CIT vs Kaveri Engineering Industries Ltd.

F.M. Ibrahim Kaufulla, J.—The Revenue has come forward with this appeal raising the following substantial questions of law :

Whether on the facts and in the circumstances of the case, the Tribunal was right in upholding the order of the CIT(A) restricting the disallowance of depreciation on machinery taken under hire-purchase agreement to Rs. 25,04,762 as against Rs. 1,02,60,016 made in the assessment order by the AO applying the test laid down by the Supreme Court in Sundaram Finance Ltd. Vs. State of Kerala and Another, on the basis of which the Board has issued a Circular No. 760, dt. 13th Jan., 1998 ? and

Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the Boards Circular No. 760, dt. 13th Jan., 1998 was not applicable on the ground that it was issued in the context of the Interest-tax Act, 1974 ignoring that the contents of the circular related to the determination of the nature of the hire-purchase agreement taking into account the terms of the agreement and was, therefore, applicable to allowance of depreciation also ?

Assailing the order of the Tribunal, Mr. K. Subramaniam, learned standing counsel for the appellant, would contend that in a hire-purchase transaction one who advances the finance, is the owner and the other party is only the hirer by virtue of section 32 of the IT Act. Since only the owner is entitled to claim depreciation, the CIT(A) as well as the Tribunal were not justified in allowing the depreciation to the assessee. In support of his contention, reliance was placed upon the CBDTs Circular No. 760, dt. 13th Jan., 1998 [(1998) 144 CTR (St) 37].

Though four other questions were sought to be raised in this appeal, in as much as those questions were not raised before the Tribunal, we are not inclined to examine the same.

As far as the above two questions are concerned, we do not find any question of law, much less substantial question of law, to be considered in this appeal, in as much as we find that the CIT(A) while rejecting the disallowance of depreciation of Rs. 25,04,762 as against the claim of Rs. 1,02,60,016 has relied upon an age-old circular of CBDT in Circular No. 9, dt. 23rd March, 1943. Though the said circular came to be issued at the time when the IT Act, 1922, was in force, as the said circular directly governed the right of a hirer to claim depreciation in a hire-purchase transaction, the CIT(A) held that the contents of the said circular would prevail and not the Circular No. 760, dt. 13th Jan., 1998 which came to be issued by the CBDT in the context of the levy of interest tax under the Interest-tax Act, 1974. The Tribunal on finding no scope to interfere with the order of the CIT(A), rejected the stand of the appellant.

Having examined the issue raised before us, we are also convinced that the stand of the appellant cannot be countenanced. As rightly held by the CIT(A). the CBDTs Circular No. 9, dt. 23rd March, 1943, made it clear that in a hire-purchase transaction the party who takes the hire-subject on a hire-purchase is known as hirer. After the payment of last instalment he becomes the owner of the subject asset and in the light of the said instance relating to the right of the hirer to become the owner of the hired asset the CBDT made it clear in the circular that the hirer is entitled for the depreciation. Moreover, since the said circular was a beneficial circular, by which depreciation is allowed on the initial value of the hired asset to the hirer the condition of ownership being an intrinsic one in the agreement it was held that the hirer was entitled to claim depreciation. In fact it is not the case of the appellant that any depreciation was claimed or allowed in favour of the hire-purchase agreement holder viz. the party, who financed for the hire purchase. Therefore, no fault can be found with conclusion of the CITA(A) in having allowed the depreciation to the hirer though ultimately the actual depreciation allowed was restricted to Rs. 77,55,254 as against the claim of Rs. 1,02,60,016 and thereby the disallowance is restricted to Rs. 25,04,762.

In fact a perusal of the assessment order discloses that while claiming depreciation on the hire-subject the assessee had the disadvantage of short-term capital gain to the value of Rs. 68,57,546 and also a sum of Rs. 33,53,115 paid by way of sales-tax which was treated as part of income. There was an alternate claim made on behalf of the assessee that without prejudice while restricting the depreciation to the original written down value, the short-term capital gain of Rs. 68,57,546 should be deleted and the sales-tax of machineries to the extent of Rs. 33,53,115 should be allowed as revenue expenditure. The same was also not accepted by the assessing authority by holding that what was being done was to unearth the real nature of the transactions executed by the assessee and after highlighting the defects in the process since applicability of IT Act, was being resorted to, there was no scope for allowing any concession. The assessee was thus put to double jeopardy in that process.

Besides the said issue, as we are convinced that the CBDTs Circular No. 9, dt. 23rd March, 1943, was the one applicable while considering the claim of the assessee for depreciation in respect of the hire subject and Circular No. 760, dt, 13th Jan., 1998 was in no way connected as to in what manner the claim for depreciation vis-a-vis hirer should be considered, we are convinced that the approach of the CIT(A) in not applying the Circular No. 760,,dt 13th Jan., 1998 was perfectly in order.

Having regard to our conclusions we do not find any merit in this appeal. Accordingly, this tax case appeal fails and the same is dismissed.