Tribunal, which also dismissed the appeal on findings that the transactions were in substance sales by instalments (hire‑purchase/equated instalments) rather than leases. The Tribunal referred three questions of law under section 256(1) of the Income‑Tax Act to this Court along with its statement of case.
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the applicant was not entitled to the claim of depreciation on the consumer durables which were leased by the applicant to various customers?
- Whether, on the facts and circumstances, the Tribunal was right in concluding that there was no "actual cost" incurred by the applicant as defined under section 43(1) of the Act to justify the claim of depreciation?
- Whether the Tribunal was right in interpreting the lease rent received as a recovery of cost of materials leased to hold that the actual cost in the hands of the applicant as 'nil'?
Arguments of the Parties
Appellant (Assessee) — Arguments
- The assessee's counsel submitted that an assessee who owns tangible assets and uses them for the purpose of business/profession is entitled to claim depreciation under section 32 of the Income‑Tax Act.
- The assessee relied on the decision in CIT v. Shaan Finance (P.) Ltd., [1993] 199 ITR 409, which was later affirmed by the Supreme Court ([1998] 231 ITR 308), to support the proposition that where an assessee is engaged in letting out assets he remains the owner and uses the assets in his business and is therefore entitled to depreciation.
Revenue / Assessing Authorities — Position and Findings
- The assessing authority held that the assessee was not the actual owner of the assets nor did it put the assets to commercial use; the assessee did not physically possess the goods and did not show them in the balance‑sheet schedule.
- The assessing authority (and the Commissioner of Income‑Tax (Appeals), who concurred) found that the transactions were structured so that customers selected and arranged purchase of goods, the assessee merely provided finance, and the assessee debited the entire cost to the customer and recovered the price by instalments (including "lease rent").
- The Tribunal found that, in substance, the arrangements operated as sale of goods on instalment/hire‑purchase basis: customers effectively became owners (the goods did not return to the assessee for re‑letting), and therefore the transactions were not genuine leases entitling the assessee to depreciation.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Shaan Finance (P.) Ltd., [1993] 199 ITR 409 (later affirmed by the Supreme Court, [1998] 231 ITR 308) | Principle that where an assessee is engaged in letting out assets and remains the owner and user of such assets for the purpose of his business, he may be entitled to depreciation (and related allowances) on such assets. | The court held this precedent was distinguishable and not helpful. The cited cases concerned proven leasing of machinery to third parties (and investment allowance under s.32A) where the assessee actually leased out assets; in the present case the findings were that the transactions were sales by instalments and the assessee did not actually own or use the assets for leasing, so the precedent did not assist the assessee. |
Court's Reasoning and Analysis
The court's analysis follows fact‑based findings recorded by the assessing authorities and the Tribunal (which were not challenged). The reasoning proceeds in discrete steps:
- Nature of the business and transactions: Although on paper the agreements were styled as leases and the assessee remained the legal owner until payments were complete, the practical operation of the transactions showed that customers selected and arranged purchase of consumer durables, the assessee financed the purchase, immediately debited the full cost to the customer's account in its books, and recovery of that cost (with interest/lease rent) was effected by instalments.
- Possession and use of assets: The assessee never actually came into physical possession of the goods for commercial use; the goods were not shown as assets in the balance‑sheet schedules and were not returned to the assessee for further leasing at the expiry of any putative lease period.
- Substance over form: Given that customers in practice paid off the full cost (often before lease expiry) and thereby became owners, and the goods never returned to the assessee, the transactions were in substance sales by instalments (hire‑purchase) rather than true leases.
- Accounting treatment and "actual cost": The assessee followed mercantile accounting and immediately debited the cost of the goods to the customer's account. Under section 43(1), "actual cost" is the actual cost to the assessee reduced by any portion met directly or indirectly by any other person. Because the assessee treated the entire cost as recoverable from the customer at once (by debiting the customer's account), the court concluded the "actual cost" in the hands of the assessee became nil upon purchase.
- Consequence for depreciation: Depreciation under section 32 cannot be allowed where the asset's actual cost in the hands of the claimant is nil. Additionally, consumer durables in the assessee's business were effectively stock‑in‑trade and not assets on which depreciation is allowable in the circumstances found.
- Distinguishing precedent: The court distinguished the relied upon decisions (including Shaan Finance) on the ground that those decisions concerned cases where it was proved that machinery was truly leased out to third parties and used by them, which justified investment allowance; by contrast, on the present facts there was no genuine leasing and the assessee did not actually own and use the goods for leasing.
Holding and Implications
Holding: The court answered all three referred questions in the affirmative, against the assessee and in favour of the Revenue. In other words, the Tribunal was held to be justified in denying the claim for depreciation and in concluding that the assessee's "actual cost" in respect of the goods was nil.
Core Ruling: Questions Nos. 1, 2 and 3 are answered in the affirmative, i.e., against the assessee and in favour of the Revenue.
