IN THE ITAT HYDERABAD BENCH ‘B’
Kabsons Gas Equipment Ltd.
Deputy Commissioner of Income-tax, Special Range-2, Hyderabad
IT APPEAL NOS. 152 TO 155 (HYD.) OF 2000, 288 & 319 (HYD.) OF 2001
AND 262, 263, 318 & 330 (HYD.) OF 2002
[ASSESSMENT YEARS 1993-94 TO 1997-98]
JUNE 8, 2012
Chandra Poojari, Accountant Member – These ten cross appeals filed by assessee and revenue are directed against the different orders of CIT(A) for the A.Y. 1993-94, 1994-95, 1995-96, 1996-97 and 1997-98. Since issues involved in all these appeals are common in nature, they are clubbed, heard and being disposed of by this combined order for the sake of convenience.
2. The common issue in assessee’s appeals in ITA Nos. 154/Hyd/2000, 155/Hyd/2000, 262/Hyd/2002, 263/Hyd/2002, 288/Hyd/2001 is with regard to allowability of depreciation on gas cylinder. The issue in assessee’s appeal ITA No. 154/Hyd/2000 and Revenue appeals in ITA Nos. 152/Hyd/2000, 153/Hyd/2001, 319/Hyd/2001, 318/Hyd/2002 and 330/Hyd/2002 is with regard to treatment of the receipts of security deposits on leasing of Gas cylinder as sales receipt and consequently treating the difference between security deposit and purchase cost of cylinders as business income of the assessee. Since these grounds are inter-related, we will adjudicate these grounds in assessee as well as in Revenue appeals collectively.
3. For clarity, we take facts in ITA No. 154/Hyd/2000 for the assessment year 1995-96. Brief facts of the case are that for the assessment year 1995-96, the assessee had shown purchase of 96200 cylinders of capacity of 2.3 kg. LPG from Ideal Engineers Hyderabad Limited for Rs. 2,08,82,545. It had also shown to have received 800 cylinders on return from PKL Limited out of cylinders loaned out to PKL Limited in earlier years. The entire 97000 cylinders were given to PKL Limited on loan basis. The cylinders were loaned out by taking security deposit @ Rs. 240/- per cylinder. The assessee had shown to have received total security deposit of Rs. 2,32,80,000 for loaning out 97000 cylinders. The assessee had claimed that purchase and sale of Liquified Petroleum Gas is one of its business and since gas cannot be sold without a container, it had sold gas to PKL Limited in the aforesaid 97000 cylinders. The assessee had also stated that each of the cylinders was filled with 1/2 kg LPG. The assessee had claimed that the cylinders are ‘plants’ for the business of purchase and sale of LPG and the assessee is entitled to 100% depreciation on the cost of the cylinders. The assessee claimed depreciation allowance of Rs. 2,08,82,545 on the cylinders. The assessee had argued that its claim of 100% depreciation on the cylinders is squarely covered in its favour by the order of Special Bench of Tribunal in the case of Detective Devices (P.) Ltd. v. ITO  22 ITD 9 (Hyd).
