2020 (12) TMI 306 - HC - Income Tax

Depreciation on leased assets u/s 32 - HELD THAT - The clauses of the agreement in the case before the Supreme Court in I.C.D.S Ltd. supra and in the case of the assessee with regard to ownership, inspection, re possession of the vehicle of the equipment on default, delivery of equipment on expiration of lease and ownership at the end of the lease period are similar. The assessee alone can claim the depreciation allowance. The aforesaid clauses have been interpreted by the Supreme Court in I.C.D.S. Ltd. 2013 (1) TMI 344 - SUPREME COURT and it has been held that the assessee is entitled to benefit of depreciation on leased assets under Section 32 of the Act. Thus, the questions of law involved in the appeal are no longer res integra and are squarely covered by the decision of the Supreme Court in I.C.D.S. The Supreme Court in RADHASOAMI SATSANG Vs. COMMISSIONER OF INCOME-TAX 1991 (11) TMI 2 - SUPREME COURT has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. In the instant case, the revenue has accepted the claim of the assessee for depreciation under Section 32 of the Act for the Assessment Year 2002-03 and 2003-04. Therefore, the revenue cannot be allowed to take a different stand for the Assessment Year 2004-05 - Rejection of the claim of the assessee for depreciation in respect of leased assets under Section 32 of the Act is hereby quashed - Decided in favour of assessee.

Summary

Issues:
1. Entitlement to claim depreciation on leased assets under Section 32 of the Income Tax Act, 1961.
2. Determination of lease nature - finance lease or operating lease.

Analysis:

Issue 1: Entitlement to claim depreciation on leased assets under Section 32 of the Income Tax Act, 1961:

The appellant, in this case, appealed against the denial of depreciation claim on assets leased by them for the Assessment Year 2004-05. The Assessing Officer initially held that the appellant, being the lessee, was not entitled to claim depreciation. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld this decision, stating that the lease was a finance lease, making the lessee the de facto owner entitled to claim depreciation. However, the appellant argued that the Supreme Court's decision in I.C.D.S. Ltd. v. Commissioner of Income Tax supported their claim. They also pointed out that the revenue had accepted similar claims in previous years, relying on the principle established in Radhasoami Satsang v. CIT. The High Court, after considering the agreements and relevant clauses, concluded that the appellant was indeed entitled to claim depreciation on leased assets under Section 32 of the Act. The court held that the substantial questions of law were covered by previous decisions and ruled in favor of the appellant.

Issue 2: Determination of lease nature - finance lease or operating lease:

The tribunal had determined that the lease in question was a finance lease, where the lessee was considered the de facto owner entitled to claim depreciation. The revenue contended that the matter required further examination based on the law laid down by the Supreme Court in I.C.D.S. Ltd. The High Court, after analyzing the clauses of the agreement and comparing them with the Supreme Court's decision in I.C.D.S. Ltd., found that the appellant, as the owner of the equipment, could claim the depreciation allowance. The court also referred to the principle in Radhasoami Satsang v. CIT, emphasizing that the revenue could not change its position after accepting the appellant's claim in previous assessment years. Therefore, the court ruled in favor of the appellant, allowing the depreciation claim on leased assets under Section 32 of the Act for the Assessment Year 2004-05.

In conclusion, the High Court allowed the appeal, quashed the tribunal's decision rejecting the depreciation claim, and held the appellant entitled to claim depreciation on leased assets under Section 32 of the Income Tax Act, 1961 for the relevant assessment year.