ORDER
A. KALYANASUNDHARAM, A. M. :
The appeal has been filed by the assessed, a leasing company, aggrieved by the non-allowing of claim of depreciation of Rs. 53,65,210 on commercial vehicles purchased by it. The grievance, as raised by the assessed, in the grounds of appeal in addition to the non-allowing of the depreciation, are that, the observation of the authorities that, the commercial vehicles were not put to use, that there was no valid certificate of registration, that the assessed had not adduced satisfactory evidence of the actual user of the commercial vehicles and finally in holding the lease agreement a non-genuine one.
Appearing for the assessed, Sh. Vaish, Senior Advocate, submitted that, the undisputed facts in the instant case are that :
(a) the assessed had purchased 54 DCM Toyota commercial vehicles;
(b) paid the total consideration of Rs. 1,07,70,420;
(c) the payment was encased by M/s DCM Toyota Ltd.;
(d) temporary certificate of registration in favor of the assessed for 54 vehicles was made and
(e) the movable property namely commercial vehicles were delivered to the assessed.
Simultaneously, the assessed had entered into an agreement for leasing the 54 vehicles to M/s DCM Toyota Ltd., vide agreement dt. 29th March, 1988. M/s DCM Toyota Ltd., were required to pay the lease and hire charges to the assessed immediately on signing of the agreement and on that basis, they had paid the assessed a sum of Rs. 2,98,430. This lease amount received from M/s DCM Toyota Ltd., was duly credited to the P&L; account and was treated as income for the year ended on 31st March, 1988.
The assessed has been carrying on the business of leasing of various kinds of machineries in the last few years and in the year had leased the commercial vehicles purchased by it. The temporary certificate of registration, which is normally issued by the dealers so as to enable the purchaser to lift the vehicles, from show-rooms to its own premises was duly carried out. The vehicles were sold to the assessed by means of several invoices that have been raised on the assessed by M/s DCM Toyota Ltd. and each of the 54 vehicles was duly insured with United India Insurance Co. Ltd. a division of General Insurance Corporation, a Govt. of India undertaking. As per the terms of the lease agreement, M/s DCM Toyota Ltd. were to ensure, that the identification in regard to the ownership of the vehicles by the assessed are clearly displayed on each of the vehicles. They were also prohibited to carry out any alterations of permanent nature, indicate the location of the vehicles during the period of lease, comply with the regulations regarding the use of the vehicles. The lessee was also required to indemnify the assessed from any defaults in regard to the rules and regulations on the use of the vehicles during the tenure of the lease. The lessee also had undertaken that he shall not offer these 54 vehicles as security for obtaining any loan by it. The lessee also has accepted that the title of the Lesser shall not be affected during the period of lease, vehicles would be allowed to be inspected by the Lesser, their auditors or any person authorised or any financial institution authorised by them. The lessee also had undertaken that in the event of the vehicle being sub-leased to any party for running it on hire, then the Lesser shall be kept informed and such information shall be provided within 7 days of the sub-lease. It further provided that in the event of the lessee failing to do so, the lessee shall lose the right of sub-leasing the vehicles.
Shri Vaish submitted that there are several other normal clauses in regard to compliance with the laws, in regard to arbitration and such other matters. He submitted that in the light of the said lease agreement the lessee had intimated, to the assessed, the names of sub-lessees with their addresses, together with the location, relating each of them to the registration No. of the vehicle containing chasis number and engine number. He submitted that all the above mentioned information were provided to the Assessing Officer (AO). The invoice, as raised by the DCM Toyota Ltd., clearly shows that the vehicles have been sold to the assessed on 28th March, 1988. The assessed paid the full consideration of the 54 vehicles on the 29th March, 1988 and the temporary registration have been effected on 29th March, 1988. Simultaneously, on the 29th March, 1988 itself, the vehicles were leased to DCM Toyota Ltd. and the lease rental of Rs. 2,98,430 was received and account for as hire charges.
He pleaded that, in the light of the above mentioned facts, the assessed had established that :
(a) it had become the owner of 54 vehicles;
(b) it had leased them, as per the objects of the company;
(c) the temporary registration as well as the insurance have been effected on the 29th March, 1988; and
(d) received hire charges and credited the same to the P&L; account.
He accordingly pleaded that, in so far as s. 32 of the IT Act is concerned, the requirement for allowing of depreciation are that :
(a) the assets should be owned by the assessed and
(b) it should be used by the assessed for its business.
