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Case Number

D.B Income-tax Appeals Nos. 46 to 48 of 2001

Judges

Mr. Khem Chand Sharma
Mr. Yad Ram Meena

Acts

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Smart Summary

Summary of the Opinion

Factual and Procedural Background

(Based exclusively on the provided opinion.)

The three appeals before the Court raise a common question of law and were decided together. They are directed against the judgment and order of the Income-tax Appellate Tribunal, Jaipur Bench, dated November 27, 2000. The appeals were admitted on a set of seven specific questions framed by the Court.

The appellant is a registered partnership firm engaged in transportation of cement and related handling works. On April 25, 1990 the firm entered into a lease agreement with Key Leasing and Finance Ltd. to take on lease fifteen trucks. The relevant assessment years are 1991-92, 1992-93 and 1993-94. The Assessing Officer examined the arrangement and concluded that the transaction was effectively a sale rather than a lease; as a result lease payments claimed by the assessee as revenue expenditure were disallowed and substantial additions were made to income (for 1991-92 total income was assessed at Rs. 15,82,582). Similar treatment was applied for subsequent years.

On appeal, the Commissioner of Income-tax (Appeals) held that under the agreement the assessee could not be treated as the owner of the leased trucks during the assessment years and therefore the lease money paid by the assessee should be allowed as revenue expenditure. The Tribunal, however, referred to a letter by the assessee's advocate (mentioned in the record) which it read as an expression that after expiry of the lease period the vehicles would be transferred to the assessee; the Tribunal agreed with the Assessing Officer and held that the lease payments could not be allowed as revenue expenditure.

Legal Issues Presented

Whether the Appellate Tribunal was justified in upholding the view of the learned Commissioner of Income-tax (Appeals) and the Assessing Officer that additions could be made on estimation or presumption and by rejecting the documentary evidences produced by the assessee in contradiction of the judgment of the apex court in Cit (Central), Calcutta v. Daulat Ram Rawatmull, [1973] 87 ITR 349?
Whether the Income-tax Appellate Tribunal was justified in bifurcating the lease rent into capital and revenue expenditure merely on a presumptive basis?
Whether the Tribunal was right in taking the view that the intention of the parties was to transfer in abrogation of the specific terms of lease agreement which all through the document provides for the ownership to be of the lessor, Key Leasing and Finance Co.?
Whether the Income-tax Appellate Tribunal was justified in sustaining the additions and reversing the order of the Commissioner of Income-tax (Appeals) in respect of expenditure on lease rent against the factual matrix available on the record of the appeal?
Whether the Tribunal was right in taking the view that the amount paid by way of lease rent was capital expenditure incurred on truck, depreciation of which has been claimed by the lessor?
Whether the Tribunal was justified in upholding the additions of realisable value of old tyres which as per method of accounting prescribed under section 145 and consistently followed by the assessee are written off in the year of purchase itself?
Whether the Appellate Tribunal was justified in overlooking the fact that the nature of expenditure has to be determined on the basis of tenure of lease and purpose of use as held by the Punjab and Haryana High Court in the case of Silver Screen Enterprises v. CIT, [1972] 85 ITR 578?

Arguments of the Parties

Appellant's Arguments

The assessee (lessee) was not the owner of the trucks during the assessment years according to the lease agreement; ownership remained with Key Leasing and Finance Ltd.
Depreciation on the fifteen trucks was allowed to the lessor (Key Leasing and Finance Ltd.), not to the lessee; therefore the lessee cannot be treated as the owner for tax purposes in those years.
Given the above, there is no justification to deny the assessee's claim that lease rent paid should be allowed as revenue expenditure.

Respondent's (Department) Arguments

The agreement contained a clause providing that on payment of one per cent of the total consideration at the end of the lease period, the lessee could become the owner—this, the Department argued, showed an intention to transfer ownership.
The Tribunal relied on a letter (referred to in the record: November 21, 1992, and a further letter noted as dated November 25, 1992) from the assessee's advocate acknowledging that after expiry of the lease period the trucks would be transferred to the assessee; the Department relied on that to support the view that the arrangement was in substance a transfer.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Cit (Central), Calcutta v. Daulat Ram Rawatmull, [1973] 87 ITR 349	Referenced in the admitted questions regarding whether documentary evidence produced by the assessee was rejected in contradiction of this apex court judgment.	The opinion includes the question but the Court's final reasoning and order, as set out in the provided text, do not indicate that this precedent was applied in the Court's analysis or outcome.
Silver Screen Enterprises v. CIT, [1972] 85 ITR 578 (Punjab & Haryana High Court)	Referenced in the admitted questions for the principle that the nature of expenditure should be determined by the tenure of lease and purpose of use.	The opinion lists this precedent among the admitted questions, but the Court's express reasoning in the provided text does not identify any application of this decision to reach the final result.

