Microcare Computers(p) Limited, Hyderabad V. THE ACIT, Hyderabad

CO 48/HYD/2010

• Counselvise Citation: [2014] 122 COUNSELVISE.COM (IT) 9570 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 25 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 21-05-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 06-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 26-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M H NAIK
• Assessee Lawyers: A V RAGHURAM
• Keywords: Depreciation; Cost of acquisition
• Section: 143(3); 115JB; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER SL. NO. ITA NO./C.O. AY ASSESSEE/CROSS OBJECTOR RESPONDENT 1. 916/H/09 2005-06 M/S MICRO CARE COMPUTERS (P) LTD., HYDERABAD PANAACCM4586C DY. COMMISSIONER OF INCOME-TAX, CIRCLE 16(2), HYDERABAD. 2. 953/H/09 2005-06 DY. COMMISSIONER OF INCOME-TAX, CIRCLE 16(2), HYDERABAD. M/S MICRO CARE COMPUTERS (P) LTD., HYDERABAD PAN AACCM4586C 3. 947/H/10 2006-07 -DO- -DO- 4. 362/H/13 2006-07 -DO- -DO- AND C.O. 5 48/H/10 (IN ITA NO. 947/H/10) 2006-07 M/S MICRO CARE COMPUTERS (P) LTD., HYDERABAD PANAACCM4586C DY. COMMISSIONER OF INCOME-TAX, CIRCLE 16(2), HYDERABAD. ASSESSEE BY : SHRI A.V. RAGHU RAM REVENUE BY : SHRI M.H. NAIK DATE OF HEARING : 21/05/2014 DATE OF PRONOUNCEMENT : 21/05/2014 ORDER PER BENCH ITA NO. 916/HYD/2009 AND 953/HYD/2009 ARE CROSS APP EALS FOR AY 2005-06 AND ARE DIRECTED AGAINST THE ORDER OF CI T(A)-V, HYDERABAD, DATED 10/078/2009. ITA NOS. 947/HYD/10 A ND 362/HYD/13 ARE FILED BY THE REVENUE FOR AY 2006-07. C.O. NO. 4 8/HYD/10 FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF CIT(A ) IN AY 2006-07. AS IDENTICAL ISSUES ARE INVOLVED IN THESE APPEALS, THEY WERE CLUBBED ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 2 AND HEARD TOGETHER, THEREFORE, WE FIND IT CONVENIEN T TO DISPOSE OF THESE APPEALS BY OF WAY OF THIS CONSOLIDATED ORDER. 2. 1 ST COMMON GROUND IN ITA NO. 916/HYD/09 AND IN C.O. NO . 48/HYD/10 IS WITH REGARD TO DISALLOWANCE OF DEPRECI ATION. 3. BRIEFLY THE FACTS OF THE CASE ARE, AS NARRATED I N AY 2005-06, THAT THE ASSESSEE IS A PRIVATE LTD. COMPANY, WHICH DERIVES FROM TRADING, LEASING AND SERVICE CONTRACTS IN COMPUTERS AND PERIPHERALS. FOR THE AY 2005-06, IT HAS FILED THE RETURN OF INCO ME ON 29/10/2005 SHOWING INCOME OF RS. 9,09,810/- UNDER NORMAL PROVI SIONS AND BOOK PROFIT OF RS. 1,95,60,060/- U/S 115JB OF THE ACT. O N SCRUTINY OF THE RETURN, THE AO DISALLOWED A SUM OF RS. 55,209/- TOW ARDS FREIGHT CHARGES AND AN AMOUNT OF RS. 25,81,775/- CLAIMED TO WARDS INTEREST U/S 40(A)(IA) OF THE ACT. THE AO FURTHER DISALLOWED A SUM OF RS. 1,74,906/- TOWARDS PRIOR PERIOD EXPENSES AND A SUM OF RS. 3,91,049/- CLAIMED TOWARDS PRIOR PERIOD INTEREST ON LOANS. HE FURTHER DISALLOWED A SUM OF RS. 2,45,99,386/- CLAIMED TOWARDS DEPRECIA TION ON THE LEASED ASSETS. IN THE RETURN, THE ASSESSEE HAS SHOW N RECEIPTS FROM LEASE RENTALS AT RS. 85,68,210/-. HOWEVER, THE AO H ELD THAT THE FINANCE INCOME FROM SUCH LEASE PERTAINING TO THE PREVIOUS YEAR, HAS TO BE TAXED. THEREFORE AFTER EXCLUDING THE SUM OF R S. 85,68,210/- SHOWN TOWARDS LEASE RENTALS FROM BHARAT HEAVY ELECT RICAL LIMITED (BHEL), HE ADDED AN AMOUNT OF RS.17,41,707/- TOWARD S 'FINANCE INCOME' FROM SUCH LEASE TO THE INCOME OF THE ASSESS EE. WITH THE ABOVE DISALLOWANCES AND ADJUSTMENTS MADE TO THE RET URNED INCOME, HE COMPLETED THE ASSESSMENT U/S 143(3) OF THE ACT O N A TOTAL INCOME OF RS.2,18,85,632/-, WHICH IS MORE THAN THE BOOK PR OFIT SHOWN AS PER SECTION 115JB OF THE ACT. 4. AS REGARDS THE GROUND RELATES TO DISALLOWANCE O F CLAIM OF DEPRECIATION ON LEASED ASSETS, DURING SCRUTINY OF THE RETURN, THE ASSESSING OFFICER FOUND THAT DURING THE PREVIOUS YE AR, THE ASSESSEE HAS LEASED OUT COMPUTERS TO BHEL. IT HAS PURCHASED THOSE COMPUTERS ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 3 AT A COST OF RS.4,09,98,978/- FROM THE FINANCE TAKE N FROM HP FINANCIAL SERVICES INDIA PRIVATE LIMITED. THE ASSESSING OFFIC ER NOTED THAT IN ITS BOOKS OF ACCOUNTS, THE ASSESSEE HAS SHOWN SUCH LEAS E TRANSACTION AS SALE AND ONLY IN THE COMPUTATION OF INCOME, IT HAS TREATED THE SAME AS LEASE TRANSACTION AND CLAIMED DEPRECIATION ON SU CH ASSETS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY SUCH LEASE TRANSA CTION SHOULD NOT BE TREATED AS SALES AND THE DEPRECIATION CLAIMED ON SUCH ASSETS SHOULD NOT BE DISALLOWED. IN RESPONSE TO THIS, THE ASSESSEE HAS SUBMITTED THAT AS PER THE ACCOUNTING STANDARD-19 (A S-19), THE LEASE TRANSACTIONS ARE CLASSIFIED AS FINANCIAL LEASE AND OPERATING LEASE. IT IS MANDATORY TO RECOGNISE THE ASSETS GIVEN UNDER FINAN CIAL LEASE, AS A RECEIVABLE IN THE BALANCE SHEET, WITHOUT CAPITALIZI NG THE SAME AS A FIXED ASSET. SINCE THE LEASED ASSETS HAVE BEEN TREA TED AS A RECEIVABLE, THE LEASE TRANSACTION HAS BEEN DISCLOSE D AS A SALE IN THE PROFIT & LOSS ACCOUNT FOR THE YEAR AND THE INITIAL DIRECT COST INCURRED SHOULD BE RECOGNISED AS A EXPENDITURE IN P & L ACCO UNT, AT THE INCEPTION OF LEASE. IT WAS STATED THAT THE ASSESSEE HAS BEEN DISCLOSING THE INITIAL INVESTMENT IN LEASE AS A REC EIVABLE IN THE BALANCE SHEET. IT WAS FURTHER STATED THAT SINCE THE OWNERSHIP RIGHT OVER THE ASSETS RESTS WITH THE COMPANY, IT HAS CLAI MED DEPRECIATION ON SUCH ASSETS. IT WAS FURTHER SUBMITTED THAT COST OF PURCHASE OF LEASED ASSETS AMOUNTING TO RS.4,09,98,978/- FORMS P ART OF FIXED ASSETS OF THE COMPANY, ON WHICH DEPRECIATION HAS BE EN CLAIMED. IT WAS FURTHER SUBMITTED THAT THE LEASE RENTALS WHICH ARE NOT ACCOUNTED IN THE COMPANY'S P & L ACCOUNT TO COMPLY WITH AS-19 ,HAS BEEN OFFERED AS A INCOME IN THE STATEMENT OF COMPUTATION OF INCOME. 