Court rules purchaser, not finance company, entitled to claim depreciation on hire purchase assets

The High Court affirmed the decision of the Income Tax Appellate Tribunal, rejecting the non-banking finance company's claim for depreciation on hire purchase assets. The court held that since the purchaser had ownership and possession of the assets, they were entitled to claim depreciation, not the finance company. The court relied on the principle that the person in actual use of the vehicle is entitled to claim depreciation, in line with relevant circulars. The Tax Case (Appeal) was dismissed without costs.

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Issues:
Claim of depreciation on hire purchase assets under hire purchase transaction.

Analysis:
The case involved a non-banking finance company claiming depreciation on hire purchase assets under a hire purchase transaction for the assessment year 1994-95. The assessee contended that since they were the owners of the assets and the hirer did not claim depreciation, they were entitled to depreciation. However, their claim was rejected at various levels of appeal. The Assessing Officer and the first Appellate Authority held that as per the scheme, ownership and possession of the assets were with the purchaser, and depreciation should be allowed only in the hands of the purchaser. The Income Tax Appellate Tribunal also rejected the assessee's case, emphasizing that the persons using the vehicles under hire had possession and were entitled to claim depreciation. The Tribunal's decision was based on the principle that the person in actual use of the vehicle is entitled to claim depreciation.

The Board's Circular No.9 dated 23.3.1943 provided guidelines on allowing depreciation in hire purchase agreements. It stated that if the agreement indicated ownership with the lessee, depreciation should be allowed to the lessee on the entire purchase price. In this case, the purchaser was in actual possession and enjoyment of the vehicle, and the ownership was transferred to the purchaser under the scheme. The assessee only had the obligation to pay instalments, indicating that the transaction was akin to a purchase by instalments. Therefore, the claim of depreciation by the assessee was not justified.

The High Court, after considering the facts and the Tribunal's findings, rejected the case of the assessee, affirming the Tribunal's decision. Even though the question of law referred to Board's Circular No.689 dated 24.8.1994, the court interpreted it in line with Circular No.9 dated 23.3.1943. Consequently, the Tax Case (Appeal) was dismissed without costs.

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