4. The Assessing Officer did not accept the claim of the assessee. She found that there were discrepancies in the various purchase documents maintained in respect of gas and loaning of cylinders. She found discrepancies in records relating to purchase of gas both in terms of dates and also amounts. She further observed that though the cylinders were claimed to have been used for sale of gas, on many occasions, the date of loaning of the cylinders precedes or succeeds the date of sale of gas. The Assessing Officer had also visited the gas filling plant of Ideal Engineers Hyderabad Limited at Balanagar, Hyderabad where the cylinders of the assessee were claimed to have been filled with 1/2 Kg LPG. She had examined Shri Anil Agate. Plant In-charge of the gas filling plant. At the time of her visit, she had also examined the Daily Report of Gas Filling for financial year 1997-98 and she found that at no point of time, any cylinder was filled with 1/2 Kg LPG and she found that the cylinders were filled in single step. She had asked Shri Agate and also Ideal Engineers Hyderabad Limited to produce records for daily filling of LPG for the financial years 1994-95 to 1997-98. Though at the time of the visit of the Assessing Officer Shri Agate had given the undertaking to produce the required documents after return of the Record Keeper from leave; only the documents relating to financial year 1997-98 were produced. A reply was however furnished by Shri Agate in this regard. On examination of the records relating to financial year 1997-98, the Assessing Officer came to the conclusion that the documents were tampered. Subsequently, she had also examined Shri G.K. Kabra. Shri G.K. Kabra happens to be the father of the Managing Director of the assessee company. Shri Kabra was described as advisor to all the three companies viz., assessee, Ideal Engineers Hyderabad Limited and PKL Limited and was authorised by all the three companies to represent them before the assessing officer in respect of cylinder and gas business. On the basis of enquiries made by her and the details filed from the assessee’s side, the assessing officer came to the conclusion that no real sale of 1/2 Kg LPG had taken place through the cylinders which were loaned out to PKL Limited and the entire transaction was a colourable device solely aimed at reducing the incidence of taxation. She observed that when the capacity of the cylinders was 2.3 Kg there was absolutely no valid basis to fill them up with 1/2 Kg LPG. She further held that what is being shown as loan transaction of cylinders is actually sale of the cylinders to PKL Limited and the security deposit is nothing but sale proceeds of the cylinders. In support of her finding that the transaction of sale of gas and loaning of cylinders was a colourable device, the assessing officer had relied upon various case-laws including that of Supreme Court in the case of McDowell & Co. Ltd. v. CTO  154 ITR 148/22 Taxman 11. She also held that the order of Tribunal in the case of Detective Devices (P.) Ltd. (supra) has no application to the facts of the present case. The assessing office had also looked into the various provisions of Gas Cylinder Rules, 1981 framed under the Explosives Act 1884 and had come to the conclusion that the assessee company had violated number of rules and regulations relating to storage of LPG and filling up of cylinders with LPG. She held that if at all it is accepted that the assessee was in the business of purchase and sale of gas, that business would be an illegal business and the loss from the same cannot be set off against the profits from manufacture and sale of regulators and valves in view of the decision of Supreme Court in the case of CIT v. S.C. Kothari  82 ITR 794. The assessing officer has summed up her various findings at para 24 of her assessment order as under :
(a) Because the person taking decision for gas and cylinder business of M/s. Ideal Engineers Hyderabad Limited M/s. P.K.L. Limited and M/s Kabsons Gas Equipment Limited are one and the same, i.e., Shri G.K. Kabra.
(b) Because M/s. Kabsons Gas Equipment Limited is a closely held company managed by Sri Satish Kabra and M/s. P.K.L. Limited is closely held company managed by Shri Rajiv Kabra, the brother of Shri Satish Kabra.
(c) Because it is proved beyond doubt that the assessee-company never sold 1/2 Kg of gas in cylinders as claimed by the assessee.
(d) Because the primary record of filling up of gas has been destroyed to suit convenience of the assessee.
(e) Because the assessee and its sister concerns are, tampering with the records.
(f) Because of statement given by Shri Anil Agate that at no point of time the cylinders were partly filled-up and at no point of time partly filled up cylinders were brought to filling plant of M/s. Ideal Engineers Hyderabad Limited for refilling them.
(g) Because purchase ledger of the assessee-company does not tally with the subsequent details of purchases filed.
(h) Because the correlation of invoice cum delivery challan for the sale of gas and the Subscription Vouchers raised for loaning of cylinder has proved beyond doubt that the sale of gas and loaning of cylinders were not simultaneous process.
(i) Because 800 cylinders claimed to have been returned by M/s. P.K.L. Limited to assessee-company were never returned to it.
(j) Because the statistics mentioned in earlier paras show that the assessee was using this device of claiming depreciation on cylinders over the years in connivance with its sister concerns.
