Mere transfer of unexpired contracts cannot be treated as Capital Expenditure

Brief Facts and Question of Law:

Brief Facts of the Assessee:

There are 2 matters involved in the appeal filed which are explained as below:

• 1^st Matter – The assessee company is operating as Non-Banking Financial Company (NBFC). 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. The assessee company paid Rs. 85,00,000/- to Citi Corp Information Technology Industries Ltd (hereinafter called “CITIL”) for purchase of their processing division. This amount was amortized over the period of 25 months being balance unexpired period of contracts. The processing service division has entered into several contracts with its clients who require CITIL to provide services pertaining to cash management, custodial services and trade finance. The Assessing Officer (hereinafter called “AO”) treated the same 85 Lakhs to be in nature of capital expenditure which was further amended u/s 154 of the Act, whereby the disallowance was reduced to 23,80,000/- as out of the unexpired period of the contract of 25 months , only 7 months fell within the previous year 31st March 1999 i.e. assessment year under appeal.

• 2^nd Matter-The assessee company is also into the business of leasing of assets like cars and computers and lease rentals derived out of such assets were treated as income by the assessee also claimed depreciation on such assets. The assests were leased by the assessee to its associated concerns and were also used for own purpose. The AO held that the lease rental is nothing but principle component plus interest component which is spread over for particular months to recover the loan amount along with the interest. Hence depreciation on such leased assets was disallowed.

Held by CIT (A):