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2022 (2) TMI 1315 - AT - Income TaxDepreciation on Assets (Finance Lease) - ownership of asset - finance lease all the risks and rewards incidental to ownership of an asset is transferred to the lessee and the lessor cannot claim depreciation on the leased plant and machinery citing the reason that the lessee has not claimed depreciation on the leased plant machinery - whether AS-19 allows the lessee to claim depreciation on the asset and not the lessor in case of Finance Lease? - CIT- A deleted the addition - As argued CIT(A) has erred in granting the relief to the assessee irrespective of the fact that the decision of the Hon ble Tribunal is being challenged by the revenue before the Higher Forums - HELD THAT - It appropriate to consider the observations of the Hon ble Tribunal RELIANCE CORPORATE IT PARK LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE- 3 (3) (1) MUMBAI 2019 (6) TMI 1489 - ITAT MUMBAI held that the assessee is continued to have ownership of the asset even after leave and license agreement with Reliance Industries Ltd and the assessee has claimed depreciation for earlier two ears. In fact it has been accepted by the department in assessment proceedings. The assessee further explained that the lessee did not claim depreciation on the leased asset. Therefore considering over all acts of this case and also by following the ratio of the Hon ble Supreme Court in the case of ICDS 2013 (1) TMI 344 - SUPREME COURT we are of the considered view that the assessee is entitled for depreciation on the leased asset as per provisions section 32(1)(ii) of the Act. The Ld CIT(A) after considering relevant facts has right ly deleted additions made by the AO towards disallowance of depreciation hence we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the revenue. - Decided in favour of assessee.
Issues Involved:
1. Deletion of disallowance of Rs. 21,33,99,431/- on account of Depreciation on Assets (Finance Lease). 2. Application of AS-19 in determining the eligibility for claiming depreciation. Issue-Wise Detailed Analysis: 1. Deletion of Disallowance of Rs. 21,33,99,431/- on Account of Depreciation on Assets (Finance Lease): The primary issue in this appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the disallowance of Rs. 21,33,99,431/- on account of depreciation on assets under a finance lease. The revenue argued that in a finance lease, all risks and rewards incidental to ownership of an asset are transferred to the lessee, and thus, the lessor cannot claim depreciation on the leased plant and machinery. The assessee company, engaged in providing infrastructure support services, had leased its polymer plant unit to Reliance Industries Ltd. The Assessing Officer (A.O.) disallowed the depreciation claimed by the assessee on the leased plant and machinery, arguing that the lessee should claim the depreciation as per AS-19 issued by the ICAI, which states that in a finance lease, the lessee is entitled to claim depreciation. However, the CIT(A) considered the grounds of appeal, submissions of the assessee, and the findings of the A.O. The CIT(A) observed that the Hon’ble Tribunal had granted relief on a similar issue for the earlier assessment year. The CIT(A) directed the A.O. to delete the addition, allowing the assessee's appeal. The Tribunal upheld the CIT(A)’s decision, noting that the assessee continued to be the owner of the asset even after the lease agreement, and the lessee did not claim depreciation on the leased plant and machinery. Therefore, the Tribunal found no infirmity in the CIT(A)’s order and dismissed the revenue’s appeal. 2. Application of AS-19 in Determining the Eligibility for Claiming Depreciation: The revenue contended that AS-19 allows the lessee to claim depreciation on the asset and not the lessor in the case of a finance lease. The A.O. disallowed the depreciation claim based on AS-19, arguing that the lease term covered the major part of the economic life of the asset, and the asset was of a specialized nature that only the lessee could use without major modifications. The Tribunal considered the observations of the Hon’ble Tribunal in earlier cases, where it was established that the ownership of the asset remained with the lessor during the lease period. The Tribunal referred to the lease agreement, which clearly indicated that the ownership of the plant and machinery remained with the assessee, and the lessee acknowledged this fact. The Tribunal also noted that the assessee had offered the total lease rental received, including the principal portion, to taxation and claimed depreciation as per the Income Tax Act. The Tribunal emphasized that the method prescribed in AS-19 would not affect the claim of depreciation in the hands of the owner of the assets, as clarified by CBDT Circular No. 2 of 2001. The Tribunal found that the assessee was entitled to claim depreciation on the leased asset under the Income Tax Act, as the ownership of the asset had not been transferred to the lessee during the lease period. Conclusion: The Tribunal upheld the CIT(A)’s decision to delete the disallowance of depreciation on the leased plant and machinery, dismissing the revenue’s appeal. The Tribunal reiterated that the assessee, being the owner of the asset, was entitled to claim depreciation under the Income Tax Act, irrespective of the provisions of AS-19. The Tribunal also dismissed the revenue’s appeal for the subsequent assessment year, as the facts and circumstances were identical to the lead case.
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