Sharp Software Development India Private Limited, Bangalore V. DCIT, Bangalore

CO 9/BANG/2016

• Counselvise Citation: [2017] 119 COUNSELVISE.COM (IT) 3409 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 4 month(s) 14 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 27-09-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 25-05-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 13-05-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: H L SOWMYA ACHAR
• Keywords: Depreciation; Transfer pricing; International transaction; Bad and doubtful debts; Provision of bad debts; Revenue expenditure; Capital expenditure
• Section: 92C; 234B; 37(1); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER IT(TP)A NOS. & ASSESSMENT YEARS APPELLANT RESPONDENT NO.1819/BANG/2013 2004-05 M/S. SHARP SOFTWARE DEVELOPMENT INDIA PVT. LTD., UNIT-5, LEVEL-3, INNOVATOR INTERNATIONAL TECH PARK, WHITEFIELD ROAD, BENGALURU-560066. PAN: AAECS0269E DY. COMMISSIONER OF INCOME-TAX, CIRCLE-12(3), 14/3, 4 TH FLOOR, RASTROTHANA BHAVAN (OPP. RBI), NRUPATHUNGA ROAD, BENGALURU-560001. NO.1826/BANG/2013 2004-05 DY. COMMISSIONER OF INCOME-TAX, CIRCLE-12(3), BENGALURU-560001. M/S. SHARP SOFTWARE DEVELOPMENT INDIA PVT. LTD., PAN: AAECS0269E C.O. NO. & ASSESSMENT YEAR APPELLANT RESPONDENT 9/BANG/2016 2004-05 (IN IT(TP)A NO.1819/BANG/2013 ) M/S. SHARP SOFTWARE DEVELOPMENT INDIA PVT. LTD., PAN: AAECS0269E DY. COMMISSIONER OF INCOME-TAX, CIRCLE-12(3), BENGALURU-560001. REVENUE BY : SMT. H. L. SOWMYA ACHAR, ADDL. CIT ASSESSEE BY : SHRI. CHAVALI NARAYAN, CA DATE OF HEARING : 18.09.2017 DATE OF PRONOUNCEMENT : 27.09.2017 O R D E R PER SUNIL KUMAR YADAV, JUDICIAL MEMBER THESE CROSS APPEALS ARE PREFERRED BY THE REVENUE A S WELL AS THE ASSESSEE AGAINST THE ORDER PASSED BY THE CIT(A). AGAINST TH E REVENUES APPEAL, ASSESSEE IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 2 OF 18 HAS ALSO FILED THE CROSS OBJECTION. SINCE THE APPE ALS AND CROSS OBJECTIONS WERE HEARD TOGETHER, THEY ARE BEING DISPOSED OFF THROUGH THIS CONSOLIDATED ORDER. 2. IT(TP)A NO. 1826/BANG/2013 THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A) INTER ALIA ON THE FOLLOWING GROUNDS: 1. THE ORDER OF THE LEARNED CIT(A) IS OPPOSED TO LAW A ND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A) ERRED IN HOLDING THAT THE SIZE AND TURNOVER OF THE COMPANY ARE DECIDING FACTORS FOR TREATING A COMPANY AS A COMPARABLE, AND ACCORDINGLY ERRED IN DIRECTING THE TPO TO EXCLUDE COMPARABLE COMPANIE S HAVING TURNOVER MORE THAN RS 200 CRORES. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A) ERRED IN LAW IN DIRECTING THE TPO TO EXCLUDE COMPAN IES WHICH ARE FUNCTIONALLY DISSIMILAR BASED ON THE GUIDELINES OF ANOTHER APPELLATE ORDER. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A) ERRED IN DIRECTING THAT BAD DEBTS ARE TO BE INCLUDE D AS OPERATING EXPENSES WITHOUT APPRECIATING THE FACT THAT THE BAD DEBTS ARE NOT RELATED TO THE OPERATING EXPENSES EVEN IF IT RECURS CONTINUOUSLY FOR THE LAST THREE FINANCIAL YEARS. 5. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT TH E TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT(A) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE ASSESSING O FFICER MAY BE RESTORED. 6. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 3. GROUND NO.1 IS GENERAL IN NATURE AND NEEDS NO AD JUDICATION. GROUND NOS. 2 AND 3 RELATE TO THE EXCLUSION OF COMPARABLES AFTER APPLYING THE TURNOVER FILTER. IN THIS REGARD, THE LEARNED DR HAS CONTENDED THAT CIT(A) HA S EXCLUDED THE FOLLOWING 5 COMPARABLES HAVING APPLIED THE TURNOVER FILTERS: I. IPOWER SOLUTIONS LIMITED II. INFOSYS TECHNOLOGIES LIMITED IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 3 OF 18 III. SATYAM COMPUTER SERVICES LIMITED IV. LARSEN & TOUBRO INFOTECH LIMITED V. XCELVISION TECHNOLOGIES LIMITED 4. THE LEARNED DR INVITED OUR ATTENTION TO THE JUDG MENT OF CHRYSCAPITAL INVESTMENT VS. DCIT (2015) 56 TAXMANN.COM 417, IN W HICH IT HAS BEEN HELD THAT TURNOVER FILTER CANNOT BE APPLIED UNLESS AND U NTIL IT IS ESTABLISHED THAT IT EFFECTS THE PROFITABILITY OF THE COMPARABLES. THE CIT(A) HAS OUT RIGHTLY APPLIED THE TURNOVER FILTER AS TO 1:200 CRORES AND EXCLUDED THE AFORESAID 5 COMPARABLES. SHE HAS ALSO PLACED RELIANCE UPON THE VARIOUS ORDERS OF THE TRIBUNAL IN WHICH IT HAS BEEN HELD THAT IN THE LIGH T OF JUDGMENT OF DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT (SUPRA ), THE TURNOVER FILTER IS NOT A GOOD FILTER, THEREFORE THE OTHER FILTER CAN ALSO BE EXAMINED FOR EXCLUDING COMPARABLES. SINCE THE CIT(A) HAS EXCLUDED THESE C OMPARABLES BY APPLYING THE TURNOVER FILTER, THESE COMPARABLES SHOULD BE RE STORED TO THE CIT(A) FOR RE- EXAMINATION OF THE APPLICABILITY OF THE OTHER FILTE RS. THE LEARNED COUNSEL FOR THE ASSESSEE DID NOT OBJECT TO THE CONTENTION OF THE REVENUE. 