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TMI Blog2016 (4) TMI 913X X X X Extracts X X X X X X X X Extracts X X X X ..... arises no question of evasion of tax and in any case if it is a genuine business transactions, the same should not be categorized as a colorable device merely because its results in reduction of tax liability. Further, it has been established that ownership of the impugned asset was with the assessee and the same was used for the purpose of business of leasing carried on by the assessee; under these circumstances the assessee was entitled for the benefit of depreciation. Therefore, AO is directed to grant the benefit of depreciation. - Decided in favour of assessee Disallowance of deduction u/s 80HH and 80IA on the amount of interest received from customers on delayed payments - Held that:- It is noted by us that this issue has already been decided by the Tribunal in earlier years i.e. Assessment Year 1992-93, 1993-94 and 1995-96. It is further noted by us that Ld. CIT(A) while deciding this issue has followed his own orders of the earlier years. In view of these facts, we find that orders of the Tribunal of earlier orders should be followed for deciding this issue, thus we direct the AO to grant benefit of deduction u/s 80HH & 80IA on the amount of interest received from cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld on 21/07/1995 passed a resolution in terms of section 149(2A) of the Companies Act, 1956 to commence the business of leasing of assets, and accordingly Memorandum and Articles of Association were also amended and the same was confirmed by the Company Law Board also. Accordingly, the assessee company commenced its leasing business by undertaking its first lease transactions with APSEB during the impugned financial year. The assessee company acquired COAL FIRED BOILER from APSEB vide agreement/invoice dated 04.09.1995 for a consideration of ₹ 46.75 crores which included a sum of ₹ 4.25 crores of sales tax payable under Andhra Pradesh Sales Tax Law. The said asset was situated at the site of APSEB. The Boiler was originally purchased by APSEB from Bharat Heavy Electrical Ltd. in the year 1990. The consideration of the said Boiler was arrived at after taking into account various factors such as insulation, erection, testing, commissioning and age/life of the Boiler etc. These factors were decided on the basis of valuation report of Chartered Engineer; the valuation report suggested the value of ₹ 75.60 crores. Subsequently, the assessee company entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and case laws relied upon by both the sides and thereafter held that the transaction done by the assessee was a genuine transaction and fell within the four corners of law and the assessee was entitled for claim of depreciation. 3.4. Being aggrieved, the revenue has filed appeal against the order of the Ld. CIT(A). 3.5. During the course of hearing, both the parties made detailed arguments. It was argued by the Ld. DR that it is case of a Finance Lease and not an Operating Lease . The assessee was not engaged in the business of lease and the assessee did not become legal owner of the asset. In support of his arguments, he relied upon the judgments of Hon ble Supreme Court in the case of Asea Brown Boveri vs. IFCI (AIR 2995 SC 17) and of the Special Bench in the case of IndusInd Bank Ltd. vs. ACIT 135 ITD 165 (SB), and Avasarala Automation Ltd. vs. JCIT 266 ITR178 (Karnataka High Court) and Hathway Investments Pvt. Ltd. vs. ACIT (ITA No.4069/Mum/2001 dated 07.08.2013. He concluded his argument by submitting that in view of these judgments assessee was not entitled to make the claim for depreciation. 3.6. Per contra Ld. Counsel of the assessee relied upon the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the very outset that Ld. CIT(A) has extensively discussed all the facts related to this transactions and all the issues raised by the AO in assessment order. 3.9. We have already discussed the brief facts in the earlier part of the order with regard to the transactions under question and the issues raised by the AO. It is noted by us that explanation 4A has been inserted to section 43(1) by Finance Act 1996 w.e.f. 01.10.1996, which is reproduced as under: Where before the date of acquisition by the assessee (hereinafter referred to as the first mentioned person), the assets were at any time used by any other person (hereinafter referred to as the second mentioned person) for the purposes of his business or profession and depreciation allowance has been claimed in respect of such assets in the case of the second mentioned person and such person acquires on lease, hire or otherwise assets from the first mentioned person, then, not withstanding anything contained in Explanation 3, the actual cost of the transferred assets, in the case of first mentioned person, shall be the same as the written down value of the said assets at the time of transfer thereof by the second of menti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) To confirm the lessor as at the 31st march of every year that the assets leased out under theses presents are intact, safe, and in good health and working order. 