COMMISSIONER OF INCOME-TAX VS A. P. PAPER MILLS
1999 P T D 746
[225 I T R 262]
[Andhra Pradesh High Court (India)]
Before Syed Shah Mohammed Quadri and R. Bayapu Reddy, JJ
COMMISSIONER OF INCOME-TAX
Versus
A. P. PAPER MILLS
R. C. Nos. 13, 22 and 101 of 1988, decided on 05/08/1996.
Income-tax---
----Depreciation---Condition precedent---Asset should be owned by assessee- Assessee purchasing trucks, delivering them to contractors for operation and transport exclusively of material of assessee---Contractors not permitted to sub-let trucks or use them for any other purpose---Option to contractors to have trucks transferred to them after 42 months---Option to contractors to terminate contract without completing target transport ---Assessee is owner of trucks---Entitled to depreciation---Indian Income Tax Act, 1961, S.32.
The assessee-company purchased trucks and after purchasing the trucks the assessee entered into agreements with contractors, and delivered the trucks to the contractors for operation for transporting wholly and exclusively the material of the assessee. Though the contractors were given custody and possession of the trucks during the period of operation, they were under an obligation not to allow the trucks to be used by any one else or to sub-let them in any manner or to part with the possession of the same. They were bound to use the trucks exclusively for the specific purposes of the assessee. The agreement specifically provided that the assessee would remain the owner of the trucks and had the power to get back possession of the trucks from the contractors. The contractors would forfeit possession of the trucks on violation of any terms and conditions of the agreement. However, the assessee undertook to transfer the ownership of the trucks to the contractors after 42 months from the date of the agreement in the event of the contractor fulfilling the conditions of the agreement. The contractors also ad the right under the agreement to seek termination of the contract without completing the full target of the transport service of Rs.5,00,000. The assessee had to arrange for a comprehensive insurance policy for the trucks on behalf of the contractors who were bound to reimburse the assessee in that regard. The contractors were bound to make good to the assessee any loss or damage caused to the trucks either by accident or for any other reason. The assessee claimed depreciation on the trucks, but the Income-tax Officer disallowed the claim. The Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. The Tribunal held that the assessee was entitled to claim depreciation on the trucks. On a reference:
Held, that two conditions had to be satisfied by the assessee for being eligible for depreciation; the building, machinery, plant or furniture in question must be owned by the assessee, and such building, machinery, plant, etc., should have been used for the purpose of the business or profession of the assessee. The trucks in question were undoubtedly being used for the purposes of the assessee. A close reading of the terms and conditions of the agreement left no doubt that the assessee was the owner of the trucks and continued to be the owner of the trucks till the trucks were transferred in favour of the contractors by the assessee on fulfilment of the terms and conditions of the agreement and that eventuality did not happen in any of the assessment years in question. There was no binding obligation on the contractors to purchase the trucks: what they had was only an option to purchase. Moreover, a right was reserved to the contractors to return the goods at any time during the subsistence of the contract. It followed that there was no sale of the trucks in favour of the contractors on a deferred payment of the purchase price. Therefore, the assessee was the owner of the trucks as it satisfied both the requirements of section 32 and was entitled to depreciation on the trucks.
K. L. Johar & Co. v. Deputy C.T.O. (1965) 16 STC 213 (SC) and Damodar Valley Corporation v. State of Bihar (1961) 12 STC 102; AIR 1961 SC 440 applied.
C.I.T. v. Steelcrete (P.) Ltd. (1983) 142 ITR 45 (Cal.); Helby v. Mathews (1895) AC 471 (HL) and Srirangacharyulu (S.P.B.P.) v. C.I.T. (1965) 58 ITR 95 (AP) ref.
S. R. Ashok for the Commissioner.
Y. Ratnakar for the Assessee.
JUDGMENT
SYED SHAH MOHAMMED QUADRI, J. ---In these reference cases, under section 256(1) of the Income Tax Act, 1961, at the instance of the Revenue, the following question is referred to this Court for opinion:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assessee is entitled to depreciation on motor trucks?"
