M&A Critique
Case Law : Tata Consultancy Services  Vs.  ACIT

Case Law : Tata Consultancy Services Vs. ACIT

LEGAL CORNER – January 2016 – CASE LAW 1


There are two matters:-

  1. Whether payments made for the purchase of unexpired processing contracts can be treated as capital in nature.
  2. Whether depreciation on a lease of cars and computers can be disallowed treating the same as a financial lease in nature. In the event of allowance of depreciation of cars, whether the rate of depreciation could be 40 % treating the same as “Commercial vehicles” even if used for an own purpose.

Facts of the Case:

In case of 1st matter:

The assessee company is operating as Non-Banking Financial Company (NBFC). Due to the downturn in NBFC business, the assessee company decided to reduce its dependence on volatile sources of revenue and complement the existing revenue streams. The assessee company paid Rs. 85,00,000/- to Citi Corp Information Technology Industries Ltd (hereinafter called “CITIL”) for a purchase of their processing division. This amount was amortized over the period of 25 months being balance unexpired period of contracts. The processing service division has entered into several contracts with its clients who require CITIL to provide services pertaining to cash management, custodial services and trade finance. The Assessing Officer (hereinafter called “AO”) treated the same 85 Lakhs to be in nature of capital expenditure which was further amended u/s 154 of the Act, whereby the disallowance was reduced to 23,80,000/- as out of the unexpired period of the contract of 25 months , only 7 months fell within the previous year 31st March 1999 i.e. assessment year under appeal.

In Case of 2nd Matter:

The assessee company is also into the business of leasing of assets like cars and computers and lease rentals derived out of such assets were treated as income by the assessee also claimed depreciation on such assets. The assets were leased by the assessee to its associated concerns and were also used for an own purpose.

The AO held that the lease rental is nothing but principle component plus interest component which is spread over for particular months to recover the loan amount along with the interest. Hence depreciation on such leased assets was disallowed. 

Appeal by assessee to Commissioner of Income-Tax (Appeals) – CIT (A)

In Case of 1st Matter:

The CIT(A) held that the assessee company has acquired the processing service division of CITIL and thus the expenditure was for the purpose of extension of business. The said expenditure is incurred for the purchase of processing contract which is capital in nature being intangible asset to be classified as business or commercial rights and entitled to depreciation at the rate of 25%.

In Case of 2nd Matter:

The CIT(A) held that the lessees have rented the cars and the assessee company has only provided funds. The lessee is using the assets for the entire economic life and all risks and rewards incidental to ownership has been transferred to the lessee. The lease is for a fixed period and non-cancellable and thereby he held that the lease is a financial lease and hence depreciation was rightly disallowed.

Assessee then made an appeal Income Tax Appellate Tribunal (ITAT ) against the orders of CIT(A)

Decision by ITAT

In Case of 1st Matter:

The ITAT observed that the assessee has acquired the service agreement whereby all the liabilities, rights and obligation and interest in the afore-stated agreement are acquired by the assessee. The payment of Rs. 85 lakhs is treated as deferred revenue expenditure in the Books of Accounts. It is merely an assignment of agreements in favor of the assessee whereby the unexpired period revenue generated contracts are assigned in favor of the assessee. Keeping in view the principle of matching concepts of revenue, ITAT held that the assessee has rightly charged as revenue expenses being Rs. 23,80,000/-.

In Case of 2nd Matter:

The ITAT observed that to claim depreciation, the asset should be owned by the assessee and it should be used for the purpose of business of the assessee. Here, the assessee is owning the assets till the same are sold to the associated concern/employees. The assessee by giving these assets on a lease is, in fact, using the same for its own business. The assessee has given such cars on lease and they are commercial vehicles entitled for depreciation.

Accordingly, the appeals of Assessee was allowed.


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