Case Law Details

Case Name : ICICI Ltd. Vs Addl. CIT (ITAT Mumbai)
Appeal Number : I.T.A. No. 4109/Mum/2001
Date of Judgement/Order : 09/09/2015
Related Assessment Year : 1996-97
Courts : All ITAT (1730) ITAT Mumbai (489)

Brief of the Case

ITAT Mumbai held In the case of ICICI Ltd. vs. ACIT that in assessee’s own case for the AY 1995-96, the ITAT referred the case of S.B.I. Home Finance Ltd. v. CIT (2006) 280 ITR 6 in which the Hon’ble Calcutta High Court has held that the leased transactions were genuine. In this case the Finance Company had entered into lease agreement, which was not accepted by the departmental authority as genuine transaction and the claim of the depreciation was denied. The Hon’ble High Court has held that even though the premises of the lease given to 3rd party have an option to purchase the property, the right to such option does not affect the ownership of lessor and the lessor was, accordingly, entitled to depreciation. Further Board Instruction No. 1978, dated 31-12-1999 and circular No. 2 of 2001 issued on 9-2-2001 by CBDT, it is clear that nowhere it is suggested that lease back transactions are doubtful transactions or depreciation is not allowable, however, it has been suggested to the departmental authority that they should be regulated. The regulated word does not mean that assessee is not entitled for depreciation. Hence, following ITAT earlier year decision, assessee is entitled for depreciation on such transactions.

Facts of the Case

The Assessee engaged in the business of project financing comprising of foreign currency loan, Rupee loan, leasing etc., filed its return of income on 30.11.1996, declaring total income of Rs.5.59 crores. During the assessment proceedings, a revised working was filed on 07.10.1998, declaring a loss of Rs.1,93,85,59,880/-.The AO completed the assessment u/s 143(3) on 19.03.99,determining the income of the assessee at Rs.1,93,68,46,050/-.

Additions of write backs of bad Debts

During the assessment proceedings, the AO found that the assessee had claimed deduction of write-back of bad debts of Rs.76,87,54,375/-.Before him it was stated that though the debts were written back in the books of account the recovery had not become final it was being contested in further legal proceedings, that out the of the said amount an amount of Rs.16.17 crores was never recovered the same was debited to P&L A/c by way of write back of debts. Referring to section 41(4), it was stated that amount of Rs.16, 17,97,000/-was not includible having not actually been received. However, the AO did not accept the claim made by the assessee and held that in the earlier year identical claim was rejected and it was held that same was to be treated as an item to be taxed by the AO and/or appellate authorities. The AO held that the claim made by the assessee that the amount of Rs.16.17 crores should be excluded was also not acceptable.

Disallowance u/s 14A

During the assessment proceedings the AO found that the assessee had claimed deduction u/s. 80M amounting to Rs.50,29,66,205/- on the gross dividend which meant that the assessee had not deducted any expenses attributable to earn the dividend income. Referring to the orders of the earlier years the AO held that 1% of the gross dividend had to be considered as a fair estimate of expenses for earning such dividend. Accordingly, a disallowance of Rs.50,29,662/- was made. In the appellate proceeding, the CIT (A) confirmed the order of the AO, following the orders for the earlier years.

Disallowance of depreciation on sale of leased back assets

During the assessment proceedings, the AO found that the assessee had leased out a boiler costing Rs.63 crores to the Rajasthan State Electricity Board (RSEB) during the last assessment year, it had claimed depreciation @ 100% on the boiler, that the assets were used after Sept. 1994, the depreciation had been claimed at Rs.31.50crores only, that the balance depreciation was claimed for the year under appeal. Referring to the order of the preceding AY the AO disallowed the depreciation of Rs.31,50, 00,000/- for the year under consideration also. An appeal filed by the assessee before CIT (A) in that regard was rejected.

Disallowance of depreciation on leased assets

During the assessment proceedings, the AO found that the assessee had given distribution transformers amounting to Rs.300 crores on 15th Sept to RSEB and had claimed depreciation @ 25%. It had purchased assets from third parties in certain cases and has leased them and in other cases assets had been purchased and leased back to same parties. It had claimed total depreciation Rs.4,62,62, 66,102/-,that the assessee had bifurcated the assets under two heads namely own assets and the leased assets, that the written down value of the leased assets was shown at Rs.395.42 crores. On 12.2.1999, the AO issued a show cause notice to the assessee to furnish details of assets leased out during the year under appeal and depreciation claimed thereon and also to explain as to why the depreciation should not be disallowed by treating the leased transactions as finance transactions. He also directed the assessee to furnish the details of capital component and rental component comprised in lease rentals credited to the P&L Account.