Court's Reasoning and Analysis

The Court analyzed the dispute by close reference to the written lease agreement and the factual record concerning who obtained the tax benefits of ownership during the lease period:

The Court examined the lease agreement (executed on April 25, 1990) and identified relevant clauses:
- Clause 3: sets out the lease period and schedule of rent.
- Clause 8: expressly states that the machinery (the trucks) shall at all times remain the sole and exclusive property of the lessor; the lessee shall have no right, title or interest; the lessee undertakes not to capitalise the leased assets on its balance-sheet; ownership during the lease (and any renewal options) indisputably rests with the lessor.
- Clause 11: prohibits the lessee from selling, hypothecating, mortgaging, pledging, assigning or otherwise encumbering or parting with possession of the trucks without written consent of the lessor.
- Clause 16: specifies that depreciation as the owner will be available to the lessor and that the lessee will not claim any reliefs/deductions available to the owner under the Income-tax Act.
The Court noted the presence in Schedule A of a terminal fee provision: on payment of one per cent of the lease amount at the end of the lease the lessee could become the owner. The Assessing Officer and the Tribunal relied on that provision (and the advocate's letter) to conclude there was an understanding to transfer at the end of the lease.
The Tribunal had also relied on a letter by the assessee's advocate (the opinion refers to letters dated November 21, 1992 and November 25, 1992 in the record) in which the advocate stated that after expiry of the lease the trucks would be transferred to the assessee. The Tribunal agreed with the Assessing Officer and held lease payments could not be treated as revenue expenditure.
The Court emphasized that its focus must be on the position during the lease period and on the explicit terms of the lease. The agreement repeatedly and expressly recognized the lessor as the owner during the lease tenure and disallowed any estate or ownership rights in the lessee during that time.
Critically, the Court observed that the lessor (Key Leasing and Finance Ltd.) had claimed and been allowed depreciation on the trucks under the Income-tax Act during the assessment years in question. Given that the lessor was treated as owner for tax purposes and had taken depreciation, the Court held there was no justification for treating the assessee as owner simultaneously for the same period: "There cannot be two owners indisputedly of the same property."
Because the Commissioner of Income-tax (Appeals) had analyzed the terms and held that the lease money paid by the assessee should be allowed as revenue expenditure (on the basis that the assessee was not owner during the lease period), the Court concluded that the Tribunal erred in restoring the Assessing Officer's contrary view.

Holding and Implications

Core Holding: The Court allowed the three appeals and held that the lease rent paid by the assessee is to be treated as revenue expenditure for the assessment years in question.

Consequences and Implications:

The Tribunal's order that had agreed with the Assessing Officer to disallow lease rent as capital expenditure was set aside; the Commissioner of Income-tax (Appeals)'s order allowing the lease rent as revenue expenditure was upheld.
The Court relied principally on the explicit contractual provisions that the lessor remained owner during the lease period and on the factual circumstance that the lessor had claimed and been allowed depreciation for those years; on that basis the Court found it inconsistent to treat the lessee as owner for tax purposes in the same period.
The opinion does not purport to lay down a new broad precedent beyond the facts: its effect is the direct reversal of the Tribunal's decision and the allowance of the lease rent as revenue expenditure in these three appeals. The text does not state that a new binding principle of law is being announced beyond its application to this factual matrix.

End of summary — prepared strictly from the text of the provided opinion.

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Rajshree Roadways v. Union Of India And Others

1. Since all the three appeals involve a common question of law, the same are being decided by this common judgment.

2. These appeals are directed against the judgment and order of the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short “the Tribunal”), dated November 27, 2000. The appeals were admitted in terms of the following questions:

“1. Whether the Appellate Tribunal was justified in upholding the view of the learned Commissioner of Income-tax (Appeals) and the Assessing Officer that additions could be made on estimation or presumption and by rejecting the documentary evidences produced by the assessee in contradiction of the judgment of the apex court in Cit (Central), Calcutta v. Daulat Ram Rawatmull., [1973] 87 ITR 349?

2. Whether the Income-tax Appellate Tribunal was justified it bifurcating the lease rent into capital and revenue expenditure merely on a presumptive basis?

3. Whether the Tribunal was right in taking the view that the intention of the parties was to transfer in abrogation of the specific terms of lease agreement which all through the document provides for the ownership to be of the lessor, Key Leasing and Finance Co.?

4. Whether the Income-tax Appellate Tribunal was justified in sustaining the additions and reversing the order of the Commissioner of Income-tax (Appeals) in respect of expenditure on lease rent against the factual matrix available on the record of the appeal?

5. Whether the Tribunal was right in taking the view that the amount paid by way of lease rent was capital expenditure incurred on truck, depreciation of which has been claimed by the lessor?

6. Whether the Tribunal was justified in upholding the additions of realisable value of old tyres which as per method of accounting prescribed under section 145 and consistently followed by the assessee are written off in the year of purchase itself?

7. Whether the Appellate Tribunal was justified in overlooking the fact that the nature of expenditure has to be determined on the basis of tenure of lease and purpose of use as held by the Punjab and Haryana High Court in the case of Silver Screen Enterprises v. CIT, [1972] 85 ITR 578?”

3. The appellant is a registered partnership firm carrying on the business of transportation of cement from J.K Cement Works, Nimbahera, and also deals in cement handling works. The appellant-firm has entered into a lease agreement with Key Leasing and Finance Ltd., for taking on lease 15 trucks on April 25, 1990. The relevant assessment years are 1991-92, 1992-93 and 1993-94. In 1991-92 in the income-tax return the assessee declared loss of Rs. 1,33,687, for the assessment year 1992-93 the assessee has shown income of Rs. 1,05,177 and in the third assessment year, i.e, 1993-94, the assessee has shown income of Rs. 7,199. The Income-tax Officer noticed that the assessee had claimed lease rent as revenue expenditure. Considering the contents of the agreement with Key Leasing and Finance Ltd., the Income-tax Officer was of the view that the trucks were not taken on lease but it was a sale. Therefore, the lease amount which has been paid cannot be allowed as revenue expenditure and he assessed the total income of the assessee at Rs. 15,82,582 in the assessment year 1991-92. Similar view has been taken for the subsequent assessment years. In appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) was of the view that as per the agreement, the assessee cannot be treated as the owner of the 15 leased trucks for the years of assessment and as per the terms and conditions of the agreement, the lease money which has been paid by the assessee should be allowed as revenue expenditure.

4. In appeal before the Income-tax Appellate Tribunal, the Tribunal has referred to the letter dated November 21, 1992, wherein the advocate of the assessee has expressed that after the expiry of the lease period of three years, the vehicles were to be transferred in favour of the assessee. Therefore, the Tribunal has agreed with the view taken by the Assessing Officer and held that the lease money which has been paid by the assessee cannot be allowed as revenue expenditure.

5. Heard, learned counsel for the parties.

6. Mr. A. Kasliwal, learned counsel for the appellant, submits that when as per the agreement, the assessee was not the owner of the trucks in the years under consideration and he has paid the lease money and even depreciation of these 15 trucks is allowed to the lessor and not to the lessee. Therefore, there is no justification to deny the claim of the assessee to allow the lease amount paid as revenue expenditure.

7. On the other hand, Ms. Parinitoo Jain, learned counsel appearing for the Department, submits that when under the agreement there is a clause that after completion of lease period, if one per cent, of the total consideration of the trucks is paid, the lessee will be the owner of those trucks.

8. Whether the assessee is the owner of the trucks or the trucks were taken on lease for three years, that has to be considered in the facts and circumstances of the case, i.e, taking into account the terms and conditions of the agreement and also the contents of the letter which reveal the intention of the assessee.

9. The Assessing Officer after considering the submissions and also considering the directions of the Deputy Commissioner of Income-tax under section 144A of the Income-tax Act, 1961, has allowed the interest on the borrowed amount at 18 per cent, as revenue expenditure and the rest of 30 per cent, was not allowed treating the expenditure in the form of lease money as capital expenditure for purchase of trucks. The Commissioner of Income-tax after considering the terms and conditions of the agreement allowed the lease rent as revenue expenditure. He pointed out in para. 15 of his order that after the expiry of the lease period, the assessee can exercise its option for purchase of the truck but prior to that neither it is the owner nor has any right of the owner on the trucks and it cannot be treated as owner and the lease rent paid for the trucks cannot be treated as capital expenditure.

