Depreciation rates and composite lease arrangements: assessment-year law governs, and ownership-like transactions can support capitalisation and depreciation.

Depreciation rates for income-tax purposes are determined by the law in force on the first day of the relevant assessment year, so amendments notified from 2 April 1983 did not apply to assessment year 1983-84. The article also explains that a lease deed and contemporaneous purchase option agreement may be read as one composite transaction; where that arrangement shows an intended transfer of property and ownership-like rights, the expenditure is capital in nature. On that basis, the capitalised amount can qualify for depreciation under section 32, and the absence of a registered formal conveyance does not by itself prevent allowance of depreciation.

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Issues: (i) Whether depreciation for assessment year 1983-84 was to be allowed at the amended rates brought into force from 2 April 1983. (ii) Whether the payment described as lease rent under the composite arrangement was capital expenditure resulting in acquisition of a capital asset and, if so, whether the assessee was entitled to depreciation under section 32.

Issue (i): Whether depreciation for assessment year 1983-84 was to be allowed at the amended rates brought into force from 2 April 1983.

Analysis: Depreciation rates are governed by the law in force on the first day of the relevant assessment year. The amended rules came into force on 2 April 1983 and therefore operated prospectively from the subsequent assessment year. The amended higher rates could not govern assessment year 1983-84.

Conclusion: The amended depreciation rates were not applicable for assessment year 1983-84. The answer was in favour of Revenue.

Issue (ii): Whether the payment described as lease rent under the composite arrangement was capital expenditure resulting in acquisition of a capital asset and, if so, whether the assessee was entitled to depreciation under section 32.

Analysis: The lease deed and the contemporaneous purchase option agreement had to be read as one composite transaction. On that construction, the arrangement was intended to transfer the property to the assessee, the consideration stood effectively paid, and the assessee obtained rights consistent with ownership. The expenditure was therefore capital in nature. Since the assessee was treated as the owner for the purposes of the transaction, depreciation under section 32 was allowable on the capitalized amount, and the alternative contention that no depreciation could be granted merely because the formal conveyance had not yet been registered was rejected.

Conclusion: The amount was capital expenditure and the assessee was entitled to depreciation on it. The answer was against the assessee on the capital nature of the expenditure and in favour of the assessee on depreciation.

Final Conclusion: The reference was disposed of by answering the depreciation-rate issue in favour of Revenue and the composite-transaction and depreciation issue partly against the assessee and partly in its favour, with the operative effect that the matter stood finally concluded.

Ratio Decidendi: For income-tax purposes, the law applicable on the first day of the assessment year governs depreciation rates, and a contemporaneous composite arrangement may be construed as transferring ownership so as to justify capitalization and depreciation under section 32.

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