ITAT HYDERABAD BENCH ‘A’
Dharti Dredgers & Infrastructure Ltd.
Assistant Commissioner of Income-tax
Income Tax Appeal Nos. 566 & 872 (Hyd.) of 2012
[ASSESSMENT YEAR 2008-09]
Date of Pronouncement – 21.01.2013
Saktijit Dey, Judicial Member
These are cross appeals filed against the order dated 28-3-2012 of CIT(A)-II, Hyderabad passed in ITA No.0071/CIT(A)-II, Hyd/2010-11 pertaining to the assessment year 2008-09.
ITA No.566/Hyd/12 (Assessee’s appeal):-
2. Though the assessee has raised four grounds, ground Nos. 2, 3 and 4 are general in nature and require no adjudication. Ground No.1 is the only effective ground which reads as under:
“That on the facts and in the circumstances of the case the learned CIT(A) has erred in facts and in law in confirming the disallowance of depreciation of Rs.36,43,57,347/- u/s 32 of the IT Act, 1961 made by the learned Assessing Officer in order dated 30th December, 2010 u/s 143(3) of the Act.”
Briefly stated, facts are the assessee a company is engaged in the business of dredging, trenching, backfilling and reclamation services. For the assessment year under dispute, the assessee filed its return of income on 30-9-2008 declaring total income of Rs.7,29,291/-. Initially, the return was processed u/s 143(1) of the Act. Subsequently, the assessee’s case was selected for scrutiny. In course of scrutiny assessment proceedings, the Assessing Officer while examining the final accounts noticed that the assessee has claimed depreciation of Rs.36,43,57,347/- on two dredgers namely Ta Lung and Ta Hsing. It was further noticed by the Assessing Officer that the aforesaid two dredgers shown to have purchased during the financial year 2007-08 relevant to the assessment year 2008-09 from M/s Hung Huo construction Co. Ltd., Taiwan and M/s Jung Hsing Marine Construction Co. Ltd., Taiwan. For further verification, the Assessing Officer asked the assessee to submit agreement copies of suppliers of the dredgers along with modalities of payment, invoices custom clearances, RBI approvals and payments details, registration details with concerned authorities under Indian Law. The Assessing Officer also called for information u/s 133(6) from MMD, Mumbai with regard to registration and ownership details of the two dredgers. The MMD in its reply dated 8-10-2010 informed that the dredgers Ta Lung and Ta Hsing were not registered with them. It was further clarified that the assessee has applied for registration of four other dredgers of them. When the Assessing Officer brought this information to the notice of the assessee, the assessee clarified that the said two dredgers are not registered with any authorities in India. The assessee further submitted that the Merchant Shipping Act applies only to see going ships fitted with mechanical means of propulsion. The dredgers Ta Lung and Ta Hsing are “DUMB” dredgers, hence are not governed under Merchant Shipping Act.
3. The Assessing Officer did not accept the contention of the assessee on the reasoning that if there is no requirement for registration of dredgers, then there was no reason for the assessee to apply for registration of other four unpropelled dredgers at that Port. The Assessing Officer held that as per section 32 of the Act, depreciation on assets is allowable only when the assessee is the owner of the asset during the relevant financial year and it is used exclusively for the purpose of business during the year under consideration. The Assessing Officer held that since the two dredgers were not registered, no depreciation can be allowed on them.
4. The assessee had also taken an alternative plea before the Assessing Officer that in case depreciation is not allowed, the charges paid towards taking on lease the dredgers should be allowed as expenditure in computing the income. The Assessing Officer did not also accept this contention of the assessee by observing that such fresh claim has to be made though a revised return only. The Assessing Officer further observed that the claim of the assessee cannot be entertained as the lease rentals was neither paid nor included in the balance sheet/profit and loss a/c. On the aforesaid conclusion, the Assessing Officer disallowed the depreciation claimed by the assessee on the two dredgers.
