2001 (8) TMI 279 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the assessment order.
2. Disallowance of depreciation on leased assets.
3. Treatment of lease rental income as income from undisclosed sources.
4. Disallowance of expenditure on software.

Summary:

1. Validity of the Assessment Order:
The assessee contended that the assessment order was "bad in law, violative of principles of natural justice, bad in law and void ab initio." The CIT(A) was criticized for not holding that the assessment was framed without affording adequate opportunity of being heard to the appellant. The CIT(A) held that the appellant was given sufficient opportunities and confronted with material gathered against him, making it a valid assessment. However, the assessee argued that the AO relied on ex parte enquiries and statements without bringing them on record and without affording the appellant an opportunity to cross-examine the deponents.

2. Disallowance of Depreciation on Leased Assets:
The CIT(A) confirmed the AO's action in disallowing depreciation of Rs. 14,65,94,400 on assets given on lease, holding the lease transactions to be sham and a colorable device to evade tax. The assessee argued that the transactions were genuine, and the ownership of the assets remained with the appellant. The CIT(A) ignored evidence proving the existence of the assets and their ownership. The AO doubted the genuineness of the transactions, holding them as paper transactions for securing finance, where assets were either not in existence or the lease arrangements were purely financial transactions. The Tribunal, however, found the transactions with PSEB and NACAST to be genuine, supported by substantial evidence, and directed the allowance of depreciation. For other leases, the issue was remanded to the AO for fresh adjudication after giving the assessee an opportunity to cross-examine the persons on whose statements the AO relied.

3. Treatment of Lease Rental Income as Income from Undisclosed Sources:
The CIT(A) confirmed the AO's action in treating lease rental income of Rs. 34.26 lakhs as income from undisclosed sources, on the ground that the entire transaction of lease of assets was a sham transaction. This issue was resolved in favor of the assessee, as the Tribunal found the transactions with PSEB and NACAST to be genuine.

4. Disallowance of Expenditure on Software:
The CIT(A) confirmed the AO's disallowance of Rs. 5,42,526, being 50% of expenditure on software, holding it to be capital expenditure. The assessee argued that the expenditure on software did not result in any enduring benefit or creation of assets in the capital field and was rightly claimed as revenue expenditure. The Tribunal agreed with the assessee, holding that software expenses are of a revenue nature and directed their allowance as a deduction.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the allowance of depreciation on assets leased to PSEB and NACAST, remanding the issue of depreciation on other leases for fresh adjudication, and allowing the software expenses as revenue expenditure.