5. HAVING CAREFULLY EXAMINED THE ORDER OF THE CIT(A ), WE FIND THAT AFTER THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT, THE TRIBUNAL HAS TAKEN A CONSISTENT VIEW THAT TURNO VER FILTER CANNOT BE APPLIED UNLESS AND UNTIL IT IS ESTABLISHED THAT IT EFFECTS THE PROFITABILITY OF THE COMPARABLES. IN THE INSTANT CASE, THE CIT(A) HAS E XCLUDED THE AFORESAID 5 IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 4 OF 18 COMPARABLES BY APPLYING THE TURNOVER FILTER. THE A CTION OF THE CIT(A) DOES NOT APPEAR TO US TO BE CORRECT. ACCORDINGLY WE SET ASI DE HIS ORDER IN THIS REGARD AND RESTORE THIS MATTER BACK TO HIS FILE WITH A DIR ECTION TO RE-EXAMINE THE AFORESAID 5 COMPARABLES IN THE LIGHT OF OTHER FILTE RS, AS IT CANNOT BE EXCLUDED BY APPLYING THE TURNOVER FILTER ALONE. 6. GROUND NO. 4 RELATE TO THE BAD DEBTS TO BE INCLU DED AS OPERATING EXPENSES. IN THIS REGARD, LEARNED DR HAS SUBMITTED THAT THIS ISSUE SHOULD ALSO BE RESTORED TO THE CIT(A) TO FIND OUT WHETHER IN THE ASSESSEES CASE, BAD DEBTS ARE TO BE INCLUDED AS OPERATING EXPENSES. TH E SAME TREATMENT SHOULD BE GIVEN IN THE CASE OF ASSESSEE AS WELL AS IN THE CASE OF COMPARABLES. 7. THE LEARNED COUNSEL FOR THE ASSESSEE OPPOSED THE RESTORATION OF THE ISSUE TO THE CIT(A) ON THE GROUND THAT IN THIS CASE THERE IS NO PROVISION FOR BAD DEBTS. HAVING CAREFULLY EXAMINED THE RIVAL SUBMISS IONS AND CAREFUL PERUSAL OF THE RECORD, WE FIND THAT INCLUSION OF PROVISION OF BAD DEBTS AS OPERATING EXPENSES ARE TO BE EXAMINED AFRESH BY THE CIT(A) AF TER MAKING THE NECESSARY VERIFICATION AND THE TREATMENT GIVEN TO THE BAD DEB TS IN THE CASE OF ASSESSEE AS WELL AS COMPARABLES. ACCORDINGLY, THE ORDER OF THE CIT(A) IS SET ASIDE IN THIS REGARD AND MATTER IS RESTORED TO HIS FILE FOR RE-EXAMINATION OF THE ISSUE. 8. IT(TP)A NO.1819/BANG/2013 THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST TH E ORDER OF THE CIT(A) INTER ALIA ON THE FOLLOWING GROUNDS: IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 5 OF 18 1. THE LEARNED CIT(A) HAS ERRED, IN LAW, AND IN FACTS, IN CONFIRMING THE ORDER ISSUED BY THE DEPUTY COMMISSIONER OF INCOME-T AX, CIRCLE 12(3), BANGALORE ('THE LEARNED AO') UNDER SECTION 1 43(3) OF THE ACT. THE APPELLANT CRAVES THAT THE ORDER OF THE LEARNED CIT(A), INASMUCH AS IT CONFIRMS THE ORDER OF THE LEARNED AO, BEING U NSUSTAINABLE AND BAD IN LAW, BE SET ASIDE. 2. THE LEARNED CIT(A) HAS ERRED, IN LAW, AND IN FACTS, IN CONFIRMING THE ORDER OF THE LEARNED AO BY UPHOLDING THAT THE APPEL LANT HAS CLAIMED A DEDUCTION UNDER SECTION 10A OF THE ACT ON THE PRO DUCTS OR ARTICLES OR THINGS WHICH THE APPELLANT HAS NOT ACTUALLY MANU FACTURED BUT DEALT WITH THE EXPORT OF PRODUCTS MANUFACTURED BY OTHERS AND HENCE DISALLOWED THE DEDUCTION CLAIMED UNDER SECTION 10A OF THE ACT. 3. THE LEARNED CIT(A) HAS ERRED, IN LAW, AND IN FACTS, IN CONFIRMING THE ORDER OF THE LEARNED AO BY UPHOLDING THAT THE EXPEN SES INCURRED BY THE APPELLANT TOWARDS THE PRINCIPAL REPAYMENT OF FI NANCE LEASE CHARGES ARE CAPITAL IN NATURE AND THEREFORE WOULD N OT BE ALLOWED AS A DEDUCTION AS PER THE PROVISIONS OF SECTION 37(1) OF THE ACT. 4. THE LEARNED CIT(A) HAS ERRED, IN LAW, AND IN FACTS, IN CONFIRMING THE ORDER OF THE LEARNED AO BY UPHOLDING THE LEVY OF INTEREST UNDER SECTION 234B OF THE ACT FOR THE AY 2004-05. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUND S IS INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. FURTHER, THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMIT, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFO RE, OR AT THE TIME OF, HEARING OF THE APPEAL. 9. GROUND NO. 1 IS OF GENERAL IN NATURE AND GROUND NO. 2 RELATE TO THE DISALLOWANCE OF DEDUCTION UNDER SECTION 10A OF THE ACT. WITH REGARD TO DEDUCTION UNDER SECTION 10A, THE FACTS BORNE OUT FROM THE REC ORD ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO OBSERVED THE CLAIM OF DE DUCTION SHOULD INVOLVE MANUFACTURE AND PRODUCTION OF ARTICLES OR THINGS OR COMPUTER SOFTWARE BY THE UNDERTAKING, BUT IN THE INSTANT CASE, AFTER THOROUG H EXAMINATION AND CROSS IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 6 OF 18 VERIFICATION, THE AO COULD NOT COME TO THE CONCLUSI ON THAT THE ASSESSEE COMPANY MANUFACTURED OR PRODUCED THE REQUIRED ITEMS AS REQU IRED U/S. 10A OF THE ACT. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WITH THE SUBMISSION THAT ASSESSEE COMPANY IS 100% EXPORT ORIENTED UNDER TAKING AND IS OBLIGATED TO EXPORT ITS ENTIRE PRODUCTION OUTSIDE INDIA. IN THE COURSE OF ITS ACTIVITIES, IT UTILIZES THE SERVICES OF OTHER ENTERPRISES TO CARRY OUT TESTING SERVICES THAT GOES INTO ENGINEERING THE FINAL PRODUCT DELIVERED BY THE ASSESSEE TO GROU P COMPANIES. THE ASSESSEE CONTRACTS WITH STAG SOFTWARE PVT. LTD., THAT PROVID ES SOFTWARE TESTING SERVICES TO THE ASSESSEE. THE TOTAL COST INCURRED BY THE ASSESSEE ON JOB WORK OUTSOURCED TO STAG SOFTWARE IS A VERY SMALL PERCENTAGE OF TOTAL COSTS INCURRED BY THE ASSESSEE ON DEVELOPMENT OF SOFTWARE. IT WAS FURTHER CONTENDED THAT EVEN IF THE ASSESSEE COMPANY MAKES USE OF SERVICES OF THIRD PARTY, THE M AJOR ACTIVITY OF SOFTWARE DEVELOPMENT IS STILL CARRIED ON BY THE ASSESSEE COM PANY. 10. THE CIT(A) RE-EXAMINED THE CLAIM OF THE ASSESSE E AND ASKED THE ASSESSEE TO FURNISH THE QUANTITATIVE DETAILS WITH RESPECT TO MA NUFACTURE OF SOFTWARE CARRIED ON BY THE ASSESSEE AS WELL AS STAG SOFTWARE. ASSESSEE PR OVIDED THE EXCHANGE OF E-MAILS AND CORRESPONDENCE WITH ITS AES. THE DETAILS WERE NOT FURNISHED BEFORE THE CIT(A). IN THE ABSENCE OF QUANTITATIVE DETAILS, THE