1988 PLP (Trib (PTD)

FARHAT ALI KHAN (CHAIRMAN).--This appeal has been placed before the Full Bench to consider the issue as to whether a decision of a Division Bench of this Tribunal reported as (1979) 39-Tax-47 required re-consideration regarding depreciation allowance in hire-purchase cases. The brief facts involved are that the appellant, a Private Limited Co., claimed depreciation allowance amounting to Rs.14,400 on a car which was allegedly owned by the appellant. It appears that vide his letter, dated 3rd March, 1983 the I.-T.O. called upon the appellant to furnish necessary details regarding its claim and the appellant by its letter, dated 3rd March, 1983 addressed to the I.-T.O. by Mr. Rehan Hassan Naqvi, its Advocate, offered the following reply:-- "That the car purchased by the assessee-company was in the name of Mr. Gul Sarwar who sold it to Mr. Muhammad Riaz Khan and he through Mr. Faiz Muhammad sold the said car on hire-purchase basis to M/s. Amber Motel Ltd., for a sum of Rs.72,

000. The first payment of Rs.2,000 on account of instalments was paid on 7th June, . 1979. The second payment of Rs.2,000 was made on 5th August, 1979, and the third payment of Rs.3,000 was made on 8th November, 1979, thus leaving a balance of Rs.65,000 as on 31st December, 1979." Together with aforesaid explanation, a photostat copy of the ledger account in the name of aforesaid Faiz Muhammad was also enclosed. It also appears that aforesaid amount of Rs.65,000 was also reflected in the balance sheet as liability of the appellant. The?.-7.0., however, disallowed aforesaid claim with the following observation:-- "Depreciation disallowed on the car as the same does not stand in the name of the company." It further appears that on appeal the order of the I.-T.O. has been confirmed by the learned C.I.T. (A) with the following observation:-- "Depreciation on car is disallowed by the I.-T.O. as the same does not stand in the name of the company. It is contended by the learned counsel that the company had purchased the car on instalments basis. In the hire-purchase system the ownership is transferred only when the instalments are fully paid. The depreciation was claimed on the car because factually the car was used by the company. The contention is considered and is found to be untenable. Depreciation as per law is admissible only to the owner. There is no provision in law to allow depreciation to any person other than the owner of the asset." The appellant, however, still feels aggrieved and came up in second appeal. Mr. Rehan Hasan Naqvi, the learned counsel for the appellant, relying upon Circular No.9 of 1943, dated 23rd March, 1943, firstly argued that both the officers below erred in ignoring it altogether. According to him had aforesaid circular been perused by both the officers below they might have allowed the depreciation allowance to the appellant. The learned counsel then also relied upon the following cases:-- (1)??????? (1979) 39-Tax-47 (Trib.) (2)??????? P L D 1961 SC 321, Shewram Das Agarwala v. Arobinda Podder. (3)??????? (1945) 13 I T R 240, Shamsher Ali Abdul Hassan v. C.P. & U.P. Mr. Rehan Hassan Naqvi, the learned counsel for the appellant, alternatively argued that if the depreciation allowance was found inadmissible Rs.7,000 which were paid by the appellant as instalments within the relevant assessment year, should be allowed as business expenditure incurred wholly and, exclusively for the purposes of the business. Mr. Muhammad Farid, the learned D.R. firstly argued that in spite of the direction of the I.T.O., the appellant failed to produce any hire-purchase agreement. The learned D.R., therefore, contended that aforesaid Circular 9 of 1943 did not apply in the case of the appellant. Mr. Muhammad Farid also relied upon a case reported from Madhya Paradesh High Court reported as (1963) 47 I T R 756 Sardar Tara Singh v. C.I.T. (M.P.). Turning to the alternative submission of Mr. Rehan Hassan Naqvi, the learned D.R. vehemently argued that it should not be entertained as it was not taken earlier before any Forum and also because it required investigation on facts. We have heard both the learned counsel for the appellant as well as learned D.R. at length and we think that we should firstly examine the relevant provisions of the Income-tax Ordinance under which depreciation allowance is admissible. From perusal of the Income-tax Ordinance, 1979, hereinafter referred to as the Ordinance it appears that the depreciation allowance is admissible as deduction under clause' (v) of subsection (1) of section 23 which reads as under:-- "

