Substantive ownership governs depreciation, while lump sum payments for parting with a capital asset are capital receipts.

Ownership in substance, rather than motor vehicle registration, determined entitlement to depreciation under section 32(1): where the agency agreement vested replacement buses in the assessee-firm, it was treated as the owner and allowed depreciation. Lump sum amounts received from sub-lessees for allowing exploitation of the buses were characterised by their substance as consideration for parting with a capital asset, not as advance hire charges, and were therefore capital receipts. The operative distinction turned on contractual ownership and the capital or revenue nature of the receipts, both resolved in favour of the assessee.

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Issues: (i) Whether the assessee-firm was the owner of the five new buses acquired in replacement of worn-out vehicles and was entitled to depreciation under section 32(1); (ii) Whether the lump sum amounts received by the assessee from sub-lessees for allowing them to exploit the buses were capital receipts or revenue receipts.

Issue (i): Whether the assessee-firm was the owner of the five new buses acquired in replacement of worn-out vehicles and was entitled to depreciation under section 32(1).

Analysis: The agency agreement required the assessee to replace old vehicles at its own cost, and expressly provided that vehicles so replaced would be the property of the agents. Depreciation under section 32(1) depends on ownership of the asset and user in business. Registration under the Motor Vehicles Act was held not to be a condition precedent to acquisition of ownership, and non-registration in the assessee's name did not displace the contractual vesting of ownership.

Conclusion: The assessee-firm was the owner of the five new buses and was entitled to depreciation on their cost.

Issue (ii): Whether the lump sum amounts received by the assessee from sub-lessees for allowing them to exploit the buses were capital receipts or revenue receipts.

Analysis: The assessee had earlier incurred capital expenditure for taking the buses on hire, and the receipts from sub-lessees were found to be similar lump sum payments. The revenue failed to show that the amounts were advance hire charges, while the tribunal found them to be premiums for parting with a capital asset. On parity of reasoning, such receipts could not be treated as income of revenue character.

Conclusion: The amounts received from the sub-lessees were capital receipts and not revenue receipts.

Final Conclusion: Both referred questions were answered in favour of the assessee, and the assessee succeeded on the depreciation issue as well as on the character of the sub-lease receipts.

Ratio Decidendi: For depreciation under section 32(1), ownership of the asset in substance is sufficient and registration under the Motor Vehicles Act is not ative; lump sum receipts received as consideration for parting with a capital asset are capital receipts.

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