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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 ..... g 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. - ITA 916/H/09, 953/H/09, 947/H/10, 362/H/13, 48/H/10, 947/H/10 - - - Dated:- 21-5-2014 - Shri D. Manmohan And Shri Chandra Poojari,JJ. For the Petitioner : Shri A. V. Raghu Ram For the Respondent : Shri M. H. Naik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchased those computers at a cost of Rs.4,09,98,978/- from the finance taken from HP Financial Services India Private Limited. The Assessing Officer noted that in its books of accounts, the assessee has shown such lease transaction as sale and only in the computation of income, it has treated the same as lease transaction and claimed depreciation on such assets. During the course of assessment proceedings, the Assessing Officer asked the assessee to explain as to why such lease transaction should not be treated as sales and the depreciation claimed on such assets should not be disallowed. In response to this, the assessee has submitted that as per the accounting standard-19 (AS-19), the lease transactions are classified as financial lease and operating lease. It is mandatory to recognise the assets given under financial lease, as a receivable in the balance sheet, without capitalizing the same as a fixed asset. Since the leased assets have been treated as a receivable, the lease transaction has been disclosed as a sale in the profit loss Account for the year and the initial direct cost incurred should be recognised as a expenditure in P L Account, at the inception of lease. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y BHEL to the assessee company, in connection with the supply of 243 PCs with peripherals and 250 PCs with peripherals, while showing the quarterly rental values separately at Rs.10,31,378/- (in respect of 243 systems under five years lease) and at Rs.26,40,711/- (in respect of 250 systems under three years lease) the 'Terminal Charges' in respect of both the items, are shown at Rs.910/- and at Rs.642/- respectively. In the two agreements, executed by the assessee with BHEL on 14.02.2005, the latter is shown as 'user' of such equipments. The assessee has been shown as the 'company'. Under clause (v) of Article-I of first lease agreement dated 14.02.2005 relating to supply of 243 number of systems (for five years), while defining the term 'Terminal Payment', it is stipulated that user will become absolute owner of the equipment on paying of the terminal charges of RS.910 after expiry of the lease period. Similarly, as per clause (v) of Article-I of the second agreement pertaining to leasing of 250 number of systems (for three years), the user will become absolute owner of such equipments on paying of terminal charges of Rs.642 after expiry of the leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Apex Court in the case of Asea Brown Boveri Ltd. Vs. Industrial finance Corporation of India (supra), the Hon'ble Tribunal, Mumbai Bench, in the case of J.M. Shares Stock Brokers Vs. Deputy CIT (2007) reported in 109 ITD 329/(2009) 311 ITR (A.T.)115, held that the agreement made by the assessee was a financial lease agreement. The lessee becomes the owner in the case of a financial lease, and the assessee not being owner of the assets, was not entitled to depreciation. 5.2 In view of the above, observations, the CIT(A) held as follows: Since, in the instant case, it is only a financial lease, as discussed in para 4.10 4.11 above, relying on the ratio of the above decisions of the Hon'ble Supreme Court in Asea Brown Boveri Ltd. Vs. Industrial Finance Corporation of India (supra) and of Hon'ble ITAT Delhi Bench, in Industrial Finance Corporation of India Ltd. (supra) and of Hon'ble ITAT, Mumbai Bench, in J.M. Shares Stock Brokers (supra), I hold that the assessee not being owner of those computer systems, supplied to BHEL under such lease, is not entitled to depreciation u/s 32 of the Act on such assets. Accordingly, the disallowance of the claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inal cost to the lessee. While deciding the lease rental and the period of lease, the assessee's investment has been duly taken into consideration to ensure that the full cost of the asset leased out by the assessee together with interest is recouped within the said period of seven years. It is the sole responsibility of the lessee to bear repairs and maintenance cost and also insurance premium. Boiler has been chosen by the lessee who has taken the delivery of it. It is the lessee who has to pay all the taxes. Features of bailment are completely absent. The risks and rewards incidental to the ownership are vested with the lessee. What the assessee as a lessor owns is not any asset but the contracted stream of payments in the shape of lease rental covering its entire investment plus interest. Such lease rentals have been ensured by way of the assessee taking post-dated cheques for the entire lease period. On the other hand what the lessee has got is not just a rented boiler but a fixed non-terminable agreement under which it is obliged to pay the rentals. These factors strongly indicate that whereas the lessee is the actual or real owner, the lessor- assessee is only nominal or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... When we consider the reality of the situation in the present case, it becomes abundantly manifest that a simple loan transaction was made to adorn the garb of lease to avoid the rightful tax due to the exchequer. We, therefore, refuse to accept the very genuineness of the so called lease agreement itself and hold that it is not even a case of finance lease. In our considered opinion, the authorities below were fully justified in refusing to grant depreciation to the assessee in both the years under consideration. Conclusion: If the conditions as laid down in the judgments of Asea Brown Boveri Limited (supra) and Association of Leasing Financial Services Companies (supra) are satisfied in a lease agreement, it will be a case 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. Respectfully following the special decision of the Tribunal, we confirm the order of the CIT(A) on this issue. Accordingly, this ground of appeal of the assessee raised in its appeal and C.O is dismissed. 