Hire-purchase depreciation on windmills was allowable in the first year under binding circulars and settled judicial position.

Depreciation on windmills acquired under a hire-purchase arrangement was allowable in the initial year because the agreement was treated as involving hire and purchase components, with title passing under the transaction framework. The Board's circulars governed such arrangements by allowing depreciation on the initial value of the asset in the year of entry, while the hire element was treated as revenue expenditure. The later Board letter and instruction reiterated that approach, and the settled judicial position accepted depreciation in the hirer's hands. On those facts, the disallowance was unsustainable and the allowance of depreciation was upheld.

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Issues: Whether depreciation on windmills acquired under a hire-purchase agreement was allowable to the assessee in the initial year, and whether the assessee's claim was governed by the Board's circulars on hire-purchase transactions.

Analysis: The agreement conferred only an option to purchase at the end of the hire period, but the Board's circular on hire-purchase treated such transactions as involving both hire and purchase components. In such cases, depreciation is allowable on the initial value of the asset in the year of entering into the transaction, and the hire component is treated separately as revenue expenditure. The later Board letter and instruction reiterated this approach, and the jurisdictional High Court and the Supreme Court had already accepted that depreciation is allowable to the hirer in such a transaction. On the facts, the agreement was one for passing on title and the asset was properly treated as covered by the Board's framework for depreciation in the initial year.

Conclusion: Depreciation on the windmills was allowable to the assessee in the first year of the hire-purchase arrangement, and the disallowance made by the Assessing Officer was not sustainable.

Final Conclusion: The departmental challenge to the allowance of depreciation failed, and the order granting depreciation was sustained.

Ratio Decidendi: In a hire-purchase transaction where the agreement confers an option to purchase and the asset is acquired on the basis of the initial value, depreciation is allowable to the hirer in the year the transaction is entered into, in accordance with the binding Board circulars and the settled judicial position.

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