Lessor is entitled to depreciation even if lessees use the assets in their business – Karnataka HC


Prakash Leasing Ltd v DCIT [IT APPEAL NO.2557 OF 2005] (Karnataka HC)

Background:

The assessee company is engaged in the business of finance and leasing. During the year under consideration, the assessee company had purchased vehicles and had leased out the same. Assessing Authority was of the view that if the vehicles were purchased by this alleged lessees, the ownership of the vehicles lies only with them and not with the assessee company.

Relying on the statements of 35 persons, the truck drivers, it was held that they have purchased the vehicles under the financial assistance from the assessee and therefore, the assessee is not the owner of the 36 motor vehicles owned and therefore, he is not entitled to depreciation. Similarly, 26 persons to whom summons had been issued did not turn up. Therefore, the Assessing Authority disallowed the depreciation claimed on these vehicles allegedly leased to the 26 persons. 

Assessee’s contentions:

  • Assessee produced original purchase bills of all the vehicles as well as the lease agreements, which he has entered into with the lessees. He has accounted for the entire lease rental in respect of all those vehicles in his profit and loss account.
  • It is thereafter he has claimed deduction at 40% on the ground that it is the lessee who is using the vehicle.

Tax Authority’s contentions

The vehicles were used by the lessees only. Assessee has also produced the lease agreements. Once the lessee is put in possession of the vehicle, the lessee also becomes the owner under the provisions of the Motor Vehicles Act. The word ‘owner’ has been defined in the Motor Vehicles Act as under :-

“Section 2(30) : Owner means a person in whose name a motor vehicle has been registered and where such person is a minor, the guardian of such minor and in relation to a motor vehicle which is the subject matter of a hire purchase agreement, or an agreement of lease or an agreement of hypothecation, the person in possession of the vehicle under that agreement.”

HELD:

  • Merely because the 36 persons to whom summons were issued claim that they are the owners, it does not mean that the assessee has failed to establish his claim of ownership.
  • The purchase receipt and the lease agreement shows that the assessee is the owner and the lessee who was put in possession under the agreement is also owner under the Act.
  • Merely because the vehicles were used by the lessees in their business, the assessee cannot be denied the depreciation @ 40%. In fact, it is not in dispute that in respect of all these vehicles, the assessee has acknowledged the receipt of lease rent and has shown the same in his profit and loss account. It is thereafter he is claiming depreciation.
  • If the authorities were of the view that the assessee has failed to prove his ownership over those vehicles, then, if depreciation is to be disallowed then they also should not have taken that lease rental agreement for the purpose of making the assessment. Under these circumstances, it is also not in dispute that for the subsequent years, the assessee had been granted the benefit of depreciation.

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