6. It is hereby mutually agreed by the between the lessor and the lessee as under, namely: - (d) The lessor may assign to any person/bank/financial institution/financiers any of its rights under this agreement, including right to receive rentals and in particular may assign such rights by way of charge and any person to whom such rights are assigned shall be entitled to the full benefit of such rights. 3.11. It has been further shown to us that sales tax has been charged in the invoice and the transaction was subject to sales tax assessment and the same was accepted by the jurisdictional sales tax department. Thus, from the above documents it can be said that the assessee company became owner of the asset. Once the assessee company is owner of the asset, it will be entitled to get depreciation if asset is used for the purpose of it business. In this regard, it was also brought to our notice during the year that assessee was engaged in carrying on the business of leasing and therefore, the assessee use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ownership. What is to be seen is whether one has the right to exercise the rights or not about the rights to hold, right to dispose etc. In this case, the Appellant by virtue of the lease agreement possesses the complete right to take back the asset, dispose, remove the asset, etc. The A.O. is wrong in denying the ownership just because some rights are not transferred. One does not cease to be the owner of other rights attached to the property. What is relevant to be seen is the legal ownership, which is essential element for claiming depreciation. 8.4 In this case, the ownership still continues with the lessor. The fact that the lessee enjoys some of the rights does not make any difference as regards the ownership. Here, the lessor has purchased the asset, paid for the same and using the same for their business. 8.5 Further, the sale of the asset is effected by APSEB. 8.6. The sale of the asset is done by APSEB which is a State Govt Undertaking. Hence it is highly impossible to presume that an asset which cannot be removed from the earth has been sold to the appellant by APSEB. APSEB which is a government body supplying electricity to the State of Andhra Prade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o give a security deposit of ₹ 11.69 crores to the Appellant? Lease financing is a recognised mode of financing and only because a lease transaction is entered into the course of financing business, it does not take away the character of lease for the purpose of lease transaction entered into. In a sale and lease back transaction, the leased assets are included in the lessor's account since he holds the title the asset. The lessor accounts for lease rentals as revenue receipts. The lessee treats the payments as operational expenses. Further, it is pertinent to note that the legislature has introduced a new provision, explanation 4A to sec 43(1) w.e.f. 1.10.1996 wherein it provides that in case of such sale and lease back transaction, the written down value of the asset in the hands of the seller has to be taken into account for the purpose of allowing depreciation in the hands of the lessor. Hence, it is to be noted that the Income tax Act recognised all those genuine sale and lease back transactions and allowed the depreciation on the cost of the asset incurred by the assessee prior to 1.10.1996. This is further strengthened by the speech of the Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is clear that there is no attempt on the part of the Appellant to value the asset at a higher price. Hence, purchase price of ₹ 46.75 crores is much less than the value as per valuation report of ₹ 75.60 crores and therefore, there cannot be any allegation, leave alone the conclusion to the effect that the valuation report is obtained to raise substantial finance, in fact, such a situation can arise only when the purchase cost is higher than the valuation price. The Appellant has valued the asset through qualified engineers approved by the Government and hence, there is not much left to the Department to object to that it was done with an intention to defraud the Revenue unless the transaction is between the associated or related parties. Here the lease transaction is the case to which provisions of Explanation 3 to sec 43(1) can be applied. The transaction is entered into between a public limited company and a State Government undertaking, at arm's