The assessee in all these cases is the same. The question arises in respect of different assessment years. R. C. No. 13 of 1988 relates to the assessment year 1979-80; R. C. No. 22 of 1988 pertains to the assessment years 1977-78 and 1978-79 and R.C. No.101 of 1988 arises from out of assessment proceedings for the assessment years 1980-81 and 1981-82.
The assessee, a public limited company, purchased trucks. The depreciation allowance, which is the subject-matter of these references, was claimed by the assessee for the abovesaid assessment years. Various amounts were claimed for those assessment years. After purchasing the trucks, the assessee entered into agreements with contractors. The germane terms and conditions of the agreement show that the assessee delivered the trucks to the contractors for operation and transporting wholly and exclusively the material of the assessee. The contractors were to operate the trucks exclusively for the abovesaid purposes. They agreed to deposit a sum of Rs.15,000 as security for fulfilment of the contract and a further sum of Rs.33,000 in 42 instalments at the rate of Rs.1,000 per month for the first 12 months and Rs.700 per month for the further period of 30 months. The operational staff, to be appointed by the contractors on the trucks, was to have the prior approval of the assessee which had the discretion to disallow any member of the staff to work on the vehicle. Though the contractors were given the custody and possession of the trucks during the period of operation, yet they were under an obligation not to allow the trucks to be used by anyone else or to sub-let the same in any manner or to part with the possession of the same. They were bound to use the trucks exclusively for the specific purpose of the assessee. It is also specifically provided in the agreement that the assessee would remain the owner of the trucks and had the power to get back the possession of the trucks from the contractors, which was delivered to them for purposes of operation. The possession of the contractors is said to be permissive which they would forfeit on violation of any terms and conditions of the agreement. However, the assessee undertook to transfer the ownership of the trucks to the contractors after 42 months from the date of the agreement in the event of the contractor fulfilling the conditions of the agreement. It is also worth noticing that the contractors had the right under the agreement to seek termination of the contract without completing the full target of the transport service of Rs.5,00,000. They were bound to deliver the vehicle in roadworthy condition. However, if the condition of the trucks at the time of delivery was found to be unroadworthy, the assessee reserved its right to deduct all the amounts due and the damages caused to the trucks and to repair the same to make it roadworthy. For this purpose, the assessee had the right to deduct the amounts from the deposits made by the contractors. Two more conditions are also relevant and they are---that the assessee had to arrange for a comprehensive insurance policy for the trucks and that was on behalf of the contractors who were bound to reimburse the assessee in that regard; the other condition is that the contractors were bound to make good to the assessee any loss or damage caused to the trucks either by accident or for any other reason.
On the basis of the abovementioned clause of the agreement, the assessee claimed depreciation on the trucks, but the Income-tax Officer disallowed the same. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. On further appeal to the Income-tax Appellate Tribunal, the case was heard by a Special Bench. There was, however, difference of opinion among the members of the Tribunal. The Tribunal allowed the appeals of the assessee and held, by majority, that the assessee was entitled to claim depreciation for the trucks. Thus, from the orders of the Tribunal, the above said question has arisen and is referred to this Court for opinion.
Section 32 of the Income Tax Act, 1961, for short "the Act", which deals with "depreciation", in so far as it is relevant for our purpose, reads as under:
"32. Depreciation. ---(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed---. . .
A plain reading of the provision, extracted above, indicates compliance with the following conditions for being eligible for depreciation:
(1) the depreciation is permissible in respect of the building, machinery, plant or furniture owned by the assessee;
(2) such building, machinery, plant, etc., should have been used for the purpose of the business or profession of the assessee.
That the trucks were being used for the purpose of business of the assessee is not in controversy. Thus, the second condition is satisfied. However, the debate centres round the question with regard to fulfilment of the first condition, viz., whether the assessee is the owner of the trucks.
