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Supreme Court Rules On Tax Depreciation
ICDS, a RBI registered non-banking financial company, was engaged in the business of hire purchase, leasing, real estate etc. ICDS purchased vehicles directly from manufacturers and leased them out to its customers on a finance lease basis. The vehicles were registered in the name of the lessee, as was required under the Motor Vehicles Act.
In its income-tax returns for assessment years 1991-1992 to 1996-1997, ICDS claimed tax depreciation on the leased vehicles on the basis that it owned the vehicles and used the vehicles for the purpose of its business. The entire lease rentals that were earned by ICDS from lease of the vehicles were reported to tax as business income. The tax depreciation was claimed at a higher rate of 50% for AY 1991-92 and 40% for AYs 1992-93 to 1996-97 on the basis that the vehicles were used in the business of running on hire.
The assessing tax officer disallowed the tax depreciation claim of ICDS on the basis that (i) ICDS was merely leasing the vehicles out and it was not actually running the vehicles in the business of hire, and (ii) ICDS had merely financed the purchase of the vehicles and was not the 'owner' of the vehicles.
After several different rulings from the Commissioner of Income-tax and the Karnataka High Court the case was brought to the Supreme Court. The Supreme Court ruled in favour of ICDS and held that the Company was eligible to claim tax depreciation on the leased vehicles, as it qualified as the 'owner' of the vehicles and had used the vehicles for the 'purpose of business'. The Supreme Court also upheld ICDS' claim for higher tax depreciation, as the leased vehicles had been used in the business of running them on hire.
The ruling of the Supreme Court in the case of ICDS brings clarity on the lessor issue, which has been long overdue. Importantly, the Supreme Court has shed light on the terms 'owner' and 'purpose of business' have to be interpreted and has accorded a broad meaning to these terms. Therefore assessees presently contending tax depreciation matters, which involve litigation on the meaning of 'owner' and 'purpose of business', can look to rely on the interpretation of these terms by the Supreme Court.