TaxTMI 
TaxTMI 
2013 (11) TMI 1245
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.... Loan Liability 3. The assessee has opposed the action of the lower authorities in treating the capital receipt in respect of the remission of a loan liability as the income of the assessee under section 41(1) of the Income Tax Act vide Ground No.1 of its appeal, whereas Revenue in its cross objections has stressed that the same is required to be taxed under section 28(i) and 28(iv) of the Income Tax Act or alternatively as capital gain in the light of provisions of section 2(14) of the Act. 4. The brief facts are that in earlier years the appellant was liable to pay the sales tax to the Madhya Pradesh Government. Under the scheme of the State Govt. namely "Madhya Pradesh Government Conversion of Amount of Deferred Tax Into Loan Liability Scheme 1989" the sales tax payable was converted into loan. The aggregate loans were payable after the period of ten years from the date of deferment. The appellant availed the benefit of such scheme and the sales tax payable by appellant was converted into loan. Simultaneously, the appellant also claimed deduction under section 43B in respect of the sales tax payable (converted into loan) which was allowed to the appellant. Under the scheme....
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.... a result, it amounts to discharge of the liability to pay sales tax. Once the liability is discharged the unpaid deferrals assumes a character of loan. In the light of the above circulars of the CBDT, sales tax collected by the assessee, which is not paid into the Government Treasury yet deemed to have been paid is nothing but the loan granted by the Government to the assessee. Therefore, such a loan cannot be treated as a trading liability. Facts on record show that during the year under consideration the Government of Maharashtra introduced the Net Present Value (NPV) under Maharashtra Act No.XX of 2002 & Rule 31D of BST Rules 1959 notified vide Govt. Notification No.STR-12.02/CR-002/Taxation-1, dated 16.11.2002, where under the eligible undertaking was permitted to prepay the loan amount. Under the said scheme, the prepayment was allowed at the NPV of the loan repayable at the end of the loan period. The assessee availed the benefits of this scheme and got a remission in the aggregate loan liability amounting to Rs. 9,92,92,718/-. It is further seen that on 12.12.2002 the Government of Maharashtra announced a scheme of "Premature Repayment of the amount of deferred tax by the e....
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....idering facts in totality, in the light of the aforesaid decision of the Tribunal Special Bench, which has been rightly followed by the CIT(A), we do not find any reason to interfere with the findings of the CIT(A). For the reasons stated above, it was to be held that the deferred sales tax liability being the difference between the payment of net present value against the future liability credited by the assessee under the capital reserve account in its books of account was a capital receipt and could not be termed as remission/cessation of liability and, consequently, no benefit would arise to the assessee in terms of section 41(1)(a) [Para 109] The appeal filed by the Revenue is accordingly dismissed." 6. The ld. A.R. has further brought our attention to the fact that even in the own case of the assessee for the earlier assessment year i.e. A.Y. 2005-06, this issue was again under consideration before the co-ordinate bench of the Tribunal and the Tribunal again relying upon the Special Bench decision in the case of 'Sulzer India Ltd.' (supra) has decided the issue in favour of the assessee observing as under: "14. In our opinion, the issue before us ....
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.... year in the books of accounts and was writing off the cost of such assets in the books of accounts by way of depreciation over the period of lease. However in computation of total income, the depreciation on such leased assets had been disallowed and added back to the total income. The entire lease rentals paid during the year had been claimed as deduction under section 37(1) of the Income Tax Act being revenue expenditure. The AO was not satisfied with the explanation given by the assessee and considered the transaction in question as a finance lease and treated the lease returns paid by the assessee as capital expenditure and disallowed the claim of the assessee for treating the said expenditure as revenue in nature. 9. In appeal the ld. CIT(A) observed that the assessee itself in its books of accounts had treated the lease of vehicles as financial lease and he therefore confirmed the action of the AO in treating the lease transaction as a financial lease. The assessee is thus in appeal before us on this issue. 10. The ld. A.R. has reiterated his submissions before us as were made before the CIT(A), which may be summed up as under: "-The ownership of the vehicle r....
