IndusInd Bank Ltd. v. Addl. CIT

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The Tax Publishers2012 TaxPub(DT) 1764 (Mum-Trib) : (2012) 045 (II) ITCL 0399 : (2012) 135 ITD 0165 : (2012) 145 TTJ 0409 : (2012) 069 DTR 0027 : (2012) 015 ITR (Trib) 0089 INCOME TAX ACT, 1961 --Depreciation--Leased agreementsFinance lease vis-a-vis operating lease--The assessee-bank filed its return claiming depreciation of Rs. 25,70,03,293. The assessing officer observed that there was substantial variation between the amount of depreciation as per books of account and that claimed in the computation of income. Such variation was found mainly due to 100% depreciation claimed on leased assets to the tune of Rs. 9,72,74,434 during the year. This depreciation was in addition to the claim of depreciation in respect of certain other assets leased in earlier years. The particulars of such asset purchased and claimed to have been leased out during the year had been furnished before assessing officer. The assessee claimed that since he was the rightful owner of the asset, therefore, claim for depreciation was allowable. The assessing officer did not accept the assessee's contention for the reasons which can be summarized as under:- (i) The assessee never got the possession of the asset, which was boiler in this case. It was a case of full payout. (ii) The risk and rewards incidental to the ownership vested with the lessee. (iii) The entire transaction was on paper for the purpose of claiming depreciation by the assessee. (iv) The lease was for a fixed term and after the expiry of the lease period, the asset was sold back to the lessee. (v) The assessee's only concern was to recover the periodic lease rentals. It was not interested in user of the asset in any manner. (vi) The documents of transaction are important but not conclusive to decide the case of the assessee. An in-depth study of the documents with inquiries showed that substance of the transaction was devoid from its form. (vii) A finance lease is analogues to outright purchase of an asset which is financed by the borrower from the lessor. The assessing officer came to hold that the assessee was not the owner of the asset and hence ineligible for depreciation. He disallowed the depreciation to the tune of Rs. 9.72 crore. Held: On reading the lease agreement as a whole, one finds that except for naming the lessor as owner at some places in the agreement and inserting certain cosmetic clauses to give the colour of operating lease, there was nothing in substance which satisfied the inherent requisites of operating lease. It can be observed that the lease was not cancellable prior to the expiry period of seven years. The cost of repairs and insurance was to be borne by the lessee. Sum total of the lease rentals by the lessee recouped the amount invested by the lessor plus interest. There was a clause that after the expiry of seven years period, the boiler was to be sold to the lessee at predetermined value. It was the lessee who had to bear the loss due to obsolescence. All the risks and rewards vested with the lessee. When cumulative effect of all the factors is considered for and against the operating lease, it can be easily found out that if one has to choose between the finance lease and operating lease, there can be no difficulty in reaching the irresistible conclusion that it was a case of finance lease agreement. In pith and substance this agreement was nothing but a finance lease. In order to decide the controversy, one need to appreciate the true meaning and purport of the term 'lease'. Section 105 of the Transfer of Property Act, 1882 defines lease. It provides that a lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.Ã¢â‚¬ From the above definition it can be seen that the fundamental characteristic of any lease is to separate the useÃ¢â‚¬ from ownershipÃ¢â‚¬ of the assets. As per the above section 105 of TPA, a person owning the asset, called the 'lessor', provides the asset for use for a certain period of time to another called the 'lessee' for some consideration. In the present commercial world, there are different types of leases such as finance lease, operating lease, deferred lease, skip lease, sale and lease back, etc. Presently this Bench has been called upon to concentrate only on the finance and operating lease, as the assessee is claiming it to be a case of operating lease, whereas the Revenue has held the lease agreement as a finance lease. [Para 5.1] As per Guidance Note on Accounting for Leases, 'Finance lease' means : 'A lease under which the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset. 