After considering the submission of the assessee,dt.5.3.99,the AO observed that the assessee had entered into 181 lease transactions of new equipments of the value of Rs.189.30 crores and 16 transaction of value of 340.74 crores for sale and lease back of used/old equipments respectively, that depreciation in respect of new equipment was claimed at Rs.146.29 crores, that rent in respect of the leased transactions amounted to Rs.16.33 crores, that depreciation on used/old assets was claimed at Rs.91.68 crores, that the rent for the used/old assets was credited at Rs.24.31 crores, that the total equipment/assets given on lease were of Rs.536.64 crores, that only 8% assets related to used/old equipments, that it had claimed depreciation to the extent of 39% with regard to such assets. referring to the judgment of the Bombay Tribunal delivered in the case of C.M.I.E (ITA 3820/B/90 dt.29.4. 96)held that transaction in respect of old and new assets were to be regarded as transactions of finance only, that the portion relatable to finance charges in lease rent was only chargeable /deductible in the hands of the lessor /lessee, that assessee was not entitled to depreciation on equipments leased out during the year including the depreciation on sale and leased back transaction, that the requisite condition of ownership of assets as envisaged in s.32(1 was not satisfied. Finally, the AO worked the disallowance at Rs.2,05,30,36,918/-.The disallowance included the depreciation on sale and lease back of asset to RSEB, depreciation in respect to assets leased to Rajendra Steel and Rajendra Pipe and depreciation claimed for assets leased to GEB.

Contention of the Assessee

Additions of write backs of bad Debts

The ld counsel of the assessee submitted that issue stands covered in favour of the assessee by the order of the Tribunal for the AY.1997-98.She referred to the judgment of United Provinces Electricity Supply Co. (110Taxmann134).

Disallowance u/s 14A

The ld counsel of the assessee submitted that similar issue had arisen and was decided in favour of the assessee by the Tribunal while adjudicating the appeal for AY.1995-96 (115 ITD 25).

Disallowance of depreciation on sale of leased back assets

The ld counsel of the assessee submitted that issue stands covered by the order of the Tribunal delivered in its own case for the AY.1995-96 (115 ITD 25).

Disallowance of depreciation on leased assets

The ld counsel of the assessee submitted that the issue is covered by the decision of the Tribunal delivered in assessee’s own case for AY 95-96 (115 ITD 25). She also referred to the case of ICICI Bank (40CCH 175), ICICI Ltd. ITA/1881 & Ors. (erstwhile SCICI Ltd.)/Mum/2000-A.Y.s.9394,95-96, 96-97, 97-98; dt. 25.7.2014, ICICI Bank Ltd. (ITA/3643-44/Mum/2001 A.Y96-97, 97-98 dt.2.5.2014, ICICI Bank Ltd. 2801/Mum/2004 A.Y.98-99 dated 5.12.2014, ICICI Bank Ltd. ITA 4499/M/2006 A.Y.2001-02 dated 31/10/14 and I.C.D.S Ltd.(350 ITR 527).

Contention of Revenue

Disallowance u/s 14A

The ld counsel of the revenue stated that the Hon’ble Court had followed the judgment of Emerald Co. Ltd. (284ITR 586), that the subsequent decisions with regard to section 14A were not available at that time, that later developments should be considered.

Held by CIT (A)

Additions of write backs of bad Debts

CIT (A) held that identical issue was rejected for the year 1994-95. By referring to the decision of Machine Tool Corporation of India Ltd. (201 ITR 101), he upheld the action of the AO.

Disallowance of depreciation on leased assets

During the appellate proceedings the assessee contended that the AO had failed to appreciate the factual as well as legal position, that the assessee had genuinely entered into lease transactions, that the assessee was entitled for the depreciation claimed by it on all the assets whether old or new. The CIT (A) referring to the order of his predecessor for AY.93-94, held that the transactions were in the nature of financial transactions. He also referred to the order of the FAA for the year 95-96 where the claim of assessee for depreciation was disallowed. Finally he dismissed the claim of the assessee.

