JUDGMENT 1. - This appeal under Section 260A of the Income Tax Act, 1961. [the Act] is directed against the order dated 22.09.2006 as passed. in ITA No.806/JDPR/2005 whereby the Income Tax Appellate. Tribunal, Jodhpur Bench, Jodhpur [the Tribunal] dismissed the. appeal filed by the revenue and affirmed the order dated 18.10.2005. as passed by the Commissioner of Income Tax (Appeals), Udaipur. [the CIT(A)], who had deleted the addition made by the Assessing. Officer [the AO] of the lease rent of the machinery, said to have. been taken on hire. The AO was of the view that the lease. agreement was that of financing and not of operational work and. hence, the lease rent was not that of business expenditure. The. Appellate Authority, however, disagreed and held that lease rentals. were allowable as business expenditure in the case of assessee. The Tribunal endorsed the views of the Appellate Authority. This. appeal, preferred in challenge to the orders so passed by the. Appellate Authority and the Tribunal, has been admitted on the. following substantial question of law:- "Whether in the facts and circumstances of the case the learned. Tribunal was justified in dismissing the appeal of the revenue and. confirming the order of the CIT(A) regarding deletion of addition of. Rs. 50,76,176 made by the AO on account of disallowance on. lease rent ignoring the finding of the AO that lease agreement is. that of a financing and not of the operational work." 2. The facts and background aspects for the purpose of present. appeal could be noticed in the following: The assessee-company. derives the income from manufacture of yarn and fabric. In its return. for the assessment year 2000-2001, the assessee-company, inter. alia, claimed in the profit and loss account an amount of. Rs. 58,18,153/- towards lease rental and interest in regard to the. machinery, said to have been taken on hire. The AO, upon. examination of the lease agreements, formed the opinion that they. were only of finance lease and not of operational lease. The AO. observed that the risks incident to the ownership of the assets stood. "substantially" transferred to the lessee although "apparently" the title. to the assets had not been transferred. However, according to the. AO, the agreement had only been drawn up to ensure that the lessor. recovers the finance involved in acquiring the machines and the. The AO. observed that the risks incident to the ownership of the assets stood. "substantially" transferred to the lessee although "apparently" the title. to the assets had not been transferred. However, according to the. AO, the agreement had only been drawn up to ensure that the lessor. recovers the finance involved in acquiring the machines and the. lease rentals were merely in the nature of repayment of capital loan. and interest thereupon. The learned AO, inter alia, observed as. under:- "In view of the above it is clearly established that the. alleged lease agreement is only a finance lease and not an. operating lease. The risks incident to the ownership of the assets. . . stand substantially transferred to the lessee although apparently. the title to the assets has not been transferred. Therefore, the. said lease agreement being in the nature of finance lease cannot. be treated as normal operating lease as understood from the. discussion of above clauses. The agreement has been drawn up. only to ensure that the lessor recovers the finance involved in. acquiring the machines. The lease rentals are merely in the nature. of repayment of the capital loan and interest thereon." 3. Upon the considerations aforesaid, the AO held that the. amount of alleged rental i.e., a sum of Rs. 50,76,176/- had been. paid towards repayment of the principal; and this amount was. disallowed and added to the total income of the assessee. However,. the other component of the payment, to the extent of Rs. 5,41,977/-,. was allowed, as being the payment of interest on the borrowed funds. for acquisition of assets. 4. In appeal, the learned CIT(A) re-examined the entire matter. with reference to the lease agreements and observed as under:- "I have considered facts of the case and contentions of the ld. AR of the appellant and found that the AO has disallowed the. lease rent claimed by the appellant on the ground that the lease. agreement is financing one and not the operational treating the. cost of the leased assets as loan amount and lease rentals as. interest. The AO has allowed interest part only and disallowed. the loan amount. It is seen from the submission of the appellant. that the appellant has taken leased assets from M/s. Gujarat. Lease & Finance Ltd. and M/s ITC Classic Finance Ltd. which. are reputed lease and finance companies. The fact of. interest. The AO has allowed interest part only and disallowed. the loan amount. It is seen from the submission of the appellant. that the appellant has taken leased assets from M/s. Gujarat. Lease & Finance Ltd. and M/s ITC Classic Finance Ltd. which. are reputed lease and finance companies. The fact of. ownership of the lessor namely GLFL and ITCCFL is supported. by following clauses of the agreement: i) Re-delivery of equipment by the lessee on termination ii) Lessors right to assign the receivables etc. iii) Lessee to affix the name plate. iv) Lessee not to part with the possession v) Lessee not to have any right in equipment except bailee. vi) Lessee to ensure the equipments. vii) Lessee not to transfer or dispose off equipments for. interest in the lease. viii) Lessee not to make alterations in the equipments,. additions belong to lessors ix) Seizure confiscate of the equipment not to claim and. relief, allowance etc. x) Sale of the equipment by the lessor, sale through the. agency of the lessee and the lessees reward." 