Depreciation In Sale–Leaseback Cannot Be Denied On Mere Suspicion: Madras High Court

The Madras High Court on 20 April 2026 held that under the Income Tax Act, 1961, a taxpayer is entitled to claim deduction of accrued construction expenses and depreciation arising from sale and leaseback transactions. It ruled that such transactions cannot be treated as colourable devices merely because they result in tax advantages.

A Division Bench comprising Justices G. Jayachandran and Shamim Ahmed dismissed the appeals filed by the Income Tax Department under Section 260-A and affirmed the concurrent findings of the Commissioner (Appeals) and the Income Tax Appellate Tribunal in favour of Vijay Shanthi Builders Ltd. It observed:

“.....the Assessing Officer had disallowed the depreciation purely on the basis of surmises and conjunctions. Sale and leaseback is a recognised business transaction. The records show that the entire amount of sale consideration was paid by cheque and encashed by the vendor. What is paid by the vendor to the assessee is the lease amount and not the sale consideration....”

The core issues before the Court were whether the taxpayer could claim construction expenses on an accrual basis while recognising income on a different basis, whether depreciation could be denied on cinematographic films in a sale and leaseback structure due to timing objections, and whether such transactions could be treated as colourable devices merely because they result in tax efficiency.

The Assessing Officer disallowed the construction expenses and depreciation under Sections 143(1)(a) and 143(3), holding that the assessee followed an improper accounting method and that the transaction lacked genuineness.

The Revenue argued that the assessee recognised income on a receipt basis while claiming expenses on an accrual basis, and contended that the sale and leaseback arrangement was a colourable device to evade tax.

Rejecting these contentions, the High Court held that the taxpayer followed a permissible method of accounting. Relying on Calcutta Company Limited v. CIT [(1959) 37 ITR 1 (SC)], it held that once liability accrues, estimated expenditure qualifies as a deductible expense, even if actual payment occurs later, consistent with the matching principle.

On depreciation, the Court held that sale and leaseback arrangements are recognised commercial transactions and cannot be disregarded merely because they provide tax benefits. It further held that disallowance based on surmises and conjectures is impermissible in law.

Accordingly, the High Court dismissed the appeals and answered all substantial questions of law against the Revenue.

For Appellant: Dr. S. Sathiya Narayanan, Senior Standing Counsel

For Respondent: Advocate, Vishnu Mohan for Advocate, R.Parthasarathy