Hire Purchase Depreciation: Lessee Wins Right to Claim on Full Purchase Price

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Case Name:

Integrated Finance Co. Ltd. vs. The Deputy Commissioner of Income Tax (High Court of Madras)

Tax Case (Appeal) No.973 of 2005

Date: 26th April 2012

Key Takeaways

1. In hire purchase agreements, depreciation can only be claimed by the party in actual possession and use of the asset.

2. The Board Circular No. 9 dated 23.3.1943 is still relevant in determining depreciation claims in hire purchase cases.

3. Finance companies cannot claim depreciation on assets they've given out under hire purchase agreements if the ownership rests with the lessee.

Issue

Is a finance company (lessor) entitled to claim depreciation on assets given under hire purchase transactions when the agreement discloses that ownership rests with the lessee?

Facts

1. Integrated Finance Co. Ltd., a non-banking finance company, claimed depreciation on hire purchase assets for the assessment year 1994-95.

2. The company argued that as the owner of the assets, and since the hirer hadn't claimed depreciation, they were entitled to it.

3. The Assessing Officer rejected this claim.

4. The company appealed to the Commissioner of Income Tax (Appeals), who also rejected their claim.

5. The Income Tax Appellate Tribunal also ruled against the company.

6. The case then reached the High Court.

Arguments

Integrated Finance Co. Ltd. (Appellant):

- As the owner of the assets, they should be allowed to claim depreciation.

- The hirer had not claimed depreciation, so the company should be entitled to it.

- They relied on Board Circular No. 9 dated 23.3.1943, arguing that since the assets were used in their business by hiring them out, they should be granted depreciation under Section 32 of the Income Tax Act.

Income Tax Department (Respondent):

- The ownership and possession of the assets were with the purchaser (lessee).

- The company was merely collecting installments as per the agreement.

- Depreciation should be allowed only in the hands of the purchaser who is in actual possession and use of the asset.

Key Legal Precedents

The main legal precedent cited in this case is the Board Circular No. 9 [R. Dis. No. 27(4)-IT/43] dated 23.3.1943. This circular provides instructions for dealing with depreciation allowances in cases where assets are acquired under hire-purchase agreements. The circular states that where the agreement discloses ownership resting with the lessee, depreciation should be allowed to the lessee on the entire purchase price.

Judgement

The High Court dismissed the appeal and ruled in favor of the Income Tax Department. Key points of the judgment:

1. The court confirmed that the purchaser (lessee) was in actual possession and enjoyment of the vehicle.

2. As per the hire purchase scheme, ownership was given to the purchaser.

3. The finance company only had the right to receive hired amounts in installments.

4. The court relied on Board Circular No. 9 dated 23.3.1943, which states that in hire purchase cases where ownership rests with the lessee, depreciation should be allowed to the lessee on the entire purchase price.

5. The court rejected the finance company's claim for depreciation.

FAQs

1. Q: Can a finance company claim depreciation on assets given under hire purchase agreements?

  A: Generally, no. If the agreement shows ownership resting with the lessee, only the lessee can claim depreciation.

2. Q: What is the significance of Board Circular No. 9 dated 23.3.1943 in this case?

  A: This circular provides guidelines for allowing depreciation in hire purchase cases and was a key factor in the court's decision.

3. Q: Does this judgment apply to all hire purchase agreements?

  A: This judgment specifically applies to cases where the agreement discloses ownership resting with the lessee.

4. Q: What factors determine who can claim depreciation in a hire purchase agreement?

  A: The key factors are actual possession, use of the asset, and the terms of ownership as stated in the agreement.

5. Q: How does this judgment impact non-banking finance companies?

  A: It limits their ability to claim depreciation on assets given out under hire purchase agreements where ownership rests with the lessee.

1. This Tax Case (Appeal) filed by the assessee was admitted on the following substantial question of law:

" Whether on the facts and the circumstances of the case, the Tribunal was right in law in holding that the appellant is not entitled to claim depreciation in respect of the assets given under hire purchase transaction by virtue of the Board Circular No.689 dated 24.8.1994?