Sri S.R. Ashok, learned standing counsel for the Income-tax Officer Department, contends that the agreements in question are analogous to hire purchase agreements and the Courts had held that the purchaser under such an agreement was the owner and was entitled to depreciation allowance, so on the same analogy, in this case also it has to be held that the contractors are the owners and, therefore, the assessee is not the owner. We are afraid, we cannot accede to the contention of learned counsel. In our view, the approach of learned standing counsel is not merely circuitous but also wholly unacceptable. The point that directly arises is, whether the assessee is the owner of the trucks, for claiming depreciation allowance. On the terms of the agreement, it has to be decided as to whether the assessee continues to be the owner or ceases to be the owner.
It is submitted that inasmuch as the assessee was getting the trucks insured at the expense of the contractor and the maintenance and other expenditure was being borne by the contractor, the contractor alone shall be treated as the owner.
Sri Y. Ratnakar, learned counsel for the assessee, submits that under the terms and conditions of the agreement, the assessee remains the owner till the property in the trucks is transferred in favour of the contractors and the assessee had the right to get back the trucks in the event of violation of the terms and conditions of the agreement; the ownership of the trucks could not be said to vest in the contractors for the reason of maintaining the trucks or keeping them in roadworthy condition. However, in our view, a close reading of the terms and conditions, particularly those referred to above, leave no doubt that the assessee is the owner of the trucks and he continues to be the owner of the trucks till the trucks are transferred in favour of the contractors by the assessee on fulfilment of the terms and conditions of the agreement and that eventuality did not happen in any one of the assessment years in question.
We shall now refer to the cases cited before us. In K. L. Johar & Co. v. Deputy C.T.O. (1965) 16 STC 213 (SC) one of the questions before the Supreme Court was whether on purchase of motor vehicles under the hire purchase agreement, the finance company would be liable to sales tax at the time the agreement was entered into or when the option to purchase was exercised by the hirer. It was held that the taxable event under the Sales Tax Act was the sale of the goods (motor vehicle) and until that taxable event took place, there could be no liability to pay tax. It is pointed out that a hire purchase agreement has two elements: (1) element of bailment, and (2) element of sale, in the sense, that it contemplated the eventual sale and that the element of sale fructifies when the option is exercised by the intending purchaser after fulfilling the terms of the agreement. It is laid down that sales tax is not exigible at the time of entering into hire purchase agreement but is exigible on the exercise of option and fulfilment of the terms of the agreement when sale takes place.
In Damodar Valley Corporation v. State of Bihar (1961) 12 STC 102; (1961) AIR 1961 SC 440, the question that fell for consideration of the Supreme Court was, whether supplying of the machinery and equipment by the Corporation to the contractors amounted to a mere contract of hiring as contended by the Corporation, or a sale or a hire purchase as contended on behalf of the respondent. The Supreme Court observed as under (at page 445 of AIR 1961 SC and at page 113 of 12 STC):
"It is well-settled that a mere contract of hiring, without more, is a species of the contract of bailment, which does not create a title in the bailee, but the law of hire purchase has undergone considerable development during the last half a century or more and has introduced a number of variations, thus leading to categories, and it becomes a question of some nicety as to which category a particular contract between the parties comes under. Ordinarily, a contract of hire purchase confers no title on the hirer, but a mere option to purchase on fulfilment of certain conditions. But a contract of hire purchase may also provide for the agreement to purchase the thing hired by deferred payments subject to the condition that title to the thing shall not pass until all the instalments have been paid. There may be other variations of a contract of hire purchase depending upon the terms agreed between the parties. When rights in third parties have been created by acts of parties or by operation of law, the question, which does not arise here, may arise as to what exactly were the rights and obligations of the parties to the original contract. It is equally well-settled that for the purpose of determining as to which category a particular contract comes under the Court will look at the substance of the agreement and not at the mere words describing the category. One of the tests to determine the question whether a particular agreement is a contract of mere hiring or whether it is a contract of purchase on a system of deferred payments of the purchase price is whether there is any binding obligation on the hirer to purchase the goods. Another useful test to determine such a controversy is whether there is a right reserved to the hirer to return the goods at any time during the subsistence of the contract. If there is such a right reserved, then clearly there is no contract of sale, vide Helby v. Mathews (1895) AC 471."
