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

The High Court reversed the Tribunal in regard to the eligibility of claiming depreciation. When the assessee bought the vehicles and lease out same to its customers by registering the vehicles in their names and the vehicles were also used by customers not by the assessee for the business purpose. Thus, on the grounds that the assessee was not the owner of the vehicles and had only financed to buy the vehicles, so the assessee will not be eligible to claim depreciation.

As per the ITATONLINE.ORG – The assessee, a NBFC, bought vehicles and leased the same to its customers. Registrations of the vehicles were in the names of the customers. As the vehicles were registered in the names of the customers and were used by them, it had been held by the AO that the assessee was not eligible for depreciation u/s 32 as he/she had not used the vehicles for purposes of business and even hold the ownership of the same. 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 “sponsor or 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)     Section 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.

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