23. Deductions-- (1) In computing the income under the head 'Income from business or profession', the following allowances and deductions shall be made, namely:-- (i) ??????? ............................................................. (ii) ?????? ............................................................. (iii) ????? ............................................................. (iv) ????? ............................................................. (v)??????? in respect of depreciation of any such building, machinery, plant, furniture or fittings, being the property of the assessee, the allowance admissible under the Third Schedule; Since aforesaid clause refers to Third Schedule of the Ordinance, we should, therefore, turn to it. From perusal of the sub-rule (1) of Rule 1 of aforesaid Schedule it appears that the depreciation allowance is admissible to the owner of a building, machinery, plant or furniture. Aforesaid sub-rule reads as under:-- "Allowance for depreciation.-- (1) Where, in any income year, any building, machinery, plant or furniture owned by an assessee is used for purposes of any business or profession carried on by him, or in any income year commencing on or after the first day of July, 1982, any machinery or plant is given on lease by the assessee being a scheduled bank, a financial institution or a leasing company approved by the Central Board of Revenue for purposes of this Schedule, on such conditions as may be specified an allowance for depreciation shall be made in computing the profits and gains of the business or profession of the assessee in the manner hereinafter provided. It is thus clear that depreciation allowance could be allowed to the appellant if it is held that the appellant was owner of the car. However, we are concerned in this appeal with the claim of depreciation regarding a car, which was allegedly obtained under Hire-Purchase agreement. Mr. Rehan Hassan Naqvi, the learned counsel for the appellant has claimed that the appellant was entitled to it as it was its owner and in order to fortify his submission he firstly relied upon a decision of this Tribunal reported as (1979) 39 Tax 47 (Trib.). From its perusal it appears that a Division Bench of this Tribunal while interpreting Shivram's case (supra) has made the following observation: "The learned Authorised Representative for the assessee drew our attention to the finding of the learned Judges of the Supreme Court of Pakistan in Shewram Das Agarwala reported as P L D 1961 S C 321 wherein it was held that if the property in the goods continued to vest in the owner there could be no question of the hire-purchaser having a right to any part of the sale proceeds. It was insisted by the Authorised Representative that in the present case the property in the machinery had passed on to the purchaser hence they become entitled to depreciation also. Having considered the facts and circumstances of the case, we are of the view that in hire-Purchase agreement the Purchaser becomes the owner of the goods and the amount of deferred instalments has the character of outstanding liability (or debt). Therefore, the claim for depreciation cannot be refused." (Emphasis added by us) Thus, it is clear from the observation reproduced above that the learned Members of this Tribunal came to the conclusion that in hire-purchase agreement the purchaser becomes the owner of the goods and the amount of deferred instalments assumes the character of outstanding liability or debt and it is on this observation that Mr Rehan Naqvi, the learned counsel for the appellant, has placed his full reliance. However, with profound respect for the learned member we do not think that the learned Bench of this Tribunal has correct stated the law on this point. We also feel very much constrained observe, with due respect, that the case of Shivram (supra) was wrongly cited and relied upon. It appears that in aforesaid case their Lordships of our own Supreme Court were called upon to decide as to whether the agreement involved in that case was a hire-purchase agreement entered into between Shivram, who was the owner of certain machinery collectively described as 'Cinema Talkie Machine' and Arobinda Podder, described as hire-purchaser. Their Lordships after examining the contents of the agreement in dispute came to the conclusion that it was not, either in fact or in law, an agreement of hire-purchase. Elaborating the reasons for the conclusions their Lordships observed at page 327 of the report as under:-- In our opinion, the conclusion that the agreement was not to be construed as a hire-purchase agreement can be supported on other grounds besides that mentioned by the learned Judges of the High Court, viz. that it contains no provision enabling the "hire-purchaser" to return the apparatus. Firstly, as has been pointed out above, there is a specific provision in the first paragraph of the agreement that the 'hire-purchaser' would have 'the right to keep and use' the apparatus 'till the payment of the full value of the price settled' subject only to the other terms and conditions, of which the relevant condition is that contained in Article 2 relating to the right of distraint to be vested in the owner upon default of payment of three