INCOME TAX ACT, 1961

Section 32(1)

Depreciation - Allowability - Plant and machinery leased out to the borrowers - Whether non-usage of leased assets by assessee barred it from claiming depreciation

Assessee- Finance Corporation-claimed depreciation on plant and machinery leased out to the borrowers. AO disallowed said depreciation holding that it was a finance lease transaction. Assessee contended that in earlier years and subsequent years also depreciation on leased out assets was allowed to it. It further contended that various clauses of the lease agreement demonstrate that the ownership continued to vest with the owner-lessor, i.e., the assessee corporation and as regards the use of asset, section 32 required that asset should be used for the purpose of business and it did not mandate usage of asset by the assessee itself, hence, depreciation would be allowable to assessee.Held: Since assessee was earning income from leasing activities and the leased out assets were being used by the lessees for their business purpose, therefore, the requirement of section 32 would stand satisfied notwithstanding the non-usage of said assets by the assessee. Moreover, Circular No. 2/2001 also explicitly provides that under the Income Tax Act, in all leasing transactions, the owner of the assets is entitled to depreciation if the same is used in the business. Hence, AO was directed to allow the benefit of depreciation to the assessee corporation.

Relied:ICDS Ltd. v. CIT & Anr. (2013) 350 ITR 527 (SC) : 2013 TaxPub(DT) 414 (SC).