Depreciation on finance-leased assets allowed where ownership stayed with the lessor, despite AS-19 accounting treatment.

Depreciation on finance-leased assets was allowable to the lessor because ownership remained with the assessee under the lease agreement, and tax depreciation had to be determined under the Income-tax Act rather than by accounting treatment under AS-19. The lessee's possession of the assets did not divest the assessee of ownership, and the fact that lease rentals were offered as business income while the lessee did not claim depreciation supported the claim. ITAT Mumbai held that AS-19 governed financial presentation only and did not control depreciation eligibility under tax law, so the disallowance was rightly deleted.

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Issues: Whether the lessor was entitled to claim depreciation on assets given on finance lease, notwithstanding the accounting treatment under AS-19 and the lessee's possession of the assets.

Analysis: The assets remained owned by the assessee under the lease agreement, and ownership for depreciation purposes had to be determined under the Income-tax Act rather than by the accounting treatment in the books. The fact that the lease rental was offered to tax as business income and that the lessee did not claim depreciation supported the assessee's case. AS-19 governed accounting presentation, but it did not control allowability of depreciation under the tax statute. The settled principle applied was that depreciation is allowable to the person who retains ownership and uses the asset for business, and the lease arrangement did not divest the assessee of that ownership during the relevant period.

Conclusion: The lessor was entitled to depreciation on the leased assets, and the disallowance made by the Assessing Officer was rightly deleted.

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