5. The learned CIT(A) further referred to the submissions that the. relevant considerations were to examine whether the lease. transactions were unreal or sham or made only to evade the tax; and. whether the lessor was legally the owner of assets. The CIT(A). observed that if the agreements were real and genuine, they had to. be accepted as they stood. The CIT(A) further noticed the fact that. the lease rentals had been allowed as business expenditure in the. case of the appellant for the assessment years 1996-1997 to 1999-. 2000 but the AO deviated from the stand taken by his predecessor. without any change of facts. The CIT(A) referred to the decision of. this Court in Rajshree Roadways v. Union of India & Ors.: 263 ITR. 206 (Raj.) and of the Tribunal in Shree Rajasthan Syntex Ltd v. ACIT and ultimately held as under:- "Thus, it is crystal clear on the facts of the case that the. appellant is a lessee in real sense and has taken assets on. lease and paid lease rentals. Accordingly, appellant claimed the. same as business expenditure. The lessor has been the actual. owner during the lease period and after that also when the lease. period has expired and the lease assets have gone back to the. lessor. The lessor has claimed depreciation on these leased. lease and paid lease rentals. Accordingly, appellant claimed the. same as business expenditure. The lessor has been the actual. owner during the lease period and after that also when the lease. period has expired and the lease assets have gone back to the. lessor. The lessor has claimed depreciation on these leased. assets in its books of account and has been allowed also. Further the decision in the case of Shree Rajasthan Syntex Ltd. quoted above also applies fully in the case of the appellant. Respectfully following the order in the above case by the Hon'ble. ITAT, Jopdhpur Bench, the claim the appellant for lease rent is. allowed. The disallowance is deleted and the appeal is allowed. on this point." 6. The Tribunal endorsed the reasons and findings of CIT(A) and. dismissed the revenues appeal while observing as under:- "4. Ground No. 1 of the appeal relates to deletion of Rs. 50,66,176/- added on account of disallowance of lease rent. The Assessing Officer has disallowed the lease rent claimed by. the assessee on the ground that the lease agreement is that of a. financing one and not the operational, treating the cost of the. leased assets as loan amount and lease rentals as interest. The. Assessing Officer has allowed the interest part only and. disallowed the loan amount. The assessee took leased assets. from M/s Gujarat Lease and Finance Limited and M/s ITC. Classic Finance Limited, which are reputed lease and finance. companies. It is not the case of the revenue that the lease. transactions or not real or are sham transactions. The lesser is. legally owner of the assets, and lessee is the actual owner for. business purposes. Therefore, the ld. CIT (A), allowed the lease. rent on the force of the reasoning that the lease rentals have. been allowed as business expenditure in the case of this. assessee in A.Ys. 1996-97 and 1999-2000. This issue stands. covered by the decision of the Hon'ble Rajasthan High Court in. the case of Rajshree Roadways v. Union of India reported in. 263 ITR 206 [Raj.] and also in the case of Shri Rajasthan Syntex. v. Assistant Commissioner of Income-tax [ITAT Jodhpur. Bench] . Thus, this ground also stands covered in favour of the. assessee, therefore, we confirm the findings of the ld. CIT (A). and dismiss ground No. 1 of the appeal either." 7. 263 ITR 206 [Raj.] and also in the case of Shri Rajasthan Syntex. v. Assistant Commissioner of Income-tax [ITAT Jodhpur. Bench] . Thus, this ground also stands covered in favour of the. assessee, therefore, we confirm the findings of the ld. CIT (A). and dismiss ground No. 1 of the appeal either." 