(k) Because the assessee has not obtained any licence/permission for possessing/storing gas and without this, it cannot possess and store gas implying thereby that the assessee cannot sell the gas in cylinders for its alleged claim of ‘putting to use.
(l) Because of the detailed discussion of statistics in the first few paras proving that the value of alleged sale of gas in cylinders was a device adopted by the assessee-company over the years which had nothing to do with the commercial or business viability.
(m) Because the conditions mentioned on back of the Subscription Vouchers are done to suit the convenience of the assessee and its sister concerns and cannot be relied upon proving to be only a paper transaction as in reality 800 cylinders were proved to be never returned back by M/s. P.K.L. Limited to assessee-company during the asst. year 1995-96.
(n) Because of all other factors discussed in earlier paragraphs, in details, it is proved beyond doubt that it was only a sham arrangement between sister concerns of close relative to reduce the burden of taxation.
Accordingly, the Assessing Officer disallowed the claim of depreciation of Rs. 2,08,82,545 on cylinders and to treat the amount shown to be received as a security deposit amounting to Rs. 2,32,80,000 as a trading receipt received during the course of sale of empty cylinders.
5. Thus, the Common issues emerged from these appeals are whether the security deposits collected from customers on letting out the Gas Cylinders is trading receipt, whether these Gas cylinders would constitute as plant as per Income Tax Act, if so, the depreciation to be granted at 100% on these Cylinders.
6. The assessees’ authorized representative submitted that the issue involved in the appeal stands covered by the order of the Tribunal, Special Bench Hyderabad, in the case of Detective Devises (P.) Ltd. (supra). He further submitted that the assessee is engaged in the business of sale of LPG in Cylinders to customers has collected security deposit from its customers. Since the security deposits is liability of the Company as such it was treated as liability in the Balance sheet. The ownership of the LPG cylinders is with the Company and Company has given cylinders to its customers on lease basis by collecting security deposits. The LPG cylinders are property of the company and the name of the Company has been engraved on the foot of the cylinders which are given to customers. The Company has given cylinders by collecting security deposits which is refundable on return of cylinders by the customers. It is further submitted that the assessing officer himself examined where the Company has returned the security deposits to customers as and when they return the cylinders. It is submitted that the assessing officer was wrongly held that it is sale transaction and the assessee is sold cylinders to its customers. During the year under consideration the assessee has collected security deposit from its customers and kept the same under liabilities. It was further submitted that in fact as per the statutory provisions of Indian Explosives Act, 1884 and Gas Cylinders Rules 1981 and The LPG (Regulation and Supply and Distribution) order 1993 cylinders cannot be sold and it is the property of the licensee.
7. The AR further submitted that during the year the assessee has purchased cylinders and treated as it as plant and claimed depreciation at 100% as admissible under the Act. Since the cylinders were put to use in the assessee own business and the cylinders are the property of the assessee the depreciation was claimed in accordance with the provisions of section 32(i)(ii) of the Income Tax Act, 1961. The AR has placed reliance on the order of the Special Bench in the case of Detective Devises Pvt Ltd. (cited supra).
8. The DR on the other hand relied on the CIT(A) order and submitted that, the assessee was actually sold the cylinders to its customers and collected twice the amount of cost what it has paid for cylinders. He was of the view that there were hardly few instances of refund of deposits, according to him, actually there was sale of cylinders to customers and hence the deposits were in fact sale proceeds for cylinders. Therefore, it has to be treated as sale proceeds and consequently the difference between the cost price and sale price to be treated as business profit of the assessee. It was further submitted that the assessee is not used the cylinders for its own business as envisaged in the Act, so as to claim depreciation. The assessee has purchased the cylinders and sold them for customers by collecting amount in the form of security deposits. Actually the amounts collected from customers are nothing but recovery of cost of cylinders. It was further submitted that the transaction has taken place between two associated concerns and which is used a devise for evading tax. He relied on the order of Divisional Bench in the case of G.K. Kabra v. Asstt. CIT  87 ITD 249 (Hyd.) wherein similar issue was decided against the assessee.
