Facts of the Case

·         For the Assessment Year 1996-97, the Assessee, who was engaged in the business of leasing equipment, claimed a depreciation allowance on a Cyclonic Scrubber Equipment & Electro Static Precipitator.

·         The machinery was purchased from M/s Assam Solvex Pvt. Ltd., Assam, for a total consideration of Rs. 39,87,500/- and was leased to M/s Sitapur Plywood Manufacturing Pvt. Ltd..

·         The Assessing Officer (AO) conducted an inquiry, disputed the genuineness of the purchase transaction, and rejected the entire claim of depreciation on the ground that the assessee failed to establish the purchase and actual user of the machinery.

·         On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] overturned the AO's view, holding both the purchase and the installation of machinery at the lessee's unit to be conclusively established.

·         The Income Tax Appellate Tribunal (ITAT) subsequently affirmed the CIT(A)'s findings and dismissed the Revenue's appeal. The Revenue appealed to the Delhi High Court.

Issues Involved

·         Whether the transaction regarding the purchase of pollution control machinery from Assam-based entities was genuine or a sham.

·         Whether an equipment lessor can be denied depreciation under Section 32 on the ground that the exact date of installation or actual operational user by the lessee was not explicitly documented or verified.

Petitioner’s (Revenue’s) Arguments

·         The Revenue initially challenged the genuineness of the purchase transaction, pointing out discrepancies/deficiencies identified by the Assessing Officer during the primary inquiry.

·         The Revenue contested the exact date of installation and questioned whether the machinery was actively put to use by the lessee before the threshold date of September 30, 1995, to qualify for the full rate of depreciation.

Respondent’s (Assessee’s) Arguments

·         The Assessee submitted robust documentary evidence, including the relevant lease agreement and proof of physical delivery to the lessee prior to September 30, 1995.

·         The Assessee argued that since its core business is leasing, the asset is automatically "put to use" for the purpose of its leasing business the moment the possession of the machinery is handed over to the lessee under a lease agreement.

Court’s Findings and Order

·         Concurrence on Genuineness: The Revenue's counsel did not pursue the challenge against the genuineness of the purchase, accepting the concurrent factual findings of the CIT(A) and the ITAT.

·         Deemed User Rule for Lessors: The High Court affirmed that because the assessee is engaged strictly in the leasing business, the machines are deemed to be utilized for its business purposes as soon as they are leased and delivered to the lessee.

·         Presumption of Actual Use: The Court held that once the machinery is proved to be installed at the manufacturing unit of the lessee, actual user is a matter of legal presumption in the absence of evidence to the contrary.

·         Conclusion: Finding no error in the Tribunal's view and determining that no substantial question of law arose, the High Court dismissed the Revenue's appeal.

Important Legal Clarification

Core Principle Established: For the purpose of claiming depreciation under Section 32 by a leasing company (lessor), the pivotal date is when the machinery is legally leased and delivered to the lessee—not the date on which the lessee actually installs or operationalizes the machine. Physical placement or installation at the lessee's site creates a valid legal presumption of use.

 

Section Involved

·        Section 32 of the Income Tax Act, 1961 (Allowance of Depreciation).


 

Link to Download the Order

https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:24074-DB/61309012006ITA422006_130036.pdf

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