4.1 THE ASSESSING OFFICER, HOWEVER, HAS NOT ACCEPTE D SUCH SUBMISSIONS OF THE ASSESSEE. HE NOTED THAT AS PER A CCOUNTING STANDARD-19 (AS-19), THIS LEASE TRANSACTION HAS TO BE TREATED AS FINANCIAL LEASE AND IT HAS TO BE RECOGNISED AS ONLY SALE FOR THE PURPOSE OF COMPUTATION OF INCOME UNDER THE INCOME T AX ACT. HE MENTIONED THAT AS IT IS ONLY A FINANCIAL LEASE TRAN SACTION, IT IS LIKELY ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 4 THAT BHEL MIGHT HAVE CLAIMED DEPRECIATION ON THESE ASSETS. HE FURTHER NOTED THAT IN RESPONSE TO HIS QUERY TO THE ASSESSEE FOR PRODUCING A LETTER FROM BHEL THAT THE LATTER HAS NO T CLAIMED DEPRECIATION ON SUCH ASSETS, IT COULD NOT PRODUCE A NY CONFIRMATION LETTER FROM BHEL IN THAT REGARD. THE ASSESSING OFFI CER FURTHER NOTED THAT UNDER A FINANCIAL LEASE, SUBSTANTIALLY ALL THE RISKS AND REWARDS INCIDENTAL TO LEGAL OWNERSHIP ARE TRANSFERRED BY TH E LESSOR AND THUS THE LEASE PAYMENT RECEIVABLE IS TREATED BY THE LESS OR AS REPAYMENT OF PRINCIPAL AND FINANCE INCOME. WITH THESE OBSERVATIO NS, THE ASSESSING OFFICER HELD THAT IN THE CASE OF THE ASSESSEE, IT I S NOT A GENUINE LEASE TRANSACTION AND HENCE, THE C1AIN: OF THE ASSESSEE F OR DEPRECIATION FOR AN AMOUNT OF RS.2,45,99,386/- (60% OF RS.4,09,98,97 8) CANNOT BE ALLOWED. ACCORDINGLY, HE DISALLOWED THE SAID CLAIM. 5. ON APPEAL TO CIT(A), THE CIT(A) AFTER CONSIDERIN G THE SUBMISSIONS OF THE ASSESSEE AND PERUSING THE MATERI AL ON RECORD, THE CIT(A) OBSERVED THAT THE ASSESSING OFFICER HAS NOT ED THAT IN THE CASE OF THE ASSESSEE, IT IS ONLY A FINANCIAL LEASE TRANSACTION. THE ASSESSEE ALSO ADMITS THAT SUCH COMPUTERS, 243 COMPU TERS VIDE LEASE AGREEMENT DATED 14.02.2005 AND FURTHER 250 COMPUTER S VIDE ANOTHER AGREEMENT DATED 14.02.2005, HAVE BEEN ACQUIRED BY B HEL UNDER A FINANCIAL LEASE. IN THEIR LETTER DATED 04.06.2004 WRITTEN BY BHEL TO THE ASSESSEE COMPANY, IN CONNECTION WITH THE SUPPLY OF 243 PCS WITH PERIPHERALS AND 250 PCS WITH PERIPHERALS, WHILE SH OWING THE QUARTERLY RENTAL VALUES SEPARATELY AT RS.10,31,378/ - (IN RESPECT OF 243 SYSTEMS UNDER FIVE YEARS LEASE) AND AT RS.26,40,711 /- (IN RESPECT OF 250 SYSTEMS UNDER THREE YEARS LEASE) THE 'TERMINAL CHARGES' IN RESPECT OF BOTH THE ITEMS, ARE SHOWN AT RS.910/- AN D AT RS.642/- RESPECTIVELY. IN THE TWO AGREEMENTS, EXECUTED BY TH E ASSESSEE WITH BHEL ON 14.02.2005, THE LATTER IS SHOWN AS 'USER' O F SUCH EQUIPMENTS. THE ASSESSEE HAS BEEN SHOWN AS THE 'CO MPANY'. UNDER CLAUSE (V) OF ARTICLE-I OF FIRST LEASE AGREEMENT DA TED 14.02.2005 RELATING TO SUPPLY OF 243 NUMBER OF SYSTEMS (FOR FI VE YEARS), WHILE DEFINING THE TERM 'TERMINAL PAYMENT', IT IS STIPULA TED THAT USER WILL ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 5 BECOME ABSOLUTE OWNER OF THE EQUIPMENT ON PAYING OF THE TERMINAL CHARGES OF RS.910 AFTER EXPIRY OF THE LEASE PERIOD. SIMILARLY, AS PER CLAUSE (V) OF ARTICLE-I OF THE SECOND AGREEMENT PER TAINING TO LEASING OF 250 NUMBER OF SYSTEMS (FOR THREE YEARS), THE USER W ILL BECOME ABSOLUTE OWNER OF SUCH EQUIPMENTS ON PAYING OF TERM INAL CHARGES OF RS.642 AFTER EXPIRY OF THE LEASE PERIOD. FROM THE A BOVE, IT MAY BE SEEN THAT IT IS MERELY A CASE OF FINANCIAL LEASE. I N THEIR FIRST LETTER DATED 04.06.2004 TO THE ASSESSEE, THE BHEL AUTHORIT IES, BY MENTIONING ABOUT THE TERMINAL CHARGES, HAVE MADE TH EIR INTENTION CLEAR TO ACQUIRE/PURCHASE THOSE ASSETS, ON ABSOLUTE /FULL OWNERSHIP BASIS. FURTHER, AS PER CLAUSE 4.2 UNDER ARTICLE-4 OF BOTH THE ABOVE AGREEMENTS, BHEL HAS TO PAY THE LEASE RENTALS DURI NG THE LEASE PERIOD DIRECTLY TO HEWLETT-PACKARD FINANCIAL SERVIC ES INDIA PRIVATE LIMITED AND NOT TO THE ASSESSEE. FROM THIS ALSO, IT CLEARLY SHOWS THAT THE SUPPLY OF COMPUTER SYSTEMS IN TWO BATCHES OF 2 43 NUMBERS AND 250 NUMBERS ALONG WITH PERIPHERALS, TO BHEL WAS THR OUGH FINANCIAL LEASE. IN OTHER WORDS, IT IS A CASE MERE FINANCING ARRANGEMENT MADE THROUGH THE ASSESSEE FOR ACQUISITION OF SAID NUMBER S OF COMPUTER SYSTEMS BY BHEL. 5.1 THE CIT(A) NOTED THAT IN THE CASE OF DCIT VS. H OUSING DEVELOPMENT FINANCE CORPORATION LIMITED (2006) 98 I TD 319 (MUM), IT WAS HELD BY THE TRIBUNAL, MUMBAI BENCH, THAT IF THE LEASE TRANSACTION IS ACTUALLY A FINANCIAL ARRANGEMENT BET WEEN THE PARTIES, THEN REQUIREMENT OF SECTION 32 OF THE ACT CANNOT BE SAID TO BE FULFILLED AND THUS, DEPRECIATION IS NOT ALLOWABLE TO THE SO-C ALLED LESSOR. IF THE LESSOR IN TERMS OF THE AGREEMENT PROVIDES ONLY THE RIGHT TO USE TO THE LESSEE DURING THE PERIOD OF LEASE, RETAINING THE RI GHT AS 'OWNER' WITH ITSELF, IN SUCH A CASE, THE LESSOR WOULD BE REGARDE D AS THE OWNER FOR THE PURPOSE OF CLAIMING DEPRECIATION. HOWEVER, IF T HE LEASING ARRANGEMENT IS A MERE FINANCING ARRANGEMENT, WHEREB Y THE LESSOR, IN REALITY IS ONLY PROVIDING FUNDS FOR ACQUISITION OF THE ASSET AND ASSET LEASED OUT, FOR ALL