I. C. D. S. Ltd vs. CIT (Supreme Court)

S. 32: A “Financier” satisfies the “ownership” & “user” test for depreciation

The assessee, a NBFC, bought vehicles and leased it out to its customers. The vehicles were registered in the names of the customers. The AO held that as the vehicles were registered in the names of the customers and were used by them, the assessee was not eligible for depreciation u/s 32 as it was not the “owner” of the vehicles nor had it “used” the vehicles for purposes of business. The CIT(A) & Tribunal allowed the assessee’s claim. However, the High Court reversed the Tribunal on the ground that the assessee was only a “financier” and not the “owner” of the vehicles and so was not eligible to claim depreciation. On appeal by the assessee to the Supreme Court, HELD reversing the High Court:

(i) S. 32 requires that the asset must be “owned, wholly or partly, by the assessee and used for the purposes of the business”. The Department’s argument that the assessee is not the “owner” of the vehicles is not acceptable because the lease agreement specifically provided that the assessee was the exclusive owner of the vehicle at all points of time and that it was empowered to repossess the vehicle (and not merely recover money) if the lessee committed a default. At the conclusion of the lease period, the lessee was obliged to return the vehicle to the assessee. Also, the assessee had the right of inspection of the vehicle at all times. 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. The fact 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 does not make a difference. Also the fact that the Motor Vehicles Act deems the lessee to be the “owner” has no relevance;

(ii) The Department’s argument that the assessee had not “used” the vehicles is also not acceptable because the vehicle was “used” by the assessee in its’ business of leasing. Once it is held that leasing out of the vehicles 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 vehicles are not used wholly for the purpose of the assessee’s business. The physical user of the vehicles is not necessary (Shaan Finance 231 ITR 308 (SC) followed)