Direct implications for the parties:
- The assessee is not entitled to claim depreciation under section 32 on the consumer durables in issue because the transactions were in substance sales by instalments and the assessee's actual cost in respect of those goods was treated as nil.
- The Tribunal's and lower authorities' decisions denying depreciation are upheld on the recorded facts.
- The Court ordered no costs ("No costs.").
Broader implications: The Court distinguished earlier decisions relied on by the assessee; the opinion rests on the particular factual findings and accounting treatment in this case. The opinion does not purport to create a new general principle beyond applying existing principles of substance over form, the statutory definition of "actual cost" under section 43(1), and the scope of depreciation under section 32. No broader change in law or new precedent was announced by this decision beyond its application to the facts before the Court.
Ashok Bhan, J.:— The Income-Tax Appellate Tribunal, Bangalore Bench (for short, “the Tribunal”), has referred the following three questions of law under section 256(1) of the Income-Tax Act, 1961 (for short “the Act”), at the instance of the assessee to this court for its opinion along with the statement of case. It arises from the order of the Tribunal in I.T.A No. 457.B of 1994, dated September 12, 1994.
“1. Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the applicant was not entitled to the claim of depreciation on the consumer durables which were leased by the applicant to various customers?
2. Whether, on the facts and circumstances, the Tribunal was right in concluding that there was no ‘actual cost’ incurred by the applicant as defined under section 43(1) of the Act to justify the claim of depreciation?
3. Whether the Tribunal was right in interpreting the lease rent received as a recovery of cost of materials leased to hold that the actual cost in the hands of the applicant as ‘nil’?
2. The assessee is a non-banking company engaged in the business of hire purchase and lease. For the assessment year 1991–92, the assessee filed its return of income declaring a total loss of Rs. 1,47,596. The return was processed under section 143(1)(a) of the Income-Tax Act, 1961 (for short, “the Act”), on 28th of January, 1992. Later on notices under sections 143(2) and 142(1) were issued and thereafter the assessment was framed by the assessing authority. The assessee has two types of business that is hire purchase of vehicles and of leasing of consumer durables. We are referring to the facts regarding leasing business only as none of the questions pertain to hire purchase business of the assessee. The assessee claimed depreciation under section 32 of the Act on the consumer durables/goods leased on the plea that the assets were owned by the assessee and were used by it in its business of leasing. The assessing authority, however, denied depreciation to the assessee on the said assets, by holding that the assessee was neither the owner of the assets nor were assets to put to any commercial use by it. The assessee was getting the vouchers and other purchase documents made out in its name. It was also found that the assessee was arranging transaction of its leasing business' in a way as if the legal ownership vests with it. But, however, it never came to possess the assets in reality. The assets were not shown in the schedule annexed to the balance-sheet of the assessee. It was also found that the assessee had never declared the “scrap value of assets” during their life time even though their written down value had become zero. The assets on which the depreciation was claimed were consumer durables like TV, VCR, refrigerators and scooters etc., and therefore there was no question of those assets being put to any commercial use by the assessee. On these findings the assessing authority concluded that the transactions entered into by the assessee with its customers were in fact not leasing transactions inasmuch as the goods were never returned to the assessee at the end of the lease period. The Assessing Officer, therefore, declined to allow depreciation on the assets.
3. The assessee being aggrieved against the order of the assessing authority filed an appeal before the Commissioner of Income-Tax (Appeals). The Commissioner of Income-Tax (Appeals) concurred with the view taken by the assessing authority and dismissed the appeal.
4. Aggrieved by the order of the Commissioner of Income-Tax (Appeals) the assessee filed a further appeal before the Tribunal which was also dismissed. It was found by the Tribunal that the leasing business of the assessee was of such a nature that the assessee nominally purchased the consumer durables and immediately handed them over to its customers. It is the customers themselves who chose the consumer durables and also arranged for their purchase. The assessee provided finance for purchasing the goods. In the books of the assessee, the customers become indebted to the entire cost of goods along with interest or so-called “lease rent” payable thereon. The agreements are drawn up in such a manner that the assessee would remain the owner of the goods till the full payments are made. But the arrangements were made in such a manner that in the case of a good customer sticking to the terms of the agreement, the entire amount including the lease rent would get paid up before the expiiy of the lease period. The ownership of the goods thereafter would pass on from the assessee to the customers and they would not be required to return the goods to the assessee. On these findings, the Tribunal dismissed the appeals. Thereafter on an application made by the assessee under section 256(1) of the Act, the Tribunal has referred the three questions of law already reproduced in the earlier part of the judgment to this court for its opinion along with the statement of case.