Held by ITAT

Disallowance of depreciation u/s 37(4) for the transit accommodation

ITAT held that in the case of Britannia Industries Ltd.( 278 ITR 546) the Hon’ble Supreme Court has held as under : “While the expression “premises and buildings” in sections 30 and 32 of the Income-tax Act, 1961, and the expression “residential accommodation including any accommodation in the nature of guest house” in sub-sections (3), (4) and (5) of section 37 can be similarly interpreted, a distinction has been sought to be introduced for the purpose of section 37 by specifying the nature of the building to be a guest house. The intention of the Legislature is clear and unambiguous: the intention was to exclude from deduction the expenses towards rents, repairs and also maintenance of premises/accommodation used for the purpose of a guest house of the nature indicated in sub-section (4) of section 37. If the Legislature had intended that deduction would be allowable in respect of all types of buildings/accommodation used for the purpose of the business or profession, then the Legislature would not have felt the need to amend the provisions of section 37 so as to make a definite distinction with regard to buildings used as guest houses as defined in section 37(5) and the provisions of sections 31 and 32 would have been sufficient for that purpose.” Respectfully, following the above, we decide Ground A against the assessee.

Additions of write backs of bad Debts

ITAT held that while deciding the identical issue for the AY 1987-88, dated 16-5-2001, the tribunal held that at the time of hearing before us, the learned counsel for the assessee made an additional argument that since the amount is not actually received by the assessee, it cannot be charged as profit u/s. 41. In support of this contention, she relied upon the decision of Hon’ble Apex Court in the case of United Provinces Electric supply Co. 110Taxmann134.However, as this claim was not made before the Assessing Officer, he had not examine this aspect, i.e., whether the money is actually received by the assessee. As the matter has already been set aside by the CIT (A) back to the file of Assessing Officer, in our opinion the assessee should raise this plea before the AO. We accordingly, while upholding the setting aside of this matter back to the file of AO, direct him to examine the assessee’s claim in the light of the decision of Hon’ble Apex Court.

Respectfully following the above, we direct the AO to decide the issue following the above decision of the Hon’ble Supreme Court. Ground no. C is decided in favour of the assessee in part.

Disallowance u/s 14A

ITAT held that the Tribunal has dealt the issue while deciding the appeal for the AY.1995-96 115 ITD 25. It was held that in view of the decision of the Bombay High Court in the case of CIT v. Emerald Co. Ltd. (2006) 284 ITR 586, we are of the view that no disallowance on account of expenses can be made while computing deduction under section 80M. We have seen the order of the Tribunal also in the case of the assessee itself and found that the decision of the Bombay High Court was not cited, therefore, the same could not be taken into consideration. With utmost respect and in view of the decision of the Bombay High Court, we are taking this view that no disallowance can be made under section 80M. Respectfully following the above, ground D is decided in favour of the assessee.

Disallowance of depreciation on leased / sale of leased back assets

ITAT held that while deciding the appeal for the AY.1995-96 in assessee’s own case the Tribunal has deliberated upon and has decided the issue in following manner:

In case of CIT v. George Williamson (Assam) Ltd. (2004) 265 ITR 626, it has been held by the Hon’;ble Guwahati High Court that actual delivery does not mean physical possession of the assets. The symbolic delivery has taken place as per the agreement. It is a valid delivery/sale as per that the definition of the delivery of goods in section 33 of Sale of Goods Act, 1930. After observing these observations, the Hon’;ble High Court has held that the assessee’;s Board and lessor with various companies had entered into a genuine agreement. Accordingly, the claim of the assessee was allowed by the Hon’;ble High Court.

Further held that the ld. counsel has rightly placed reliance on Explanation 4A(2) section 43(1), Board circular No. 762 dated 18-2-1998 reported in 230 ITR 12, 31 ST that this Explanation was introduced in order to curb the higher claim of depreciation by the lessor. In order to curb such transaction, an amendment had been made to deal with a case where the assets had been sold and acquired by any assessee by way of hire, lease or otherwise. In such a case the actual cost for the purpose of deduction of depreciation allowance shall be taken to the written down value at the time of transaction of the assets in the hands of the seller but subsequently acquired the assets by the way of hire, lease or otherwise. The Explanation 4A section 43(1) supports the case of the assessee. The Legislature is well aware of such type of transaction and to curb the higher depreciation, this Explanation was introduced to section 43(1) with effect from 1-10-1996, therefore, it cannot be said in any way that the sale of lease back transactions are not genuine transactions.

