IN THE ITAT MUMBAI BENCH ‘C’
Deputy Commissioner of Income-tax
Prithvi Prakashan (P.) Ltd.
IT Appeal NO. 5189 (MUM.) OF 2006
[ASSESSMENT YEAR 1993-94]
AUGUST 3, 2012
Rajendra Singh, Accountant Member
This appeal by the revenue is directed against the order dated 27.7.2006 of CIT(A) for the assessment year 1993-94. The only dispute raised in this appeal is regarding allowability of depreciation in respect of plant and machinery being leased out by the assessee.
2. The facts in brief are that the assessee had purchased 17 Iron Rolls used in Steel Industries from M/s. Indore Steel & Iron Mills Ltd. (ISIM) for a sum of Rs. 34,97,500/- on 25.3.1993. These rolls had been purchased by ISIM for a sum of Rs. 36,88,540/- in 1991. The assessee had made payment of Rs. 20.00 lacs through DD on 26.3.1993 and balance amount of Rs. 14,97,500/- had been paid through DD on 31.5.1993. The assessee vide lease agreement dated 27.3.1993 had leased these rolls to ISIM for a period of three years commencing from 27.3.1993. As per lease agreement the lease rent payable was Rs. 3,50,000/- on 27.6.1993 and thereafter Rs. 3,80,000/- at the end of each quarter till the three year period ended on 27.3.1996. At the time of original assessment dated 29.12.1995, the AO noted that there was no physical movement of iron rolls which remained with ISIM. No physical possession was handed over by ISIM to the assessee. The assessee had also failed to give specific details of iron rolls. The AO also observed that the iron rolls were highly depreciable in nature and, therefore, prior to the purchase by the assessee these were heavily depreciated due to use by ISIM. The assessee had claimed depreciation of Rs. 17,48,750/- @ 50% of the normal rate for 100% of depreciation allowable on such rolls as in the relevant year this had been used for less than six months. The AO in the original assessment held that the rolls remained in the possession of ISIM throughout who was the actual owner. The AO held that it was a case of simple loan transaction which had been given the colour of lease transaction to reduce tax liability of the assessee. The AO, therefore, held that purchase and lease back transaction of iron rolls was a sham transaction and accordingly disallowed the claim of depreciation. In appeal, the CIT(A) allowed claim of depreciation in order dated 28.6.1996. In further appeal, the Tribunal in the order dated 30.1.2004 in ITA No. 5840/Mum/2006 noted that the authorities below did not examine as to what happened to the leased assets on expiry of lease period. The Tribunal also observed that the AO had assessed the entire lease rent disclosed by the assessee but had disallowed the claim of depreciation which was inconsistent. The Tribunal further observed that the Special Bench of the Tribunal in the case of Mid East Portfolio (87 ITD 537) had made various observations which had a bearing on the claim of depreciation of assets bought and leased back. The Tribunal, therefore, set aside the order of CIT(A) and restored the matter to the file of AO for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee.
3. During fresh assessment proceedings, the assessee furnished copy of lease agreement, bills of purchase of iron rolls from ISIM, confirmation from ISIM, receipt of payment from ISIM, certificate from ISIM regarding cost of purchase of iron roll, details of purchase of iron roll by ISIM and certificate from Shri Navin Goyal a chartered engineer regarding valuation of iron rolls. The assessee submitted before AO that the transaction was a genuine transaction and, therefore, the claim of depreciation should be allowed. The AO however did not accept the contentions raised. It was observed by him that after purchase by the assessee, physical possession of iron rolls were not handed over by ISIM to the assessee and even after expiry of lease agreement the iron rolls were still lying with ISIM and had not been taken over by the assessee till date. The AO also observed that ISIM had claimed 100% depreciation on the iron rolls and thereafter assessee also claimed depreciation on the same assets. The AO further observed that though the assessee had produced copy of certificate from Shri Navin Goyal a chartered engineer but failed to produce supporting documents on the basis of which Shri Goyal had quantified the values of these rolls at Rs. 35,00,000/-. It was also not clear from the certificate as to whether the rolls inspected by Shri Navin Goyal were same which had been leased by the assessee to ISIM. The AO also noted that the assessee was in the business of publishing news papers and buying of goods and leasing them out on rent was not normal business of the assessee. The AO therefore, concluded that the transaction was a sham transaction entered into by the assessee with a motive of reducing tax liability. The AO accordingly disallowed the claim of depreciation of Rs. 17,48,750/- and assessed total income at Rs. 41,11,565/-.
