ORDER 

Per Prashant Maharishi AM

01. These are the cross appeals filed by the assessee and the learned assessing officer for assessment year 2004 – 05 against the order of the learned Commissioner Of Income Tax (Appeals) –XI, New Delhi dated 5 July 2010.

02. In ITA number 4346/Del/2010, assessee has preferred following grounds of appeal:-

1. That the Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in not allowing depreciation amounting to ₹ 101,237,629/– claimed by the appellant in respect of the assets given on lease. 1.1 That the Commissioner of income tax (appeals) erred on facts and in law in holding that lease transaction undertaken by the appellant to be a financing transaction.

2. Without prejudice to ground of appeal number 1, that in case the lease transaction undertaken by the appellant was held to be merely a financing transaction, then the assessing officer erred in bringing to tax the entire lease rent received and offered for tax by the appellant in the return of income.

2.1 that the assessing officer/CIT (A) failed to appreciate that in case the lease transaction undertaken by the appellant was held to be merely a financing transaction, then only the finance/interest component of the gross lease rent received should have been brought to tax as income of the appellant.

3. That the Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the action of the assessing Officer in disallowing expenses amounting to Rs 1, 81,80,000/-u/s 14 A of The Income Tax Act, 1961 to be the same towards earning exempt dividend income.

3.1 That the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that only expenditure actually incurred and having direct relation to earning of exempt income could be disallowed u/s 14A of the act.

3.2 That the Commissioner of Income Tax (Appeals) failed to appreciate that no expenditure was actually incurred by the appellant in relation to exempt income and consequently, the provisions of Section 14 A of the act were not applicable.

4. That the Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in not allowing foreign exchange fluctuation loss of Rs. 125,730,000 holding the same to be merely notional in nature

4.1 That the Commissioner of Income Tax (Appeals) failed to appreciate that the aforesaid issue is squarely covered in favour of the appellant by the decision of the Supreme Court in case of CIT versus Woodward Governor India (private) limited 312 ITR 254

03. In ITA number 4336/del/2010 the learned assessing officer has raised the following grounds of appeal:-

1. The order of the learned CIT (A) is wrong, perverse, illegal and against the provisions of law, liable to be set aside.

2. On the facts and circumstances of the case and in law, the CIT (A) has erred in deleting the disallowance of RS. 1,48,43,143 on account of redemption premium

04. Brief facts of the case culled out from the assessment order show that the assessee is a company engaged in the business of leasing and finance and it finances projects in the form of rupees loans, foreign loans, and underwriting and subscription to the capital issues.

05. Assessee filed its return of income on 30/10/2004 declaring loss of Rs 4,484,105,688/–. The return was revised on 31^st of March 2006 declaring loss of Rs 4,503,153,821/–. The case of the assessee was picked up for scrutiny and assessment order u/s 143 (3) of The Income Tax Act 1961 was passed by the learned Assessing Officer on 22nd of December 2006 determining total loss of the assessee at Rs 4,243,163,352/–. Several additions/disallowances were made. Assessee challenged the same before the learned CIT – A. The learned CIT – A as per order dated 5 July 2010 partly allowed the appeal of the assessee. Therefore, both the parties are in appeal before us.

06. We first come to the appeal of the learned assessing officer where the only