Depreciation on leased assets turns on retained ownership and absence of a disguised finance transaction.

Depreciation under section 32(1) remains available to a lessor where the asset is purchased from independent vendors, leased under written agreements to unrelated users, and the documentation shows continuing ownership in the lessor. The decisive test is whether the transaction is in substance a finance arrangement that transfers the essential incidents of ownership to the lessee; on the facts noted, the lease terms did not show transfer of ownership, the leases did not cover most of the assets' useful life, and the assets retained residual value. Clauses reserving title and requiring return of the equipment supported the lessor's ownership, and the revenue did not prove a sham or disguised transfer. Depreciation was therefore allowable.

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Issues: Whether depreciation under section 32(1) of the Income-tax Act, 1961 was allowable to the lessor on assets acquired and leased out under the impugned lease agreements, or whether the arrangements were in substance finance transactions disentitling the assessee to depreciation.

Analysis: Depreciation under section 32 depends upon ownership of the asset and user for business. The assessee had purchased the assets from independent vendors, leased them under separate written agreements to unrelated users, and the transactions were supported by documentation and banking channels. The record did not establish that ownership had been transferred to the lessees, that the lease terms covered the major part of the useful life of the assets, or that the assets had no substantial residual value at the end of the term. The agreements also contained clauses asserting the lessor's ownership and requiring return of the equipment on termination. The Court held that the agreements, read as a whole, did not justify treating the assessee as having lost ownership merely because certain risks and obligations were allocated to the lessees. The revenue had not discharged the burden of showing that the arrangements were a mere disguise or that the assessee had entered into a finance lease so as to forfeit depreciation.

Conclusion: Depreciation on the leased assets was allowable to the assessee, and the disallowance made by the authorities was unsustainable.

Ratio Decidendi: For allowance of depreciation on leased assets, the decisive test is whether the assessee retained ownership in substance and the transaction is not shown to be a sham or finance arrangement transferring the essential incidents of ownership to the lessee; where ownership remains with the lessor under the agreement and the revenue fails to prove a disguised transfer, depreciation cannot be denied.

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