CIT(A) UPHELD THE ACTION OF THE AO. NOW THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL AND R EITERATED ITS CONTENTIONS AS RAISED BEFORE THE CIT(A). DURING THE COURSE OF HEARING, T HE ASSESSEE HAS INVITED OUR ATTENTION TO THE P & L ACCOUNT TO DEMONSTRATE THAT IT RECEIVED INCOME FROM SOFTWARE DEVELOPMENT SERVICES AT RS.11,72,96,748/-. HE HAS ALSO FILED THE AGREEMENT WITH M/S. STAG SOFTWARE PVT. LTD., AND COPY OF THE LEDGE R ACCOUNT OF M/S. STAG SOFTWARE IN ITS ACCOUNT TO DEMONSTRATE TH AT HE HAS ONLY PAID A SUM OF IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 7 OF 18 RS.99,43,350/- TO M/S. STAG SOFTWARE. THEREFORE, T HE MAJOR PART OF SOFTWARE WERE DEVELOPED BY THE ASSESSEE AND NOT BY M/S. STAG SOFT WARE. THE LEARNED DR ON THE OTHER HAND PLACED RELIANCE UPON THE ORDER OF THE CI T(A). 11. HAVING CAREFULLY EXAMINED THE ORDER OF THE LOWE R AUTHORITIES, IN THE LIGHT OF RIVAL SUBMISSIONS, WE FIND THAT LOWER AUTHORITIES H AVE DISALLOWED THE CLAIM OF EXEMPTION UNDER SECTION 10A PRIMARILY ON THE BASIS THAT SOFTWARE WAS NOT DEVELOPED BY THE ASSESSEE HIMSELF AND IT WAS PROCURED FROM M/ S. STAG SOFTWARE, WHEREAS FROM THE DOCUMENTS FILED BEFORE US IT APPEARS THAT MAJOR PART OF THE SOFTWARE WERE DEVELOPED BY THE ASSESSEE HIMSELF. SINCE THE ASSES SEE HAS NOT FILED THE RELEVANT EVIDENCE BEFORE THE CIT(A) DESPITE HIS ASKING, THE CIT(A) COULD NOT APPRECIATE THESE FACTS. SINCE ALL THESE FACTS REQUIRES VERIFICATION WE SET ASIDE THE ORDER OF THE CIT(A) IN THIS REGARD AND RESTORE THIS MATTER TO HIS FILE FOR READJUDICATION OF THE ISSUE AFRESH AFTER OBTAINING COMPLETE QUANTITATIVE DETAILS FROM THE ASSESSEE. ASSESSEE IS ALSO DIRECTED TO EXTEND ALL SORT OF CO-OPERATION AND FUR NISH REQUIRED DETAILS TO CIT(A) TO ARRIVE AT A PROPER CONCLUSION. 12. WITH REGARD TO GROUND NO.3, THE FACTS BORNE OUT FROM THE RECORD ARE THAT THE AO ON VERIFICATION OF THE STATEMENT FURNISHED BY TH E ASSESSEE HAS NOTICED THAT A SUM OF RS.14.29 LAKHS WAS CLAIMED AS DEDUCTION ON TRANS ACTION WHEREIN THE ASSESSEE HAS TAKEN MOTOR-VEHICLES UNDER THE FINANCE LEASE AG REEMENT FROM THE LESSORS. THE SPECIFIED SUM WAS PAID TO THE LESSOR ON ACCOUNT OF REPAYMENT TOWARDS THE PRINCIPAL COMPONENT OF THE VALUE OF MOTOR VEHICLES. A SUM OF RS.5.10 LAKHS WAS PAID TOWARDS INTEREST CHARGES OF THE FINANCE LEASE. THE AO WAS OF THE OPINION THAT THE SUM OF RS.14.29 LAKHS WAS CAPITAL IN NATURE AND HENCE NOT ALLOWABLE. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WITH THE SUBM ISSION THAT VEHICLES HAVE BEEN IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 8 OF 18 USED BY THE ASSESSEE FOR THE PURPOSE OF THE BUSINES S AND THE LESSOR WAS THE EXCLUSIVE OWNER OF THE VEHICLES AND THEREFORE, THE ASSESSEE HAS NOT CLAIMED DEPRECIATION AND THE FINANCE LEASE PAYMENT ARE IN T HE NATURE OF RENT AND THEREFORE, ALLOWABLE AS REVENUE EXPENDITURE. THE CIT(A) HAS C ONSIDERED ALL THESE FACTS IN THE TERMS OF THE LEASED AGREEMENT IN QUESTION. HAVING CAREFULLY EXAMINED THE DETAILS, THE CIT(A) CAME TO THE CONCLUSION THAT ASSESSEE IS ACTUAL OWNER OF THE VEHICLES AND LEASE RENTALS PAYABLE AMOUNT TO CAPITAL EXPENDITURE WHICH IS NOT ALLOWABLE UNDER SECTION 37(1) OF THE ACT. HE ACCORDINGLY UPHELD TH E ACTION OF THE AO AND ALSO HELD THAT ASSESSEE WILL BE ENTITLED TO CLAIM DEPRECIATIO N ON THE ASSETS TAKEN ON THE FINANCE LEASE. 13. AGGRIEVED, THE ASSESSEE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL AND REITERATED ITS CONTENTIONS AS RAISED BEFORE THE CIT (A). THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO PLACED RELIANCE UPON THE JUDGMENT IN THE CASE OF MYSORE MINERALS LTD., VS. CIT [(1999) 106 TAXMAN 16 6 (SC)] AND ICDS VS. CIT [(2013) 29 TAXMANN.COM 129 (SC)] WITH THE SUBMISSIO N THAT IN THE CASE OF FINANCE LEASE, THE VEHICLE OWNED BY THE FINANCERS AND THE L ESSEE ONLY PAYS THE LEASE RENT. THEREFORE ENTIRE LEASE RENT PAID BY THE ASSESSEE SH OULD BE ALLOWABLE AS REVENUE EXPENDITURE UNDER SECTION 37(1) OF THE ACT. THE LE ARNED DR ON THE OTHER HAND HAS CONTENDED BESIDES PLACING RELIANCE UPON THE ORDER O F THE CIT(A) THAT IN THE INSTANT CASE ASSESSEE IS THE OWNER OF THE VEHICLE AND SIMPL Y FINANCE WAS GIVEN BY THE FINANCER. THEREFORE ASSESSEE IS ENTITLED FOR DEPRE CIATION AND THE ENTIRE LEASE RENT CANNOT BE ALLOWED TO BE A REVENUE EXPENDITURE AS IT INCLUDES COMPONENT OF COST OF THE VEHICLE. IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 9 OF 18 14. HAVING CAREFULLY EXAMINED THE ORDER OF LOWER AU THORITIES IN THE LIGHT OF RIVAL SUBMISSION AND VARIOUS JUDICIAL PRONOUNCEMENTS REFE RRED TO BY THE ASSESSEE WE FIND THAT NATURE OF EXPENDITURE DEPENDS UPON THE NATURE OF THE LEASE. IN CASE OF FINANCE LEASE THE VEHICLE IS OWNED BY THE LESSEE AND LESSOR IS ENTITLED TO RECOVER THE COST OF ASSET AS WELL AS INTEREST ACCRUED THEREON. DURING THE COURSE OF HEARING A SPECIFIC QUERY WAS RAISED FROM THE LEARNED COUNSEL FOR THE A SSESSEE AS TO IN WHOSE NAME THE VEHICLE IS REGISTERED. THE LEARNED COUNSEL FOR THE ASSESSEE ADMITTED THAT VEHICLES ARE REGISTERED IN THE NAME OF THE ASSESSEE THOUGH I T WAS HYPOTHECATED WITH THE FINANCER. IT MEANS THAT ASSESSEE IS THE OWNER AND SIMPLY IT WAS PLEDGED WITH THE FINANCER TILL