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....n 'Association of Leasing & Financial Services Companies v. Union of India &Ors.' [2010-(SC2)-GJX-0838-SC] and also by the Hon'ble Bombay High Court in 'Avinash Bhosale v. Union of India &Ors' [(2010) 322 ITR 381 (Bom)] has drawn the following broad features of a finance lease:- "- Such a lease is non-cancellable and there is a fixed obligation on the lessee for payment of lease money. In case lease is terminated prematurely by the lessee, the lessor is entitled to recover his investment with expected interest. - Such a lease is always for a fixed period, which period is decided by taking into consideration the economic life of the asset. - The initial lease period is settled in such a way so as to fully recover the investment of the lessor together with interest thereon. - Lessor is always interested in the recoupment of his investment with interest in the shape of rentals over the period of lease and not the asset or its user. - It is the responsibility of the lessee to bear all costs of insurance, repairs and maintenance and other related costs and expenses for the leased equipment. - Though the equipment is chosen....
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....er Article 3.1, upon which the lease contract will end, the lessee would be liable to return the vehicle to the lessor along with documents, keys etc. as provided under Article 3.2 of the said master agreement. Under Article 4.6 the lessee would be liable to pay the charges for the excess kms covered by the vehicle than agreed to be run under the contract for the lease period agreed. The claim of the insurance under the agreement is receivable by the lessor . 15. A reading of the master agreement, as a whole and one document and its various clauses in harmony with each other, reveals beyond doubt that the lessor in this case has remained through out the owner of the vehicle whereas the assessee falls in the definition of lessee. The goods i.e. the vehicle in question which are the subject matter of the lease are specifically identifiable. The lease has to end on the expiry of the specified period or on the happening of any event as mentioned under the agreement including by mutual consent of the parties. On expiry of the lease, the vehicles have been agreed to be returned to the lessor and further the expenditure relating to repair and maintenance etc. of the vehicle has been ag....
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.... concerned." 16. When we apply the observations/ proposition of the law as laid down by the Hon'ble Supreme Court as reproduced above to the facts of the present case of the assessee, who is a lessee in the case in hand, there remains no doubt in our mind to hold that lease in question in the case in hand can be said to be essentially an operating lease and not a finance lease. 17. It may be observed that for the earlier years in the case of the assessee i.e. assessment year 2005-06, the AO had issued notice under section 142(1) of the Income Tax Act requiring the assessee to explain as to why the lease rental be not considered as capital expenditure treating the lease as a financial lease and the AO after admitting the explanation given by the assessee in this respect allowed the claim of the assessee in assessment proceedings under section 143(3) of the Income Tax Act. However, for the year under consideration, the revenue departed from its earlier stand without pointing any distinguishing fact on the issue. However, in view of our detailed discussion as above on the issue, this ground of the assessee's appeal is hereby allowed. ITA No.4963/M/11 (A.Y. 2007-08) ....
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....as relied upon an authority of the Hon'ble Bombay High Court styled as 'CIT vs. Reliance Utilities and Power Ltd.' [2009] 313 ITR 340 (Bom.) wherein the Hon'ble Bombay High Court has held that if there are funds available, both interest free and overdraft/loans taken, then presumption would arise that investments would be out of the interest free fund generated or available with the company if the interest free funds were sufficient to meet the investments. Similar proposition of law has been laid down by the Hon'ble Gujarat High Court in the case of 'Suzlon Energy Ltd. vs. DCIT' [354 ITR 630 (Guj)]. However, on the other hand the contention of the ld. D.R. has been that such a presumption would arise only if on the date of investment, assessee had its own/interest free funds available with it. He has further contended that since the assessee has not provided any fund flow statement to prove that sufficient interest free funds were available with it on the date of investment, hence the presumption of investment made by the assessee out of its own funds would not be applicable in the case in hand. On the other hand the ld. A.R. has submitted that the asse....
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....n view of our above observation, we set aside the disallowance of Rs. 2 lakhs made by the ld. CIT(A) towards interest cost attributable to the investments made for earning exempt income and restore the issue to the file of the AO with a direction to find out as to whether sufficient own funds/interest free funds were available with the assessee on the date of investments made for earning exempt income and if found so not to make any disallowance for interest cost under this head. However if the AO will find from the fund flow statement that sufficient own funds were not available to the assessee on the dates of investments, then also he will duly consider the working, if any, given by the assessee and if the AO will not be satisfied with the working given by the assessee, he will have to record cogent and convincing reasons for the same and thereafter to calculate the disallowance on some reasonable basis. Needless to say that the A.O. will provide proper opportunity to the assessee to file the necessary documents including fund flow statement if any. 23. So far the disallowance made under this head towards administrative and managerial expenses attributable to investments made ....