The Supreme Court laid down two tests to determine the question whether a particular agreement is a contract of mere hiring or whether it is a contract of purchase on a system of deferred payments of the purchase price. They are: (i) whether there is any binding obligation on the hirer to purchase the goods; and (ii) whether there is a right reserved to the hirer to return the goods at any time during the subsistence of the contract. It was noted that there was such a right reserved; then, clearly there was no contract of sale.
On the facts of the present case, if we apply these two tests, the answer to the first question has to be in the negative because there is no binding obligation on the contractors to purchase the trucks; what they have is only an option to purchase. So far as the second question is concerned, the answer can be in the positive because the right is reserved in the contractors to return the goods at any time during the subsistence of the contract. It follows that there was no sale of the trucks in favour of the contractors, on a deferred payment of the purchase price. However, learned standing counsel relied on the judgment in S.P.B.P. Srirangacharyulu v. C.I.T. (1965) 58 ITR 95 (AP) to contend that in the case of a hire purchase agreement, the hirer would become the owner. In that case the assessee claimed development rebate under section 10(2)(vi-b) of the Indian Income-tax Acct, 1922, in respect of a bus which he had purchased by borrowing money from the third party under a hire purchase agreement whereunder the third party was described to be the owner and the assessee was described as the hirer. The Income-tax Tribunal held that the assessee was not the owner of the bus. On a reference, the Division Bench of our High Court, which dealt with that case, observed that whether the assessee was the owner of the bus or not ought to be decided on a consideration of all the facts. and circumstances of the case and the terms of the agreement. There, the assessee had purchased the bus and it was registered in his name. The permit of the vehicle was also standing in his name. It so happened that the assessee did not sell or execute a sale-deed nor did he transfer the bus in the name of the financier so that the vehicle remained in his name only. On those facts it was held that the assessee was the owner of the bus.
In C.I.T. v. Steelcrete (P.) Ltd. (1983) 142 ITR 45 (Cal.) the assessee was a private limited company and was engaged in construction work. During the material time, the assessee secured a contract from the Vizag port authority for construction of four berths of the port. In that connection, some machinery was to be imported, so the assessee sought the permission of the Government of India to import the machinery but the machinery was actually imported by the Government of India. The assessee was allowed to use the machinery on condition of the Government of India recovering the cost of the machinery from the monthly bill of the assessee and transferring the machinery to the assessee on the completion of the contract. The Income-tax Officer disallowed the claim of the assessee for the development rebate in respect of the machinery on the ground that the assessee was not the legal owner of the machinery. On appeal, the Appellate Assistant Commissioner and on further appeal by the Revenue, the Income-Service Benefit Fund Association (R. P. Sethi, C J) tax Appellate Tribunal held that the assessee was the owner of the machinery and was entitled to the deduction. On a reference to the High Court of Calcutta, speaking for the Division Bench, Sabyasachi Mukharji, J. (as he then was), held that for all real intents and purposes and also for the purpose of section 32 of the Act, it was intended that the property in the machinery would pass to the assessee at the relevant time when the contract was entered into, but the right of ownership of the assessee was restricted by several conditions in order to ensure that due payment to the Government was made and the contract was fully implemented. Thus, the assessee was the legal owner of the plant and machinery and was entitled to claim depreciation and development rebate thereon. On the facts of this case, as discussed above, we find no support for the contention of learned standing counsel for the Revenue from this case.
From the above discussion, it follows that the assessee was the owner of the trucks as it satisfied both the requirements of section 32 and was entitled to depreciation on the trucks.
We, therefore, answer the question of law in the affirmative, i.e., in favour of the assessee and against the Revenue.
The reference cases are accordingly answered,
C.M.A./1712/FC Reference answered.