SBI CAPITAL MARKETS LTD.,MUMBAI vs. JCIT SPECIAL RANGE, MUMBAI

The learned CIT(A) erred in confirming the disallowance of a sum of Rs.62,55,435 being 25% depreciation on Nitrogen Storage Unit leased to Mangalore Refineries & Petrochemicals Ltd.

The learned CIT(A) erred in holding that a. the assessee has entered into lease agreement with MRPL even before became the owner of the assets, which is definitely against the principles of sale and lease back transaction, where the sale precedes the lease or sale is anterior to lease.

The learned CIT(A) erred in making the following observations which are contrary to the facts of the case and in law: a. ……Though assessee satisfies all the criteria or conditions laid down for classic sale and lease back transaction, the assessee made one mistake which in fact proves that sale and lease back transaction entered by assessee is nothing but finance transaction. b. …….Thus the assessee has entered into lease agreement before it could even buy the equipment. This shows true intention of the assessee i.e. to finance the lessee. c. …..The Tribunal's observation or finding that in a case where lease agreement has been entered into, prior to the owning of the asset by the lessor is clear indication of the intention of parties i.e to finance only, is applicable on all fours in the instant case also The lessor's intention behind this transaction is only to finance and not to lease The lease agreement is nothing but only a devise to ensure that the leased equipment remains with the lessor as security for the money lent. d. …….The so called lease agreement of the assessee gives the description of the leased assets as "various equipment From this, one could instantly understand that fact that at the time of lease, neither the lessor nor the lessee is aware of the nature of the equipment that is going to be leased. In fact the description of components has been in the list which has been enclosed with the sale invoice which is much after the lease agreement e. ……..The amount to be financed has already been decided and the list of the equipment equivalent to the monies lent, has been prepared subsequently. f. …..Thus, in any eventuality if delivery of the goods or equipment is insisted upon lessee would not be a position to part with its components without jeopardising the very functioning of the unit. Though it may be mentioned in the lease agreement that the lessor is the absolute owner of the equipment and has right to redelivery and repossession of the equipment etc., the real fact remains that the equipment cannot be delivered to the assessee if the physical delivery is insisted upon. g. …..the question of physical delivery in any eventuality would not arise in this case as the delivery of the components which alleged to have been leased out would not be possible without disrupting the very functioning of the unit.

The learned CIT(A) erred m confirming the action of the assessing officer in not granting deduction under section 80-O of Rs.10,10,038 as claimed by the appellant in the return of income

Each one of the above grounds of appeal is without prejudice to the other

The appellant reserves the right to amend, alter or add to the grounds of appeal.”

