Depreciation can be claimed on leased vehicles

The assessee before the Hon’ble Madras High Court was a Limited Company engaged in the business of manufacture and sale of chassis for medium and heavy duty commercial vehicles, engines, etc. The assessment was completed u/s 143(2); and again after giving effect to the order in appeal. Subsequently, it was taken up for rectification under section 154 on the question of depreciation, as regards the lease of buses to MSRTC and PMTC which according to the Revenue was a sale transaction. The Assessing Officer construed that the lease agreement was a simple sale and held that the assessee was not entitled to depreciation on the vehicles. On appeal the first Appellate Authority confirmed the order passed by the Learned Assessing Officer. Being aggrieved by the Order of the CIT(A), the assessee preferred an appeal to the Appellate Tribunal. The Appellate Tribunal allowed the appeal of the assessee and observed that leasing of vehicles was the predominant business activity carried on by the assessee. Further, the written lease agreement executed between the parties and the assessee-company had collected deposit. The lease rentals were adjusted against the deposits made by the lessee company. The Tribunal further observed that the assessee-company was assessed to Maharashtra Sales Tax on these lease transactions which clearly show the exact nature of the transactions between the assessee and MSRTC as of pure lease and not of sale. Being aggrieved by the Order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Madras High Court under section 260A of the Act. Hon’ble High Court upheld the order of the Appellate Tribunal and held that a reading of the lease agreement showed that the parties were clear as to what they intended to do. The fact that the lessee had paid more than 90 per cent of the cost of lease rental by way of meeting the expenditure, 90 per cent of the security deposit going in for adjustment towards lease rentals did not by itself convert the lease transaction into a sale. Consequently, the direction given by the Tribunal to grant the depreciation allowance on the leased out vehicles at the rates applicable as per the rules was correct.