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2016 (3) TMI 870 - ITAT KOLKATA

2016 (3) TMI 870 - ITAT KOLKATA - TMI - Revision u/s 263 - disallowance of proportionate depreciation on Aircraft - Held that:- The order passed by the Learned AO in allowing the depreciation on aircrafts could not be treated as erroneous much less prejudicial to the interests of revenue. In this regard, we place reliance on the decision of the Hon’ble Apex Court in the case of CIT vs Max India Ltd reported in (2007 (11) TMI 12 - Supreme Court of India) wherein held the phrase ‘prejudicial to th .....

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reated as an erroneous order prejudicial to the interest of the Revenue , unless the view taken by the AO is unsustainable in law. - Decided in favour of assessee

Disallowance of lease rentals on principal repayment of vehicle loan - Held that:- merely because the lease arrangement has been considered as finance lease for the purpose of AS 19 , that itself does not render the lessee (assessee herein) as the owner of asset for IT Act for claiming depreciation. We find that AS 19 provid .....

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ng on the revenue. As per this Circular No. 2/2001 dated 9.2.2001, in a lease transaction, the owner of the assets is entitled to depreciation. In the instant case, the lessor (Orix Auto) being the owner had the right to claim depreciation and the assessee has not claimed any depreciation as per the provisions of the IT Act and instead had claimed the entire lease rental as revenue expenditure.. Thus safely concluded that the order has been passed by the Learned AO by taking one of the possible .....

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f assessee - ITA No. 529/Kol/2013 - Dated:- 19-2-2016 - Shri N.V. Vasudevan, Judicial Member, and Shri M. Balaganesh, Accountant Member For The Appellant : Shri R.N Bajoria, Sr. Advocate and Shri A.K. Gupta, FCA, ld.ARs For The Respondent : G. Mallikarjun, CIT, ld.DR ORDER SHRI M.BALAGANESH, AM : This appeal of the assessee arises out of the order of the Learned CIT, Kolkata u/s 263 of the Act vide proceedings No. CIT-III/DC(HQ)-3/KOL/263/2012-13/6667 dated 30.1.2013 treating the order passed .....

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f the Act exists and/or have been satisfied. 2. For that the order passed by the Assessing Officer was not in any way erroneous or prejudicial to the interest of revenue and as such the Commissioner of Income Tax could not exercise any power under section 263 of the Act. The Commissioner of Income Tax erred in holding that the order of assessment is erroneous and prejudicial to the interest of revenue. 3. For that the order of assessment having been merged in the order of the Commissioner of Inc .....

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respect of liability of lease rental paid for taking the cars on hire and as the order of the A.O. was perfectly in accordance with law, the same could not be revised under section 263 of the Act. 5. For that further and in any event and without prejudice to the above, the CIT erred in revising the assessment order allowing the aggregate lease rental charges, simply because an alternate view is possible. 6. For that further and in any event and without prejudice to the above the order passed is .....

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on for non-business use of the air-crafts was to be disallowed proportionately. 8. For that further and in any event, the provisions of section 38(2) of the Act were not applicable in the facts of the instant case as disallowance for non-business use was on estimate and was not based on any definite material or finding of non-business use. The air- crafts were used only for the purpose of business and the provision under section 38(2) of the Act was not attracted and could not be invoked for mak .....

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id cars for the purpose of its business and as such the lease rental paid by the appellant was fully allowable as revenue expenditure. 10. That the appellant craves leave to add, amend, modify, rescind, supplement or alter any of the grounds stated above, either before or at the time of hearing of this appeal. 3. The first issue to be decided in this appeal is as to whether the Learned CIT is justified in invoking the provisions of section 38 of the Act for disallowance of proportionate deprecia .....

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ness purposes. The assessee preferred an appeal before the Learned CITA who disposed off the appeal vide his order dated 22.3.2012 giving partial relief to the assessee. On first appeal, the Learned CITA restricted the disallowance of aircraft maintenance expenses to 10%. The assessee as well as the revenue had preferred appeals before this tribunal against the order of the Learned CITA which is pending adjudication. Later the Learned CIT invoked jurisdiction u/s 263 of the Act in order to disal .....

