2007 (8) TMI 494 - AT - Income Tax

Summary

Issues Involved:
1. Entitlement to depreciation on windmills under a hire-purchase agreement.
2. Applicability of CBDT Circular No. 19 dated 12-5-1943, specifically clause (ii) versus clause (iii).
3. Determination of the period for allowing depreciation.

Issue-wise Detailed Analysis:

1. Entitlement to Depreciation on Windmills under a Hire-Purchase Agreement:
The primary issue revolves around whether the assessee is entitled to claim depreciation on windmills acquired under a hire-purchase agreement. The Assessing Officer disallowed the depreciation claimed by the assessee, arguing that the assessee was merely a hirer and not the owner of the windmills. The assessee contended that as per CBDT Circular No. 19 dated 12-5-1943, depreciation should be allowed to the hirer in a hire-purchase transaction. The CIT(A) accepted the assessee's claim, leading to the department's appeal.

2. Applicability of CBDT Circular No. 19 dated 12-5-1943, Specifically Clause (ii) Versus Clause (iii):
The department argued that the assessee's case falls under clause (iii) of the Circular, which pertains to transactions where the hirer has an option to purchase the equipment, rather than clause (ii), where ownership is transferred immediately. The Assessing Officer held that depreciation should be allowed at the end of the hire period, not at the beginning. The CIT(A), however, directed the Assessing Officer to allow depreciation as if the assessee's case was covered under clause (ii), where depreciation is allowable in the first year of the period.

3. Determination of the Period for Allowing Depreciation:
The core of the dispute is the timing of the depreciation allowance. The CBDT Circular No. 19 outlines that in hire-purchase agreements, depreciation is to be allowed on the initial value of the asset. The Board's subsequent clarifications and judicial precedents, including the jurisdictional High Court's decision in "Addl. CIT v. General Industries Corpn. [1985] 155 ITR 430 (Delhi)," support the view that depreciation should be allowed in the year of entering into the hire-purchase transaction. The Tribunal noted that the hire-purchase agreement between the assessee and M/s. Garden Finance Ltd. was essentially an agreement for passing on title, with the hirer bearing all risks and having the option to acquire the asset at the end of the hire period.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, affirming that the assessee is entitled to claim depreciation on the windmills in the initial year of the hire-purchase agreement. It was observed that the transaction, in substance, was one of purchase by instalments, aligning with clause (ii) of the CBDT Circular. The Tribunal referenced multiple judicial precedents, including the Supreme Court's acceptance of the Board's Circular in CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308, which supports the allowance of depreciation to the hirer in hire-purchase transactions. Consequently, the department's appeal was dismissed.