2020 (5) TMI 190 - AT - Income Tax

Addition on account of interest paid to M/S CISCO Capital System holding the same to have been claimed twice by the assessee - deduction of expenditure u/s 37 - HELD THAT - Issue whether double deduction has been claimed by the assessee of the interest expenditure should be restored to the Assessing Officer for verification. Treatment of lease agreement entered - finance lease agreement or operating lease - whether the principal component of lease rental claimed by the assessee is a Revenue expenditure falling u/s 37 of the Act or a capital expenditure incurred for the purpose of capital assets? - HELD THAT - When the Income Tax Act does not distinguishes between various type of leases, we find no justifiable reason to firstly describe and categorise a particular type of transaction/agreement as a form of lease named finance lease and then to say that the provisions of section 37 of the Income Tax Act for claim of expenditure on lease rental will not be applicable on such type of lease; this, in our view, will be against the provisions of the Income Tax Act. On the one hand, terming and placing a transaction / agreement under the genre of Lease and then to say that such particular species of that genre will not be entitled to the deductions as prescribed for the lease transactions under the Income Tax Act, in our view, serves no purpose other than confusion and conflict of opinion giving rise to the dispute and litigation on the issue. As per the provisions of the Income Tax Act what is to be determined as to whether the agreement / transactions in question is of a lease or a loan or of a hire / purchase. Whether the agreement with CISCO is of a lease as claimed by the assessee or the same is mere loan / finance agreement? - The impugned order is to be read as a whole, and a single line or word can not be chosen to interpret a different meaning. What the Ld. CIT(A) has conveyed is that though the execution of the lease deed is not doubted but the real intention behind the deed is to be gathered from the various clauses of the deed and facts and circumstances of the case. Thus, we have no hesitation in holding that the arrangement in the present case was a loan / finance arrangement in the guise of a lease agreement. The assessee is entitled only to claim interest paid as part of the said lease rentals as expenditure u/s 36 (1) (iii) of the Income Tax Act. The assessee, in view of the discussion made above, is not entitled to claim the principal component of alleged lease rent paid as revenue expenditure u/s 37(1) of the Act. However, the assessee is also entitled to claim depreciation on the said assets purchased from borrowed capital. Rate depreciation allowable to the assessee on the equipment so purchased after obtaining finance from the CISCO ?- whether the STBs Set top boxes will be eligible for depreciation as applicable to the computers or not? - @ 60% OR 15% - HELD THAT - The entire cost incurred by the assessee on the equipment is required to be squared off at the time of sale of equipment. Hence, under the circumstances, the assessee will be entitled either to the deduction of the cost of the equipment either as revenue expenditure and if the same is to be treated as capital asset, then depreciation cannot be postponed beyond the actual life / ownership of the equipment and the assessee will be entitled to the deduction of the written down value of the equipment at the end of 3 years from the sale price received. However, the peculiar facts and circumstances of the case are that it is the own case of the department that the life of the equipment is 3 years and that the asset in the hands of the assesssee is a capital asset, then we cannot understand, how can the department press an argument for the grant of depreciation at a lower rate which may be extended beyond the life of the asset. Under these circumstances also, the assessee, in our view, is entitled to the higher rate of depreciation which is commensurate with the life of the asset. It is held that the assessee is entitled to deprecation @ 60% as applicable to the computers for the year under consideration. This ground is accordingly stands allowed. Disallowance of deduction claimed u/s 35D of 1/5th of the preliminary expenses - HELD THAT - assessee contended that may be the expenses incurred for acquiring lease rights of fibre links did not fall within the definition and scope of preliminary expenses under the provisions of section 35D, however the same were allowable either as business expenses or as depreciation on the leased asset acquired by virtue of this IRU agreement. This contention has been raised before us for the first time. Even the CIT(A) has not gone into this aspect having denied the claim of deduction u/s 35D of the Act only. We, therefore, restore this issue to the CIT(A) to examine all the facts of the case on this issue and thereafter decide the claim in accordance with law. Disallowance of interest expenditure u/s 36(1)(iii) - HELD THAT - Tribunal in the case of ACIT Vs. Janak Global Resources Pvt Ltd 2018 (12) TMI 902 - ITAT CHANDIGARH 3 holding that that if the assessee is possessed of sufficient own interest free funds to meet the investments / interest free advances, then, under the circumstances, presumption will be that interest free advances / investments have been made by the assessee out of own funds / interest free funds. Reliance in this respect can also be placed on the decision of the Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd Vs. CIT 2015 (11) TMI 1314 - SUPREME COURT and also CIT (LTU) Vs. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT . Thus, as per the settled law no disallowance u/s 36(1)(iii) of the Act is warranted on this issue. This ground is accordingly allowed in favour of the assessee. Higher rate of depreciation claim in response to section 148 - as per AO assessee has claimed depreciation at a higher rate i.e. @ 35% as against its entitlement of 15% whereas the assessee in the return filed in response to notice u/s 148 of the Act has claimed the depreciation @ 60% - HELD THAT - We hold that the Assessing Officer as well as the Ld. CIT(A) were legally duty bound to consider and entertain the issue raised by the assessee of admissibility of statutory deduction of depreciation at a higher rate as prescribed and adjudicate upon it. Even there is no bar on the Tribunal in this respect to entertain and adjudicate upon the issue of rate of depreciation despite the fact that the claim relating to admissibility of higher rate of depreciation was made for the first time in the return filed in response to section 148 of the Act. So far the issue on merits is concerned, in view of our detailed discussion as above on the issue while adjudicating upon the additional ground taken in assessee s own appeal and in view of our decision rendered therein and the facts being similar in this appeal, the issue is accordingly decided in favour of the assessee and it is accordingly held that the assessee is entitled to depreciation on the assets in question @ 60%. Deprecation claimed on the STBs which were not put to use during the year - HELD THAT - Transaction of acquiring of STBs by the assessee was a loan/financial transaction meaning thereby the STBs were purchased by the assessee to put to use in its business. STBs are further given to the consumers on hire purchase agreement which are deemed to be sold to the consumers after three years from the date of delivery/installation - assessee had put the STBs in its business from the date it acquired/purchased the same. In view of this, the assessee is entitled to deprecation irrespective of the date of installation of STBs in the premises of the consumers. This issue is accordingly allowed in favour of the assessee. Disallowance of the interest component u/s 40(a)(ia) for less deduction of TDS - interest component paid by the assessee to the CISCO along with lease rental, the assessee had deducted TDS @ 1% instead of 2% as was required under the provisions of section 194A r.w.s. 194-I - HELD THAT - As the said lease rentals in fact were repayment of the loan amount. The assessee, therefore, was not required to deduct the TDS on the principal component of the loan amount. The assessee, however, has deducted TDS on the said component also, which under the circumstances, is to be considered as deduction of TDS towards interest component. The issued is accordingly restored to the file of the Assessing Officer for decision a fresh as per our observations made above. Disallowance u/s 14A - expenditure incurred for earning of tax exempt income - HELD THAT - No disallowance is attracted u/s 14A of the Act in case the assessee has not earned any income not forming part of the total income. This issue is accordingly decided in favour of the assessee. The disallowance made by the lower authorities on the above issue is ordered to be deleted.

