2001 (1) TMI 974 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of depreciation on boiler leased to Bombay Dyeing.
2. Taxability of Tanzanian income in India.

Summary:

Issue 1: Disallowance of Depreciation on Boiler Leased to Bombay Dyeing

The primary issue in the assessee's appeal is the disallowance of depreciation on a boiler leased to Bombay Dyeing. The Assessing Officer (AO) disallowed the depreciation by applying the ratio of the Supreme Court decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 1481, concluding that the transaction was not genuine and was a colorable device to avoid tax. The AO inferred that the transaction was designed to reduce the profits of the assessee-company by claiming depreciation. CIT(A) confirmed the disallowance, noting that Bombay Dyeing had NIL income and could not claim depreciation, while the assessee-company had substantial profits.

The Tribunal, however, found that the transaction was a genuine business transaction and not solely for the purpose of avoiding tax. The assessee was earning rental income from the transaction, which was subjected to tax, indicating that it was not a sham transaction. The Tribunal also observed that the assessee was genuinely engaged in the leasing business, earning lease rental income from other parties as well. The Tribunal concluded that the transaction did not fall within the purview of McDowell & Co. Ltd.'s case and directed that the assessee be granted depreciation on the leased boiler as claimed.

Issue 2: Taxability of Tanzanian Income in India

The second issue pertains to the taxability of income earned by the assessee from Tanzania. The assessee claimed exemption for this income u/s Article 7 of the Double Taxation Avoidance Agreement (DTAA) between India and Tanzania. The AO held that the income was attributable to the permanent establishment (PE) in Tanzania and was thus taxable in India. CIT(A) upheld this view.

The Tribunal examined Article 7 of the DTAA, which states that profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a PE situated therein. The Tribunal concluded that profits attributable to the PE in Tanzania are taxable in both Tanzania and India. The Tribunal rejected the argument that this would result in double taxation, noting that the DTAA provides for a mechanism to eliminate double taxation by granting credit against Indian tax for taxes paid in Tanzania. Consequently, the Tribunal upheld the inclusion of Tanzanian income in the total income of the assessee.