2013 (6) TMI 95 - HC - Income Tax

Reassessment proceedings - entitlement to depreciation claim u/s 32 on leased assets - Held that - The assessee is a leasing company which leases out trucks that it purchases. Therefore, on a combined reading of Section 2(13) and Section 2(24) the income derived from leasing of the trucks would be business income, or income derived in the course of business, and has been so assessed. Hence, it fulfills the aforesaid second requirement of Section 32 viz. that the asset must be used in the course of business. In view of judgment of I.C.D.S Ltd. vs. Commissioner of Income Tax 2013 (1) TMI 344 - SUPREME COURT assessee satisfied the condition that it must use the asset for the purposes of business. It does not mandate usage of the asset by the assessee itself. As long as the asset is utilized for the purpose of business of the assessee, the requirement of Section 32 would stand satisfied. In favour of assessee.

Summary

Issues:
Claim of depreciation under Section 32 of the Income Tax Act - Whether the assessee is entitled to depreciation on leased assets - Whether the assessee is engaged in leasing business or financing business.

Analysis:
The judgment involves the disposal of multiple cases filed by similarly situated assessees regarding the initiation of reassessment proceedings by the Revenue in relation to depreciation claimed under Section 32 of the Income Tax Act. The primary issue revolves around whether the assessee, engaged in the business of hire purchase and financing of vehicles, is entitled to claim depreciation on vehicles given on lease. The Assessing Officer disallowed the depreciation claim, leading to subsequent appeals. The Commissioner of Income Tax (Appeals) held the transactions as finance transactions, not lease transactions. The Tribunal found that the assessee was not the owner of the vehicles and conducted financing/hire purchase activities, not leasing. The central dispute is whether the assessee's activities qualify for depreciation under Section 32.

The Supreme Court's judgment in I.C.D.S Ltd. vs. Commissioner of Income Tax is pivotal in this case. The Court clarified that the assessee, as a leasing company leasing out trucks, qualifies as the owner of the vehicles for depreciation purposes under Section 32. The Court emphasized that usage of the asset for business purposes, not necessarily by the assessee itself, satisfies the requirement of Section 32. The Court rejected the Revenue's argument that the lessees, being in possession of the vehicles, should claim depreciation, emphasizing that the assessee's business income derived from leasing fulfills the statutory requirements for depreciation.

The Court analyzed the Motor Vehicle Act's definition of 'owner' and the legal fiction of ownership in lease agreements. It concluded that the lessor, i.e., the assessee, is the owner of the vehicles leased out, meeting the conditions for depreciation under Section 32. The Court's detailed reasoning on ownership, registration certificates, and income treatment reaffirmed the assessee's entitlement to depreciation. Consequently, the first question of law, regarding the assessee's eligibility for depreciation, was decided in favor of the assessee, leading to the allowance of the appeal and writ petitions.

In light of the decision on the first issue, the second question regarding the taxation of interest income versus total lease rental was deemed unnecessary for consideration. The judgment clarifies the distinction between leasing and financing activities, establishing the assessee's right to claim depreciation on leased assets used in the course of its business. The legal interpretation provided by the Supreme Court's precedent and the Court's analysis of ownership rights under the Motor Vehicle Act solidified the assessee's position in claiming depreciation under Section 32 of the Income Tax Act.