consecutive instalments. The conferment of a 'right' in these terms is highly unusual. Its duration was to be determined by the performance of an obligation by the 'hire--purchaser' himself. Moreover, upon fulfilment of this obligation, the right was not to terminate, but was to continue. The purpose behind the use of these words is thus not wholly clear, but it is certainly opposed to any suggestion that the 'hire-purchaser' was entitled to return the property, in the manner of a true hire-purchaser at law. Further indications to the contrary are found in the two provisions regarding the right of the 'hire-purchaser' to receive any balance over the amount due to the owner, which might be left upon a forced sale by the owner under the terms of the agreement. If property in the goods continued to vest in the owner, there could be no question of the 'hire?-purchaser' having a right to any part of the sale proceeds." Their Lordships then dealt with the question of passing of the property in the following words:-- "Moreover, the apparatus in question being movable property, the ordinary presumption would be that property in the apparatus passed to the alleged 'hire-purchaser' when the contract was made, it being immaterial whether the time of payment of the price was postponed beyond the date of the contract." Now from perusal of Shewram's case (supra) and the decision of this tribunal mentioned above, it appears that in both the cases the concept of hire-purchase agreement was involved. It, therefore, could profitably be discussed at this juncture. It, however, could better be appreciated in context of and with reference to the nature of other types of transfer agreements. To begin with let us point out that the first transaction in which ownership and possession stand transferred in return for payment of whole consideration is called an outright sale. In such case the entire bundle of rights are transferred together with possession from vendor to vendee and the latter becomes owner with immediate effect. However, there could be second type of transaction also in which the possession and ownership are transferred by the vendor to the vendee with all bundle of rights in lieu of either partly paid or wholly unpaid consideration. In such case the vendor may retain seller's lien on the property in transfer regarding unpaid consideration. Thus here also the ownership passes to the vendee like the case of an outright sale. Now there could be 3rd type of sale also. In such case the vendor may pass on the possession but retain the ownership with the, agreement that the vendee would go on paying the consideration in instalments and after the receipt of the entire consideration the vendor would transfer the ownership in favour of the vendee. In such case the vendee has no right to return the possession of the goods though he enjoys the possession thereof but exercises no ownership rights thereon. The fourth category could be of that type of transfer of possession of goods where the vendee has to pay the consideration in instalments but at the same time it is stipulated between the' parties that if the vendee pays off all the instalments, he would have a right to get the ownership transferred to himself. Furthermore it is also agreed between the parties that the vendee at his option would have right to terminate the agreement and return back the goods to the vendor. As far as the vendor is concerned, he is generally given the right of getting the' possession back on default of payment of instalments. It is this type of transfer under an agreement, which is known as hire-purchase agreement, and as is obvious from this discussion, the ownership remains with the vendor till it is finally transferred to the vendee on payment of all instalments of consideration. Let us specifically observe here that in hire-purchase agreement the vendee has the right to return the goods at his option to the vendor during the subsistence of this agreement whereas in other type of transaction he is left with no such option. In order to better appreciate the difference between an agreement of hire-purchase on one hand and the other type of agreements as discussed above, reference may be made to the following authorities:-- (1)??????? (1893) 2 QB 318, Lee v. Buttler (2)??????? (1895) A C 471 Helley v. Mathews. (3)??????? A I R (1930) Bombay '306 Bhimji a Dalai v. Bombay Trust Corporation. (4)??????? A I R (1932) All. 607 Mahabali Prashad v. H. N. Palmer. Nevertheless let us reproduce hereinbelow an observation of Allahabad High Court made in Mahabali's case (supra), Their Lordships observed:-- "The difference between a contract of sale at a price payable by instalments and a contract of hire-purchase is that in the former the purchaser has no option to terminate the contract and return the chattel whereas in the latter the hirer has. In the former there is an agreement to purchase, whereas in