2014 (6) TMI 247 - AT - Income Tax

Tribunal rules on lease transactions, disallowance of expenses and tax provisions

M/s. Micro Care Computers (P) Ltd. Versus Dy. Commissioner of Income-tax

M/s. Micro Care Computers (P) Ltd. Versus Dy. Commissioner of Income-tax - TMI Issues Involved:1. Disallowance of depreciation on leased assets.2. Addition on account of reworking of lease rentals.3. Disallowance of prior period expenditure.4. Disallowance under section 40(a)(ia) of interest payments to HP Financial Services (P) Ltd.Detailed Analysis:1. Disallowance of Depreciation on Leased Assets:The primary issue was whether the assessee, a private limited company engaged in trading, leasing, and service contracts in computers and peripherals, could claim depreciation on computers leased to Bharat Heavy Electrical Limited (BHEL). The Assessing Officer (AO) disallowed the depreciation claim of Rs. 2,45,99,386, treating the lease as a financial lease rather than an operating lease. The AO argued that under a financial lease, the lessee (BHEL) assumes all risks and rewards of ownership, and thus, the lessor (assessee) cannot claim depreciation. The CIT(A) upheld this view, citing precedents from various cases, including the Supreme Court's decision in Asea Brown Boveri Ltd. vs. Industrial Finance Corporation of India. The Tribunal confirmed the CIT(A)'s order, emphasizing that the lease agreement satisfied all criteria of a financial lease, making the lessee the real owner of the assets.2. Addition on Account of Reworking of Lease Rentals:The AO reworked the lease rentals, treating the income from the financial lease as 'finance income' rather than lease rentals. The AO computed the finance income for the assessment year 2005-06 at Rs. 17,41,707, based on the lease agreements with BHEL. The CIT(A) agreed with this computation, stating that the finance income, not the lease rentals, should be taxed. The Tribunal upheld this view, directing the AO to determine the income of the assessee in accordance with the law, recognizing the transactions as finance leases.3. Disallowance of Prior Period Expenditure:The AO disallowed Rs. 1,74,906 claimed by the assessee as prior period expenditure, arguing that it did not pertain to the current accounting year. The CIT(A) upheld this disallowance, stating that the assessee failed to provide specific illustrations to support the claim. The Tribunal dismissed this ground as not pressed by the assessee, indicating no serious arguments were advanced in this regard.4. Disallowance Under Section 40(a)(ia) of Interest Payments to HP Financial Services (P) Ltd.:The AO disallowed Rs. 25,81,775 paid to HP Financial Services India Pvt. Ltd. as interest on a term loan, citing non-deduction of tax at source (TDS). The assessee contended that the payment was under a hire purchase agreement and not subject to TDS. The CIT(A) agreed with the assessee, referencing CBDT Circular No. 647, which exempts hire purchase payments from TDS. The Tribunal, following the precedent set by the Hon'ble AP High Court in CIT vs. M.G. Brothers Finance Ltd., held that hire purchase payments are not considered interest and thus not subject to TDS under section 194A. Consequently, the Tribunal dismissed the revenue's appeals on this ground.Conclusion:The Tribunal's consolidated order addressed multiple issues, primarily focusing on the nature of the lease transactions and the applicability of TDS provisions. The Tribunal upheld the disallowance of depreciation and reworking of lease rentals, recognizing the transactions as financial leases. It also dismissed the disallowance of prior period expenditure and the disallowance under section 40(a)(ia), aligning with the assessee's arguments and relevant legal precedents. The appeals by the assessee were partly allowed, while the revenue's appeals were dismissed.