'Operating lease' has been defined to mean : ' A lease other than a finance lease'. The phrase 'fair value' as used in the definition of 'Finance lease' has been further defined to mean : 'The amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length transaction.' The Explanation further elaborates the definition of 'Finance lease' by providing that : A lease is classified as a finance lease if it secures for the lessor the recovery of his capital outlay plus a return on the funds invested during the lease term. Such a lease is normally non-cancellable and the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset.' The AR has invited attention towards clause 28 of this Guidance Note which provides that the recommendations of this Guidance Note shall apply to all assets leased during the accounting periods beginning on or after 1-4-1995. It was put forth that the assessee entered into the instant lease transaction during the previous year relevant to the assessment year 1998-99 and hence this Guidance Note shall be relevant for determining the distinction between the operating and finance lease in the years in question. From the above Guidance Note one can understand the ambit of finance lease in a generic sense to mean a lease under which the lessor secures the recovery of his capital outgo plus a return on such funds during the lease term and the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset. Another highlight of such a lease is that it is normally non-cancellable. Accounting Standard (AS) 19 issued in 2001 explains that 'a lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.' In this Accounting Standard a 'Finance lease' has been defined as : 'a lease that transfers substantially all the risks and rewards incident to ownership of an asset' and 'Operating lease' as 'a lease other than finance lease'. Para 6 of this Accounting Standard provides that a lease is classified as finance lease if it transfers substantially all the risks and rewards incident to ownership. Title may or may not eventually be transferred. [Para 5.3] On a perusal of the meaning of operating lease and finance lease from the Guidance Note and Accounting Standard 19 there is not much difference between the two. Operating lease has been defined in both as a lease other than finance lease. And when one examine the meaning of 'Finance lease' as per Guidance Note along with Explanation given in para 4, it turns out that its scope is almost the same as that given in the AS-19. Rather, the AS simply elaborates the concept of finance lease as given in the Guidance Note without making any qualitative addition to or subtraction from that. [Para 5.5] There is no dearth of judicial precedents holding that the general meaning of a word or phrase or expression as assigned by the Supreme Court under one enactment without reference to any specific provision therein is binding under another enactment which again does not specifically define such word or phrase or expression. One such case is the judgment of the jurisdictional High Court in Avinash Bhosale v. UOI & Ors. (2010) 322 ITR 381 (Bom). From the above judgment of the jurisdictional High Court, it is apparent that when the Hon'ble Supreme Court has interpreted or explained a particular term or phrase under one enactment, it cannot lie in the mouth of the lower authorities to interpret such term or phrase in a different manner under another enactment unless the context of such other enactment otherwise requires. Coming back to the facts of the instant case, it is noticed that the Supreme Court in the case of Asea Brown Boveri Limited (supra) has given a meaning to the concept of Finance lease,Ã¢â‚¬. Further as such meaning has been given without any definition of finance lease in the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992. When this Bench adverts to IT Act, 1961, here again this Bench find that no definition has been given to the finance leaseÃ¢â‚¬. In such a situation, this Bench is not only empowered but also duty bound to consider and apply such meaning of finance lease given by the Hon'ble Supreme Court under the IT Act, 1961. [Para 5.11] Thus, it is apparent that the broader guidelines laid down by the Hon'ble Supreme Court in the case of ABB Ltd have been reiterated in the latter case of Association of Leasing & Financial Services Companies v. Union of India & Ors. On a fair reading of the aforenoted two judgments rendered by the Hon'ble Supreme Court in the light of the Guidance Note and the AS 19, one can draw the following broad features of finance lease :- (i) Such a lease is non-cancellable and there is a fixed obligation on the lessee for payment of lease money. In case lease is terminated prematurely by the lessee, the lessor is entitled to recover his investment with expected interest. (ii) Such a lease is always for a fixed period, which period is decided by taking into consideration the economic life of the asset. (iii) The initial lease period is settled in such a way so as to fully recover the investment of the lessor together with interest thereon. (iv) Lessor is always interested in the recoupment of his investment with interest in the shape of rentals over the period of lease and not the asset or its user. (v) It is the responsibility of the lessee to bear all costs of insurance, repairs and maintenance and other related costs and expenses for the leased equipment. (vi) Though the equipment is chosen by the lessee but the payment to the supplier is made by the lessor. Thus, it is the lessee who chooses the assets, takes delivery, enjoys the use of the asset, bears its wear and tear. It is the lessee who becomes the real owner of the asset. (vii) It is the lessee who pays taxes, etc., in relation to such asset. (viii) The risks and rewards incidental to the ownership vest with the lessee. (ix) The features of bailment are absent in such a lease. (x) The lessor simply holds the title of asset as his security till his investment and interest thereon is recouped. The lessor is only symbolic owner during the period of lease and on the expiry of lease period, even such symbolic ownership also comes to an end. [Para 5.14] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 1764 (Mum-Trib) : (2012) 045 (II) ITCL 0399 : (2012) 135 ITD 0165 : (2012) 145 TTJ 0409 : (2012) 069 DTR 0027 : (2012) 015 ITR (Trib) 0089

