M/S VECTRA INVESTMENTS PRIVATE LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-7(1)(2), BANGALORE

PER BEENA PILLAI, JUDICIAL MEMBER : Present appeal has been filed by assessee against order dated 01/03/2018 passed by Ld. CIT (A)-7 Bangalore for assessment years under consideration on following grounds of appeal: ITA No.1429/Bang/2018 (AY: 2010-11) That the Deputy Commissioner of Income-tax Circle 12(5) 1. (hereinafter referred to as 'Ld. AO') has erred on facts and in law in assessing the loss of the appellant at Rs. 14,84,958 as against the returned loss of Rs. 64,73,056. The order of the Ld. AO is bad in law and on the facts to that extent, apart from being unjust.

ITA Nos.1429-1430(B)/2018 2 That the Ld. AO has grossly erred on facts and in law 2. disallowing the claim of depreciation on plant and machinery amounting to Rs. 7,31,285 on plant and machinery, alleging that the plant and machinery have not been put to use for the purpose of the business of the appellant during the relevant assessment year, without appreciating the fact that the plant machinery was given on operating lease to the lessee.

2.1. The Ld. AO has vitiated the principle of natural justice by not giving proper opportunity of being heard to the appellant before disallowing the aforesaid claim of depreciation. That the Ld. AO has erred on facts and in law in disallowing security deposit written off amounting to Rs. 14,68,800 under section 37(1) of the Act, alleging that the same is in the nature of capital loss, without appreciating that the same is in the nature of business expense incurred by the appellant during the relevant assessment year for the purpose of the business of the appellant.

ITA No.1430/Bang/2018 (AY: 2011-12) The Appellant prefers the present appeal on the below mentioned grounds which are mutually exclusive and without prejudice to one another:

ITA Nos.1429-1430(B)/2018 3 1. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the order passed by Ld. AO, in disallowing depreciation claimed by the Appellant amounting to Rs. 6,21,592 in respect of plant & machinery given on lease by Appellant in course of its business. 2. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the order passed by Ld. AO, in making addition of Rs. 23,84,651 to the book profits under clause (f) of Explanation (1) of Section 115JB(2) of the Act in respect of suo-moto disallowance made by the Appellant under section 14A of the Act in its return of income, without appreciating that the Appellant did not earn any exempt income during relevant Assessment Year and such disallowance ought not to have been made even under normal provisions of the Act. 3.That in facts and in the circumstances of the case and in law, suo- moto disallowance of Rs. 23,84,651 made by the Appellant under section 14A of the Act while computing its total income under normal provisions of the Act, may kindly be directed to be reversed, in light of the fact that the Appellant did not earn any exempt income during the relevant Assessment Year. All of the above Grounds of Appeal are independent of and without prejudice to one another. Furthermore, the Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the foregoing grounds of appeal at or before the hearing, and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. ITA No.1431/Bang/2018( AY: 2012-13) That the Deputy Commissioner of Income-tax Circle 7(1) (2) 1. (hereinafter referred to as 'Ld. AO') has erred on facts and in law in assessing the Profit of the appellant at Rs. 35,94,321/- as against the returned loss of Rs. 1,22,61,807/-. The order of the Ld. AO is bad in law and on the facts to that extent, apart from being unjust.

ITA Nos.1429-1430(B)/2018 4 That the Ld. AO has grossly erred on facts and in law in 2. disallowing the claim of depreciation on plant and machinery amounting to Rs. 5,79,130/-, alleging that the plant and machinery have not been put to use for the purpose of the business of the appellant during the relevant assessment year, without appreciating the fact that the plant & machinery was given on operating lease to the lessee. 2.1. The Ld. AO has vitiated the principle of natural justice by not giving opportunity of being heard to the appellant before disallowing the aforesaid claim of depreciation. 3. That the Ld. AO has erred on facts and in law in disallowing the interest claim amounting to Rs. 1,52,76,998 being interest paid on borrowings. 3.1. The Ld. AO has vitiated the principle of natural justice by not giving opportunity of being heard to the appellant before disallowing the aforesaid claim of interest payment All of the above Grounds of Appeal are independent of and without prejudice to one another. Furthermore, the Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the foregoing grounds of appeal at or before the hearing, and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. 2. Brief facts of the case are as under: Assessee filed its return of income for years under consideration within time specified under section 139 (1) of the Act. The case was selected for scrutiny and statutory notices were issued to assessee in response to which representatives of assessee appeared before Ld.AO and filed requisite details. 2.1 Ld.AO observed that, assessee is nonbanking finance company, engaged in business of dealing in shares, debentures,