During the course of appellate proceedings before the ld. CIT(A) it was submitted that the transaction of the assessee were admittedly finance lease, however the assessee remained the owner of assets. The assessee submitted lease agreement to substantiate the ownership of the assessee lessor. The assessee has also referred clause 6 of the agreement which state that the equipment shall remain the personal property and shall continue to be in the ownership of the lessor. Further lessee was prevented from carrying out any alteration to the equipment or to remove any component thereof. As per clause 13 of the agreement the lessee has to hold the equipment as the bailee of the lessor and not claim any right, title or interest in the equipment other than that of a lessee. The clause 15 provide that in the events of any loss or damage the lessee shall replacethe equipment within 30 days of the date of occurrence of such loss or damage with an equipment which in the opinion of the lessor is comparable. Clause 18.2(2) provides that upon termination of the lease the lessor shall without notice to the lessee be entitled to remove and reprocess the equipment. Clause 18.6 provide that lessor shall be entitled to sell, release or otherwise dispose of the equipment. Clause 19 provides that no title of right in the equipment shall pass the lessee except the right of lease in respect thereof granted to the lessee. It was submitted that the lessor had shown the lease assets as fixed assets in its audited accounts. During the course of appellate proceedings before the ld. CIT(A) the assessee has also placed reliance on the decision of juri ictional High Court of Bombay in the case of Prakash Industries Ltd. held that the lessor bank was the owner of the leased assets. The asessee has also placed reliance on the decision of the Supreme Court in the case of P a g e | 16 19 Appeals Shaan Finance Pvt. Ltd. (231 ITR 308) where the Hon’ble Supreme Court held that a leasing company whose business consists of hiring out machinery was entitled to investment allowance u/s 32A of the Income Tax Act. The ld. CIT(A) has also given reference of other decision relied upon by the assessee i.e in the case of United Technologies Ltd. (73 ITD 150) Micro Land Ltd. (61 ITD 446) (Banglore), Kirloskar Investment & Finance Ltd. (67 ITD 504) (Banglore) and Karmchand Thapar & Brothers (66 ITD 39) DGP Windsor (India ) Ltd. (74 TTJ 291) (Mum). The assessee has also submitted before the ld. CIT(A) that explanation 4A added to Sec. 43(1) by the Finance (No.2) Act 1996 on the manner ofdetermination of actual cost in the case of a sale and lease back transaction is suggestive of the fact that it is a lessor who is entitled to depreciation. After taking into consideration of the submission and fact of the case the ld. CIT(A) has stated that A.O has not made any inquiry to disprove the fact that assessee was not the owner of leased assets and he had only provided finance. The ld. CIT(A) has also taken into consideration the various judicial pronouncements including decisions of juri ictional High Court and Mumbai benches of the ITAT and held that the transaction entered into by the assessee were not finance transaction but genuine lease transaction. The assessee was the legal owner of the lease assets and was therefore entitled to depreciation in respect of these assets. After taking into consideration the facts and finding of the ld. CIT(A) as elaborated in detail at page 51 to 61 of his order, we don’t find any infirmity in his decision that the assessee had leased out those assets as part of its regular business of leasing which it had been carrying out for the last several years. During the course of appellate proceedings the revenue has not brought any material to controvert the facts and findings of the ld. CIT(A), therefore, this ground of appeal of the revenue stand dismissed." In the aforesaid referred case the assesse was also engaged in the business of leasing of assets/equipment and after taking into consideration the various judicial pronouncements including the decision of juri ictional High Court and Mumbai ITAT it is held that the transaction entered into by the assesse were not finance transaction but genuine lease transaction. Therefore, in the light of the above facts and findings we consider that decision of ld. CIT(A) to sustain the disallowance of depreciation is not justified and we direct the A.O to allow the claim of depreciation. Therefore, ground no. 1 to 4 are allowed. Ground No. 5: Disallowing of claim of deduction u/s 80-O of Rs.10,10,038/-:

The ld. CIT(A) has confirmed the disallowance of claim of deduction u/s 80-O made by the assesse after referring the order of his predecessor for assessment year 1995-96. P a g e | 17 19 Appeals

Heard both the sides and perused the material on record. This is undisputed fact that assesse has earned consultancy charges in foreign currency from the Eisenverg Group of companies of Rs.22,21,027/-. After reducing expenses of Rs.2,70,951/- the net income was shown at Rs.26,20,076/- on which deduction @ 50% was claimed at Rs.10,10,038/- u/s 80-O of the Act. The assessing officer has disallowed the claim of deduction that receipt in foreign currency was pertained to the work performed by the assesse related to financial services undertaken by the foreign clients in India. During the course of appellate proceedings, the ld. Counsel has referred the circular of CBDT No. 7001, dated 23.03.1995 wherein it is clarified that deduction u/s 80-O would be available to the person rendering the services even if foreign recipients of the services utilises the benefit of such services in India. We have also considered the decision of ld. Hon’ble High Court in the case of Eicher Consultancy Services Ltd. Vs. CIT (2008) 167 taxmann.com 64 (Delhi) wherein held that even though services may be utilise in India by foreign recipients of services it would still quality for deduction u/s 80-O of the Act. In view of the above facts and finding we direct the assessing officer to allow the claim of deduction u/s 80-O of the assesse. Ground No. 1 to 5:

As the facts and the issue involved in this appeal is the same as supra in ITA No. 3790/Mum/2004 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed.

In respect of ground of appeal 6 for not granting credit for tax deducted at source, the issue is restored to the file of the A.O for deciding after verification/examination of the relevant material. The P a g e | 18 19 Appeals SBI Capital Market Ltd. Vs. ACIT,Range 4(3)(3) issue of interest u/s 234B and interest u/s 234C are consequential and charged as per law. Ground No. 1 to 10:

As the facts and the issue involved in this appeal is the same as supra in ITA No. 3790/Mum/2004 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed.

