TMI Blog2013 (7) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... ructuring of debt" the assessee has gained the commercial benefit, therefore the incurring of the expenditure in question can be said to be expended wholly and exclusively for the purpose of the business. The same is allowable u/s.37(1). The assessee has to establish the evidence in respect of the payment of the amount of ₹ 5 lacs claimed to have been made in full on 29/07/2002, therefore restore this ground back to the stage of the AO for the limited purpose of verification of the fact of date of full payment, so as to allow the same in that year as per law. Cost incurred on replacement of core engine of Captive Power Plant - revenue v/s capital - assessee was not the owner of the machinery in question but was used as a leased hold property - Held that:- As decided in CIT vs. Madras Auto Service (P) Ltd. [1998 (8) TMI 1 - SUPREME Court] a leased assets cannot be held as a property belonging to the assessee, therefore the expenditure incurred on that property is in the nature of Revenue Expenditure - not in agreement with the view taken by the AO & CIT(A) considering the nature of the business carried on by the assessee as demonstrated from the "flow diagram" and hereby ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -company. The assessee-company is engaged in the business of manufacturing of chemicals. Grounds raised are hereby decided as follows:- 2. Ground No.1 reads as under:- 1. The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance ₹ 4,00,000/- (Rs.5,00,000 - ₹ 100000) being expenses incurred on substitution of high interest bearing NCD's. It is submitted that in the facts and circumstances of the case the same is revenue in nature and required to be allowed as deduction. It is submitted that it be so held now. 2.1. It was noted by the AO that as per the computation of income the assessee had claimed a dededuction of ₹ 5 lacs towards incidental expenditure incurred on a substitution of high interest cost of NCDs. It was further noted that as per the P L account, the assessee had debited only ₹ 1 lac being the amount of expenditure; rest was amortized over a period of 5 years and treated as a deferred Revenue Expenditure. The objection of the AO was that the entire expenditure could not be allowed u/s.37(1) of IT Act. 2.2. The explanation of the assessee was that there was a programme of debt re-structuring by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs towards pre- payment of premium expenses of 13.75% NCDs of Centurion Bank Ltd. The assessee has made pre-payment of this NCDs and also filed a receipt dated 28-02-2002 and the relevant portion of the receipts as under:- With reference to your request, we are pleaded to advise that our Corp Office has approved the company's proposal to pre-pay the outstanding NCDs of ₹ 15 cr. Along with upto date interest by 15th Mar.2002. This is subject to the company paying to the Bank the agreed pre-payment charges of ₹ 7.50 lacs @ of 0.50% p.a. on the outstanding NCDs. The assessee has paid to the Centurion Bank Ltd. and claimed ₹ 7.50 lakhs in the relevant assessment year and claimed the deduction. It is not the case of the Revenue that this is not an allowable expenditure and moreover, the assessee has not deferred the payment rather it has made the entire payment in this year only and accordingly the same is allowable in this year only. Accordingly, we allow the claim of the assessee and this issue of the assessee's appeal is allowed. 4. From the side of the Revenue, ld. CIT-DR Mr.G.P.Gupta has pleaded that there is a distinction in the facts for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d now. 2.2. In case the findings of the learned Commissioner of Income Tax (Appeals) are upheld, it is submitted that the Assessing officer be directed to grant depreciation at a rate higher than the rate at which he has already allowed depreciation. It is submitted it be so held now. 6.1. There was replacement of core engine of lease hold Captive Power Plant (CPP). The replacement expenditure was amounted to ₹ 4,16,93,695/-. It was noted that the same was amortized in the books of accounts over a period of three years, however the full amount was claimed while filing the return of income. The assessee has claimed the replacement cost of Core Engine u/s.37(1) of IT Act, however the AO was of the view that the replacement cost was in the nature of capital expenditure. The assessee's reply was as under:- Core Engine is an important part of Captive Power Plant. This part is required to be replaced after every 24000 running hours. The same is sent back for the maintenance at the suppliers workshop. The replacement cost was incurred for the replacement of the core engine during the year. During the year 2002-2003, company has incurred expenditure of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Core Engine is only a part of a Gas Turbine and not an independent machinery. He has placed reliance on CIT vs. Renu Sagar Power Co.Ltd. [2008]169 Taxman 175 (All.) and CIT vs. Saravana Spinning Mills (P) Ltd. 293 ITR 201 (SC). He has pleaded that the Revenue Authorities have ignored one of the important fact that the Captive Power Plant was taken on lease by the assessee, hence the assessee is not an owner. In the case of a leased asset an expenditure is to be allowed as a Revenue Expenditure as held in the cases of CIT vs. Laxmi Talkies (2005) 275 ITR 125 (Guj.), CIT vs. Hari Vignesh Motors P.Ltd. (2006)282 ITR 338(Mad.) and CIT vs. Madras Auto Service (P) Ltd. 1998) 233 ITR 468 (SC). 7.1. From the side of the Revenue, ld.CIT-DR has placed reliance on the case of CIT vs. Sri Mangayarkarasai Mills (P) Ltd. (2009)315 ITR 114 (SC) for the legal proposition that in view of Explanation of section 31; current repairs are to be considered as capital expenditure. He has also argued that it was a replacement of machinery, therefore a capital expenditure was incurred by the assessee. 7.2. In rejoinder, ld.AR has drawn our attention on the flow-on diagram to demonstrate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... survive because the main ground has already been decided in favour of the assessee. 