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2015 (5) TMI 118 - HC - Income TaxLease rental on the lease of certain assets - Addition made to chargeable interest under Section 2(7) of the Interest Tax Act - ITAT deleted addition - Held that - Considering the various clauses in the agreement entered into between the assessee and the lessee reproduced hereinabove and the intention of the parties and the observations made by the Hon ble Supreme Court in the case of Asea Brown Boveri Ltd. (2004 (10) TMI 325 - SUPREME COURT OF INDIA) we are of the opinion that the transaction by the assessee - lessor and lesseee is in substance a financial lease/transaction and therefore, the assessee is liable to pay the interest tax on the interest component. The learned Tribunal has materially erred in not treating/considering the transaction between the lessor and lessee as a financial lease/finance transaction and consequently, materially erred in holding that the assessee is not liable to pay the interest tax on the interest component. Thus ITAT has materially erred in treating the transaction entered into by the assessee in the form of agreement as a Lease Agreement. As observed hereinabove, in substance, the transaction is a financial transaction and the agreement is a Finance Agreement and therefore, the assessee is liable to pay the Tax on interest as defined under Section 2(7) of the Act on the finance interest component which even according to the assessee would be ₹ 1,03,47,165/-.- Decided against the assessee.
Issues Involved:
1. Whether the ITAT was correct in law and on facts in deleting the addition made to the chargeable interest under Section 2(7) of the Interest Tax Act by the Assessing Officer. Detailed Analysis: 1. Nature of the Agreement: Finance Agreement vs. Lease/Operating Agreement The core issue was whether the agreement entered into by the assessee was a Finance Agreement or a Lease/Operating Agreement. The court had to determine if the interest component was liable to tax under Section 2(7) of the Interest Tax Act. The assessee argued that the agreement was a Lease Agreement and thus, the rental income received was not chargeable to interest tax. The Revenue contended that the agreement was, in substance, a finance transaction, and therefore, the interest component should be taxable. The court referred to the Supreme Court's decision in Sundaram Finance Ltd. vs. The State of Kerala, which emphasized that the true effect of a transaction should be determined from the terms of the agreement considered in light of the surrounding circumstances. The court also cited Asea Brown Boveri Ltd. vs. Industrial Finance Corporation of India, which explained that a financial lease is primarily for financing the purchase by the financier, with the borrower assuming ownership-like responsibilities. 2. Analysis of Agreement Clauses The court examined various clauses of the agreement, noting that the lessee bore the risks, maintenance costs, and insurance responsibilities, which are typical of a finance lease. The agreement stipulated that the equipment was purchased at the lessee's request and delivered directly to the lessee, further indicating a finance transaction. The court observed that the lessee was required to pay a total amount significantly higher than the purchase price of the equipment, implying the presence of a finance interest component. Despite the agreement labeling the payments as lease rentals and stating that the ownership remained with the lessor, the court concluded that these terms did not change the substance of the transaction. 3. Applicability of Interest Tax Given the nature of the transaction, the court held that the assessee was liable to pay interest tax on the interest component as defined under Section 2(7) of the Act. The court found that the ITAT had erred in treating the transaction as a lease agreement and deleting the addition made by the Assessing Officer. Conclusion The court set aside the ITAT's judgment, restored the Assessing Officer's order, and upheld the levy of interest tax on the interest component. The substantial question of law was answered in favor of the Revenue and against the assessee.
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