8. Next ground is with regard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,16,88,532 Finance income to be received for 60 months Rs. 54,28,872 Average rate of finance income = Total finance income/lease Period Rs. 54,28,872/36 = Rs.150802 9.2 Since during the current previous year, the duration of such lease was for a period of seven months, the finance income pertaining to such period falling in the current previous year, which has to be taxed in the hands of the assessee, was computed by the Assessing Officer at Rs.10,55,614 (Rs.1,50,802 X 7 months). Thus, the total finance income from both the above leases, which is taxable in the hands of the assessee, was worked out by the Assessing Officer at Rs.17,41,707 (Rs.6,86,963 + Rs.10,55,614). Since the lease rental from BHEL, as per both the above agreements comes to Rs.85,65,210 (Rs.24,06,551 + Rs.61,61,659), after excluding the said amount from total income of the assessee, the Assessing Officer added such finance income amounting to Rs.17,41,707 to the total income of the assessee. 10. After considering the submissions of the assessee, the CIT(A) did not agree with the contentions of the assessee. He ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, are in the name of the assessee company and not in the name of hire purchase financier i.e. Hewlett Packard Financial Services (India) Pvt. Ltd. Stating that the said assets form part of the fixed assets of the company and it is eligible to claim depreciation u/.s 32 of the Act thereon, the assessee contended that the method adopted by the AO for computing income at Rs. 17,41,707/- after rejecting the claim of depreciation and adding back Rs. 85,68,210/- shown by the assessee, is incorrect. 12. The learned DR, on the other hand, relied on the order of CIT(A). 13. We have heard both the parties, perused the record and gone through the orders of the revenue authorities. In this case, we have held that the transactions of the assessee are finance lease transactions. Being so, we have held that the assessee is not entitled for depreciation and, consequently, the entire lease income has to be considered as gross income of the assessee. Therefore, we direct the AO to determine the income of the assessee in accordance with law. Thus, this ground raised in 916/H/109 and in CO is partly allowed for statistical purposes. 14. Next ground raised by the assessee in ITA No. 916/Hyd/0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the said amount made by the Assessing Officer in the assessment, under prior period expenses adjustment, is justified, and hence, the same is upheld. Thus, the ground of appeal on this account, is rejected. Aggrieved, the assessee is in appeal before us. 18. We have heard both the parties, perused the record and gone through the orders of the revenue authorities. Before us, no serious arguments have been advanced by the learned AR on this ground. Therefore, this ground is dismissed as not pressed. 19. Now we deal with the revenue appeals. The revenue has raised a common ground with regard to the disallowance u/s 40(a)(ia) of interest payments to HP Financial Services (P) Ltd. in ITA No. 953/H/09, 947/H/10 and in ITA No. 962/H/13. 20. To dispose of this ground, we refer to the facts from ITA No. 953/Hyd/09 for AY 2005-06. 21. During the assessment proceedings, the Assessing Officer noticed that the assessee has paid an amount of Rs.25,81,775 to M/s HP Financial Services India Pvt. Ltd. towards interest on term loan. In response to query raised by the Assessing Officer whether any tax was deducted at source (TDS) on such payment, the assessee has submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. The total amount payable in 12 quarterly instalments would be 12 X Rs.25,66,280 = Rs.3,07,95,360. The difference between the total amount of instalments payable and the cost of the asset i.e. Rs.42,70,502 (Rs.3,07,95,360 - Rs.2,65,24,858), being hire charges, has been classified as Interest by the assessee for accounting purpose. The assessee has made four payments of Rs.25,66,280 during the F.Y. 2004-05 to M/s HP Financial Services India Pvt. Ltd. as per agreement and the amount of hire charges in the installments paid during the F.Y. 2004-05, amounting to Rs.16,61,265 has been charged to the profit loss account under the head Interest . It was further stated that similar treatment has been given to the quarterly instalments of Rs.9,09,520 per quarter paid as per Schedule #02 of the Agreement. Hence, the total amount paid towards hire charges was classified as Interest and charged to the profit loss account by the assessee company on account of both the agreements. 22.2 The assessee further submitted that as per the circular No.647, dated 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect 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 the record and have gone through the orders of the authorities below. We find that the issue in dispute whether it is interest or not on hire purchase contract has been decided by 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 of 2007 and 761 of 2006, judgment dated 05/12/2013, wherein the Hon'ble Court held as follows: The owner of the goods, which are usable movable goods let out to the hirer on payment of certain amount either on monthly or quarterly or yearly basis and after payment of the entire amount as claimed by the owner being the price of the goods, it is optional for the hirer to buy up to become owner or not. In the event, he exercises his option t buy them, then, the owner of the goods is bound to convey the same by transferring title in favour of the hirer. On the other hand, if the hirer does not exercise his option, then the goods in question must be returned and the payments so far made are treated to be rentals. Therefore, the whole concept ..... X X X X Extracts X X X X X X X X Extracts X X X X
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