ITAT upholds CIT(A)'s decision on depreciation for Solar Generating System leased assets.

The ITAT upheld the CIT(A)'s decision to delete the disallowance of depreciation on the Solar Generating System leased assets, concluding that the assessee was entitled to the depreciation claim as per the relevant legal provisions and judicial precedents. The revenue's appeal was dismissed.

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Issues Involved:
1. Disallowance of depreciation on Solar Generating System leased assets.

Detailed Analysis:

Issue 1: Disallowance of Depreciation on Solar Generating System Leased Assets

1. Background and Initial Proceedings:
- The appeal by the assessee arises from the CIT(A)-VIII, Kolkata's order dated 23.12.2011.
- The assessment was framed by DCIT, Circle-12(5), Kolkata under section 143(3) of the Income-tax Act, 1961 for the Assessment Year 1996-97.
- The primary issue is the CIT(A)'s deletion of the disallowance concerning depreciation on Solar Generating System, a leased asset.

2. Facts and Agreements:
- The assessee acquired Solar Cookers, Solar Water Heater, and ancillary equipment from LG Auto Engineering Ltd. via a hire purchase agreement dated 10.06.1995 and leased them to United Industries under a lease agreement dated the same day.
- Lease hire charges were to be paid directly to LG Auto Engineering Ltd. as per the agreement.
- The assessee claimed 100% depreciation on these assets as per the prescribed depreciation rate under the Income Tax Rules, 1962.

3. Initial Disallowance and Appeals:
- The AO initially disallowed the depreciation claim, but the CIT(A) allowed it based on CBDT Circular 9.
- The ITAT initially allowed the revenue's appeal but later recalled the order and set aside the assessment for further investigation to determine if the transaction was a genuine tax planning measure or a colorable device for tax evasion.

4. Subsequent Investigation and Findings:
- Upon reassessment, the AO again disallowed the depreciation, citing the Tribunal's earlier observations that the agreements were merely a tax avoidance scheme.
- The CIT(A), upon further appeal, deleted the disallowance, noting that the AO did not follow the ITAT's directions properly and failed to consider the provisions of section 32 and relevant rules, circulars, and Supreme Court decisions.

5. Legal Provisions and Judicial Precedents:
- Section 32(1) of the Income-tax Act allows depreciation on tangible assets owned and used for business purposes.
- Depreciation on renewable energy devices is admissible at 80% under Appendix 1 to Rule 5 of the Income-tax Rules.
- The term 'owned' in section 32(1) is to be interpreted broadly, including possession and dominion over the property.
- CBDT Circular No. 9 of 1943 outlines the treatment of leased assets for depreciation purposes.
- Judicial precedents, including Mysore Minerals Ltd. v. CIT and CIT v. Shaan Finance Pvt. Ltd., support the allowance of depreciation on leased assets.

6. CIT(A)'s Observations and Final Decision:
- The CIT(A) observed that the AO did not follow the ITAT's directions and failed to consider the relevant legal provisions and judicial precedents.
- The CIT(A) concluded that the assessee did not adopt a colorable device and was entitled to depreciation on the leased assets.
- The CIT(A) directed the AO to allow the depreciation claim in accordance with section 32 and the corresponding rules.

7. ITAT's Final Decision:
- The ITAT noted that the lease rentals were accepted by the AO, and there was no reason to disallow the depreciation.
- The ITAT referred to the Supreme Court's decision in CIT v. Shaan Finance Pvt. Ltd., which supports the allowance of depreciation on leased assets.
- The ITAT also cited the Gujarat High Court's decision in CIT v. Pinnacle Finance Ltd., which reinforces the entitlement to depreciation for leasing or finance companies.
- The ITAT confirmed the CIT(A)'s order deleting the disallowance of depreciation and dismissed the revenue's appeal.

Conclusion:
The ITAT upheld the CIT(A)'s decision to delete the disallowance of depreciation on the Solar Generating System leased assets, concluding that the assessee was entitled to the depreciation claim as per the relevant legal provisions and judicial precedents. The revenue's appeal was dismissed.

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