2003 (9) TMI 25 - HC - Income Tax

Depreciation - business of financing investment leasing etc. - use of assets - once a leasing or finance company which owns machinery and leases it to third party is found to have satisfied the other requirements of the provision it would be entitled to the deduction of depreciation in respect of such machinery or plant. It is further held that where the business of the assessee consists of hiring out machinery and/or where the income derived by the assessee from the hiring of such machinery is business income the assessee must be considered as having used the machinery for the purpose of its business - Tribunal is right in holding that the assessee is entitled to depreciation u/s 32

Summary

Issues:
1. Allowability of depreciation for assets in lease finance business.
2. Interpretation of section 32 of the Income-tax Act, 1961 regarding depreciation.
3. Application of the decision in CIT v. Shaan Finance P. Ltd. [1998] 231 ITR 308.
4. Requirement of actual use for depreciation allowance.
5. Distinction between sections 32 and 32A of the Income-tax Act, 1961.

Analysis:

1. The primary issue in this case was the allowability of depreciation for assets in a lease finance business. The appellant-Revenue questioned whether the assessee, engaged in lease finance, was entitled to depreciation under section 32 of the Income-tax Act, 1961, even if the asset was not put to use in the relevant year.

2. The court considered the interpretation of section 32 of the Income-tax Act, 1961, which deals with depreciation. The Assessing Officer disallowed the depreciation claim for a leased boiler, stating it was not used by either the assessee or the lessee. The Commissioner of Income-tax (Appeals) allowed the depreciation claim, and the Tribunal upheld this decision based on the Supreme Court's ruling in CIT v. Shaan Finance P. Ltd. [1998] 231 ITR 308.

3. The application of the decision in CIT v. Shaan Finance P. Ltd. [1998] 231 ITR 308 was crucial in this case. The Tribunal relied on this decision to uphold the allowability of depreciation for the leased asset. The court emphasized that if a leasing or finance company owns machinery leased to a third party and meets other requirements, it is entitled to depreciation deduction for such machinery or plant.

4. The issue of actual use for depreciation allowance was raised by the Revenue, arguing that section 32 of the Act requires actual user for granting depreciation. However, the court held that where the business involves hiring out machinery and the income derived is business income, it is considered that the machinery is used for the business, as per the decision in CIT v. Shaan Finance P. Ltd.

5. Another aspect discussed was the distinction between sections 32 and 32A of the Income-tax Act, 1961. The Revenue highlighted differences in language between the two sections regarding the ownership and use of assets. The court clarified that for investment allowance under section 32A, the asset must be wholly used for the business carried on by the assessee, while section 32 allows depreciation for assets used for the business.

In conclusion, the court dismissed the appeal, stating that based on the settled legal position and the Tribunal's findings, no substantial question of law arose from the order. The judgment reaffirmed the entitlement of a leasing company to claim depreciation for assets leased out in the course of its business operations.