2013 (8) TMI 300 - HC - Income Tax

Disallowance of depreciation - Assets leased to Western Railways - transactions of lease were questioned by the Assessing Officer - Held that - it is not a case, as is appearing from different clauses of the lease deed that the equipments leased will be returned back to the lessor after the expiry of the lease. Nothing has been brought to disapprove the said clauses of the lease deed by any of the authorities below - It is not proved that assessee is only a financer and is not interested in the assets and therefore, it cannot be said as full payout lease - such claim did not arise for consideration for the first time, but, is spread over to the entire period between A.Y. 1996-97 to 1999-2000. Such claim was made by the Assessee and duly granted by the Assessing Officer - Decided against Revenue. Premium on redemption of debentures - Tribunal allowed deduction - Held that - where the company undertakes to pay more amount than what it has borrowed, and liability to pay the excess amount undertaken to be paid by the company to fulfill its needs for borrowed money is an allowable expenditure under section 37 of the Income Tax Act - Following decision of Madras Industrial Investment Corporation Limited v. Commissioner of Income Tax 1997 (4) TMI 5 - SUPREME Court - Decided against Revenue. Deduction on restructuring of the term loan - Tribunal allowed deduction - Held that - act of borrowing money was incidental to carrying on of the business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure so made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. Thus, when obtaining of a loan is not considered as an asset or an advantage of enduring nature, any expenditure incurred for reducing such loan burden or securing the borrowings, on more advantageous condition, can not be seen as resulting into a benefit of enduring nature so as to be categorized as a capital expenditure - Following decision of India Cements Limited v. Commissioner of Income Tax, Madras 1965 (12) TMI 22 - SUPREME Court - Decided against Revenue. Deduction u/s 36 1 (iii) - Held that - Department had allowed such deduction in the earlier years - when it was found that the machinery being purchased through borrowed funds was not for the purpose of new business but expansion of the existing business claim of interest was rightly held allowable - Decided against Revenue.

Issues:
I. Allowance of expenditure on feasibility study of an abandoned project.
II. Allowance of premium on redemption of debentures.
III. Deduction claim on restructuring of term loan.
IV. Claim of deduction under Section 35D of the Income Tax Act.
V. Disallowance of deduction claimed under Section 36(1)(iii) of the Income Tax Act.
VI. Disallowance of depreciation claimed on certain assets.
VII. Ownership of assets and disallowance of depreciation.

Analysis:

I. Feasibility Study Expenditure:
The Revenue appealed against the Tribunal's decision to allow expenditure on a feasibility study of an abandoned project. The Tribunal's reliance on the earlier years' decision was challenged by the Revenue. The Court found it necessary to consider this issue due to the pending Tax Appeal challenging the earlier decision.

II. Premium on Redemption of Debentures:
The Tribunal accepted the deduction claim on the premium paid on debentures, citing Section 36(1)(iii) of the Income Tax Act and the decision in the Madras Industrial Investment Corporation case. The Court upheld the Tribunal's decision based on the Supreme Court's ruling that such expenses are revenue expenditures.

III. Restructuring of Term Loan:
The assessee claimed deduction for restructuring the term loan. The Revenue argued that the enduring benefit from the restructuring should be treated as capital expenditure. However, the Tribunal allowed the deduction, considering the loan as a business necessity and following the India Cements case. The Court agreed with the Tribunal's decision, emphasizing that borrowing money for business needs does not result in enduring benefits.

IV. Claim under Section 35D:
The Tribunal allowed the assessee's claim under Section 35D, despite the Assessing Officer's restriction. The Tribunal's decision was based on the principle of consistency, as the claim had been granted in previous years. The Court supported the Tribunal's decision, emphasizing the importance of maintaining consistency in tax assessments.

V. Deduction under Section 36(1)(iii):
The Tribunal ruled in favor of the assessee's deduction claim under Section 36(1)(iii), following the Core Health Care Ltd. case. The Court agreed with the Tribunal, highlighting that interest on borrowings for business expansion is an allowable deduction under the Act.

VI. Disallowance of Depreciation:
The Tribunal overturned the disallowance of depreciation claimed on certain assets, emphasizing the rule of consistency. The Court supported the Tribunal's decision, noting that the claim had been consistently allowed in previous assessments.

VII. Ownership of Assets and Depreciation Disallowance:
The Tribunal allowed the depreciation claim, considering the ownership of assets and the nature of the lease agreement. The Court upheld the Tribunal's decision, emphasizing the rule of consistency in granting the claim over several assessment years.

In conclusion, the Court admitted the Tax Appeal for consideration of the feasibility study expenditure issue, while upholding the Tribunal's decisions on other issues based on legal principles and the importance of consistency in tax assessments.

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