2016 (9) TMI 954 - AT - Income Tax

Penalty u/s 271(1)(c) - Claim of depreciation on financed leased assets - Held that - We note that the Assessing Officer while disallowing the depreciation has not excluded the capital / principle component in the lease rentals which are included in the total income of the assessee. If the Assessing Officer has taken a view that the transaction in question is a finance lease and depreciation on such asset is not allowable to the assessee then only the interest component in the lease/repayment amount received by the assessee can be assessed to tax instead the entire lease amount. Therefore we find that the Assessing Officer while disallowing the claim of the assessee on account of depreciation of ₹ 7,27,04,961 has not excluded the principle component in the lease rental of ₹ 14,84,88,074. If the Assessing Officer would have computed the correct income of the assessee then despite being disallowance of the depreciation the total income of the assessee would have been much less than the total income by allowing the claim of depreciation. We note that the assessee has included in the total income a sum of ₹ 17,63,40,728 being lease rentals which includes principle as well as finance charges. Therefore in view of the above facts when the Assessing Officer while disallowing the claim of depreciation has not considered the exclusion of the principle component of the lease rental clearly shows that the penal provisions of Section 271(1)(c) of the Act cannot be attracted in this case. Even otherwise, it is a case of difference of opinion on an issue of allowabilty of depreciation on lease assets wherein the Assessing Officer has not accepted the view and belief of the assessee which has been confirmed by this Tribunal however, in view of the judgment of Hon ble Supreme Court in the case of ICDS Ltd. Vs. CIT 2013 (1) TMI 344 - SUPREME COURT , this issue is a debatable issue and if the assessee has claimed depreciation on leased asset which is a possible view then disallowing of said claim of the assessee would not ipso facto amount to concealment of income or furnishing of inaccurate particulars of income. Accordingly, in view of the above discussion, we do not find any error or illegality in the impugned order of the CIT (Appeals). - Decided against revenue.

Summary

Issues:
Penalty under Section 271(1)(c) of the Income Tax Act for disallowance of depreciation on financed leased assets.

Detailed Analysis:

1. Disallowance of Depreciation on Lease Assets:
- The Assessing Officer disallowed depreciation on lease assets, asserting that depreciation can only be claimed on capital assets purchased and used in the business, not on assets where the cost was treated as business expenditure.
- The CIT (Appeals) and the Tribunal upheld the disallowance in the assessment order for the year in question.
- The Assessing Officer initiated penalty proceedings under Section 271(1)(c) and levied a penalty, which was later challenged by the assessee.

2. Arguments by Departmental Representative and Authorised Representative:
- The Departmental Representative argued that the disallowance of depreciation justified the penalty under Section 271(1)(c) as the claim was considered bogus.
- The Authorised Representative contended that the assessee had disclosed all relevant facts during assessment, citing specific disclosures in financial statements and tax audit reports.
- The Authorised Representative also highlighted that the issue was debatable, supported by a pending appeal in the High Court and a previous Tribunal decision in favor of the assessee.

3. Tribunal's Analysis and Decision:
- The Tribunal examined the treatment of the transaction in the books of accounts and noted the discrepancy in the treatment as a purchase and sale versus a lease transaction.
- It was clarified that even though the Assessing Officer disallowed depreciation, it did not automatically imply concealment of income or furnishing inaccurate particulars.
- The Tribunal emphasized the importance of disclosed accounting policies and tax treatments, which were part of the audited financial statements.
- The failure of the Assessing Officer to exclude the principal component in lease rentals while disallowing depreciation was noted, impacting the total income calculation.
- Citing a Supreme Court judgment, the Tribunal deemed the issue of depreciation on leased assets as debatable, indicating that disallowance does not necessarily equate to concealment of income.
- Ultimately, the Tribunal dismissed the revenue's appeal, concluding that the penalty under Section 271(1)(c) was not warranted in this case.

This detailed analysis of the legal judgment highlights the key issues, arguments presented by both parties, and the Tribunal's thorough examination leading to the decision to dismiss the appeal regarding the penalty for disallowance of depreciation on financed leased assets.