High Court allows claim for depreciation on leased assets despite finance lease classification

The High Court ruled in favor of the appellant, allowing them to claim depreciation on leased assets under Section 32 of the Income Tax Act for the Assessment Year 2004-05. The court held that the appellant, as the lessee, was entitled to claim depreciation despite the lease being classified as a finance lease. The court emphasized consistency in the revenue's position and previous decisions, ultimately quashing the tribunal's decision and granting the appellant the right to claim depreciation on the leased assets.

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Issues:
1. Entitlement to claim depreciation on leased assets under Section 32 of the Income Tax Act, 1961.
2. Determination of lease nature - finance lease or operating lease.

Analysis:

Issue 1: Entitlement to claim depreciation on leased assets under Section 32 of the Income Tax Act, 1961:

The appellant, in this case, appealed against the denial of depreciation claim on assets leased by them for the Assessment Year 2004-05. The Assessing Officer initially held that the appellant, being the lessee, was not entitled to claim depreciation. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld this decision, stating that the lease was a finance lease, making the lessee the de facto owner entitled to claim depreciation. However, the appellant argued that the Supreme Court's decision in I.C.D.S. Ltd. v. Commissioner of Income Tax supported their claim. They also pointed out that the revenue had accepted similar claims in previous years, relying on the principle established in Radhasoami Satsang v. CIT. The High Court, after considering the agreements and relevant clauses, concluded that the appellant was indeed entitled to claim depreciation on leased assets under Section 32 of the Act. The court held that the substantial questions of law were covered by previous decisions and ruled in favor of the appellant.

Issue 2: Determination of lease nature - finance lease or operating lease:

The tribunal had determined that the lease in question was a finance lease, where the lessee was considered the de facto owner entitled to claim depreciation. The revenue contended that the matter required further examination based on the law laid down by the Supreme Court in I.C.D.S. Ltd. The High Court, after analyzing the clauses of the agreement and comparing them with the Supreme Court's decision in I.C.D.S. Ltd., found that the appellant, as the owner of the equipment, could claim the depreciation allowance. The court also referred to the principle in Radhasoami Satsang v. CIT, emphasizing that the revenue could not change its position after accepting the appellant's claim in previous assessment years. Therefore, the court ruled in favor of the appellant, allowing the depreciation claim on leased assets under Section 32 of the Act for the Assessment Year 2004-05.

In conclusion, the High Court allowed the appeal, quashed the tribunal's decision rejecting the depreciation claim, and held the appellant entitled to claim depreciation on leased assets under Section 32 of the Income Tax Act, 1961 for the relevant assessment year.

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