2016 (4) TMI 913 - AT - Income Tax

Depreciation on boiler - boiler purchased from and leased back to Andhra Pradesh State Electricity Board (APSEB) - Held that - The impugned sale and lease back transactions is a genuine transaction. The transaction has been entered into between two unrelated parties by way of a written agreement and one of them is statutory corporation; the payment was made by banking channels; sales tax and other applicable taxes were paid and the transactions of sale has been accepted as valid by the concerned sales tax authorities. Though in the initial year assessee has claimed depreciation which reduced tax liability but at the same time amount of all these rentals have been included in the taxable income by the assessee in subsequent year during the lease period and thus, over all, there was no loss of revenue to the income tax department. Further the sale and lease back transactions have been recognized by the legislature by insertion of Explanation 4A to Section 43(1). Under these circumstances, there arises no question of evasion of tax and in any case if it is a genuine business transactions, the same should not be categorized as a colorable device merely because its results in reduction of tax liability. Further, it has been established that ownership of the impugned asset was with the assessee and the same was used for the purpose of business of leasing carried on by the assessee; under these circumstances the assessee was entitled for the benefit of depreciation. Therefore, AO is directed to grant the benefit of depreciation. - Decided in favour of assessee Disallowance of deduction u/s 80HH and 80IA on the amount of interest received from customers on delayed payments - Held that - It is noted by us that this issue has already been decided by the Tribunal in earlier years i.e. Assessment Year 1992-93, 1993-94 and 1995-96. It is further noted by us that Ld. CIT(A) while deciding this issue has followed his own orders of the earlier years. In view of these facts, we find that orders of the Tribunal of earlier orders should be followed for deciding this issue, thus we direct the AO to grant benefit of deduction u/s 80HH & 80IA on the amount of interest received from customers/dealers.- Decided in favour of assessee

Issues Involved:
1. Depreciation on assets leased back.
2. Re-computation of depreciation due to foreign exchange fluctuation.
3. Deduction under sections 80HH and 80IA.
4. Accrual of technical know-how fees.
5. Disallowance of entertainment expenses.
6. Notional interest on overdraft for advance tax.
7. Deduction under section 80HHC.
8. Expenditure on Global Depository Receipts (GDR).

Issue-wise Analysis:

1. Depreciation on Assets Leased Back:
The revenue contested the CIT(A)'s decision to allow depreciation on a boiler leased back to Andhra Pradesh State Electricity Board (APSEB). The assessee had purchased the boiler and leased it back, claiming depreciation under section 32. The AO disallowed the claim, arguing the transaction was a finance lease and not an operating lease, and the assessee was not the true owner. The CIT(A) reversed this, finding the transaction genuine and compliant with legal requirements. The Tribunal upheld the CIT(A)'s decision, noting the transaction involved a state corporation, was genuine, and met all legal criteria, including ownership transfer and business use of the asset.

2. Re-computation of Depreciation Due to Foreign Exchange Fluctuation:
The revenue challenged the CIT(A)'s directive to re-compute depreciation considering foreign exchange rate fluctuations. The Tribunal noted this issue had been settled in the assessee's favor in previous years, citing the Supreme Court's decision in CIT v. Woodward Governor India P. Ltd., which allowed such adjustments. The Tribunal upheld the CIT(A)'s decision.

3. Deduction Under Sections 80HH and 80IA:
The assessee's claim for deductions under sections 80HH and 80IA was disallowed by the AO for interest received from customers on delayed payments. The CIT(A) upheld this disallowance. The Tribunal, following its earlier rulings, allowed the claim, recognizing such interest as part of business income eligible for the deductions.

4. Accrual of Technical Know-how Fees:
The AO included technical know-how fees from P.T. Five Star Industries Ltd. as income for the assessment year, which the assessee contested, claiming it had not accrued. The CIT(A) upheld the AO's decision. The Tribunal remanded the issue to the AO for verification, consistent with its approach in previous years, to ensure the fees were not taxed twice.

5. Disallowance of Entertainment Expenses:
The AO disallowed expenses on tea, snacks for visitors, and food for employees at a holiday home, treating them as entertainment expenses. The CIT(A) upheld this disallowance. The Tribunal, consistent with its earlier decisions, upheld the disallowance, rejecting the assessee's argument that these were not entertainment expenses.

6. Notional Interest on Overdraft for Advance Tax:
The AO disallowed notional interest on overdraft used to pay advance tax. The CIT(A) upheld this. The Tribunal remanded the issue to the AO to verify if the assessee's own funds were sufficient for the tax payment, following its approach in earlier years.

7. Deduction Under Section 80HHC:
The AO disallowed the deduction under section 80HHC, arguing the assessee claimed it without adjusting export incentives against export loss. The CIT(A) upheld this. The Tribunal, following Supreme Court rulings in IPCA Laboratory Ltd. and A.M. Moosa, upheld the disallowance, confirming that both profits and losses must be considered in computing the deduction.

8. Expenditure on Global Depository Receipts (GDR):
The AO disallowed the deduction of GDR-related expenses, treating them as capital expenditure. The CIT(A) upheld this. The Tribunal agreed but remanded the issue for the AO to consider the alternative claim under section 35D, allowing one-tenth of the expenditure if it related to business expansion.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal, remanding certain issues for further verification and re-examination by the AO, consistent with its rulings in previous years.

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