2000 (2) TMI 856 - HC - Income Tax

Summary

Issues:
1. Entitlement to investment allowance and additional depreciation on machineries leased out.
2. Accrual of interest on loans in court and its treatment.

Entitlement to Investment Allowance and Additional Depreciation on Leased Machineries:
The case involved the question of whether the assessee, engaged in leasing out and hiring, was entitled to investment allowance and additional depreciation on machineries leased to others. The assessing officer initially disallowed the claim, arguing that since the assessee was not involved in manufacturing or production operations, it was not eligible for benefits under Section 32A. However, the CIT (Appeals) and the Tribunal ruled in favor of the assessee, citing the decision in Commissioner of Income Tax Vs. Shaan Finance Pvt Ltd. The Apex Court's observation clarified that when machinery is leased out, the owner is entitled to depreciation, while the hirer can claim hire charges as revenue expenditure. The Court emphasized that a hire transaction is a form of bailment, not a transfer of ownership. Consequently, the ITAT's decision to allow Investment Allowance on leased assets was deemed correct.

Treatment of Accrued Interest on Loans in Court:
The second issue revolved around the treatment of interest accrued on loans in court. The assessing officer included an amount as interest based on the Supreme Court's ruling in the State Bank of Travancore case. However, the CIT (Appeals) distinguished the present case from the aforementioned precedent, noting that the assessee did not recognize interest until the court decreed the suits. This practice aligned with the principles outlined in UCC BANK Vs. C.I.T., where it was established that interest on doubtful loans should only be included in income upon actual receipt. The Tribunal upheld the CIT (Appeals) decision, emphasizing that the interest was not accrued until the court's decision. Consequently, the Tribunal's action to delete the addition of the interest amount was deemed legally sound.

In conclusion, the High Court of Karnataka at Bangalore ruled in favor of the assessee on both issues. The judgment clarified the entitlement to investment allowance and additional depreciation on leased machineries, emphasizing the nature of hire transactions as bailments. Additionally, the treatment of accrued interest on loans in court was aligned with legal principles governing the recognition of income.