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TMI Blog2014 (6) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... s in computers and peripherals. For the AY 2005-06, it has filed the return of income on 29/10/2005 showing income of Rs. 9,09,810/- under Normal Provisions and Book Profit of Rs. 1,95,60,060/- u/s 115JB of the Act. On scrutiny of the return, the AO disallowed a sum of Rs. 55,209/- towards freight charges and an amount of Rs. 25,81,775/- claimed towards interest u/s 40(a)(ia) of the Act. The AO further disallowed a sum of Rs. 1,74,906/- towards prior period expenses and a sum of Rs. 3,91,049/- claimed towards prior period interest on loans. He further disallowed a sum of Rs. 2,45,99,386/- claimed towards depreciation on the leased assets. In the return, the assessee has shown receipts from lease rentals at Rs. 85,68,210/-. However, the AO held that the 'finance income' from such lease pertaining to the previous year, has to be taxed. Therefore after excluding the sum of Rs. 85,68,210/- shown towards lease rentals from Bharat Heavy Electrical Limited (BHEL), he added an amount of Rs.17,41,707/- towards 'finance income' from such lease to the income of the assessee. With the above disallowances and adjustments made to the returned income, he completed the assessment u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease and it has to be recognised as only sale for the purpose of computation of income under the Income Tax Act. He mentioned that as it is only a financial lease transaction, it is likely that BHEL might have claimed depreciation on these assets. He further noted that in response to his query to the assessee for producing a letter from BHEL that the latter has not claimed depreciation on such assets, it could not produce any confirmation letter from BHEL in that regard. The Assessing Officer further noted that under a financial lease, substantially all the risks and rewards incidental to legal ownership are transferred by the lessor and thus the lease payment receivable is treated by the lessor as repayment of principal and finance income. With these observations, the Assessing Officer held that in the case of the assessee, it is not a genuine lease transaction and hence, the c1ain: of the assessee for depreciation for an amount of Rs.2,45,99,386/- (60% of Rs.4,09,98,978) cannot be allowed. Accordingly, he disallowed the said claim. 5. On appeal to CIT(A), the CIT(A) after considering the submissions of the assessee and perusing the material on record, the CIT(A) observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... systems by BHEL. 5.1 The CIT(A) noted that in the case of DCIT Vs. Housing Development Finance Corporation Limited (2006) 98 ITD 319 (Mum), it was held by the Tribunal, Mumbai Bench, that if the lease transaction is actually a financial arrangement between the parties, then requirement of section 32 of the Act cannot be said to be fulfilled and thus, depreciation is not allowable to the so-called lessor. If the lessor in terms of the agreement provides only the right to use to the lessee during the period of lease, retaining the right as 'owner' with itself, in such a case, the lessor would be regarded as the owner for the purpose of claiming depreciation. However, if the leasing arrangement is a mere financing arrangement, whereby the lessor, in reality is only providing funds for acquisition of the asset and asset leased out, for all intents and purposes, becomes property of the lessee, then in such a situation the benefit of depreciation would not be available in the hands of the lessor, but in the hands of the lessee. It was so held by the Hon'ble Tribunal Delhi Bench, in their decision in the case of Industrial Finance Corporation of India Limited Vs. CIT (2005) 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instant lease agreement it can be observed that it is the lessee alone who has the right to use the asset not only during the period of lease of seven years but after that also as the agreement itself provides for sale of the boiler to Indo Gulf after the expiry of the lease period at a pre-determined value of 1% of the cost of asset. The assessee cannot cancel the lease period at his option and repossess the asset at any time. It is only the lessee who has to decide about the user of the asset. He has got the exclusive right to use the asset. Irrespective of the fact whether the boiler is used or not or even kept idle for a fairly long period, the assessee cannot compel him in any manner either to use the boiler or return it. Whether there is any appreciation or depreciation in the value of boiler, it is only the lessee who has to share the benefit or take the risk. The assessee-lessor has no authority whatsoever to lease out the boiler to anybody else during or after the lease period of 7 years. Any other benefit such as the right to claim damages, warrantees, etc. from the supplier also vest with the lessee alone. The assessee can in no case claim any subsidiary or other benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to bear the loss due to obsolescence. All the risks and rewards vest with the lessee. The court considered the cumulative effect of all the factors for and against the operating lease, it could be easily found out that if one has to choose between the finance lease and operating lease, there can be no difficulty in reaching the irresistible conclusion that it is a case of finance lease agreement. In pith and substance this agreement is nothing but a finance lease. Whether depreciation is allowed to lessor in case of genuine finance lease Adverting to the facts of the instant case, it can be seen that it is a case of finance lease agreement. The only and the inescapable conclusion which in our considered opinion follows is that the real owner of the leased property is Indo Gulf Fertilizer & Chemical Corporation Limited and not the assessee. We, therefore, decline to grant any depreciation to the assessee-lessor. However the lessee, if so advised, may take recourse to the legal remedy if any, for the grant of depreciation. Realty behind present lease agreement The law permits tax planning and not tax avoidance. If within the four corners of law a person arranges its affair in suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total finance for the entire lease period at Rs. 58,88,262/-, and the average monthly finance income at Rs.98,137/-, as under: Agreement I Lease period 60 months Cost Rs. 1,47,39,318 For 60 months Rs. 2,06,27,580 Finance income to be received for 60 months Rs. 58,88,262 Average rate of finance income = Total finance income/lease Period Rs. 58,88,262/60 = Rs.98,137 9.1 Since during previous year relevant to the assessment year 2005-06, the duration of lease was for a period of seven