Depreciation Claim on Leased Assets Upheld as Transactions Are Not Merely Financial Based on Precedent
Issue
Whether depreciation under Section 32 is allowable on assets given on lease, or if such lease transactions should be treated merely as financial arrangements that disqualify the lessor from claiming depreciation.
Facts
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Assessment Period: The case involves a series of lease transactions spanning Assessment Years 1994-95 to 1997-98.
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AO’s Objection: The Assessing Officer disallowed the depreciation claims, contending that the lease agreements were disguised financial transactions and the assessee was not the “owner” for the purposes of Section 32.
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Tribunal Ruling: The Tribunal allowed the claim, relying on the landmark Supreme Court decision in I.C.D.S. Ltd. v. CIT, which established that lessors are entitled to depreciation on leased assets.
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High Court Action: The High Court upheld the Tribunal’s view, confirming the assessee’s right to claim depreciation.
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Current Status: The Revenue challenged the High Court’s order via a Special Leave Petition (SLP), but a similar challenge in the assessee’s own case (Tata Motors Ltd. [2026]) had already been dismissed by the Supreme Court.
Decision
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Precedent Followed: The Court noted that the core issue was already settled by the Supreme Court in I.C.D.S. Ltd., which held that the lessor remains the legal owner of the assets and uses them for business purposes by leasing them out.
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Consistency: Since the Revenue’s earlier challenge on this identical issue was dismissed (albeit on the ground of delay), the current SLP was also dismissed to maintain legal consistency.
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Outcome: The dismissal of the SLP effectively sustains the High Court’s order in favor of the assessee.
Key Takeaways
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Legal Ownership vs. Possession: For the purpose of Section 32, the lessor (owner) is entitled to depreciation even if the physical possession and use of the asset are with the lessee.
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Financial Lease vs. Operating Lease: The tax law does not automatically treat a lease as a “mere financial transaction” to deny depreciation; the registered ownership and the business of leasing are the primary criteria.
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Judicial Consistency: Once a superior court has established a principle or dismissed a challenge in a similar fact pattern for the same assessee, the Revenue cannot re-litigate the same issue across different assessment years.