ITA Nos.1429-1430(B)/2018 5 stocks, bonds and securities, leasing, hire purchase and letting on hire purchase plant and machinery. Books of accounts and other details furnished by assessee were examined by Ld.AO and observed that assessee has claimed depreciation on general plant and machinery. Assessment was completed for years under consideration by making various additions. However, alleged addition by assessee is in respect of disallowance of depreciation on plant and machinery, and suo-moto disallowance alleged to be made by Ld.AO under section 14 A when assessee did not earn any exempt income. 3. Aggrieved by disallowances made by Ld.AO assessee preferred appeal before the Ld.CIT (A) who upheld additions so made. 3.1. Aggrieved by order of Ld.CIT (A) assessee is in appeal before us now. A.Y : 2010-11 4. Ld.AR submitted that for assessment year 2010-11 there is only one ground relating to disallowance of depreciation claimed by assessee amounting to Rs.7,31,285/- in respect of plant and machinery given on lease by assessee in course of its business. It has been submitted by Ld.AR that assessee gave its plant and machinery on lease to its clients in earlier years, and accordingly formed part of its block of assets depreciable at 15%. He argued that test of ownership and existence of such general plant and machinery has not been disputed since A.Y:2000-01. 4.1 Ld.AR submitted that plant and machinery being dumpers, concrete mixer’s etc., were on lease to its customers, though, no

ITA Nos.1429-1430(B)/2018 6 lease rent was generated during years under consideration. However, he submitted that, these assets existed with assessee and even for earlier years in books of account forming part of block of assets. Referring to page 67 of paper book containing schedule to financial statements and page 251-to 55 of paper book containing schedule depreciation schedule forming part of tax audit report for assessment year 2008-09 to 2011-12, he submitted that no sale of such assets have taken place. 4.3 Ld.AR in written submission filed on 11/07/19 after hearing was concluded submits that, in preceding years assessing officer disallowed claim of depreciation, without appreciating fact that, these assets were part of block of assets since long, however to buy peace of mind and to avoid further litigation assessee did not file any appeal before appellate authorities for preceding years. 4.4 He placed reliance upon decision of Hon’ble Supreme Court in case of ICDS Ltd vs CIT reported in (2013) 29 Taxmann.com 129. 4.5 He further submitted that section 32 does not require assessee to receive lease rentals against lease of plant and machinery. The only requirement under section is that plant and machinery leased has to be owned by assessee and has been used by assessee for its business. He also placed reliance upon decision of Hon’ble Karnataka High Court in case of Manipal Finance Corporation Ltd vs ACIT reported in (2014) 49 Taxmann.com 353. 5. On the contrary, Ld.DR submitted that there is no dispute regarding the fact that, assessee has not earned any income

ITA Nos.1429-1430(B)/2018 7 from lease of these alleged plant and machinery for years under consideration. He thus submitted that out of twin condition for eligibility to claim depreciation on plant and machinery one of the conditions remain unsatisfied, as assessee has not earned any income against which depreciation could be claimed. He thus brought out distinguishing factor in present case vis-a-vis decisions relied upon by Ld.AR passed by Hon’ble Supreme Court, Hon’ble Karnataka High Court and various other High Courts, referred to in written submissions filed by Ld.AR. He thus strongly relied upon view taken by authorities below. We have perused submissions advanced by both sides in the light of the records placed before us. 6.1 Only contention raised by Ld.AR is, plant and machinery forms part of block of assets, it satisfies requirement under section 32 for claiming depreciation. 7. Ld.DR on the contrary, argued that assessee has not established before authorities below existence of such plant and machinery that are alleged to be owned by assessee, and how it has been put to use, as no income is generated from the same. It has been submitted by Ld.DR that, merely because the assets formed part of block of assets in financial statements, and alledged that these have been leased to various parties during the years under consideration does not ipso facto lead to conclusion that, they qualify for depreciation under section 32 of the Act. 8. We agree with submissions of Ld.DR that twin conditions required for claiming depreciation under section 32 stands unsatisfied, as assessee do not have income from lease of

