2018 (1) TMI 1355 - AT - Income Tax

Depreciation u/s 32 on leased assets - ownership of the assets - use of assets for the purpose of its business - Held that - The definitions of ownership essentially make ownership a function of legal right or title against the rest of the world. However, it is nomen generalis simum , and its meaning is to be gathered from the connection in which it is used, and from the subject matter to which it is applied. As long as the assessee has a right to retain the legal title against the rest of the world, it would be the owner of the asset in the eyes of law. - Claim of depreciation allowed.

Summary

Issues Involved:
1. Disallowance of depreciation on leased assets.
2. Disallowance of expenses incurred for increase in authorized share capital.
3. Disallowance of prior period expenses.
4. Disallowance under section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Leased Assets:
The assessee challenged the disallowance of depreciation amounting to ?55,02,27,227 on leased assets. The Assessing Officer (AO) disallowed the depreciation on the grounds that the lease transactions were finance/loan transactions, and the assessee was neither the owner of the assets nor used them for business purposes. The first appellate authority sustained the disallowance. The learned Sr. Counsel for the assessee argued that the Tribunal had previously decided in favor of the assessee in similar cases by applying the Supreme Court's decision in ICDS Ltd. v/s CIT. The Tribunal found that the issue was recurring and had been decided in favor of the assessee in earlier years. The Tribunal followed the Supreme Court's principle that ownership and usage for business purposes are sufficient for claiming depreciation, even if the asset is not used by the assessee itself. The Tribunal allowed the depreciation claimed by the assessee, following the decisions in the assessee's own case and the Supreme Court's ruling.

2. Disallowance of Expenses Incurred for Increase in Authorized Share Capital:
The AO disallowed ?89,10,830 incurred for increasing the authorized share capital, treating it as capital expenditure. The first appellate authority sustained the disallowance. The learned Sr. Counsel conceded that based on the Supreme Court's decisions in Punjab State Industrial Development Corporation v/s CIT and Brooke Bond India Ltd v/s CIT, the expenditure should be treated as capital in nature. The Tribunal upheld the decision of the first appellate authority and dismissed this ground.

3. Disallowance of Prior Period Expenses:
The AO disallowed ?9,87,760.54 claimed as prior period expenses, rejecting the assessee's explanation that the expenses crystallized in the impugned assessment year. The first appellate authority confirmed the disallowance. The learned Sr. Counsel argued that the assessee had offered prior period income and claimed prior period expenses in the same year, and the Department should not disallow the expenses if it accepts the income. The Tribunal found that the AO did not provide a cogent reason for rejecting the assessee's claim and allowed the prior period expenses, deleting the addition made by the AO.

4. Disallowance under Section 14A of the Income Tax Act:
The AO disallowed interest expenditure of ?34.96 crore and 10% of dividend income towards other expenses under section 14A, noting that the assessee had earned exempt income but had not disallowed any expenses attributable to it. The first appellate authority upheld the interest expenditure disallowance but deleted the disallowance of other expenses. The learned Sr. Counsel argued that the assessee had sufficient own funds to cover the investments, and no disallowance of interest expenditure should be made. The Tribunal noted that the assessee had sufficient interest-free funds and deleted the disallowance of interest expenditure, following the jurisdictional High Court's decisions. Regarding other expenses, the Tribunal directed the AO to disallow 1% of the dividend income, following its decision in the assessee's own case for earlier years.

Conclusion:
The Tribunal allowed the depreciation on leased assets and prior period expenses, upheld the disallowance of expenses for increasing authorized share capital, and directed a 1% disallowance of dividend income under section 14A. Both appeals were partly allowed.