Depreciation in sale and leaseback transactions depends on legal ownership and business use, while statutory deductions remain condition-based.

Depreciation on assets used in sale and leaseback arrangements was treated as allowable where the assessee retained legal ownership in substance and used the assets in business, so the disallowance was deleted. Preliminary expenses under section 35D were not deductible because the expenditure was incurred after commencement of business and not for expansion or setting up a new industrial undertaking, so the disallowance was sustained. No separate disallowance was permitted for dividend income under section 80M on the facts applied, so that relief was allowed. Interest under section 234B was held consequential to the substantive tax determination, while interest under section 234C was chargeable according to law on the returned income.

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Issues: (i) Whether depreciation was allowable on assets involved in sale and leaseback transactions and other leased assets; (ii) Whether deduction for preliminary expenses under section 35D was allowable; (iii) Whether any disallowance was permissible in relation to dividend income under section 80M; (iv) Whether interest under sections 234B and 234C was leviable and in what manner.

Issue (i): Whether depreciation was allowable on assets involved in sale and leaseback transactions and other leased assets.

Analysis: The claim for depreciation was examined in the light of the principle that a lessor may be treated as the owner of the asset where the transaction documents and surrounding circumstances show ownership in substance. Reliance was placed on the settled view that, for section 32, ownership and use in business are the relevant requirements. The reasoning also followed the earlier view that sale and leaseback arrangements do not, by themselves, deny depreciation where the assessee retains the attributes of ownership recognized in law.

Conclusion: Depreciation was allowable and the disallowance was deleted in favour of the assessee.

Issue (ii): Whether deduction for preliminary expenses under section 35D was allowable.

Analysis: The expenditure was found to have been incurred after commencement of business and not in connection with expansion of an industrial undertaking or setting up of a new industrial undertaking. The statutory conditions for deduction under section 35D were therefore not satisfied.

Conclusion: The disallowance of preliminary expenses was sustained against the assessee.

Issue (iii): Whether any disallowance was permissible in relation to dividend income under section 80M.

Analysis: The issue was governed by the earlier tribunal view following the Bombay High Court decision that no separate disallowance could be made merely for earning dividend income when the assessee claimed deduction on gross dividend and no distinguishing facts were shown.

Conclusion: The disallowance in relation to dividend income was deleted in favour of the assessee.

Issue (iv): Whether interest under sections 234B and 234C was leviable and in what manner.

Analysis: Interest under section 234B was held to be consequential to the tax determination on the substantive issues. As to section 234C, interest was directed to be computed according to law on the returned income.

Conclusion: Interest under section 234B was consequential, while interest under section 234C was chargeable as per law.

Final Conclusion: The appeals resulted in a mixed outcome, with depreciation and dividend-related relief granted, preliminary expenses disallowed, and interest issues disposed of in accordance with the substantive findings.

Ratio Decidendi: In a lease or sale and leaseback arrangement, depreciation under section 32 depends on the assessee's legal ownership and business use of the asset, and statutory deductions or disallowances must be tested strictly against the conditions expressly enacted.

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