2012 (11) TMI 1275 - AT - Income Tax

Summary

Issues Involved:

1. Validity of the CIT(A)'s order.
2. Nature of the transaction as 'hire purchase' or 'lease' and depreciation disallowance.
3. Applicability of CBDT Circular No.2 dated February 9, 2001.
4. Exclusion of foreign currency expenditure from 'export turnover' for u/s 10A computation.

Summary:

Issue 1: Validity of the CIT(A)'s Order
The appellant argued that the CIT(A)'s order was erroneous in law and facts. However, the judgment does not provide specific details on this ground.

Issue 2: Nature of the Transaction and Depreciation Disallowance
The appellant contended that the transaction of giving assets on lease was not a 'hire purchase' but an operating lease, thus entitling them to claim depreciation. The AO disallowed the depreciation claimed on assets given on finance lease, a decision upheld by the CIT(A) who treated the transaction as a hire-purchase agreement. The Tribunal examined the lease agreement and supplementary schedules, determining that the transaction was indeed a finance lease. The Tribunal noted that the lessee bore all risks and rewards associated with the equipment, making the lessee the de facto owner. Consequently, depreciation was allowable to the lessee, not the lessor, in accordance with the Special Bench decision in Indus Ind Bank Ltd. vs. Addl. CIT.

Issue 3: Applicability of CBDT Circular No.2 of 2001
The appellant argued that CBDT Circular No.2 of 2001, which states that the lessor is entitled to depreciation, was binding. The Tribunal held that the circular was considered, but the terms of the contract determined ownership for depreciation purposes. The revenue did not contravene the circular as it examined the contract terms to ascertain ownership.

Issue 4: Exclusion of Foreign Currency Expenditure from Export Turnover
The appellant's alternate plea was that the exclusion of foreign currency expenditure from export turnover should also apply to total turnover for u/s 10A computation. The Tribunal, following the Karnataka High Court decision in CIT vs. Tata Elxsi Ltd. & Others, directed the AO to exclude the foreign currency expenditure from both export and total turnover for u/s 10A computation. This ground was rejected, but the alternate plea was allowed.

Conclusion:
The assessee's appeal was dismissed, with the Tribunal upholding the CIT(A)'s decision on the nature of the transaction and depreciation disallowance while allowing the alternate plea regarding the exclusion of foreign currency expenditure for u/s 10A computation.