TaxTMI 
TaxTMI 
2015 (11) TMI 17
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Rs. 23,80,000 made to Citicorp Information Technology Services Limited(CITIL) for the purchase of processing contracts was capital in nature having failed to appreciate that these contracts were acquired in the ordinary course of business and therefore the expenses incurred are revenue nature allowable under section 37 of the Act. (2) The CIT(A) erred on facts and in law in disallowing depreciation of Rs. 30,052,849/- on cars given on lease , treating them to be in the nature of Assessed By Shri P.J. Paradiwalla & Shri Niraj Sheth 'Revenue By Shri Shrikant Namdeo Date of hearing 12.08.2015 Date of pronouncement 30.09.2015 financial lease having failed to appreciate that the transactions undertaken by the appellants are in the nature of operating lease and thereby ought to have directed that AO to allow depreciation thereon. (3) The CIT(A) ought to have held that in the event depreciation on cars leased is allowable, the rate of depreciation should be 40% on the cars leased which were purchased after 1.10.1998 as they were covered by the definition of 'Commercial Vehicles' and are therefore eligible for depreciation at a higher rate. (4) The CIT(A) erred on facts and in law in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tract. The assessing officer held that the said amount was not mentioned in the agreement executed between the assessee company and CITIL. The assessing officer held that the amount of Rs. 40,80,000/- paid for the period of 12 months out of total payment of Rs. 85,00,000 paid for 25 months is to be held as capital expenditure being the acquisition of processing division of the CITIL and disallowed as revenue expenditure as claimed by the assessee company. 5. Aggrieved by the orders of the assessing officer, the assessee company filed the first appeal with the CIT(A) and contended that since 1992, the assessee company is operating as Non Banking Financial Company (NBFC) . The assessee company submitted that due to downturn in NBFC business during the year ended 30.06.1998 and the defaults faced by the company in leasing business, the assessee company decided to reduce its dependence on volatile sources of revenue and complement the existing revenue streams with greater proportion of revenues of a stable and annuity nature, which was approved by the share holders and Directors of the company and accordingly memorandum of association of the company was duly amended to incorporate the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hereby the CITIL has assigned the service agreements between CITI Bank and CITIL in the form of cash management, product agreement, custodial service agreement, trade finance agreement vide assignment of agreement effective from 01.08.1998 which was produced before us also. The assessee company also produced before us copy of Director's report of the assessee company for the year ending 30.06.1999, whereby it is mentioned in the Director's Report dated 25th September 1999 addressed to the Shareholders of the company that the assessee company during the financial year ended 30th June 1999 commenced the business of providing transaction processing services in the field of banking and finance to Citigroup entities. The assessee company's AR made statement before us that the assessee company has received the revenue of Rs. 9,06,10,908/- towards transaction processing and administrative fees arising form the afore-stated assignment agreement effective from 01-08-1998 whereby transaction services contracts are assigned in favour of the assessee company. The assessee company has also showed us that this payment of Rs. 85 lac has been treated as deferred revenue expenditure in the Books of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assignment of agreements in favour of the assessee company whereby the unexpired period revenue generated contracts are assigned in favour of the assessee company. The entire consideration of Rs. 85 lac is paid to acquire the unexpired portion of the service agreements which will generate revenue for the assessee company during the unexpired period of this service agreement ie 25 months from 01.08.1998. Keeping in view the principle of matching concepts of revenue and expenditure and also that these assignment of agreements are towards revenue field, we hold that assessee company has rightly charged as revenue expenses , 7 months expenses out of 25 months unexpired period of contract being Rs. 23,80,000/- and hence additions made by the assessing officer to the tune of Rs. 23,80,000/- to the income of the assessee company and as confirmed by the CIT(A) is hereby deleted. We order accordingly. 10. The second ground of appeal relates to the depreciation of Rs. 30,052,849/- on car leased by the assessee company being charged to revenue account which was disallowed by the assessing officer treating it to be in the nature of financing and not leasing transactions.. 11.The assessee com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ears which is allowed by the Revenue and it is the first time in the assessment year 1999-00, the depreciation on vehicle is disallowed by the Revenue on the allegation that the transaction is a financing arrangement to avail the benefit of depreciation on assets given on lease and also to enable the associated concerns to take benefit by way of claim for lease rent paid as well as depreciation on such assets. The assessee company submitted that they are the owners of assets which have been leased to its associate concerns as per lease agreements entered, the copies of master lease agreements and also name and addresses of the lessee's were submitted before the CIT(A). The assessee placed reliance on the following decisions:- 1. CIT v. Shaan Finance (P) Ltd. (SC) (231 ITR 308) 2. CIT v. Maharashtra Apex Corporation Ltd. (SC) (254 ITR 98) 3. CIT v. Madan & Co. (Mad. HC) (254 ITR 445) 4. CIT v. Annamalai Finance Ltd. (Mad. HC) ( 275 ITR 451) 5. CIT v. Mirza Ataullah Baig and Another (Bom HC) (202 ITR 291) 6. CIT v. Cosmo Films Limited (Del.HC) (ITA 1404/2008). 