INCOME TAX ACT, 1961

--Depreciation--Leased agreementsFinance lease vis-a-vis operating lease--The assessee-bank filed its return claiming depreciation of Rs. 25,70,03,293. The assessing officer observed that there was substantial variation between the amount of depreciation as per books of account and that claimed in the computation of income. Such variation was found mainly due to 100% depreciation claimed on leased assets to the tune of Rs. 9,72,74,434 during the year. This depreciation was in addition to the claim of depreciation in respect of certain other assets leased in earlier years. The particulars of such asset purchased and claimed to have been leased out during the year had been furnished before assessing officer. The assessee claimed that since he was the rightful owner of the asset, therefore, claim for depreciation was allowable. The assessing officer did not accept the assessee's contention for the reasons which can be summarized as under:- (i) The assessee never got the possession of the asset, which was boiler in this case. It was a case of full payout. (ii) The risk and rewards incidental to the ownership vested with the lessee. (iii) The entire transaction was on paper for the purpose of claiming depreciation by the assessee. (iv) The lease was for a fixed term and after the expiry of the lease period, the asset was sold back to the lessee. (v) The assessee's only concern was to recover the periodic lease rentals. It was not interested in user of the asset in any manner. (vi) The documents of transaction are important but not conclusive to decide the case of the assessee. An in-depth study of the documents with inquiries showed that substance of the transaction was devoid from its form. (vii) A finance lease is analogues to outright purchase of an asset which is financed by the borrower from the lessor. The assessing officer came to hold that the assessee was not the owner of the asset and hence ineligible for depreciation. He disallowed the depreciation to the tune of Rs. 9.72 crore. Held: On reading the lease agreement as a whole, one finds that except for naming the lessor as owner at some places in the agreement and inserting certain cosmetic clauses to give the colour of operating lease, there was nothing in substance which satisfied the inherent requisites of operating lease. It can be observed that the lease was not cancellable prior to the expiry period of seven years. The cost of repairs and insurance was to be borne by the lessee. Sum total of the lease rentals by the lessee recouped the amount invested by the lessor plus interest. There was a clause that after the expiry of seven years period, the boiler was to be sold to the lessee at predetermined value. It was the lessee who had to bear the loss due to obsolescence. All the risks and rewards vested with the lessee. When cumulative effect of all the factors is considered for and against the operating lease, it can be easily found out that if one has to choose between the finance lease and operating lease, there can be no difficulty in reaching the irresistible conclusion that it was a case of finance lease agreement. In pith and substance this agreement was nothing but a finance lease.

In order to decide the controversy, one need to appreciate the true meaning and purport of the term 'lease'. Section 105 of the Transfer of Property Act, 1882 defines lease. It provides that a lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.Ã¢â‚¬ From the above definition it can be seen that the fundamental characteristic of any lease is to separate the useÃ¢â‚¬ from ownershipÃ¢â‚¬ of the assets. As per the above section 105 of TPA, a person owning the asset, called the 'lessor', provides the asset for use for a certain period of time to another called the 'lessee' for some consideration. In the present commercial world, there are different types of leases such as finance lease, operating lease, deferred lease, skip lease, sale and lease back, etc. Presently this Bench has been called upon to concentrate only on the finance and operating lease, as the assessee is claiming it to be a case of operating lease, whereas the Revenue has held the lease agreement as a finance lease. [Para 5.1] As per Guidance Note on Accounting for Leases, 'Finance lease' means : 'A lease under which the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset. 