2024 (8) TMI 1026 - HC - Income Tax

Depreciation on leased assets - transactions of lease of various assets were mere financial transactions and the assessee was not entitled to depreciation - denial of claim by revenue as assessee does not fulfill the twin requirement of ownership and usage for business purpose to claim depreciation u/s 32 - ITAT allowed claim - HELD THAT - The position in law as enunciated in the decision of the Supreme Court in I.C.D.S. 2013 (1) TMI 344 - SUPREME COURT would squarely be applicable in the facts of the present case. The revenue s contention on the basis of clauses of lease agreement, that the assessee although was the purchaser of the assets in question, by virtue of having made payments to the seller of the assets, and that the assessee had not acquired the risk of ownership of such assets and further that the assessee s concern was only to recover the contracted amount of lease rentals provided in the agreements, the lease agreements being in fact loan transactions, in disguise of finance lease and that the lessee was the owner of the assets would disentitle the assessee to claim depreciation cannot be accepted. The reasons as rendered by the assessing officer have been rightly not accepted by the Tribunal, that the documents have artificially empowered the assessee with the ownership of the assets, although its economic life was vested with the lessee, and only to claim depreciation, the academic ownership was shown to be with the assessee company. Such observations of the assessing officer which is the case of the revenue in appeal, cannot be accepted, considering the plain reading of Section 32 as interpreted by the Supreme Court in I.C.D.S. (supra). First question of law as raised by revenue would not arise for consideration of this Court. Decided in favour of assessee. Addition of Interest u/s 220(2) - ITAT allowed claim holding that interest u/s. 220 (2) of the Act is chargeable upto original assessment order passed u/s. 143 (3) or 144 of the Act but not upto the order passed u/s. 143 (3) r.w.s. 254 - HELD THAT - Tribunal was right in deleting the interest in question by holding that the interest under section 220 (2) of the Act is chargeable upto original assessment order passed u/s. 143 (3) or 144 of the Act, but not upto the order passed u/s. 143 (3) r.w.s. 254 of the Act. The depreciation on the leased asset is allowed to the assessee, by setting aside its disallowance, the issue of such interest under section 220 (2) is consequential to the disallowance of depreciation on leased assets. It was, therefore, rightly held that the assessee was not liable to pay further interest after the passing of the assessment order. For these reasons, second question of law would also not arise for consideration.

Summary

Issues Involved:
1. Deletion of disallowance of depreciation on leased assets under Section 32 of the Income-tax Act.
2. Deletion of interest under Section 220(2) of the Income-tax Act.

Detailed Analysis:

1. Deletion of Disallowance of Depreciation on Leased Assets under Section 32 of the Income-tax Act:
The primary issue revolves around whether the assessee is entitled to claim depreciation on leased assets under Section 32 of the Income-tax Act. The revenue contended that the assessee did not fulfill the twin requirements of ownership and usage for business purposes to claim depreciation.

The facts of the case reveal that the assessee entered into various lease transactions and claimed depreciation on the leased assets. The Assessing Officer disallowed the depreciation, treating the transactions as mere financial transactions. This disallowance was upheld by the CIT (A). However, the Tribunal, relying on its earlier orders and the Supreme Court's decision in I.C.D.S. Ltd. vs. Commissioner of Income-tax, allowed the assessee's claim for depreciation.

The Supreme Court in I.C.D.S. Ltd. held that Section 32 requires the asset to be used for the purpose of business and does not mandate usage by the assessee itself. As long as the asset is used in the course of the assessee's business, the requirement is satisfied. The Tribunal applied this principle and concluded that the assessee, being in the business of leasing, used the assets for its business purposes, thus fulfilling the conditions of Section 32.

The Tribunal's decision was further supported by the Bombay High Court in Commissioner of Income-tax vs. Apollo Finvest (I) Ltd., which applied the I.C.D.S. Ltd. decision to similar facts, confirming that leasing qualifies as business use under Section 32.

Given these precedents, the High Court found no merit in the revenue's contention and dismissed the appeal, affirming the Tribunal's decision to allow depreciation on leased assets.

2. Deletion of Interest under Section 220(2) of the Income-tax Act:
The second issue concerns the deletion of interest charged under Section 220(2) of the Income-tax Act. The revenue argued that interest should be charged up to the order passed under Section 143(3) read with Section 254 of the Act.

The Tribunal held that interest under Section 220(2) is chargeable only up to the original assessment order passed under Sections 143(3) or 144, and not up to the order passed under Section 143(3) read with Section 254. This decision was based on the premise that the disallowance of depreciation on leased assets was set aside, making the issue of interest consequential.

The High Court agreed with the Tribunal's reasoning, stating that since the depreciation on leased assets was allowed, the issue of interest under Section 220(2) does not arise. Consequently, the appeal on this ground was also dismissed.

Conclusion:
The High Court dismissed all the appeals filed by the revenue, affirming the Tribunal's decisions on both issues. The court upheld the deletion of disallowance of depreciation on leased assets under Section 32 and the deletion of interest under Section 220(2), finding no substantial questions of law arising for consideration.