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Issues Involved:
1. Disallowance of Rs. 26,00,000 being depreciation on waste heat recovery. 2. Disallowance of interest amounting to Rs. 6,24,709. Summary: Issue 1: Disallowance of Rs. 26,00,000 being depreciation on waste heat recovery The assessee-company, engaged in trading chemicals, purchased a waste heat recovery boiler from its sister concern, M/s Barium Chemicals Ltd., for Rs. 26 lacs and leased it back to the seller. The assessee claimed 100% depreciation on the boiler. The AO disallowed the depreciation, viewing the transaction as a paper transaction aimed at tax avoidance. The CIT(A) upheld the AO's decision, terming the transaction as a tax-evading design. The assessee argued that the transaction was genuine, supported by invoices and the object clause in its memorandum of association. The Departmental Representative contended that the transaction was a colourable device to avoid tax, citing various Supreme Court decisions. The Tribunal considered whether Explanation 4A to s. 43(1) had retrospective operation and concluded it did not, based on the Supreme Court's decision in Keshavji Ravji & Co. vs. CIT and the memorandum explaining the provisions in Finance (No. 2) Bill, 1996. The Tribunal found the transaction genuine, noting that the equipment was duly reflected in both companies' balance sheets, and the lease rentals were taxed. The Tribunal rejected the Department's view that the transaction was a colourable device, emphasizing that tax considerations are integral to business decisions. The Tribunal allowed the depreciation claim, concluding that the transaction was not merely a paper transaction. Issue 2: Disallowance of interest amounting to Rs. 6,24,709 The AO disallowed the interest on the grounds that the assessee made interest-free advances from interest-bearing loans. The CIT(A) confirmed the disallowance. The assessee argued that no disallowance was made in the previous year, and the advances had reduced from Rs. 101 lacs to Rs. 66.72 lacs. The assessee also contended that no correlation was established between interest-free advances and interest-bearing borrowings, citing the Karnataka High Court decision in CIT vs. Sridev Enterprises. The Tribunal noted that the advances had reduced and no disallowance was made in the previous year. It found it difficult to establish a nexus between the funds and concluded that the entire interest paid was for business purposes. The Tribunal deleted the disallowance. Conclusion: The appeal of the assessee was allowed, with the Tribunal ruling in favor of the assessee on both issues.
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