Depreciation for leased assets and interest disallowance on advances depend on ownership, business use, and diversion of borrowed funds.

Depreciation was allowable to a lessor on leased vehicles where the assessee retained ownership in the tax sense and the leasing activity constituted business use; physical use by the lessee did not defeat the claim, so the assessee succeeded on Section 32(1). Interest on borrowed funds was not disallowable under Section 36(1)(iii) because the Tribunal found no established diversion for non-business purposes and the advances were treated as lacking the revenue's required nexus, so the assessee also succeeded on this issue. The Revenue's challenge failed on both substantial questions, and the Tribunal's order was left undisturbed.

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Issues: (i) Whether depreciation under Section 32(1) was allowable to a lessor in respect of vehicles leased to customers though the vehicles were not physically used by the assessee. (ii) Whether interest on borrowed funds was disallowable under Section 36(1)(iii) where advances were made to related persons without interest for non-business purposes.

Issue (i): Whether depreciation under Section 32(1) was allowable to a lessor in respect of vehicles leased to customers though the vehicles were not physically used by the assessee.

Analysis: The court applied the settled principle that, for depreciation, the assessee must be the owner of the asset and the asset must be used for the purposes of business. In a leasing arrangement, actual physical use by the lessee does not defeat the lessor's claim if the leasing activity itself forms part of the assessee's business and the assessee retains ownership in the relevant legal sense. The earlier jurisdictional decision and the Supreme Court authority on leased vehicles were followed.

Conclusion: The issue was answered in favour of the assessee.

Issue (ii): Whether interest on borrowed funds was disallowable under Section 36(1)(iii) where advances were made to related persons without interest for non-business purposes.

Analysis: The court accepted the principle that disallowance depends on whether the borrowed funds were diverted away from business needs or whether the advances were justified by commercial expediency. On the facts, the Tribunal's finding that the interest-free advances did not warrant disallowance was upheld, and the cited precedents supported allowance where the factual matrix did not justify a nexus between borrowed funds and non-business diversion.

Conclusion: The issue was answered in favour of the assessee.

Final Conclusion: The Department's challenges failed on both substantial questions, and the Tribunal's decision in favour of the assessee was left undisturbed.

Ratio Decidendi: In leasing transactions, depreciation is allowable to the lessor if ownership in the tax sense and business use requirements are satisfied, and interest on borrowed capital is not disallowable unless the Revenue establishes that the borrowing was diverted for non-business purposes without commercial expediency.

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