4. The assessee disputed the decision of AO and reiterated the submissions made earlier that purchase and lease back of iron rolls was a genuine transaction and depreciation should be allowed. The CIT(A) remanded the matter to the AO for report in the light of observations of ITAT. In the remand report, the AO mentioned that the assessee had declared lease rentals in assessment years 1994-95, 1995-96 and 1996-97. The AO also reported that balance depreciation of 50% claimed by the assessee in 1994-95 had been allowed by AO in full. CIT(A) after considering details and material on record observed that the assessee had furnished copy of lease agreement, bills of purchase and also confirmation from ISIM as well as details of purchase of these rolls by ISIM as well as certificate from chartered engineer. CIT(A) also observed that finance part of the transaction was established and there was no material to show any pre-existing relationship between assessee and ISIM. CIT(A) further observed that considering all these factors including assessment of lease rentals in 1994-95 to 1996-97, her predecessor CIT(A), in earlier round had held that the transaction was not colourable and depreciation had been allowed. The AO had simply followed the reasoning given in the original assessment order in disallowing the claim. CIT(A) therefore allowed the claim of the assessee and deleted the addition made by AO, aggrieved by which, revenue is in appeal before the Tribunal.
5. Before us, the ld. DR appearing for the revenue assailed the order of CIT(A). It was argued that CIT(A) had not considered the fact that the rolls were not taken over by the assessee even after expiry of the lease period and the said rolls always remained with ISIM who was using them for business. The assessee had only paid certain amounts which had been received back in instalments without even taking over the rolls. It was pointed out that ISIM had already claimed depreciation on the rolls on which assessee was claiming depreciation through paper transaction, there being no movement of rolls. The Ld. Departmental Representative highlighted the various factual position discussed in the order of AO. It was also submitted that the case of the assessee was similar to the case of M/s. IndusInd Bank Limited v. ACIT in ITA 6566/M/02 for assessment year 1998-99 dated 14.3.2012 in which similar transactions had been held as finance transactions by the Special Bench of the Tribunal. It was accordingly urged that the order should be set aside and disallowance made by AO should be upheld.
5.1 The ld. AR for the assessee on the other hand strongly supported the order of CIT(A) and submitted that transactions were supported by bills and confirmations as well as payment made by draft. The lease of the rolls was supported by lease agreement. It was pointed out that purchase and lease back was a normal business transaction and it was not necessary to take over assets by the assessee physically when it was being leased simultaneously. The ld. AR referred to the decision of the Special Bench of the Tribunal in the case of Mid East Portfolio Management Ltd. v. Dy. CIT (Mumbai)(SB) (87 ITD 537) in which it has been held that actual or physical delivery in such transactions was not material and that constructive delivery was enough in case of the sale and lease back transactions. It was also submitted that purchase value of the rolls was supported by certificate of chartered engineer, a copy of which was placed before the authorities below and placed at page-74 of the paper book. It was also argued that lease rentals in respect of the same rolls had been taxed by AO in assessment year 1994-95 to 1996-97 and therefore, the transactions could not be held to be non-genuine. He however, admitted that, in assessment year 1994-95 in which balance 50% depreciation had been made, the assessment had been made under section 143(1). The ld. AR also placed reliance on the judgment dated 17.4.2012 of the Hon’ble High Court of Madras in the case of CIT v. M/s. High Energy Batteries (India) Ltd. in T.C. (Appeal) Nos. 579 to 581 of 2005 dated 17.4.2012 in which under similar situation the claim of the assessee had been allowed. It was also pointed out that subsequently, the assessee became a sick company under BIFR. It was accordingly urged that the claim of the assessee should be allowed and order of CIT(A) being reasonable and fair should be upheld.
6. We have perused the records and considered the rival contentions carefully. The dispute in this appeal is regarding disallowance of depreciation in respect of iron rolls purchased by the assessee from ISIM and leased back to the same party. ISIM had purchased these rolls in 1991 for a sum of Rs. 36,88,540/-. The assessee purchased the said rolls on 25.3.1993 for a sum of 34,97,500/- and leased back to ISIM as per lease agreement dated 27.3.1993 for initial lease rent of Rs. 3,50,000/- followed by quarterly lease rent of Rs. 3,80,000/- till the end of three year lease period. In the original assessment order dated 29.12.1995, the AO had disallowed the claim of depreciation amounting to Rs. 17,48,750/- @ 50% on the ground that the assessee had not taken physical possession of the rolls from ISIM and these rolls which were entitled for 100% depreciation were heavily depreciated due to usage by ISIM before sale to the assessee. In appeal, CIT(A) allowed claim of the assessee but in further appeal the Tribunal had restored the issue to the file of the AO for fresh order after examining as to what happened to the assets on expiry of the lease period and after considering the fact that in the subsequent years, the lease rent from the assets had been taxed in case of the assessee and after taking into account the decision of the Special Bench of the Tribunal in case of Mid East Portfolio (supra).
6.1 In the fresh assessment proceedings, the assessee produced bills of purchase from ISIM, the confirmation of receipt of payment, copy of lease agreement and certificate of Shri Navin Goyal, a Chartered Engineer regarding valuation of iron rolls. The AO however did not accept the claim on the ground that the assessee never received the rolls after purchase and that the rolls remained with the seller even after expiry of the lease period. The AO has also observed that ISIM had claimed 100% depreciation on these rolls on which the assessee was again claiming depreciation when the rolls remained with ISIM. Further, certificate from Navin Goyal had not given any basis for the purchase value shown by the assessee . The AO, thus, treated the transaction as sham with a motive to reduce tax liability and, thus, disallowed claim of depreciation. CIT(A) however, allowed the claim on the ground that purchase and lease back was supported by documents and there was evidence of payment for purchase and the lease rentals had been taxed in case of the assessee. CIT(A), therefore, held that transaction was not colourable particularly when there was no relationship between assessee and ISIM.
