Tribunal partially allows Revenue's appeals, upholds disallowance of depreciation, interest on securities, and guest house expenses.

The appeals of the Revenue were partly allowed. The Tribunal sustained the Assessing Officer's disallowance of depreciation on leased plant and machinery, directed to assess only the interest component, upheld the CIT (Appeals) orders regarding interest on securities, and upheld the deletion of disallowances related to guest house expenses.

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Issues Involved:
1. Depreciation on leased plant and machinery.
2. Interest on securities held as stock in trade.
3. Disallowance of guest house expenses.

Issue-wise Detailed Analysis:

1. Depreciation on Leased Plant and Machinery:

The primary issue in these appeals is the depreciation on leased plant and machinery. The assessee, engaged in long-term housing finance, claimed depreciation on leased plant and machinery at 100%, restricted to 75% as per the applicable provisions for the Assessment Year 1991-92. The plant and machinery were acquired from M/s. Larsen and Toubro Ltd. (LandT) and leased to Reliance Petro Chemicals Ltd. (RPL). The Assessing Officer (A.O) disallowed the depreciation claim, citing reasons such as the transaction being a simple financing arrangement disguised as a lease, the plant becoming immovable property after erection, and the lease terms implying RPL's ownership for all practical purposes. The A.O also noted that the lease rental was calculated based on the assumption of 100% depreciation, and the lease was non-cancelable.

On appeal, the CIT (Appeals) posed two questions: (i) whether the assessee is the owner of the plant and machinery, and (ii) whether the plant and machinery are separately owned and identifiable. The CIT (Appeals) answered both questions affirmatively, holding that the assessee was entitled to depreciation. The Revenue appealed, arguing that the CIT (Appeals) did not address the A.O's finding that the agreement was a colorable device to evade tax.

The Tribunal examined the terms of the agreements and concluded that the arrangement was not a genuine lease but a financing arrangement. The Tribunal noted that the assessee was not in the business of leasing plant and machinery and that the real intention was to provide finance to RPL. The Tribunal also held that the arrangement was a colorable device to avoid tax, as the lease agreement was structured to allow the assessee to claim depreciation and reduce tax liability. Consequently, the Tribunal set aside the CIT (Appeals) orders and sustained the A.O's disallowance of depreciation. The Tribunal directed the A.O to exclude the lease rent from the assessment and assess only the interest component.

2. Interest on Securities Held as Stock in Trade:

The issue pertains to the addition of interest on securities held as stock in trade for the Assessment Years 1991-92 and 1992-93. The assessee, holding various securities as stock in trade, offered interest income based on specified dates but did not offer income where the specified date fell beyond the accounting period. The A.O included the interest on a day-to-day accrual basis, as the assessee followed the mercantile method of accounting.

On appeal, the CIT (Appeals) held that interest on securities accrued on fixed or prescribed dates, not on a day-to-day basis, relying on the High Court judgment in the case of Canara Bank. The Tribunal upheld the CIT (Appeals) orders, noting that the issue was covered by the Tribunal's decision in the case of Union Bank of India vs. DCIT, where it was held that interest on securities accrues on specified dates and not on a day-to-day basis. The Tribunal directed the A.O to verify and take appropriate action regarding any excess relief allowed to the assessee.

3. Disallowance of Guest House Expenses:

The issue involves the deletion of disallowances made by the CIT (Appeals) in respect of guest house expenses on account of rent, rates, taxes, and repairs. The Departmental Representative argued that the CIT (Appeals) order could not be sustained in view of the Special Bench decision in the case of Eicher Tractors Ltd. and judgments of the Bombay High Court.

The Tribunal, however, noted that the Bombay High Court in the case of Chase Bright Steel Ltd. held that Sections 37(3) and 37(4) could not override the provisions of Sections 30 to 36 of the Act, and only expenses allowable under Section 37(1) could be disallowed under Sections 37(3) or 37(4). The Tribunal observed that the Special Bench had not commented on the decisions of the Bombay High Court in the case of Chase Bright Steel Ltd. and Century Spinning and Mfg. Co. Ltd., which were still binding within its jurisdiction. Accordingly, the Tribunal upheld the deletion made by the CIT (Appeals).

Conclusion:

The appeals of the Revenue were partly allowed. The Tribunal sustained the A.O's disallowance of depreciation on leased plant and machinery, directed to assess only the interest component, upheld the CIT (Appeals) orders regarding interest on securities, and upheld the deletion of disallowances related to guest house expenses.

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