2012 (12) TMI 840 - HC - Income Tax

Disallowance of lease rent lease of plant & machinery used for business Hire purchase - AO has allowed such deduction for the previous and subsequent assessment years AO on the ground that machinery would become the property of the Lessee even though there is no agreement to that effect and ownership remains with the Lessor - Held that - As concluding from the facts of the case that books of Lessor and taken into account as income of the Lessor and paid tax thereon. There is no material placed on record to show that the transaction is that of hire purchase and not lease agreement. The Revenue has not denied that it did not allow such deduction for the previous years and subsequent year of assessment year in question. AO has disallowed the deduction only for the A.Y 1997-98. Following the decision in case of S. A. BUILDERS LTD. (2006 (12) TMI 82 - SUPREME COURT) appeal decides in favour of assessee

Summary

Issues involved:
Challenge to disallowance of expenditure towards lease of Plant and Machinery for assessment year 1997-98.

Analysis:

1. Background:
The appellant had taken Plant and Machinery on lease for contract business and claimed deduction for lease rentals paid. The Assessing Officer disallowed the deduction, stating that machinery would become the property of the Lessee. The order was challenged before the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, both of which upheld the disallowance.

2. Substantial Question of Law:
The main issue raised in the Appeal was whether the Assessing Officer was justified in disallowing the expenditure incurred towards lease of Plant and Machinery for the assessment year 1997-98, especially when such deduction was allowed for previous and subsequent assessment years.

3. Appellant's Argument:
The Assessee had entered a lease agreement for the machinery, utilized them for business purposes, paid lease rentals, and claimed deduction. The Assessing Officer incorrectly concluded it was a hire purchase agreement. The appellant argued that the lease rentals were taxed in the hands of the Lessor, and there was no reason to doubt the genuineness of the lease. Citing a relevant decision, the appellant contended that the expenditure was justified for business purposes.

4. Respondent's Argument:
The respondent contended that there were no legal issues with the impugned orders disallowing the deduction.

5. Court's Decision:
The Court found that the transaction was a lease agreement, not hire purchase, as claimed by the Assessing Officer. The machinery was used for business purposes, and there was no suspicion regarding the genuineness of the transaction. The Court noted that the Revenue had allowed similar deductions in previous and subsequent years. Relying on a relevant Supreme Court decision, the Court held in favor of the appellant, setting aside the orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal.

6. Conclusion:
The Court allowed the Appeal, setting aside the orders of the lower authorities and ruling in favor of the appellant/assessee.