2013 (9) TMI 520 - AT - Income Tax

Depreciation on Assets whether lessor was entitled to depreciation on assets leased by it in finance lease - Held that - Following M/s INDUSIND BANK LTD. Versus ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(3), MUMBAI 2012 (12) TMI 416 - ITAT MUMBAI - Finance lease was for a fixed period & non-cancellable - Lessee used the asset for its entire economic life & all risks and rewards incidental to ownership were transferred to the lessee even though title may or may not be eventually transferred to him - There was a fixed obligation on the lessee for payment of lease money - the assessee s lease agreement had all the characteristics of a finance lease - Further, RBI Circular No.FSCBC 18/24-01- 001/93-94 dated 14.02.1994 states that equipment leasing activity should be treated by banks on par with loans and advances - lease agreement under consideration was that of finance lease and not operating lease Decided against Assessee. Disallowance of Expenses Financial Charges Allowable u/s 36(1)(iii) or Not Held that - Following United Phosphorus Ltd. Versus Joint Commissioner Of Income tax. 2001 (5) TMI 134 - ITAT AHMEDABAD-A - Interest paid on funds borrowed for business purpose, including for the purpose of setting of anew unit of the existing running business was allowable u/s 36(1)(iii) of the Act - While examining the applicability of this tribunal decision, we have noted above that interest expenditure will be allowable if it was found that borrowed fund were used for the purpose of setting up of a new unit of the existing running business - borrowed funds were not used for setting up of a new unit of an existing running business but it was setting up of a new unit for production of an altogether new product i.e. power whereas the existing business of the assessee was production of lignite - Since this aspect was not fulfilled in the present case, even interest expenditure was not allowable in the present case u/s 36(1)(iii) because in the present case, the product to be manufactured by the new unit was an altogether new product Decided against Assessee. Disallowance as per Explanation u/s 37(1) - salary to staff against the guidelines of Gujarat Govt- Whether the expenditure incurred by the assessee was for any purpose which was an offence and/ or which was prohibited by law and if it was not so, the provisions of explanation to Section 37(1) was not attracted - Held that - If the expenditure is incurred in violation of the guidelines of Government of Gujarat and against Article 192 of the assessee corporation then the remedy lies somewhere else and action can be taken as per law against the person responsible for such violation but this cannot be the basis for making disallowance of expenses without proving that it was not for the purpose of assessee s business - This was not the claim of the revenue that this expenditure was not for the purpose of business and therefore, the disallowance was deleted Decided in favour of Assessee. Disallowance of Obsolete Stores/Stock Held that - Writing off of the value of closing stock should be allowed to the extent it brings the value of closing stock at level with cost or market price whichever was lower - The market price of obsolete items of stock will be definitely very low than its cost. At the same time, it is not acceptable that the value of such obsolete items will be nil - Now, the question was what can be the scrap value of such obsolete items. Ld. CIT(A) has considered the same @ 25% of the cost - the same was reasonable - the assessee was following mercantile system of accounting and hence, scrap value had to be considered in the present year itself and it could not be deferred till the actual sale of scrap - the scrap value of stock had to be considered as opening stock in the year of sale. Deletion of Disallowance of Expenses the fact had to be brought out on record as to whether the expenses in question have crystelised during this year and if the assessee is able to do so, no disallowance should be made - The A.O. should pass necessary order as per law as per above discussion after providing adequate opportunity of being heard to the assessee Decided in favour of Revenue. Deletion of Addition of Bonus and Royalty Held that - Following Kedarnath Jute Manufacturing Co. Ltd Vs CIT 1971 (8) TMI 10 - SUPREME Court - If liability was crystallized during the year, the same was allowable even if not claimed in the books of accounts - The fact that the liability or expenses were covered U/s. 43B, the disallowances also cannot be upheld since the liability had been filed before filing of return of income within the prescribed period - the expenses cannot be held even U/s. 43B of the Act and the addition/ made therefore cannot be sustained and accordingly deleted - as per the provisions of Section 43B, deduction had to be allowed with regard to these expenses because the payment was made before the due date of filing of return of income Decided against Revenue.

Summary

Issues Involved:
1. Disallowance of depreciation on assets leased to GSRTC.
2. Disallowance of expenditure on the Mata No Madh project.
3. Disallowance of depreciation on assets of Shriram Cement Ltd.
4. Initiation of penalty proceedings.
5. Charging of interest under Sections 234B and 234C.
6. Disallowance of expenses related to Akri Mota Power Project.
7. Disallowance of salary to staff.
8. Disallowance of obsolete stores/stock.
9. Disallowance of depreciation on assets leased to GSRTC and GEB.
10. Deletion of disallowance of depreciation on multimodal project at Ambaji.
11. Deletion of disallowance of prior period expenses.
12. Deletion of addition in respect of bonus and royalty.
13. Disallowance of depreciation on assets used in Mata No Madh and Akri Mota Power Projects.
14. Disallowance of prior period expenses.
15. Disallowance of interest on share loan written off.
16. Addition on account of miscellaneous receipts from Mata No Madh and Akri Mota Power Projects.
17. Deletion of penalty under Section 271(1)(c).