9. We have heard the rival submissions and considered the materials on record and appraised the facts of the cases. The assessee is a company engaged in the business of supply of LPG to its customers. The assessee supplied the LPG cylinders to its customers on lease basis and collected security deposits. The customers can return the cylinders and take back the security deposits. It was observed by the assessing officer that the customers have returned the cylinders and taken back the security deposits. The assessee has separately collected the security deposits and the amount collected does not have any relation to the price fixed for the goods to be delivered i.e. LPG. The amount was held by the assessee as security till the consumer returning the cylinder and it is also evident from other terms and conditions of agreement entered by the assessee with the customers that the business connection came to end only when the consumer surrendered the cylinder. The assessee repaid the deposit as and when the customer returned the cylinder. Thus the contract has every element of contract of supply of cylinders on lease basis and amount of deposits constitutes security deposits just like borrowed funds. As for as the contention of the revenue is concerned that there was a transfer of ownership in cylinders to the customers, in our opinion, there was only leasing of cylinder to use the same by assessee’s customers during the currency of contract and there is no absolute sale of cylinders. The consumer has no right over the cylinder and they were prohibited from alienating the right over the cylinders. The cylinder is to be returned to the assessee company and the company has to refund the security deposit on its return. From the facts of the case, it is clear that the assessee supplied cylinders and the cylinders are the property of the assessee itself and the consumers does not have any right or interest over the cylinders. The security deposit collected by the assessee from the customers cannot be treated as received by the assessee towards sales consideration by any stretch of imagination. The learned Representatives appearing for both the parties stated that the order of the Tribunal in the case of G.K. Kabra (supra) was suspended by the Hon’ble High Court in CMP No. 19922 of 2002 in ITTA No. 86 of 2002 dated 3.4.2003. It is also brought on record by the parties that similar issue was considered by this Tribunal in the case of M/s. Prakun Equipments (P.) Ltd. in IT Appeal No. 264/Hyd/02 for the assessment year 1997-98, the Tribunal vide order dated 5.9.2007 decided the issue in favour of the assessee. It is also on record that this Tribunal in the case of Ideal Engineers (Hyderabad) (P.) Ltd. in IT Appeal No. 1759/Hyd/1996 vide order dated 20.12.2007 considered similar facts and held in paras 6 to 8 as follows:
‘6. We have duly considered the rival contentions and the material on record. To our dismay, we find that the CIT(A) has distinguished the decision in the case of Detective Devices (supra) on flimsy grounds. This is evident from the expression used by himself to the effect that the facts ore “not exactly identical”. One of the differences pointed out by him is that the assessees are different. There cannot be a flimsier ground than this to distinguish any decision. Another difference pointed out by him is that Detective Devices Pvt. Ltd. dealt with domestic cylinders whereas the assessee deals in smaller cylinders of 2.3 kgs. each, ignoring the fact that the gas cylinder rules apply equally to both the types of cylinders. The Gas Cylinder Rules defines “gas cylinder” to be a closed metal container having a volume exceeding 500 ml. but not exceeding 1000 ltrs. intended for the storage and transport of compressed gas including my liquefied petroleum gas. Further, we have not found any provision in any of the relevant enactments which is specifically applicable or not applicable to the smaller cylinders dealt with by the assessee. Moreover, the absence of written contract also does not make any difference. There can be an oral contract and under the rules, when the assessee is not entitled to sell the cylinder, the transaction entered into by it is deemed to be pursuant to such oral contract. As per the said contract, the assessee is liable to-refund the deposit as and when the customer surrenders back the cylinder. It was in this context, the Special Bench held that the business connection came to an end only when the consumers decided to terminate the contract by surrendering the gas connection or it would have come to on end if notice had been given by either party. On such termination, the amount became repayable. We do not see any material distinction between the facts of the present case and those in the case before the Special Bench. It was only the audacity of the CIT(A) not to submit to the higher wisdom despite the following observations of the Supreme Court in the case of Union of India v. Kamlakshi Finance Corporation Ltd., AIR 1992 SC 711:
“It cannot be too vehemently emphasised that it is of utmost importance that in disposing of the quasi-judicial issues before them revenue officers are bound by the decisions of the appellate authorities. The order of the Appellate Collector is binding on the Assistant Collectors working within his jurisdiction and the order of the Tribunal is binding upon the Assistant Collectors and the Appellate Collectors who function under the jurisdiction of the tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not ‘acceptable’ to the Department in itself an objectionable phrase- and is the subject-matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax laws.”
