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Issues: (i) Whether the assessee was entitled to depreciation under Section 32 of the Income-tax Act, 1961 on the sale and lease back transactions with the electricity board. (ii) Whether depreciation was allowable in respect of the four leased assets where the lease period had expired and the assets had not been taken back.
Issue (i): Whether the assessee was entitled to depreciation under Section 32 of the Income-tax Act, 1961 on the sale and lease back transactions with the electricity board.
Analysis: The allowance of depreciation under Section 32 depends on ownership of the asset and its use for the purposes of the assessee's business. A leasing company can satisfy this requirement when the assets are acquired and leased out as part of its business. On the facts, the agreements, invoices, subsequent ratification, and surrounding circumstances did not establish that the arrangement was a sham or merely a loan transaction. The absence of physical delivery, the form of repayment, and the State Government guarantee were insufficient to dislodge the documented sale and lease back structure. The materials on record supported the genuineness of the transaction and the claim to depreciation.
Conclusion: The assessee was entitled to depreciation on the sale and lease back transactions, and the disallowance was unsustainable.
Issue (ii): Whether depreciation was allowable in respect of the four leased assets where the lease period had expired and the assets had not been taken back.
Analysis: Even though the lease period had expired and the assessee had not recovered physical possession, the assets continued to form part of the assessee's leasing business. In those circumstances, the assets were treated as having been used for the purposes of the business, and the block of assets did not cease to qualify merely because the lease term had ended. The factual position justified acceptance of the depreciation claim on those assets.
Conclusion: Depreciation on the four leased assets was allowable.
Final Conclusion: The appeal was allowed and the orders disallowing depreciation were set aside, with the order of the first appellate authority restored in full.
Ratio Decidendi: A leasing company is entitled to depreciation on assets leased out in the course of its business where ownership and business use are established, and a sale and lease back transaction will not be disallowed unless the revenue proves that it is a sham or non-genuine arrangement.
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