Partly allowed appeal: second transaction depreciation disallowed, first transaction depreciation restored, matter remitted for recalculation of embedded interest

SC held the so-called lease dated 15.3.1991 was not proved and affirmed the AO's disallowance of depreciation of Rs. 30,17,122 under the Second Transaction. The Court deleted the disallowance of depreciation of Rs. 18,04,572 under the First Transaction. An alternative contention that, if the Second Transaction were a financial arrangement, only embedded interest should be taxed was noted and the matter was remitted for appropriate recalculation. The civil appeal was partly allowed.

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Issues:
- Claim of depreciation under Section 32(1)(ii) of the Income-tax Act, 1961 for two separate transactions dated 15.2.1991 and 15.3.1991.
- Nature of transactions regarding the lease agreements dated 15.2.1991 and 15.3.1991.
- Disallowance of depreciation by the Assessing Officer (AO) and subsequent confirmation by the Tribunal and High Court.

Analysis:

(A) Facts Regarding Lease dated 15.2.1991 (Transaction No. I):
The appellant, as the lessor, entered into a lease agreement with M/s Coolade Beverages Pvt. Ltd. for soft drink bottles. The Assessing Officer initially disallowed depreciation on a portion of the bottles, but later, after remand, allowed full depreciation. The High Court and Tribunal held that the transaction was a financial arrangement, not a lease, and disallowed the depreciation claim. The Supreme Court, citing precedent, held that the benefit granted by the AO cannot be taken away by the Department. The Court found that the Department erred in disallowing depreciation for the bottles sold before 31.3.1991. Consequently, the Court allowed depreciation for 42,000 bottles out of the total 5,46,000 bottles.

(B) Facts Regarding Lease dated 15.3.1991 (Transaction No. II):
The appellant, as the lessor, entered into a lease agreement with M/s Aravali Leasing Ltd., with a sub-lease to M/s Unikol Bottlers Ltd. The AO disallowed depreciation for this transaction, stating it was not proved. The Tribunal and High Court upheld this decision. The appellant argued that evidence proved the transaction, but the Court found the sub-lease predating the main lease raised doubts. The Court concluded that the transaction was not proved, upholding the disallowance of depreciation. An alternative argument for taxing only interest on lease rentals was rejected due to the transaction being deemed a sham.

In conclusion, the Supreme Court partly allowed the civil appeal, deleting the disallowance of depreciation for the first transaction but upholding it for the second transaction.

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