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Whether Statutory reserve created u/s 45-IC of RBI Act is a "diversion of income at source" and can be excluded from book profits?

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Court :
Delhi High Court

Brief :
The appellant is a NBFC engaged in the business of leasing of commercial vehicles, infrastructure construction machinery/equipment and financing of infrastructure projects equipment/machinery. The total income of the appellant-assessee was assessed under the normal provisions and the book profits under Section 115JB of the Act. By theimpugned order, addition of Rs.9,80,00,000/- to the special reserve as per the mandate of Section 45-IC of the Reserve Bank of India Act, 1934 stands confirmed relying upon Explanation 1 clause (b) to Section 115JB(2) of the Act. The Assessing Officer by his assessment order applied clause (b) to Explanation 1 to Section 115JB (2) of the Act and added back the said amount to Book profit. For the same reason, the Assessing Officer also made adjustment of Rs.18,66,00,000/-, which were treated by the assessee as Debt Redemption Reserve. The assesse contented that - Firstly, the reserve created as per the mandate of Section 45-IC of the Reserve Bank of India Act, 1934, is a liability and not a reserve.Secondly, that in terms of Section 45-IC of the Reserve Bank of India Act, 1934, the appellant-assessee does not have any title over the reserve and, therefore, it is a case of diversion of income at source.

Citation :
SREI Infrastructure Finance Ltd. –Appellant – Versus –Additional Commissioner of Income Tax -Respondent

IN THE HIGH COURT OF DELHI AT NEW DELHI

INCOME TAX APPEAL NO. 371/2012

 

Reserved on: 11th December, 2014

Date of decision: 13th February, 2015

 

SREI INFRASTRUCTURE FINANCE LTD.

Appellant

 

Through Mr. S. Ganesh, Sr. Advocate with Mr. U.A. Rana,

Ms. MrinalElkerMazumdar, Mr.Himanshu Mehta and

Mr.Abirat Kumar, Advocates.

 

Versus

 

ADDITIONAL COMMISSIONER OF INCOME TAX

Respondent

Through Mr.RohitMadan, Sr. Standing Counsel

with Mr.AkashVajpai and Mr.Ruchir Bhatia Advocates.

 

INCOME TAX APPEAL NO. 372/2012

 

SREI INFRASTRUCTURE FINANCE LTD.

Appellant

Through Mr. S. Ganesh, Sr. Advocate with Mr. U.A. Rana, Ms.MrinalElkerMazumdar,

Mr.Himanshu Mehta and Mr.Abirat Kumar, Advocates.

 

Versus

 

ADDITIONAL COMMISSIONER OF INCOME TAX

Respondent

 

Through Mr.RohitMadan, Sr. Standing Counsel with

Mr.AkashVajpai and Mr.Ruchir Bhatia Advocates.

 

CORAM:

HON'BLE MR. JUSTICE SANJIV KHANNA

HON'BLE MR. JUSTICE V. KAMESWAR RAO

SANJIV KHANNA,J.:

These two appeals under Section 260A of the Income TaxAct, 1961 (Act, for short) by the assessee SREI Infrastructure Finance Ltd. pertaining to assessment years 2006-07 and 2007-08, are directed against the common order dated 23rd February, 2012 passed by the Income Tax Appellate Tribunal (Tribunal, for short). The aforesaid appeals require adjudication on two separate aspects. The first aspect, which is common to both the assessment years, relates to rate of depreciation in respect of motor vehicles given on lease. The substantial question of law framed on the said aspect vide order dated 10th April, 2013, reads as under:-

“Whether Income Tax Appellate Tribunal has erred in law in reminding the issue of claim of depreciation at the higher rate of 30% to the Assessing Officer in respect of motor vehicles given on lease?”

 2. The Tribunal in the impugned order has referred to the decision of the Delhi High Court in CIT Vs. MGF (India) Ltd. (2006) 285 ITR 142 (Delhi) and CIT Vs. Bansal Credits Ltd. (2003) 259 ITR 69 (Del). Tribunal in the impugned order reproduced paragraph 23 of the judgment in the case of Bansal Credit Ltd. (supra), which reads as follows:-

“Before we close, we may point out that in some of the cases before us (ITAs No.64/99, 65/99, 73/99 & 74/99), the Tribunal has remanded the matters back to the AOs to examine whether the leased out vehicles had been actually used by the lessee in the business of hire. In the light of the view taken by us, we do not find any infirmity in such a direction. As a matter of fact, wherever there is a doubt it must be examined whether the leased out vehicles are actually being used in the business of hiring. Only in such a situation depreciation at the higher rate of 40 per cent or 50 per cent as the case may be, is to be allowed under the relevant entry in Appendix I to the Rules.”