months, the Assessing Officer computed the finance income, taxable in the hands of the assessee for this assessment year as per the above lease, at Rs.6,86,963 (Rs.98,137 X 7). Further, as the cost of computers given under the second agreement (Agreement II) was Rs.2,62,59,660 and the total lease rental value under that lease for three years (36 months) is shown at Rs.3,16,88,534, the Assessing Officer computed the total 'finance income' and average monthly finance income receivable under such lease, at Rs.54,28,872 and Rs.1,50,802, as under: Agreement II Lease period 60 months Cost Rs. 2,62,59,660 Lease for 36 months Rs. 3,16,88,532 Finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial lease in its balance sheet as a 'Receivable' at an amount equal to the net investment in the lease. Hence, the fair value of said assets given on financial lease to BHEL, which is Rs.4,49,23,970, has been treated as a receivable and corresponding credit given to sales a/c. It was submitted that the actual cost of the leased assets has been included in the purchases amounting to Rs. 4,09,98,978. It was further submitted that the proportionate financial charges on accrued lease rentals amounting to Rs. 20,76,370/- has been recognized as income and credited to the profit & loss account for the year. Further, clarifying on the method of arriving at the profit as per Income-tax Act, the assessee submitted that the profit as per the books has been adjusted by adding back the value of purchase of Rs. 4,09,98,978/-. It was further stated that the sale value of Rs. 4,49,23,970/- and the financial charges on lease rentals of Rs. 20,76,370/- as per the books has been adjusted to the book profit. It was further submitted that the invoices pertaining to such leased assets, are in the name of the assessee company and not in the name of hire purchase financier i.e. Hewlett Pack ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed unguaranteed residual values of assets, transferred under financial lease, the same is adjusted in the accounts. However, in absence of any specific illustration furnished by the assessee in this regard, I am unable to agree with such contention of the assessee that there was a reduction for an amount of Rs.l,74,906 on above account during the previous year. In the computation statement of total income, while adding back a sum of Rs.4,09,98,978, the assessee has deducted an amount of Rs.4,50,98,876 towards fair value of assets transferred under financial lease. However, as the fair value of the said assets given on financial lease to SHEL, is shown by the assessee at Rs.4,49,23,970, it clearly shows that the assessee has claimed deduction for an amount of Rs.1,74,906 (Rs.4,50,98,876 -Rs.4,49,23,970), arising from transfer of asset under a financial lease, which do not pertain to the previous year 2004-05. Since, such claim do not pertain to the current previous year, the same cannot be allowed deduction in the assessment year 2005-06. Accordingly, the disallowance of the said amount made by the Assessing Officer in the assessment, under prior period expenses adjustment, is justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see company has entered into a Master Agreement #424 with Hewlett Packard Financial Services India Private Limited. The said agreement is a hire purchase agreement between the assessee and M/s HP Financial Services India Pvt. Ltd. It was stated that under a hire purchase agreement, the instalments payable at fixed periodical intervals, comprise of the charges towards hire of the asset and balance amount towards the cost of the asset. It is a standard accounting practice to reflect the amount due on the asset under hire purchase scheme as a secured loan and hire charges paid during the year, are charged to the profit & loss account under the head "Interest", even though a composite payment is made to the vendor. 22.1 It was submitted that the according to the Schedule #01 and Schedule #02 of the said Master Agreement, the assessee company is required to discharge its liability for the assets acquired under hire purchase, within a period of 36 months. The instalments have been fixed on a quarterly basis. According to Schedule #01 of the Agreement, the total cost of the assets acquired on hire purchase is Rs.2,65,24,858. The instalments have been fixed at Rs.25,66,280 per quarter. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the said company, in my view, the provisions of section 40a(ia) of the Act are not applicable to the said amount, shown as paid towards interest in the books of assessee. Therefore, the disallowance of the said amount made by the Assessing Officer u/s 40a(ia) of the Act in the assessment, is not sustainable. Hence, the same is deleted." 24. Aggrieved, the revenue is in appeal before us. 25. We have heard both the parties, perused the record and gone through the orders of the revenue authorities. We find that similar issue came up for consideration before the coordinate bench of Hyderabad Tribunal in case of M/s R. Balarami Reddy & Co. in ITA No. 2224/Hyd/2011 for AY 2008-09 vide order dated 04/03/2014 wherein the coordinate bench following the judgment of the Hon'ble AP High Court in the case of CIT Vs. M/s M.G. Brothers Finance Ltd., vide ITTA Nos. 43,44,45,50 fo 2007 and 761 of 2006, judgment dated 05/12/2013, directed the AO to recompute the disallowance u/s 40(a)(ia) in the light of the amended provisions, which came into effect from 13/07/20016. The relevant findings of the coordinate bench are as follows: "5. We have heard the arguments of both the parties, perused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt which is in the form of a hire purchase agreement. In this case, the learned Tribunal had admittedly held that there is a hire purchase agreement factually. Therefore, we affirm the judgment and order of the learned Tribunal. The appeals fail and they re accordingly dismissed." 5.1 In view of the above judgment, 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. Accordingly, to that extent, the CIT(A) justified in observing that section 40(a)(ia) is not applicable. However, we find that insertion of Explanation 1 to section after amendment of section 194A by Taxation Laws (Amendment) Act, 2006, with effect from 13/07/2006, payment by the assessee towards hire charges on hire purchase agreement to be liable for TDS u/s 194I of the Act. Accordingly, we direct the Assessing Officer to recompute the disallowance u/s 40(a)(ia) in the light of the amended provisions, which came into effect from 13/07/2006. Accordingly, this ground of appeal is partly allowed. " Since the issue under consideration is materially identical to the one decided by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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