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2014 (6) TMI 247 - AT - Income TaxDisallowance of depreciation on leased assets Finance lease or operating lease - Held that - Following M/s. IndusInd Bank Limited Versus The Addl. Commissioner of Income-tax 2012 (3) TMI 212 - ITAT MUMBAI - Finance lease is for a fixed period & non-cancellable - Lessee uses the asset for its entire economic life & all risks and rewards incidental to ownership are transferred to the lessee even though title may or may not be eventually transferred to him - There is 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 - thus, the lease agreement is that of finance lease and not operating lease - only the lessee can be treated as owner of the asset in case of a finance lease - No depreciation can be allowed to the lessor in such a case of a genuine finance lease Decided against Assessee. Addition of reworking of lease rentals Held that - The transactions of the assessee are finance lease transactions thus, the assessee is not entitled for depreciation and, consequently, the entire lease income has to be considered as gross income of the assessee the AO is directed to determine the income of the assessee in accordance with law Decided partly in favour of Assessee. Disallowance u/s 40(a)(ia) of interest payments to HP Financial Services (P) Ltd. - TDS u/s 194A Held that - Following Asst. Commissioner of Income Tax Versus M/s. R. Balarami Reddy & Co. 2014 (4) TMI 904 - ITAT HYDERABAD - the payment made by the assessee on account of hire purchase transaction and payment of finance charges/hire charges cannot be construed as interest so as to deduct TDS u/s 194A of the IT Act - the payment made to HP Financial Services Pvt. Ltd. towards hire charges cannot be considered as interest so as to disallow u/s 40(a)(ia) of the Act Decided against Revenue.
Issues Involved:
1. Disallowance of depreciation on leased assets. 2. Addition on account of reworking of lease rentals. 3. Disallowance of prior period expenditure. 4. Disallowance under section 40(a)(ia) of interest payments to HP Financial Services (P) Ltd. Detailed Analysis: 1. Disallowance of Depreciation on Leased Assets: The primary issue was whether the assessee, a private limited company engaged in trading, leasing, and service contracts in computers and peripherals, could claim depreciation on computers leased to Bharat Heavy Electrical Limited (BHEL). The Assessing Officer (AO) disallowed the depreciation claim of Rs. 2,45,99,386, treating the lease as a financial lease rather than an operating lease. The AO argued that under a financial lease, the lessee (BHEL) assumes all risks and rewards of ownership, and thus, the lessor (assessee) cannot claim depreciation. The CIT(A) upheld this view, citing precedents from various cases, including the Supreme Court's decision in Asea Brown Boveri Ltd. vs. Industrial Finance Corporation of India. The Tribunal confirmed the CIT(A)'s order, emphasizing that the lease agreement satisfied all criteria of a financial lease, making the lessee the real owner of the assets. 2. Addition on Account of Reworking of Lease Rentals: The AO reworked the lease rentals, treating the income from the financial lease as 'finance income' rather than lease rentals. The AO computed the finance income for the assessment year 2005-06 at Rs. 17,41,707, based on the lease agreements with BHEL. The CIT(A) agreed with this computation, stating that the finance income, not the lease rentals, should be taxed. The Tribunal upheld this view, directing the AO to determine the income of the assessee in accordance with the law, recognizing the transactions as finance leases. 3. Disallowance of Prior Period Expenditure: The AO disallowed Rs. 1,74,906 claimed by the assessee as prior period expenditure, arguing that it did not pertain to the current accounting year. The CIT(A) upheld this disallowance, stating that the assessee failed to provide specific illustrations to support the claim. The Tribunal dismissed this ground as not pressed by the assessee, indicating no serious arguments were advanced in this regard. 4. Disallowance Under Section 40(a)(ia) of Interest Payments to HP Financial Services (P) Ltd.: The AO disallowed Rs. 25,81,775 paid to HP Financial Services India Pvt. Ltd. as interest on a term loan, citing non-deduction of tax at source (TDS). The assessee contended that the payment was under a hire purchase agreement and not subject to TDS. The CIT(A) agreed with the assessee, referencing CBDT Circular No. 647, which exempts hire purchase payments from TDS. The Tribunal, following the precedent set by the Hon'ble AP High Court in CIT vs. M.G. Brothers Finance Ltd., held that hire purchase payments are not considered interest and thus not subject to TDS under section 194A. Consequently, the Tribunal dismissed the revenue's appeals on this ground. Conclusion: The Tribunal's consolidated order addressed multiple issues, primarily focusing on the nature of the lease transactions and the applicability of TDS provisions. The Tribunal upheld the disallowance of depreciation and reworking of lease rentals, recognizing the transactions as financial leases. It also dismissed the disallowance of prior period expenditure and the disallowance under section 40(a)(ia), aligning with the assessee's arguments and relevant legal precedents. The appeals by the assessee were partly allowed, while the revenue's appeals were dismissed.
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