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....se of Goetze (India) Ltd. and the Mumbai Bench of the ITAT in the case of RBK Share Broking (P) Ltd. in the light of the provisions of section 14A as well as section 115JB of the Act. 27. In Goetze (India) Ltd. the Delhi bench of the ITAT while holding that the provisions of section 14A cannot be imported to clause (f) of the explanation to section 115JA has observed as under: "4.6 We have considered the facts of the case and rival submissions. We may at the outset consider the provisions contained in clause (f) of the Explanation to section 115JA and sub-section (1) of section 14A of the Act. Under the aforesaid clause (f) the amount of expenditure relatable to any added to the book profit. Under the provisions contained in section 14A, no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Since we are dealing with the issue of expenditure relating to dividend income, a matter falling under Chapter III, it becomes clear on perusal of these two provisions that they are similar in nature. Clause (f) uses the words "expenditure relatable to any income", while sect....
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....for exempt income is not allowable as a deduction whereas under sub section (2) a method of computation of such expenditure has been provided and in sub section 3 to section 14A it has been mentioned that such method would be applicable even in cases where the assessee claims that no expenditure has been incurred by him in relation to exempt income. Under clause (f) of the explanation (1) of section 115JB it has been provided that the amount of expenditure relatable to exempt income is to be added back in the book profits while computing tax under section 115JB. The contention of the ld. A.R. that only the expenditure which finds mention in the profit and loss account is required to be added back and not the expenditure as assessed under section 14A does not have any force as no such provision is there under section 115JB. When we read the provisions of section 14A along with section 115JB, it becomes clear that the expenditure relatable to exempt income as provided under sub section (1) of section 14A is required to be added back while computing book profit under section 115JB. We do not find any confliction in the above said two provisions of the Act. The Mumbai bench of the Trib....
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....ect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act." The expression "in relation to" used for making disallowance u/s 14A has been employed in Explanation (1) to section 115JB(2) as expenditure "relatable to", in more or less the same form. It is manifest that the amount of dividend is exempt u/s 10(33) [not section 10(38)] of the Act. Thus any expenditure 'relatable to' the exempt dividend income would fall under clause (f). The ld. AR argued that unless an amount is specifically debited to the Profit and loss account in respect of an exempt income, the same cannot be brought within the purview of clause (f) of the Explanation 1 to section 115JB(2). He stated that since the disallowance u/s 14A is computed as per rule 8D, the origin of the expenses disallowed cannot be traced to the profit and loss account and hence it cannot be covered within the mischief of clause (f) of the Explanation. We fail to find any logic in this submission because of the clear language of the Explanation 1, which provides in unequivocal terms that the amount of expenditure `relatable to' the exempt income shall be add....
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.... appeal relating to assessment year 2006-07 as above. In view of our findings given above on the issue, this issue is accordingly decided in favour of the assessee. Ground No.7 Depreciation on Motor Vehicles 26. This ground has been taken by the assessee as an alternate to ground No.6 of the appeal. Since the ground No.6 has been decided in favour of the assessee, so ground No.7 becomes infructuous and does not need any finding at this stage. ITA No.5261/Mum/11 (Assessment Year 2007-08) This appeal has been preferred by the Revenue against the order with the CIT(A) relevant to assessment year 2007-08. The various issues raised in the above appeal are discussed as here under: Ground Nos.1 to 4 Remission of Loan Liability 27. We have already taken this issue in assessee's appeal for assessment year 2006-07 and in view of our findings given above on the issue, the same is accordingly decided in favour of the assessee. Ground Nos.5 & 6 Disallowance u/s 14A - Applicability of rule 8D: 28. We have already discussed this issue while dealing with the ground Nos.1 to 4 of the assessee's appeal for the same assessment year i.e. assessment year 2007-08....