The Supreme Court of India in its judgment in the case of M/s ICDS Ltd. Vs. Commissioner of Income Tax & Anr. (Civil Appeal No. 3282 of 2008) decided on January 14, 2013 has settled the controversy on depreciation allowance on motor leasing. The judgment has come as an encouragement to motor leasing transactions in India and is a welcome relief for banks and non banking finance companies.
The controversy surrounded the interpretation of provisions under section 32 of the Income Tax Act, which require the assessee to meet the two criteria in order to claim depreciation i.e. (a) The asset must be “owned, wholly or partly by the assesse; (b) It should be used for the ‘purposes of the business”.
Clearly for a successful claim of depreciation u/s 32 of the Act, it will be necessary to establish “ownership” and “usage for business” of the vehicle and the hon’ble court has decided the two pertinent issues, which will ultimately greatly help the business of motor finance.
The assessing officer, in this case, had taken a narrow view and disallowed the claim for depreciation on the ground that the lessor’s use of the vehicle 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. The view taken was that assessee (lessor) who had merely financed the purchase of the motor vehicles, was neither the owner nor the user of the vehicle.
A narrow view was taken by the Income Tax authorities qua the ownership of the vehicle based on the definition under section 2(30) of the Motor Vehicles Act. The said definition for the “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 subject matter of hire purchase agreement, or an agreement of lease, or an agreement of a hypothecation, the person in possession of the vehicle under that agreement. Accordingly it was taken that the test of ownership was in the registration and certification, since the certificates were in the name of the lessee they were considered to be the legal owners of the vehicle. In appeal, the Commissioner of Income Tax allowed the claim of depreciation however such depreciation was not allowed at the higher rate.
In appeal before the Income Tax Appellate Tribunal, the depreciation was allowed at the higher rate. The High Court held that the vehicle was not registered in the name of the assesse (lessor) and that the assesses had only financed the transaction, it could not be held to be the owner of the vehicle and hence not entitled to depreciation.
Hon’ble Supreme Court, in appeal held that the assessee (lessor) is indeed the owner of the leased motor vehicle and has done away with the perception of the registered owner (lessee) being the owner of a motor vehicle.
Referring to the definition of the word “ownership” in Black’s Dictionary (6th Edn), the judgment quotes “ 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 belonging to someone in particular, to the exclusion of all other persons. The exclusive right of possession, enjoyment or disposal; involving as an essential attribute the right to control, handle and dispose.”
The court after duly considering lease agreement and considering provisions of law on the point held the assessee ( lessor) as the owner of the leased motor vehicles from the right to repossession in the event of default / right to seek return at the end of the lease tenor /right of inspection / ownership clause etc. As Section 51 (4) and (5) of the Motor Vehicles Act also establishes that the lessee cannot transfer ownership of the vehicle registered in its name without the express consent of the lessor.
It is seen from the said provisions that in case the lessor repossesses the motor vehicle from the lessee as per the terms of the lease agreement, he can seek surrender of the certificate of registration and in the event of default seek a fresh certificate of registration in its name from the Motor Registering Authority.
Hence, it is clear that no inference of ownership in favour of the lessee can be drawn from the certificate of registration.
It has also been clarified that use of the vehicle for purposes of the leasing transaction by the lessor qualifies it as use in “course of business”.
The judgment upholds the view that leasing out of motor vehicles is a mode of doing business and when income derived from leasing out is treated as business income, it would be contradictory to say that the motor vehicles are not used wholly for the purposes of the business. It has further upheld the view that for a lessor to claim depreciation, it is not required to be using the motor vehicle “itself”.
The hon’ble court has relied on the judgment in the case of Shaan Finance (P) Limited and studied the analogous provision on section 32A and Section 33 of the Income Tax Act dealing with investment allowance and Development rebate respectively and held that “used for the purpose of business” does not necessarily require a usage of the asset itself by the lessor.
Depreciation disallowance has been a major deterrent and an impediment to a healthy growth of motor leasing. The judgment will go a long way in bringing about a greater certainty and have a positive impact on the business of motor finance.
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