2002 (4) TMI 226 - AT - Income Tax

Tribunal grants depreciation for leased assets, remands Haryana case for review, upholds expense disallowance

Consortium Finance Ltd. Versus Joint Commissioner Of Income-tax.

Consortium Finance Ltd. Versus Joint Commissioner Of Income-tax. - ITD 082, 808, TTJ 077, 795, Issues Involved:1. Disallowance of depreciation claim for assets leased to KPCL.2. Disallowance of depreciation claim for assets leased to Haryana State Electricity Board.3. Disallowance of depreciation on two-wheelers.4. Disallowance of depreciation on trucks leased out.5. Disallowance of preliminary and issue expenses.Issue-wise Detailed Analysis:1. Disallowance of Depreciation Claim for Assets Leased to KPCL:The assessee, a non-banking finance company, claimed depreciation on assets leased to KPCL. The Assessing Officer (AO) disallowed the claim, arguing that the transaction was a finance transaction rather than a genuine lease, and the assets did not come into the physical possession of the assessee. The AO also questioned the valuation of the assets, citing that the written down value (WDV) in KPCL's books was nil, and the assets were part of a larger power plant system. The Commissioner of Income-tax (Appeals) upheld the AO's decision, stating that the transaction was intended to mobilize resources for KPCL, which was in financial distress, and the lease agreement was a mere paper formality.The Tribunal, however, found the transaction genuine, noting that the sale and leaseback were supported by proper documentation, including a lease agreement and invoice. It emphasized that physical delivery is not necessary in sale-cum-leaseback transactions and constructive delivery suffices. The Tribunal also highlighted that the valuation report provided by the assessee was uncontroverted by the Revenue. Consequently, the Tribunal directed the AO to allow the depreciation claim and make necessary adjustments in respect of lease rentals and interest.2. Disallowance of Depreciation Claim for Assets Leased to Haryana State Electricity Board:The assessee claimed depreciation for assets leased to the Haryana State Electricity Board. The Commissioner of Income-tax (Appeals) rejected the claim, applying the same reasoning as in the KPCL case. However, the Tribunal noted that the transaction occurred after the insertion of Explanation 4A to section 43(1) of the Income-tax Act, which affects sale-cum-leaseback transactions post-1-10-1996. The Tribunal set aside the orders of the tax authorities and remanded the matter back to the AO for a fresh decision, taking into account the new legal provisions.3. Disallowance of Depreciation on Two-Wheelers:The assessee claimed depreciation at 25% on two-wheelers, but the AO allowed only 20%. The Tribunal referred to the relevant entry in Part III of Appendix I, which specifies a 25% rate for machinery and plant not covered by other specific sub-items. Since two-wheelers were not specifically mentioned under other sub-items, the Tribunal directed the AO to allow depreciation at 25%.4. Disallowance of Depreciation on Trucks Leased Out:The assessee claimed depreciation at 40% on trucks leased out, arguing that the lessees used them in the business of running them on hire. The AO restricted the claim to 25%, contending there was no evidence of such use by the lessees. The Tribunal, agreeing with the assessee, directed the AO to allow the higher depreciation rate, subject to verification that the lessees indeed used the trucks for hiring purposes. The Tribunal clarified that it is sufficient if the lessee, not necessarily the assessee, is engaged in the hiring business.5. Disallowance of Preliminary and Issue Expenses:The assessee did not press this ground during the hearing, and hence, it was treated as not argued and rejected.Conclusion:The Tribunal allowed the appeals in part, directing the AO to grant the depreciation claims for the assets leased to KPCL and two-wheelers, subject to necessary adjustments. The matter of depreciation for assets leased to the Haryana State Electricity Board was remanded for reconsideration. The higher depreciation claim on trucks was allowed, subject to verification of their use in the hiring business. The disallowance of preliminary and issue expenses was upheld as it was not pressed by the assessee.