Thus, respectfully we follow the decision of the Special Bench to hold that the receipts of Rs. 52,06,650 are security deposits and not the income of the assessee. The judgment relied upon by the learned Departmental Representative in 251 ITR 743 does not help the revenue in any manner. Undoubtedly, the judgment is in the assessee’s own case for assessment year 1980-81 but the issue before the High Court was entirely different. For assessment year 1980-81, the Tribunal had upheld the action of the revenue authorities to treat the deposits as the income of the assessee. Two miscellaneous applications were filed by the assessee against the order of the Tribunal and the same were dismissed. A third miscellaneous application was filed by which the Tribunal recalled its original order on the ground that it had overlooked the provisions in the contract for return of cylinders, entries in the books of account by way of depreciation and the provision regarding refund of deposits. The High Court observed that a statutory tribunal or an authority cannot exercise review power unless the statute which creates such tribunal or authority grants such power specifically. Having rejected the earlier two miscellaneous applications, not on technical grounds, but on merits, the order made by the tribunal on the third application was tantamount to review of its earlier order which was not permissible. Thus, in this case, the High Court did not have any occasion 10 express its opinion on the merits of the addition and hence cannot be helpful to the revenue. Therefore, in the light of the aforesaid discussion, we direct the Assessing Officer to delete the addition of Rs. 52,06,650.
7. Since we have upheld the claim of the assessee, the latter remains the owner of the cylinders and hence would be entitled to depreciation at 100% following the order of the Tribunal in the case of Prakun Equipments Pvt. Ltd. (supra). The Assessing Officer is directed to grant depreciation of Rs. 33,28,534.
8. Last ground in the appeal is without prejudice to the first ground and is against the addition of Rs. 1,67,519 being the difference between the cost of cylinders on which depreciation is claimed and outgoing expenses amounting to Rs. 31,61,015. Since we have held the deposits not to be the income of the assessee, this ground does not survive and is rendered infructuous.”
10. Even otherwise, assessability of security deposits stands squarely covered by the order of the Special Bench in the case of Detective Devises (P.) Ltd. (supra) wherein held that:
“(i) It is open to every prudent businessman to utilise amounts which come into his coffers to the maximum advantage. Therefore, the mere fact that large cash balances were not maintained does not support the Department’s stand that there was no idea of returning the deposit. There is no instance brought to notice that any consumer had made a claim for refund of deposit and the assessee had bulked such payment. Nor can the assessee be expected to keep large cash balances in books uninvited and for reasons of security.
(ii) In the present case, certain amounts were taken as deposit under a contract, towards security of the cylinders supplied. The moment the said deposits were paid, the consumer became entitled to the supply of gas.
Gas was the commodity which was being sold. The amount deposited did not have any relation to the price fixed for the goods to be delivered which in the present case was gas nor is it to be adjusted out of deposit. The amount was held by the assessee as security for the consumer returning the cylinder and also observing other conditions of the contract. The business connection in the present case came to an end only when the consumers decided to terminate the contract by surrendering the gas connections or it would have come to an end if notice had been given by either party. On such termination, the amount became repayable. The transaction of deposit in the present case also has all the essential elements of a contract of loan and the deposits constitute borrowed money. The mere fact that the amount was to be adjusted against claim arising out of possible default would not alter the character of the transaction. Such a deposit remained a loan of which the repayment in full was conditioned by the due fulfilment of the obligations under the collateral contract. The assessee was fully saddled with the liabilities under the Indian Explosive Act as well as rules relating to gas cylinders. The amounts received were deposits which did not partake the nature of trading receipts.- CIT v. Punjab Distilling Industries Ltd.  53 ITR 75 (SC), K,M.S. Lakshmanier & Sons v. CIT  23 ITR 202 (SC) and Badri Narayanan Balkrishan v. CIT  57 ITR 752 (AP) relied on. Goyal Gases (P) Ltd. v. ITO (IT Appeal No. 2214 (Del) of 1984) approved. Ideal Engineers, Hyderabad (P) Ltd. v. ITO (IT Appeal No 551(Hyd) of 1985) overruled.”