3. In terms of the aforesaid observations, the Tribunal restored the matter to the file of the Assessing Officer to decide the issue in accordance with law, i.e. end user on part of the persons, who had put the vehicles to use. It was observed that the assessee had canvassed the said factum; however, necessary verification at the end of the Assessing Officer should have been undertaken. The contention of the assessee is that the order of remand should not have been and is not required to be passed.

4. The Supreme Court in the case of ICDS Vs. Commissioner of Income Tax, Mysore and Anr(2013) 350 ITR 527 (SC), had examined and considered the issue of depreciation on vehicles given on hire, in depth and detail. It is noticeable that under Section 32 of the Act, an assessee is entitled to depreciation on buildings, machinery, plant, furniture, etc. being tangible assets owned wholly or partly by the assessee and used for the purpose of business or profession. The Supreme Court observed that depreciation is the monetary equivalent of the wear and tear suffered by a capital asset that is set aside to facilitate its replacement when the asset becomes dysfunctional. Referring to the expression ―for the purpose of business‖, it was observed that it does not mandate use of the asset by the assessee itself, but requires that the asset should be utilised for the purpose of business of the assessee. Thus, income derived from leasing of trucks by a financing company would be ―business income‖ as the asset was used in the course of business. Reference was made to the decision of the Supreme Court in Commissioner of Income Tax Vs. Shaan Finance (P) Ltd. Bangalore (1998) 231 ITR 308 (SC), which interpreted analogous provisions of Sections 32A(2)(a), (b) and Section 33 of the Act dealing with investment allowance and development rebate, respectively. Thesecond contention of the Revenue that the assessee was not the owner of the asset, i.e. trucks, was also rejected after relying upon the observations of the Tribunal that vehicles were given under a lease agreement on payment of lease rent as prescribed under the schedule. A lease agreement it was elucidated was different from hire-purchase agreement and was a contract of bailment with no element of sale therein. The Supreme Court observed that the Tribunal had rightly held that the lease agreements in fact were transactions of ―hire‖. The Supreme Court also observed that the lease rentals received were treated as ―business income‖ in the hands of the assessee and as deductible revenue expenditure in the hands of the payer/lessee. It was accordingly held as under:-

“Finally, learned senior counsel appearing on behalf of the assessee also pointed out a large number of cases, accepted and unchallenged by the Revenue, wherein the lessor has been held as the owner of an asset in a lease agreement (CIT v. A. M. Constructions [1999] 238 ITR 775 (AP) ; CIT v. Bansal Credits Ltd. [2003] 259 ITR 69 (Delhi) ; CIT v. M. G. F. (India) Ltd. [2006] 285 ITR 142 (Delhi) ; CIT v. Annamalai Finance Ltd. [2005] 275 ITR 451 (Mad)). In each of these cases, the leasing company was held to be the owner of the asset, and accordingly held entitled to claim depreciation and also at the higher rate applicable on the asset hired out. We are in complete agreement with these decisions on the said point.”

5. On the question of rate of depreciation, it was exemplified:-

“With regard to the claim of the assessee for a higher rate of depreciation, the import of the same term "purposes of business", used in the second proviso to section 32(1) of the Act gains significance. We are of the view that the interpretation of these words would not be any different from that which we ascribed to them earlier, under section 32(1) of the Act. There- fore, the assessee fulfills even the requirements for a claim of a higher rate of depreciation, and, hence, is entitled to the same. ―In this regard, we endorse the following observations of the Tribunal, which clinch the issue in favour of the assessee.

To read the full judgment, please find the attached file:

Attached file:

http://lobis.nic.in/dhc/SKN/judgement/13-02-2015/SKN13022015ITA3712012.pdf

 

Hetvi Sheth
on 23 February 2015
Published in Others
Views : 3355
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