length. Further, looking at the overall tax treatment of the whole transaction, it cannot be said that the transaction was intended to reduce the tax liability by claiming depreciation on the enhanced cost of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated parties by way of written agreement. The sale and lease back transactions are recognised by the legislature by insertion of Explanation 4A to Sec. 43(1). The Appellant has made the payment through banking channels. Though in the initial year, the Appellant Company claimed depreciation, but at the same time, the lease rentals have been offered for taxation during the lease period and this proves that there is no loss of revenue to the Department. In view of the detailed discussions, I am of the view that the A.O. was not justified in denying depreciation to the Appellant. Accordingly, the A.O. is directed to allow the depreciation of ₹ 46.75 crores in the hands of the Appellant in respect of the boiler leased to APSEB, as claimed by the Appellant in its Return of Income. 3.15. Thus, from the above discussion it comes out that not only the transaction was genuine, but also the other note worthy point is that as a net-effect it does not create any material difference in the long run on the total tax liability of the assessee. In the initial period, the assessee may have claimed depreciation but in all subsequent years the assessee has been showing income on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Burmah Trading Co. Pvt. Ltd. vs. ACIT, Mumbai Bench held as under: To sum up, if it is a genuine business transaction, the same should not be characterized as a colorable device merely because it results in reduction of tax liability. Whether a particular transaction is a genuine business transaction or not, has to be gathered from the facts and circumstances of each case. In case of sale and lease back transactions, the same would generally be treated as sham if there is a finding that the assets shown to be leased out does not actually exist, or where it is found that the same asset is leased out to more than one lease at the same point of time. In the instant case, no aspect of the transaction had been found to be of dubious nature and hence, it was directed that the assessee be granted depreciation on the lease boiler as claimed by it. 3.19. Further in the case of DCIT v. Sheba Properties Ltd. (supra), the Mumbai Bench got an occasion to analyse similar transactions done with the same corporation namely APSEB and after considering various judgments including the judgment of Hon ble Special Bench in the case of IndusInd Bank Ltd. v. ACIT, 135 ITD 165 (SB), whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the submissions of both the sides, it is relevant to mention that the issue relating to the claim of depreciation vis-a-vis sale and lease back of assets has been considered by the Special Bench of the Tribunal in the case of IndusInd Bank Ltd. (supra). However, the entire controversy has been set at rest by the decision of the Hon'ble Apex Court in the case of ICDS Ltd. (supra), wherein the Apex Court has allowed the depreciation in the case of sale and lease back transaction. This decision of the Apex Court has been followed by the Tribunal in the case of Development Credit Bank Ltd (supra). Considering the fact of the case in the light of the judicial decisions, we find that the issue is squarely covered in favour of the assessee and accordingly the assessee is entitled to claim the depreciation on sale and leased back assets. Therefore, the order of the Ld. CIT(A) in allowing the claim of depreciation is upheld. Resultantly, this appeal filed by the revenue is dismissed. 3.20. Similarly in the case of JCIT vs. Cable Corporation of India Ltd. (supra), Mumbai Bench of the Tribunal analysed, discussed and distinguished the judgment of Hon ble Supreme Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a nature other than a lease transaction. The conducts of the parties were in tune with the contentions advanced by the assesseecompany. The existence of the energy saving device has been established; its user has been established and in such circumstances there cannot be a case that the transaction involved in the present case did not answer the tests laid down by the Supreme Court in the case of Asea Brown Boveri Ltd. 3.21. It is further noted by us that this issue came up for consideration before Hon ble Delhi High Court in the case of CIT vs. Cosmo Films Ltd. (supra) wherein Hon ble Delhi High Court got occasion to analyse the entitlement of claim of depreciation in case of similar transactions done with another State Corporation namely Haryana State Electricity Board (HSEB) and analysed various judgments which have been relied upon by the Ld. AO or by the Ld. DR before us, namely Avasarala Automation