13.The CIT(A) relied upon the decision of Mumbai Tribunal - Special Bench in the case of Indus Ind Bank Ltd. dated 14t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rities below. 17.We have considered the rival submissions and carefully perused the relevant material on record. We have observed that to claim depreciation, the asset should be owned by the assessee and it should be used for the purpose of business of the assessee. In this case, the assessee company is owning the asset i.e. cars till the same are sold to the associated concern/employees. The assessee company by giving these cars on lease is in fact using the same for its own business. The Judgment of Hon'ble Supreme Court in the case of ICDS Ltd (Supra) is directly applicable in the facts and circumstances of the present case and the assessee company has rightly claimed the depreciation on the cars leased by the assessee company. The assessee company has also stated that it has brought on record before the CIT(A), the evidence that no depreciation is claimed by the lessee on these leased cars and the CIT(A) has given finding of the fact that there was no basis for the assessing officer to conclude that the lessee's have claimed depreciation on these leased assets i.e. cars. Hence in view of the above, we hold that assessee company has rightly claimed the depreciation on the lease....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e company is not entitled to depreciation. 21.Aggrieved by the decision of the CIT(A), the assessee company is in appeal before us. 22.Before us, the assessee company reiterated the submissions as made before the lower authorities. The assessee company relied upon the decision of jurisdictional Hon'ble High Court of Bombay in ITA no 828 of 2010 in CIT v. Birla Global Asset Finance Co. Limited and submitted that the instant case is squarely covered by the said decision. The assessee company contended that depreciation at the rate of 40% is in accordance with the entry III (2) (iia) of part A of Appendix I applicable to the assessment years 1998-99 to 2002-03. The assessee company contended that the commercial vehicles have been defined in Note No. 3A of the Appendix I to Rule 5 below the table of rates at which depreciation is admissible which includes 'light motor vehicles'. The assessee company submitted that the assessee company is engaged in the business of giving cars on lease in the ordinary course of the assessee company's business to the employees/ associated concern which are used for office purposes by the employees/ associated concerns . The assessee company contended t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company is carrying out leasing activity for the last several years and only for the first time in the assessment year 1999-2000, depreciation on computers was disallowed on the alleged ground that the transaction is a financing arrangement to avail the benefit of depreciation on assets given on lease. The assessee company placed on records evidence regarding the fact that the Revenue has allowed depreciation on assets given on lease upto assessment year 1998-99. The assessee company further submitted that they were entitled to depreciation on the leased assets. The assessee company placed reliance on the following decisions:- 1. CIT Vs. Shaan Finance (P) Ltd. (SC) (231 ITR 308) 2. CIT Vs. Maharashtra Apex Corporation Ltd. (SC) (254 ITR 98) 3. CIT Vs. Madan & Co. (Mad. HC) (254 ITR 445) 4. CIT Vs. Annamalai Finance Ltd. (Mad. HC) ( 275 ITR 451) 5. CIT Vs. Mirza Ataullah Baig and Another (Bom HC) (202 ITR 291) 6. CIT Vs. M/s Cosmo Films Limited (Del. HC) (ITA 1404/2008). Without prejudice , the assesee company further submitted that the assessing officer ought to have disallowed the amount of depreciation claimed at Rs. 986,474/- as against Rs. 3,288,246/- being the adjusted ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... used for less than 180 days) of Rs. 9,86,474 on the computers purchased of Rs. 32,88,246/- during the assessment year and given on lease and the disallowance of Depreciation on the leased computers as disallowed by the assessing officer and as confirmed by the CIT(A) is hereby deleted. We order accordingly. 32. Ground no. 5 disallowance of depreciation of Rs. 64,708/- claimed on cars held for own use which were purchased after 1.10.1998. 33.The assessee company has claimed 40% depreciation on the car owned by the assessee company which were purchased after 1.10.1998 but before 1st day of April 1999 and put to use for its own office purpose before 1st day of April 1999. The assessee company submitted before the assessing officer that depreciation @40% is to be allowed on commercial vehicles purchased after 1.10.1998 but before 1st day of April 1999 and put to use for its own office purpose before 1st day of April 1999 and there is no stipulation that these commercial vehicles are to be used in the business of running them on hire to fall under the head 'Commercial Vehicles' and even if the car is used for own purpose , it is commercial vehicle entitled for higher rate of deprecia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....under the definition of commercial vehicle which include light motor vehicle as per definition contained in Motor Vehicles Act,1988 and there is no such stipulation that the cars are to be used for purpose of giving them on hire. The assessee company is using the car for its own office purpose which is for the purpose of its business and hence the assessee company is entitled for higher depreciation @ 40% and the disallowance of excess depreciation of Rs. 64,708/- claimed by the assessee which was disallowed by the assessing officer and as upheld by the CIT(A) is hereby deleted. We order accordingly. 