INTENTS AND PURPOSES, BECOMES P ROPERTY OF THE LESSEE, THEN IN SUCH A SITUATION THE BENEFIT OF DEP RECIATION WOULD NOT ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 6 BE AVAILABLE IN THE HANDS OF THE LESSOR, BUT IN THE HANDS OF THE LESSEE. IT WAS SO HELD BY THE HON'BLE TRIBUNAL DELHI BENCH, IN THEIR DECISION IN THE CASE OF INDUSTRIAL FINANCE CORPORATION OF IN DIA LIMITED VS. CIT (2005) 4 SOT 223 (DEL). FURTHER, IN THE CASE OF ASE A BROWN BOVERI LTD. VS. INDUSTRIAL FINANCE CORPORATION OF INDIA (2 005) 126 COMP CAS 332 (2006) 154 TAXMAN 512, THE HON'BLE SUPREME COUR T HELD THAT IN CASE OF FINANCE LEASE, IT IS THE LESSEE WHO, FOR AL L PRACTICAL PURPOSES, IS THE OWNER OF THE ASSETS AND NOT THE LESSOR. APPL YING THE PRINCIPLES LAID DOWN BY THE HON'BLE APEX COURT IN THE CASE OF ASEA BROWN BOVERI LTD. VS. INDUSTRIAL FINANCE CORPORATION OF I NDIA (SUPRA), THE HON'BLE TRIBUNAL, MUMBAI BENCH, IN THE CASE OF J.M. SHARES & STOCK BROKERS VS. DEPUTY CIT (2007) REPORTED IN 109 ITD 3 29/(2009) 311 ITR (A.T.)115, HELD THAT THE AGREEMENT MADE BY THE ASSESSEE WAS A FINANCIAL LEASE AGREEMENT. THE LESSEE BECOMES THE O WNER IN THE CASE OF A FINANCIAL LEASE, AND THE ASSESSEE NOT BEING OW NER OF THE ASSETS, WAS NOT ENTITLED TO DEPRECIATION. 5.2 IN VIEW OF THE ABOVE, OBSERVATIONS, THE CIT(A) HELD AS FOLLOWS: SINCE, IN THE INSTANT CASE, IT IS ONLY A FINANCIAL LEASE, AS DISCUSSED IN PARA 4.10 & 4.11 ABOVE, RELYING ON THE RATIO OF THE ABOVE DECISIONS OF THE HON'BLE SUPREME COURT IN ASE A BROWN BOVERI LTD. VS. INDUSTRIAL FINANCE CORPORATION OF I NDIA (SUPRA) AND OF HONBLE ITAT DELHI BENCH, IN INDUSTRIAL FINA NCE CORPORATION OF INDIA LTD. (SUPRA) AND OF HONBLE IT AT, MUMBAI BENCH, IN J.M. SHARES & STOCK BROKERS (SUPRA), I HO LD THAT THE ASSESSEE NOT BEING OWNER OF THOSE COMPUTER SYSTEMS, SUPPLIED TO BHEL UNDER SUCH LEASE, IS NOT ENTITLED TO DEPREC IATION U/S 32 OF THE ACT ON SUCH ASSETS. ACCORDINGLY, THE DISALLO WANCE OF THE CLAIM OF DEPRECIATION FOR AN AMOUNT OF RS. 2,45,99, 386/- MADE BY THE AO IN THE ASSESSMENT IS JUSTIFIED. THUS, SUC H DISALLOWANCE MADE IN THE ASSESSMENT, IS UPHELD. HEN CE, THIS GROUND OF APPEAL IS REJECTED. 6. AGAINST THE ORDER OF THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RECO RD AND GONE THROUGH THE ORDERS OF THE REVENUE AUTHORITIES. THE LEARNED TRIED TO DISTINGUISH THE ORDER OF THE TRIBUNAL, SPECIAL BENC H, MUMBAI IN CASE ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 7 OF INDUSIND BANK LTD. VS. ADDITIONAL CIT, [2012] 13 5 ITD 165 (SB)(MUM.). HOWEVER, WE ARE NOT IN A POSITION TO AC CEPT THE ARGUMENTS OF THE ASSESSEES COUNSEL AS IT IS A SETT LED ISSUE AND, THEREFORE, WE FOLLOW THE ORDER OF THE SPECIAL BENCH WHEREIN THE SPECIAL BENCH HELD AS FOLLOWS: WHETHER PRESENT AGREEMENT IS AN OPERATING LEASE OR FINANCE LEASE TURNING TO THE INSTANT LEASE AGREEMENT IT CAN BE OB SERVED THAT IT IS THE LESSEE ALONE WHO HAS THE RIGHT TO USE THE ASSET NOT ONLY DURING THE PERIOD OF LEASE OF SEVEN YEARS BUT AFTER THAT ALSO AS THE AGREEMENT ITSELF PROVIDES FOR SALE OF THE BOILE R TO INDO GULF AFTER THE EXPIRY OF THE LEASE PERIOD AT A PRE-DETER MINED VALUE OF 1% OF THE COST OF ASSET. THE ASSESSEE CANNOT CANCEL THE LEASE PERIOD AT HIS OPTION AND REPOSSESS THE ASSET AT ANY TIME. IT IS ONLY THE LESSEE WHO HAS TO DECIDE ABOUT THE USER OF THE ASSET. HE HAS GOT THE EXCLUSIVE RIGHT TO USE THE ASSET. IR RESPECTIVE OF THE FACT WHETHER THE BOILER IS USED OR NOT OR EVEN KEPT IDLE FOR A FAIRLY LONG PERIOD, THE ASSESSEE CANNOT COMPEL HIM IN ANY MANNER EITHER TO USE THE BOILER OR RETURN IT. WHETH ER THERE IS ANY APPRECIATION OR DEPRECIATION IN THE VALUE OF BOILER , IT IS ONLY THE LESSEE WHO HAS TO SHARE THE BENEFIT OR TAKE THE RIS K. THE ASSESSEE-LESSOR HAS NO AUTHORITY WHATSOEVER TO LEAS E OUT THE BOILER TO ANYBODY ELSE DURING OR AFTER THE LEASE PE RIOD OF 7 YEARS. ANY OTHER BENEFIT SUCH AS THE RIGHT TO CLAIM DAMAGES, WARRANTEES, ETC. FROM THE SUPPLIER ALSO VEST WITH T HE LESSEE ALONE. THE ASSESSEE CAN IN NO CASE CLAIM ANY SUBSID IARY OR OTHER BENEFIT ATTACHED TO THE OWNERSHIP OF BOILER. THE ABOVE DISCUSSION IN THE LIGHT OF THE RELEVANT C LAUSES OF THE AGREEMENT FAIRLY INDICATES THAT ALL THE CRITERIA OF FINANCE LEASE ARE FULLY SATISFIED IN THIS CASE. LEASE AGREEMENT I S NON- CANCELLABLE FOR A PERIOD OF SEVEN YEARS AND THEREAF TER THE LEASED ASSET HAS BEEN PRE-DECIDED TO BE SOLD AT 1% OF THE ORIGINAL COST TO THE LESSEE. WHILE DECIDING THE LEA SE RENTAL AND THE PERIOD OF LEASE, THE ASSESSEES INVESTMENT HAS BEEN DULY TAKEN INTO CONSIDERATION TO ENSURE THAT THE FULL CO ST OF THE ASSET LEASED OUT BY THE ASSESSEE TOGETHER WITH INTEREST I S RECOUPED WITHIN THE SAID PERIOD OF SEVEN YEARS. IT IS THE SO LE RESPONSIBILITY OF THE LESSEE TO BEAR REPAIRS AND MA INTENANCE COST AND ALSO INSURANCE PREMIUM. BOILER HAS BEEN CH OSEN BY THE LESSEE WHO HAS TAKEN THE DELIVERY OF IT. IT IS THE LESSEE WHO HAS TO PAY ALL THE TAXES. FEATURES OF BAILMENT ARE COMPLETELY ABSENT. THE RISKS AND REWARDS INCIDENTAL TO THE OWN ERSHIP ARE VESTED WITH THE LESSEE. WHAT THE ASSESSEE AS A LESS OR OWNS IS NOT ANY ASSET BUT THE CONTRACTED STREAM OF PAYMENTS IN THE SHAPE OF LEASE RENTAL COVERING ITS ENTIRE INVESTMEN T PLUS ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 8 INTEREST. SUCH LEASE RENTALS HAVE BEEN ENSURED BY W AY OF THE ASSESSEE TAKING POST-DATED CHEQUES FOR THE ENTIRE L EASE PERIOD. ON THE OTHER HAND WHAT THE LESSEE HAS GOT IS NOT JU ST A RENTED BOILER BUT A FIXED NON-TERMINABLE AGREEMENT UNDER W HICH IT IS OBLIGED TO PAY THE RENTALS. THESE FACTORS STRONGLY INDICATE THAT WHEREAS THE LESSEE IS THE ACTUAL OR REAL OWNER, THE LESSOR- ASSESSEE IS ONLY NOMINAL OR SYMBOLIC OR THE SO-CALL ED PERCEIVED OWNER. WHETHER THE EXTANT LEASE AGREEMENT PREDOMINANTLY SA TISFIES THE CONDITIONS OF AN OPERATING LEASE. ON READING THE LE ASE AGREEMENT AS A WHOLE, IT IS FOUND THAT EXCEPT FOR N AMING THE LESSOR AS OWNER AT SOME PLACES IN THE AGREEMENT AND INSERTING CERTAIN COSMETIC CLAUSES TO GIVE THE COLOUR OF OPER ATING LEASE, THERE IS NOTHING IN SUBSTANCE WHICH SATISFIES THE I NHERENT REQUISITES OF OPERATING LEASE. IT WAS OBSERVED THAT THE LEASE IS NOT CANCELLABLE PRIOR TO THE EXPIRY PERIOD OF SEVEN YEARS. THE COST OF REPAIRS AND INSURANCE IS TO BE BORNE BY THE LESSEE. SUM TOTAL OF THE LEASE RENTALS BY THE LESSEE RECOUPS TH E AMOUNT INVESTED BY THE LESSOR PLUS INTEREST. THERE IS A CL AUSE THAT AFTER THE EXPIRY OF SEVEN YEARS PERIOD, THE BOILER WILL B E SOLD TO THE LESSEE AT PREDETERMINED VALUE. IT IS THE LESSEE WHO HAS TO BEAR THE LOSS DUE TO OBSOLESCENCE. ALL THE RISKS AND REW ARDS VEST WITH THE LESSEE. THE COURT CONSIDERED THE CUMULATIV E EFFECT OF ALL THE FACTORS FOR AND AGAINST THE OPERATING LEASE , IT COULD BE EASILY FOUND OUT THAT IF ONE HAS TO CHOOSE BETWEEN THE FINANCE LEASE AND OPERATING LEASE, THERE CAN BE NO DIFFICUL TY IN REACHING THE IRRESISTIBLE CONCLUSION THAT IT IS A CASE OF FI NANCE LEASE AGREEMENT. IN PITH AND SUBSTANCE THIS AGREEMENT IS NOTHING BUT A FINANCE LEASE. WHETHER DEPRECIATION IS ALLOWED TO LESSOR IN CASE O F GENUINE FINANCE LEASE ADVERTING TO THE FACTS OF THE INSTANT CASE, IT CAN BE SEEN THAT IT IS A CASE OF FINANCE LEASE AGREEMENT. THE ONLY AND THE INESCAPABLE CONCLUSION WHICH IN OUR CONSIDERED OPIN ION FOLLOWS IS THAT THE REAL OWNER OF THE LEASED PROPERTY IS IN DO GULF FERTILIZER & CHEMICAL CORPORATION LIMITED AND NOT T HE ASSESSEE. WE, THEREFORE, DECLINE TO GRANT ANY DEPRECIATION TO THE ASSESSEE-LESSOR. HOWEVER THE LESSEE, IF SO ADVISED, MAY TAKE RECOURSE TO THE LEGAL REMEDY IF ANY, FOR THE GRANT OF DEPRECIATION. REALTY BEHIND PRESENT LEASE AGREEMENT THE LAW PERMITS TAX PLANNING AND NOT TAX AVOIDANCE. IF WITHIN THE FOUR CORNERS OF LAW A PERSON ARRANGES ITS AFFAI R IN SUCH A WAY THAT HIS OVERALL TAX LIABILITY IS REDUCED, THER E CANNOT BE ANY EMBARGO ON SUCH TAX PLANNING. IF HOWEVER DUBIOUS ME ANS ARE ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 9 ADOPTED TO REDUCE THE INCIDENCE OF TAX BY ARTIFICIA LLY INFLATING EXPENSES OR REDUCING INCOME, IT CANNOT BE DESCRIBED AS ANYTHING OTHER THAN TAX AVOIDANCE. THE LAW PERMITS ONLY TAX PLANNING AND NOT TAX AVOIDANCE. WHEN WE CONSIDER TH E REALITY OF THE SITUATION IN THE PRESENT CASE, IT BECOMES ABUND ANTLY MANIFEST THAT A SIMPLE LOAN TRANSACTION WAS MADE TO ADORN THE GARB OF LEASE TO AVOID THE RIGHTFUL TAX DUE TO THE EXCHEQUER. WE, THEREFORE, REFUSE TO ACCEPT THE VERY GENUINENESS OF THE SO CALLED LEASE AGREEMENT ITSELF AND HOLD THAT IT IS N OT EVEN A CASE OF FINANCE LEASE. IN OUR CONSIDERED OPINION, THE AU THORITIES BELOW WERE FULLY JUSTIFIED IN REFUSING TO GRANT DEP RECIATION TO THE ASSESSEE IN BOTH THE YEARS UNDER CONSIDERATION. CONCLUSION: IF THE CONDITIONS AS LAID DOWN IN THE JUDGMENTS OF ASEA BROWN BOVERI LIMITED (SUPRA) AND ASSOCIATION OF LEASING & FINANCIAL SERVICES COMPANIES (SUPRA) ARE SATISFIED IN A LEASE AGREEMENT, IT WILL BE A CASE OF FINANCE LEASE AND NOT OPERATIN G LEASE. ONLY THE LESSEE CAN BE TREATED AS OWNER OF THE ASSE T IN CASE OF A FINANCE LEASE. NO DEPRECIATION CAN BE ALLOWED TO THE LESSOR IN SUCH A CASE OF A GENUINE FINANCE LEASE. RESPECTFULLY FOLLOWING THE SPECIAL DECISION OF THE TRIBUNAL, WE CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE RAISED IN ITS APPEAL AND C.O IS DISMISSED. 8. NEXT GROUND IS WITH REGARD TO THE ADDITION ON AC COUNT OF REWORKING OF LEASE RENTALS IN ITA NO. 916/H/09 AND IN C.O. 9. ACCORDING TO THE ASSESSING OFFICER, SINCE IN THI S CASE, IT IS ONLY A FINANCIAL LEASE TRANSACTION, THE 'FINANCE INCOME' , FROM SUCH LEASE PERTAINING TO THE PREVIOUS YEAR UNDER CONSIDERATION , HAS TO BE TAXED IN THE HANDS OF THE ASSESSEE. HE OBSERVED THAT THE LEASE RENTAL RECEIVABLE BY THE ASSESSEE DURING THE PERIOD OF LEA SE AGREEMENT, OVER AND ABOVE THE VALUE OF ASSETS, AMOUNTS TO RECE IPT OF FINANCE CHARGES, WHICH HAS TO BE TAXED OVER THE PERIOD OF L EASE AS 'FINANCE INCOME'. THE PURCHASE COST OF THE ENTIRE COMPUTER S YSTEMS WAS RS.4,09,98,978/- (RS.L,47,39,318 + RS.2,62,59,660). SINCE THE COST OF COMPUTERS SUPPLIED UNDER AGREEMENT I WAS RS.L,47,39 ,318 AND THE TOTAL LEASE RENTAL VALUE FOR FIVE YEARS WAS RS.2,06 ,27,561/-, THE ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 10 ASSESSING OFFICER COMPUTED THE TOTAL FINANCE FOR TH E ENTIRE LEASE PERIOD AT RS. 58,88,262/-, AND THE AVERAGE MONTHLY FINANCE INCOME AT RS.98,137/-, AS UNDER: AGREEMENT I LEASE PERIOD 60 MONTHS COST RS. 1,47,39,318 FOR 