Ltd. vs JCIT ( Karnataka High Court) (supra), Asea Brown Boveri (supra), McDowell Company Ltd ( 154 taxmann 148) (SC) and Union of India vs. Azadi Bachao Andolan 263 ITR 706 (SC). The gist of the judgment of Hon ble Delhi High Court is reproduced hereunder: Insofar a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was paid by the assessee. Merely because tax liability was reduced could not be conclusive of arrangement being sham of a device. As regards observations of the Hon ble Supreme Court in McDowell Co. Ltd. v. CIT 154 ITR 148, the matter has been explained in subsequent judgments including in Union of India V. Azadi Bachao Andolan 263 ITR 706, reiterating the view that the assessee was entitled to arrange his affairs to reduce tax liability, without violating the law. It was observed in Azadi Bachao Andolan s case (supra) that the principle laid down in IRC v. Duke of Westminster [1936] A.C. was still valid. 3.24. Thus, from the analysis of the cases as discussed above, the clear position of law that emerges before us is that in the similar kind of transactions entered by assessee with a state corporation, the same cannot be treated as bogus or sham or ingenuine and therefore benefit of depreciation cannot be disallowed so long as the same is otherwise permissible under the law. 3.25. Now, we shall also like discuss the cases which have been relied upon by the Ld. DR before us. Ld. DR had vehemently relied upon the judgment of Hon ble Karnataka High Court in the case of Av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of asset under the agreement/ deed Water treatment plant is embedded to earth (Page 5 Para 8) Boiler can be removed as per the Registered Valuer s report. (Page 2 Para 4.8 of CIT(A) s order) 9 Production of invoices, installation certificate and other basic details before lower authorities Invoices / other basic details were never produced before lower authorities (Page 6 Para 10) Invoices, installation certificate and all basic details were produced before authorities and verified by them. (Page 5 Para 7.1 of CIT(A) s order) 10 Tax treatment accorded by the AO to lease rental income Lease rental offered to tax by the assessee were excluded from assessable income by the AO. (Page 3 Para 2) Lease rent has been taxed as business income for the year under consideration. (Page 26 Para 8.16 of CIT (A) s order) 11 Furnishing of details to AO and cooperation during the assessment proceedings Assessee did not furnish details of installation, copies of invoices, depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etached and removed. In the case of Avasarala , all lower authorities after considering materials placed before them had recorded a finding that it was a sham transaction, whereas in the case of assessee before us, Ld CIT(A) after considering the factual details, concluded that it was a genuine transaction. 3.26. Similarly Ld. DR vehemently relied upon another judgment of the Mumbai Bench in the case of Hathway Investment P. Ltd. In this regard also detailed note has been filed before us showing distinguishing feature of the said case with the case of the assessee and the same is reproduced below: Particulars Hathway Investments Bombay Dyeing (assessee) 1 Transaction with Gujarat State Electricity Board (GEB) i.e. PSU (Page 7 Para 2) Andhra Pradesh State Electricity Board(APSEB) i.e. PSU (Page 1 of FPB) 2 Nature/description of asset Energy Meters (Page 7 Para 2) Coal Fired Boiler (Page 17 of FPB) 3 Identification location of assets in sale invoice/lease agreement Identification exact location of the assets not specified in sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s /is unable to accept the the delivery and installation of the equipment, lessor shall be entitled to cost of the equipment plus other expenses incurred (Page 18 Para 20.VII) No such clause Lessee as the agent of lessor will be responsible for obtaining timely delivery of the equipment (Page 18 Para 20.VII) No such clause Function of lessor in the lease is to purchase the equipment selected by the lessee from the Manufacturer designated by lessee (Page 18 Para 20.VII) No such clause In the event of upward revision in minimum lending rates of commercial banks, lease rental will be revised accordingly (Page 20 Para 20. XI) No such clause Lease rentals have been worked out taking into consideration the depreciation on assets presently available to lessor (Page 20 Para 20.XI) No such clause If eligibility of lessor to claim depreciation is increased/decreased, or the claim is disallowed ,the rates of rentals will be increased/decreased to the extent of gain or loss to the lessor (Page 20 Para 20.XI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od and thus, over all, there was no loss of revenue to the income tax department. Further the sale and lease back transactions have been recognized by the legislature by insertion of Explanation 4A to Section 43(1). Under these circumstances, there arises no question of evasion of tax and in any case if it is a genuine business transactions, the same should not be categorized as a colorable device merely because its results in reduction of tax liability. Further, it has been established that ownership of the impugned asset was with the assessee and the same was used for the purpose of business of leasing carried on by the assessee; under these circumstances the assessee was entitled for the benefit of depreciation. Therefore, AO is directed to grant the benefit of depreciation. This ground of the revenue s appeal is dismissed. 