The Ground No. 11 dismissed as not pressed. Ground No. 1 to 5:

As the facts and the issue involved in this appeal is the same as supra in ITA No. 3790/Mum/2004 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed.

The ground no. 6 pertaining to error in granting short credit for tax deducted at source to the extent of Rs.9,52,170/- is restored to the file of the A.O for deciding after verification of the relevant material. Ground No.1: Regarding confirming disallowance of depreciation of Rs.13,87,500/- on Bombay Stock Exchange membership card:

During the course of assessment the A.O noticed that assesse has claimed depreciation on BSE card amounting to Rs.13,87,500/-. The assessing officer was of the view that BSE card cannot quality for deduction as the same was not depreciable asset. Therefore, the claim of depreciation was disallowed.

Heard both the sides and perused the material on record. During the course of appellate proceedings before us the ld. Counsel has placed

As the facts and the issue involved in this appeal is the same as supra in ITA No. 3790/Mum/2004 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed. Ground No. 1 to 4:

As the facts and the issue involved in this appeal is the same as supra in ITA No. 3790/Mum/2004 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed. Ground No. 5:

The issue of short credit for tax deducted at source is restored to the file of the A.O for deciding after verification of the relevant material. Ground No. 1:

As the facts and the issue involved in this appeal is the same as supra in ITA No. 6822/Mum/2004 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed.

As the facts and the issue involved in this appeal is the same as supra in ITA No. 3790/Mum/2004, therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed.

During the course of assessment the A.O had noticed that assesse has claimed exempt dividend income of Rs.6,29,13,288/- u/s 10(33) of the Act. The A.O also noticed that during the year the assesse company has claimed the interest received on tax free securities amounting to Rs.7,89,38,634/- and Rs.5,25,00,000/- as exempt u/s 10(15)(iv)(4) and u/s 10(23G) of the Act. During the course of assessment the assesse explained that it was having sufficient own funds to make investment and investment was not made out of borrowed funds for earning tax free income. The company further submitted that they have earned income from leasing and hire purchase, merchant banking activities, investment/securities and income during the course of its business.

Heard both the sides and perused the material on record. It is undisputed fact that the assesse was having own funds as follows: (i) Share capital: Rs.58.36 crores (ii) Reserve and Surplus; Rs.223.98 Crores (iii) Profit of the year to 4.42 crores As against the investment which was to the amount of Rs.182.15 crores as on 31.03.2002. The ld. Counsel referred the decision of Hon’ble

During the course of assessment the assessing officer has disallowed the claim of deduction in respect of bad debt on the ground of same was not established to be genuine.

Heard both the sides and perused the material on record. During the year under consideration the assesse company claimed deduction of Rs.7,04,37,389/- as bad debt written off. The party wise detail of bad debt written off have been furnished. In this regard, it is noticed that prior to amendment of Income Tax Act 1987 w.e.f 01.04.1989 for claiming deduction the assesse was required to establish that the debt in question has become in fact bad debt. Mere writing off of the debt in the books was not sufficient to claim deduction under these provisions. However, after amendment of Income Tax 1987 Section 36(1)((vii) provide that the claim of bad debt may be allowed in the year in which such bad debt has been written off as irrecoverable in the account of the assesse. Further, the Hon’ble Supreme Court in the case of TRF Ltd. Vs. CIT Vs. (2010) 190 taxman.com 391 (SC) held that it is not necessary for the assesse to establish that debt, in fact has become irrecoverable, in the accounts of the assesse. In the light of the above facts and finding we don’t find any merit in the decision of ld. CIT(A) therefore, we direct the A.O to allow the claim of bad debt to the assesse. Therefore, this ground of appeal of the assesse is allowed. Ground No. 1 to 3:

As the facts and the issue involved in these ground is the same as supra in ITA No. 3790/Mum/2004, therefore, applying the same findings mutatis mutandis, this ground of the assessee is also allowed. Ground No. 4:

As the facts and the issue involved in this ground is the same as supra in the ground of 6 of ITA No. 7264/Mum/2005 therefore, applying the same findings mutatis mutandis, this ground of the assessee is also allowed. Ground No. 5:

As the facts and the issue involved in this ground is the same as supra in the ground no. 7 of ITA No. 7264/Mum/2005 therefore, applying the same findings mutatis mutandis, this ground of the assessee is also allowed. Ground No. 1 to 3:

