COMMISSIONER OF INCOME TAX Vs. BANSWARA SYNTEX LTD

JUDGEMENT

(1.) This appeal under Section 260A of the Income Tax Act, 1961 ['the Act'] is directed against the order dated 22.09.2006 as passed in ITA No.806/JDPR/2005 whereby the Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur ['the Tribunal'] dismissed the appeal filed by the revenue and affirmed the order dated 18.10.2005 as passed by the Commissioner of Income Tax (Appeals), Udaipur ['the CIT(A)'], who had deleted the addition made by the Assessing Officer ['the AO'] of the lease rent of the machinery, said to have been taken on hire. The AO was of the view that the lease agreement was that of financing and not of operational work and hence, the lease rent was not that of business expenditure. The Appellate Authority, however, disagreed and held that lease rentals were allowable as business expenditure in the case of assessee.

(2.) The Tribunal endorsed the views of the Appellate Authority. This appeal, preferred in challenge to the orders so passed by the Appellate Authority and the Tribunal, has been admitted on the following substantial question of law:-

(3.) The facts and background aspects for the purpose of present appeal could be noticed in the following: The assessee-company derives the income from manufacture of yarn and fabric. In its return for the assessment year 2000-2001, the assessee-company, inter alia, claimed in the profit and loss account an amount of Rs.58,18,153/- towards lease rental and interest in regard to the machinery, said to have been taken on hire. The AO, upon examination of the lease agreements, formed the opinion that they were only of finance lease and not of operational lease. The AO observed that the risks incident to the ownership of the assets stood "substantially" transferred to the lessee although "apparently" the title to the assets had not been transferred. However, according to the AO, the agreement had only been drawn up to ensure that the lessor recovers the finance involved in acquiring the machines and the lease rentals were merely in the nature of repayment of capital loan and interest thereupon. The learned AO, inter alia, observed as under:-