10. The lease agreement was executed on April 25, 1990, and is annexed to the appeals as annexure 2. We have perused the lease agreement. Clause 3 of the agreement provides the period of lease and the rent was to be paid as per the schedule. Clause 8 of the agreement speaks about the ownership of the trucks under the agreement. There is a clear provision that the said machinery shall at all times remain sole and exclusive property of the lessor and the lessee shall have no right, title or interest thereon. It further provides the irrevocable undertaking of the lessee that at no time during the currency of the lease agreement, which shall be non-cancellable, will lessee attempt to capitalise leased assets on lessee's balance-sheet. As per clause 8 it has been agreed that the ownership of the said assets during the tenure of lease and inclusive of any renewal options that the lessor may concur indisputably rests with the lessor.

11. So in clear terms, the agreement provides that during the lease period, only the lessor shall be treated as the owner of the trucks and not the lessee. Clause 11 of the agreement further provides that the lessee when it is not the owner of the machinery has no right and shall not sell, hypothecate, mortgage, pledge, assign, let or otherwise encumber or suffer a lien upon and/or deal with or part with possession of the said machinery, i.e, the trucks, without the consent of the lessor in writing.

12. The lessee, i.e, the assessee also cannot offer the machinery, i.e, the trucks, as security for any loan, guarantee, other assistance from any person, corporation, company, financial institution or bank. Clause 16 provides who will get depreciation as the owner of the trucks. This clause provides that notwithstanding any change in law or ambiguity in any clause thereof, it is specifically agreed that since the lessee is not the owner of the equipment the lessee shall not claim any relief by way of any deduction, allowance or grant, available to the lessor as the owner of the equipment under the Income-tax Act, 1961.

13. The Assessing Officer as well as the Tribunal have gone by item No. 9 of Schedule A, which provides the lease rental structure. In sub-para. 2 there is a provision of terminal fee, i.e, if the lessee pays one per cent, of the lease amount of the trucks he can be the owner of the trucks. The Assessing Officer as well as the Tribunal were of the view that when there was an understanding at the time of initial agreement for purchase of trucks on terminal of the lease period, that in case the assessee pays one per cent, of the lease amount, it will be the owner of the trucks.

14. In letter dated November 25, 1992, which has been referred by the Tribunal and has been written by the advocate of the assessee addressed to the Income-tax Officer, after referring the payment of the lease amount for each year, the advocate has accepted that after the expiry of the lease period, the trucks will be transferred in favour of the assessee. For that also, he has referred the fact which has been mentioned in Schedule A enclosed to the agreement.

15. It is true that there was a clause that the assessee had an option to purchase the trucks on payment of one per cent, of the lease money on termination of the lease period and the lessee can become the owner of the truck but we are concerned with the lease period and terms of the lease. As we have referred above, in the terms and conditions of the agreement, when Key Leasing and Finance Ltd., both the parties agreed that during the lease period, the lessor, Key Leasing and Finance Ltd., shall be the owner of the trucks and the lessee, i.e, the assessee, will have no right to transfer or alienate to other party in any form. Not only that the lessee as well as the lessor both have agreed that the depreciation which is permissible under the Income-tax Act, being the owner of the trucks, the lessor will have that right and benefit and it will get the benefit of depreciation on these trucks during this lease period, i.e, during the assessment years 1991-92, 1992-93 and 1993-94.

16. It is also pertinent to note that the lessor has claimed this benefit and that has been allowed by the Department to the lessor i.e, to the Key Leasing and Finance Ltd. Once under the same agreement when the lessor, Key Leasing and Finance Ltd., has been treated as the owner of these trucks and has been allowed the depreciation permissible under the provisions of the Income-tax Act, there is no justification to treat the assessee also as the owner of these trucks during this period. There cannot be two owners indisputedly of the same property. In our view, the Tribunal has committed an error in restoring the view of the Assessing Officer. Therefore, considering the terms and conditions of the lease agreement and the fact that depreciation on these trucks has been allowed to the lessor, Key Leasing and Finance Ltd., now there is no justification to deny the claim of the assessee that his lease rent should be allowed as revenue expenditure. In our view, the Commissioner of Income-tax (Appeals) has rightly allowed the claim of the assessee. In the result, in these three appeals we hold that the lease rent which has been paid by the assessee be treated as revenue expenditure.

17. These three appeals are, consequently, allowed.

Rajshree Roadways v. Union Of India And Others

Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Respondent's (Department) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Rajshree Roadways v. Union Of India And Others

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