60 MONTHS RS. 2,06,27,580 FINANCE INCOME TO BE RECEIVED FOR 60 MONTHS RS. 58,88,262 AVERAGE RATE OF FINANCE INCOME = TOTAL FINANCE INC OME/LEASE PERIOD RS. 58,88,262/60 = RS.98,137 9.1 SINCE DURING PREVIOUS YEAR RELEVANT TO THE ASSE SSMENT YEAR 2005-06, THE DURATION OF LEASE WAS FOR A PERIOD OF SEVEN MONTHS, THE ASSESSING OFFICER COMPUTED THE FINANCE INCOME, TAXA BLE IN THE HANDS OF THE ASSESSEE FOR THIS ASSESSMENT YEAR AS PER THE ABOVE LEASE, AT RS.6,86,963 (RS.98,137 X 7). FURTHER, AS THE COST O F COMPUTERS GIVEN UNDER THE SECOND AGREEMENT (AGREEMENT II) WAS RS.2, 62,59,660 AND THE TOTAL LEASE RENTAL VALUE UNDER THAT LEASE FOR T HREE YEARS (36 MONTHS) IS SHOWN AT RS.3,16,88,534, THE ASSESSING O FFICER COMPUTED THE TOTAL 'FINANCE INCOME' AND AVERAGE MONTHLY FINA NCE INCOME RECEIVABLE UNDER SUCH LEASE, AT RS.54,28,872 AND RS .1,50,802, AS UNDER: AGREEMENT II LEASE PERIOD 60 MONTHS COST RS. 2,62,59,660 LEASE FOR 36 MONTHS RS. 3,16,88,532 FINANCE INCOME TO BE RECEIVED FOR 60 MONTHS RS. 54,28,872 AVERAGE RATE OF FINANCE INCOME = TOTAL FINANCE INC OME/LEASE PERIOD RS. 54,28,872/36 = RS.150802 9.2 SINCE DURING THE CURRENT PREVIOUS YEAR, THE DUR ATION OF SUCH LEASE WAS FOR A PERIOD OF SEVEN MONTHS, THE FINANCE INCOME PERTAINING ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 11 TO SUCH PERIOD FALLING IN THE CURRENT PREVIOUS YEAR , WHICH HAS TO BE TAXED IN THE HANDS OF THE ASSESSEE, WAS COMPUTED BY THE ASSESSING OFFICER AT RS.10,55,614 (RS.1,50,802 X 7 MONTHS). T HUS, THE TOTAL FINANCE INCOME FROM BOTH THE ABOVE LEASES, WHICH IS TAXABLE IN THE HANDS OF THE ASSESSEE, WAS WORKED OUT BY THE ASSESS ING OFFICER AT RS.17,41,707 (RS.6,86,963 + RS.10,55,614). SINCE TH E LEASE RENTAL FROM BHEL, AS PER BOTH THE ABOVE AGREEMENTS COMES T O RS.85,65,210 (RS.24,06,551 + RS.61,61,659), AFTER EXCLUDING THE SAID AMOUNT FROM TOTAL INCOME OF THE ASSESSEE, THE ASSESSING OFFICER ADDED SUCH FINANCE INCOME AMOUNTING TO RS.17,41,707 TO THE TOT AL INCOME OF THE ASSESSEE. 10. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE CIT(A) DID NOT AGREE WITH THE CONTENTIONS OF THE ASSESSEE. HE OBSERVED THAT SINCE, IN THE CASE OF THE ASSESSEE, IT IS A FINANCI AL LEASE, THE ASSESSEE IS NOT ENTITLED TO DEPRECIATION ON THE ASS ETS GIVEN UNDER SUCH LEASE, AS ALREADY HELD BY HIM. FURTHER, BEING FINANCIAL LEASE TRANSACTIONS, THE 'FINANCE INCOME' ARISING FROM SUC H LEASE, AND NOT THE LEASE RENTALS AS PER BOTH THE LEASE AGREEMENTS, PER TAINING TO THE PREVIOUS YEAR UNDER CONSIDERATION, HAS TO BE TAXED IN THE HANDS OF THE ASSESSEE FOR THIS ASSESSMENT YEAR. HE THEREFORE DID NOT FIND ANY INFIRMITY IN THE METHOD ADOPTED BY THE AO FOR ARRIV ING AT THE FINANCE INCOME AS PER BOTH THE LEASE AGREEMENTS. THE CIT(A ) HELD THAT SINCE, THE FINANCE INCOME AS PER BOTH THE AGREEMENT S, HAVE BEEN ARRIVED BY THE AO AT RS. 6,86,963/- AND RS. 10,55,6 14/-, HE WAS JUSTIFIED IN TAXING THE SAID AMOUNTS AGGREGATING TO RS. 17,41,707/- WHILE EXCLUDING THE LEASE RENTALS FOR AN AMOUNT OF RS. 85,68,210/- FROM THE INCOME SHOWN BY THE ASSESSEE. HE, THEREFOR E, CONFIRMED THE ACTION OF THE AO. AGGRIEVED, THE ASSESSEE IS IN AP PEAL BEFORE US. 11. BEFORE US, THE LEARNED AR OF THE ASSESSEE SUBMI TTED THAT THE STAND TAKEN BY THE ASSESSING OFFICER IN THE ASSESS MENT, IS NOT CORRECT. IT WAS STATED THAT AS PER THE ACCOUNTING S TANDARD, THE LESSOR, ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 12 I.E. THE ASSESSEE COMPANY, IS REQUIRED TO RECOGNISE ASSETS GIVEN UNDER A FINANCIAL LEASE IN ITS BALANCE SHEET AS A ' RECEIVABLE' AT AN AMOUNT EQUAL TO THE NET INVESTMENT IN THE LEASE. HE NCE, THE FAIR VALUE OF SAID ASSETS GIVEN ON FINANCIAL LEASE TO BHEL, WH ICH IS RS.4,49,23,970, HAS BEEN TREATED AS A RECEIVABLE AN D CORRESPONDING CREDIT GIVEN TO SALES A/C. IT WAS SUBMITTED THAT TH E ACTUAL COST OF THE LEASED ASSETS HAS BEEN INCLUDED IN THE PURCHASES AM OUNTING TO RS. 4,09,98,978. IT WAS FURTHER SUBMITTED THAT THE PROP ORTIONATE FINANCIAL CHARGES ON ACCRUED LEASE RENTALS AMOUNTING TO RS. 2 0,76,370/- HAS BEEN RECOGNIZED AS INCOME AND CREDITED TO THE PROFI T & LOSS ACCOUNT FOR THE YEAR. FURTHER, CLARIFYING ON THE METHOD OF ARRIVING AT THE PROFIT AS PER INCOME-TAX ACT, THE ASSESSEE SUBMITTED THAT THE PROFIT AS PER THE BOOKS HAS BEEN ADJUSTED BY ADDING BACK THE VALU E OF PURCHASE OF RS. 4,09,98,978/-. IT WAS FURTHER STATED THAT THE S ALE VALUE OF RS. 4,49,23,970/- AND THE FINANCIAL CHARGES ON LEASE RE NTALS OF RS. 20,76,370/- AS PER THE BOOKS HAS BEEN ADJUSTED TO T HE BOOK PROFIT. IT WAS FURTHER SUBMITTED THAT THE INVOICES PERTAINING TO SUCH LEASED ASSETS, ARE IN THE NAME OF THE ASSESSEE COMPANY AND NOT IN THE NAME OF HIRE PURCHASE FINANCIER I.E. HEWLETT PACKARD FIN ANCIAL SERVICES (INDIA) PVT. LTD. STATING THAT THE SAID ASSETS FORM PART OF THE FIXED ASSETS OF THE COMPANY AND IT IS ELIGIBLE TO CLAIM D EPRECIATION U/.S 32 OF THE ACT THEREON, THE ASSESSEE CONTENDED THAT THE METHOD ADOPTED BY THE AO FOR COMPUTING INCOME AT RS. 17,41,707/- A FTER REJECTING THE CLAIM OF DEPRECIATION AND ADDING BACK RS. 85,68,210 /- SHOWN BY THE ASSESSEE, IS INCORRECT. 12. THE LEARNED DR, ON THE OTHER HAND, RELIED ON TH E ORDER OF CIT(A). 13. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORD AND GONE THROUGH THE ORDERS OF THE REVENUE AUTHORITIES. IN T HIS CASE, WE HAVE HELD THAT THE TRANSACTIONS OF THE ASSESSEE ARE FINA NCE LEASE TRANSACTIONS. BEING SO, WE HAVE HELD THAT THE ASSES SEE IS NOT ENTITLED FOR DEPRECIATION AND, CONSEQUENTLY, THE ENTIRE LEAS E INCOME HAS TO BE ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 13 CONSIDERED AS GROSS INCOME OF THE ASSESSEE. THEREFO RE, WE DIRECT THE AO TO DETERMINE THE INCOME OF THE ASSESSEE IN ACCOR DANCE WITH LAW. THUS, THIS GROUND RAISED IN 916/H/109 AND IN CO IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 14. NEXT GROUND RAISED BY THE ASSESSEE IN ITA NO. 9 16/HYD/09 IS WITH REGARD TO DISALLOWANCE OF PRIOR PERIOD EXPENDI TURE. 15. AS NOTED BY THE ASSESSING OFFICER, THE ASSESSEE HAS SHOWN AN ADJUSTMENT IN THE COMPUTATION SHEET FOR A SUM OF RS .1,74,906 (RS.4,50,98,876 - RS.4,49,23,970). STATING THAT SUC H EXPENSES DO NOT PERTAIN TO THE CURRENT ACCOUNTING YEAR, THE ASSESSI NG OFFICER DISALLOWED THE SAID AMOUNT. 16. ON APPEAL, BEFORE THE CIT(A), IT WAS SUBMITTED THAT SUCH AMOUNT HAS BEEN DERIVED AFTER COMPUTING THE FAIR VA LUE OF THE ASSET AND ACTUAL LEASE RENTAL OVER A PERIOD OF TIME DUE T O APPLICATION OF THE PRESENT VALUE FACTOR ON THE FUTURE LEASE RENTALS IN ACCORDANCE WITH THE AS-19. IT WAS STATED THAT ACCORDING TO THE ,AS-19, THE ESTIMATED UNGUARANTEED RESIDUAL VALUES USED IN COMPUTING THE LESSOR'S GROSS INVESTMENT IN A LEASE ARE REVIEWED REGULARLY. IF TH ERE HAS BEEN A REDUCTION IN THE ESTIMATED UNGUARANTEED RESIDUAL VA LUE, THE SAME IS ADJUSTED IN THE FINANCIAL YEAR IN WHICH IT OCCURS. IN VIEW OF THESE, THE ASSESSEE HAS CLAIMED AN AMOUNT OF RS. 1,74,906/-. 17. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE CIT(A) CONFIRMED THE ADDITION MADE BY THE AO ON THIS COUNT BY OBSERVING AS UNDER: I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND THE FACTS OF THE CASE. ACCORDING TO THE ASSESSE E, WHERE THERE IS A REDUCTION IN THE ESTIMATED UNGUARANTEED RESIDUAL VALUES OF ASSETS, TRANSFERRED UNDER FINANCIAL LEASE , THE SAME IS ADJUSTED IN THE ACCOUNTS. HOWEVER, IN ABSENCE OF AN Y SPECIFIC ILLUSTRATION FURNISHED BY THE ASSESSEE IN THIS REGA RD, I AM UNABLE TO AGREE WITH SUCH CONTENTION OF THE ASSESSE E THAT THERE WAS A REDUCTION FOR AN AMOUNT OF RS.L,74,906 ON ABO VE ACCOUNT DURING THE PREVIOUS YEAR. IN THE COMPUTATION STATEM ENT OF TOTAL INCOME, WHILE ADDING BACK A SUM OF RS.4,09,98,978, THE ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 14 ASSESSEE HAS DEDUCTED AN AMOUNT OF RS.4,50,98,876 T OWARDS FAIR VALUE OF ASSETS TRANSFERRED UNDER FINANCIAL LE ASE. HOWEVER, AS THE FAIR VALUE OF THE SAID ASSETS GIVEN ON FINAN CIAL LEASE TO SHEL, IS SHOWN BY THE ASSESSEE AT RS.4,49,23,970, I T CLEARLY SHOWS THAT THE ASSESSEE HAS CLAIMED DEDUCTION FOR A N AMOUNT OF RS.1,74,906 (RS.4,50,98,876 -RS.4,49,23,970), AR ISING FROM TRANSFER OF ASSET UNDER A FINANCIAL LEASE, WHICH DO NOT PERTAIN TO THE PREVIOUS YEAR 2004-05. SINCE, SUCH CLAIM DO NOT PERTAIN TO THE CURRENT PREVIOUS YEAR, THE SAME CANNOT BE ALLOW ED DEDUCTION IN THE ASSESSMENT YEAR 2005-06. ACCORDING LY, THE DISALLOWANCE OF THE SAID AMOUNT MADE BY THE ASSESSI NG OFFICER IN THE ASSESSMENT, UNDER PRIOR PERIOD EXPENSES ADJU STMENT, IS JUSTIFIED, AND HENCE, THE SAME IS UPHELD. THUS, THE GROUND OF APPEAL ON THIS ACCOUNT, IS REJECTED. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 18. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORD AND GONE THROUGH THE ORDERS OF THE REVENUE AUTHORITIES. BEFO RE US, NO SERIOUS ARGUMENTS HAVE BEEN ADVANCED BY THE LEARNED AR ON T HIS GROUND. THEREFORE, THIS GROUND IS DISMISSED AS NOT PRESSED. 19. NOW WE DEAL WITH THE REVENUE APPEALS. THE REVEN UE HAS RAISED A COMMON GROUND WITH REGARD TO THE DISALLOWANCE U/S 40(A)(IA) OF INTEREST PAYMENTS TO HP FINANCIAL SERVICES (P) LTD. IN ITA NO. 953/H/09, 947/H/10 AND IN ITA NO. 962/H/13. 20. TO DISPOSE OF THIS GROUND, WE REFER TO THE FACT S FROM ITA NO. 953/HYD/09 FOR AY 2005-06. 21. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSIN G OFFICER NOTICED THAT THE ASSESSEE HAS PAID AN AMOUNT OF RS. 25,81,775 TO M/S HP FINANCIAL SERVICES INDIA PVT. LTD. TOWARDS INTER EST ON TERM LOAN. IN RESPONSE TO QUERY RAISED BY THE ASSESSING OFFICER W HETHER ANY TAX WAS DEDUCTED AT SOURCE (TDS) ON SUCH PAYMENT, THE A SSESSEE HAS SUBMITTED THAT SUCH AMOUNT PAID TO M/S HP FINANCIAL SERVICES INDIA PVT. LTD., AS PER HIRE PURCHASE AGREEMENT ENTERED I NTO WITH SAID COMPANY, IS TOWARDS HIRE PURCHASE FINANCIAL CHARGES AND PROVISIONS OF TDS ARE NOT APPLICABLE TO THE SAME. HOWEVER, THE ASSESSING ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 15 OFFICER HAS NOT ACCEPTED SUCH SUBMISSIONS OF THE AS SESSEE. HE NOTED THAT AS PER THE BALANCE SHEET OF THE ASSESSEE, THE AMOUNT PAYABLE TO M/S HP FINANCIAL SERVICES INDIA PVT. LTD. IS SHOWN UNDER THE HEAD TERM LOAN PAYABLE TO THE SAID COMPANY. IN THE PROFI T & LOSS ACCOUNT, THE ASSESSEE HAS DEBITED INTEREST ON SUCH TERM LOAN . THE ASSESSING OFFICER FURTHER NOTED THAT THE ASSESSEE HAS TAKEN L OAN FROM THE SAID COMPANY AND PURCHASED ASSETS FROM VARIOUS PARTIES. ACCORDING TO HIM, IT IS PURELY A FINANCIAL TRANSACTION. HE FURTH ER NOTED THAT AS PER THE ENTRIES MADE IN THE BOOKS OF ACCOUNT OF THE ASS ESSEE, THE SAID PAYMENT MADE BY IT TO THE ABOVE COMPANY, IS ONLY IN TEREST, ON WHICH PROVISIONS OF TDS ARE APPLICABLE. STATING THAT THE ASSESSEE HAS NOT DEDUCTED TAX ON SUCH PAYMENTS (TDS), AND APPLYING T HE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT, THE ASSESSING OFFICER HAS DISALLOWED THE SAID AMOUNT. AGGRIEVED, THE ASSESSEE CARRIED THE M ATTER IN APPEAL BEFORE THE CIT(A). 