Supreme Court Affirmation: Physical Utilization Not a Prerequisite for Claiming Depreciation on Leased Assets
The interpretation of depreciation rules under the Income-tax Act has frequently sparked litigation between the Revenue and the assessee, particularly concerning leased assets. A central point of contention is whether the owner of an asset must physically use it to claim depreciation, or if deploying the asset in a leasing business satisfies the statutory requirements.
The judicial summary of the landmark dispute in CIT (LTU) Vs Tata Motors Ltd. provides definitive clarity on this subject. The case navigates through the complexities of lease transactions, the twin conditions of ownership and business use under Section 32, and the consequential levy of interest under Section 220(2).
Genesis of the Dispute
The controversy originated during the assessment proceedings for the assessment years spanning from 1994-95 to 1997-98. The Assessing Officer scrutinized the depreciation claims made by the assessee on various assets that had been leased out to third parties.
The Assessing Officer rejected the depreciation claim, presenting the following arguments:
- The leasing arrangements were merely disguised financial transactions rather than genuine operational leases.
- The assessee failed to fulfill the mandatory twin conditions stipulated under
Section 32of the Income-tax Act, which require the assessee to both own the asset and utilize it for business purposes. - Because the physical possession and usage of the assets were with the lessees, the assessee was deemed ineligible for the depreciation benefit.
Additionally, while framing the order under Section 143(3) read with Section 254, the Assessing Officer imposed interest under Section 220(2).