2004 (3) TMI 326 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of depreciation claimed on leased assets.
2. Addition under Section 68 for share application money.
3. Disallowance of claim under Section 35D for public issue expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Claimed on Leased Assets:

The primary issue was whether the assessee could claim depreciation on assets leased to M/s Beta Napthol Ltd. The assessee, a public limited company engaged in leasing and hire-purchase, had purchased assets from M/s Beta Securities Ltd. and leased them to Beta Napthol Ltd. The Assessing Officer (AO) disallowed the depreciation claim of Rs. 49,16,250, arguing that the transaction was a finance transaction rather than a lease, and the assessee was not the owner of the assets.

The CIT(A) reversed this disallowance, holding that the transaction was a genuine lease and not a sham. The CIT(A) emphasized that the assessee was the legal owner of the assets and the decision to purchase and lease the assets was a business decision aimed at earning income through lease rentals.

The Tribunal upheld the CIT(A)'s decision, finding that the terms of the lease agreement supported the assessee's claim of ownership. Key clauses of the lease agreement, such as the absence of a security deposit, the lessee's covenant not to claim ownership, and the requirement for the lessee to insure the equipment in the name of the assessee, were consistent with a genuine lease transaction. The Tribunal also noted that the lease rentals were not unconscionably low or high, and there was no evidence of a paper arrangement or hawala transaction. The Tribunal referenced a similar case, Sharyans Resources Ltd. vs. Jt. CIT, where the transaction was also held to be a genuine lease.

2. Addition under Section 68 for Share Application Money:

The second issue concerned the addition of Rs. 5 lakhs under Section 68, which represented share application money received in the name of one Kunal Kapoor. The CIT(A) found that the AO had not made any enquiry into the matter and restored the issue to the AO for verification. The Tribunal upheld this decision, allowing the AO to verify the claim in depth and make a fresh decision in accordance with the law, ensuring the assessee was afforded adequate opportunity of being heard.

3. Disallowance of Claim under Section 35D for Public Issue Expenses:

The final issue was the disallowance of Rs. 63,179 claimed under Section 35D for public issue expenses. The CIT(A) held that the assessee's business had already commenced, and therefore, the expenditure should be amortized over a period of 10 years. The Tribunal found no error in the CIT(A)'s decision and confirmed the same.

Conclusion:

The Tribunal dismissed the Department's appeal, confirming the CIT(A)'s decisions on all three grounds. The assessee was entitled to claim depreciation on the leased assets, the addition under Section 68 was to be re-examined by the AO, and the claim under Section 35D was correctly allowed by the CIT(A).