2012 (12) TMI 15 - AT - Income Tax

Court dismisses appeal on depreciation but allows appeal on penalty under Section 271(1)(c)

Gruh Finance Ltd. ‘Gruh’ Versus Income Tax Officer, Ward-4(4), Ahmedabad

Gruh Finance Ltd. ‘Gruh’ Versus Income Tax Officer, Ward-4(4), Ahmedabad - TMI Issues Involved:1. Invocation of Section 147 for income escaping assessment.2. Disallowance of depreciation on leased assets.3. Classification of lease transactions as financial leases versus operational leases.4. Imposition of penalty under Section 271(1)(c) for furnishing inaccurate particulars of income.Detailed Analysis:1. Invocation of Section 147 for Income Escaping Assessment:Ground no. 1 of the appeal was not pressed by the appellant's representative in both years. Consequently, this ground was rejected as not pressed.2. Disallowance of Depreciation on Leased Assets:The primary issue was the disallowance of depreciation of Rs. 1,40,07,126/- on assets given on lease. The appellant contended that the assets were owned by them and used for their business of leasing, thus qualifying for depreciation under the Income Tax Act.The Assessing Officer (AO) disallowed the claim on the grounds that the lease transactions were financial leases rather than operational leases. The AO noted that the appellant had not disproved the findings regarding the nature of the lease transactions. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the appellant had not provided sufficient evidence to counter the AO's findings.The Tribunal referenced the Special Bench decision in the case of IndusInd Bank Ltd. vs. ACIT, which outlined the characteristics of financial leases. It was noted that the lease in question satisfied the criteria of a financial lease, including the transfer of risks and rewards to the lessee, the non-cancellable nature of the lease, and the recovery of the asset's cost plus interest through lease payments.3. Classification of Lease Transactions as Financial Leases versus Operational Leases:The Tribunal examined whether the lease transactions were financial leases or operational leases. The key features of financial leases, as noted by the AO and upheld by the CIT(A), included:- The lessee selected the asset.- Risks and rewards of ownership were transferred to the lessee.- The lease payments covered the asset's cost plus interest.- The lessor did not bear costs of repairs, maintenance, or operation.- The lease was non-cancellable.The Tribunal concluded that the lease transactions in question were financial leases. Therefore, the lessee, not the lessor, was entitled to claim depreciation.4. Imposition of Penalty under Section 271(1)(c) for Furnishing Inaccurate Particulars of Income:The appellant challenged the penalty of Rs. 18,27,740/- imposed under Section 271(1)(c) for allegedly furnishing inaccurate particulars of income. The appellant argued that the issue of depreciation on finance leases was debatable until the Special Bench's decision.The Tribunal agreed with the appellant, noting that the legal position on the allowability of depreciation on finance leases was clarified only recently. Consequently, it could not be said that the appellant had concealed income or furnished inaccurate particulars. The penalty was thus deleted.Conclusion:- Both appeals in quantum proceedings were dismissed, upholding the disallowance of depreciation on leased assets.- The appeal in penalty proceedings was allowed, and the penalty under Section 271(1)(c) was deleted.