6.2 On careful consideration of the facts and circumstances of the case and material on record, we are unable to sustain the order of CIT(A). The Tribunal in this case had set aside the issue to the file of AO, to look into the fact as to what happened to the roll after expiry of lease period. The AO has given a clear finding that the rolls remained with the ISIM even after expiry of lease period. CIT(A) has however neither considered this aspect nor has given any finding on this issue. The transactions can not be considered as genuine merely on the ground that the same are supported by bills and agreements. It is a settled legal position that it is substance and not the form of transaction which is relevant. Further, for a transaction to be a colourable device, it is not necessary that there should be pre-existing relationship between parties. Even unrelated parties can enter into colourable transaction to avoid tax liability if it is mutually beneficial. In our view all relevant facts and circumstances of the case have to be considered carefully before arriving at any conclusion as to whether a particular transaction is genuine transaction or a colourable device. The relevant factors in this case would be the valuation of the asset purchased by the assessee, the conduct of the assessee in dealing with the asset purchased, evasion of tax etc. Merely on the ground that the assessee after purchase of asset has leased back the same to the seller and there was no delivery taken, it cannot be concluded that it was not a case of genuine purchase and lease back. In such cases of purchase and lease back, physical delivery may not be necessary as the asset has to be given back to the same party and constructive delivery would suffice as held by the Special Bench of the Tribunal in the case of Mid East Portfolio (supra).
6.3 But it is important to consider whether the assessee has dealt with the asset as an owner which should be clear from the conduct of the assessee with respect to the asset after expiry of the lease period because in case of genuine purchase, assessee is expected to take back the asset and use it either for own purpose or lease it to some other party. In the present case, the AO has given a finding that the asset remained with ISIM, the original owner, even after expiry of lease period. CIT(A) has not given any finding on this aspect. Further, insofar as the assessee is concerned it had only paid a sum of Rs. 34,97,500/- to ISIM and has received total sum of Rs. 45,30,000/- over a period of three years. Therefore, in case the rolls have not been received by the assessee after the lease period, it would be a strong case of advancing of money which has been received back with principal and some interest over a period of three years. As regards the argument of the assessee that the AO himself allowed balance 50% depreciation in assessment year 1994-95, we find that the return in assessment year 1994-95 had only been processed under section 143(1) in which AO had no power to make any variation in the income of the assessee. Therefore, there is no conscious decision of the AO to allow depreciation in assessment year 1994-95.
6.4 It has also been argued that lease rentals received by the assessee have been taxed. But it has not been examined by any of the authorities whether assessee had really paid tax on the lease rentals. In assessment year 1993-94 by showing the asset on lease the assessee claimed depreciation of Rs. 17,48,750/- and therefore, reduced the income to that extent. In assessment year 1994-95, the lease rental declared by assessee was Rs. 15,20,000/- against which depreciation of Rs. 17,48,750/- was claimed which means no tax was paid on the lease rent. The position in assessment years 1995-96 and 1996-97 has not been examined as to whether assessee has paid any effective tax on the lease rentals. This is required to be looked into particularly in view of the fact that the assessee subsequently is stated to have become sick. In case, it is found that the assessee has derived tax advantage due to this arrangement, it would support the case of a colourable device. Further, ISIM had claimed 100% depreciation on the assets which shows that these were highly depreciable asset. The assessee however, has shown the purchase price of Rs. 34,97,500/- when ISIM had purchased the same at Rs. 36,88,540/- i.e. almost at the same price even after use and claim of 100% depreciation. The valuation certificate of Shri Navin Goyal, a copy of which has been placed at page-74 of the paper book does not give any basis for valuation of Rs. 35.00 lacs. It only states that he inspected the rolls and after seeing invoices and bills the value should be around Rs. 35.00 lacs. The ld. AR has placed reliance on the judgment of the Hon’ble High Court of Madras in the case of CIT v. M/s. High Energy Batteries (India) Ltd. (supra), which in our view is distinguishable. In that case the Hon’ble Court held that the mere fact that the asset purchased had been leased back and vendor had undertaken to pay lease charges can not per se lead to the conclusion that the transaction is sham in the absence of any other material. In the present case there are other facts and circumstances as discussed earlier which suggest that transaction may not be a genuine lease transaction but only a financial transaction. However, before arriving at a proper conclusion, further examination as mentioned earlier is necessary. The matter in our view requires fresh examination at the level of CIT(A) who has not considered the issue properly. We, therefore, set aside the order of CIT(A) and restore the issue back to him for passing a fresh order after necessary examination in the light of observations above and after allowing opportunity of hearing to the assessee.
7. In the result appeal by the revenue is allowed for statistical purposes.