THE ENTIRE PAYMENT OF ASSET AS WELL A S THE INTEREST IS MADE. UNDER THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE INSTALME NT PAID BY THE ASSESSEE CONSISTS OF 2 COMPONENTS, ONE IS PART OF THE COST OF ASSET A ND THE OTHER IS INTEREST ACCRUED ON THE OUTSTANDING DUES. IN SUCH CIRCUMSTANCES THE AS SESSEE CAN CLAIM THE INTEREST PAID ON THE OUTSTANDING DUES AS REVENUE EXPENDITURE AND ON THE PART PAYMENT OF THE COST OF THE ASSET THE DEPRECIATION CAN BE CLAIMED. IN THE LIGHT OF THESE PROPOSITIONS WE FIND THAT CIT(A) HAS NOT PROPERLY EXAMINED THE I SSUE AS HE HAS DISALLOWED THE ENTIRE PAYMENT OF LEASE INSTALMENT. WE, HOWEVER, E XTRACT RELEVANT PORTION OF THE CIT(A) ORDER AS UNDER: I HAVE CONSIDERED THE FACTS OF THE CASE, THE KEY T ERRNS OF THE LEASE AGREEMENT IN QUESTION ARE AS UNDER :- (A) THE LESSOR(S)HAD PURCHASED THE MOTOR VEHICLES (SUCH AS HONDA ACCORD, SANTRO XING, ACCENT, ETC.) (THE 'VEHICLES) FROM THE THIRD PARTY VENDOR 'S AND LEASED OUT THE SAME TO THE SSDI (LE. LESSEE) UNDER THE FINANCE LEASE AGREEMENT. (B) THE VEHICLES HAVE BEEN USED BY SSDI(ASSESSEE) F OR THE PURPOSE OF ITS BUSINESS. (C) THE LESSOR WOULD BE THE EXCLUSIVE OWNER OF THE VEHICLES AT ALL POINTS OF TIME (REFER PARA 8, PAGE 3 OF THE LEASE AGREEMENT). IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 10 OF 18 (D) THE LESSEE WOULD HAVE NO RIGHT, TITLE, OR INTER EST TO MORTGAGE, HYPOTHECATE OR SELL THE SAME AS BAILEE (REFER PARA 8, PAGE 3 OF THE LEASE AGREEMENT) (E) THE LESSOR SHALL HAVE THE RIGHT AT ALL REASONAB LE TIME TO INSPECT AND / OR TEST THE EQUIPMENT AND / OR OBSERVE ITS USE (REFER PARA 10, PAGE 3 OF THE LEASE AGREEMENT). (F) IF THE LESSEE MAKES DEFAULT IN PAYMENT OF LEASE RENTALS, LESSOR HAS RIGHT TO RECOVER COMPENSATION (REFER PARA 16, PARA 17, PAGE 5 OF THE LEASE AGREEMENT). (G) THE LESSOR WOULD HAVE THE RIGHT OF REPOSSESSION OF THE VEHICLES ON DEFAULT OF LESSEE IN PAYMENT OF LEASE RENTALS (REFER PARA 1 7(A) PAGE 5 OF THE LEASE AGREEMENT). (H) ON THE EXPIRY OF THE LEASE, THE LESSEE IS OBLI GED TO RETURN THE VEHICLES TO LESSOR (REFER PARA 15, PAGE 5 OF THE LEASE AGREEMEN T). (I) THE LEASE IS CLASSIFIED BY SSDI(ASSESSEE) IN I TS BOOKS AS A FINANCE LEASE. (J) REGULAR LEASE RENTAL PAYMENTS HAVE BEEN MADE B Y SSDI(ASSESSEE) TO THE LESSORS AS PER THE TERMS OF THE LEASE AGREEMENT. (K) SSDI(ASSESSEE) CLAIMED THE LEASE RENTAL PAYMEN TS AS REVENUE EXPENDITURE DURING THE SUBJECT AY. THIS INCLUDES BOTH, PAYMENT TOWARDS PRINCIPAL REPAYMENT OF LEASE OBLIGATION AS WELL AS PAYM ENT TOWARDS INTEREST COMPONENT OF THE LEASE OBLIGATION. (L) SSDI (ASSESSEE), BEING A LESSEE, HAD NOT CLAIM ED THE TAX DEPRECIATION ON THE VEHICLES TAKEN UNDER THE FINANCE LEASE AGREEMENT ; AND (M) FURTHER, IN THE BOOKS OF ACCOUNTS OF SSDI(ASSE SSEE), THE VEHICLES ACQUIRED ON FINANCE LEASE ARE CAPITALISED AND BOOK DEPRECIAT ION IS PROVIDED ON THE SAME IN COMPLIANCE WITH THE 'ACCOUNTING STANDARD 19 AC COUNTING FOR LEASES' ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THE CORRESPONDING VALUE IS CREDITED AS LIABILITY DUE TO THE LESSOR. T HE LEASE RENTAL PAYMENTS ARE SPLIT UP INTO PRINCIPAL AND INTEREST COMPONENTS. TH E INTEREST COMPONENT IS DEBITED AS EXPENSE TO THE PROFIT AND LOSS ACCOUNT W HEREAS THE PRINCIPAL COMPONENT IS REDUCED FROM THE LIABILITY DUE TO THE LESSOR.' 4.1 THE TERM 'FINANCE LEASE' VIS-A-VIS ACTUAL OWNER WAS EXAMINED BY A SPECIAL BENCH, CONSTITUTED AT MUMBAI,OF THE HON'BLE TRIBUNAL IN INDUSIND BANK LTD. V. ADDITIONAL COMMISSIONER OF INCOME-TAX (15 ITR (TRIB) 089). IN THIS CASE, FOR THE ASSESSMENT YEARS 1998-99 AND 199 9-2000, THE ASSESSEE-BANK CLAIMED 100 PER CENT. DEPRECIATION ON CERTAIN ASSET S PURCHASED AND LEASED UNDER LEASE AGREEMENTS. THE ASSESSING OFFICER HELD THAT THE ASSESSEE WAS NOT THE OWNER OF THE ASSETS AND WAS INELIGIBLE FOR DEPR ECIATION. HE DISALLOWED THE DEPRECIATION. HE, HOWEVER, ACCEPTED THE ASSESSEE'S ALTERNATIVE CONTENTION THAT IF DEPRECIATION ON THE LEASED ASSETS WAS TO BE DISA LLOWED TREATING IT AS A LOAN TRANSACTION, THE CAPITAL RECOVERY EMBEDDED IN THE L EASE RENTALS SHOULD NOT BE CHARGED TO TAX. THE COMMISSIONER (APPEALS) DISMISSE D THE ASSESSEE'S APPEALS. ON FURTHER APPEALS : HELD, ACCORDINGLY, DISMISSING THE APPEALS, ON THE F ACTS, (I) THAT ALL THE CRITERIA OF FINANCE LEASE WERE FULLY SATISFIED IN THIS CASE. THE LEASE AGREEMENT WAS NON- IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 11 OF 18 CANCELLABLE FOR A PERIOD OF SEVEN YEARS AND THEREAF TER THE LEASED ASSET HAD BEEN PRE-DECIDED TO BE SOLD AT 1 PER CENT. OF THE ORIGIN AL COST TO THE LESSEE. WHILE DECIDING THE LEASE RENTAL AND THE PERIOD OF LEASE, THE ASSESSEE'S INVESTMENT HAD BEEN DULY TAKEN INTO CONSIDERATION TO ENSURE THAT T HE FULL COST OF THE ASSET LEASED OUT BY THE ASSESSEE TOGETHER WITH INTEREST W AS RECOUPED WITHIN THE PERIOD OF SEVEN YEARS. IT WAS THE SOLE RESPONSIBILI TY OF THE LESSEE TO BEAR REPAIRS AND MAINTENANCE COST AND INSURANCE PREMIUM. THE EQU IPMENT HAD BEEN CHOSEN BY THE LESSEE WHO HAD TAKEN THE DELIVERY OF IT. IT WAS THE LESSEE WHO HAD TO PAY ALL THE TAXES. FEATURES OF BAILMENT WERE COMPLETELY ABSENT. THE RISKS AND REWARDS INCIDENTAL TO THE OWNERSHIP WERE VESTED WIT