2015 (4) TMI 293 - AT - Income Tax

Tribunal rules in favor of assessee on depreciation and broken period interest but upholds guest house expenses disallowance.

The Tribunal ruled in favor of the assessee on the disallowance of depreciation on assets leased to REPL and AEL, as well as on the deletion of addition ... Disallowance of guest house expenses u/s 37(4)- Held that:- This issue has been decided against the assessee by the Hon’ble Supreme Court in the case of Britannia Industries Ltd. [2005 (10) TMI 30 - SUPREME Court] - Decided against assessee. Disallowance of depreciation on assets leased to REPL - As a sequel of the search operation, conducted by Investigation Directorate in the case of REPL group establishing non-existence of assets and bogus lease transactions entered by the group, the AO disallowed the claim of depreciation on assets leased to REPL - As per assessee proper course of action should be under section 158BD and, therefore, the additions/disallowance made by the AO is bad in law - Held that:- We are inclined to hold that if the department proposed to make an assessment based on searched material, then the course available to it was to proceed as per the provisions of Chapter XIV-B i.e. sec. 158BD read with sec. 158BC of the Act and not u/s 143(3). In case of search material, the same is to be assessed by way of block assessment under Chapter XIV-B. Thus the impugned addition cannot be made in the hands of the assessee on protective basis by taking recourse to sec. 143(3). Thus we set aside the order of Ld. CIT(A) and direct the AO to delete the addition on account of depreciation. See case of Kapil Dev [2012 (3) TMI 397 - ITAT DELHI] - Decided in favour of assessee. Disallowance of depreciation on leased assets to AEL - Held that:- As relying on I.C.D.S Ltd. vs. CIT [2013 (1) TMI 344 - SUPREME COURT ] wherein held that as the entire lease rent received by the assessee is assessed as business income in its hands and the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hands of the lessee. This reaffirms the position that lessor i.e. the assessee is the owner of the vehicles. As the owner, it used the assets in the course of its business, satisfying both requirements of Section 32 of the Act and hence, is entitled to claim depreciation in respect of additions made to the trucks, which were leased out. - Decided in favour of assessee. Addition of broken period interest - CIT(A) deleted the addition - Held that:- As decided in assessee's own case [2014 (8) TMI 119 - BOMBAY HIGH COURT] addition of broken period interest need to be deleted as relying on American Express International Banking Corporation v/s Commissioner of Income Tax [2002 (9) TMI 96 - BOMBAY High Court] - Decided against revenue. Issues Involved:1. Disallowance of guest house expenses.2. Disallowance of depreciation on assets leased to REPL.3. Disallowance of depreciation on assets leased to AEL.4. Deletion of addition on account of broken period interest.5. Disallowance of interest attributable to earning tax-free income.Issue-wise Detailed Analysis:1. Disallowance of Guest House Expenses:The first ground relates to the disallowance of guest house expenses under section 37(4) of the Income Tax Act, 1961. The assessee conceded that this issue has been decided against them by the Hon'ble Supreme Court in the case of Britannia Industries Ltd., 278 ITR 546(SC). Consequently, the ground was dismissed.2. Disallowance of Depreciation on Assets Leased to REPL:The AO disallowed the depreciation on assets leased to REPL, concluding that the transactions were bogus. This was based on an investigation by the Directorate which found no installation of Wind Mills by HDFC Bank Ltd. The assessee contended that such additions should be made under section 158BD of the Act. The Tribunal, after considering the decision of the Delhi Bench in the case of Kapil Dev, held that the procedure prescribed by section 158BD was mandatory. Since the AO did not follow this procedure, the addition was directed to be deleted, allowing the ground in favor of the assessee.3. Disallowance of Depreciation on Assets Leased to AEL:The AO disallowed the depreciation on assets leased to AEL, questioning the ownership and business use of the assets. The CIT(A) upheld this disallowance, citing a violation of the RBI circular. The Tribunal, however, relied on the Supreme Court decision in ICDS Ltd. vs. CIT, 350 ITR 527 (SC), and similar Tribunal decisions in favor of the assessee, directing the AO to allow the claim of depreciation.4. Deletion of Addition on Account of Broken Period Interest:The Revenue's appeal contested the deletion of the addition on account of broken period interest. The Tribunal referenced the Jurisdictional High Court's decision in the assessee's own case, which followed the judgment in American Express International Banking Corporation v/s. CIT, 258 ITR 601. The Tribunal found no infirmity in the CIT(A) or ITAT's orders and dismissed the Revenue's ground.5. Disallowance of Interest Attributable to Earning Tax-Free Income:The Revenue's appeal included the disallowance of interest attributable to earning tax-free income. The Tribunal noted that similar issues in the assessee's own case for earlier years (A.Y. 2001-02 to A.Y. 2005-06) were decided in favor of the assessee. Consequently, the Tribunal upheld the CIT(A)'s findings and dismissed this ground of the Revenue's appeal.Conclusion:The Tribunal made a series of decisions favoring the assessee, particularly on the issues of depreciation on leased assets and broken period interest, while upholding the Revenue's stance on the disallowance of guest house expenses. The judgments were consistent with established legal precedents and previous rulings in the assessee's own cases.