5. The assessee challenged the assessment order by filing an appeal before the CIT(A). The assessee contended before the CIT(A) that it cannot be said that title of the assessee over the dredgers are not complete unless there is registration of dredgers. The assessee submitted that there was no legal requirement for registration of dredgers for which reason Port Officials, Machilipatnam had declined to register them. Relying upon the decision of the Hon’ble Supreme Court in case of Mysore Minerals Ltd. v. CIT  239 ITR 775 it was submitted that anyone in possession of the property exercising such dominion over the property as would enable others being excluded there from and having right to use and occupy the property in his own right would be owner of the building for purpose of section 32(1) though a formal deed of title may not have been executed or registered. It was submitted that as the dredgers are floating crafts passing of ownership is decided by agreement for sale/purchase, signing of protocol of delivery and acceptance and bill of sale etc. It was submitted that on the basis of those documents, the title to the dredgers passed on to the assessee and the assessee has to bear all risks and liabilities of the dredgers. It was submitted that those two dredgers were sold during the assessment year 2009-10 as the assessee could not comply to the payment schedule and the payments already made were forfeited. The assessee incurred a loss of Rs.5,68,93,849/-. However, assessee itself did not claim the loss while computing the income. It was submitted that the sale proceeds of two dredgers were credited to the block of dredgers and depreciation was claimed on the remaining balance. The assessee submitted that the Assessing Officer completed the assessment for the assessment year 2009-10 without making any addition on account of dredgers that have been sold and depreciation was allowed on the net block after deducting the sale proceeds of those two dredgers. The assessee made an alternative submission that in case the depreciation is not allowed, then deduction towards lease rent for the period during which the dredgers were used for the purpose of business be allowed.
6. The CIT(A) after examining the agreements of sale, the protocol of delivery and other documents on record found that the effective date of agreement would be the date on which RBI has accorded approval. It was noticed by the CIT(A) that in case of dredgers Ta Lung approval was granted by RBI on 18-3-2008 whereas in case of Ta Hsing approval was given on 8-4-2008, which means that the agreements have not become effective till the approval of RBI. The CIT(A) further found that though the assessee has paid some amount on execution of the agreement, but further payment was made only from 16-4-2008 onwards. On the basis of the aforesaid facts, the CIT(A) came to the conclusion that the seller of the dredger has not parted with his right on the dredgers because as per the terms of the agreement, the seller shall have exclusive charge over the dredgers till last instalment is paid and no due certificate is issued by the seller. The CIT(A) observed that one of the characteristics of ownership of asset or property is the absolute right to deal with the property in question, however, the assessee is not entitled to create any charge on the dredgers till the payment of last instalment and receipt of no due certificate from the seller. The CIT(A) held that in view of such facts, the assessee cannot claim to be the absolute owner of the dredgers and thereby claim depreciation on them. The CIT(A) further held that though the sale agreement for Ta Lung provided that necessary declaration as may be required by Customs/Banks/RBI for change of import from “import for re-export” to “import for Home consumption” would be extended/signed by both the parties, the assessee did not furnish any such declaration in respect of both the dredgers to establish that the ownership has been passed on to it and thereby entitling it to depreciation. The CIT(A) ultimately concluded that as the assessee has not furnished evidence to show that import duty for home consumption has been paid in respect of the two dredgers nor produced any proof of taxes/fees paid in connection with the purchases and registration under the buyers’ flag nor any proof that the name of the dredgers and funnel markings were changed/altered in terms with the sale agreement, the assessee cannot be treated as the owner of the dredgers and therefore the depreciation on them cannot be allowed. The CIT(A) however accepted the alternative claim of the assessee by directing the Assessing Officer to allow deduction of hire charges paid by the assessee.
7. The learned AR reiterating the contentions raised before the first appellate authority submitted that the CIT(A) as well as the Assessing Officer were not correct in disallowing depreciation on the ground that dredgers were not registered with any Indian Port. The learned AR submitted that there is no requirement under Law to register DUMB dredgers. In this context, the learned AR referred to the letter issued by the Port officials of Machilipatnam which is at page-35 of the paper book. The learned AR submitted that the assessee’s ownership over the dredgers cannot also be rejected due to non payment of customs duty as the dredgers are duty free and no customs duty is payable. The learned AR submitted that when the CIT(A) does not deny the purchase of dredgers and also the fact that dredgers were physically used by the assessee she cannot hold that the assessee was not the owner of the dredgers. The learned AR submitted that the effective date as mentioned in the agreement, on which, much emphasis has been put by the CIT(A) was mentioned only because no payment can be made without RBI approval. Significance of RBI is only in the context of remittance to be made. The learned AR referring to the sale agreement, copies of invoices, protocol of delivery and acceptance submitted that those documents clearly establish the ownership of the assessee over the dredgers. The learned AR submitted that as the assessee was having possession over the dredgers and using it for the purpose of its business in exclusion to others it should be treated as the owner of the dredgers and as such entitled to claim depreciation on them. In this context, the learned AR relied upon the decision of the Hon’ble Supreme Court in the case of Mysore Miners Ltd. (supra). The learned AR further submitted that the assessee stands still in a better footing as the dredgers are movable properties and in case of movable properties, the ownership is transferred upon delivery of possession. The learned AR submitted that in assessee’s case, it was outright purchase of dredgers whereas in case of hire purchase agreement also depreciation is allowable. In this context, the learned AR relied upon CBDT Circular No.9 dated 23-3-1943. The learned AR referring to the schedule of the depreciation in the annual report submitted that the assessee had included the dredgers in the block of assets which proves the ownership of the assessee over the dredgers.
