Depreciation allowed on leased assets despite revenue's disguised loan claim under Section 32

Bombay HC upheld ITAT's decision allowing depreciation on leased assets, rejecting revenue's contention that lease agreements were disguised loan transactions. Court applied SC precedent in I.C.D.S., holding that assessee met ownership and business use requirements under Section 32 despite revenue's argument about economic ownership vesting with lessee. HC also upheld ITAT's deletion of interest under Section 220(2), ruling it was chargeable only up to original assessment order under Section 143(3) or 144, not subsequent orders. Both questions of law decided in favor of assessee.

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Issues Involved:
1. Deletion of disallowance of depreciation on leased assets under Section 32 of the Income-tax Act.
2. Deletion of interest under Section 220(2) of the Income-tax Act.

Detailed Analysis:

1. Deletion of Disallowance of Depreciation on Leased Assets under Section 32 of the Income-tax Act:
The primary issue revolves around whether the assessee is entitled to claim depreciation on leased assets under Section 32 of the Income-tax Act. The revenue contended that the assessee did not fulfill the twin requirements of ownership and usage for business purposes to claim depreciation.

The facts of the case reveal that the assessee entered into various lease transactions and claimed depreciation on the leased assets. The Assessing Officer disallowed the depreciation, treating the transactions as mere financial transactions. This disallowance was upheld by the CIT (A). However, the Tribunal, relying on its earlier orders and the Supreme Court's decision in I.C.D.S. Ltd. vs. Commissioner of Income-tax, allowed the assessee's claim for depreciation.

The Supreme Court in I.C.D.S. Ltd. held that Section 32 requires the asset to be used for the purpose of business and does not mandate usage by the assessee itself. As long as the asset is used in the course of the assessee's business, the requirement is satisfied. The Tribunal applied this principle and concluded that the assessee, being in the business of leasing, used the assets for its business purposes, thus fulfilling the conditions of Section 32.

The Tribunal's decision was further supported by the Bombay High Court in Commissioner of Income-tax vs. Apollo Finvest (I) Ltd., which applied the I.C.D.S. Ltd. decision to similar facts, confirming that leasing qualifies as business use under Section 32.

Given these precedents, the High Court found no merit in the revenue's contention and dismissed the appeal, affirming the Tribunal's decision to allow depreciation on leased assets.

2. Deletion of Interest under Section 220(2) of the Income-tax Act:
The second issue concerns the deletion of interest charged under Section 220(2) of the Income-tax Act. The revenue argued that interest should be charged up to the order passed under Section 143(3) read with Section 254 of the Act.

The Tribunal held that interest under Section 220(2) is chargeable only up to the original assessment order passed under Sections 143(3) or 144, and not up to the order passed under Section 143(3) read with Section 254. This decision was based on the premise that the disallowance of depreciation on leased assets was set aside, making the issue of interest consequential.

The High Court agreed with the Tribunal's reasoning, stating that since the depreciation on leased assets was allowed, the issue of interest under Section 220(2) does not arise. Consequently, the appeal on this ground was also dismissed.

Conclusion:
The High Court dismissed all the appeals filed by the revenue, affirming the Tribunal's decisions on both issues. The court upheld the deletion of disallowance of depreciation on leased assets under Section 32 and the deletion of interest under Section 220(2), finding no substantial questions of law arising for consideration.

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