2. The assessee is a non-banking finance company. In respect of the assessment year 1994-95, the assessee claimed depreciation on hire purchase assets under hire purchase transaction. The assessee claimed that they being the owner of the assets and that the hirer not having claimed the depreciation, they were entitled to the grant of depreciation on hired assets. The claim of the assessee was rejected. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax (Appeals). The assessee placed reliance on the beneficial Board Circular No.9 dated 23.3.1943 and submitted that since the assets were used in the business of the assessee by hiring it out, the assessee was entitled to the grant of depreciation under Section 32 of the Income Tax Act. The claim of the assessee was, however, rejected. Confirming the view of the Assessing Officer, the first Appellate Authority pointed out that as per the Scheme, the ownership and possession of the assets were with the purchaser and the assessee was the hirer, collecting the instalments as per the agreement; consequently, depreciation have to be allowed only in the hands of the purchaser. Thus the assessee's appeal was rejected. Aggrieved by this, the assessee preferred a further appeal before the Income Tax Appellate Tribunal, which also rejected the case of the assessee. The Tribunal pointed out that the various persons to whom the vehicles were hired out, in fact, had the possession and were using them. As per the Board's circular, person who is in actual use of the vehicle was entitled to claim depreciation; consequently, the assessee could not be granted depreciation. Aggrieved by this, the assessee has filed this appeal before this Court.

3. It is not denied by the assessee that the purchaser is in actual possession and enjoyment of the vehicle. As per the Scheme, the ownership was given to the purchaser. All that the assessee had under the agreement was payment of the hired amount in instalments. In this connection, Circular No.9 [R.Dis.No.27(4)-IT/43], dated 23.3.1943, enumerating on allowing depreciation in the case of hire purchase agreement, reads as under:

" Departmental clarification. -- The following circular has been issued by the Board for allowing depreciation in the case of assets owned under hire-purchase agreements:

Allowances in assessing business income -- Depreciation allowance -- Plant and machinery acquired in hire-purchase agreement. -- The following instructions are issued for dealing with cases in which an asset is being acquired under, what is known as, a hire-purchase agreement:-

(1) In every case of payment purporting to be for hire-purchase, production of the agreement under which the payment is made should be insisted on.

(2) Where the effect of an agreement is that the ownership of the subject is at once transferred to the lessee (e.g. where the lessor obtains a right to sue for arrear instalments but no right to recovery of the asset), the transaction should be regarded as one of the purchase by instalments and no deduction in respect of hire should be made. Depreciation should be allowed to the lessee on the entire purchase price as per the agreement.

(3) Where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction should be regarded as one of hire-purchase. In such cases the periodical payments made by the hirer should for tax purposes be regarded as made up of:

a. Consideration for hire, to be allowed as a deduction in the assessment, and

b. payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value (e.g. the amount for which the hired subject would have been sold for cash at the date of agreement).

(4) The allowance to be made in respect of hire should be the difference between the aggregate amount of the periodical payments under the agreement and the initial value (as described above), the amount of this allowance being spread evenly over the term of the agreement. If, however, the agreement was terminated either by the outright purchase of equipment or of its return to the owner, the deduction should cease as from the date of the termination.

(5) An assessee claiming this deduction should be asked to furnish a certificate, from the vendor or other satisfactory evidence, of the initial value (as described above). Where no certificate or satisfactory evidence is forthcoming, the initial value should be arrived at by computing the present value of the amount payable under the agreement at an appropriate rate per centum; in doubtful cases the facts should be reported to the Board. " Thus the Board pointed out that in matters of hire purchase, where the agreement disclosed the ownership resting with the lessee, the claim of depreciation should be allowed to the lessee on the entire purchase price.

4. On the admitted fact as narrated above and on the facts found by the Tribunal, we have no hesitation in rejecting the case of the assessee, thereby confirming the order of the Tribunal. Even though the question of law admitted by this Court referred to Board's Circular No.689 dated 24.8.1994, the same has to be read as Circular No.9 dated 23.3.1943.

The Tax Case (Appeal) stands dismissed. No costs.

To

1. The Income Tax Appellate Tribunal, Madras "A" Bench, Chennai.

2. The Commissioner of Income Tax (Appeals) VI, Chennai.

3. The Deputy Commissioner of Income Tax, Special Range-VIII Chennai 600 034