the latter there is none. In each case the substance of the trans?action or the agreement must be looked at and not mere words." Thus in view of discussion made above we are left in no doubt that the observation of the learned Division Bench of this Tribunal that in hire-purchase agreement the purchaser becomes the owner of the goods is not laying down the correct statement of law. Similarly it is also clear that Shewram's case (supra) does not support the Tribunal at all in its aforesaid finding. Let us also mention here that a ease reported from no less an authority than the Indian Supreme Court as A I R 1962 S C 53, Instalment Supply (P) v. Chairman of India could not be taken as an authority for the proposition that in a hire-purchase agreement the hirer becomes the owner of the property immediately after execution of the agreement. This case actually deals with the concept of deemed sale, which was introduced by Explanation-I to section (2)(g) of the Bengal Finance (Sales-tax) Act, 1941 for the purposes of levying tax on a transaction carried out under a hire-?purchase agreement. In the aforesaid explanation the Hire-purchase agreement was given the status of deemed sale for the purposes of levying tax under that Act. It, therefore, is very much restricted to its own peculiar facts. Mr. Rehan Hasan Naqvi, the learned counsel for the appellant, has also relied upon a case of Shamsher Ali (supra). From perusal of the case it appears that a Division Bench of the Nagpur High Court has supported the learned counsel for the appellant when it observed as under:-- It is clear that whatever the terms which are imposed according to the particular contract on the default of any instalment (and we have not been shown the contracts in any case) the hire-purchase system is nothing but a sale or an agreement to sell with an extended period of instalments." However, we feel that if aforesaid observation is taken in isolation of the facts of that case the observation does support Mr. Rehan Hassan Naqvi. But when the entire ruling is perused, it appears that their Lordships of Nagpur High Court treated the transaction involved in that case as an outright sale though the consideration was made payable by the instalments. This, conclusion is borne out from the following observation:-- "The contention is that the property in these vehicles remained with the assessee and that what he received was purely hire in the vehicles and consequently it is machinery let on hire and that he is entitled to depreciation allowance on it .......... Thus it is certainly not an authority for the proposition that lessee is entitled to claim depreciation allowance and that the lessor would not be competent to do so. Let us also point out here that aforesaid Nagpur's case has been understood in the same sense by a Division Bench of Madhya Pradesh High Court also in a case reported as (1963) 47 I T R 756 Sardar Tara Singh v. C I T. Their Lordships have observed as under:- "The hire-purchase in Shamsher Ali Abdul Hasan v. C I T was regarded as one of sale in itself giving to the purchaser the facility of paying the price by instalments." Thus Shamsher Ali's case (supra) also does not come to the rescue of Mr. Rehan Hasan Naqvi. Mr. Muhammad Farid, the learned D.R. on the other hand, has relied upon a case of Sardar Tara Singh (supra). In this case the assessee carried on the business of motor transport and maintained a fleet of buses for that purpose. During the year of account, he claimed depreciation allowance under section 10(2)(vi) of the repealed Income-tax Act in respect of all the buses which were in his possession under a hire-purchase agreement. The I.T.O. disallowed the claim on the ground that the said buses were not the property of the assessee at the material time and his finding was confirmed on appeal by the learned A.A.C. On further appeal it was not disputed before the Tribunal that the assessee did not become the owner of the bus in the year of account. The Tribunal, therefore, held that since the bus was not the property of the assessee, he was not entitled to depreciation under section 10(2)(vi) of the repealed Income-tax Act, Let us mention here that under section 10(2)(vi) an assessee could claim the depreciation allowance if the property was his as the words used were "being the property of the assessee" in clause (vi) of aforesaid section. However, under sub-rule (1) of Rule 1 of the third Schedule of the Ordinance such property must not only be E owned by 'an assessee' but should have also been "used for the purposes of any business or profession carried on by him'. However, we do not find any difficulty in reconciling this position as their Lordships of Indian Supreme Court in a case reported as (1959) 36 1 T R 521, Jogta Coal Co. Ltd. v. C I T have held that the word 'an assessee' as used under section 10(2)(vi) covers the person who owns the property in question for the