8. The learned Departmental Representative submitted that more than one amendment was effected to the agreement of sale entered into between the parties which show that negotiations were going on and sale was not finalized. The learned Departmental Representative submitted that the effective date as per the agreement is the date of RBI approval. Hence, the agreement of sale could not have been effective prior to RBI approval which came in March, 2008 and April, 2008. The learned Departmental Representative further submitted that the payment made by the assessee were also in accordance with the payment schedule. The learned Departmental Representative countering the arguments of the counsel for the assessee with regard to letter issued by the Port Officer Machilipatnam submitted that the Machilipatnam is a minor Port under the authority of State Government, whereas major Ports are under the Central Government and governed by Indian Major Ports Trust Act. The learned Departmental Representative submitted that dredging being a specialized service there must be document s authenticating the operation and movement of dredgers. The learned Departmental Representative submitted that the assessee has not submitted any document or evidence either with regard to ownership of dredger or user of them for the purpose of business. The learned Departmental Representative submitted that the assessee has adopted a colourable devise to claim extraordinarily high depreciation for reducing its profits.
9. We have heard rival submissions and perused the material on record including the documents submitted in the paper book filed by the assessee. We have also examined the decisions relied upon at the time of hearing. Section 32 of Income-tax Act, 1961 allows deduction in respect of depreciation at the prescribed rates on both tangible and intangible assets owned wholly or partly by the assessee and used for the purpose of business or profession. Thus, the first condition to be fulfilled for claiming depreciation is, the assets must be owned wholly or partly by the assessee. The only issue to be decided in the present appeal is whether the assessee was the owner of two dredgers viz. Ta Lung and Ta Hsing and thereby entitled to claim depreciation on them. For arriving at a just conclusion regarding the ownership of dredgers various facts have to be considered, one of them being intention of the parties to the agreement. It is therefore necessary at this stage to look into the agreement of sale of the dredgers. Both the agreements are almost identical with regard to terms and conditions. At page-1 of the paper book submitted by the assessee, is the sale agreement dated 28-9-2007 between M/s Hung Hua Construction Co. Ltd. and the assessee for sale of dredgers Ta Lung. As per the preamble of the agreement, Hung Hua Construction Co. Ltd., agreed to sell and the assessee agreed to buy the said dredgers. As per clause-2 the purchase price of the dredgers was 45.15 million US dollars. Clause-3 of the agreement sets out the payment schedule of the purchase price. Clause -4 of the agreement provides for furnishing a bank guarantee for a sum of $ 7,00,000 valid initially for one year and same to be extended from time to time till payment of last instalment as per payment schedule in clause-3. It further stipulated that in case of failure by the buyer to extend the bank guarantee within 30 days of expiry, the seller is not only entitled to take back the dredgers along with all spares and accessories but will also forfeit all the instalments paid by the assessee including the amount initially paid.
