2019 (10) TMI 308 - AT - Income Tax

Depreciation on leased assets - whether income derived from leasing of the trucks would be business income? - HELD THAT - In this case the assessee was a leasing company which leased out trucks that it purchased and in M/S ICDS. LTD. 2013 (1) TMI 344 - SUPREME COURT held that the income derived from leasing of the trucks would be business income and, therefore, the requirement of section 32 i.e. the assets must be used in the course of business stood fulfilled. In the present case also it is undisputed that the assessee is earning income from leasing activities and the leased out assets are being used by the lessees for their business purposes. A perusal of the profit and loss account also shows that the assessee has been earning income from lease business. Circular No. 2/2001 issued by the CBDT on 9.2.2011 explicitly provides that under the Income Tax Act, in all leasing transactions, the owner of the assets is entitled to depreciation if the same is used in the business. As the assessee was being allowed the benefit of depreciation prior to the two assessment years under consideration. Copies of assessment orders for assessment years 2004-05 and 2005-06 also show that the assessee s claim with respect to depreciation was allowed. Thus, it is apparent that there has been no change in the facts and circumstances of the case and, therefore, there is no cogent reason for the department to deviate from its earlier stand. Although it is settled law that principle of res judicata does not apply to income tax proceedings, it is also settled law that without a change in circumstances and facts the accepted position by both the department as well as the assessee should not be disturbed. We find ourselves unable to persuade ourselves to agree to the conclusions reached by the lower authorities and, therefore, for both the years under consideration, we set aside the order of Ld. CIT (A) and direct the AO to allow the benefit of deprecation to the assessee corporation.- Decided in favour of assessee.

Summary

Issues:
Assessment of depreciation on leased assets as finance lease or operating lease.

Analysis:
1. The appellant, a Finance Corporation, claimed depreciation on plant and machinery leased out to borrowers. The ownership of assets remained with the appellant. The leasing activity ceased in 2001, and no new leases were given in subsequent years.

2. In assessment years 2002-03 and 2003-04, the Assessing Officer disallowed depreciation on leased assets, considering them finance leases. The appellant challenged this decision before the ITAT, arguing the assets remained owned by the appellant, satisfying conditions for depreciation claim.

3. The Authorized Representative argued that the transaction was a lease, not a sale or finance lease, as wrongly concluded by lower authorities. Referring to Circular No. 2/2001, it was emphasized that ownership determines depreciation entitlement.

4. The Senior DR supported the CIT (A)'s decision, asserting the transaction was a finance lease. The CIT (A) considered relevant case laws and concluded correctly.

5. The ITAT analyzed the lease agreement, highlighting clauses indicating ownership retention by the appellant. Referring to the ICDS Ltd. case, the ITAT emphasized asset usage for business purposes, supporting depreciation claim. Circular No. 2/2001 was also considered.

6. Noting the consistent allowance of depreciation in previous years, the ITAT found no reason to deviate from the established practice. The reliance on Asea Brown Boveri Ltd. case by the department was deemed misplaced.

7. Consequently, the ITAT set aside the CIT (A)'s order and directed the AO to allow depreciation benefits to the appellant for both assessment years.

This judgment clarifies the distinction between finance and operating leases, emphasizing ownership and asset usage for depreciation claims. The ITAT's decision was based on a thorough analysis of the lease agreement, legal precedents, and tax regulations, ensuring fair treatment for the appellant regarding depreciation on leased assets.