2025 (6) TMI 1794 - AT - Income Tax

Depreciation on factory assets leased out - real owner of assets - finance lease v/s operating lease - assessee cooperative society has leased out its factory to other party and the assets on which depreciation has been claimed were not used by the assessee himself. HELD THAT - As earlier the assessee itself was running the sugar factory but due to financial crisis the factory with all assets was handed over to other party for running the business. We also find from the details that the income by leasing out the factory was shown as business income by the assessee cooperative society and in earlier years such depreciation was also allowed to the assessee cooperative society under similar facts and circumstances of the case. Copy of assessment order for assessment year 2017-18 and copy of first appeal order for assessment year 2016-17 were produced before us wherein depreciation was allowed to the assessee cooperative society. The Revenue is not in appeal against the order of Ld. CIT(A) allowing depreciation on such leased assets. Thus we find force in the arguments of assessee that the AO as well as CIT(A)/NFAC erred in not allowing the depreciation claimed by the assessee since the same was already allowed in earlier years and therefore there is no reason to disallow the same in subsequent years. Appeal of assessee allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

- Whether the assessee cooperative society is entitled to claim depreciation on factory assets leased out to a third party, given that the assessee itself is not using the assets for manufacturing during the relevant assessment year.

- Whether the lease of the factory assets constitutes a finance lease or an operating lease, and the consequent entitlement to claim depreciation under the Income Tax Act.

- Whether the failure of the assessee to produce the lease agreement during appellate proceedings justifies disallowance of depreciation claimed.

- Whether the principle of consistency and precedents set in earlier assessment years, where depreciation was allowed on similar facts, should influence the current assessment year's decision.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to Depreciation on Leased Assets

Relevant legal framework and precedents: Section 32 of the Income Tax Act, 1961, governs the allowance of depreciation on tangible assets used for the purpose of business or profession. The depreciation is allowable only if the asset is used for the purpose of business by the assessee. The distinction between finance lease and operating lease is significant in determining the ownership and hence the right to claim depreciation. The Tribunal in IndusInd Bank Ltd. v. Addl. CIT held that in case of a finance lease, the lessee is treated as the owner and entitled to claim depreciation, while the lessor can claim depreciation in case of an operating lease or genuine finance lease.

Court's interpretation and reasoning: The Assessing Officer (AO) disallowed depreciation on the ground that the assessee had leased out the sugar factory from financial year 2013-14 onwards and was not using the asset himself for manufacturing. The AO held that such leasing negated the assessee's right to claim depreciation under section 32. The CIT(A) upheld this view, emphasizing that the assessee failed to produce the lease agreement to establish the nature of lease and ownership rights, which was critical to allow depreciation.

Key evidence and findings: The assessee claimed depreciation on the leased assets, relying on Indian Accounting Standard 19 to argue that the lessor is eligible to claim depreciation. However, repeated requests to furnish the lease agreement were not complied with, and the assessee submitted only unsubstantiated replies. The AO and CIT(A) found no credible evidence to support the claim.

Application of law to facts: The AO and CIT(A) applied the principle that depreciation is allowable only if the asset is used in the business by the assessee. Since the factory was leased out and not operated by the assessee, and the lease agreement was not produced to clarify ownership or lease type, depreciation was disallowed.

Treatment of competing arguments: The assessee argued that the leased factory was still used for business purposes (crushing of sugarcane) and that ownership of assets remained with the assessee, thereby entitling it to depreciation. The assessee also relied on a coordinate bench decision supporting depreciation claims by lessors in genuine finance leases. The Revenue countered by emphasizing lack of evidence and non-submission of lease agreement.

Conclusions: Initially, the AO and CIT(A) concluded that depreciation was not allowable due to lack of proof of ownership/use and non-submission of lease agreement.

Issue 2: Effect of Non-submission of Lease Agreement

Relevant legal framework and precedents: The burden of proof lies on the assessee to establish entitlement to depreciation. Production of relevant documents such as lease agreements is essential to determine the nature of lease and rights over the asset.

Court's interpretation and reasoning: The CIT(A) observed that despite repeated opportunities, the assessee failed to furnish the lease agreement, which was critical to decide ownership and use. The absence of this evidence led to rejection of the depreciation claim.

Key evidence and findings: The repeated failure to produce the lease agreement was noted, and the only submissions were unsubstantiated replies.

Application of law to facts: The Tribunal recognized the importance of documentary evidence to substantiate claims and found the failure to produce the lease agreement as a significant factor in disallowing depreciation.

Treatment of competing arguments: The assessee contended that the lease was for business purposes and that depreciation was allowable, but without documentary proof, the argument was insufficient.

Conclusions: The appellate authorities initially held that non-submission of lease agreement justified disallowance.

Issue 3: Consistency with Earlier Assessment Years and Precedents

Relevant legal framework and precedents: The principle of consistency in tax assessments and the doctrine of precedent guide that similar facts should yield similar tax treatment unless there is a material change in circumstances or law.

Court's interpretation and reasoning: The Tribunal noted that in earlier assessment years, the assessee was allowed depreciation on the same leased assets, and the Revenue did not appeal against those orders. For example, in assessment year 2016-17, the CIT(A) had allowed depreciation after scrutiny, and in 2017-18, no disallowance was made. The Tribunal found no material change in facts or law to justify disallowance in the current year.

Key evidence and findings: Copies of earlier assessment orders and appellate orders were produced, showing allowance of depreciation on leased assets. The Revenue's silence on those orders was significant.

Application of law to facts: The Tribunal applied the principle that the assessee's entitlement to depreciation on leased assets had been recognized previously and that the Revenue's acceptance of those orders implied acquiescence.

Treatment of competing arguments: The Revenue did not challenge the earlier orders allowing depreciation, weakening its position in the instant year.

Conclusions: The Tribunal concluded that the Assessing Officer and CIT(A) erred in disallowing depreciation in the current year when it was allowed in earlier years on similar facts.

3. SIGNIFICANT HOLDINGS

- "Under these circumstances, we find force in the arguments of Ld. counsel of the assessee that the Assessing Officer as well as Ld. CIT(A)/NFAC erred in not allowing the depreciation claimed by the assessee since the same was already allowed in earlier years and therefore there is no reason to disallow the same in subsequent years."

- The Tribunal emphasized the importance of consistency and noted that the Revenue's failure to appeal against earlier orders allowing depreciation indicated acceptance of the claim.

- The Tribunal set aside the order of the CIT(A)/NFAC and directed the Assessing Officer to allow the depreciation claimed by the assessee on the leased factory assets.

- The principle established is that where leased assets are used for business purposes and depreciation has been allowed in earlier years under similar facts, disallowance in subsequent years without material change or evidence is unwarranted.