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TMI Blog2014 (12) TMI 677X X X X Extracts X X X X X X X X Extracts X X X X ..... ot refer to the very same lease agreement to decide about the ownership – thus, the assessee should be allowed depreciation benefit – thus, the order of the CIT(A) is set aside and the disallowance of lease rentals is upheld and the AO is directed to allow the depreciation - Decided in favour of assessee. Computation of book profits u/s 115JB – Held that:- The view of the CIT(A) that the unabsorbed depreciation should be taken as NIL does not appear to be correct view, since the unabsorbed depreciation as well as unabsorbed business loss shall be described as negative figures only - as per the provisions of sec. 115JB, lower of the both is required to be deducted from the book profit – thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO for examination of claim of assessee - Decided in favour of assessee. Interest pertaining to earlier years disallowed – Held that:- The assessee claimed interest on SBI loans relating to FY 2001-02 and 2002-03 as deduction –assessee rightly contended that if the loan account is categorised as “Non-Performing Asset”, nothing prevented the assessee to make provision for payment of interest - Though the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies was lower than the rate of M/s Excel Tubes and Cones - the purchase rate was dependent upon various factors - the disallowance of 12% made out of purchases made from M/s Arya Industries is on higher side – thus, the AO is directed to compute the disallowance at the rate of 6% of the aggregate purchase value of purchases made from M/s Arya Industries – the order of the CIT(A) is modified – Decided partly in favour of assessee. - I.T.A. No. 4035/Mum/2006, I.T.A. No. 1623 and 1624/Mum/2009 - - - Dated:- 17-12-2014 - Shri B. R. Baskaran (AM) And Sanjay Garg (JM),JJ. For the Petitioner : Smt. Parminder Prejanand J For the Respondent : Shri Rahul Sarda and Dr K Shivraman Sr.Cousel ORDER Per B. R. Baskaran, Accountant Member: The appeal filed by the revenue for assessment year 2002-03 and the appeals filed by the assessee for assessment years 2004-05 and 2005-06 are directed against the orders passed by Ld CIT(A) in the respective years. All these appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience. 2. The facts relating to the case are stated in brief. The assessee herein is a manufacturer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cover the whole of the cost of the equipment. (c) The agreement does not take cognizance of the scrap value of the machinery that may be fetched by selling the machine in the open market at the end of the lease period. 5. Before Ld CIT(A), the assessee submitted that the lease transaction should not be seen in isolation by disregarding the business arrangement by which the assessee agreed to purchase DMT from M/s BD and the said company agreed to purchase machinery and lease it out to the assessee. Accordingly, it was submitted that it was a case of genuine lease agreement. The Ld CIT(A) was convinced with these submissions and accordingly held that it was not a case of sale and lease back transaction. Accordingly, he set aside the order of AO on this issue. 6. The Ld D.R strongly defended the order passed by the assessing officer. He submitted that the lease rentals fixed for the entire lease period was equal to the cost of machinery. Further, M/s BD has purchased the machinery after entering into the lease agreement. Further, there was a composite agreement between the assessee and M/s BD, by which M/s BD has agreed to provide assistance to the assessee in expanding as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was a sale and lease back transaction. We have already seen that the case of the assessing officer was something different. Hence, in our view, the Ld CIT(A) has granted relief to the assessee on a misconceived notion and hence his order is liable to be set aside. 10. We notice that the AO has denied the benefit of depreciation also on the ground that the assessee is not the owner of the asset as per the lease agreement. There is a fallacy in the said decision. Once the AO has held that this was a case of finance transaction by ignoring the lease agreement, in our view, he should not refer to the very same lease agreement to decide about the ownership. Accordingly, we are of the view that the assessee should be allowed depreciation benefit. 11. In view of the foregoing discussions, we set aside the order of Ld CIT(A) on this issue in assessment year 2002-03 and uphold the order of the assessing officer in confirming the disallowance of lease rentals. However, as discussed in the preceding paragraph, we direct the assessing officer to allow the depreciation admissible as per the Act on the value of machinery. 12. We shall now take up the appeal filed by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has taken the view in accordance with the decision taken by us while adjudicating identical issue in AY 2002-03 in the preceding paragraphs. Accordingly, we hold that the Ld CIT(A) was justified in disallowing lease rental expenses and in the alternative allowing depreciation on the cost of assets to the assessee. 