ITA Nos.1429-1430(B)/2018 8 alleged plant and machinery, against which depreciation could be claimed. Merely because assessee included these plants and machinery in block of assets, would not establish these plant and machinery to be existing and have been used for purposes of business ,as assessee do not have any evidence to establish the same. While the case was being argued by Ld.AR this bench called for production of lease/hire purchase agreements entered into by assessee with various parties, to whom these plant and machinery was given on lease/hire purchase. In paper book filed before us, we do not find any such agreements. Even along with written submissions filed subsequently on 11/07/19, there are no such agreements placed on record by Ld.AR in order to substantiate his claim. Further Hon’ble Kerela High Court in CIT vs Geo Tech Construction Corporation reported in (2000) 111 Taxman 373, referred to by assessee at page 481-483 of paper book has considered various decisions on this issue passed by Hon’ble Supreme Court and Hon’ble Bombay High Court, held as under: “Like every other animate and inanimate object, business premises, machinery, plant or furniture employed by an assessee in the course of his business, profession, etc has a limited effective life. The vigour, strength, capability etc of every such object gradually exhaust by the factors of use and time. These have undoubtedly aided assessee to earn income from such business or profession which is subjected to the levy of tax.” 9. On perusal of various decisions relied upon by Ld.AR, it is observed that moot question considered by Hon’ble Courts therein is whether claim of depreciation against the assets was

ITA Nos.1429-1430(B)/2018 9 owned by assessee and/or it was put to use for purposes of business. None of these cases refer to a situation where, revenue doubts existence of plant and machinery. In facts of present case, authorities below rejected claim of depreciation for the reason that, there is no asset, as has been claimed by assessee, and that, no such assets has been used for purposes of business which generated any income, on which claim of depreciation could be computed. Mere existence of plant and machinery on which depreciation is claimed has been doubted, and assessee has not been able to substantiate the same by way of any agreements entered into by it, with parties to which plant and machinery has been released on hire purchase. Even in the preceding years assessee has not been able to establish existence of plant and machinery by way of corroborative evidences. 10. Before us, Ld.AR was called to file documents in respect of existence of plant and machinery on which depreciation is claimed. No evidence to establish prima facie existence of machinery has been brought on record. Under such circumstances ratio of decisions relied upon by Ld. ar is not applicable to the facts of present case. Accordingly this ground raised by assessee stands dismissed. 11. In the result appeal filed by assessee for assessment year 2010-11 stands dismissed. 12. AY : 2011-12 It has been submitted that Ground No.1 is in respect of disallowance of depreciation claimed by assessee.

ITA Nos.1429-1430(B)/2018 10 13. Both parties refer to and relied upon the submissions advanced which has been reproduced hereinabove. Admittedly the facts and circumstances of the issue are same and identical with that of assessment year 2009-10. We are therefore inclined to apply our view expressed hereinabove which is based upon the discussions mutatis mutandis to ground No. 1 herein. Accordingly Ground No. 1 raised by assessee stands dismissed. 14. Ground No.2 is in respect of addition under section 14 A made while computing book profit under section 115 JB (2) Explanation 1 clause (f). 15. Ld.AR submitted that assessee had inadvertently computed suo moto disallowance under section 14 A under normal provisions. Placing reliance upon page 59 of paper book being the financial statement, it is submitted that there is no exempt income earned during the year under consideration. 15.1 Ld.AR placed reliance upon the decision of Delhi Special Bench in case of ACIT vs Vireet Investments Pvt. Ltd., reported in (2017) 58 ITR (T) 313. 16. Ld. DR relied upon the orders of authorities below. 17.1 We have perused submissions advanced by both sides in the light of the records placed before us. 18. We have referred to computation of income and financial statements placed in paper book, relied upon by Ld.AR. Admittedly, there is no exempt income earned during the year by assessee. This issue therefore stands covered by the ratio laid down by Delhi Special Bench in case of ACIT vs Vireet Investments Pvt. Ltd. (supra). We therefore direct Ld.AO to delete

