Ruling in M/s ICDS Ltd v Commis-sioner of Income Tax, Mysore & Anr, the Supreme Court held that tax depreciation on a finance lease transaction should be available to the lessor, as the lessor qualifies as the owner of the asset and is using the asset for the purpose of business.
The court was ruling on a claim for depreciation under section 32 of the Income Tax Act, 1961, by ICDS, a non-banking financial company that bought and leased vehicles. The vehicles leased were registered in the names of the customers. ICDS had also claimed depreciation at a higher rate on the ground that the vehicles were used in the business of running on hire.
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The assessing officer held that as the vehicles were registered in the names of the customers and were used by them, ICDS was not eligible for depreciation under section 32. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) allowed the company’s claim. However, Karnataka High Court reversed the ITAT’s decision on the ground that ICDS was only a financier and not the owner of the vehicles.
Overruling the high court, the Supreme Court held that section 32 requires that the asset must be “owned, wholly or partly, by the assessee and used for the purposes of the business”. As the lease agreement specifically provided that the lessor was the exclusive owner of the vehicle, the court ruled that the assessee is the owner of the vehicle in the eyes of law. The fact that the Motor Vehicles Act, 1988, deems the lessee to be the owner is irrelevant.
Further, the court rejected the argument that the assessee had not used the vehicles as the vehicle was used by the assessee in its business of leasing.
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The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.