22. BEFORE THE CIT(A), THE AR OF THE ASSESSEE FILED WRITTEN SUBMISSIONS WHEREIN IT WAS SUBMITTED THAT THE ASSES SEE COMPANY HAS ENTERED INTO A MASTER AGREEMENT #424 WITH HEWLETT P ACKARD FINANCIAL SERVICES INDIA PRIVATE LIMITED. THE SAID AGREEMENT IS A HIRE PURCHASE AGREEMENT BETWEEN THE ASSESSEE AND M/S HP FINANCIAL SERVICES INDIA PVT. LTD. IT WAS STATED THAT UNDER A HIRE PUR CHASE AGREEMENT, THE INSTALMENTS PAYABLE AT FIXED PERIODICAL INTERVA LS, COMPRISE OF THE CHARGES TOWARDS HIRE OF THE ASSET AND BALANCE AMOUN T TOWARDS THE COST OF THE ASSET. IT IS A STANDARD ACCOUNTING PRAC TICE TO REFLECT THE AMOUNT DUE ON THE ASSET UNDER HIRE PURCHASE SCHEME AS A SECURED LOAN AND HIRE CHARGES PAID DURING THE YEAR, ARE CHA RGED TO THE PROFIT & LOSS ACCOUNT UNDER THE HEAD 'INTEREST', EVEN THOUGH A COMPOSITE PAYMENT IS MADE TO THE VENDOR. 22.1 IT WAS SUBMITTED THAT THE ACCORDING TO THE SC HEDULE #01 AND SCHEDULE #02 OF THE SAID MASTER AGREEMENT, THE ASSE SSEE COMPANY IS REQUIRED TO DISCHARGE ITS LIABILITY FOR THE ASSE TS ACQUIRED UNDER HIRE ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 16 PURCHASE, WITHIN A PERIOD OF 36 MONTHS. THE INSTALM ENTS HAVE BEEN FIXED ON A QUARTERLY BASIS. ACCORDING TO SCHEDULE # 01 OF THE AGREEMENT, THE TOTAL COST OF THE ASSETS ACQUIRED ON HIRE PURCHASE IS RS.2,65,24,858. THE INSTALMENTS HAVE BEEN FIXED AT RS.25,66,280 PER QUARTER. THE TOTAL AMOUNT PAYABLE IN 12 QUARTERLY I NSTALMENTS WOULD BE 12 X RS.25,66,280 = RS.3,07,95,360. THE DIFFEREN CE BETWEEN THE TOTAL AMOUNT OF INSTALMENTS PAYABLE AND THE COST OF THE ASSET I.E. RS.42,70,502 (RS.3,07,95,360 - RS.2,65,24,858), BEI NG HIRE CHARGES, HAS BEEN CLASSIFIED AS 'INTEREST' BY THE ASSESSEE F OR ACCOUNTING PURPOSE. THE ASSESSEE HAS MADE FOUR PAYMENTS OF RS. 25,66,280 DURING THE F.Y. 2004-05 TO M/S HP FINANCIAL SERVICE S INDIA PVT. LTD. AS PER AGREEMENT AND THE AMOUNT OF HIRE CHARGES IN THE INSTALLMENTS PAID DURING THE F.Y. 2004-05, AMOUNTING TO RS.16,61 ,265 HAS BEEN CHARGED TO THE PROFIT & LOSS ACCOUNT UNDER THE HEAD 'INTEREST'. IT WAS FURTHER STATED THAT SIMILAR TREATMENT HAS BEEN GIVE N TO THE QUARTERLY INSTALMENTS OF RS.9,09,520 PER QUARTER PAID AS PER SCHEDULE #02 OF THE AGREEMENT. HENCE, THE TOTAL AMOUNT PAID TOWARDS HIRE CHARGES WAS CLASSIFIED AS INTEREST AND CHARGED TO THE PROFI T & LOSS ACCOUNT BY THE ASSESSEE COMPANY ON ACCOUNT OF BOTH THE AGREEME NTS. 22.2 THE ASSESSEE FURTHER SUBMITTED THAT AS PER THE CIRCULAR NO.647, DATED 22.03.1993 ISSUED BY CBDT, PROVISIONS OF SECT ION 194A ARE NOT APPLICABLE TO HIRE PURCHASE AGREEMENTS. IT WAS SUBM ITTED THAT IN THE SAID CIRCULAR IT HAS BEEN CLARIFIED THAT PERIODICAL INSTALLMENTS COMPRISING OF HIRE CHARGES CANNOT BE CATEGORIZED AS INTEREST PAYMENTS AND HENCE, THE HIRER IS NOT UNDER AN OBLIG ATION TO DEDUCT TAX (TDS) WHILE PAYING THE INSTALMENTS. 22.3 WITH THE ABOVE SUBMISSIONS, THE ASSESSEE CONT ENDED THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DISALLOWING AN AMOUNT OF RS.25,81,775 U/S 40A(IA) OF THE ACT AND REQUESTED T HAT THE SAID DISALLOWANCE MAY BE DELETED. ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 17 23. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE CIT(A) DELETED THE DISALLOWANCE MADE BY THE AO U/S 40(A)(I A) OF THE ACT, BY HOLDING AS UNDER: I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND FACTS OF THE CASE. THE ASSESSING OFFICER HAS DI SALLOWED THE SAID AMOUNT, SHOWN AS PAID TOWARDS INTEREST ON TERM LOAN TO M/S HP FINANCIAL SERVICES INDIA PVT. LTD. HOWEVER, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND SIN CE THE SAID AMOUNT SHOWN UNDER INTEREST, HAS ARISEN FROM THE PA YMENT MADE IN INSTALMENT UNDER THE HIRE PURCHASE AGREEMEN T TO M/S HP FINANCIAL SERVICES INDIA PVT. LTD. WHICH IS A CO MPOSITE PAYMENT MADE TO THE VENDOR, AND FURTHER SINCE NO PA YMENT HAS BEEN MADE EXCLUSIVELY FOR THAT AMOUNT TOWARDS INTER EST TO THE SAID COMPANY, IN MY VIEW, THE PROVISIONS OF SECTION 40A(IA) OF THE ACT ARE NOT APPLICABLE TO THE SAID AMOUNT, SHOW N AS PAID TOWARDS INTEREST IN THE BOOKS OF ASSESSEE. THEREFOR E, THE DISALLOWANCE OF THE SAID AMOUNT MADE BY THE ASSESSI NG OFFICER U/S 40A(IA) OF THE ACT IN THE ASSESSMENT, IS NOT SU STAINABLE. HENCE, THE SAME IS DELETED. 24. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 25. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORD AND GONE THROUGH THE ORDERS OF THE REVENUE AUTHORITIES. WE F IND THAT SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE COORDINA TE BENCH OF HYDERABAD TRIBUNAL IN CASE OF M/S R. BALARAMI REDDY & CO. IN ITA NO. 2224/HYD/2011 FOR AY 2008-09 VIDE ORDER DATED 0 4/03/2014 WHEREIN THE COORDINATE BENCH FOLLOWING THE JUDGMEN T OF THE HONBLE AP HIGH COURT IN THE CASE OF CIT VS. M/S M.G. BROTH ERS FINANCE LTD., VIDE ITTA NOS. 43,44,45,50 FO 2007 AND 761 OF 2006, JUDGMENT DATED 05/12/2013, DIRECTED THE AO TO RECOMPUTE THE DISALL OWANCE U/S 40(A)(IA) IN THE LIGHT OF THE AMENDED PROVISIONS, W HICH CAME INTO EFFECT FROM 13/07/20016. THE RELEVANT FINDINGS OF T HE COORDINATE BENCH ARE AS FOLLOWS: 5. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES , PERUSED THE RECORD AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE ISSUE IN DISPUT E WHETHER IT IS INTEREST OR NOT ON HIRE PURCHASE CONTRACT HAS BEEN DECIDED BY THE HONBLE AP HIGH COURT IN THE CASE OF CIT VS. M/ S M.G. BROTHERS FINANCE LTD., VIDE ITTA NOS. 43,44,45, 50 OF 2007 AND ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 18 761 OF 2006, JUDGMENT DATED 05/12/2013, WHEREIN THE HONBLE COURT HELD AS FOLLOWS: THE OWNER OF THE GOODS, WHICH ARE USABLE MOVABLE G OODS LET OUT TO THE HIRER ON PAYMENT OF CERTAIN AMOUNT EITHE R ON MONTHLY OR QUARTERLY OR YEARLY BASIS AND AFTER PAYMENT OF T HE ENTIRE AMOUNT AS CLAIMED BY THE OWNER BEING THE PRICE OF T HE GOODS, IT IS OPTIONAL FOR THE HIRER TO BUY UP TO BECOME OWNER OR NOT. IN THE EVENT, HE EXERCISES HIS OPTION T BUY THEM, THEN, TH E OWNER OF THE GOODS IS BOUND TO CONVEY THE SAME BY TRANSFERRI NG TITLE IN FAVOUR OF THE HIRER. ON THE OTHER HAND, IF THE HIRE R DOES NOT EXERCISE HIS OPTION, THEN THE GOODS IN QUESTION MUS T BE RETURNED AND THE PAYMENTS SO FAR MADE ARE TREATED T O BE RENTALS. THEREFORE, THE WHOLE CONCEPT IS WITH REGARD TO PAYM ENT OF CONSIDERATION MONEY OR RENTAL NOT REPAYMENT OF LOAN AMOUNT IN FINANCIAL TRANSACTION. UNLESS THERE IS INVOLVEMENT OF LOAN TRANSACTION, THE QUESTION OF PAYMENT OF INTEREST DO ES NOT ARISE. THE AFORESAID PECULIAR SITUATION WITH REGARD TO THE HIRE PURCHASE AGREEMENT HAS BEEN EXPLAINED BY THE SUPREME COURT Q UITE LONG TIME BACK IN THE CASE OF SUNDARAM FINANCE LTD. VS. THE STATE OF KERALA. IN PARAGRAPH-24 OF THE SAID JUDGMENT, TH EIR LORDSHIPS HAVE EXPLAINED THE POSITION STATING THUS: BUT A HIRE PURCHASE AGREEMENT..................... ....IS MORE COMPLEX TRANSACTION. THE OWNER UNDER THE HIRE PURCH ASE AGREEMENT ENTERS INTO A TRANSACTION OF HIRING OUT G OODS ON THE TERMS AND CONDITIONS SET OUT IN THE AGREEMENT, AND THE OPTION TO PURCHASE EXERCISABLE BY THE CUSTOMER ON PAYMENT OF ALL THE INSTALMENTS OF HIRE ARISES WHEN THE INSTALMENTS ARE PAID AND NOT BEFORE. IN SUCH A HIR E PURCHASE AGREEMENT THERE IS NO AGREEMENT TO BUY GOO DS; THE HIRER BEING UNDER NO LEGAL OBLIGATION TO BUY, H AS AN OPTION EITHER TO RETURN THE GOODS OR TO BECOME ITS OWNER BY PAYMENT IN FULL OF THE STIPULATED HIRE AND THE P RICE FOR EXERCISING THE OPTION. THIS CLASS OF HIRE PURCHASE AGREEMENT MUST BE DISTINGUISHED FROM TRANSACTION IN WHICH THE CUSTOMER IS THE OWNER OF THE GOODS AND WI TH A VIEW TO FINANCE HIS PURCHASE HE ENTERS INTO AN ARRANGEMENT WHICH IS IN THE FORM OF A HIRE PURCHASE AGREEMENT. IN THIS CASE, THE LEARNED TRIBUNAL HAD ADMITTEDLY H ELD THAT THERE IS A HIRE PURCHASE AGREEMENT FACTUALLY. THEREFORE, WE AFFIRM THE JUDGMENT AND ORDER OF THE LEARNED TRIBUNAL. THE APP EALS FAIL AND THEY RE ACCORDINGLY DISMISSED. 5.1 IN VIEW OF THE ABOVE JUDGMENT, THE PAYMENT MADE BY THE ASSESSEE ON ACCOUNT OF HIRE PURCHASE TRANSACTION A ND PAYMENT ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 19 OF FINANCE CHARGES/HIRE CHARGES CANNOT BE CONSTRUED AS INTEREST SO AS TO DEDUCT TDS U/S 194A OF THE IT ACT. ACCORD INGLY, TO THAT EXTENT, THE CIT(A) JUSTIFIED IN OBSERVING THAT SECTION 40(A)(IA) IS NOT APPLICABLE. HOWEVER, WE FIND THAT INSERTION OF EXPLANATION 1 TO SECTION AFTER AMENDMENT OF SECTION 194A BY TAXATION LAWS (AMENDMENT) ACT, 2006, WITH EFFECT FR OM 13/07/2006, PAYMENT BY THE ASSESSEE TOWARDS HIRE C HARGES ON HIRE PURCHASE AGREEMENT TO BE LIABLE FOR TDS U/S 19 4I OF THE ACT. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER T O RECOMPUTE THE DISALLOWANCE U/S 40(A)(IA) IN THE LIGHT OF THE AMENDED PROVISIONS, WHICH CAME INTO EFFECT FROM 13/07/2006. ACCORDINGLY, THIS GROUND OF APPEAL IS PARTLY ALLOWE D. SINCE THE ISSUE UNDER CONSIDERATION IS MATERIALLY I DENTICAL TO THE ONE DECIDED BY THE COORDINATE BENCH IN CASE OF M/S R. B ALARAMI REDDY & CO (SUPRA), FOLLOWING THE SAME, WE ARE INCLINED TO HOLD THAT PAYMENT MADE TO HP FINANCIAL SERVICES PVT. LTD. TOWARDS HIR E CHARGES CANNOT BE CONSIDERED AS INTEREST SO AS TO DISALLOW U/S 40( A)(IA) OF THE ACT. ACCORDINGLY, THIS GROUND RAISED IN THE REVENUE APPE ALS UNDER CONSIDERATION IS DISMISSED. 26. IN THE RESULT, ITA NO. 916/HYD/09 AND C.O. NO. 48/HYD/10 BY THE ASSESSEE ARE PARTLY ALLOWED AND THE APPEALS BY THE REVENUE IN ITA NOS. 953/H/09, 947/H/10 AND 362/H/13 ARE DISMIS SED. PRONOUNCED IN THE OPEN COURT ON 21/05/2014. SD/- SD/- (D. MANMOHAN) (CHANDRA POOJAR I) VICE PRESIDENT ACCOUN TANT MEMBER HYDERABAD, DATED: 21/05/2014 KV COPY TO:- 1) M/S MICROCARE COMPUTERS (P) LTD., C/O AV RAGHU RAM, 403, MANISHA TOWERS, 10-1-18/31, SHYAMNAGAR, HYD-50 0 004.. 2) DCIT, CIRCLE 16(2), HYDERABAD. 3) THE CIT(A)-V, HYDERABAD 4) THE CIT-IV, HYDERABAD. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A .T., HYDERABAD. ITA NOS. 916/H/09 AND OTHERS M/S MICROCARE COMPUTERS (P) LTD. 20 S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER