2012 (12) TMI 15 - AT - Income Tax

Depreciation dis-allowance in respect of assets given on lease assessee contended it to be operating lease whereas Revenue as Financial lease Held that - Lessee purchased the asset on a lease finance of assets required by him and that the asset is user specific and is selected by the lessee for his own use and hence the first condition regarding finance lease is satisfied in the present case. The second aspect is that risk and rewards, incidental to ownership are passed on to the lessee. Since clauses of lease agreement go to show that risk and rewards incidental to the ownership of the asset in question is passed on to the lessee and hence, the second condition of finance lease is also satisfied in the present case. The third condition is that single lease repays the cost of the asset together with the interest. It is evident as per deed that total cost of asset together with interest is recovered through lease rentals; hence third condition is also satisfied. The other important feature is that the lessor does not bear the cost of repairs, maintenance and operation, which is also satisfied since lessee is required to pay all taxes penalty etc. levied either in connection with the transaction or the asset by sales tax, interest tax etc. and he is also to bear all costs in connection with the preservation of asset by insurance, repair etc. Hence the lease in the present case is the finance lease and consequently depreciation is allowable to the lessee and not to the lesser. See Induslnd Bank Ltd. vs. ACIT (2012 (3) TMI 212 - ITAT MUMBAI), Asea Brown Boveri Limited v. IFCI (2004 - TMI - 106804 - Supreme Court Of India). Penalty u/s 271(1)(c) dis-allowance of depreciation - Held that - In the present case, the penalty u/s 271(1)(c) is not justified in respect of dis-allowance of depreciation. It is seen that the same is in respect of dis-allowance of depreciation on finance lease although the claim was on this basis that these are operating lease. We find that there was no clarity on this aspect and therefore, it cannot be said that there is any concealment of income or furnishing of inaccurate particulars of income in the facts of present case because issue was debatable till very recently when Special Bench of the Tribunal clarified the legal position. We, therefore, delete the penalty Decided in favor of assessee

Summary

Issues Involved:
1. Invocation of Section 147 for income escaping assessment.
2. Disallowance of depreciation on leased assets.
3. Classification of lease transactions as financial leases versus operational leases.
4. Imposition of penalty under Section 271(1)(c) for furnishing inaccurate particulars of income.

Detailed Analysis:

1. Invocation of Section 147 for Income Escaping Assessment:
Ground no. 1 of the appeal was not pressed by the appellant's representative in both years. Consequently, this ground was rejected as not pressed.

2. Disallowance of Depreciation on Leased Assets:
The primary issue was the disallowance of depreciation of Rs. 1,40,07,126/- on assets given on lease. The appellant contended that the assets were owned by them and used for their business of leasing, thus qualifying for depreciation under the Income Tax Act.

The Assessing Officer (AO) disallowed the claim on the grounds that the lease transactions were financial leases rather than operational leases. The AO noted that the appellant had not disproved the findings regarding the nature of the lease transactions. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the appellant had not provided sufficient evidence to counter the AO's findings.

The Tribunal referenced the Special Bench decision in the case of IndusInd Bank Ltd. vs. ACIT, which outlined the characteristics of financial leases. It was noted that the lease in question satisfied the criteria of a financial lease, including the transfer of risks and rewards to the lessee, the non-cancellable nature of the lease, and the recovery of the asset's cost plus interest through lease payments.

3. Classification of Lease Transactions as Financial Leases versus Operational Leases:
The Tribunal examined whether the lease transactions were financial leases or operational leases. The key features of financial leases, as noted by the AO and upheld by the CIT(A), included:
- The lessee selected the asset.
- Risks and rewards of ownership were transferred to the lessee.
- The lease payments covered the asset's cost plus interest.
- The lessor did not bear costs of repairs, maintenance, or operation.
- The lease was non-cancellable.

The Tribunal concluded that the lease transactions in question were financial leases. Therefore, the lessee, not the lessor, was entitled to claim depreciation.

4. Imposition of Penalty under Section 271(1)(c) for Furnishing Inaccurate Particulars of Income:
The appellant challenged the penalty of Rs. 18,27,740/- imposed under Section 271(1)(c) for allegedly furnishing inaccurate particulars of income. The appellant argued that the issue of depreciation on finance leases was debatable until the Special Bench's decision.

The Tribunal agreed with the appellant, noting that the legal position on the allowability of depreciation on finance leases was clarified only recently. Consequently, it could not be said that the appellant had concealed income or furnished inaccurate particulars. The penalty was thus deleted.

Conclusion:
- Both appeals in quantum proceedings were dismissed, upholding the disallowance of depreciation on leased assets.
- The appeal in penalty proceedings was allowed, and the penalty under Section 271(1)(c) was deleted.