Shri Vaish submitted that the facts as narrated and as are accepted by the Revenue, clearly establish that both the conditions as are necessary for allowing of depreciation are satisfied, namely, (a) ownership of vehicles and (b) their use for the purpose of business which is leasing or hiring. He accordingly pleaded that there being no further requirement, in so far as s. 32 is concerned the claim of the assessed for allowing depreciation should be accepted and deduction allowed to it as such.
He submitted that the primary major objection of the authorities in not allowing depreciation to the assessed is that a public transport vehicle must necessarily have the permit, as are issued under the Motor Vehicles Act, without which, they would not be permitted to be used as a public transport vehicle. He submitted that the said permit as is required or as is issued by the transport authorities under the Motor Vehicles Act, is with reference to movement of the vehicles within one State or in more than one State or what is called, the national permit allowing it to be used throughout India. This permit is necessary for a transporter or a person who is engaged in the business of transportation of goods by means of goods-carriers or trucks. The business of the assessed is limited to hiring or leasing only. The actual user which in the instant case are the 54 sub-lessees it is for them to obtain the necessary permits under the Motor Vehicles Act. He submitted that, since s. 32 does not envisage any other condition other than ownership and use for the business the authorities were in error in importing the needs or satisfaction under other Acts, as pre-emptive requirement. Sh. O. P. Vaish submitted that with reference to Allahabad High Court decision in Ayodhya Prasad Tarachand Khera vs . CIT : [1967]66ITR576(All) that an assessed who carries on business of leasing out of machinery etc. and makes an addition of certain machinery, which in the instant case is transport carrier intended for hire, it is entitled to investment allowance, development rebate as the case may be. He submitted that the requirement as far as other Acts are concerned are wholly unnecessary.
He submitted that the Calcutta High Court in CIT vs . Salkia Transport Associates : [1983]143ITR39(Cal) had examined this very aspect, in regard to allowing of depreciation to the assessed, who had bought some buses. The authorities, did not allow depreciation on the buses on the basis that the buses were not registered under the Motor Vehicles Act. The conclusion of the High Court was that for allowing of depreciation registration under the Motor Vehicles Act was not essential. He also made reference to the decision of the Bangalore Bench of the Tribunal in Sangam Hotels Pvt. Ltd. vs . ITO wherein the purchase of two lorries by a transporter, whether non-registration of the vehicles under the Motor Vehicles Act would disentitle the assessed of the depreciation was examined and it was concluded that the non-registration of the vehicle under the Motor Vehicles Act would not disentitle the assessed from obtaining the benefit of depreciation.
He submitted that, thereforee, this objection of the Revenue has no force at all and the assessed cannot be deprived of the deduction of the depreciation. Sh. O. P. Vaish made reference to the extracts of the Motor Vehicles Act which have been placed at pages 48-58 and submitted that these provisions are specially enacted under the Motor Vehicles Act, for allowing a vehicle for moving in public and other places and States. The only business of the assessed is leasing and the assessed does not carry on the business as a transporter of either passengers or goods and, thereforee, the provisions of the Motor Vehicles Act have no applicability. He submitted that s. 22 of the Motor Vehicles Act makes it incumbent on the owner not to permit the vehicles to be driven in public places unless the vehicles are registered with that effect and certificate of registration is obtained. Shri Vaish submitted that as owner of the vehicles he has leased out the vehicles to DCM Toyota. The DCM Toyota had given an undertaking that it shall ensure compliance of various laws insofar as plying of the vehicles or running of the vehicles are concerned. He submitted that to this extent the lessee has taken care to ensure the compliance under the Motor Vehicles Act. He submitted that the temporary registration is normally allowed to be granted by the dealers who have been so authorised under the Act to issue such temporary registration. There is no material to the contrary, to indicate that DCM Toyota Ltd. had not been so authorised by the authorities, for issuing of the temporary registration. He submitted that all the other requirements in so far as the Motor Vehicles Act are applicable to a person who uses the vehicle for movement of passengers or goods. He accordingly pleaded that these requirements are not applicable insofar as the assessed is concerned for leasing of the vehicles which is its only business. Sh. O. P. Vaish further submitted that the doubt has arisen, because, this is a new kind of business that has come up, which is financing in nature primarily, but it needs to be examined in the light of several sub-lessees not being in a position to purchase or own the vehicle, but capable of only running it as actual user. He submitted that the assessed leasing company in a period of 3 years has almost recovered its entire investment on the purchase of the vehicles. The return of investment being about 1/3rd each year, it was a sound business decision.
