Leasing, sticky-loan income, repossessed-asset loss and transfer pricing were examined under real income and arm's length principles.

Depreciation on leased vehicles was examined under section 32 on the basis that legal ownership under the lease documents and business use through leasing may satisfy the statutory test; the issue was remitted for fresh verification. Interest on sticky loans and advances was held not to accrue as taxable income for a non-banking finance company where RBI prudential norms governed income recognition and the real income principle applied. Loss on sale of repossessed assets was treated as a deductible business loss arising in the financing cycle. Transfer pricing adjustment on intra-group services could not be fixed at nil merely on qualitative objections; the matter was remanded for proper tested-party selection, method selection and comparability analysis.

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Issues: (i) Whether depreciation was allowable on leased vehicles on the footing that the assessee was the owner for the purposes of section 32; (ii) whether interest on sticky loans and advances could be brought to tax on accrual basis despite RBI prudential norms; (iii) whether loss on sale of repossessed assets was deductible as business loss; and (iv) whether transfer pricing adjustment on intra-group services could be sustained at nil without proper comparability analysis and determination of the tested party.

Issue (i): Whether depreciation was allowable on leased vehicles on the footing that the assessee was the owner for the purposes of section 32.

Analysis: The leasing arrangements showed that the vehicles were deployed in the assessee's leasing business and the lease agreements reserved title, possession rights on default, inspection rights, and obligation to return the assets at the end of the term. The ownership test under section 32 was therefore examined in the light of the Supreme Court's approach in ICDS Ltd., namely that the lessor's legal ownership, coupled with business use through leasing, may satisfy the statutory conditions. The matter was not finally concluded on facts and was restored to the Assessing Officer for fresh examination in accordance with that legal position.

Conclusion: The disallowance of depreciation was not finally sustained and the issue was remitted for de novo adjudication in the assessee's favour in principle.

Issue (ii): Whether interest on sticky loans and advances could be brought to tax on accrual basis despite RBI prudential norms.

Analysis: The assessee, being a non-banking finance company, was required to follow RBI prudential norms governing recognition of income from non-performing assets. Applying the real income principle and the binding effect of the statutory RBI framework, the interest on doubtful sticky loans was held not to have accrued as taxable income. The tribunal followed the jurisdictional High Court and its own earlier decision in the assessee's case to hold that notional accrual could not override the mandated income-recognition regime.

Conclusion: The additions on account of interest on sticky loans and advances were deleted in favour of the assessee.

Issue (iii): Whether loss on sale of repossessed assets was deductible as business loss.

Analysis: The repossessed assets were treated as part of the financing business cycle, with the debtors' accounts replaced by the assets repossessed on default and any shortfall on sale recorded in the profit and loss account. The tribunal followed binding precedent holding that such loss is a real revenue loss arising in the ordinary course of the financing business and is allowable as a deduction.

Conclusion: The disallowance of loss on sale of repossessed assets was deleted in favour of the assessee.

Issue (iv): Whether transfer pricing adjustment on intra-group services could be sustained at nil without proper comparability analysis and determination of the tested party.

Analysis: The assessee produced agreements, service descriptions, allocation workings, correspondence and other material to show the need for, rendition of, and expected business benefit from the services. The tribunal held that the benefit test must be viewed from the assessee's commercial perspective and that the TPO cannot substitute his own business judgment for that of the taxpayer. It further held that the services were not shown to be merely duplicative or shareholder activities and that the arm's length price could not be fixed at nil merely on qualitative objections. However, instead of finally determining the price, the matter was remitted to the TPO/AO to rework the arm's length price by undertaking proper tested-party selection, most appropriate method analysis and comparability analysis.

Conclusion: The transfer pricing adjustment at nil was set aside and the issue was remanded for fresh determination.

Final Conclusion: The assessee succeeded on the sticky-loan interest and repossessed-asset loss issues, obtained remand on depreciation and transfer pricing, and the connected consequential grounds were not separately sustained; the appeals were partly allowed overall.

Ratio Decidendi: For a leasing NBFC, legal ownership under lease documentation and business use may satisfy section 32, income on non-performing assets is not taxable on mere accrual where RBI prudential norms bar recognition, loss on sale of repossessed assets is a deductible business loss, and transfer pricing of intra-group services cannot be fixed at nil merely by questioning commercial expediency without proper ALP analysis.

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