10. Clause-5 of the agreement stipulates that the seller shall have exclusive charge over the dredgers till last instalment amount is paid under clause-3(ii). It is further provided that on receipt of last instalment the seller shall issue a no due certificate and only thereafter the buyer shall be entitled to create any charge on the dredger. Clause-14 of the agreement provides that in case the payments are not made as per clause-2 or bank guarantee is not extended as per clause-3, the seller has a right to terminate the agreement take possession of the dredger and also forfeit the amounts already paid by the buyer. The sale agreement read as a whole would clearly indicate that the seller has not parted with its right of ownership of the dredger in favour of the buyer as the agreement makes it very clear that in case of failure on the part of the buyer as per the terms of the agreement or if bank guarantee is not extended the seller has right to terminate the agreement take possession of the dredger and forfeit the amount already paid by the buyer. These facts are further confirmed by clause-5 of the agreement which debars the buyer for creating any charge on the dredger until payment of last instalment and issuance of no due certificate by the seller. Until such time, as per clause-5, the seller shall have exclusive charge over the dredger. In view of such conditions and restrictions imposed it cannot be said that the assessee had acquired the ownership right over the dredger before the payment of final instalment and issuance of no due certificate by the seller. A reading of agreement further reveals that it is not an agreement for outright sale of dredger as contended by the learned AR but, is conditional. Only on fulfilment of those conditions final sale could have taken place and ownership over the dredger would have got transferred from the seller to the buyer. That is why the agreement stipulates that till the payment of last instalment the seller was vested not only with exclusive change over the dredger but also was entitled to terminate the agreement and take possession of the dredger. These facts are further evident from the observations made by the CIT(A) that the dredgers were sold/forfeited immediately succeeding financial year at a loss by the assessee as it could not comply with the payment schedule and the payments already made by the assessee were forfeited for non fulfilment of conditions in the agreement. This would mean that the sale agreement, in effect, was terminated for non fulfillment of conditions by the buyer i.e. the assessee.
11. It is further worth mentioning that the sale agreement was subjected to further amendment on 11-1-2008 by incorporating certain changes in the payment schedule under clause-3 and again on 25-1-2008 by making some more changes to the payment schedule and incorporating an additional clause mentioning “effective date”. As per this clause, effective date of the agreement will be the date on which RBI communicates approval to the agreement. It is seen from record that the RBI has granted approval for Ta Lung on 18-3-2008 and for Ta Hsing on 8-4-2008. Though the learned AR has submitted that effective date was mentioned only because no payment could be made without RBI approval, we are unable to accept it. “Effective date” as defined in the additional clause is clear enough to indicate that the parties to the agreement intended the date of approval by the RBI to be the effective date of agreement. Thus, according to the meaning of “effective date” the sale agreement for Ta Lung is effective from 18-3-2008 and for Ta Hsing is effective from 8-4-2008. In this context we also find force in the submissions of the learned Departmental Representative that the subsequent amendments of the sale agreement is suggestive of the fact that negotiations were still going on between the parties and the sale was not finalized. Apart from this, as observed by the CIT(A), other conditions of sale agreement was also not fulfilled like furnishing of declaration as required by customs/banks/RBI for change of import from “import for re-export” to “import from home consumption” signed by both the parties and further no evidence was submitted that the name of the dredger and funnel markings were changed/altered as per the terms of the sale agreement. Cumulative effective of the facts discussed hereinabove, leads to the irresistible conclusion that the ownership of the dredger was not transferred to the assessee in pursuance to the sale agreement, contrary to the claim of the assessee made in this regard. Even accepting the contention of the learned AR that no registration of dredger is required and customs duty is not payable on dredgers, it is a fact on record that the assessee has not produced any evidence of substance to prove its ownership over the dredgers.
12. In response to the query made in this context by the bench in the course of hearing, the assessee on 22-11-2012, has submitted a letter dated 22-11-2012 of Bajaj Alliance General Insurance Company without a copy of insurance policy. That letter only says that dredger Ta Hsing was insured from 1-2-2008 to 31-1-2009 for a sum of Rs.185 crores. This letter however no where establishes the ownership of the assessee over the dredger. The learned AR has referred to the copy of the protocol of the delivery and acceptance and the invoices to prove that the dredgers were transferred to the assessee. However, those documents cannot be considered in isolation and de hors the sale agreement and other document. It cannot be said that by virtue of the protocol of delivery and acceptance, ownership of dredgers have been transferred to the assessee when the sale agreement stipulates that the seller shall have exclusive charge over the dredgers until receipt of the final instalment and issuance of no due certificate. The learned AR has further relied upon CBDT Circular No.9, dated 23-3-1943 while submitting that even in case of hire purchase agreement depreciation is allowed. However, clause-2 of the aforesaid circular makes it explicit that the circular is applicable to such hire purchase agreement under which the ownership of the subject is at once transferred to the lessee which in other words means that the lessor obtains a right to sue for failure in payment of instalments but no right to recovery of the asset. However, the sale agreement of the assessee confers a right on the seller to terminate the agreement and take back possession of the dredger and forfeit the payments already made in case of violation of the conditions of payment and failure to extend the bank guarantee. In view of this, the circular No.9 does not apply to the facts of the present case. So far as the decision of the Hon’ble Supreme Court in the case of Mysore Minerals Ltd. (supra) is concerned the facts are quite distinguishable. In that case, the assessee a private limited company had purchased some low income group houses from the Housing Board under a housing scheme after part payment. The possession of the houses was delivered to the assessee and the assessee also exercised possession and control over the houses. Only the registration of the property was deferred.