He submitted that the authorities have considered the lease agreement to be a non-genuine one, because, the cost as paid by the assessed of Rs. 1.07 crores had been recovered in the shape of lease income over a period of 3 years. He submitted that this is a sheer coincidence and as the facts and as the evidence go to indicate, the purchase of the vehicle stands proved and similarly the leasing of the vehicles to DCM Toyota Ltd. is proved and is duly supported by the lessee furnishing complete information in regard to the sub-lessees and the location of the vehicles. He accordingly submitted that there is no basis to hold that the agreement is a sham or non-genuine one. He, thereforee, pleaded that the assesseds entitlement to the depreciation is fully justified and the same should be allowed.
For the Department, Shri H. S. Nanda, the learned Departmental Representative vehemently supported the orders of the authorities below. He laid emphasis on this short period of four days, within which all the transactions have been stated to have taken place. He submitted that, the invoice is dt. 28th March and the cheque is paid on the 29th March on which date itself the lease agreement is signed by the parties and the temporary registration only has been effected on the 30th March. He submitted that all these are insufficient to establish that the assessed had become the owner of the vehicles. Referring to the order of the CIT(A) para 5 and para 7, he submitted that the manner in which the entire transaction had been so arranged, needs to be looked closely through the microscope. He further submitted that under the Motor Vehicles Act, using any vehicle for transportation of passengers or goods, without a permit is an offence. He submitted that the temporary registration certificate issued by the M/s DCM Toyota Ltd., purported to be under s. 25 of the Motor Vehicles Act, as a special authority, is no registration in the eye of law. He submitted that there is no evidence on record for the actual use of the trucks. He submitted that between the date of lease and the date of closing of the account there were hardly three days and in order to infuse a feeling of genuineness the assessed showed Rs. 2,98,430 as hire charges. He further pleaded that the actual ownership has not been established and, thereforee, the assessed was not entitled to any claim of depreciation. He made reference to the Delhi Tribunal decision, in Ashoka Stone Crushing Industries vs . ITO for the proposition that there are certain requirements before which trucks could be allowed to be applied on public places and, thereforee, the use for the business have not been established.
2. We have given our very careful consideration to the rival submissions. We have also perused the materials, that have been placed on our records, such as the copies of the invoices along with the temporary and permanent registration certificates, copies of insurance of the various vehicles, copy of the lease agreement, the certificate from M/s DCM Toyota Ltd. stating that it had 154 trucks on its stock after it had sold 54 trucks to the assessed and also that, it had obtained permits according to the needs of the user and also the list of 54 sub-lessees giving information of engine number, chassis number, vehicle number, location, name and addresses of the sub-lessees.
As per the schedule that was annexed to and forming part of the lease agreement, between the assessed and the DCM Toyota Ltd. dt. 29th March, 1988, the lessee was M/s DCM Toyota Ltd. The lessee was required to pay the lease management fee of Rs. 80,778, place in security deposit with the assessed Rs. 26,96,605 and pay the first lease rental of Rs. 2,98,430 immediately on signing of the agreement. The Schedule B is reproduced below for the sake of facility :
'1. Lease Management Fee payable on signing of the lease agreement Rs. 80,778 (Rupees Eighty thousand seven hundred seventy eight only) payable by the lessee.
2. Security deposit payable on or before 7th April, 1988, of Rs. 26,92,605 (Rupees Twenty six lacs ninety two thousand six hundred five only) refundable to the lessee after all dues under the lease agreement stand paid to the Lesser.
3. The first lease rental of Rs. 2,98,430 (Rupees Two lacs ninety eight thousand four hundred thirty only) shall be paid immediately on signing of this agreement. Subsequent lease rental of Rs. 2,98,430 (Rupees Two lacs ninety eight thousand four hundred thirty only) shall be payable monthly in advance on 1st day of each month commencing from May, 1988 for the balance period of 35 months. The total lease rental for 36 months lease period amounting to Rs. 1,07,43,480 (Rupees One Crore seven lacs forty three thousand four hundred eighty only).
Sales-tax and other taxes on lease rentals, as may be applicable, will be extra on lessees account.'
The preamble of the lease agreement provides that the assessed carries on the business of giving on or letting out of various types of equipment and other capital assets. The assessed has offered to give on lease and that the lessee has agreed to take on lease the (vehicles as described in Schedule A) which have been individually referred to as vehicle for a term of 3 years and that the Lesser has agreed to give on lease to the lessee equipment, on the terms and conditions provided in the agreement. Clause (1)(b) of the said agreement reads : 'The vehicles shall be put to use for commercial running either by the lessee himself or through its sub-lessees before 31st March, 1988 and will continue to use for commercial running till the termination of the lease provided that where the sub-leasing is done the same shall be on the sub-lease proforma which is approved by the Lesser. The rentals for each piece of vehicle for the initial term of 3 years shall be as specified in Schedule B cited above.