8. Ground No.3 reads as under:- 3. The Learned Commissioner of Income Tax (Appeals) erred in not allowing deduction u/s.80HHC while computing book profit in accordance with provisions of section 115JB of the Act. It is submitted that in the facts and circumstances of the case deduction should be allowed on the basis of book profit. It is submitted that it be so held now . 8.1. Before we deal with this ground, our attention has been drawn on the additional ground which is connected with ground No.3, for reference reproduced below:- Additional ground: In the facts and circumstances of the case while computing the Book Profit under section 115JB of the Act, the appellant would be entitled to deduction of the whole of the export profit computed as per section 80HHC of the Act on the basis of the Book Profit in view of the decision of the Supreme Court in the case of Ajanta Pharma. It is submitted it be so held now. 9. From the side of the Revenue, at the outset, ld.CIT-DR has vehemently objected the admission of the additional ground. However, considering the legal issue being ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTR 337 (SC) as also by the decision pronounced in assessee's own case for AY 2002-03, wherein a decision of Special Bench pronounced in the case of Synchom Formulation (I) Ltd.(supra) has been followed. Now we are left with the computation part as raised in the additional ground. Facts and figures are yet to be examined by the AO, however he is directed to compute the eligible profit vis- -vis deduction u/s.80HHC as prescribed in the case of Ajanta Pharma Ltd.327 ITR 305(SC). Therefore, the result of above discussion is that ground No.3 is allowed in favour of the assessee, however, additional ground is restored back to the file of the AO to be decided as per law after verification of the facts and figures, hence may be treated as allowed for statistical purposes only. 11. Ground No.4 reads as under:- 4. The learned Commissioner of Income Tax (appeals) erred in not adjudicating Ground no.6.1 6.2 raised before him relating to inclusion of excise duty and sales tax in the total turnover, reduction of jobwork charges and interest income from profit of the business. It is submitted that if the appellant is eligible for deduction under section 80HHC of the Act, then exci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sa Ltd. vs. CIT 268 ITR 130 (Orissa). The argument of the assessee was that it was not in leasing business. After detailed discussion, AO has arrived at the conclusion that the assessee is the owner of the asset and the lease- rent was nothing but a payment towards cost of the asset. The asset was purchased by the assessee which was only financed by GNFC Ltd. According to AO, only interest component was to be allowed. He has asked the assessee to compute the interest component. The final outcome as per the assessment order was as under:- The total gross lease rentals to be received over the entire lease period are ₹ 47,42,58,600/-. Thus, in the absence of any further details from the assessee's side, it is not possible to work out the interest component. Hence, the entire lease rent payment of ₹ 7,48,28,546/- claimed by the assessee is disallowed. Further, the depreciation of ₹ 1,29,88,373/- claimed in the hands of GNFC Ltd. on these assets and disallowed in the assessment order of GNFC Ltd. for A.Y. 2003-04 is allowed to the assessee. 12.3. When the matter was carried before the first appellate authority, ld.CIT(A) has taken a note of the decision t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt has been pronounced in the case of I.C.D.S. Ltd. vs. CIT 29 Taxmann.com 129 (SC), wherein the issue was in respect of depreciation u/s.32 in respect of leased out vehicles. Vide paragraph No.14, the Hon'ble Court has quoted the objection of the Revenue in the following manner:- 14. The Revenue attacked both legs of this portion of the section by contending: (i) that the assessee is not the owner of the vehicles in question and (ii) that the assessee did not use these trucks in the course of its business. It was argued that depreciation can be claimed by an assessee only in a case where the assessee is both, the owner and user of the asset. 13.1. An observation of the Hon'ble Court in respect of whether the assets in question must be used by the assessee itself, the answer given was as under:- We would like to dispose of the second contention before considering the first. Revenue argued that since the lessees were actually using the vehicles, they were the ones entitled to claim depreciation, and not the assessee. We are not persuaded to agree with the argument. The Section requires that the assessee must use the asset for the purposes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Apex Court in the case of Shaan Finance (P) Ltd. is that where the business of the assessee consists of hiring out machinery and/or where the income derived by the assessee from the hiring of such machinery is business income, the assessee must be considered as having used the machinery for the purpose of business. In the present case, it is worth to mention that GNFC Ltd. has shown the lease rent as income in its hand under the head business income . That assessment is required to be considered in the present case while deciding this technical issue. We have noted that in the case of the lessor, i.e. GNFC Ltd. the issue has been consistently decided that the assets being under the ownership of GNFC Ltd., hence entitled for claim of depreciation and that the lease rent received from the assessee is required to be assessed as business income . Under the totality of the facts and circumstances of the case, we therefore hold that the lease rent paid is in the normal course of business of the assessee on the leased assets, hence required to be allowed as deduction. Ground Nos.5 6 are decided in assessee's favour. 14. Ground No.7 reads as under: 7. The learned Com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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