5. Question No. 1: Counsel for the assessee argued that an assessee is entitled to depreciation under section 32 of the. Act on tangible assets like building, machinery, plant or furniture and intangible assets like knowhow, patents, copyrights, trade marks, licences, etc., if he owns the assets and uses them for the purpose of business/profession. For this he has placed reliance on the judgment of this court in CIT v. Shaan Finance (P.) Ltd., [1993] 199 ITR, 409 which was later on affirmed by the Supreme Court in CIT v. Shaan Finance (P.) Ltd., [1998] 231 ITR 308. The assessee being engaged in the business of leasing out/letting out of his articles, remains the owner of the assets and uses them for its business and, therefore, would be entitled to the depreciation claimed under section 32 of the Act.
6. We do not find merit in the submission of counsel for the assessee on the given facts and circumstances of the case. Ordinarily, the lessor is not entitled to claim depreciation on the assets leased by him because, in that case, the leased out asset is used for the purpose of business/profession of the lessee and not that of the lessor. But, if an assessee is engaged in the letting out of his assets then he would be entitled to the depreciation in respect thereof as he remains the owner of assets as well as uses them for his business, the business being letting out the assets. In the present case, on the findings recorded (which have not been challenged) we find that the transaction entered into by the appellant were in fact not lease transaction but sale of goods on instalment basis. It is the customers, who themselves chose the consumer durables and arranged for their purchase. The assessee provided the finance and in the books of the assessee, the customer become indebted to the extent of the entire cost of the goods along with interest or so called “lease rent” payable thereon. The arrangements are made in such a way that if a customer sticks to the terms of the agreement, then, the entire amount including the lease rent gets paid up before the expiry of the period of lease and the ownership of the goods passes on from the assessee to the customer automatically. The customers are not required to return the goods to the assessee. It is like selling goods by way of equated instalments. The contention that the assessee remains the legal owner of the goods and he is engaged in the leasing business and, therefore, entitled to the depreciation on the assets leased out, would not hold good in the present case as consumer durables are actually stock-in-trade in the business of the assessee on which there is no provision for allowance of depreciation.
7. The judgments on which the reliance is placed by counsel for the assessee are of no assistance to him as in those cases the courts were considering as to whether the assessee is entitled to investment allowance in respect of machinery owned by the assessee to third parties who use the machinery for manufacture of articles or things. It was proved by the assessee that the machinery owned by it had actually been leased out to a third party and on these facts it was held that the assessee would be entitled to the investment allowance under section 32A. Whereas in the case before us the finding recorded is that the assessee neither actually owned the assets nor did it use it for its business. The transaction entered into by the assessee was for sale of the consumer durables by way of instalments. It is the assessee who chose and purchased the goods. The assessee had paid for the goods on behalf of the customer. Simultaneously, it debited the sale price to the account of the consumer and recovered the money due to it in instalments which included the cost of the assets as well as the interest on the money advanced by the assessee for the purchase of the goods. By the time the final instalment got paid, the principal as well as interest get wiped out and the consumer becomes the owner of the goods. The goods never come back to the assessee for leasing them to any other person. Though the transaction was termed as a lease deed, in fact that was in the nature of hire purchase/instalment scheme.
8. The goods have to be considered as assets payable thereon. The assessee incurs expenditure on the cost of the goods at the time of purchase of the same. But immediately thereafter the assessee debits the respective customer in respect of the said entire cost. The cost of the goods incurred by the assessee thus becomes recoupable by it from its customers. Had the assessee been leasing out the goods then after the expiry of the lease period the leased goods would be returned to the assessee for further leasing. As pointed out earlier the consumer becomes the owner of the goods before the expiry of the lease period as he pays the purchase price of the goods along with interest by way of instalments. The assessee has not even declared the scrap value of the goods at any time during the life time of the goods or when the written down value becomes zero. In these circumstances, we are of the opinion that the Tribunal was right in holding that the assessee would not be entitled to claim depreciation on the goods which were stated to have been leased out by him to the authorised customers. Question No. 1 is answered in the affirmative, i.e, against the assessee and in favour of the Revenue. Questions Nos. 2 and 3: Questions Nos. 2 and 3 are interlinked and interdependent on each other and therefore, are taken up together. Immediately after incurring the expenditure on the cost of the goods, the assessee debits the respective customer in respect of the entire cost in his books and the cost of the goods incurred by the assessee becomes recoup-able by it from its customers. The assessee follows the mercantile system of accountancy. The assessee gets reimbursed by the customer in respect of the cost of the goods incurred by it although the actual payment may take some time under the deferred payment scheme. “Actual cost” as defined under section 43(1) means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. As the assessee in his books of account debits the cost of the goods in the account of the customer and the customer becomes indebted to the extent of the entire cost along with interest, the actual cost of the assets in the hands of the assessee becomes nil immediately on purchase of the goods. It goes without saying that the depreciation cannot be allowed on the assets for which the actual cost is nil. Questions Nos. 2 and 3 are also answered in the affirmative, against the assessee and in favour of the Revenue.
9. The questions stands answered accordingly. No costs.
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