According to the lease agreement the lessee was required to carry out the following :
(a) pay the security deposit;
(b) affix Lessers identification on each of the vehicles;
(c) maintain the vehicles;
(d) not to make any alteration of permanent nature to the vehicle;
(e) keep the assessed informed of the location of the vehicles;
(f) comply with all the regulations regarding the use of the vehicles;
(g) indemnify the Lesser in regard to defaults in compliance of statutes and rules on the use of the vehicles;
(h) supply information with balance sheets, and such other details as may be called for.
The lease agreement provides the following mutual covenants :
(a) Lessers title shall not be affected by grant of lease;
(b) Lesser or any of its officers would be allowed for inspection of the vehicle;
(c) Lessee would have the right to sub-lease the vehicle in which case he shall inform the Lesser of each such sub-lessee within 7 days of the sub-lease failing which he would lose the right of sub-leasing to any person;
(d) The Lesser only has the right of hypothecating vehicles for obtaining any finance that may be needed etc.
The balance sheet for the year ended 31st March, 1988, has been placed in pages 65 to 70. In page 68, the movement of assets have been shown in which the purchase of the vehicles has been shown as addition under the head 'assets given on finance lease'. The P&L; account shows revenues comprising of lease rentals received under finance-tied leases and operating leases. The temporary registration have been effected in favor of the assessed and the perusal of various invoices, as raised by the DCM Toyota Ltd., gives particulars of chassis number, engine number along with the colour of the vehicles and description. The copy of excise duty paid on the vehicles have also been enclosed along with the invoices. The expenses on temporary registration have been charged and debited to various accounts which is not disputed. The insurance of the vehicles have been effected with United India Insurance Co. Ltd. a wing of General Insurance Corporation, Govt. of India undertaking from 28th and 29th March, 1988 for a period of one year. Copy of permanent registration in respect of most of the vehicles have been provided for and the perusal of which indicate that registration have been duly effected in favor of the assessed company.
The invoices of the 54 DCM Toyota trucks are dt. 28th March, 1988 and the assessed had paid for the same on the 29th March, 1988 in full. All the temporary registration are dt. 28th March, 1988.
The perusal of the above facts indicate that M/s DCM Toyota Ltd. had sold 54 trucks by means of several of its invoices to the assessed, on 28th March, 1988. The ownership of the vehicles are established by the fact that the invoices are made out in favor of the assessed and the insurance has also been effected in favor of the assessed and the assessed on its part had paid the due consideration. To this extent, the requirement of ownership, in our opinion, stands satisfied, because, as per the Sale of Goods Act, all goods other than immovable goods, the ownership gets transferred consequent to both the parties performing their parts of contract and also the delivery which is usually in the shape of receipt of the documents. The title to the goods, especially in the case of motor vehicles, is passed the moment the invoices are prepared and the temporary registration is effected.
Coming to the question, whether the assessed could be said to have used the vehicles for its business purposes or not, in our opinion, it has to be viewed from the point of view of the nature of the business carried on by the assessed. The business in which the assessed is in, is giving on hire or letting out of various types of equipment and other capital assets. thereforee, the assessed derives income from hiring of various equipments owned by it. According to the agreement of lease entered into with M/s DCM Toyota Ltd., the lease was effected on 29th March, 1988 and the lessee, namely, DCM Toyota Ltd., was required to ensure the commercial use of the vehicles before 31st March, 1988. The DCM Toyota Ltd., as per this agreement, had paid the lease amount of Rs. 2,98,430 immediately on signing of the lease agreement which amount has been credited to the P&L; account under the head revenues. The bipartite agreement has not been found as false or non-genuine, because there had been no retraction by DCM Toyota Ltd. to the written agreement. The agreement, could be treated as non-genuine only if one of the parties to the agreement claim it to be not genuine in so far as they are concerned and that they have never entered into or acted upon such agreement. It is not the case of the Revenue, that DCM Toyota Ltd. had stated that the agreement was never intended to be acted upon or was never acted upon. thereforee, the said agreement could not be treated as a non-genuine one or a sham. There is also no other material available on record indicating the transaction of agreement to be non-genuine.
During the course of hearing the reading of cl. 3 of Schedule B which provided that all subsequent lease rental of Rs. 2,98,430 shall be paid monthly in advance on the first day of each month commencing from May, 1988 for the balance period of 35 months, could be taken to mean that the lease in fact commenced only from 1st April, 1988, i.e., the beginning of the next financial year, was raised. The submission of the counsel, Sh. Vaish, in this regard was that the agreement was effected on 29th March, 1988 and it is on that basis that the first payment was to be made immediately on signing of the said agreement. Thereafter, for the mutual convenience between the parties, it has been stated that the lease rental shall be payable on the first of each month. He accordingly pleaded that cl. 3 of Schedule B to the agreement could not in any manner be interpreted to mean that the leased commenced from the 1st of April, 1988 only.