11. Facts and circumstances of the cases before us being identical, consistent with the view taken in those matters, in these cases also the purchases of the cylinder and loaning of the same to customers can not be considered as dubious transaction. In our, opinion, the deposit received on loaning of cylinders can not be treated as sales receipt and it is a liability on the assessee which is required to be returned like borrowed money and therefore amount collected as deposits during relevant assessment years could not be taxed as trading receipt. Thus, we hold that the receipts of security deposits do not constitute sales receipts and consequently the difference between the cost price of the cylinders and security deposit received on leasing the same does not constitute as income of the assessee. Therefore, in view of the above discussion, we hold that the collection of security deposit on loaning the gas cylinder could not be treated as a sale transaction and the resultant difference is also not business profit of the assessee. Accordingly, we decide the issue in favour of the assessee and against the Revenue.
12. The next issue before us is whether the LPG cylinders were property of the assessee or not. If so, is it a Plant as defined within the meaning of section 32 of the Income Tax Act, 1961 and eligible for depreciation at 100%. So far as the depreciation on cylinders, the cylinders were used by the assessee for supply of LPG in which it was dealing. The cylinders clearly constitute plant having regard to the definition of term plant as per the provisions of Income Tax Act. As the cylinders are property of the assessee and also plants used in the course of its own business. Further the cylinders were used by the assessee in the course of its business by leasing it to its customers. The user of the cylinders were customers of the assessee company and leasing of the cylinders is the business of the assessee and usage of cylinders by the assessee’s customers is to be considered as usage by the assessee itself. Therefore, it could not be said that the cylinders were not used by the assessee in its business and the depreciation cannot be disallowed. For this proposition, we are supported by the judgement of Supreme Court in the case of CIT v. Shaan Finance (P.) Ltd.  231 ITR 308/97 Taxman 435 wherein the Apex Court held that assessee engaged in the business of leasing out machinery is entitled to investment allowances; machines so leased out are being used for the purpose of assessee’s business and there is no express requirement in section 32A that the assessee must itself use the machinery.
13. In view of the above discussion and also relying on the decision of Special Bench in the case of Detective Devises (P.) Ltd. (supra), we direct the assessing officer to allow depreciation at 100% on cylinders. Accordingly, we decide the issue in favour of assessee and against the revenue.
14. In ITA No. 155/Hyd/2000 the assessee raised the ground that addition of Rs. 1,90,400 towards difference in closing stock is unjustified. Though this ground was raised in the grounds of appeal by the assessee, no argument was put before us. Accordingly, this ground is dismissed as not argued before us.
15. In ITA No. 288/Hyd/2001 (assessee’s appeal) – the assessee raised the ground that the CIT(A) erred in not allowing deduction u/s. 80HHC of the Act at Rs. 1,96,354 in respect of income earned on the export turnover as claimed in the additional ground before the CIT(A). Though this ground was raised in the grounds of appeal by the assessee, no argument was put before us. Accordingly, this ground is dismissed as not argued before us.
16. In the result, all the assessee appeals are allowed except ITA No. 155/Hyd/2000 and 288/Hyd/2001 which are partly allowed. All the Revenue appeals in ITA Nos. 152 & 153/Hyd/2000, 319/Hyd/2001, 318 & 330/Hyd/2002 are dismissed.