Depreciation on Leased Vehicles 2026: Bombay HC Ruling Explained

What Happened?

The Bombay High Court recently declined to entertain the Revenue's challenge against depreciation claimed on leased vehicles, even though these vehicles were registered in the customer's name. The court remanded the matter to the Income Tax Appellate Tribunal (ITAT) to decide only the deferred maintenance charges issue, leaving the depreciation question settled in favour of the taxpayer. This ruling from July 2026 is crucial for vehicle leasing companies, fleet operators, and businesses that lease vehicles to customers.

Background & Legal Context

Under the Income Tax Act, 2025, depreciation is allowed on fixed assets owned by the taxpayer as per Schedule II. The key issue here is: Who is the owner for depreciation purposes — the leasing company or the customer whose name appears in the vehicle registration?

Relevant Sections:

• Section 32 of IT Act 2025: Allows depreciation on tangible fixed assets owned by the assessee
• Section 44AB of IT Act 2025: Governs depreciation for lease transactions
• Old Section 32 of IT Act 1961: Still applies for pending assessments under old provisions

The Revenue had argued that since the vehicle was registered in the customer's name, the ownership (beneficial ownership) vested with the customer, not the leasing company. Therefore, the leasing company had no right to claim depreciation. However, the Bombay HC disagreed with this interpretation.

The Court's Key Finding:

The Court held that legal ownership and beneficial ownership are two different concepts. Even if the vehicle is registered in the customer's name for operational convenience, the legal and beneficial ownership remains with the leasing company based on the lease agreement terms. Therefore, depreciation can be claimed by the leasing company.

This ruling aligns with commercial reality: In a typical vehicle lease arrangement, the leasing company purchases the vehicle, finances it, bears the depreciation risk, and receives periodic rental income. The customer only has the right to use the vehicle during the lease period. Once the lease ends, the vehicle goes back to the leasing company.

What Does This Mean for You?

For Vehicle Leasing Companies:

• You can now confidently claim depreciation on leased vehicles even if they are registered in your customer's name, provided the lease agreement clearly establishes your ownership
• The depreciation benefit will be available in AY 2025-26, AY 2026-27, and future years based on this precedent
• You should ensure your lease agreements clearly state that you retain legal and beneficial ownership despite customer registration
• Keep copies of lease agreements with customers as supporting documentation during Income Tax assessments

For Fleet Operators & Businesses Using Leased Vehicles:

• If you lease vehicles, understand that the depreciation benefit belongs to the lessor (leasing company), not to you as the lessee
• You cannot claim depreciation on leased vehicles even if they are registered in your name
• You can claim lease rental payments as a deductible business expense under Section 37 of IT Act 2025
• Ensure your lease agreements clearly define the payment structure and ownership terms

What About Deferred Maintenance Charges?

The court remanded the issue of deferred maintenance charges to the ITAT. This means the question of whether the leasing company can deduct deferred maintenance charges (charges paid by customers for excess wear and tear) is still under consideration. Await the ITAT ruling for clarity on this point.

For Bank & Financial Institution Asset Finance Division:

If your institution provides vehicle financing under lease arrangements, this ruling clarifies that depreciation can be claimed as long as the asset ownership is legally with your finance company. This enhances the ROI on lease portfolios.

What Should You Do Now?

Immediate Actions for Leasing Companies:

1. Review Your Lease Agreements: Ensure all existing and new lease agreements clearly state that legal and beneficial ownership of the vehicle remains with your company, and the customer has only usage rights
2. Document Ownership: Maintain all supporting documents proving ownership — purchase invoices, loan agreements, insurance policies in your name, registration certificates (even if customer-named)
3. Check Pending Assessments: If you have pending Income Tax assessments (AY 2025-26 onwards) where the Revenue disallowed depreciation on leased vehicles, file a response before the Assessing Officer citing this Bombay HC precedent
4. Claim Depreciation Correctly: In your Income Tax Returns (ITR) for AY 2025-26 onwards, claim depreciation on Schedule 2 (Depreciation) with reference to the lease agreement
5. Maintain Audit Trail: Get an audit report prepared showing depreciation computation on leased vehicles, confirming ownership under lease terms

If You Are in an Ongoing Assessment:

• If the Revenue has disallowed depreciation in your assessment, you can now appeal to ITAT citing this Bombay HC ruling
• Provide a written submission to your Assessing Officer with the judgment details
• If you have already paid additional tax, consider filing a refund claim under Section 92 of IT Act 2025

For Lessees (Customers):

• Do not attempt to claim depreciation on leased vehicles in your ITR
• Claim lease rental payments as a business expense if the vehicle is used for business purposes
• Keep lease agreements and rental invoices for Income Tax audit purposes

Key Takeaways

• Ownership Over Registration: Legal ownership (as per lease agreement) determines depreciation eligibility, not vehicle registration in the customer's name
• Safe for Lessors: Leasing companies can confidently claim depreciation on leased vehicles for AY 2025-26 onwards under this precedent
• Section 32 Applies: Depreciation is available under Section 32 of IT Act 2025 for all assets owned by the assessee, including leased vehicles
• Documentation is Key: Maintain clear lease agreements and ownership evidence to support depreciation claims during Income Tax assessments
• Deferred Charges Pending: The issue of deferred maintenance charges remains pending before ITAT — await clarity before restructuring lease terms

Bottom Line: This Bombay HC ruling is a significant victory for the vehicle leasing industry. If you are a leasing company or fleet finance provider, you can now claim depreciation with confidence, provided your lease agreements clearly establish your ownership. However, ensure your documentation is water-tight, as the Revenue may still challenge individual cases based on specific facts. If you are a lessee, remember that depreciation benefits flow to the lessor, not to you.

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