ITA Nos.1429-1430(B)/2018 11 disallowance computed under section 14 A while computing book profits. Accordingly this ground raised by assessee stands allowed. 19. Ground No. 3 is in respect of suo-moto disallowance computed by assessee under section 14A of the Act in regular provisions. It has been submitted by Ld.AR that disallowance computed by assessee may be considered on the basis of ratio laid down by Hon’able Delhi High Court in case of CIT vs Chem Investment reported in 378 ITR 33. 20. Ld. DR has objected to fact that this ground does not arise out of the order passed by Ld.CIT (A). 21. We have perused submissions advanced by both sides in the light of the records placed before us. It is a legal claim of assessee that by assessee inadvertently even though no exempt income was earned during the year under consideration may be deleted by following the ratio laid down by Hon’able Delhi High Court in case of CIT vs Chem Investment. As the issue is set aside to Ld.AO in respect of book profit computation, we direct Ld.AO to consider assessee’s claim of disallowance under section 14 A, as there is no exempt income earned by assessee. Accordingly this ground raised by assessee stands allowed. 22. In the result appeal filed by assessee for assessment year 2011-12 stands partly allowed. 23. AY : 2012-13 It has been submitted that Ground No.1 is in respect of disallowance of depreciation claimed by assessee.

ITA Nos.1429-1430(B)/2018 12 23.1 Both parties refer to and relied upon submissions advanced, which has been reproduced hereinabove. Admittedly, facts and circumstances of the issue are same and identical, with that of assessment year 2009-10. We are therefore inclined to apply our view expressed hereinabove discussions mutatis mutandis to Ground No. 1 herein. Accordingly Ground No. 1 raised by assessee stands dismissed. 24. Ground No.2 is in respect of disallowance of interest of Rs.1,52,76,998/-under section 36 (1) (iii) of the Act. 24.1 Ld.AR submitted that assesse entered into loan agreement with Vectra Advanced Engineering Pvt.Ltd on 01/04/2010, for advancing loan at 5.5% which was further revised to 9 % vide addendum dated 01/04/2011. Ld. ar submitted that the agreement is placed at page 276-281 of paper book. Subsequently it is submitted that assessee entered into an agreement for borrowing of loan with SREI Infrastructure Finance Ltd on 22/04/11 at 14% for development of oil and gas exploration activities and other investments in the group. 24.1 He submitted that Ld.AO made proportionate disallowance for the reason that there is a diversion of funds and that agreement between assessee and M/s Vectra Advanced Engineering Pvt. Ltd was not as per market price. Is also been submitted that Ld.AO adopted 15.5% instead of 14% for computing the disallowance of interest. 25. Ld.AR submitted that as both assessee as well as M/s Vectra Advanced Engineering Pvt.Ltd are loss-making companies therefore question of diversion of funds or

ITA Nos.1429-1430(B)/2018 13 transaction not being at arms length does not arise. Alternatively Ld.AR submitted without prejudice that, if disallowance of interest is to be upheld, corresponding deduction may be directed to be provided in the hands of Vectra Advanced Engineering Pvt.Ltd., by way of secondary adjustment. 26. Ld.DR submitted that, disallowance has been rightly computed because assessee and Vectra Advanced Engineering Pvt.Ltd are loss-making companies. 27. We have perused submissions advanced by both sides in the light of the records placed before us. 28. Ld.AR tried to make a point on disallowance by submitting that loan advanced by assessee to Vectra Advanced Engineering Pvt.Ltd was due to prior commitments, being a group concern. Further there is no dispute regarding loan having not been advanced by assessee. Revenue is aggrieved with the fact that, assessee borrowed loan at 14% and advanced to Vectra Advanced Engineering Pvt.Ltd at 9% and thereby holding loan transaction, not at market price. One has to look into the transaction in an holistic way taking into consideration Commercial expediency. It is an agreed position that assessing officer cannot dictate a businessman how to conduct its business. However it also cannot be denied that the interest at which assessee has extended borrowed funds to its group concern is much low than SBI rate. We are therefore restricting the disallowance to 2% being difference between the rate at which assessee borrowed funds and 12% being SBI rate during relevant period.

ITA Nos.1429-1430(B)/2018 14 Accordingly this ground raised by assessee stands partly allowed In the result appeal filed by assessee for assessment year 2012-13 stands partly allowed. Order pronounced in the open court on 31-07-2019. Sd/- Sd/- (B.R.BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: the 31st July, 2019. *am Copy of the Order forwarded to: 1.Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5. DR 6. ITO (TDS) 7.Guard File By Order Asst.Registrar

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