purposes of claiming depreciation. Thus, the difference in the use of expressions in the repealed Income-tax Act and the Ordinance does not make any difference and the case of Tara Singh (supra) as relied upon by the learned D.R. supports him on all fours. Nevertheless we feel that if the provisions of sub-rule (1) of Rule 1 of the third Schedule of the Ordinance are strictly applied to hire-purchase agreement, neither the owner nor the hirer would be entitled to depreciation allowance. The owner would not be allowed it because he never used the vehicle for the purposes of his business or profession. Similarly, the hirer would not be entitled to it for the simple reason that he was not the owner of the vehicle. Thus, the provision of depreciation allowance made by the legislature would stand defeated in case of hire-purchase transaction. Keeping this anamoly in mind the C.B.R. issued Circular 9 which reads as under:-- "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:-- (i)???????? 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. (ii)??????? 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 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 agreement. (iii)?????? 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:-- (1)??????? consideration for hire, to be allowed as a deduction in the assessment; and (2)??????? payment on account of purchase, to be treated as capital outlay, depreciation allowed to the lessee on the initial value (i.e. the amount for which it would have been sold for cash at the date of agreement). The allowance to be made in respect of hire should be the difference between the aggregate amount of the periodical payment 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 were terminated either by the outright purchase of the equipment or its return to the owner the deduction should cease as from the date of the termination. 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." Mr. Rehan Hassan Naqvi, the learned counsel for the appellant, has' based his alternative arguments on clause (iii) of aforesaid Circular. Exercising his right of reply to the submissions of the learned D.R., the learned counsel also submitted that no written agreement was executed to witness a hire-purchase agreement. Referring to the balance sheet, the learned counsel submitted that the case of the appellant should be given treatment under clause (11) of aforesaid H Circular. In other words the learned counsel submitted that in the case of the appellant where no hire-purchase agreement was ever executed, it should' be taken that the ownership in the car stood transferred at once to the appellant with the right of recovery of the unpaid consideration vested in the owner of the car hence the appellant was entitled to depreciation allowance. Mr. Muhammad Farid, the learned D.R., however, has contested both these submissions. In our judgment the alternative submission of the learned counsel for the appellant is untenable firstly because he never raised this plea at any Forum earlier. It is not even taken in his grounds of appeal. Similarly it needs further enquiry on facts. However, as far as the other submission of the learned counsel for the appellant is concerned.' we find considerable force in it. Since admittedly no hire-purchase agreement was either executed or produced before the I.-T.O., it could be taken that the parties agreed to immediate transfer of ownership with the right of the vendor to recover the balance of unpaid price and the right of the vendor to pay the price in agreed instalments. This conclusion is very much supported by the fact that the unpaid price has been shown as a liability in the balance-sheet and the I.-T.O. has not disputed either the payment of instalments or the use of the car by the appellant for the purposes of its business. Let us also point out that this transaction is called as hire-purchase agreement by both the appellant as well as the I.-T.O. and for that matter by the learned C.I.T. (A) without appreciating that in law only that agreement could be designated as hire-purchase agreement which is not only in writing but also in which it is agreed that the hirer would have the right to return the property to the owner at any time during the subsistence of the aforesaid agreement. Thus, we conclude that firstly our decision reported as (1979) 39 Tax 47 (Trib.) did not state the law of hire-purchase correctly and secondly that in the facts and circumstances of this appeal both the officers erred in not allowing the depreciation allowance to the appellant. Let the appeal go back to the Single Member for disposal of the point regarding depreciation in the light of discussion made by us and also for decision on other points involved. The reference to the Full Bench stands answered accordingly. M.B.A./509/T????????????????????????????????????????????????????????????????????????????????????? Order accordingly.