Further held that the Hon’;ble Orissa High Court in case of Industrial Development Corpn. of Orissa Ltd. v. CIT (2004) 268 ITR 130 has allowed depreciation under section 32 on account of purchase and lease back of assets. While allowing the claim of depreciation under section 32, the Hon’;ble High Court has observed that there was no evidence which suggested that the transactions were not genuine. In that case also the lessor entered into a purchase-cum lease agreement with Orissa State Electricity Board for generation, distribution and supply of Electricity and there was no finding, evidence or material that the findings of the Tribunal was based only on conjecture, suspicion and surmises and was otherwise perverse. Accordingly the transaction of sale and lease back were held as genuine and depreciation was allowed.

Further the Hon’;ble Calcutta High Court in case of Competent Authority v. Smt. Bani Roy Chowdhury (1981) 131 ITR 578has held that : “where the transferor or transferee is the Government or a statutory body, there cannot be any scope for such collusion between the parties. The untrue statement about the agreed consideration is made only for the purpose of the evasion of tax. When the Government or statutory body is a party to the transfer, the question of evasion of tax does not arise. If the presumption under clause (b) of section 269C (2) is applied, it will mean that the untrue statement regarding the agreed consideration is made also at the instance of the Government or the statutory body which is absurd.”

Further held that In case of S.B.I. Home Finance Ltd. v. CIT (2006) 280 ITR 6 the Hon’ble Calcutta High Court has held that the transactions were genuine. In this case the Finance Company had entered into lease agreement, which was not accepted by the Departmental Authority as genuine transaction and the claim of the depreciation was negative. The Hon’ble High Court has held that even though the premises of the lease given to 3rd party an option to purchase the property the right to such option does not affect the ownership of lessor and the lessor was, accordingly, entitled to depreciation.

Further held that In a recent decision in case of Dy. CIT v. Global Tele System Ltd. [IT Appeal No. 1085 (Mum.) of 1998 vide order dated 30-11-2006] has allowed the claim of the assessee by dismissing the appeal of the Department. In that case also, the assessee claimed depreciation of Rs. 3.42 crores on Surface Banking Oven. These assets were sold by Tata Engineering and Locomotives Company to M/s. Classic Finance Services Enterprises for a consideration of Rs. 3.42 crore. M/s. Classic Finance Services made full payment of Rs. 3.42 crores to M/s. Telco and sold the same assets to M/s. Global Tele System under Hire & Purchase agreement dated 20-6-1993. M/s. Global Tele System gave assets on lease to Telco under an agreement dated 27-9-1993. The assessee claimed depreciation at the rate of 100 per cent, however, Assessing Officer denied the claim of depreciation by holding that all these transactions are colourable to reduce the tax burden. The CIT(A) allowed the claim of the assessee. On further appeal, the Tribunal discussing the issue at great length and after considering the decision of the Mid-East Portfolio Management Ltd.’;s case and the decision of the Chennai Bench in Investment Trust of India Ltd.’;s case whereby the decision of the Mid-East Portfolio Management Ltd.’;s case was considered and distinguished, allowed claim of the assessee. Other cases were also taken into consideration along with the decision of the Hon’ble Rajasthan High Court in case of Rajasthan Electricity Board and the decision of Sharyans Resources Ltd. v. Jt. CIT (2002) 83 ITD 340(Mum.) and in case of Dy. CIT v. Sony Capital Market Ltd. (sic) and also the decision of the Jodhpur Bench in case of Shree Rajasthan Syntex Ltd. v. Asstt. CIT (2005) 93 ITD 78then allowed the claim of the assessee.

Further held that in the case of ICICI Ltd. (erstwhile SCICI Ltd.), the Tribunal had while deciding the issue for the AY.1998-99 held that we find force in the submission of the Ld. Sr. Counsel that Hon’ble Supreme Court in the case of ICDS vs. CIT, 350 ITR 527, had the occasion to consider the question – “Whether the assessee is entitled to depreciation on vehicles financed by it which is neither owned by the assessee nor used by the assessee”. The Hon’ble Supreme Court after perusing the lease agreement and other related factors held that the lessor is the owner of the vehicles. As an owner, it used the assets in the course of its business satisfying both the requirements of Sec. 32 and hence is entitled to claim depreciation. Respectfully following the above decisions, ground Nos. G & H is decided in favour of the assessee.

Accordingly, appeal of the assessee partly allowed.

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Category : Income Tax (20862)
Type : Judiciary (8910)