4. Ground No.2: In this ground, the revenue is aggrieved with the action of Ld. CIT(A) in directing the AO to re-compute the depreciation admissible as per law taking into account the increase in the cost of assets on account of fluctuation in foreign exchange rates as on the last date of the accounting year i.e. 31.03.1996. 4.1. The unanimous stand of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,12,895/- being the tea, snacks expenses to visitors and being the expenses incurred on food for the employees during their stay at Matheran Holiday Home by treating the same as Entertainment expenditure. 4) Notional Interest on overdraft facility to hank for payment of Advance Tax - ₹ 76,82,959/-. 4.1 On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the disallowance made by the Assessing Officer towards the notional interest of ₹ 76,82,959/- on overdraft facility from the bank towards the payment of advance tax. 5. Deduction u/s 80 HHC of the Income Tax Act, 1961. 5.1 The CIT (A) erred in disallowing deduction u/s 80HHC of ₹ 89,66,944/- on the basis that this deduction purely represents 90% of the export incentives received by the Appellants and that this is claimed without adjusting it with the Export loss of ₹ 20,78,79,287/-. 6. Expenditure On G.D.R. Issue 6.1 The CIT (A) erred in disallowing the Appellants claim for deduction of ₹ 28.74 Lacs u/s 37 (1) in respect of expenditure incurred in connection with Global Depository Receipt on the basis that it was a capital expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deduction under Section 80HH 80I with respect to interest received from customers for delayed payment, the same is part and parcel of the sale turn over and therefore, the deduction is allowable in view of the decision of the Hon ble jurisdictional High Court in the case of Bhansali Engg Polymers Ltd.(supra). So far as other receipts in respect of interest on statutory deposits, staff loans, margin money, the sale of import license and other miscellaneous receipts, etc. are not the income derived from the undertaking and, therefore, in view of the decision of the Hon ble Supreme Court in the cases of Pandian Chemicals Limited Vs. CIT, reported in 262 ITR 278(SC), CIT Vs. Sterling Foods, reported in 237 ITR 278 (SC) and Liberty India Vs. CIT, reported in 317 ITR 218 (SC), the deduction under Section 80HH 80I is not allowable on these incomes. Hence, ground No.7.1 is partly allowed. 10.1. Thus, respectfully following the orders of the Tribunal, we direct the AO to grant benefit of deduction u/s 80HH 80IA on the amount of interest received from customers/dealers. Thus, this ground is allowed. 11. Ground No.2: This ground is against the action of lower authorities b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 3,59,32,602/- has already been brought to tax. The assessee had included the total amount in the P L Account of the previous year ending 31.03.1998 being income on receipt basis. However, some portion of the said income has already been brought to tax on accrual basis in the preceding years and hence only the balance is to be brought to tax during the relevant Assessment Year. The said income which has already been brought to tax is to be excluded from the current year. We confirm the order of CIT(A) in directing the Assessing Officer to verify the extent of income on account of technical fees brought to tax in the earlier years and to exclude the same while computing the income for the year under consideration i.e., the year in which the assessee had offered the total receipt of technical fee as income on receipt basis. The Assessing Officer shall afford a reasonable opportunity of hearing to the assessee. The ground No.1 raised by the Revenue is thus allowed for statistical purpose. 