Detailed Analysis:

1. Disallowance of Depreciation on Assets Leased to GSRTC:
The tribunal found that the issue is covered against the assessee by the Special Bench decision in the case of Indusind Bank Ltd. vs. Addl. CIT. The decision of the Special Bench held that in the case of a financial lease, the lessor is not entitled to depreciation, and only the interest component of lease rental should be recognized as income. Respectfully following this decision, the tribunal upheld the disallowance of Rs. 9,12,73,931/- claimed by the assessee.

2. Disallowance of Expenditure on the Mata No Madh Project:
The tribunal noted that this issue is consistently decided in favor of the assessee in earlier years. The expenditure incurred on the Mata No Madh project was treated as revenue expenditure in previous tribunal decisions. The tribunal did not find any difference in facts for the current year and thus allowed the expenditure of Rs. 36,46,532/- as revenue expenditure.

3. Disallowance of Depreciation on Assets of Shriram Cement Ltd.:
The tribunal upheld the disallowance of Rs. 37,41,345/- as the issue was covered against the assessee by earlier tribunal decisions for previous years. The assets were not used by the assessee for business purposes.

4. Initiation of Penalty Proceedings:
The tribunal found this ground to be premature and hence rejected it.

5. Charging of Interest under Sections 234B and 234C:
This issue was deemed consequential and did not require adjudication at this stage.

6. Disallowance of Expenses Related to Akri Mota Power Project:
The tribunal found that the Akri Mota Power Project was a new line of business and not an extension of the existing business. Therefore, the expenses were capital in nature. The tribunal rejected the alternative contention that interest charges should be allowed under Section 36(1)(iii), as the borrowed funds were used for setting up a new unit for a new product (power generation).

7. Disallowance of Salary to Staff:
The tribunal allowed the deduction of Rs. 1,32,000/- paid as salary to staff at the residence of the Chairman, stating that the expenditure was not an offense or prohibited by law. The guidelines of the Government of Gujarat and the Articles of Corporation could not be considered as law of the country.

8. Disallowance of Obsolete Stores/Stock:
The tribunal upheld the decision of the CIT(A) to allow 75% of the write-off of obsolete stock while confirming the disallowance of 25% as scrap value. The tribunal found this approach reasonable.

9. Disallowance of Depreciation on Assets Leased to GSRTC and GEB:
Following the decision in the case of Indusind Bank Ltd., the tribunal upheld the disallowance of Rs. 5,64,59,076/- claimed by the assessee.

10. Deletion of Disallowance of Depreciation on Multimodal Project at Ambaji:
The tribunal found that the issue was covered in favor of the assessee by earlier tribunal decisions for previous years. The tribunal upheld the deletion of the disallowance of Rs. 5 lacs.

11. Deletion of Disallowance of Prior Period Expenses:
The tribunal remanded the issue back to the AO to determine whether the expenses crystallized during the year. If the expenses crystallized during the year, the disallowance should not be made.

12. Deletion of Addition in Respect of Bonus and Royalty:
The tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 58,27,429/- as the liability was paid before the due date of filing the return of income, in line with Section 43B.

13. Disallowance of Depreciation on Assets Used in Mata No Madh and Akri Mota Power Projects:
The tribunal allowed the depreciation of Rs. 3,43,800/- on assets used in the Mata No Madh project but disallowed the depreciation of Rs. 43,58,210/- on assets used in the Akri Mota Power Project, treating it as part of preoperative expenses.

14. Disallowance of Prior Period Expenses:
The tribunal upheld the CIT(A)'s decision where expenses were allowed if they crystallized during the year and disallowed if they did not. The tribunal found this approach consistent with earlier tribunal decisions.

15. Disallowance of Interest on Share Loan Written Off:
The tribunal allowed the deduction of Rs. 30,19,123/- as the interest on share loan was already offered to tax in earlier years and was written off in the current year.

16. Addition on Account of Miscellaneous Receipts from Mata No Madh and Akri Mota Power Projects:
The tribunal remanded the issue back to the AO to determine whether the receipts were directly connected and incidental to the construction of the plant. The AO was directed to decide the issue in light of the judgments of the Hon'ble Apex Court.

17. Deletion of Penalty under Section 271(1)(c):
The tribunal found that the assessed income was lower than the returned income after giving effect to appellate orders, and thus no penalty was justified. The tribunal upheld the CIT(A)'s decision to delete the penalty.

Conclusion:
The tribunal provided a detailed analysis of each issue, considering relevant tribunal and court decisions. The appeals were partly allowed or dismissed based on the merits of each case, with some issues remanded back to the AO for further examination. The tribunal's approach ensured that the principles of law were consistently applied, and justice was served in each case.