Summary

Issues Involved:
1. Classification of lease agreement as finance lease or operating lease.
2. Allowability of lease rental as revenue expenditure.
3. Correct rate of depreciation on Set Top Boxes (STBs).
4. Disallowance of interest expenditure under Section 36(1)(iii).
5. Disallowance of deduction under Section 35D.
6. Disallowance under Section 14A for expenditure incurred for earning tax-exempt income.
7. Disallowance of interest component under Section 40(a)(ia) for less deduction of TDS.
8. Additional depreciation claimed on assets not put to use.

Detailed Analysis:

1. Classification of Lease Agreement:
The Tribunal analyzed the lease agreement between the assessee and CISCO to determine whether it was a finance lease or an operating lease. The Tribunal held that the transaction was a finance lease, as the assessee was effectively the owner of the assets, bearing all risks and rewards associated with the ownership. The Tribunal noted that the lease term covered the economic life of the assets, and the agreement was non-cancellable, ensuring full recovery of the investment by CISCO. The Tribunal also observed that the assessee had treated the lease as a finance lease in its books, following AS-19, and had claimed depreciation on the assets.

2. Allowability of Lease Rental as Revenue Expenditure:
The Tribunal held that since the lease was classified as a finance lease, the principal component of the lease rental could not be allowed as revenue expenditure under Section 37. Instead, the assessee was entitled to claim depreciation on the leased assets. The Tribunal restored the issue of double deduction of interest to the Assessing Officer for verification.

3. Correct Rate of Depreciation on STBs:
The Tribunal concluded that STBs should be classified under the category of computers and computer software, eligible for depreciation at the rate of 60%. The Tribunal reasoned that STBs perform functions similar to computers, including decoding and processing digital signals, and are integral to the assessee's business of digital cable services. The Tribunal also considered the short economic life of STBs, aligning with the higher depreciation rate.

4. Disallowance of Interest Expenditure under Section 36(1)(iii):
The Tribunal allowed the assessee's claim for interest expenditure, noting that the assessee had sufficient own funds to cover the advances made to M/s G.S. Majestic Developers Pvt. Ltd. The Tribunal relied on the principle that if an assessee has sufficient interest-free funds, it can be presumed that the interest-free advances were made from such funds.

5. Disallowance of Deduction under Section 35D:
The Tribunal restored the issue to the CIT(A) to examine whether the expenses incurred for acquiring lease rights of fiber links could be allowed as business expenses or as depreciation on the leased asset. The Tribunal noted that the expenses might not qualify as preliminary expenses under Section 35D.

6. Disallowance under Section 14A:
The Tribunal held that no disallowance under Section 14A was warranted as the assessee did not earn any tax-exempt income during the year. The Tribunal relied on various High Court decisions that support the view that Section 14A disallowance is not applicable in the absence of exempt income.

7. Disallowance of Interest Component under Section 40(a)(ia):
The Tribunal restored the issue to the Assessing Officer for verification of the actual TDS deducted by the assessee. The Tribunal noted that the assessee had deducted TDS on the entire lease rental, including the interest component, and the Assessing Officer needed to verify the correctness of the TDS deduction.

8. Additional Depreciation Claimed on Assets Not Put to Use:
The Tribunal allowed the assessee's claim for depreciation on assets that were ready to use, even if not put to use during the relevant period. The Tribunal held that the STBs were part of the assessee's business from the date of acquisition and were eligible for depreciation.

Conclusion:
The Tribunal's judgment addressed multiple issues related to the classification of lease agreements, the allowability of lease rentals, the correct rate of depreciation on STBs, and various disallowances under the Income Tax Act. The Tribunal provided detailed reasoning for its decisions, considering the nature of the transactions, the applicable accounting standards, and relevant judicial precedents. The judgment emphasized the importance of correctly classifying transactions and assets for tax purposes and ensuring compliance with statutory provisions.