2007 (2) TMI 239 - AT - Income Tax

Depreciation on the leased vehicles/assets - Rate of depreciation - Financial lease Or Not - lease agreement between the assessee (lessor) and SIL (lessee) - whether the assessee is entitled to depreciation u/s 32 - HELD THAT - A combined reading of the terms of the lease agreement clearly reveals that all the features of the finance lease exist in the agreement between the parties. Therefore, respectfully following the judgment of Hon'ble Supreme Court in ABB's case 2004 (10) TMI 325 - SUPREME COURT , it is held that assessee was not the owner of the leased vehicles as the impugned agreement was an agreement of financial lease and not the normal lease. Consequently, the assessee is not entitled to any depreciation. It may be clarified that even after the judgment of the Hon'ble Supreme Court in ABB's case, a clear distinction has to be made between the normal lease and financial lease . If the agreement is a financial lease, then the consequences would be governed by the decision of the Hon'ble Supreme Court in ABB's case but if it is a case of normal lease, then consequences would be governed by the earlier judgment of the Hon'ble Supreme Court in the case of Shaan Finance (P.) Ltd. 1998 (3) TMI 8 - SUPREME COURT . It may also be mentioned that the learned counsel for the assessee has argued to the effect that the learned CIT(A) was not justified in allowing depreciation to the extent of 50 per cent only. He has also argued that the rate of depreciation should have been 40 per cent instead of 25 per cent allowed by the learned CIT(A). Thus, the order of the CIT(A) is set aside on this issue and consequently the disallowance of depreciation made by the Assessing Officer is restored. The grounds raised by the assessee are, therefore, dismissed while the ground raised by the revenue is allowed. Disallowance in respect of repairs and maintenance - HELD THAT - We find that the learned CIT(A) has passed a sketchy order without giving any reason in support of his conclusion. He has also not discussed anything about the Explanation 1 to section 32 of the Act which provides that where the business of the assessee is carried on in a building not owned by him and any capital expenditure incurred for the purpose of business on the construction of any structure or do any work in/or relation to and by way of renovation or extension of or improvement to the building, then provisions of section 32 shall apply as if the said structure or work is a building owned by the assessee. When the Assessing Officer had invoked such provisions, it was the duty of the learned CIT(A) to have adjudicated the matter in the light of the above provisions. Thus, we set aside the order of the learned CIT(A) on this issue and restore the matter to his file for fresh adjudication after examining the evidence on record or as may be filed by the assessee before him. In the result, both the appeals stand partly allowed.

Issues Involved:
1. Disallowance of Rs. 2 lakhs for stamp duty payment.
2. Disallowance of Rs. 68,096/- under section 350 of the Income-tax Act, 1961.
3. Claim for depreciation on leased assets.
4. Disallowance of loss of Rs. 2,50,55,749/- on the sale of non-convertible portion (Part-B) of partly convertible debentures.
5. Disallowance of Rs. 19,02,171/- in respect of repairs and maintenance.

Detailed Analysis:

1. Disallowance of Rs. 2 lakhs for stamp duty payment:
The issue relating to the disallowance of Rs. 2 lakhs for stamp duty payment to the registrar for an increase in authorized capital was not pressed by the assessee. Therefore, this ground was dismissed as "not pressed."

2. Disallowance of Rs. 68,096/- under section 350 of the Income-tax Act, 1961:
Similarly, the issue of disallowance of Rs. 68,096/- under section 350 of the Income-tax Act, 1961, was also not pressed by the assessee. Consequently, this ground was dismissed as "not pressed."

3. Claim for depreciation on leased assets:
The primary issue in the assessee's appeal and the revenue's appeal was the claim for depreciation on leased assets. The assessee had entered into a lease agreement with M/s. Sriram Investments Ltd. (SIL) for leasing 97 vehicles, claiming depreciation at 40% on the grounds that the vehicles were used for hiring purposes. The Assessing Officer, however, treated the agreement as a hire-financing arrangement rather than a lease, disallowing the depreciation claim. The CIT(A) allowed depreciation but only on 50% of the cost and at a rate of 25%.

The Tribunal examined the terms of the lease agreement and found that all the features of a finance lease, as defined by the Supreme Court in the case of Asea Brown Boveri Ltd. v. Industrial Finance Corpn. of India, were present. These features included the lessor's role as merely a financier, the lessee bearing all risks and rewards, and the lease being non-cancellable. Consequently, the Tribunal held that the assessee was not the owner of the leased vehicles and was not entitled to depreciation. The Tribunal set aside the CIT(A)'s order and restored the disallowance of depreciation made by the Assessing Officer.

4. Disallowance of loss of Rs. 2,50,55,749/- on the sale of non-convertible portion (Part-B) of partly convertible debentures:
The assessee claimed a short-term capital loss of Rs. 2,50,55,749/- on the sale of the non-convertible portion (Part-B) of partly convertible debentures. The Assessing Officer treated this as a speculation business loss due to a lack of evidence of delivery. The CIT(A) admitted additional evidence showing actual delivery and held that the loss could not be treated as a speculation business loss. However, the CIT(A) added the loss to the cost of shares acquired.

The Tribunal, following the decision of the Calcutta Bench in the case of Karamchand Thapar & Bros. (Coal Sales) Ltd. v. Dy. CIT, held that the loss incurred on the sale of Part-B of the debentures should be allowed as a business loss. The Tribunal modified the CIT(A)'s order and directed the Assessing Officer to allow the loss as a business loss.

5. Disallowance of Rs. 19,02,171/- in respect of repairs and maintenance:
The issue of disallowance of Rs. 19,02,171/- in respect of repairs and maintenance was discussed by the Assessing Officer, who treated the expenditure as capital in nature and allowed depreciation. The CIT(A) allowed the claim as revenue expenditure without providing detailed reasons.

The Tribunal found that the CIT(A) had not adequately addressed the provisions of Explanation 1 to section 32 of the Act, which treats certain capital expenditures on leased buildings as depreciable assets. The Tribunal set aside the CIT(A)'s order on this issue and restored the matter for fresh adjudication, directing the CIT(A) to examine the evidence and adjudicate the matter in accordance with the law.

Conclusion:
Both the appeals were partly allowed, with the Tribunal providing detailed reasoning for each issue and directing further examination where necessary. The key takeaway is the Tribunal's adherence to legal principles and precedents, particularly in distinguishing between finance leases and operating leases for depreciation claims.

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