2015 (4) TMI 20 - SC - Income Tax

Depreciation on the 1250 gas cylinders disallowed - High Court concurred with the opinion of the Tribunal in denying the depreciation on the ground that the cylinders were not purchased for leasing business and one of the parties to whom the cylinders were leased out is the manufacture and seller of the cylinders. It is further stated that the cylinders were dispatched to the other party only a day before the closing of the accounting period - Held that - The reasons given by the ITAT and the High Court in denying the depreciation do not appear to be valid reasons in law. Insofar as the purchase of gas cylinders by the assessee is concerned, this fact is not disputed. It is also not disputed that these gas cylinders were purchased for business purpose. In fact, the plea of the assessee that since manufacturing unit had not started functioning and this necessitated the assessee to lease out these gas cylinders to the aforesaid two parties to enable it to earn some income, rather than keeping those cylinders idle, is also not in dispute. On the contrary, as mentioned above, the income which is generated from leasing out those gas cylinders is treated as business income . Once the income from leasing those gas cylinders is accepted as the business income , which is taxed at the hands of the assessee as such, we see no reason how the depreciation on these gas cylinders could be disallowed on the ground that the cylinders were not purchased for leasing business . The aforesaid facts would clearly demonstrate that the assessee has proved ownership of these gas cylinders and use of these gas cylinders for business purpose. Once these ingredients are proved, the assessee was entitled to depreciation under Section 32 - Decided in favour of assessee.

Summary

Issues: Depreciation on gas cylinders for assessment year 1986-87.

Analysis:
The judgment pertains to the issue of claiming depreciation on 1250 gas cylinders for the assessment year 1986-87. The appellant, who set up a manufacturing unit for industrial gases, purchased the gas cylinders but leased them out to other parties as the unit was not operational. The Assessing Officer initially rejected the depreciation claim on the grounds of lack of proof of a hiring business. However, the Commissioner of Income Tax (Appeals) accepted the appeal, considering the income from leasing as business income and allowing the depreciation. The CIT(Appeals) highlighted that the appellant became the owner of the cylinders, leased them out for business purposes, and had the right to use them for any beneficial purpose. The Income Tax Appellate Tribunal later overturned the CIT(Appeals) decision, which was upheld by the High Court, stating that the cylinders were not purchased for leasing business. The Supreme Court disagreed with the lower courts, emphasizing that the appellant had proved ownership and business use of the cylinders, making them eligible for depreciation under Section 32 of the Income Tax Act.

The Supreme Court found the reasons given by the lower courts for denying depreciation to be legally invalid. It was established that the gas cylinders were purchased for a business purpose, and the income generated from leasing them was treated as business income. The court noted that once the income from leasing was considered business income and taxed accordingly, disallowing depreciation on the grounds of not being purchased for leasing business was unjustified. The appellant demonstrated ownership of the gas cylinders and their use for business purposes, meeting the requirements for claiming depreciation under Section 32 of the Income Tax Act. Therefore, the Supreme Court allowed the appeal, setting aside the judgments of the High Court and affirming the appellant's entitlement to the claimed depreciation for the relevant assessment year.