H THE LESSEE. WHAT THE ASSESSEE AS A LESSOR OWNED WAS NOT ANY ASSET BUT TH E CONTRACTED STREAM OF PAYMENTS IN THE SHAPE OF LEASE RENTAL COVERING ITS ENTIRE INVESTMENT PLUS INTEREST. SUCH LEASE RENTALS HAD BEEN ENSURED BY WA Y OF THE ASSESSEE TAKING POST-DATED CHEQUES FOR THE ENTIRE LEASE PERIOD. ON THE OTHER HAND, WHAT THE LESSEE HAD GOT WAS NOT JUST A RENTED BOILER BUT A F IXED NON-TERMINABLE AGREEMENT UNDER WHICH IT WAS OBLIGED TO PAY THE REN TALS. THESE FACTORS STRONGLY INDICATED THAT WHEREAS THE LESSEE WAS THE ACTUAL OR REAL OWNER, THE ASSESSEE, THE LESSOR, WAS ONLY NOMINAL OR SYMBOLIC OR THE SO- CALLED PERCEIVED OWNER. EXCEPT FOR NAMING THE LESSOR AS OWNER AT SOME PLACE S IN THE AGREEMENT AND INSERTING CERTAIN COSMETIC CLAUSES TO GIVE THE COLO UR OF OPERATING LEASE, THERE WAS NOTHING IN SUBSTANCE WHICH SATISFIED THE INHERE NT REQUISITES OF AN OPERATING LEASE. WHEN THE CUMULATIVE EFFECT OF ALL THE FACTOR S FOR AND AGAINST THE OPERATING LEASE WERE CONSIDERED, IN PITH AND SUBSTA NCE THIS AGREEMENT WAS NOTHING BUT A FINANCE LEASE. (II). THAT THE ASSESSEE HAD CLAIMED DEPRECIATION ON THE LEASED ASSET AND ALSO SHOWN THE FULL AMOUNT OF LEASE RENTAL AS INCOME IN CONTRAVENTION OF PARA 1(V) OF THE RESERVE BANK OF INDIA CIRCULAR DATED FEBRUAR Y 14, 1994. WHEN THE ASSESSING OFFICER CONCLUDED THAT THE LEASE CANNOT B E CHARACTERISED AS FINANCE LEASE, THE ASSESSEE REQUESTED HIM NOT TO CHARGE TO TAX THE CAPITAL RECOVERY EMBEDDED IN THE LEASE RENTAL AND THE ASSESSING OFFI CER HAD EXCLUDED THE PORTION OF CAPITAL RECOVERIES FROM THE RENTAL INCOM E. THE ACTION OF THE ASSESSING OFFICER WAS FULLY IN CONSONANCE WITH THE RESERVE BANK CIRCULAR WHICH STATED THAT IN CASE OF EQUIPMENT LEASING THE ENTIRE LEASE RENTAL SHOULD NOT BE TREATED AS BANK'S INCOME BUT ONLY THAT COMPONENT OF SUCH LEASE RENTAL WHICH REPRESENTS FINANCE CHARGES. 4.2. THE HON'BLE BENCH HAD OCCASION TO EXAMINE FINA NCE LEASE AND OPERATING LEASE. IN A NUTSHELL, THE HIGHLIGHTS FROM ITS DECIS ION CAN BE SUMMARISED AS, THE GENERAL MEANING OF A WORD OR PHRASE OR EXPRESSION A S ASSIGNED BY THE SUPREME COURT UNDER ONE ENACTMENT WITHOUT REFERENCE TO ANY SPECIFIC PROVISION THEREIN IS BINDING UNDER ANOTHER ENACTMENT WHICH AGAIN DOES NOT SPECIFICALLY DEFINE SUCH WORD OR PHRASE OR EXPRESSION. WHEN THE SUPREME COURT HAS INTERPRETED OR EXPLAINED A PARTICULAR TERM OR PHRASE UNDER ONE ENACTMENT, IT IS NOT OPEN TO LOWER AUTHORITIES TO INTERPRET SUCH TERM OR PHRASE IN A DIFFERENT MANNER UNDER ANOTHER ENACTMENT UNLESS THE CONTEXT OF SUCH OTHER ENACTMENT OTHERWISE REQUIRES. IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 12 OF 18 THERE IS NO DEFINITION OF 'OPERATING LEASE' OR 'FIN ANCE LEASE' IN THE INCOME- TAX ACT, 1961. THE MEANING ASCRIBED TO FINANCE LEAS E BY THE SUPREME COURT IN THE CASE OF ASEA BROWN BOVERI LTD. V. INDUSTRIAL FI NANCE CORPORATION OF INDIA [2005] 126 COMP CAS 332 IS OF UNIVERSAL APPLICATION AND THE TRIBUNAL IS DUTY BOUND TO CONSIDER AND AL PIY SUCH MEANING OF FINANC E LEASE GIVEN BY THE SUPREME COURT UNDER THE INCOME-TAX ACT, 1961. THE CONCEPTS OF FINANCE AND OPERATING LEASE, WHICH ARE IMPLICIT UNDER THE INCOME-TAX ACT, 1961 HAVE BEEN MADE EXPLICIT UNDER THE DIRECT TAX CODE BILL, 2010. THE DIRECT TAX CODE BILL, 2010 DOES NOT PROVI DE ANYTHING CONTRARY OR IN CONTRADISTINCTION TO THE PROVISIONS UNDER THE AC T ON THIS SUBJECT. IN THE CASE OF AN OPERATING LEASE, THE LESSOR PROVI DES THE ASSET FOR THE USE A CERTAIN PERIOD OF TIME TO THE LESSEE FOR RENT. ON T HE EXPIRY OF SUCH LEASE PERIOD, THE LESSOR HAS TO INEVITABLY REPOSSESS THE ASSET. ON THE OTHER HAND, A CASE OF FINANCE LEASE IS IN ESSENCE FOR AN ARRANGEM ENT OF BORROWING. THE ROLE OF THE LESSOR IS LIMITED TO THAT OF FINANCIER ONLY. IN AN OPERATING LEASE, IT IS THE LESSOR WHO BEARS THE LOSS AND OBSOLESCENCE OF THE A SSET LEASED, WHEREAS IN THE CASE OF A FINANCE LEASE IT IS THE LESSEE WHO ALWAYS BEARS SUCH LOSS. IN THE CASE OF AN OPERATING LEASE, THE LESSOR REMAINS THE OWNER OF THE ASSET THROUGHOUT THE LEASE PERIOD AND THEREAFTER ALSO, WHEREAS IN A FINA NCE LEASE IT IS THE LESSEE WHO BECOMES THE REAL OWNER. THE LESSORS TITLE OVE R THE ASSET IS ONLY SYMBOLIC TO SERVE AS SECURITY FOR THE RENTALS, WHICH ARE NOTHI NG BUT THE RETURN OF HIS INVESTMENT WITH INTEREST. AN OPERATING LEASE IS CAN CELLABLE, WHEREAS A FINANCE LEASE IS ALWAYS NON-CANCELLABLE. IN A CASE OF FINANCE LEASE, THE LESSOR IS I . NTERESTED IN LEASE RENTALS AND NOT THE ASSET. IN TH E CASE OF AN OPERATING LEASE, SUBSTANTIAL RISKS AND REWARDS OF O WNERSHIP OF THE ASSET REMAIN WITH THE LESSOR, WHEREAS IN THE CASE OF FINA NCE LEASE THESE AB INITIO VEST WITH THE LESSEE. IN THE CASE OF AN OPERATING L EASE, THE FIXATION OF LEASE RENTAL BEARS NO SYMMETRY WITH ECONOMIC LIFE OF THE ASSET AND THE POSSIBILITY OF THE ASSET REVERTING BACK TO THE LESSOR CAN NEVER BE RULED OUT. HOWEVER IN THE CASE OF A FINANCE LEASE, THE LEASE PERIOD IS OR DINARILY EQUAL TO THE ECONOMIC LIFE OF THE ASSET AND LEASE RENTALS ARE FI XED IN SUCH A WAY SO AS TO RECOVER THE INVESTMENT WITH INTEREST DURING THE LEA SE PERIOD ITSELF. THE POSSIBILITY OF THE ASSET REVERTING BACK TO THE LESS OR IS NEVER THERE. IN THE CASE OF