· “Capital Gains – Limit of investment in specified bonds (REC/NHAI) being restricted to Rs. 50 lakhs per Financial Year” Background:Under section 54EC of the Income Tax Act, 1961, any person who has earned Capital Gains on sale/transfer of a Long Term Capital Asset can invest the consideration received on such sale in specified bonds (REC/NHAI) and claim deduction from Capital Gains subject to certain conditions. The conditions are that the amount should be invested within 6 months of the sale/transfer date and the upper limit of investment is Rs. 50 lakhs in any financial year.Till now, the transactions were being planned in such a way that the period of six months would cover the current as well as the next financial year (e.g. transaction dated 1st December, 2011 – validity of six months would mean that the amount can be invested upto 31st May, 2012). Due to this form of tax planning, the investors would be able to claim a deduction of Rs. 100 lakhs instead of Rs. 50 lakhs if the investment of Capital Gains was made in two tranches. (1st 50 lakhs before 31st March, 2011 and next 50 lakhs after 31stMarch, 2011 in above case).
Judgment delivered by ITAT Jaipur bench:As per a recent judgment delivered by Jaipur bench of ITAT (ITAT is a adjudicating authority constituted specially to hear tax related matters. For cases dismissed by ITAT, generally an appeal can be made to High Court and then the Supreme Court in that order), an investor was denied the benefit of claiming Rs. 50 lakhs deduction twice even though the investments were made in two different Financial Years.Conclusion:This judgment has made it clear that there cannot be two different interpretations of Section 54EC. Assessees can get a maximum deduction/benefit of Rs. 50 lakhs u/s 54EC.
· “Time limit for investment u/s 54EC is six months from the date of actual receipt of sale consideration related to a Long Term Capital Gains Transaction.” Chanchal Kumar Sircar V. Income-tax OfficerChapal Kumar Sircar V. Income-tax Office (ITA Nos 1146/Kol/2011 and 1147/Kol/2011)Background:Under section 54EC of the Income Tax Act, 1961, any person who has earned Capital Gains on sale/transfer of a Long Term Capital Asset can invest the consideration received on such sale in specified bonds (REC/NHAI) and claim deduction from Capital Gains subject to certain conditions. The conditions are that the amount should be invested within 6 months of the sale/transfer date and the upper limit of investment is Rs. 50 lakhs in any financial year.An assessee had received the sale consideration in installments, some of them six months later than the date of sale, but had invested each such installment within six months of receipt in the notified bonds. The claims for deduction were denied stating that the time limit of six months is from the date of sale and not from the date of receipt of sale consideration.
Judgment delivered by ITAT Kolkata Bench:The period of six months for making deposit u/s. 54EC of the Act should be reckoned from the dates of actual receipt of the consideration, because in the present case the assessee has received part payment as on the date of execution of agreement and handing over of possession of the property and received part payment after six months at the time of registration of sale deed or even after that in few of instances.
Conclusion:
Thus, the time limit of investment in specified bonds u/s 54EC is six months from the date of receipt of sales consideration and not from the deemed date of sale in light of the above judgment.
· In “Finance Lease” Lessor Is Not “Owner” For Depreciation: ITAT Special Bench IndusInd Bank Ltd vs. ACIT (ITAT Mumbai Special Bench)
Background:
The assessee, a bank, purchased a boiler and gave it on lease to Indo-Gulf Fertilisers. The assessee claimed depreciation on the said boiler on the basis that it was the “owner” thereof. The AO & CIT (A) disallowed the claim for depreciation on the basis that the transaction was a “finance lease” which was akin to a loan given by the assessee and that the assessee was not the “owner“.
On a reference to the Special Bench HELD:
- The distinction between a “Finance lease” and an “operating lease” is set out in the Guidance Note on Accounting for Leases and Accounting Standard (AS) 19. It is also set out in the judgement of the Supreme Court in Asea Brown Boveri vs. IFCI 154 TM 512 (SC) & Association of Leasing & Financial Services Companies v. UOI. In a finance lease, the lessee selects the equipment & the lessor provides the funds, acquires the title to the equipment and allows the lessee to use it for its expected life. The lessee uses the asset for its entire economic life & all risks and rewards incidental to ownership are transferred to the lessee even though title may or may not be eventually transferred to the lessee. A finance lease is for a fixed period & non-cancellable. There is a fixed obligation on the lessee for payment of lease money & in case of premature termination, the lessor is entitled to recover his investment with expected interest. In substance, finance lease is a loan from the lessor to the lessee. In an operating lease, the lessor bears the risk of loss, the period is cancellable and lease rentals are not synchronized with the economic life of the asset. On facts, the assessee’s lease agreement had all the characteristics of a finance lease;
- The assessee’s argument that even in the case of a finance lease, depreciation should be allowed to the lessor is not acceptable because all risks & rewards incidental to ownership are borne by the lessee and the lessor’s “ownership” is nominal & symbolic & serves no purpose other than as security for the recoupment of the investment with interest in the form of lease rentals. It is the lessee who is the actual and real owner of the asset (Podar Cement 226 ITR 625 (SC) & Mysore Minerals 239 ITR 775 (SC) applied), MCorp Global 309 ITR 434 (SC) distinguished)
- On facts, the assessee had already advanced a loan to Indo-Gulf to purchase the boiler much prior to the entering into of the lease agreement. The lease agreement was entered into subsequently with the sole purpose of enabling the assessee to artificially fulfill the twin requirements of ownership and user of the asset so as to claim depreciation, to which it was not otherwise entitled as per law and thereby reduce its income in a mala fide manner. The agreement was consequently a “sham“. The assessee’s argument that the issue of depreciation is tax neutral because the tax rates on the lessor & lessee is the same is not correct because while the assessee had huge income, the lessee had a loss. The lease agreement was thus a “dubious way” to mitigate the assessee’s tax liability.
Conclusion:
Thus, in case of a finance lease, the actual owner for the purpose of claiming depreciation is the lessee and not the lessor in light of the above judgment.
· While computing income u/s 115JB, amount of disallowance worked out as per Rule 8D cannot be given effect to since it is only the actual expenditure which is debited in books of account which has to be considered (ITAT Delhi Bench)
HELD THAT:
No actual expenditure was debited in the profit & loss account relating to the earning of exempt income. Therefore, the provision of section 14A cannot be imported into while computing the book profit u/s 115JB of the Act inasmuch as clause (f) of Explanation to sec. 115JB refers to the amount debited to the profit & loss account which can be added back to the book profit while computing book profit u/s 115JB of the Act. In this connection, reliance can be placed upon the decision of ITAT Delhi Bench in the case of Goetze (India) Ltd. Vs. CIT (2009) 32 SOT 101 (Del), wherein it has been held that provisions of sub-sec. (2) & (3) of section 14A cannot be imported into clause (f) of the Explanation to sec. 115JA of the Act. In this view of the matter, we therefore, delete the disallowance of expenses confirmed by the CIT(A) while computing book profit under sec. 115JB of the Act. In other words, no addition to the book profit shall be made on account of alleged expenditure incurred to earn exempt income while computing income u/s 115JB of the Act.
Conclusion:
Thus, While computing income u/s 115JB, amount of disallowance worked out as per Rule 8D cannot be given effect to since it is only the actual expenditure which is debited in books of account which has to be considered.
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