Dear Friends,
We are starting a series of questions and their answers on Income Tax Matters, for information and knowledge of our readers and students. This would be helpful for those aspiring students of our profession.
Let’s us consider the first question related to the right to claim depreciation in case of lease of motor vehicles. You know that as per Motor Vehicle Act, 1988 the registration of a leased motor vehicle should be in the name of the lessee and not the lessor. But in Income Tax Act, 1961 for claiming depreciation of assets, the asset must be owned by the person claiming depreciation.
PROBLEM
A Ltd., a non-banking finance company, is engaged in the business of leasing and hire purchase business. It purchases motor vehicles or motor cars from Shakti Motors and leases out to its customers. The lease agreement with the customers states that in case of default of customers for payment of lease rent or other terms and conditions , the A Ltd., has power to repossess the motor cars/vehicles leased out. Since the registration of vehicles are in the name of lessees and per provisions of Motor Vehicles Act, 1988. A Ltd., has claimed a depreciation of Rs. 5.00 Lakhs on the motor cars leased out as on 31/03/2021. The claim is rejected by the Assessing Officer on the ground that the assessee ( A Ltd.) in only finances for purchase of leased vehicles and hence it is neither owner or used the same motor cars in his business.
SECTION 32
Provides the method of calculation of depreciation and conditions to be fulfilled are:
- The assets must be owned, wholly or partly, by the assessee.
- The assets must be in use for the business or profession of the taxpayer. If the assets are not used exclusively for the business, but for other purposes as well, depreciation allowable would be proportionate to the use of business purpose. The Income Tax Officer also has the right to determine the proportionate part of the depreciation under Section 38 of the Act.
- Co-owners can claim depreciation to the extent of the value of the assets owned by each co-owner.
- You cannot claim depreciation on the cost of land.
- Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have been allowed as a deduction irrespective of a claim made by a taxpayer in the profit & loss account.
SECTION 37
Says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, “Profits and Gains of Business or Profession”.
ANSWER
The above question is based on Supreme Court ruling given in case of ICDS Ltd. Vs. CIT[2013] 29 Taxmann.com.com 129. In this case , motor vehicles were registered in the name of lessees during the period of lease as per requirement of the Motor Vehicles Act, 1988 . The depreciation was not claimed by the lessees for income tax purposes. The Apex Court gave ruling in favour of the leasing company to have the benefit of claiming depreciation as deduction expenditure under provisions of Section 32 of the Act, 1961, on the basis of following arguments-
"The Motor Vehicles Act, 1988 mandates that during the period of lease, the Vehicle be registered in the Certificate of Registration in the name of lessee and, on conclusion of the lease period , the vehicle again register in the name of lessor ( hire purchase) company as the owner. The section leaves no choice to the lessor to allow the vehicles to be registered in the name of lessee, thus no inference can be drawn from registration certificate as to ownership of the legal title of the vehicles leased and if the lessee was in fact the owner , he would have claimed depreciation on the vehicles , which as specifically recorded in order of Appellate, was not done. It would be strange situation to have no claim of depreciation in case of a particular depreciable asset due to vacuum of ownership during period of lease. As aforesaid the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hand of lessee. This reaffirms the position the position that the assessee is in fact the owner of the vehicles, in so far as section 32 is concerned."
CONCLUSION
Please note that in above case if lessee claim lease rent as deductible revenue expenditure under provisions of Section 37 of the Income Tax Act, 1961 and have not claimed depreciation under Section 2 ,then the leasing company ( A Ltd.) is entitled to claim depreciation as deductible expenditure on vehicles leased under Section 32.
DISCLAIMER: The article produced here is only for information and knowledge of readers. The views expressed are personal views of the author . It is advisable to consult your tax consultant for more clarification.
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