16. The next issue relates to the disallowance of interest pertaining to earlier years. During the year relevant to the AY 2004-05, the assessee claimed interest on SBI loans relating to FY 2001-02 and 2002-03 to the tune of ₹ 7.33 crores as deduction. The assessee submitted that the assessee s loan account had been categorized as Non performing asset by the bank and hence no interest was charged in the relevant years. However, during the current year, the Cash credit limit was enhanced and the enhanced amount was used to recover the arrear interest. Accordingly, the assessee submitted that the interest was charged during the year and the same has also been recovered through the Cash Credit account. Accordingly, it was claimed that the interest has got crystallized during the year. The AO disallowed the same on the reasoning that the same does not pertain to the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Disallowance of depreciation on electrical fittings; (d) Disallowance of interest u/s 36(1)(iii) of the Act; (e) Disallowance made under section 40A(2)(b) of the Act. (f) Computation of book profit without allowing adjustment of amount transferred from general reserve. 20 The first issue relates to the disallowance of depreciation of leased premises. The facts relating thereto are that the assessee had given on lease a part of its premises, along with the electrical fittings, furniture and other fixtures to two of its sister concerns and also to others under license agreements. The assessee received rent of ₹ 18 lakhs in aggregate and declared the same as business income. Accordingly, the assessee also claimed depreciation on WDV of the building.. The AO, however, assessed the rental income under the head income of the house property and accordingly disallowed depreciation claimed on the premises leased out. The ld. CIT(A) confirmed the action of the AO. 21. Before us, the ld. AR submitted that the rental income should have been assessed as the assessee s business income. He further submitted that, even if the rental income is assessed as Income from House Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent expenditure claimed by the assessee. In the alternative, we have held that the depreciation should be allowed on the cost of assets. The view taken by the ld. CIT(A) in the instant year is in accordance with the decision taken by us in the earlier years. Accordingly, we confirm the order of ld. CIT(A) on this issue. 27. The next issue relates to disallowance of depreciation claimed on electrical fittings. The assessee had claimed the depreciation at the rate of 25% on the electrical installation and fittings i.e. at the rate applicable to the plant and machinery. However, the AO noticed that the electrical fittings is included in the category of furniture and fittings in the Depreciation Schedule prescribed in the Income tax Act and the applicable rate of depreciation is 15% only. Accordingly, the AO disallowed the excess claim of 10%. The ld. CIT(A) also confirmed the said disallowance. The ld. counsel of the assessee submitted that the electrical fittings contemplated in the Depreciation Schedule under the head furniture and fitting relate those items not related to Plant and Machinery. However, the assessee has classified those items which are related to the Plant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case should be considered as plant and machinery and hence the depreciation should be allowed at the rate of 25% to plant and machinery. 30. The next issue is disallowance of interest u/s 36(1)(iii) of the Act. The AO noticed that the assessee had capitalized the interest of ₹ 51.15 lakhs, being the interest relating to capital expansion in the existing unit and also relating to the new units being set up. The assessee had worked out the disallowance by adopting average interest rate of 12.23%. On further analysis, it was noticed that the assessee had capitalized interest amount of ₹ 23.61 lakhs in respect of the new project being set up at Athal and Sirigam, even though the actual amount on these two units was over ₹ 6 crores and ₹ 15 crores respectively. Hence, the AO took the view that the amount capitalized by the assessee was not correct. Accordingly, he worked out the interest to be capitalized, by taking into account date-wise investment and also by applying formulae adopted by the assessee and accordingly made further disallowance (capitalization) of ₹ 37.58 lakhs. Though the assessee contended that the assessee had not borrowed any fresh ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, he submitted that the AO was not correct in comparing the price quoted by M/s Arya Industries and some other concern, without establishing parity of the quality, size. He further submitted that the price would also depend upon the quantity of the purchases. Accordingly, he submitted that the disallowance of ₹ 19 lakhs made under section 40A(2)(a) is not justified. In the alternative, he submitted that the disallowance was very much on the higher side. 34. On the contrary, the ld. DR strongly defended the order of ld. CIT(A). 35. We notice from the assessment order that the AO has compared the rates of M/s Arya Industries with that of M/s Excel Tubes and Cones. The AO has tabulated the said comparison in a Tabular form. Admittedly, there is a variation in the price. From the table prepared by the AO, we notice that the AO has noted down the description of the product, quality, size and quantity. However, we notice that the AO has adopted the average rate of 12% for making the disallowance, with the observation that the variation ranges from 10 to 15%. However, we notice that, on three occasions, the purchase rate of products purchased from M/s Arya Industries was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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