Appeals partly allowed, AO to re-examine interest on advances to AEs. Tribunal affirms FAA's decision on depreciation.

The Tribunal partly allowed the appeals, directing the AO to re-examine the addition of interest on interest-free advances to AEs and determine the correct figure. The Tribunal upheld the earlier year's order on interest on share application money and depreciation on leased assets. It also affirmed the FAA's decision on depreciation for a motor car purchased in the director's name. The case was concluded on 11th May 2018.

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Issues Involved:
1. Addition of interest on interest-free advances to Associated Enterprises (AEs).
2. Interest on share application money.
3. Depreciation on leased assets.
4. Depreciation on motor car purchased in the name of the director.

Issue-wise Detailed Analysis:

1. Addition of Interest on Interest-Free Advances to AEs:
The first ground of appeal concerns the AO's modification of the addition of Rs. 1.27 crores on interest-free advances given to AEs. The TPO noted that the assessee had advanced money to four AEs without charging any interest. The assessee argued that these advances were for supporting the business of the AEs at the initial stage and were made in the ordinary course of business. However, the TPO proposed to charge arm’s length interest at 13% on these advances, resulting in an addition of Rs. 1.27 crores to the assessee's total income. The FAA, considering the material and submissions, directed the AO to apply a rate of six months LIBOR plus 150 basis points instead of 13%. The Tribunal found that the issue needed further verification and restored it to the file of the TPO/AO for fresh adjudication, directing them to adopt the correct figure for determining the ALP and afford a reasonable opportunity to the assessee.

2. Interest on Share Application Money:
The next two grounds dealt with interest on share application money and depreciation of leased assets. Both parties agreed that these issues were covered by the Tribunal's order for the earlier AY. The Tribunal had previously adjudicated that remittances made by the assessee to its WOS as share application money, where shares were allotted after some delay, should not be re-characterized as loans. However, for the amount refunded by the WOS without allotting shares, the Tribunal held that it should be treated as a loan. The Tribunal directed the AO/TPO to adopt a rate of interest as six months LIBOR plus 150 basis points for the delayed receipt of the payment.

3. Depreciation on Leased Assets:
The third ground dealt with lease rental, specifically whether the lease was a financial lease or an operating lease. The Tribunal had previously concluded that the lease transaction was a financial lease and not an operating lease, thus disallowing the lease rental claimed by the assessee. However, the Tribunal directed that the assessee should be allowed depreciation and interest on the leased assets. The Tribunal reiterated these directions for the current year, instructing the AO to verify the amounts and allow the claims accordingly.

4. Depreciation on Motor Car:
The last ground of appeal concerned the depreciation of Rs. 42,924 on a motor car purchased in the name of the director. The AO disallowed the claim, stating that the assessee was not the owner of the car. The FAA, referring to a previous Tribunal order, allowed the depreciation claim, stating that de facto ownership and use of the asset for business purposes should be considered. The Tribunal upheld the FAA's decision, rejecting the AO's ground.

Conclusion:
The appeals filed by the AO and the assessee were partly allowed. The issues concerning the addition of interest on interest-free advances and the correct figure of the disputed amount were restored to the AO/TPO for fresh adjudication. The Tribunal directed the AO to follow the directions given in the earlier year’s order for the issues of interest on share application money and depreciation on leased assets. The Tribunal upheld the FAA's decision regarding the depreciation on the motor car. The order was pronounced in the open court on 11th May 2018.

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