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ved, the assessee is in appeal before us. 3.2. The Learned AR argued that during the relevant previous year, the assessee maintained two aircrafts bearing Registration No. VT EJZ (King Air C 90A) and VT - OBR (Hawker 850 XP). The aircraft bearing Registration No. VT-OBR (Hawker 850XP) was acquired during the financial year 2007-08 relevant to assessment year under consideration. The cost of acquisition of new aircraft Hawker 850XP was ₹ 55,87,73,380/-. The assessee had sold one aircraft be .....

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assessee company for the purposes of travelling undertaken by its very senior directors / employees for business purposes for attending important business meetings. Accordingly he argued that the aircrafts were utilized wholly for the business purposes and hence any expenses incurred in connection with the same are allowable as business expenditure. He argued that the assessee had provided the detailed break up of expenses , passenger manifest/ log book / details of flights with name of flights .....

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se of aircrafts. He further argued that examination of the passenger manifest would also reveal that in most of the cases there had been chartered flights giving rise to revenue. He further placed reliance on the decision of the co-ordinate bench of this tribunal in assessee s own case in Asst Year 2002-03 in ITA No. 316 / Kol /2006 dated 11.9.2015, wherein it was held that there cannot be any personal element of expenditure that could be incurred by a company as assessee company being a non-nat .....

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n correspondingly no disallowance of depreciation on aircrafts could be made and hence the order passed by the Learned AO in granting full depreciation on aircrafts does not suffer from any infirmity. In addition to this, he also argued that this issue has been adjudicated by the Learned AO and Learned CITA in assessment and first appellate proceedings respectively and hence cannot be the subject matter of revision u/s 263 of the Act. 3.3. In response to this, the Learned DR vehemently supported .....

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section 38(2) of the Act are very clear to disallow proportionate depreciation and hence there is no question of having two views on the impugned issue. He also placed reliance on the following decisions in support of his contentions:- Decision of Pune ITAT in the case of Avinash Nivrutti Bhosale vs Adll CIT in ITA No. 1425/PN/2008 dated 22.8.2008 Decision of Calcutta High Court in the case of Sri Satyasai Properties & Investment Pvt Ltd vs CIT in ITA No. 257 of 2003 dated 10.2.2014 (c ) Dec .....

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ness expenses had been considered in detail. The Learned AO after detailed consideration of the issue as a whole had inflicted an adhoc disallowance of 60% in respect of maintenance expenses of aircraft, although allowed full depreciation claimed on aircraft. Being aggrieved, the assessee filed an appeal before the Learned CITA who in turn after adjudicating the subject matter in detail had restricted the disallowance of aircraft maintenance to 10%. We find that the assessee owns aircraft, has c .....

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ITA can do what Learned AO could not do. It can be argued that when the issue in question has been duly considered in assessment order and further adjudicated in appeal by Learned CITA, any further addition in connection with the same matter cannot be made u/s 263 proceedings since as per doctrine of merger provided in Explanation (c ) to section 263(1) of the act , the order of the Learned CITA merges with the assessment order in respect of the said matter. But the crucial point to be addressed .....

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still we hold that the provisions of Explanation 1 (c ) to section 263(1) of the Act are very clear on this aspect. It would be relevant to reproduce the same herein for the sake of convenience :- Explanation 1 (c ) to section 263(1) 263 (1) - Explanation 1 - For the removal of doubts, it is hereby declared that , for the purposes of this sub-section,- (a) ………… (b) …………. (c ) where any order referred to in this sub-section and passed by th .....

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y Learned CITA in appellate proceedings. As stated supra that though the issue of allowability of depreciation on aircrafts flows from maintenance of aircrafts for business / non-business purposes according to Learned CIT, this aspect of the issue from the angle of depreciation on aircrafts was never considered and decided by the Learned CITA in the appeal. This could be explained by way of an example :- Suppose the allowability of payment of professional fees as deduction is under dispute befor .....

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s of section 194J read with section 40(a)(ia) of the Act) was never considered and decided by the Learned CITA in original appellate proceedings. Now coming to the facts of the instant case before us, the aspect of depreciation on aircrafts was never examined / decided by the Learned CITA. Hence the arguments of the Learned AR on the point of Doctrine of Merger is not appreciated and hence is accordingly dismissed. 3.4.1. We find that the assessee owns the aircrafts and were used for providing s .....

