Assessee Wins Tax Depreciation Claim on Leased Buses, Deemed Real Owner for Tax Purposes

The Tribunal allowed the assessee's claim for depreciation on the leased buses, overturning the lower authorities' decisions. The lease was deemed a financial lease, with the assessee considered the real owner for tax purposes despite DMRC retaining title as security. Consequently, the assessee was entitled to claim depreciation on the buses. The alternative argument for treating lease payments as revenue expenditure became unnecessary following the favorable ruling on depreciation.

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Issues Involved:
1. Disallowance of depreciation on leased buses.
2. Alternative claim for deduction of lease payments as revenue expenditure.

Detailed Analysis:

1. Disallowance of Depreciation on Leased Buses:
The primary issue revolves around whether the assessee is entitled to claim depreciation on buses leased from Delhi Metro Railway Corporation Ltd. (DMRC). The assessee, engaged in the transportation business, entered into a Metro Link Bus Service Lease Agreement with DMRC for plying feeder buses. Under this agreement, the assessee acquired 87 buses, capitalized their cost, and claimed depreciation. The Assessing Officer (AO) disallowed this claim, stating that ownership of the buses would transfer to the assessee only after the successful completion of the agreement and full payment. Until then, DMRC retained ownership, making the assessee ineligible for depreciation.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that DMRC had already claimed depreciation on these buses. Additionally, the CIT(A) noted that payments made by the assessee were advances for acquiring capital assets in the future, thus not eligible for depreciation.

2. Alternative Claim for Deduction of Lease Payments as Revenue Expenditure:
The assessee alternatively argued that if depreciation was disallowed, the lease payments made to DMRC should be treated as revenue expenditure. The CIT(A) partially accepted this, allowing the interest component of the lease payments as revenue expenditure but disallowing the principal component, considering it a capital advance.

Tribunal's Findings:
The Tribunal examined the nature of the lease agreement to determine whether it constituted a financial lease or an operating lease. Key considerations included:
- The lease was non-cancellable with a fixed obligation for lease payments.
- The lease period matched the repayment period of the buses' cost.
- The assessee bore all costs related to insurance, maintenance, repairs, and taxes, indicating that risks and rewards of ownership vested with the assessee.

The Tribunal referenced the Supreme Court's guidelines and the Special Bench's observations in similar cases, concluding that the lease was a financial lease. Consequently, DMRC retained the title of the buses merely as security for repayment, and the assessee was deemed the real owner for tax purposes.

Judgment:
The Tribunal allowed the assessee's claim for depreciation on the leased buses, setting aside the lower authorities' orders. Given this decision, the alternative claim for treating lease payments as revenue expenditure became redundant.

Conclusion:
The appeal was allowed, granting the assessee the right to claim depreciation on the leased buses. The Tribunal's decision emphasized the substance over the form of the lease agreement, recognizing it as a financial lease and thus entitling the assessee to depreciation. The alternative plea for revenue expenditure was rendered moot due to the favorable ruling on depreciation.

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