AN OPERATING LEASE, THE ASSET IS ORDINARILY A COMMON USE UTILITY WHEREAS IN THE CASE OF A FINANCE LEASE THE ASSET IS NORMALLY SELECTED BY THE LESSEE HIMSELF SO AS TO SUIT HIS PARTICULAR REQUIRE MENTS. NORMALLY AN OPERATING LEASE IS NON PAYOUT WHEREAS A FINANCE LEA SE IS FULL PAYOUT. A FULL PAYOUT LEASE MEANS THAT THE LESSOR RECOVERS THE FUL L VALUE OF THE EASED ASSET PLUS THE FINANCE COST OVER THE PERIOD OF THE FIRST LEASE. A FULL PAYOUT EASE IS PECULIAR TO A FINANCE LEASE. ON THE OTHER HAND, A N ON PAYOUT LEASE IS ONE WILERE THE LESSOR IS NOT INTERESTED IN RECOVERING H IS PRINCIPAL INVESTMENT PLUS TEREST FROM ONE LESSEE ONLY BECAUSE HE MAY LE ASE OUT THE SAME ASSET IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 13 OF 18 OVER AND OVER AGAIN. THOUGH NO SINGLE LEASE RECOVER S THE PRINCIPAL AMOUNT PLUS INTEREST COMPONENT OF THE LESSOR BUT ALL THE L EASES TAKEN TOGETHER MAKE IT A FULL PAYOUT. THAT IS WHY THE NON PAYOUT LEASE IS PECULIAR TO OPERATING LEASE. WHEREAS IN A USE OF OPERATING LEASE, THE LES SOR IS BOTH THE DE FACTO AND THE DE JURE OWNER, IN THE CASE OF A FINANCE LEA SE, THE LESSEE IS THE DE FACTO OWNER AND THE LESSOR IS THE ONLY DE JURE OWNE R. THEREFORE, IN A CASE OF FINANCE LEASE IT IS THE LESSEE WHO IS THE OWNER OF THE PROPERTY FOR ALL PRACTICAL PURPOSES AND HE IS ENTITLED TO DEPRECIATI ON AT LAW THE ONE AND NOT THE LESSOR. THERE IS AN UNDERLYING BASIC DISTINCTION BETWEEN AD VANCING A SIMPLE LOAN AS AGAINST A FINANCE LEASE. WHEREAS FINANCING IS THE G ENUS, A FINANCE LEASE IS ITS SPECIES. IN THE CASE OF A LOAN SIMPLICITER, THE LEN DER ONLY ADVANCES THE LOAN WITHOUT ACQUIRING EVEN A NOMINAL TITLE IN THE ASSET AGAINST WHICH THE LOAN IS GIVEN. THE VERY NATURE OF FINANCE LEASE PRESUPPOSES THAT EXISTENCE OF THE LENDER AS A LESSOR. THE ESSENCE OF FINANCE LEASE AN D LOAN SIMPLICITER IS THE SAME, THAT IS, TO ADVANCE MONEY TO THE BORROWER BY THE LENDER. TO PROVIDE SANCTITY TO THE FINANCE LEASE, THE LESSOR A CTS AS A NOMINAL OR SYMBOLIC OWNER. IF THE LESSOR AS A NOMINAL OWNER IS REMOVED, THE TRANSACTION OF FINANCING WILL GO OUT OF THE AMBIT O F 'FINANCE LEASE' AND FALL WITHIN THE OVERALL CATEGORY OF A SIMPLE LOAN. IF THERE IS SOME OVERLAPPING IN THE CONTENTS OF THE CLAUSES OF AN GREEMENT, THEN IT BECOMES NECESSARY TO EXAMINE THE PITH AND SUBSTANCE OF THE AGREEMENT. IT CAN BE DONE BY SEEIN G AS TO WHETHER IT PREDOMINANTLY SATISFIES THE CONDITIONS OF OPERATING LEASE OR FINANCE LEASE. THE CRUX IS THAT IT SHOULD FIND OUT THE SUBS TANCE OF THE AGREEMENT. ALLOWABILITY OF DEPRECIATION IS GOVERNED BY SECTION 32. THE TWIN CONDITIONS OF OWNERSHIP AND USER OF ASSET FOR THE PURPOSE OF BUSINESS ARE REQUIRED TO BE CUMULATIVELY SATISFI ED SO AS TO ALLOW DEPRECIATION. FOR THE PURPOSES OF SECTION 32(1) THE WORD 'OWNER' IS TO BE ASSIGNED A WIDER MEANING SO THAT ANYONE IN POSSE SSION OF SUCH PROPERTY IN HIS OWN TITLE EXERCISING SUCH DOMINION OVER THE PROPERTY AS WOULD ENABLE OTHERS BEING EXCLUDED THEREFROM AND HA VING A RIGHT IN HIS OWN RIGHT WOULD BE THE OWNER FOR THE PURPOSE OF SEC TION 32(1) NOTWITHSTANDING THE FACT THAT A FORMAL DEED OF TITL E MAY NOT HAVE BEEN EXECUTED AND REGISTERED IN HIS NAME. SALE AND LEASE BACK IS A TRANSACTION IN WHICH THE ASSET IS TRANSFERRED TO THE LESSOR FIR ST AND THE SELLER OF THE ASSET BECOMES THE LESSEE SUBSEQUENTLY. IT IS IN CON TRADISTINCTION TO A FINANCE LEASE IN WHICH THERE IS NO SUCH TRANSFER OF THE SAME ASSET FIRST TO THE LESSOR. THE LEGISLATURE IN ITS WISDOM HAS TREAT ED THE LESSOR AS THE OWNER OF THE ASSET IN THE CASE OF A SALE AND LEASE BACK TRANSACTION BY SPECIFICALLY MANDATING THAT THE WRITTEN DOWN VALUE OF THE ASSET IN THE CASE OF THE LESSEE SHALL BE TREATED AS THE ACTUAL C OST TO THE LESSOR. IN THE CASE OF A GENUINE SALE AND LEASE BACK OF AN ASSET, THE ADMISSIBILITY OF IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 14 OF 18 DEPRECIATION IN THE HANDS OF THE LESSOR IS BEYOND T HE PALE OF DOUBT. HOWEVER, THERE IS NOTHING IN THE LANGUAGE OF THIS P ROVISION WHICH EXTENDS ITS SCOPE TO FINANCE LEASE AS WELL. THE LESSOR, WHO IS NOT THE REAL OWNER OF THE PROPER TY IN THE CASE OF A FINANCE LEASE, CANNOT BE GRANTED DEPRECIATION MEREL Y FOR THE REASON THAT THE LESSEE HAD NOT CLAIMED DEPRECIATION ON THE LEAS ED ASSET. IT IS ONLY THE RIGHT PERSON ENTITLED UNDER LAW, WHO CAN GET THE BENEFIT OF DEPRECIATION ALLOWANCE. PARTIES CANNOT, IN DISREGARD OF THE LAW, MUTUALLY DECIDE WHO OUT OF THEM WILL BE ALLOWED THE DEPRECIATION AND THEN O FFER SUCH PROPOSAL TO THE ASSESSING OFFICER FOR IMPLEMENTATION. IT IS THE DUT Y OF THE ASSESSING OFFICER TO FIND OUT WHETHER THE ASSESSEE BEFORE HIM IS ENTI TLED TO DEPRECIATION IN ACCORDANCE WITH THE LAW. COURTS, OR FOR THAT MATTER, THE AUTHORITIES, MUST H AVE DUE REGARD TO THE REALITY OF A TRANSACTION BEFORE TAKING A FINAL DECI SION ON ITS TRUE NATURE. REALITY CAN BE GATHERED TOM THE INTENTION OF THE PA RTIES AND SUCH INTENTION, IN TURN, CAN BE INFERRED FROM THE FACTS AND CIRCUMSTANCES OF THE CASE RATHER THAN THE WAY IN WHICH IT HAS BEEN PRESE NTED. THE NOMENCLATURE OR A DESCRIPTION GIVEN TO A PARTICULAR AGREEMENT CANNOT AND SHOULD NOT BE ALLOWED TO CHANGE THE TRUE NATURE OF TRANSACTION. THUS THE TRUE ERECT OF A TRANSACTION CAN BE DETERMINED B Y LOOKING INTO THE TERMS OF THE AGREEMENT SEEN IN THE LIGHT OF THE INH ERENT INTENTION OF THE PARTIES AND ALSO THE ATTENDING CUM STANCES. 