In our opinion, there is considerable merit in the argument advanced by the Senior Advocate, Sh. O. P. Vaish that the agreement has to be read as it is. The Schedule B is an annexure and forming part of the lease agreement dt. 29th March, 1988. The preamble of the lease agreement indicates that the agreement has been effected on 29th March, 1988 and for a period of 3 years. In order to clarify the doubt, Sh. O. P. Vaish produced a copy of the letter dt. 1st April, 1992 from DCM Toyota Ltd. by which they had called for the sale of 54 vehicles to them as per the second lease agreement entered into on 28th March, 1991. He submitted that this clearly clarifies that the leases commenced on 29th March, 1988 and the first lease rental income on account of lease was from 29th March, 1988. There is considerable force in the argument advanced by Sh. Vaish that reading of Schedule B to the agreement could not be interpreted to mean that it was given effect to from 1st April, 1988. The counsels argument that it was mutual convenience to receive the lease rental on the first of every month and it could not be interpreted to mean that the lease commenced on 1st April, 1988 only; also has merits. In our view, since the agreement no where indicates first of April, 1988, as the starting date, and to infuse it into the agreement, would be wrong, on the facts of the case. We have, thereforee, to hold that the lease became effective from 29th March, 1988.
The income on account of lease of the 54 vehicles has been stated to be 'hire' which is no doubt a reasonable or proper submission. This, in fact, is in accordance with the business of the assessed, which is letting out or giving various types of equipment and capital assets for hire. thereforee, the act of leasing and giving over the vehicles as per the lease agreement, being in consonance or in compliance, with the objects of the company, it has to be concluded that the vehicles so hired out are used for the purposes of the business of the assessed.
During the course of hearing, it was stated that depreciation that is available to the assessed is at the rate of 50% to motor lorries and motor trucks used in the business of running them on hire. The argument of the counsel, Sh. O. P. Vaish, in this regard was that the business of the assessed is only letting out on hire. He submitted that there does not appear to be any difference in the rate of depreciation, since the main requirement is that the assessed should allow the hire of the vehicles which it had done.
Appendix I to the IT Rules, Part I, cl. 3(2)(ii) reads as under :
'Block of Assets
Depreciation allowance as percentage of written down value
(ii) Motor buses, motor lorries and motor taxis used in a business of running them on hire
50'
In our opinion, a reading of the above gives an impression that the depreciation @ 50% is allowable in respect of motor lorries which are used in business of running them on hire. Since motor lorries as are purchased by the assessed are leased out, they could be used only for running as transport of passengers or goods. thereforee, the assessed which is carrying on the business of leasing or letting of its capital assets, clearly carries on the business of running the motor lorries on hire. thereforee, it is entitled to the depreciation of 50% as provided in the Act.
Sec. 32(1) reads as under :
'32(1) In respect of depreciation of buildings, machinery, plants or furniture owned by the assessed and used for the purpose or the business of profession, the following deductions shall, subject to the provisions of s. 34, be allowed......'
The reading of the above clearly implies satisfaction of only two conditions (i) the assets should be owned by the assessed and (ii) they must be used for the purposes of business of the assessed. In so far as the ownership is concerned, in the earlier paragraphs, we have found that the evidence on record such as invoices, insurance and the registration that have been effected followed by payments made by the assessed in full, giving the right of the assessed to lease them on hire, clearly establish the fact that the assessed owned the 54 vehicles. In so far as the usage for the purpose of business is concerned, it has been found that the vehicles have been leased out on hire which is the business of the assessed. thereforee, the conditions as are required under s. 32(1) having been fully satisfied, then, as per the provisions contained in the Act, the deductions on account of depreciation have to be allowed and there is no alternative available. The reliance placed on the Calcutta and Allahabad High Court decisions by the assessed also supports the view taken by us. The Bangalore Bench (supra) has also taken identical conclusion. The decision of the Delhi Bench, in Ashoka Stone Crushing Industries (supra) is distinguishable on facts because in that case the assessed was carrying on the business of transporter, for which purpose, he had necessarily to comply with certain formalities under the Motor Vehicles Act and till such formalities are completed, the vehicle could not be stated to be available for use of the business. In the present case, it is not the case of the Revenue that there were certain other expenses to be incurred before the vehicle could be used as such.
3. In view of the above, we are of the opinion that the claim of the assessed to allow depreciation on the 54 vehicles is fully justified and we allow the claim. The appeal is allowed.