2006 (9) TMI 302 - AT - Income Tax

Expenditure incurred in relation to income not includible in total income, Minimum Alternate Tax, Bad debts

Issues Involved:
1. Depreciation on leased vehicles.
2. Lease equalization charges and computation of book profit under section 115JA.
3. Write-off of bad debt under section 36(1)(vii).
4. Disallowance of notional expenses under section 14A.

Detailed Analysis:

1. Depreciation on Leased Vehicles:
The Revenue contended that the Commissioner of Income-tax (Appeals) [CIT(A)] erred in allowing a higher depreciation rate of 40% on leased vehicles, as opposed to 20% allowed by the Assessing Officer (AO). The AO argued that the vehicles were not used by the assessee in the business of running them on hire, thus only qualifying for a 20% depreciation rate.

The assessee, a Non-Banking Finance Company (NBFC), claimed depreciation at 40% on heavy vehicles leased out to various parties. The CIT(A) referred to several judicial precedents, including the Delhi High Court's decision in CIT v. Bansal Credits Ltd., which held that leasing vehicles is tantamount to hiring them out, thus qualifying for the higher depreciation rate. The Tribunal upheld the CIT(A)'s decision, following its own precedent in the assessee's case for a previous assessment year.

2. Lease Equalization Charges and Computation of Book Profit under Section 115JA:
The Revenue challenged the CIT(A)'s direction to the AO not to add back Rs. 13,83,84,000 as lease equalization charges while computing book profit under section 115JA. The AO had added this amount, considering it a notional charge.

The CIT(A) noted that the lease equalization charges were in accordance with the guidelines issued by the Institute of Chartered Accountants of India (ICAI) and were mandatory for the assessee. The CIT(A) relied on the Supreme Court's decision in Apollo Tyres Ltd. v. CIT, which held that the AO has limited power to alter book profits certified under the Companies Act. The Tribunal confirmed the CIT(A)'s decision, noting that lease equalization charges do not fall under any of the specific clauses in the Explanation to section 115JA.

3. Write-off of Bad Debt under Section 36(1)(vii):
The assessee appealed against the CIT(A)'s decision, which upheld the AO's disallowance of a Rs. 2 lakh bad debt write-off. The AO argued that the debt was not incurred in the normal course of the assessee's business.

The CIT(A) held that the principal business of the assessee was leasing and financing, not money lending. The Tribunal disagreed, stating that the business of an NBFC inherently involves money lending. Therefore, the write-off should be allowed as a deduction under section 36(1)(vii).

4. Disallowance of Notional Expenses under Section 14A:
The assessee contested the CIT(A)'s confirmation of the AO's disallowance of Rs. 1,13,812 as notional expenses related to tax-free dividend income. The AO had estimated 5% of the dividend income as expenses incurred in earning it.

The CIT(A) upheld the AO's estimate, rejecting the assessee's argument that section 14A does not permit notional disallowances. The Tribunal found that while disallowance is warranted under section 14A, the AO's estimate lacked a proper basis. The matter was remanded to the AO to determine an appropriate disallowance.

Conclusion:
- The Tribunal upheld the CIT(A)'s decision on higher depreciation for leased vehicles.
- The Tribunal confirmed that lease equalization charges should not be added back to book profits under section 115JA.
- The Tribunal allowed the assessee's claim for bad debt write-off under section 36(1)(vii).
- The Tribunal remanded the issue of notional expense disallowance under section 14A to the AO for a proper determination.

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