7. Questioning the orders aforesaid, it is submitted that whether a. lease is a finance lease or an operational lease depends on the. substance of the agreement rather than its form. According to the. appellants, as per the lease agreements, the obligation to pay rental. is absolute and not conditional whereas in the operational lease, the. rental should be related to actual use of machinery. Then, the. lessee was responsible for quality, cost, delivery, condition, durability. and insurance of machinery; the fact of damage or loss to the. machinery would not be affecting the payment of lease rent; and. the lessee was also required to pay all rates, tax, licence, fee,. registration charges and other outgoing payable in respect of. equipments. It is contended that all such features establish beyond. doubt that the risks incident to the ownership of the assets stood. substantially transferred to the lessee even if ownership as such had. not been transferred. It is submitted that the AO, after examining. . . the lease agreements, rightly held it to be a matter of finance lease. not an operational lease as claimed by the assessee and thus, rightly. disallowed the alleged lease rentals. It is further submitted that as. per the ratio of the decision in Rajshree Roadways, the question as. to whether a lease is a financial one or an operational one is to be. decided on the facts of the lease agreement and its contents and. thus, the said case could not have been directly applied. 8. On the other hand, the learned counsel for the respondent assessee. has duly supported the order impugned and, inter alia,. pointed out that present one and other connected appeals were. admitted with reference to admission of D.B.Income Tax Appeal. No.23/2005 that has already been decided against the revenue by this Court in the decision reported as Commissioner of Income-Tax. v. Shree Rajasthan Syntex Ltd.: (2009) 313 ITR 231 . 9. After having given thoughtful consideration to the rival. submissions and having examined the record, we are clearly of the. admitted with reference to admission of D.B.Income Tax Appeal. No.23/2005 that has already been decided against the revenue by this Court in the decision reported as Commissioner of Income-Tax. v. Shree Rajasthan Syntex Ltd.: (2009) 313 ITR 231 . 9. After having given thoughtful consideration to the rival. submissions and having examined the record, we are clearly of the. view that this appeal remains bereft of merit and deserves to be. dismissed. 10. The facts of the case make it clear that the respondent assessee. had taken the machinery on lease from Gujarat Lease &. Finance Ltd. and ITC Classic Finance Ltd. It has not been the case. of revenue that the lease transactions were not genuine or were. sham. The CIT(A) in his appellate order has clearly noticed the. salient features of the lease agreements whereby it was established. beyond doubt that the ownership of the machinery concerned. remained only with the lessor company and not with the assessee,. who was the lessee for the purpose. The observations as made by. . . the AO that the risks incident to the ownership of the assets stood. "substantially" transferred to the lessee though "apparently" the title. to the assets had not been transferred, in our view, had been of not. viewing the case in its correct perspective. The CIT(A) has rightly. observed that once the agreements were accepted as real and. genuine, they were required to be accepted and there was no reason. to treat the assessee as the owner of the machinery. 11. For such nature agreements and their legal implication, the. principles of law expounded and explained by the Hon'ble Supreme. Court in CIT v. Shaan Finance (P.) Ltd.: (1998) 231 ITR 308 could. be noticed, for being of direct application to the present case, as. under:- "Neither of these cases deals with an agreement of hire of. machinery in contradistinction to an agreement of hire purchase. When the machinery is given on hire by the owner to the hirer on. payment of hire charges, the income derived by the owner is. business income. The owner is also entitled to depreciation. on the machinery so hired out. The hirer, on the other hand,. who pays hire charges, is entitled to claim these as revenue. expenditure. The hirer has not acquired any new asset. A. transaction of hire is, therefore, of bailment of the machinery. business income. The owner is also entitled to depreciation. on the machinery so hired out. The hirer, on the other hand,. who pays hire charges, is entitled to claim these as revenue. expenditure. The hirer has not acquired any new asset. A. transaction of hire is, therefore, of bailment of the machinery. There is no extinguishment of any right of the owner in the. machinery. There is merely a licence given to the hirer to use, for. a temporary period, the machinery so hired" (emphasis supplied) 12. In the case of Rajshree Roadways (supra), this Court. considered the matter where the lessee had the option of purchasing. the trucks on payment of 1% of lease money at the end of the lease. period but as regards the lease period, this Court found the lessor to. be the owner of the trucks and the lessee having no right to transfer. or alienate. Further, it had been agreed that the lessor would be. entitled to claim depreciation as would be permissible under the Act,. being the owner of the trucks. It was noticed that the depreciation. . . had indeed been allowed to the lessor. In the given fact situation of. the case of Rajshree Roadways (supra), this Court observed and. held as under:- "It is true that there was a clause that the assessee had an. option to purchase the trucks on payment of one per cent. of the. lease money on termination of the lease period and the lessee. can become the owner of the truck but we are concerned with. the lease period and terms of the lease. As we have referred. above, in the terms and conditions of the agreement, when Key. Leasing and Finance Ltd., both the parties agreed that during. the lease period, the lessor, Key Leasing and Finance Ltd., shall. be the owner of the trucks and the lessee, i.e., the assessee, will. have no right to transfer or alienate to other party in any form. Not only that the lessee as well as the lessor both have agreed. that the depreciation which is permissible under the Income-tax. Act, being the owner of the trucks, the lessor will have that right. and benefit and it will get the benefit of depreciation on these. trucks during this lease period, i.e., during the assessment years. 1991-92, 1992-93 and 1993-94. that the depreciation which is permissible under the Income-tax. Act, being the owner of the trucks, the lessor will have that right. and benefit and it will get the benefit of depreciation on these. trucks during this lease period, i.e., during the assessment years. 1991-92, 1992-93 and 1993-94. It is also pertinent to note that the lessor has claimed this benefit. and that has been allowed by the Department to the lessor, i.e., to. the Key Leasing and Finance Ltd. Once under the same. agreement when the lessor, Key Leasing and Finance Ltd., has. been treated as the owner of these trucks and has been allowed. the depreciation permissible under the provisions of the Income tax. Act, there is no justification to treat the assessee also as the. owner of these trucks during this period. There cannot be two. owners indisputedly of the same property. In our view, the. Tribunal has committed an error in restoring the view of the. Assessing Officer. Therefore, considering the terms and. conditions of the lease agreement and the fact that depreciation. on these trucks has been allowed to the lessor, Key Leasing and. Finance Ltd., now there is no justification to deny the claim of the. assessee that his lease rent should be allowed as revenue. expenditure. In our view, the Commissioner of Income-tax. (Appeals) has rightly allowed the claim of the assessee." 13. In the present case too, the assessee had no right to transfer. or alienate the machinery in any form, was obliged to re-deliver the. equipment upon termination of lease agreement, was not to part. with possession and not to make alteration in the equipments with. the stipulation that additions would belong to the lessor; and the. lessor was entitled to claim depreciation during the lease period. Looking to the explicit terms and stipulations, the findings of the AO. . . about so-called "substantial" transfer of ownership though "apparent". non-transfer of title, in our view, could not have been countenanced. and have rightly been reversed by the Appellate Authority. 14. It may also be observed that the present appeal and other. connected appeals were admitted with reference to the fact of. admission of D.B.Income Tax Appeal No.23/2005. The said appeal. has been decided by this Court along with cognate cases on. 06.05.2008 in the decision referred by the learned counsel for the. respondent, reported as Commissioner of Income-Tax v. Shree. It may also be observed that the present appeal and other. connected appeals were admitted with reference to the fact of. admission of D.B.Income Tax Appeal No.23/2005. The said appeal. has been decided by this Court along with cognate cases on. 06.05.2008 in the decision referred by the learned counsel for the. respondent, reported as Commissioner of Income-Tax v. Shree. Rajasthan Syntex Ltd.: (2009) 313 ITR 231 . Therein, this Court. considered the case of the assessee who had given the machinery. on hire to another concern by way of different agreements; and the. assessee claimed depreciation as being the owner of the machinery. This Court upheld the claim of depreciation as made by the lessor,. particularly with reference to the decision in Shaan Finances case. (supra). As a necessary corollary it follows, and has been laid down. by the Hon'ble Supreme Court in no uncertain terms, that the hirer,. who pays hire charges, is entitled to claim those charges as revenue. expenditure. 15. In the ultimate analysis, in the present case where the. respondent-assessee has been found to be essentially a hirer after. appreciation of evidence on record, in our view, no interference in. the findings on the mixed question of law and facts as rendered by. the Appellate Authority and the Tribunal is called for. The features as. noticed by the CIT(A) in his order make it clear that the lease rentals. paid on the hired machinery were allowable as business expenditure. for the year in question. 16. Accordingly and in view of the above, the answer to the. formulated question of law is in the affirmative i.e., against the. revenue and in favour of the assessee. 17. Consequently, the appeal fails and is, therefore, dismissed. No. costs.Appeal Dismissed. *******