2013 (11) TMI 1667 - HC - Income Tax

Entitlement to deprecation at higher rate on the vehicles leased out to third parties - Held that - Assessee engaged in the business of lease financing was entitled to higher rate of depreciation on vehicles used for hire, even when the vehicles were leased out to a third party. See I.C.D.S. Ltd. vs. CIT 2013 (1) TMI 344 - SUPREME COURT

Summary

Issues Involved:
1. Entitlement to higher depreciation rate on leased vehicles.
2. Validity of depreciation on assets treated as finance transactions.
3. Legality of canceling interest charged under Section 234B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Entitlement to Higher Depreciation Rate on Leased Vehicles:
The Tribunal's decision in favor of the assessee was upheld. The Delhi High Court in CIT vs. Bansal Credits Ltd. and the Supreme Court in I.C.D.S. Ltd. vs. CIT had established that an assessee engaged in lease financing is entitled to a higher depreciation rate on vehicles used for hire, even when leased to third parties. Therefore, Question No.1 was answered against the Revenue and in favor of the assessee.

2. Validity of Depreciation on Assets Treated as Finance Transactions:
For Assessment Year 1996-97, the assessee claimed 100% depreciation on assets purchased and leased back to the sellers. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)) disallowed the depreciation, treating the transactions as financial, not leasing. They argued that the assets were not physically transferred and remained with the sellers, indicating a mere financial arrangement to claim depreciation and reduce taxable income.

For Assessment Year 1997-98, similar transactions were scrutinized. The AO invoked Explanation 4A to Section 43(1)(a), arguing the assets were not new and the transactions were financial, not operational leases. However, the Tribunal reversed these findings, emphasizing that the ownership of the assets remained with the assessee during the lease term, and the lessee bore the risks and rewards of ownership, thus qualifying as genuine lease transactions.

The Tribunal's findings were upheld, noting that the transactions were genuine, the assets were new, and the sale consideration was duly accounted for. The Tribunal emphasized that the lease agreements clearly established the assessee's ownership, and the transactions were not sham or colorable devices. The Supreme Court's decision in I.C.D.S. Ltd. vs. CIT was cited, affirming that finance companies are entitled to depreciation on leased assets.

3. Legality of Canceling Interest Charged under Section 234B:
The assessee conceded that interest under Section 234B is mandatory. Consequently, the Tribunal's decision to cancel the interest was overturned, and Question No.3 was answered in favor of the Revenue. The AO was directed to calculate the interest based on the total income determined after giving effect to the appeal.

Conclusion:
The Tribunal's findings were largely upheld, affirming the assessee's entitlement to depreciation on leased assets, while the mandatory nature of interest under Section 234B was recognized, favoring the Revenue. The judgment comprehensively addressed the legal nuances of lease transactions, depreciation claims, and interest obligations under the Income Tax Act, 1961.