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ons and no personal expenses have been charged to revenue. The chartering revenue offered by the assessee has been accepted by the revenue and hence it can safely be concluded that the aircrafts are used for the purpose of its business. In this regard, it would be relevant to refer to the tribunal order in assessee s own case in Asst Year 2002-03 in ITA No. 316/Kol/2006 dated 11.9.2015, wherein, a similar issue was discussed at length. In the said decision, we had held that that assessee company .....

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xpenditure on that count on an estimated basis. We also draw support from the decision of the Hon ble Gujarat High Court in the case of Sayaji Iron and Engineering Co vs CIT reported in 253 ITR 749 (Guj) in this regard. Based on these findings and judicial precedent relied upon, it was held that no disallowance of expenditure on maintenance of aircrafts need to be made on an estimated basis towards expenditure incurred for non-business purposes. Hence the issue of maintenance of aircrafts being .....

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(2) of the Act and hence are considered to be irrelevant. Hence on this count itself, it could be safely held that the order passed by the Learned AO in allowing the depreciation on aircrafts could not be treated as erroneous much less prejudicial to the interests of revenue. In this regard, we place reliance on the decision of the Hon ble Apex Court in the case of CIT vs Max India Ltd reported in (2007) 295 ITR 282 (SC) wherein their Lordships relying on the earlier decision rendered in Malabar .....

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wo views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue , unless the view taken by the AO is unsustainable in law. In view of the aforesaid findings and judicial precedent relied upon, we hold that no revision proceedings u/s 263 of the Act would lie on the issue of disallowance of depreciation. Hence the grounds raised by the assessee on this issue are allowed. 4. The next issue .....

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and finance charges of ₹ 90.88 lakhs to the lessor. The assessee chose to treat the lease transactions differently in its books of accounts and that for the purpose of income tax returns as below:- Treatment in books of accounts The leased asset was capitalized in the books of accounts of the assesee at lower of fair value and present value of minimum lease rental) and depreciation claimed in the books on the premise that the assessee is the owner of the leased assets in line with the Acc .....

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to profit and loss account in its statement of total income and claimed the entire lease rentals paid (including principal repayment) as deduction in its return of income. 4.1.1. The assessee claimed that this treatment has been consistently followed by it from the earlier years and the same has been accepted by the revenue in scrutiny assessment proceedings without any dispute. The entire details regarding this issue was elaborately examined by the Learned AO during the course of assessment pr .....

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rincipal repayment of lease rent as revenue expenditure as the assessee is defacto owner of the vehicles and all the risk and rewards rest with the assessee and for all practical purposes, the assessee is the owner of the vehicles as per terms of contract. Aggrieved, the assessee is in appeal before us on various grounds on this issue. 4.2. The Learned AR argued the relevant clauses in the lease deed wherein he said that the lessee (assessee herein) does not have the option to buy back the asset .....

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ntually become the property of the hirer or confer on the hirer an option to purchase the equipments. 4.2.1. He further argued that the treatment given for a particular transaction in the books of accounts need not be the determinative factor for reckoning the taxable income under the provisions of the Act. In support of this proposition, he relied on the following decisions :- Kedarnate Jute Manufacturing Co Ltd vs CIT reported in (1971) 82 ITR 363 (SC) Sutlej Cotton Mills Ltd vs CIT reported i .....

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the taxability of the leased asset is required to be done as per the existing provisions of the IT Act read with the Circulars laid down in this regard more so when the CBDT has itself clarified vide Circular No.2 /2001 dated 9.2.2001 that the AS-19 will have no implication on the allowance of depreciation on assets under the provisions of IT Act. He stated that Circular No. 2/2001 dated 9.2.2001 stipulates that in a lease transaction, the owner of the assets is entitled to depreciation. In the .....

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the Hon ble Apex Court in the case of M/s I.C.D.S. Ltd vs CIT reported in (2013) 350 ITR 527 (SC). 4.2.5. He further argued that this issue has been the subject matter of dispute in assessee s own case for the Asst Year 2011-12 which was resolved by the Honourable Dispute Resolution Panel ( DRP in short) vide proceedings dated 12.10.2015. The issue before the Hon ble DRP (comprising of three members in the rank of commissioners of income tax) is reproduced herein below for the sake of convenien .....

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rected to delete the addition. 4.2.6 Without prejudice to the above arguments, the Learned AR submitted that whether the assessee is allowed depreciation or lease rental , in both the cases, the quantum of claim under the IT Act remains the same. He explained that under the lease transaction, the lessee is not considered as the owner, it is eligible for claim of lease rental which constitute cost of asset as well as finance charges. Where, however, under the lease arrangement, the lessee is cons .....

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the Learned AO being not anyway prejudicial to the interest of revenue, initiation of section 263 proceedings is not warranted. 4.3. In response to the same, the Learned DR argued that the reliance placed by the Learned AR on the proceedings of Hon ble DRP for Asst Year 2011-12 which is not relevant for the assessment year under consideration. He placed reliance on the order of the Learned CIT u/s 263 . He argued that principle of res judicata is not applicable to income tax proceedings. He reli .....

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the assessee had followed two different treatments in its books of accounts and for income tax purposes in respect of the lease transaction. We agree with the Learned AR that this differential treatment of lease transactions in the books vis- a- vis income tax returns, have been accepted by the revenue in the case of the assessee in the earlier years and accordingly the decisions relied upon by the Learned AR in this regard are well placed. The argument placed by the Learned DR that principle of .....

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forming part of the paper book vide pages 87 to 98 , we find that the ownership / title on the vehicles always lies with M/s Orix Auto Infrastructure Services Limited (lessor) during the subsistence of the lease vide clause 8 of the lease deed. We find that during the subsistence of this lease arrangement and till the vehicles are delivered back to the lessor, the lessee shall insure the vehicles with the lessor s name as the owner vide clause 11 of the lease deed. Clause 15 of the Lease deed cl .....

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No. 9 [R.Dis.No. 27(4)-IT/43] dated 23.3.1943, since the terms of the agreement does not provide that the equipments shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipments. We hold that merely because the lease arrangement has been considered as finance lease for the purpose of AS 19 , that itself does not render the lessee (assessee herein) as the owner of asset for IT Act for claiming depreciation. We find that AS 19 provides for various s .....

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e. As per this Circular No. 2/2001 dated 9.2.2001, in a lease transaction, the owner of the assets is entitled to depreciation. In the instant case, the lessor (Orix Auto) being the owner had the right to claim depreciation and the assessee has not claimed any depreciation as per the provisions of the IT Act and instead had claimed the entire lease rental as revenue expenditure. We find that the issue is squarely covered by the decision of the Hon ble Supreme Court in the case of I.C.D.S. Ltd vs .....

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be used in the course of business. The assessee did use the vehicles in the course of its leasing business. The fact that the trucks themselves were not used by the assessee was irrelevant for the purpose of section. (ii) That a scrutiny of the material facts at hand raised a presumption of ownership in favour of the assessee. The vehicle, along with its keys, was delivered to the assessee upon which, the lease agreement was entered into by the assessee with the customer. The fact that at the e .....

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sed as business income in its hands and the entire lease rent paid by the lessee been treated as deductible revenue expenditure in the hands of the lessee. This reaffirmed the position that the assessee was in fact the owner of the vehicle, in so far as section 32 of the Act is concerned. (iv) That, therefore, the assessee was the owner of the vehicles. As the owner, it used the assets in the course of its business, satisfying both requirements of section 32 of the Act and, hence, was entitled t .....

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Though this decision has been rendered on the allowability of depreciation on leased assets from the angle of the lessor, the principle laid down could be made very much applicable to the facts of the instant case for allowability of lease rentals in the hands of the assessee (lessee). We also find that the issue is squarely covered by the decision of the Hon ble Rajasthan High Court (Jaipur Bench) in the case of Rajshree Roadways vs Union of India & Ors reported in (2003) 263 ITR 206 (Raj) .....

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t further that irrecoverable undertaking of the lessee that at no time during the currency of the lease agreement, which shall be non-cancellable, would the lessee attempt to capitalise the leased assets in its balance-sheet. As per clause 8, it had been agreed that the ownership of the said assets during the tenure of the lease and inclusive of any renewal options that the lessor may concur indisputably rested with the lessor. So in clear terms, the agreement provided that during the lease peri .....

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eement. In the instant case, the assessee (lessee) falls in a better footing , in as much as there is no clause in the lease agreement, enabling the lessee to buy back the assets on termination of the lease arrangement. We find that the case law relied upon by the Learned DR on the decision of Delhi Tribunal need not be discussed as the issue is squarely covered by the High Court and Supreme Court in favour of the assessee. 4.4.2. Whether order passed by the Learned AO is erroneous From the fact .....

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