2015 (2) TMI 545 - HC - Income Tax

Depreciation at the higher rate of 30% - motor vehicles given on lease - Held that - We do not think that the order of remand was required to be passed as it is an accepted and admitted position that motor vehicles in question were given on lease and, therefore, motor vehicles have to be treated as given on hire. Accordingly, the appellant-assessee was entitled to higher rate of depreciation.- Decided in favour of the assessee. Computation of MAT - Book profit - Addition of amount credited to special reserve account - transfer by overriding title - held that - Tribunal confirming the addition of sum transferred to the special reserve pursuant to the provisions of Section 45-IC of the Reserve Bank of India Act, 1934 under Clause (b) of the Explanation to Section 115JB and to the debt redemption reserve - Held that - Considering language of clause (b) to Explanation (1) to Section 115JB of the Act, the appellant-assessee had adopted a different line of argument relying upon the decision of the Supreme Court in the case of National Rayon Corporation (1997 (7) TMI 113 - SUPREME Court) and Vazir Sultan Tobacco Company Ltd. (1981 (9) TMI 105 - SUPREME Court) and argued that the amounts appropriated‖ under Section 45-IC of the Reserve Bank of India Act, 1934 are not a reserve. We record and express our inability to agree with the said contention for the reasons set out below. Computation of MAT - Book profit - Addition of amount credited to redemption reserve account - transfer by overriding title - Held that - In respect of Debt Redemption Reserve of ₹ 18,66,00,000/-, no specific explanation was given; on what account and why the said reserve was created. Nothing has been shown or pointed out to us to show why the said reserve was created. The reserve, which is required to be created under Section 45-IC, is out of the profits earned by a non-banking financial institution. It is not an amount diverted at source by overriding title. The Reserve Bank of India Act, 1934 can permit appropriation in respect of the said reserve. The assessee can also ask for specific directions from the Central Government subject to proviso to sub-section (3) of the said Section. The special reserve under Section 40IC of the Reserve Bank of India Act, 1934 of ₹ 9,80,00,000/- and ₹ 16,00,000/- relating to Assessment Years 2006-07 and 2007-09, respectively was not on account of specific or known liability to repay. It is not the case of charge on profits. It was only appropriation of profits after they had been earned. It is not an expense. To reiterate, a reserve is below the line of allocation of profits. The amount mentioned in the reserve does not get reflected in the Profit and Loss account. Further, the amount mentioned in the reserve is not to be kept in a designated bank account, but would get reflected in the form of assets under the heading assets, etc. - Decided in favour of revenue.

Summary

Issues Involved:
1. Rate of depreciation on motor vehicles given on lease.
2. Computation of book profits under Section 115JB of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Rate of Depreciation on Motor Vehicles Given on Lease:

The primary question was whether the Income Tax Appellate Tribunal (Tribunal) erred in remanding the issue of claim of depreciation at a higher rate of 30% to the Assessing Officer (AO) for motor vehicles given on lease. The Tribunal had referred to the Delhi High Court decisions in CIT Vs. MGF (India) Ltd. and CIT Vs. Bansal Credits Ltd., emphasizing the need to verify if the leased vehicles were used in the business of hire.

The Supreme Court in ICDS Vs. Commissioner of Income Tax, Mysore, and Anr., clarified that under Section 32 of the Act, depreciation is allowed on assets used for business purposes, irrespective of whether the asset is used by the assessee itself or leased out. The Court held that income from leasing trucks by a financing company is business income and that the lessor in a lease agreement is entitled to claim depreciation at a higher rate applicable to assets hired out.

The Tribunal's decision to remand the matter for verification was deemed unnecessary as it was an accepted fact that the vehicles were given on lease, thus qualifying for a higher depreciation rate. Consequently, the substantial question of law was answered in favor of the appellant-assessee, granting them the higher rate of depreciation.

2. Computation of Book Profits under Section 115JB:

The second issue concerned the computation of book profits under Section 115JB, specifically whether amounts transferred to the special reserve under Section 45-IC of the Reserve Bank of India Act, 1934, and the debt redemption reserve should be added back to the book profits.

For the assessment years 2006-07 and 2007-08, the appellant-assessee had created reserves as mandated by the Reserve Bank of India Act. The AO added these amounts back to the book profits under clause (b) of Explanation 1 to Section 115JB, which states that book profit should be increased by amounts carried to any reserve, except those specified under Section 33AC of the Act.

The appellant-assessee argued that the amounts appropriated under Section 45-IC were liabilities and not reserves, citing decisions in National Rayon Corporation and Vazir Sultan Tobacco Company Ltd. However, the court disagreed, emphasizing that the language of clause (b) to Explanation 1 is clear and includes all reserves by whatever name called, except those specified under Section 33AC.

The court further clarified that the reserve under Section 45-IC is created out of profits earned and is not a diversion of income at source. It is an appropriation of profits after they have been earned and does not constitute an expense or liability. The same reasoning applied to the debt redemption reserve, where the appellant-assessee failed to explain why the reserve was created or how it represented an ascertained liability.

The court concluded that the amounts transferred to the special reserve and debt redemption reserve were rightly added back to the book profits under Section 115JB. Thus, the substantial questions of law regarding the computation of book profits were answered against the appellant-assessee and in favor of the respondent-Revenue.

The appeal was partially dismissed, with the question of the rate of depreciation being answered in favor of the appellant-assessee, and no costs were imposed.