4.3. THE MUMBAI BENCH OF THE HON'BLE TRIBUNAL IN J. M. SHARES AND STOCK BROKERS V. DEPUTY COMMISSIONER OF INCOME-TAX (311 I TR (A.T.) 115) RULED IN A CASE WHERE THE ASSESSEE ENTERED INTO AN AGREEM ENT WITH SIL, WHEREUNDER IT LEASED OUT VEHICLES FOR CERTAIN VALUE . ON THIS AMOUNT, THE ASSESSEE CLAIMED DEPRECIATION AT 40 PER CENT. SINCE , ACCORDING TO THE ASSESSEE, THE VEHICLES WERE ULTIMATELY USED FOR HIR ING PURPOSES. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER EXAMINED THE TERMS OF THE LEASE DEED AND FOUND THAT 50 PER CENT. OF THE INVOICE VALUE WAS RECEIVED AS SECURITY DEPOSIT AND RENTAL VALUE PAYAB LE WAS FIXED AT 2.2 PER CENT. PER MONTH OF THE INVOICE VALUE FOR THE LEASE PERIOD OF 36 MONTHS. THE ASSESSING OFFICER FOUND THAT THERE WAS NEITHER ANY STIPULATION IN THE LEASE AGREEMENT THAT THE VEHICLES WOULD ONLY BE USED IN T HE BUSINESS OF RUNNING THEM ON HIRE NOR WAS THERE ANY ACTUAL PHYSICAL CONT ROL OF THE ASSESSEE OVER THE MANNER OF UTILIZATION OF THE VEHICLES. IN VIEW OF THIS, HE OPINED THAT DEPRECIATION WAS ALLOWABLE AT 25 PER CENT. THE COMM ISSIONER (APPEALS) HELD THAT THE ASSESSEE WAS ENTITLED TO DEPRECIATION TO THE EXTENT OF 50 PER CENT. OF THE COST OF ASSETS. ON APPEAL TO THE TRIBU NAL : HELD, (I) THAT OWNERSHIP OF THE ASSET IS A CONDITIO N PRECEDENT FOR ALLOWING THE DEPRECIATION UNDER SECTION 32 OF THE INCOME-TAX ACT, 1961. IN CIT V. SHAAN FINANCE LTD., THE SUPREME COURT HAD HELD THAT WHERE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF LEASING, THEN THE LESSOR WAS ENTITLED T O DEPRECIATION ALLOWANCE. HOWEVER, IN ASEA BROWN BOVE RI LTD. V. IFCI, IT HAD BEEN HELD THAT IN CASE OF FINANCE LEASE, IT WAS THE LESSEE WHO, FOR ALL IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 15 OF 18 PRACTICAL PURPOSES, WAS THE OWNER OF THE ASSETS AND NOT THE LESSOR. THE SUPREME COURT OBSERVED THAT : '(1) THE ASSET IS USE -SPECIFIC AND IS SELECTED FOR THE LESSEE SPECIFICALLY. USUALLY, THE LESSEE IS ALLOWED TO SELECT IT HIMSELF (2) THE RISKS AND REWARDS INCIDENT TO OWNERSHIP ARE PASSED ON TO THE LESSEE. THE LESSOR ONLY REMAINS THE LEGAL OWNER OF THE ASSE T. (3) THEREFORE, THE LESSEE BEARS THE RISK OF OBSOLESCENCE. (4) THE LESS OR IS INTERESTED IN HIS RENTALS AND NOT IN THE ASSET. HE MUST GET HIS PRINC IPAL BACK ALONG WITH INTEREST. THEREFORE, THE LEASE IS NON-CANCELLABLE B Y EITHER PARTY. (5) THE LEASE PERIOD USUALLY COINCIDES WITH THE ECONOMIC LIFE OF THE ASSET AND MAY BE BROKEN INTO PRIMARY AND SECONDARY PERIOD. (6) THE LESSOR E NTERS INTO THE TRANSACTION ONLY AS A FINANCIER. HE DOES NOT BEAR THE COSTS OF REPAIRS, MAINTENANCE OR OPERATION. (7) THE LESSOR IS TYPICALLY A FINANCIAL INSTITUTION AND CANNOT RENDER SPECIALISED SERVICE IN CONNECTION WITH THE ASSET. ( 8) THE LEASE IS USUALLY FULL- PAY-OUT, THAT IS, THE SINGLE LEASE REPAYS THE COST OF THE ASSET TOGETHER WITH THE INTEREST'. EVEN AFTER THE JUDGMENT OF THE SUPREME COURT IN AS EA BROWN BOVERI LTD. V. IFCI, A CLEAR DISTINCTION HAS TO BE MADE BE TWEEN THE NORMAL LEASE AND FINANCIAL LEASE. IF THE AGREEMENT IS A FINANCIAL LE ASE, THEN THE CONSEQUENCES WOULD BE GOVERNED BY THE EARLIER JUDGMENT IN CIT VS . SHAAN FINANCE P. LTD. IN THE INSTANT CASE A READING OF THE TERMS OF THE L EASE AGREEMENT CLEARLY REVEALED THAT ALL THE FEATURES OF THE FINANCE LEASE EXISTED IN THE AGREEMENT BETWEEN THE PARTIES. THE ASSESSEE WAS NOT THE OWNER OF THE LEASED VEHICLES AS THE AGREEMENT WAS AN AGREEMENT OF FINANCIAL LEAS E AND NOT A NORMAL LEASE. CONSEQUENTLY, THE ASSESSEE WAS NOT ENTITLED TO ANY DEPRECIATION. 4.4. THE PRINCIPLES EMERGING FROM THE DECISIONS OF THE SPECIAL AS WELL AS DIVISION BENCH OF THE MUMBAI TRIBUNAL READ WITH THA T OF THE APEX COURT ARE THAT IN CASE OF A FINANCE LEASE, THE ACTUAL OWN ER OF THE LEASED ASSET IS THE LESSEE AND NOT THE LESSOR. THE LESSOR CANNOT C LAIM DEPRECIATION ON SUCH ASSETS. BUT HOWEVER, THE SITUATION REVERSES IN CASE OF A OPERATING LEASE. IT IS NEEDLESS TO MENTION THAT THIS VIEW IS FORTIFIED BY THE DECISION OF THE HON'BLE SUPREME COURT IN ASEA BROWN BOVERI LTD. V. IFCI (126 COMP CAS 332) (SC). IN LIGHT OF THESE EMERGING PRINCIPLES, THE LESSEE IS ASSESSEE WHO HAS ENTERED INTO A FINANCE LEASE AGREEMENT WITH INFRASTRUCTURE LEASING & FINANCIAL SERVICES LTD. AND ORIX AUTO LIM ITED (LESSORS), WHEREIN THE LESSORS HAD PURCHASED MOTOR-VEHICLES AN D LEASED THE SAME TO THE ASSESSEE. WHILE THE FORMER HAS PROVIDED THE FIN ANCE, THE LATTER HAS PROVIDED THE LEASED ASSETS. THE ASSESSEE PAYS EMI W HICH INCLUDES PART PRINCIPAL AND PART INTEREST ON THE LOAN ADVANCED BY THE FIRST LESSOR. THE PERIOD OF LEASE IS 60 MONTHS FROM THE DATE OF RENTA LS. THUS, AT THE END OF THE PERIOD OF LEASE, THE ENTIRE PRINCIPAL AMOUNT OF LOA N ALONG WITH INTEREST IS RECOVERED BY THE LESSORS.ALL EXPENSES RELATED TO TH E LEASED ASSETS IS TO BE BORNE BY THE LESSEE.ALTHOUGH THE AGREEMENT HAS BEEN DRAFTED IN A MANNER TO DEPICT THAT THE LESSORS ARE THE ACTUAL OWNERS OF THE VEHICLE, THERE CAN BE NO TWO OPINIONS THAT THE LEASE IN QUESTION IS NOT A N OPERATING LEASE, BUT A FINANCE LEASE. IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 16 OF 18 IN SUCH CASE, APPLYING THE PRINCIPLES LAID DOWN BY THE APEX COURT (SUPRA), THE ASSESSEE IS THE ACTUAL OWNER OF THE VEHICLES A ND THE LEASE RENTALS PAYABLE AMOUNT TO CAPITAL EXPENDITURE WHICH IS NOT ALLOWABL E U/S. 37(1) OF THE ACT. HENCE, THE ACTION OF THE AO IS UPHELD, BUT HOWEVER THE ASSESSEE WILL BE ENTITLED TO CLAIM DEPRECIATION ON THE ASSETS TAKEN ON FINANCE LEASE. THE AO SHALL LOOK INTO THIS MATTER AND ALLOW ENTITLED DEPR ECIATION AS PER LAW WHILE GIVING EFFECT TO THIS APPELLATE ORDER. 