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2013 (11) TMI 201 - AT - Income TaxNature of Lease - Whether the lease transaction was operating lease or financial lease – The transaction of the assessee was only a ‘financial lease’ and not that of ‘operation lease’ - following Asea Brown Boveri vs. IFCI [2004 (10) TMI 325 - SUPREME COURT OF INDIA] - The distinction between a “Finance lease” and an “operating lease” was set out in the Guidance Note on Accounting for Leases and Accounting Standard (AS) 19 - In a finance lease, the lessee selects the equipment & the lessor provides the funds, acquired the title to the equipment and allows the lessee to use it for its expected life - The lessee uses the asset for its entire economic life & all risks and rewards incidental to ownership are transferred to the lessee even though title may or may not be eventually transferred to the lessee. A finance lease is for a fixed period & non-cancellable. There is a fixed obligation on the lessee for payment of lease money & in case of premature termination, the lessor is entitled to recover his investment with expected interest. In substance, finance lease is a loan from the lessor to the lessee. In an operating lease, the lessor bears the risk of loss, the period is cancellable and lease rentals are not synchronized with the economic life of the asset. The assessee company claimed the lease rental by treating the said transaction as operating lease - However, in the assessment framed u/s 143(3), the AO disallowed the claim of impugned lease rental as he found the transaction was for the purpose of purchase of railway wagon by the assessee and assessee was the owner of the same by concluding the transaction as financial lease. Parial Disallowance of Interest – Held that:- Disallowance of proportionate interest cannot be made if the interest free advances have been made to the sister concerns for commercial expediency. Since in the instant case the assessee has conclusively proved that the amount has been paid to subsidiary companies for the purpose of business and no part of the amount of advance has been utilized by the Directors for their personal purpose and the entire amount has been utilized for the purpose of business, therefore, no proportionate disallowance of interest – Following the judgement of Taurian Iron and Steel Co. (P) Ltd. Versus Addl. CIT [2011 (12) TMI 410 - ITAT, Mumbai ] – Decided in favour of Assessee. Disallowance of Punitive Charges – Regarding 'punitive charges' as payments and not an offence or prohibited by law - According to the A.O., as per the provisions of Explanation to Sec. 37 any expenditure incurred by an assessee for any purpose which is an offence or prohibited by law shall not be deemed to have been incurred for the purposes of business and no deduction shall be allowed - It is the case of the Revenue that the same being a penalty paid to the Railways for violation of the rules and regulations, explanation to section 37(1) is attracted and therefore the same should be disallowed.
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