39. Ground no. 6 is regarding ad-hoc disallowance of expenses incurred of Rs. 4,40,000 on computer repairs and maintenance expenses. 40. The assessee company incurred expenditure of Rs. 3,198,207/- on repair and maintenance of the computers. The assessing officer noted that the assessee company has purchased computer for office after 1.10.1998 amounting to Rs. 5,29,709/- and before 1.10.1998 of Rs. 51,502, therefore the total cost of computer used in the office premises comes to Rs. 5,81,211/-while computers given on lease which is purchased after 1.10.1998 amounting to Rs. 32,88,246....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the disallowance to Rs. 4,40,000/- after holding that LAN administrative charges of Rs. 9,68,002/-ought to be allowed as a deduction being in the nature of networking maintenance charges which is not computer maintenance charges and of the balance Rs. 22,00,000/- , the CIT(A) held that it will be fair to restrict the disallowance to 20% of the repair and maintenance charges . 42.Aggrieved by the order of the CIT(A), the assessee company is in appeal before us. 43.Before us, the assessee company submitted that ad-hoc disallowance has been made out of total computer equipment repairs and maintenance charges of Rs. 31,98,307/- , whereby Rs. 9,68,002/- has been allowed being LAN administrative charges out of of Rs. 31,98,307/-, as it is in the nature of networking maintenance charges while out of balance of Rs. 22 lacs, 20% is disallowed by the CIT(A) aggregating to Rs. 4,40,000.00 . The assessee company submitted that these are ad- hoc disallowances while not defect has been pointed out in the Books of Account. The assessee company submitted that the expenses incurred are mainly LAN administration charges paid to CMS (Rs.9,68,002/- ) , Microbanker AMC(Rs.1,68,750/- ) Microland AMC....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l submission and perused the relevant material on record. We have observed that the assessee company has duly incurred these expenses of Rs. 31,98,307/- and no defect has been pointed out by the assessing Officer or by the CIT(A) in the books of account maintained by the assessee company nor the books of accounts are rejected by the Assessing Officer or by the CIT(A). We note that during the assessment year, the assessee company transitioned from being a NBFC to a processing company. A major component of the income of the assessee company is from transaction processing business. The assessee company has duly demonstrated that these expenses are to be incurred for the purposes of business of the assessee company . The assessee company has demonstrated that the expenses incurred are mainly LAN administration charges paid to CMS (Rs.9,68,002/- ) , Microbanker AMC(Rs.1,68,750/-) Microland AMC (Rs.11,01,267/-) and Toner cartridge purchases-computer consumabes (Rs.4,82,895/- ) which aggregates to Rs. 27,20,914/- out of total expenses of Rs. 31,98,307/- and hence constitute majority of expenses while as well for the rest of the expenses the details are submitted by the assessee company wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....allowed. He stated that the assessee has not duly replied to the query raised by the assessing officer during original assessment u/s 143(3) of the Act whereby the assessee company has not furnished all necessary facts with respect to the details of utility of loans raised by the assessee company as also the sources of investment in fixed assets and hence the assessing officer has rightly issued the notice dated 24th March 2008 u/s 148 of the Act for re-assessment as the income has escaped assessment. 50. The assessee company submitted that original assessment order u/s 143(3) read with section 143(2) of the Act was completed on 30.03.2005 and notice u/s 148 of the Act was issued on 24.03.2008, which is beyond the period of four years from the end of the assessment year i.e. 31st March 2003. The assessee company drew our attention to the reason recorded by the assessing officer for initiating proceedings u/s 147 of the Act which are primarily concerned with fixed assets pending installation as existing in the books of accounts of the assessee company of Rs. 1,12,55,903/- and the corresponding secured loan of Rs. 1,31,26,833/- existing in the books of accounts and the allegation by....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct to the interest paid on secured loans raised by the assessee company which was duly replied by the assessee company during course of original assessment proceedings u/s 143(3) read with Section 143(2) and hence notice u/s 148 dated 24th March 2008 of the Act for re-assessment is merely change of opinion and is bad in law and was rightly quashed by the CIT(A). 51. We have heard the rival contentions and perused the material on record. We have observed that during the original assessment proceedings u/s 143(3) read with section 143(2) of the Act, the assessing officer has raised specific query regarding the interest paid by the assessing company of Rs. 15,83,080/- on the secured loan raised of Rs. 1,31,26,833/- which the assessee company duly replied to the assessing officer vide letter No. Corp/e-Serve/KSV/275 filed with Revenue on 13th February 2005 that these secured loans are the cash credits, demand loan and packing credits which are used for meeting working capital requirement of the company during the course of the year and hence there is no correlation between the secured loan of Rs. 1,31,26,833/- raised by the company and fixed assets pending capitalization of Rs. 1,12,5....