15. THOUGH CIT(A) HAS EXAMINED THE ISSUE IN THE LIG HT OF VARIOUS JUDICIAL PRONOUNCEMENTS BUT HE HAS NOT ALLOWED ANY PART OF P AYMENT OF LEASE RENT AS A REVENUE EXPENDITURE. THEREFORE WE MODIFY THE ORDER OF THE CIT(A) AND DIRECT THE AO TO BIFURCATE THE PAYMENT OF LEASE RENT. INTEREST C OMPONENT OF LEASE RENT BE ALLOWED AS REVENUE EXPENDITURE AND ON REMAINING PART DEPREC IATION BE ALLOWED AS IT IS PART OF COST OF ASSET. 16. C.O. NO.9/BANG/2016 THROUGH THIS CO, ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACT S, BY NOT ACCEPTING THE RESPONDENT'S PLEA IN ENTIRETY AND CONFIRMING WITH T HE LEARNED ASSESSING OFFICER ('AO)/ TRANSFER PRICING OFFICER ('TPO') ON NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE RESPONDENT IN A CCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULE S, 1962 AND HOLDING THAT THE RESPONDENT'S INTERNATIONAL TRANSACTION IS NOT A T ARM'S LENGTH. 2. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACT S, IN NOT ACCEPTING THE RESPONDENT'S PLEA AND CONFIRMING WITH THE LEARNED A O/TPO BY DETERMINING THE ARM'S LENGTH MARGIN/ PRICE USING FI NANCIAL YEAR 2003-04 DATA WHICH WAS NOT AVAILABLE TO THE RESPONDENT AT T HE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENT S. 3. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACT S, BY REJECTING COMPANIES BY APPLYING DIFFERENT QUANTITATIVE AND QUALITATIVE FIL TERS: A. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTING THE RESPONDENT'S PLEA THAT PERCENTAGE OF EMPLOYEE COST IS NOT AN APPROPRIATE COMPARABILITY CRITERION; B. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTING THE RESPONDENT'S PLEA THAT REJECTION OF COMPARABLES CON SIDERED BY THE ASSESSEE IN THE COMPARABILITY ANALYSIS ON THE GROUN D THAT THE COMPARABLES IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 17 OF 18 WERE HAVING DIFFERENT ACCOUNTING YEAR (OTHER THAN M ARCH 31 OR COMPANIES WHOSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS)IS NOT AN APPROPRIATE COMPARABILITY CRITERION: C. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTING THE RESPONDENT'S PLEA THAT REJECTION OF COMPARABLE COMP ANIES IDENTIFIED BY THE ASSESSEE AS HAVING ECONOMIC PERFORMANCE CONTRAR Y TO THE INDUSTRY BEHAVIOR (E.G. COMPANIES WHICH SHOWED A DIMINISHING REVENUE TREND) IS NOT AN APPROPRIATE COMPARABILITY CRITERION; D. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTING THE RESPONDENT'S PLEA THAT REJECTION OF COMPARABLES CON SIDERED BY THE ASSESSEE IN THE COMPARABILITY ANALYSIS USING FOREIGN EXCHANG E EARNINGS GREATER THAN 75% AS A COMPARABILITY CRITERION; 4. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACT S, BY ACCEPTING CERTAIN COMPARABLE COMPANIES USING UNREASONABLE COMPARABILI TY CRITERIA. 5. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FAC TS, BY NOT CONSIDERING THE PLEA OF THE ASSESSEE TO CONSIDER FOREIGN EXCHANGE F LUCTUATIONS AS OPERATING IN NATURE 6. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY NOT CONSIDERING THE PLEA OF THE ASSESSEE TO RECTIFY ERRONEOUS MARGIN AN D WORKING CAPITAL ADJUSTMENT COMPUTED BY THE LEARNED AO/TPO. 7. THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE RESPONDENT VIS--VIS THE COMPARABLES 8. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, IN CONFIRMING THE COMPUTING THE ARMS LENGTH PRICE WITHOUT GIVING BENE FIT OF +/- 5 PERCENT UNDER THE PROVISO TO SECTION 92C OF THE ACT; 9. THE LEARNED CIT(A) ERRED IN CONFIRMING THE IMPOSITI ON OF INTEREST UNDER SECTION 234B OF THE ACT; THE RESPONDENT SUBMITS THAT EACH OF THE ABOVE GROUN DS IS INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. THE RESPONDENT CRAVES LEAVE TO ADD, ALTER, VARY, OM IT, AMEND OR DELETE ONE OR MORE OF THE ABOVE GROUNDS OF CROSS-OBJECTIONS AT AN Y TIME BEFORE, OR AT THE TIME OF, HEARING OF THE APPEAL, SO AS TO ENABLE THE APPELLATE TRIBUNAL TO DECIDE THIS RESPONSE ACCORDING TO LAW. 17. BUT DURING THE COURSE OF HEARING, HE OPTED NOT TO PRESS THE COS IN THE LIGHT OF THE FINDINGS IN THE CROSS APPEALS. ACCORDINGLY WE DISMISS THE CO. 18. IN THE RESULT, APPEAL OF ASSESSEE AND REVENUE A RE PARTLY ALLOWED FOR STATISTICAL PURPOSES AND CO OF THE ASSESSEE IS DISMISSED. IT(TP)A NO.1819,1826/BANG/2013, CO NO.9/BANG/2016 PAGE 18 OF 18 PRONOUNCED IN THE OPEN COURT ON THIS 27 TH DAY OF SEPTEMBER, 2017. SD/- SD/- (A. K. GARODIA) (SUNIL K UMAR YADAV ) ACCOUNTANT MEMBER J UDICIAL MEMBER BANGALORE. DATED: 27 TH SEPTEMBER, 2017. /NSHYLU/* COPY TO: 1. APPELLANTS 2. RESPONDENT 3. CIT 4. DR, ITAT, BANGALORE. 5. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.