SC Dismisses Revenue SLP Due to Delay, Upholds Depreciation on Leased Assets

CIT Vs Tata Motors Ltd. (Supreme Court of India)

The matter arose from a batch of appeals filed by the Income Tax Department challenging a common order of the Income Tax Appellate Tribunal (ITAT) relating to assessment years 1994–95 to 1997–98. The key issues concerned (i) allowability of depreciation under Section 32 of the Income-tax Act, 1961 on leased assets, and (ii) levy of interest under Section 220(2) beyond the original assessment order.

At the assessment stage, the Assessing Officer disallowed depreciation on leased assets, holding that the transactions were merely financial arrangements and that the assessee did not satisfy the twin conditions of ownership and usage for business. This disallowance was upheld by the Commissioner (Appeals). Upon remand, the Assessing Officer reiterated the disallowance and also levied interest under Section 220(2).

Read Bombay HC Judgment in this case: Bombay HC allowed Depreciation on Leased Assets as Business Use Requirement Satisfied

The ITAT, however, allowed the assessee’s claim by relying on its earlier decisions in the assessee’s own case and deleted both the depreciation disallowance and the interest. The Tribunal found that the leased assets existed, were acquired through proper banking channels, and that lease rentals were offered to tax as business income. It also noted that lessees had confirmed ownership and had not claimed depreciation themselves.

The Bombay High Court upheld the Tribunal’s order. It relied on the Supreme Court’s interpretation in ICDS Ltd. v. Commissioner of Income-tax, which clarified that for claiming depreciation, the requirement of “use” under Section 32 does not mean actual physical use by the assessee. It is sufficient if the asset is used in the course of the assessee’s business. In leasing transactions, assets leased out generate business income and therefore satisfy the usage condition. The High Court rejected the Revenue’s contention that such lease transactions were merely financing arrangements or disguised loans, and held that legal ownership with the assessee and use in leasing business were sufficient to claim depreciation.

On the issue of interest under Section 220(2), the High Court held that such interest is chargeable only up to the original assessment order and not beyond an order passed under Section 143(3) read with Section 254. Since the disallowance of depreciation itself was set aside, the levy of interest was consequential and unsustainable. Accordingly, the High Court dismissed all Revenue appeals, holding that no substantial question of law arose.

The matter was then carried to the Supreme Court of India by way of a Special Leave Petition (SLP). The SLP was filed with a delay of 501 days. The Court noted that there was hardly any explanation for such a substantial delay. It also observed that although the High Court had decided a batch of appeals by a common order, only one case had been brought before the Court without any reference to the others.

The Supreme Court dismissed the application for condonation of delay and consequently dismissed the SLP. The dismissal was subject to payment of costs of ₹25,000 to a specified welfare fund within four weeks. As a result, the High Court’s ruling remained undisturbed.

In effect, the combined outcome of the High Court and Supreme Court proceedings confirms that depreciation on leased assets is allowable where the assessee retains ownership and the assets are used in the course of leasing business, and that interest under Section 220(2) cannot be extended beyond the original assessment order. The Supreme Court did not examine the merits due to delay, thereby leaving the High Court’s conclusions intact.

FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER

1. The present Special Leave Petition has been filed after delay of 501 days. The petitioner before this Court is the Income Tax Department. There is hardly any explanation for justifying such a huge delay in filing a petition.

2. Even otherwise, a perusal of the impugned order passed by the High Court shows that a bunch of appeals were decided vide a common order and only one has been listed before this Court. There is nothing mentioned about the other cases.

3. The application for condonation of delay is dismissed. Consequently, the Special Leave Petition is also dismissed subject to cost of Rs. 25,000/-, to be deposited in the below mentioned bank account, within a period of four weeks from today.

4. The Registry is directed to forward a copy of this order on the following email ID for information: cw.281b@gmail.com

5. Pending application(s), if any, shall stand disposed of.