As the facts and the issue involved in these ground is the same as supra in ITA No. 3790/Mum/2004 therefore, applying the same findings mutatis mutandis, these ground of the assessee is also allowed. Ground No.4:

As the facts and the issue involved in these ground is the same as supra in ground no. 6 in ITA No. 7264/Mum/2005 therefore, applying the same findings mutatis mutandis, these ground of the assessee is also allowed. Ground No. 1: Confirming the disallowance of loss of Rs.8,56,298/- on sale of share held as stock in trade u/s 94(7) of the Act:

During the course of assessment the A.O noticed that assesse has purchased and sold large number of securities both under the head investment and as stock in trade. On verification of detail filed by the assesse. A.O noticed that there was an amount of Rs.8,56,298/- being disallowable as loss under provision of Sec. 94(7) of the Act in respect of exempt dividend income received by the assesse. On query the assesse submitted that provision of Sec.94(7) are applicable only in the cases where the securities or unites held as investment and not as stock in trade. The A.O has not agreed with the submission of the assesse and he was of the view that irrespective of the fact whether the securities are held as investment or stock in trade provision of Sec. 94(7) will be applicable in respect of any dividend therein stripped. The Ld. CIT(A)

As the facts and the issue involved in this ground is the same as supra in ITA No. 6822/Mum/2004 therefore, applying the same findings mutatis mutandis, this ground of the assessee is also allowed. Ground No. 3:

As the facts and the issue involved in this ground is the same as supra in ground no. 6 of ITA No. 7264/Mum/2005 therefore, applying the same findings mutatis mutandis, this ground of the assessee is also allowed. Ground No. 4:

As the facts and the issue involved in this ground is the same as supra in ITA No. 3790/Mum/2004 therefore, applying the same findings mutatis mutandis, this ground of the assessee is also allowed.

The issue of not granting credit for TDS is restored to the file of the A.O for deciding after verification of the relevant material on record.

Regarding levy of interest u/s 234D the same is restored to the file for deciding as per law after verification of the relevant material on record. The issue of initiation of penalty u/s 271(1)(c) of the Act is premature at this stage therefore the same stand dismissed. Ground Nos. 1 to 4 & 8 to 10: confirming the levying of interest u/s 220 (2) of the Act:

During the course of assessment the A.O has computed additional interest of Rs.6,05,883/- u/s 220(2) of the Act for the period of July, 2009 to July, 2020 from date of the order giving effect to the CIT(A) till date of passing the rectification to the said order. On appeal the ld. CIT(A) stated that the effective ground of appeal relates to the charging of interest by the assessing officer of Rs.16,73,752/- u/s 220(2) of the Act for the period from January, 2008 to July, 2010. In this regard, the ld. CIT(A) stated that mistake made by the assessing officer in erroneously calculating the interest u/s 220(2) of the Act of Rs.59,07,042/- needs to be corrected because the net demand receipt vide order dated 08.02.2018 was Rs.27,20,352/- and not Rs.50,49,523/- as mentioned in the demand notice which subsequently got reduced to Rs.1,86,29,649/- by order u/s 154 dated 18.06.2010 and ultimately paid on 31.12.2011. Therefore, the ld. CIT(A) directed the assessing officer to correct the mistake and issue a demand notice accordingly.

After hearing the both sides and perused the material on record we direct the assessing officer to correct the mistake as per the direction given by the ld. CIT(A) therefore, this ground of appeal is allowed for statistical purpose. Ground No. 5 to 10: Pertaining to computing the interest u/s 234D of the Act on the refund of Rs.7,89,84,087/- as against interest u/s 234D computed by the assessing officer of Rs.50,49,023/-:

After hearing both the sides and perused the material on record we direct the assessing officer to recalculate the quantum of interest in accordance with Sec.234D of the Act after verification of the detail filed by the assesse as directed by the ld. CIT(A) therefore, this ground of appeal is allowed for statistical purpose. P a g e | 26 19 Appeals Ground No. 1:

No depreciation is allowable on Membership Card of BSE from A.Y. 2006-07, Since as per the scheme of demutulisation the card ceased to exist as held in the decision of ITAT Mumbai in the case of Sunidhi Consultancy Services Ltd. Vs. DCIT Mumbai (2012) 19 taxmann.com (Mum) after considering the decision of Hon’ble Supreme Ground No. 2:

