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Issues: (i) Whether the assessee was entitled to depreciation on the leased vehicles and, if so, at what extent and rate; (ii) whether the loss arising on sale of the non-convertible portion of partly convertible debentures was allowable as a business loss or had to be treated as part of the cost of acquiring shares.
Issue (i): Whether the assessee was entitled to depreciation on the leased vehicles and, if so, at what extent and rate.
Analysis: The lease arrangement was examined against the features of a finance lease. The lease rentals were structured to recover the cost of the assets with return, the lessee bore the risks and obligations relating to use, taxes, insurance and damage, and the lessor was not functioning as a conventional owner-lessor but as a financier. The agreement therefore fell within the commercial indicia of a finance lease rather than a normal operating lease. In such a case, ownership for depreciation purposes does not remain with the lessor.
Conclusion: The assessee was not entitled to depreciation on the leased vehicles and the disallowance made by the Assessing Officer was restored.
Issue (ii): Whether the loss arising on sale of the non-convertible portion of partly convertible debentures was allowable as a business loss or had to be treated as part of the cost of acquiring shares.
Analysis: The debentures were actually allotted and the non-convertible portion was transferred in the manner contemplated by the arrangement. The loss arose on disposal of that portion and was not shown to be part of the direct cost of acquiring the equity shares represented by the convertible portion. The nature of the loss was thus distinct from the cost of the shares.
Conclusion: The loss was allowable as business loss and not as part of the cost of the shares.
Final Conclusion: The depreciation issue was decided against the assessee, the debenture-loss issue was decided in favour of the assessee, and the repairs-and-maintenance issue was sent back for fresh adjudication.
Ratio Decidendi: Where the substance of an arrangement shows a finance lease in which the lessee bears the risks and rewards of ownership and the lessor acts only as a financier, depreciation is not allowable to the lessor; and a loss on disposal of the non-convertible portion of partly convertible debentures is a separate deductible loss when it is not part of the cost of acquiring the equity shares.
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