2013 (9) TMI 490 - AT - Income Tax

Disallowance of Depreciation - lease transaction - finance lease or operating lease or otherwise - Held that - The transaction was neither operating lease not financial lease - Therefore, the claim of depreciation cannot be allowed - In the course of arguments when questioned why only six days lease was offered, Ld. Counsel fairly admitted that assessee may be entitled for 50% of the depreciation claim as per the provisions - In case, at any point of time, the findings given by us in this order are to be modified, as the claim before Hon ble Delhi High Court in liquidation proceedings seems pending, then assessee was entitled for only 50% of the depreciation claim and not full, as the assets were used for less than 180 days during the year - In fact, the usage of asset admittedly by lessor is itself doubtful, but as assessee offered lessee rent to that extent usage issue was not material as per the judicial pronouncements on the issue of use . the agreement in question cannot be called as a financial lease agreement - it was a simple case of advancing of loan by the assessee to the lease and the so called lease agreement had been attempted to be used as a device to reduce tax liability of assessee - the assessee lessor was not entitled to depreciation - Only the lessee can be treated as owner of the asset in case of a finance lease - It was he who was entitled to claim depreciation as per law - No depreciation can be allowed to the lessor in such a case of a genuine finance lease - it was a case of mere advancing of loan by the assessee to Indo Gulf Fertilizers - There was, in fact, no genuine leasing of boiler, neither operating nor finance - In that view of the matter also no depreciation was admissible to the assessee-lessor. - Decided against the assessee. Validity of Lease Transaction - Whether the lease transaction was treated as non-genuine or finance transaction then lease rentals may not be taken as income for the relevant and subsequent years and directions may be accordingly given Held that - The only amount offered was only Rs. 60,000/- in this year stated to be six days lease - Even though assessee accepted 96 lakhs deposit but accounted Rs.84 lacs as lease rental receivable and nine lakhs as advance received in the books - Since the agreement itself was not genuine, we cannot direct the AO to examine the same to determine the principle and interest out of this amount - Since the entire exercise was to claim depreciation at 100%, no such direction can be given in the facts of the case, in other years which were not before us. Assessee had to take necessary steps in relevant years or to face the consequences of its actions. - Decided against the assessee. Interest u/s 220(2) Whether the Commissioner of Income-tax (A) erred in confirming the order of A.O. levying interest u/s 220(2) without appreciating that demand becomes due only on the making of fresh assessment and not from the original assessment order which was set aside and hence the interest levied u/s 220(2) may be deleted - Held that - Under the said section, interest at a specified rate is chargeable in case the demand raised on the assessee as per the demand notice was not paid within the time allowed in the notice - The issue raised in this ground was as to when the original assessment had been set aside by Tribunal and fresh assessment had been made by the A.O., the period for levy of interest u/s.220(2) should be reckoned from the date of default as per the original assessment order or as per the fresh assessment order - We find that this issue has already been examined by the CBDT who had clarified the issue vide Circle No.334 Dt.3.4.1982 - the interest can be levied only from the date of default of the demand notice issued in pursuance of the fresh assessment order - The AO was directed to levy interest from the date of re-assessment order only Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Claim of depreciation on leased assets.
2. Treatment of lease transaction as non-genuine or finance transaction.
3. Levy of interest under section 220(2).

Issue-wise Detailed Analysis:

1. Claim of Depreciation on Leased Assets:
The assessee contested the disallowance of depreciation of Rs. 1,06,42,500/- on three boilers leased to M/s. SOL Ltd. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] found the lease transaction non-genuine, stating that the manufacturer and lessee were non-existent. The ITAT had earlier allowed additional evidence and remanded the case to the AO, who reaffirmed the disallowance. The CIT(A) found discrepancies in the valuation reports and purchase invoices, confirming the AO's decision. The Tribunal concluded that the transaction was not a genuine lease but an arrangement to claim depreciation, following the precedent set by the Special Bench in the case of Indus Ind Bank. Consequently, the claim of depreciation was disallowed.

2. Treatment of Lease Transaction as Non-genuine or Finance Transaction:
The assessee argued that if the lease transaction was deemed non-genuine or a finance transaction, the lease rentals should not be considered income for the relevant and subsequent years. The Tribunal rejected this prayer, noting that the assessee was unclear whether the income was lease or interest income. The entire transaction was deemed an attempt to claim depreciation at 100%, and no directions were given to the AO to re-examine the income components. The Tribunal emphasized that the assessee must address this issue in the relevant years or face the consequences.

3. Levy of Interest Under Section 220(2):
The assessee challenged the levy of interest from the date of the original assessment order, arguing that interest should be charged only from the date of the fresh assessment order. The Tribunal referred to CBDT Circular No. 334 dated 3rd April 1982, which clarifies that interest under section 220(2) should be charged only after the expiry of 35 days from the date of service of the demand notice pursuant to the fresh assessment order. The Tribunal followed the precedent set by the Co-ordinate Bench in the case of Narad Investments & Trading P. Ltd, directing the AO to levy interest from the date of the reassessment order only, thus modifying the AO and CIT(A)'s orders.

Conclusion:
The Tribunal disallowed the claim of depreciation on the leased assets, rejected the prayer to exclude lease rentals from income, and directed the AO to levy interest under section 220(2) from the date of the fresh assessment order. The assessee's appeal was partly allowed.