Depreciation – Section 32 – A. Y. 1996-97 – Purchase and lease back of energy measuring devices – Lessee not claiming depreciation – Assessee entitled to depreciation

In the relevant year, the assessee claimed 100% depreciation on energy measuring devices purchased from the Haryana State Electricity Board. After purchase, they were leased back to the Board, under a lease agreement dated 29/09/1995. The Assessing Officer held that the purchase and lease back transaction was in fact and in substance a finance lease agreement. He disallowed the depreciation relying on the Circular No. 2 of 2001 dated 09/02/2001 and added the amount to income of the assessee. The CIT(A) and the Tribunal allowed the assessee’s claim.

On appeal filed by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The condition precedent in a case of hire purchase is ownership of the assets and user for purposes of the business, i.e., not usage of the assets by the assessee itself but for purposes of its business of leasing.

ii) The entire case of the Department was based on Circular No. 2 of 2001, dated 09/02/2001. CIT(A) had examined the transactions and found them to be genuine. It was not disputed that the lessee had not claimed depreciation and the assessee had also taken loan against security of the leased assets.

iii) Accordingly, appeal is dismissed.”