As the facts and the issue involved in this ground is the same as supra in ground no. 6 ITA No. 7264/Mum/2005 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed. Ground No. 3:

As the facts and the issue involved in this ground is the same as supra ground 1 to 4 of ITA No. 3790/Mum/2004 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed. Ground No. 1:

As the facts and the issue involved in this ground is the same as supra ground no. 6 of ITA No. 7264/Mum/2005 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed. Ground No.2:

As the facts and the issue involved in this ground is the same as supra ground no. 1 to 4 ITA No. 3790/Mum/2004 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed.

As the facts and the issue involved in this ground is the same as supra ground no. 1 to 4 of ITA No. 3790/Mum/2004 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed. Ground No. 2:

As the facts and the issue involved in this ground is the same as supra ground no. 6 of ITA No. 7264/Mum/2005 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed. Ground No. 3: Against the decision of ld. CIT(A) that Section 234D of the Act is not applicable:

After hearing both the side and perusal of material on record it is noticed that ld. CIT(A) held that interest u/s 234D cannot be levied on pending assessment where refund has been received before date of insertion of Sec. 234D i.e 01.06.2003. Looking to the provision of Sec. 234D as referred by the ld. CIT(A) we don’t find any error in his decision, therefore, this ground of appeal of revenue stand dismissed.

The solitary issue in the ground of appeal of the assesse is of confirming the penalty u/s 271(1)(c) of the Act on a sum of Rs.10,10,038/- being deduction claimed by the assesse u/s 80-O of the Act. We have directed the assessing officer to allow the claim of deduction u/s 80-O of the Act vide ITA No. 3790/Mum/2004 as supra, therefore, the penalty levied in the case of the assesse become infructuous. Therefore, the ground of appeal of the assesse is allowed. P a g e | 28 19 Appeals

As the facts and the issue involved in this appeal is the same as supra in ITA No. 7538/Mum/2005 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed.

Since the quantum addition on the basis of which the penalty was levied has been deleted supra vide ITA No.6822/Mum/2004, therefore, the penalty levied become infructuous and the same is deleted. The appeal of the assesse is allowed.

As the facts and the issue involved in this appeal is the same as supra in ITA No. 1088/Mum/2007 therefore, applying the same findings mutatis mutandis, this appeal of the assessee is also allowed. The solitary issue in the additional ground of appeal of the assesse directed against the order of ld. CIT(A) in confirming the penalty of Rs.3,13,341/- levied u/s 271(1)(c) of the Act:

Vide the additional ground filed, the assesse contended that notice issue u/s 274 dated 27.12.2007 for levying penalty u/s 271(1)(c) is invalid since the AO has not specified the default for which the penalty was to be levied.

During the course of appellate proceedings before us at the outset the ld. Counsel referred the copy of notice issue u/s 274 r.w.s 271(1)(c) of the Act dated 27.12.2007 and submitted that non applicable part of the notice has not been striked off. The relevant para of the notice is reproduced as under: “have without reasonable cause failed to comply with a notice under section 22(4)/23(2) of the India Income-tax Act, 1922 or under section 142(1/143(2) of the Income Tax Act, 1961. No……………………………….dated…………………………………. “have concealed the particulars of your income or………………………..furnished inaccurate particulars of such income.

Heard both the sides and perused the material on record. It is undisputed fact that in the impugned notice issued u/s 274 of the Act dated 27.12.2007 as cited supra in this case the inapplicable portion of the notice has not been deleted. With the assistance of the ld. Representative we have perused the decision of Hon’ble juri ictional High Court in the case of Mohd. Farhan A Shaikh Vs. DCIT, CC-1 (2021) 125 taxman.com 253 (Bom) wherein it is held that non striking off irrelevant matter would vitiate penalty proceedings. Therefore, following the decision of juri ictional High Court as referred supra, we consider that the impugned notice was issued without deleting or striking off the irrelevant part of the notice, therefore the penalty levied is not valid. Accordingly, the same deleted. The appeal is of the assesse is allowed.

In the result the, all the appeals of the assesse are partly allowed and the appeal of the revenue is dismissed.