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Leasing vs hiring

GOING by Sec. 2(ea)(ii) of the Wealth Tax Act, 1957 _ defining asset _ cars held by an assessee as stock-in-trade are not subject to wealth tax. Car manufacturers and dealers hold cars as stock-in-trade. And, so do assessees who are in the business of ru nning cars on hire and travel services. Now, what are the businesses that could be brought under the category of ``used in the business of running them on hire''? There are several travel services which own cars and let them on hire as and when requested by their customers. They definitely come under this category. In such cases, the expenditure towards repairs and petrol are borne by the travels.

Now, consider the case of a firm engaged in the business of leasing out cars. When a car is leased out to a customer by a leasing company, the lessee meets the expenditure towards repairs and petrol and the lessor gets only the lease income as per the ag reement. In this case, it is not very clear if the cars used in the business of lease could be classified under ``used by the assessee in the business of running them on hire''. Can leasing of a car be equated to hiring of a car? Because no clear definit ions exist, there are several litigations pending before various appellate authorities.

Let us analyse a case law on this subject. The following decision was given by the ITAT, Calcutta Bench, in Shroff Lesing (P) Ltd vs Assistant Commissioner of Wealth Tax (58 ITD 273).

The company, in the business of leasing motor cars, also owned the leased cars. The AO completed the assessment by including the value of the motor cars in the assessee's net wealth. On first appeal, the Commissioner (Appeals) confirmed the assessment or der. On second appeal, the Tribunal gave a decision _ contrary to the one by the Commissioner (Appeals) _ that was in favour of the assessee.

The Tribunal observed that there is no difference between assessees running cars on hire basis for each trip and leasing companies that give cars on a stipulated lease. Under both circumstances, the assessee earns hire charges by allowing the third party to use the motor car. From this argument, one would have expected the Tribunal to conclude that the cars are exempt from wealth-tax liability as they are used in the business of running them on hire.

But the Tribunal exempted the cars from wealth tax liability on the submission that they were owned by the assessee and used as stock-in-trade in the business of leasing carried out by the assessee.

If the cars held by the leasing company are exempted from wealth tax on the basis that they are used as stock-in-trade, then, are they eligible for depreciation under Sec. 32 of I-T Act?

Normally, if the assets are held as stock-in-trade, they are not eligible for depreciation under the section. The benefit available by way of depreciation on motor cars under income-tax is more than the wealth tax liability thereon. The fact that an asse ssee is expected to forgo depreciation on account of escaping wealth tax liability on motor cars is truly a puzzle.

What is required is a circular from CBDT clarifying whether a motor car held by a leasing company is exempted from wealth tax liability (by equating it with the business of running motor cars on hire) or not. This clarification will solve the puzzle surr ounding this issue and eliminate litigation.

V. V. Ganesan