2012 (12) TMI 284 - AT - Income Tax

Whether the security deposits collected from customers on letting out the Gas Cylinders is trading receipt, whether these Gas cylinders would constitute as plant as per Income Tax Act, if so, the depreciation to be granted at 100% on these Cylinders. Held that - The cylinder is to be returned to the assessee company and the company has to refund the security deposit on its return. From the facts of the case, it is clear that the assessee supplied cylinders and the cylinders are the property of the assessee itself and the consumers does not have any right or interest over the cylinders. The security deposit collected by the assessee from the customers cannot be treated as received by the assessee towards sales consideration by any stretch of imagination. - the receipts of Rs. 52,06,650 are security deposits and not the income of the assessee. - Decided in favor of assessee. Depreciation of cylinders - held that - The user of the cylinders were customers of the assessee company and leasing of the cylinders is the business of the assessee and usage of cylinders by the assessee s customers is to be considered as usage by the assessee itself. Therefore, it could not be said that the cylinders were not used by the assessee in its business and the depreciation cannot be disallowed. - AO directed to allow depreciation at 100% on cylinders - Decided in favor of assessee.

Summary

Issues Involved:
1. Allowability of depreciation on gas cylinders.
2. Treatment of security deposits received on leasing gas cylinders as sales receipts and business income.

Issue-wise Detailed Analysis:

1. Allowability of Depreciation on Gas Cylinders:
The assessee claimed 100% depreciation on gas cylinders, treating them as "plant" under the Income Tax Act. The cylinders were used in the business of selling LPG, which required the use of these cylinders. The assessee argued that the cylinders were integral to its business operations and relied on the Special Bench decision in Detective Devices Pvt. Ltd. vs. Income Tax Officer, which supported the claim of 100% depreciation on such assets.

The Assessing Officer (AO) rejected the claim, citing discrepancies in purchase records and questioning the legitimacy of the transactions. The AO argued that the cylinders were not used in the assessee's business and that the transactions were a colorable device to evade taxes. The AO also noted that the assessee violated several provisions of the Gas Cylinder Rules, 1981, and the Explosives Act, 1884.

However, the Tribunal found that the cylinders were indeed used for the assessee's business, as they were leased to customers, and the ownership of the cylinders remained with the assessee. The Tribunal emphasized that the leasing of cylinders constituted a legitimate business activity, and the depreciation claim was justified. The Tribunal directed the AO to allow 100% depreciation on the cylinders, consistent with the decision in Detective Devices Pvt. Ltd.

2. Treatment of Security Deposits as Sales Receipts and Business Income:
The AO treated the security deposits received from customers for leasing gas cylinders as sales receipts, arguing that the transactions were effectively sales of the cylinders. The AO contended that the difference between the security deposit and the purchase cost of the cylinders should be treated as business income. The AO's conclusion was based on the belief that the transactions were a sham designed to reduce tax liability.

The assessee countered that the security deposits were liabilities, not sales receipts, and that the cylinders were leased, not sold. The assessee argued that the deposits were refundable upon the return of the cylinders, and the transactions were legitimate business operations.

The Tribunal agreed with the assessee, ruling that the security deposits were not sales receipts but liabilities similar to borrowed funds. The Tribunal noted that the deposits were refundable, and the customers had no ownership rights over the cylinders. The Tribunal also referenced the Special Bench decision in Detective Devices Pvt. Ltd., which supported the treatment of such deposits as liabilities. Consequently, the Tribunal held that the security deposits did not constitute business income, and the difference between the deposit amount and the purchase cost of the cylinders was not taxable as business profit.

Other Issues:
- In ITA No. 155/Hyd/2000, the assessee's ground regarding the addition of Rs. 1,90,400 towards the difference in closing stock was dismissed as it was not argued before the Tribunal.
- In ITA No. 288/Hyd/2001, the ground concerning the deduction under Section 80HHC of the Income Tax Act was also dismissed due to lack of argument.

Conclusion:
The Tribunal allowed the assessee's appeals concerning the allowability of depreciation on gas cylinders and the treatment of security deposits, while dismissing the Revenue's appeals. The Tribunal upheld the legitimacy of the assessee's business transactions and directed the AO to grant the claimed depreciation and treat the security deposits as liabilities, not sales receipts. The decisions in ITA Nos. 155/Hyd/2000 and 288/Hyd/2001 were partly allowed, and the Revenue's appeals were dismissed.