'Operating lease' has been defined to mean : ' A lease other than a finance lease'. The phrase 'fair value' as used in the definition of 'Finance lease' has been further defined to mean : 'The amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length transaction.' The Explanation further elaborates the definition of 'Finance lease' by providing that : A lease is classified as a finance lease if it secures for the lessor the recovery of his capital outlay plus a return on the funds invested during the lease term. Such a lease is normally non-cancellable and the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset.' The AR has invited attention towards clause 28 of this Guidance Note which provides that the recommendations of this Guidance Note shall apply to all assets leased during the accounting periods beginning on or after 1-4-1995. It was put forth that the assessee entered into the instant lease transaction during the previous year relevant to the assessment year 1998-99 and hence this Guidance Note shall be relevant for determining the distinction between the operating and finance lease in the years in question. From the above Guidance Note one can understand the ambit of finance lease in a generic sense to mean a lease under which the lessor secures the recovery of his capital outgo plus a return on such funds during the lease term and the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset. Another highlight of such a lease is that it is normally non-cancellable. Accounting Standard (AS) 19 issued in 2001 explains that 'a lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.' In this Accounting Standard a 'Finance lease' has been defined as : 'a lease that transfers substantially all the risks and rewards incident to ownership of an asset' and 'Operating lease' as 'a lease other than finance lease'. Para 6 of this Accounting Standard provides that a lease is classified as finance lease if it transfers substantially all the risks and rewards incident to ownership. Title may or may not eventually be transferred. [Para 5.3] On a perusal of the meaning of operating lease and finance lease from the Guidance Note and Accounting Standard 19 there is not much difference between the two. Operating lease has been defined in both as a lease other than finance lease. And when one examine the meaning of 'Finance lease' as per Guidance Note along with Explanation given in para 4, it turns out that its scope is almost the same as that given in the AS-19. Rather, the AS simply elaborates the concept of finance lease as given in the Guidance Note without making any qualitative addition to or subtraction from that. [Para 5.5] There is no dearth of judicial precedents holding that the general meaning of a word or phrase or expression as assigned by the Supreme Court under one enactment without reference to any specific provision therein is binding under another enactment which again does not specifically define such word or phrase or expression. One such case is the judgment of the jurisdictional High Court in Avinash Bhosale v. UOI & Ors. (2010) 322 ITR 381 (Bom). From the above judgment of the jurisdictional High Court, it is apparent that when the Hon'ble Supreme Court has interpreted or explained a particular term or phrase under one enactment, it cannot lie in the mouth of the lower authorities to interpret such term or phrase in a different manner under another enactment unless the context of such other enactment otherwise requires. Coming back to the facts of the instant case, it is noticed that the Supreme Court in the case of Asea Brown Boveri Limited (supra) has given a meaning to the concept of Finance lease,Ã¢â‚¬. Further as such meaning has been given without any definition of finance lease in the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992. When this Bench adverts to IT Act, 1961, here again this Bench find that no definition has been given to the finance leaseÃ¢â‚¬. In such a situation, this Bench is not only empowered but also duty bound to consider and apply such meaning of finance lease given by the Hon'ble Supreme Court under the IT Act, 1961. [Para 5.11] Thus, it is apparent that the broader guidelines laid down by the Hon'ble Supreme Court in the case of ABB Ltd have been reiterated in the latter case of Association of Leasing & Financial Services Companies v. Union of India & Ors. On a fair reading of the aforenoted two judgments rendered by the Hon'ble Supreme Court in the light of the Guidance Note and the AS 19, one can draw the following broad features of finance lease :- (i) Such a lease is non-cancellable and there is a fixed obligation on the lessee for payment of lease money. In case lease is terminated prematurely by the lessee, the lessor is entitled to recover his investment with expected interest. (ii) Such a lease is always for a fixed period, which period is decided by taking into consideration the economic life of the asset. (iii) The initial lease period is settled in such a way so as to fully recover the investment of the lessor together with interest thereon. (iv) Lessor is always interested in the recoupment of his investment with interest in the shape of rentals over the period of lease and not the asset or its user. (v) It is the responsibility of the lessee to bear all costs of insurance, repairs and maintenance and other related costs and expenses for the leased equipment. (vi) Though the equipment is chosen by the lessee but the payment to the supplier is made by the lessor. Thus, it is the lessee who chooses the assets, takes delivery, enjoys the use of the asset, bears its wear and tear. It is the lessee who becomes the real owner of the asset. (vii) It is the lessee who pays taxes, etc., in relation to such asset. (viii) The risks and rewards incidental to the ownership vest with the lessee. (ix) The features of bailment are absent in such a lease. (x) The lessor simply holds the title of asset as his security till his investment and interest thereon is recouped. The lessor is only symbolic owner during the period of lease and on the expiry of lease period, even such symbolic ownership also comes to an end. [Para 5.14]