Depreciation on Operating Lease Vehicles Allowed Even When Registered in Customer’s Name: Bombay High Court Analysis

The Bombay High Court in PCIT Vs ALD Automotive Pvt Ltd has once again reinforced an important principle for leasing businesses: for purposes of claiming depreciation under Section 32 of the Income Tax Act 1961, what matters is real ownership and business use, not whose name appears on the Registration Certificate (RC) under the Motor Vehicles law.

This decision is particularly relevant to assessees engaged in operating lease of vehicles, fleet management, and similar asset-based service models. It also flags a procedural aspect: if the ITAT omits to decide a specific ground raised before it, that issue can be sent back for fresh adjudication, even while the rest of the appeal stands concluded.

Background of the Dispute

Nature of business and claim

The assessee, ALD Automotive Pvt Ltd, was carrying on the following businesses:

  • Operating lease of motor vehicles
  • Resale of used vehicles
  • Fleet management services

For A.Y. 2012-13, the assessee:

  • Filed its return of income on 29th September 2012
  • Declared taxable income of Rs. 11,56,67,769/-
  • Reflected:
    • Lease rental income of Rs. 135,19,92,359/-
    • Fleet management income of Rs. 30,22,37,218/-
    • Other income of Rs. 16,70,984/-
  • Claimed total expenses of Rs. 163,02,07,110/-, including:
    • Depreciation on vehicles of Rs. 74,14,49,570/-

The case was picked up for scrutiny. Notices under Section 143(2) and Section 142(1) were issued, and the assessee’s authorised representative appeared and furnished supporting details.

Assessing Officer’s approach

One of the principal issues in assessment was the allowability of depreciation on vehicles given on operating lease.

The Assessing Officer (AO):

  • Noted that the assessee was giving vehicles on operating lease
  • Observed that similar depreciation claims had been disallowed in earlier years
  • Sought:
    • Complete details of leased vehicles
    • Evidence and justification for the depreciation claim

The assessee responded that:

  • All leased vehicles were capitalised in its balance sheet
  • Corresponding lease rentals were offered to tax as income
  • Under the Master Lease Agreements, the assessee remained the absolute owner of the vehicles
  • Customers acquired only a contractual right of use
  • Names of customers appeared on the RCs only to satisfy the Motor Vehicles Act, not as an indication of ownership

Despite this explanation, the AO:

  • Relied on his approach in earlier assessment years (A.Y. 2007-08 and A.Y. 2008-09) where depreciation had been disallowed
  • Repeated the same disallowance logic for A.Y. 2012-13, primarily on the grounds that:
    • RCs of vehicles were in the names of lessee-customers
    • The assessee had not demonstrated that the lessees themselves had not claimed depreciation
  • Consequently, the AO disallowed the depreciation of Rs. 74,14,49,570/- on leased vehicles

In addition, there was a separate disallowance relating to deferred maintenance charges amounting to Rs. 1,14,48,078/-, treated by the Revenue as a provision for unascertained liability.

First Appeal: CIT(A) Sides with the Assessee

The assessee challenged the AO’s action before the CIT(A).

Findings of the CIT(A)

By order dated 25th July 2017, the CIT(A):

  • Recorded extensive submissions of the assessee (from paragraph 4.1 onwards in the appellate order)
  • Analysed:
    • Facts of the case
    • Assessment order
    • Judicial precedents
    • Earlier appellate orders in the assessee’s own case

On this basis, the CIT(A):

  1. Allowed depreciation on leased vehicles

    • Held that disallowance of Rs. 74,14,49,570/- was incorrect
    • Relied heavily on earlier years where:
      • For A.Y. 2007-08, A.Y. 2008-09, A.Y. 2009-10, and A.Y. 2010-11, the assessee had been allowed depreciation by the appellate authorities
      • The ITAT Mumbai had already upheld these CIT(A) orders in the assessee’s favour

  2. Deleted the disallowance of deferred maintenance charges of Rs. 1,14,48,078/-

    • The CIT(A) treated the amount as an allowable expenditure rather than a non-deductible provision for unascertained liability

Accordingly, the addition made by the AO on both counts was substantially reversed.

Second Appeal: Revenue Before the ITAT

The Revenue filed an appeal before the ITAT challenging the order of the CIT(A).

Grounds taken by the Revenue

The Revenue’s main grievances were: