Income Tax Appellate Tribunal - Delhi
Industrial Finance Corporation Of ... vs Deputy Commissioner Of Income Tax on 31 May, 2005
Equivalent citations: (2006)101TTJ(DELHI)894
ORDER
G.S. Pannu, A.M.
1. As all these appeals relate to the same assessee, they are clubbed together and are being disposed of by way of a common order for the sake of convenience and brevity.
ITA No. 1563/Del/19992. This is an appeal by the assessee against the order of the CIT(A) dt. 25th Jan., 1999 pertaining to asst. yr. 1995-96. The main grounds preferred by the assessee are as under:
1. That on the facts and circumstances of the case, the learned CIT(A) has erred in confirming the disallowance of Rs. 6,96,449 incurred on the maintenance of visiting officer's flats meant for the stay of officers of the assessee-company while on official tour, which is more economical for the assessee-company rather than incurring huge cost in hotels.
2. That on the facts and circumstances of the case, the learned CIT(A) has erred in confirming the disallowance of the revenue expenditure of Rs. 67,06,33,245 . incurred in connection with the swapping of foreign currency funds for augmenting the rupee funds required for the business of the assessee-company. The learned CIT(A) ought to have held that the said revenue expenditure was to be allowed in the year of incurrence of the liability.
3. That on the facts and circumstances of the case, the learned CIT(A) has erred in confirming the disallowance of Rs. 52,799 claimed on account of lease rent though attributable to the year under consideration.
4. That on the facts and circumstances of the case, the interest amounting to Rs. 16,66,200 and Rs. 80,25,445 charged under Sections 234B and 234C of the IT Act, 1961, would need revision.
3. The first ground is with regard to the expenditure incurred by the assessee for maintaining premises at various centres for providing lodging facilities to its employees on tour. The AO held that the expenditure was in the nature of guest-house expenses and not allowable under Section 37(3) of the IT Act, 1961 (as 'Act'). The CIT(A). has since sustained the order of the AO.
4. After hearing both the parties, we find that the decision of the CIT(A) is in line with the decision of the Special Bench of the Tribunal in the case of Eicher Tractors Ltd. v. Dy. CIT (2002), 77 TTJ (Del)(SB) 681 : (2003) 84 ITD 49 (Del)(SB). We accordingly sustain the decision of the CIT(A) on this ground and the ground of the assesses is hereby dismissed.
5. The second ground taken by the assessee is with, regard to the disallowance of Rs. 67,06,33,245 incurred in connection with the swapping of foreign currency funds for augmenting the rupee funds required for the business of the assessee.
6. The brief facts and the background leading to the said dispute are as follows :
That the main business of the assessee is that of making loans and advances to various industrial concerns. For meeting its lending requirements the assessee also raises foreign currency borrowings. The assessee swapped such foreign currency into Indian rupees in order to augment its rupee resources for meeting its lending requirements. The foreign currencies borrowed were repayable to the foreign lenders on later dates falling within the current previous year ending on 31st March, 1995 and in some cases falling in the next previous year relevant to subsequent assessment year. For repurchasing these currencies on their respective due dates of repayment, the assessee entered into forward contracts with banks as a safeguard against foreign currency fluctuations. The assessee recognized the difference between the forward contract rate and the exchange rate on the date of the transaction. The assessee thus determined the exchange difference of Rs. 8,172.85 lakhs arising out of re-alignment of foreign currency borrowings covered against forward contracts and treated the same as cost of borrowings. In its books of account, a sum of Rs. 1,466.55 lakhs was charged to the P&L a/c during the year itself and the balance of Rs. 67,06,33,245 was treated as deferred revenue expenditure which was to be charged over the balance period of forward cover which spilled over into next assessment year. However, in the computation of income, the assessee claimed the sum of Rs. 67,06,33,245 as deductible from the total income. The AO has disallowed this claim of the assessee on the ground that the expenditure claimed pertained to future period and not to the period relevant to assessment year under consideration inasmuch as the impugned transaction was to safeguard against future currency fluctuations. The AO held that the expenditure did not cover the obligation of the previous year relevant to assessment year under consideration. The AO also held the same as ineligible for deduction as according to him, the expenditure was capital in nature. We find that .the AO however, allowed the deduction with respect to the amount of Rs. 1,466.55 lakhs which had been charged by the assessee in its P&L a/c during the year itself and has restricted the disallowance to the amount classified as deferred revenue expenditure amounting to Rs. 67,06,33,245. The assessee carried the matter in appeal before the CIT(A).
7. In appeal before the CIT(A), the contentions of the assessee were to the following effect :
That the swapping activity was carried out by the assessee as a matter of routine to augment its rupee resources for meeting its business obligations. The assessee explained that it was in the business of financing and it kept the money market situation under consideration and was doing activities by way of which it could minimize its cost of borrowings and thereby increase its profitability. The activity of swapping was done with the aforesaid objective. It was explained that the surplus rupee sources available with the assessee were deployed in call money market or kept in term deposits with the bank to earn interest whereas surplus foreign currency available with it was deployed only in short-term deposits with banks which yielded lower interest. By swapping the surplus foreign currency into rupee resources, the same resulted in increased profitability inasmuch as the deployment of rupee resources yielded higher profitability. The activity of swapping resulted in expenditure also, say, of the impugned nature and thus the impugned amount was said to be justified as having been incurred in the course of normal business activities. The assessee also assailed the inconsistency in the stand of the AO inasmuch as a sum of Rs. 1,466.65 lakhs was held to be allowable in the current assessment year as revenue expenditure whereas the balance of Rs. 67,06,33,245 i.e., the impugned amount was held as capital expenditure whereas the nature of expenditure was similar. The assessee accordingly submitted that the entire expenditure was to be treated as a revenue expenditure allowable under Section 37(1) of the Act.
8. After considering the aforesaid submissions of the assessee, the CIT(A) has since held that while the AO was wrong in treating a portion of the expenditure, not relating to current assessment year, as capital expenditure but sustained the disallowance on the ground that such expenditure did not relate to the current assessment year. Accordingly, the disallowance of Rs. 67,06,33,245 made by the AO was upheld. Not being satisfied with the order of the first appellate authority, the assessee is presently in appeal before us.
9. The learned Counsel for the assessee, Shri N. Avtar has reiterated the submissions made on behalf of the appellant before the lower authorities. The learned Counsel for the assessee argued that having regard to business mechanics of the assessee in the course of which the impugned costs have been incurred, the expenditure has been per se accepted by the CIT(A) to be of revenue in nature. Thus, an expenditure which has been incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It was argued that the expenditure was definite and therefore, it was to be allowed as deduction in the impugned year itself although the currency transacted under the forward contract was to be received in the subsequent period. The rate at which the assessee was to get the currency was fixed and the same was done with the objective of safeguarding against the foreign currency fluctuations. The learned Counsel relied upon the decisions of the Hon'ble apex Court in the cases of India Cements Ltd. v. CIT and also Empire Jute Co. Ltd. v. CIT in the course of the hearing.
10. On the other hand, the learned Departmental Representative, Shri B.N. Verma has defended the order of the first appellate authority. According to the learned Departmental Representative, the impugned expenditure has been correctly held by the CIT(A) to be allowed in the year to which it pertains. According to the learned Departmental Representative, the benefit under the impugned forward contract was spread over a period extending beyond the current assessment year and in support of his submissions, referred to the decision of the Hon'ble apex Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT . In this manner, the learned Departmental Representative defended the stand of the Revenue that even under the IT Act, an expenditure could be allowed to be spread over the period over which the benefit accrued to the assessee notwithstanding that it was a revenue expenditure.
11. In reply, the learned Counsel for the assessee submitted that treating the expenditure as deferred revenue expenditure in the books of account was only an accounting concept and insofar as the issue under the IT Act is concerned, the same was to be looked at purely in terms of the provisions of the statute. According to him, the impugned swapping cost was fully allowable in the year itself and in support of his submissions, reliance was placed on the decision of the Hon'ble Allahabad High Court in the case of Hindustan Commercial Bank Ltd., In re (1952) 21 ITR 353 (All).
12. We have carefully considered the rival contentions, perused the orders of the lower authorities and proceed to dispose of the issue hereinafter. The facts in relation to the impugned dispute lie in a very narrow compass. Admittedly the appellant is carrying on business in the field of money-lending and other related facets of business of financing. The funds used for business of lending comprise both self-generated and borrowings including borrowings in foreign currency. The borrowings in foreign currency are converted into Indian rupees for use in the assessee's business of financing which is termed as swapping by the assessee. In order to safeguard against fluctuation in the rate of foreign exchange at the time of repayment in relation to the foreign currency so swapped assessee enters into forward contracts with banks to purchase foreign currencies on future date at predetermined rates. The assessee claimed as deduction the difference between the forward rate and the exchange rate on the date of transaction as revenue expenditure. In relation to the contract which were entered into and were concluded during the year itself, i.e., contracts whereby the assessee repurchased the foreign exchange at the predetermined rates during the year itself the claim of the assessee pertaining to the aforesaid difference was allowed by the AO itself. The amount of such claim was Rs. 1,466.65 lakhs. The balance of the claim of Rs. 67,06,33,245 was relating to contracts which were not concluded within the year under consideration. The same has been negated by AO on twin grounds. Firstly that the assessee had itself not debited in its P&L a/c but treated it as deferred revenue expenditure and secondly, that it was capital in nature. Insofar as the issue of nature of expenditure is concerned, CIT(A) has since held that the same is revenue in nature and the Revenue has not challenged the same before us in its cross-appeal filed which shall be taken up by us in the later part of this order. Thus to that extent there can be said to be a common ground between the parties that as a result of order of the CIT(A), the nature of the impugned expenditure is liable to be treated as revenue.
13. However, the dispute which is intertwined with above and remaining unresolved is as to whether the expenditure of Rs. 67,06,33,245 is to be allowed deduction during the current assessment year itself or the same is to be considered while computing the income of the subsequent year. The stand of the Revenue is that the assessee purchased foreign currency relatable to such swapping cost only in the subsequent years and, therefore, such costs are allowable in the subsequent years.
14. First of all, it is to be understood that having regard to the nature of appellant's business, it cannot be denied that the swapping costs have been incurred by it in its regular course of business inasmuch as such activities are incidental to its business of financing. The peculiar features of the impugned expenditure can be analyzed as follows : That the assessee enters into a contract for purchasing foreign currency on a later date at pre-determined rates. The date and the rate of purchase of the foreign currency are decided at the time of entering into the contract. The difference between the forward rate and the exchange rate on the date of entering into the contract has to be recognized as income or expense, as the case may be. The issue is whether it is to be considered at the time of the execution of the contract or at its final settlement on a future date. In our view, the difference in the forward rate and exchange rate on the date of transaction (i.e., on the date of entering into the contract) is an income/expense which is ascertainable and is definite on account of contractual obligation. The cost at which the assessee is to purchase currency on a subsequent date and the cost at which it had earlier swapped the currency are both available and ascertainable. We may give an example to illustrate the aforesaid. Let us assume that an assessee raises a foreign currency loan of US $ 1,000 on 1st May, 1994. It converts the same into Indian currency on the same date, say at the rate of Rs. 35 per US Dollar. The assessee is required to repay to the foreign lender US $ 1,000 on say 31st July, 1995. Since the assessee was required to return the US dollar to its lender on 31st July, 1995 and it did not want to risk the fluctuation in the rate of dollar on the future date, it entered into a forward contract with a bank on 1st May, 1994 itself to buy the required foreign exchange on 31st July, 1995 at a negotiated rate, say Rs. 37 to a dollar, meaning thereby that on 31st July, 1995 it will be able to take delivery of the foreign currency equivalent to 1000 US $ @ Rs. 37 which would enable it to repay the same to its foreign lender. The assessee thus entered into a contract on 1st May, 1994, as a result of which, liability of Rs. 2,000 was crystallized on that date itself. It is clearly discernible from the aforesaid illustration that such liability is definite and ascertainable having regard to the contractual obligation.
In terms of the contract, assessee becomes aware of the rate at which the foreign currency shall be purchased on the future date. The effect or the finality of the contract does not get postponed to the future date. It is well-settled that a liability arising on account of contractual obligation is to be allowed in entirety in the year in which the same is incurred having regard to the terms of the contract. Here, we may refer to the decision of the Hon'ble apex Court in the case of Calcutta Co. Ltd. v. CIT . In the said case, the circumstances were that the assessee had in the course of land developing business sold some plots of lands with a contractual obligation contained in the sale deed to the effect that it would carry out certain improvements necessitating certain expenditure. The assessee, in terms of the contract, received only a part of the price and the balance was to be received in instalments. In the accounts, which the assessee maintained on mercantile basis, it credited the full contracted price payable to it during the year itself and . debited the entire expenditure including expenses for improvements to be undertaken by him. The Hon'ble apex Court held that the expenditure so debited was an allowable deduction having regard to the contractual obligation. Similarly in the instant case, the assessee in terms of its contractual obligation is required to purchase foreign currency on a later date at a predetermined price and thus the resultant swapping cost so incurred is to be construed as having accrued on the date of contract itself.
15. We may also mention here that it would be wrong to construe any element of contingency in relation to the impugned liability. A contingent liability is to be understood as one which is dependent on the happening of a future event and is incapable of ascertainment or even estimation with a fair degree of precision. A liability which is capable of being valued and is certain with regard to its happening cannot be said to be contingent in nature. As in the instant case, we have noticed earlier that the swapping cost incurred by the assessee is capable of determination at the time of execution of the forward contract and such determination does not get postponed. Therefore, in spite of the fact that a part of the contract is performed on a later date, the liability arising on the date of the contract itself gets crystallized and is definite. The parity of reasoning initiated by the Hon'ble apex Court in the case of Metal Box Co. of India Ltd. v. Their Workmen supports the aforesaid proposition.
16. Now we would consider the stand of the learned Departmental Representative that benefits accrue to the assessee over the entire period of contract and thus it is only at the end of the contract that the expenditure is allowable. The reliance by the learned Departmental Representative on the decision in the case of Madras Industrial Investment Corporation Ltd. (supra) does not help the case of the Revenue. The assessee in that case had issued debentures at a discount and, therefore, it incurred a liability to pay an amount larger than what it had borrowed. The debentures raised were to be redeemed or arising for repayment after a period of 12 years. The liability to pay an amount larger than the amount borrowed was held to be spread over the entire period of debenture, as there was a continuous benefit to the business of the company over the entire period of debenture. In coming to this conclusion, the Hon'ble apex Court noted that the liability to pay the discount incurred in the year of issue of debenture was with a view to secure a benefit over a number of years or in other words it was found that there was a continuing benefit as the assessee was utilizing the funds raised by way of debentures continuously in its business till its repayment. In fact, the Hon'ble apex Court in the case of Madras Industrial Investment Corpn. Ltd. (supra) itself noticed that ordinarily revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years except in situation where the facts may justify such spread over a period in the ensuing years. Firstly, in the instant case, as noted earlier, the impugned swapping cost has to be considered in the light of the contractual obligation on the part of the assessee and it cannot be said that there is any continuous benefit accruing to the assessee under the contract. Secondly, the Hon'ble apex Court also noted that the allowance of the entire expenditure in the year of incurring itself would give a distorted picture of profit for that particular year as there was a continuous benefit. In the instant case, the situation is reverse. If the cost of swapping is not provided against the profit of the impugned year, that would lend the profits of the year a distorted picture, as would be clear from the following. The assessee has converted its foreign currency borrowings into Indian rupees and deployed the same to earn income by way of interest, return on investments, etc. The impugned cost is incurred to enable the assessee to obtain such funds and to enable it to ascertain the actual cost of such funds the cost required to reconvert it and repay the foreign currency is essential as it has a direct nexus. If the income in relation to such activity is offered for taxation, on which there is no dispute, the matching cost should also be accordingly allowed. Therefore, the ratio of the decision of the Hon'ble apex Court cannot be said to be applicable to the instant case inasmuch as not allowing the impugned expenditure in the year of incurring would result in a distorted picture of profits. As a result of the aforesaid discussions, in our view the circumstances and the nature of the expenditure in the instant case do not justify the invocation of the ratio of the decision of the Hon'ble apex Court in the case of Madras Industrial Investment Corpn. Ltd. (supra).
17. In the result, having regard to the aforesaid discussion, the claim of the assessee for allowance of expenditure of Rs. 67,06,33,245 incurred in connection with swapping of foreign currency funds for augmenting the rupee funds required by it for its business is to be allowed in the year of incurrence of the same i.e. during the current assessment year itself. The assessee succeeds on this ground.
18. The brief facts leading to the third ground are that the assessee had claimed a sum of Rs. 52,799 on account of amortization of lease rent in respect of the properties at Calcutta, Jaipur and Chandigarh. The AO and the CIT(A) have disallowed the claim treating the assessee as the owner of these properties on the ground that the same have been leased for a very long period establishing the assessee as an owner thereof. The claim for amortization of lease premium paid by the assessee was thus not allowed.
19. After having heard both the parties and perusing the orders of the lower authorities, we find that the full facts concerning the matter have not been culled out and brought on record inasmuch as the terms of the agreement for taking the properties on lease, etc., are not available. Thus, it is not possible to test the efficacy of the claim of the assessee, although the learned Counsel for the appellant submitted during the course of hearing that Tribunal in the case of the assessee itself for the asst. yr. 1986-87 in ITA No. 1308/Del/1994, dt. 27th Sept., 2001 has considered a similar issue. In this regard, we are of the view that the ratio of any decision has to be understood in the background of the facts of a particular case and unless the full facts concerning the matter are on record, it is not possible to apply the ratio of any decision. As noted by us earlier, since we do not have the benefit of the full facts viz., terms of lease agreement, etc., so as to appreciate the true nature of payment made by the assessee, in the circumstances, we are constrained to restore the matter to the file of the AO for passing an order afresh after affording a reasonable opportunity of being heard to the assessee in the matter and also keeping in mind the decision of the Tribunal noted above. We hold accordingly.
20. The fourth ground relates to levy of interest under Sections 234B and 234C of the IT Act, 1961, which in our view is consequential in nature.
21. In the result, the appeal of the assessee is treated as partly allowed. ITA No. 1913/Del/1999 (Revenue's appeal---Asst. yr. 1995-96)
22. The two grounds of appeal preferred by the Revenue are as follows :
On the facts and in the circumstances of the case the CIT(A) has erred both on facts and in law :
1. In deleting the disallowance of Rs. 18,74,22,388 on account of depreciation on leased assets on the basis of the decision of the Supreme Court in CIT v. Shaan Finance (P) Ltd. .
(a) despite the fact that the AO had clearly established that the transaction in question was in the nature of finance/hire purchase transaction and not in the nature of lease;
(b) despite the fact that the issue at dispute in the present case is whether the assessee was carrying on any business of leasing or not which was not therein in the case relied on by the CIT(A).
2. In deleting the disallowance of Rs. 9,43,19,666 on account of interest on borrowings for construction of office building despite the fact that the above amount was clearly to be capitalized as the loan had been used to acquire the fixed assets.
23. The first ground of the Revenue in this appeal is against the order of the CIT(A) in deleting the disallowance of Rs. 18,74,22,388 made on account of depreciation on leased assets on the basis of the decision of the Supreme Court in CIT v. Shaan Finance (P) Ltd. ; (a) despite the fact that the AO had clearly established that the transaction in question was in the nature of finance/hire purchase transaction and not in the nature of lease; (b) despite the fact that the issue at dispute in the present case is whether the assessee was carrying on any business of leasing or not which was not therein in the case relied on by the CIT(A).
24. The facts leading to the said ground that the assessee had claimed depreciation of Rs. 18,74,22,388 on leased out assets on which the assessee was showing income from lease rent. The denial of depreciation by the AO was on the ground that the business of the assessee was some kind of hire-cum-purchase and finance business and the assets/plants and machinery leased out were the stock-in-trade. In coming to such conclusion, the relevant discussions made by the AO in the assessment order are as follows :
The transactions of leasing out of assets carried out by the assessee-corporation is broadly summarized as under :
(i) First a lessee approaches the assessee-Corporation for taking a plant and machinery on lease.
(ii) Assessee makes arrangement for purchase of such asset on behalf of the lessee. Simultaneously the assessee-Corporation enters into a lease agreement with the lessee whereby among other things it is stipulated that:
(a) primary rent will be charged for first 60 months, and
(b) secondary rent will be charged for next 36 months.
Aggregate of primary rent charged in primary period of 60 months, is about 153.3 per cent of the cost of asset and the secondary rent charged for next 3 years is about 3.6 per cent of its cost. Thus, total recovery of 156.9 or about 157 per cent of the cost of asset is made through lease rent in 8 years (153.3 per cent recovery is in 5 years). After this period the asset/plant and machinery is neither received back nor leased out to any other client. In fact the leased assets are generally sold to the lessee on expiry of lease period on a nominal price.
In all the cases the equipment/plant and machinery is directly delivered by the manufacturer or vendor of the equipment/plant and machinery to the lessee and no expenses are incurred by the IFCI. It is also noteworthy that the assessee-Corporation has no such equipment/plant and machinery which is leased out repeatedly to different lessees. For every lessee new equipment/plant and machinery is purchased by the lessor and it is directly delivered to the lessee by the vendor/manufacturer. Thus, following salient features of these transactions emerge :
(i) For every lessee a new equipment/plant and machinery is purchased by IFCI.
(ii) Same is directly got delivered to lessee through manufacturer/vendor. It is never taken possession of by the lessor and no cost for transport or installation is incurred by the lessor.
(iii) More than 150 per cent of cost of the asset is recovered through lease rent in primary period of 60 months.
(iv) Lease rentals for secondary period are very nominal (as full cost of the asset is already recovered).
(v) Instances of return of assets by the lessee to the lessor after the lease period are not known. In fact lease assets have not been brought back to the premises of the corporation so far.
(vi) Also instances of any asset leased out to any second lessee are not known.
Thus, like any other stock-in-trade, the assessee's leasehold assets are never brought back to its premises after they have been leased out. The assessee's business in this regard, therefore, consists of some kind of hire purchase-cum-finance business which the assessee calls lease for the purpose of claiming depreciation. I, therefore, hold that this business of so-called leasing is in the nature of hire-purchase-cum-finance business and the assets/plants and machinery involved are its stock-in-trade.
Under these circumstances no depreciation can be allowed to the assessee on the so-called leased out assets as they do not form part of a normal lease transaction. They are rather stock-in-trade for a business of finance-cum-hire purchase. Assessee has preferred to call these as lease transactions due to obvious reasons.
25. Aggrieved by the order of the AO denying the claim of depreciation, the assessee carried the matter in appeal before the CIT(A). It was submitted before the CIT(A) that the AO had failed to appreciate the nature of assessee's business inasmuch as terms of the lease agreement were ignored by him. It was canvassed that the assessee fulfilled the conditions of Section 32 which requires that an asset should be owned by the assessee and the same should have been used for the purposes of business of the assessee during the year. After considering the pleas of the assessee, the CIT(A) allowed the claim of the assessee for depreciation placing reliance on the decision of the Hon'ble apex Court in the case of Shaan Finance (P) Ltd. (supra). The Revenue is presently in appeal before us against the aforesaid stand of the CIT(A).
26. Before us, the learned Departmental Representative Shri B.N. Verma, appearing on behalf of the Revenue has assailed the order of the CIT(A) by placing reliance on the reasoning adopted by the AO in the order of assessment. On the other hand, the learned Counsel for the assessee has placed reliance on the order of the first appellate authority and also referred to the paper book filed on behalf of the assessee containing inter alia, a model copy of the lease agreement in support of his submissions.
27. We have considered the rival submissions. The reasons weighing with the AO to deny the claim of depreciation are that the assessee was not carrying out leasing business but was engaged merely in financing of assets. According to the AO, the assets leased by the assessee are never brought back to its premises at the expiry of the lease period and it is akin to being sold like a stock-in-trade of the assessee and, therefore, no depreciation was allowable on it.
28. Normally, under the IT Act in all leasing transactions the owner of the asset is entitled to the depreciation if the same is used in the business in terms of Section 32. The emphasis in the statutory provisions contained in Section 32 is that in order to claim depreciation the concerned asset should be owned by the assessee. The assessee before us claims depreciation on the assets leased by it on the plea that during the currency of the lease agreement the ownership of the assets rests with it. If the assessee satisfies the condition of ownership, its claim for depreciation is consequently allowable. Normally, the ownership of the asset is to be determined by the terms of contract between the lessor and the lessee. If the lessor in terms of the agreement provides only the right to use to the lessee during the period of lease, retaining the rights as an 'owner' with itself, in such a case the lessor would be regarded as the owner for the purposes of claim of depreciation. However, if the leasing arrangement is a mere financing arrangement whereby the lessor, in reality is only providing funds for acquisition of the asset and the asset leased out for all intents and purposes becomes the property of the lessee then in such a situation the benefit of depreciation would not be available in the hands of the lessor. Viewed in the above background, in the instant case, we find that the CIT(A) concludes that during the currency of lease, the assessee alone remains the owner and at the end of the lease period, the assessee-lessor is within its right to receive back the leased asset. For this purpose we have perused the specimen of lease agreement placed at pp. 35 to 70 of the paper book, the relevant Clause 2.4 of the Article II of the agreement reads as under :
2.4 Upon termination this agreement by afflux of time or otherwise, the lessee shall, at its own cost and expenses, forthwith deliver or cause to be delivered to the lessor the equipment, at such time and place as may be directed by the lessor, in good repair, order and conditions (subject to normal wear and tear).
A perusal of the aforesaid does lead to conclusion that during the currency of lease deed, the assessee alone remains the owner and at the end of the lease period, the assessee-lessor is within its right to receive back the leased assets. The CIT(A) has accordingly proceeded to allow the claim of the assessee for depreciation. However, we find that the AO in its order reached at the findings that the assessee was engaged merely in financing and that the assets leased by the assessee are never brought back to its premises at the expiry of the lease period and the entire arrangement is thus akin to sale of asset. If it is indeed so, the assessee cannot claim to be the owner and its depreciation claim cannot be entertained. The order of the CIT(A) is silent on this issue and in the absence of complete facts and materials before us, we are also not in a position to verify the efficacy of the aforesaid conclusions of the AO. Moreover, this being a factual aspect needs verification and thus we are inclined to set aside the order of the CIT(A) on this issue and remand the issue back to the file of the AO to de novo examine the claim of the assessee in the aforesaid light. The AO shall allow the assesses an adequate opportunity of being heard and shall cull out the entire facet of the transaction with reference to the material and information placed before him and thereafter pass appropriate orders in accordance with law keeping in mind our discussion in above para.