13. The Hon’ble Supreme Court held that since the assessee was in possession of the property in his own title exercising dominion over the property and enjoying its usufruct in his own right to the exclusion of others he would be the owner of the building though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act and Registration Act. However, the facts are different in the present case. Here the sale agreement does not confer any ownership right on the assessee. Rather clause-5 of the sale agreement stipulates that the seller shall have exclusive charge over the dredger till payment of last instalment and issuance of no dues certificate.
14. Further, in case of default in payment of instalments or extension of bank guarantee the seller had the authority to terminate the agreement, take back possession of the dredger and forfeit the amount already paid. Therefore, it cannot be said that the assessee had dominion over the dredger in exclusion of the seller before payment of the last instalment.. The ratio of decision of Hon’ble Supreme Court in case of Mysore Minerals Ltd. (supra) therefore does not apply to the facts of the instant case. In aforesaid view of the matter, we therefore hold that the assessee not being the owner of the dredgers either wholly or partly is not entitled to claim depreciation on the dredgers. We uphold the order of the CIT(A) on this aspect. The grounds raised by the assessee are therefore dismissed.
15. In the result, the appeal filed by the assessee stands dismissed.
ITA No.872/Hyd/2012 (departmental appeal):-.
16. The Revenue has raised the following two effective grounds:-
“1. The learned CIT(A) erred in admitting the alternative claim of assessee and giving direction to consider the instalment payments as hire charges and to allow the same after examination.
2. The learned CIT(A) ought not to have given the impugned direction to consider the claim of payments of hire charges as the same are not prima facie allowable as there is no TDS done nor the same was debited in P & L a/c.?”
17. In course of the assessment proceeding the assessee made an alternative claim that the dredgers were taken on lease @USD7,00,000 per month which should be allowed as expenditure while computing the income. The Assessing Officer did not entertain such claim of the assessee relying upon the decision of the Hon’ble Supreme Court in case of Goetze (India) Ltd. v. CIT  284 ITR 323 wherein it was held that unless fresh claim is supported by the revised return, Assessing Officer cannot entertain such request. The Assessing Officer further observed that the assessee’s claim cannot be considered as lease rentals were not made and also not included in the balance sheet or P & L account.
18. The assessee repeated its claim before the first appellate authority. The CIT(A) allowed the claim of the assessee by holding that as the assessee has used the dredgers for the purpose of business the payments made towards hire charges are to be allowed.
19. We have considered rival submissions on this issue and perused the materials on record. We find the order of the CIT(A) on this issue to be very cryptic and bereft of reasons. The CIT(A) has not at all applied her mind properly to the issue in dispute before allowing the claim of the assessee. The assessee’s claim could not have been accepted on the face of the documents available on record. There is nothing on record to suggest that the dredgers were given on hire and the assessee paid hire charges of USD 7,00,000 per month for each dredger. On the contrary, the amendment No.1 to the sale agreement stipulates that payment of USD 7,00,000 commencing from January, 2008 was towards monthly instalment of the purchase price payable for the dredgers. Since the assessee could not comply to the payment schedule conditions of sale as per the agreement were not fulfilled. But that does not convert the transaction to hiring of dredgers.
20. Even assuming that USD 7,00,000 per month is towards hire charges, the same cannot be allowed as deduction in view of sec. 40(a)(i) as the assessee has not deducted tax at source as per provision contained u/s 195 of the Act. The contention of the learned AR that the companies being non residents having no business connection in India is not acceptable in view of the specific provisions contained in the said section. Giving on hire of the dredgers for operation in India and deriving income there from certainly amounts to having a business connection in India. The CIT(A) having allowed the claim of the assessee without considering the issue from this angle and in context with the statutory provisions, the same cannot be sustained. Accordingly, we reverse the direction of the CIT(A) for allowing deductions towards hire charges. The grounds raised are allowed.
21. In the result, appeal filed by the assessee is dismissed and the appeal of the department stands allowed.