6.2 Accordingly, we direct the Assessing Officer to verify the fact of amount of technical know-how fee of ₹ 15.33 crores as has been taxed for the assessment year 1998-99 and ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly perused rival submission, relevant records and findings of the ld. CIT(A). The confirmation of disallowance by the ld. CIT(A), to the tune of ₹ 56,250/-, u/s. 37(2A) of the Act is based on the submission of the assessee that no expenditure at all was incurred in R D Wing. Having regard to the entirety of facts and circumstances of the case, we do not find any infirmity in the findings of ld. CIT(A) in restricting the disallowance to ₹ 56,250/-. Consequently, the findings of the ld. CIT(A) in respect of such disallowance is upheld. This ground of appeal is dismissed. 3.2 Learned AR has relied upon the case of Hindustan Lever Limited Vs. ACIT, reported in 58 ITD 555. On the other hand, learned DR has submitted that the CIT(A) has given a finding of fact that the assessee has not complied with the conditions as provided under clause (b) of Second Proviso to Section 37(4) of the Income Tax Act. We are of the view that when the issue has been considered and decided by this Tribunal in the assessee s own case for the assessment year 1990-91 then the decision cited by the learned AR ITA for the assessee would not help the case of the assessee being factual in nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se for A.Ys. 1994-95 1995-96. It is noted that the Tribunal decided this issue against the assessee in assessment year 1994-95 vide order dated 08.01.2014 in ITA No.2139/Mum/2000 by observing as under: Ground no. 7 (i) relates to the disallowance of deduction of ₹ 72,45,570/- claimed u/s 80HHC by the assessee company. The relevant facts are that the assessee company claimed a sum of ₹ 72,45,570/- as deduction which represented 90% of the export incentives received by it. According to the assessee, 90% of the export incentives should be allowed to it as per the proviso below subsection (3) of section 80HHC without off-setting the loss as worked out under the said sub section. However, in the assessment framed, the AO did not accept the contention of the assessee on the reason that while working out the deduction u/s 80 HHC, at the first stage, when the profit and loss from the manufacturing operation is worked out, it resulted in a loss, as 90% of the export incentives are removed from the profits and gains and are added only at the last stage of formula. Accordingly, the AO disallowed the claim of deduction as there is no profit, there is no question of adding pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to account the losses, if any. Thus the word profit has the same meaning in Sections 80HHC(1) and (3). Same view has been reiterated by the Hon ble Apex Court in the case of A.M. Moosa vs. CIT(2007) 294 ITR 1 (SC). Therefore, we do not find any infirmity in the decision of the Ld.CIT(A) in confirming the said disallowance. Ground no. 7(i) is dismissed. Thus, respectfully following the order of the Tribunal, this issue is decided against the assessee and this ground is dismissed. 15. Ground Nos. 6 7: In these grounds the assessee has made a claim for allowing the expenses incurred in connection with Global Depository Receipt (GDR) for the reason that if these are treated as capital expenditure on the ground that these were in connection with issue of shares which led to an increase in the share capital of the Assessee Company, then, alternatively, these expenses can be allowed u/s 35D at the rate of one-tenth of the total amount in the year under consideration, since expenditure incurred was in respect of expansion of the existing business of the assessee. With the assistance of both the parties, it is noted that primary claim of the assessee made u/s 37 has been decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 93 to 610.71 crores as on March 1994. Schedule 5 on fixed asset indicates that there is an addition of 218.47 crores in gross block during the year under consideration. These facts results in the presumption that the assessee has incurred expenditure in modernization of the DMT division of the assessee company. Due to the reason that the plant has been shut down over a period of time to complete the major revamping involved in the expansion, the fact that there is no increase in the production cannot be a decisive test to negatively conclude that there has no modernization of the DMT Division. However, it is not clear whether the amounts of ₹ 48.05 crores and ₹ 16.76 crores incurred by the assessee in connection with re-payment of foreign currency loan and investing in PSU bonds is for the purpose of modernization of the DMT division of the assessee company as claimed. In view of that matter, we are of the view that it is just and proper to remit the issue back to the file of the AO to verify whether the amounts of ₹ 48.05 crores and ₹ 16.76 crores incurred by the assessee in connection with re-payment of foreign currency loan and investing in PSU bonds is f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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