29. However, we may mention that the reliance placed by the CIT(A) on the decision of Shaan Finance (P) Ltd. 's case (supra) to allow the claim of depreciation on leased assets cannot be faulted in principle. Once it is held that the leasing of the machinery is the mode of business carried on by the assessee and the income thereof is treated as business income, it would be, therefore, natural to allow depreciation on the same. However, before reaching to the conclusion that leasing is the mode of business, such an aspect has to be factually supported and our remanding the issue to the file of AO is with this objective.
30. The said ground of the Revenue accordingly stands disposed of.
31. The second ground with regard to the claim of the assessee for deduction of Rs. 9,43,19,666 being interest on borrowings used for construction of office building. The assessee had capitalized such interest in its books of account but claimed the same as revenue expenditure in computation of income filed along with the return of income for the impugned assessment year. The AO disallowed the interest on the ground that Section 36(1)(iii) does not allow the deduction for interest on borrowings spent for construction of a building which was not put to use during the year. According to the AO Section 36(1)(iii) covers a case of loan which has been utilized in the course of a running business alone. The AO also held that since the assessee itself debited the interest in its books of account as capital expenditure, the same was not allowable as revenue expenditure in spite of the fact that the deduction was claimed in the computation of income. The CIT(A) has since allowed the claim of the assessee. The CIT(A) also held that the treatment by the assessee in the books of account cannot deviate from the true character of the expenditure. Accordingly, the Revenue is in appeal before us.
32. After having heard the rival parties, we do not find any substance in the present ground of the Revenue for the reason discussed hereinafter. The trite law is that under Section 36(1)(iii), an assessee is entitled to deduction of interest paid on moneys borrowed for the purpose of business irrespective of the utilization of the borrowings. The expression "purposes of business" found in Section 36(1)(iii), as relevant for the assessment year under consideration, is comprehensive to cover the utilization of such moneys on: both the aspects whether revenue or capital, The only limitation being that the expenditure must be incurred for the purposes of assessee. As long as the borrowing has been made for the purposes of business, then even if it is used for incurring a capital expenditure, the claim of the assessee would be within the scope of Section 36(1)(iii). Insofar as the instant case is concerned, the business of the assessee has been in operation hitherto. Having utilized the borrowings for the purposes of construction of building for its own use, it cannot be anybody's case that the utilization is not for the purposes of business. We are thus in agreement with the conclusion drawn by the CIT(A) that the impugned interest was an allowable expenditure. With regard to the objection of the AO to the treatment in the books of account, the same, in our view, is not determinative of the liability for deduction, having regard to the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT . We affirm the conclusion of the CIT(A) on this issue. Accordingly the Revenue fails in this ground.
The appeal of the Revenue is treated as partly allowed.
ITA No. 2379 (Revenue's appeal--Asst. yr. 1995-96)
33. This appeal of the Revenue is against the order passed by the CIT(A) arising out of order framed by the AO under Section 154 of the Act for the asst. yr. 1996-97. The ground preferred by the Revenue is as under:
On the facts and in the circumstances of the case, the CIT(A) has erred both on fact and in law in allowing the assessee's claim of depreciation of Rs. 18.74 crores and directing the AO to modify his order under Section 154 accordingly on the ground that the said disallowance had been deleted by him in the appellate order against the assessment order under Section 143(3) despite the fact that the above order of the CIT(A) has not been accepted by the Department and against which an appeal had been filed.
34. The rival parties fairly agreed that consequent to the decision of the Tribunal in ITA No. 1913/Del/1999 which dealt with the assessment order under Section 143(3) of the Act for the asst. yr. 1995-96 the impugned ground becomes consequential in nature.
35. As we have already affirmed the order of the CIT(A) while disposing of the appeal of the Revenue in ITA No. 1913/Del/1999, the impugned ground of the Revenue does not survive for consideration. Accordingly the same is dismissed.
36. In the result, the appeal of the assessee is partly allowed and the appeals of the Revenue are dismissed.