COMECON OVERSEAS (P) LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2006-LL-0210]

Citation 2006-LL-0210
Appellant Name COMECON OVERSEAS (P) LTD.
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 10/02/2006
Assessment Year 1992-93
Judgment View Judgment
Keyword Tags disallowance of depreciation • reduction of tax liability • 100 per cent depreciation • memorandum of association • business or profession • reduction of liability • lease back transaction • financial transaction • business transaction • date of acquisition • business of trading • specific direction • colourable device • physical delivery • lease transaction • show-cause notice • security deposit • avoidance of tax • leasing business • risk and reward • unabsorbed loss • lease agreement • purchase price • crossed cheque • gas cylinder
Bot Summary: The assessee purchased 520 glass bottles moulds from M/s Mohan Crystal Glass Works for Rs. 14,01,400 and leased back to them and at the end of the lease period of 3 years were sold for Rs. 15,415 only to M/s National Serial Ltd., a sister-concern of the assessee. The assessee has purchased the equipment as per invoice, the equipment had been in the ownership and custody of the lessee before its purchase by the assessee and the same were leased back to the assessee on payment of lease rentals. As regards the observation of the AO that the lease with SIL had expired in September, 1994, but the assessee had not taken possession of the leased asset in accordance with the lease agreement, the learned counsel has pointed out that there was litigation with M/s SIL and in view of the order of thestatus quo the possession of the said assets could not be obtained by the assessee. In the case of sale and lease back transactions the same is generally to be treated as a sham if there is finding that the assessee shown to have leased out the asset not exist or where finding that the assessee shown to have leased out the asset not exist or where it is found that the same asset is leased out to more than one lessee at the same time. 3 to s. 43(1) reads as under : Where, before the date of acquisition by the assessee, the assets were at anytime used by any other person for the purposes of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax, the actual cost to the assessee shall be such an amount as the AO may, with the previous approval of the Jt. CIT, determine having regard to all the circumstances of the case. The mere production of documentary evidence showing that a contract was made for the purchase of the asset at a certain price does not conclusively establish the correctness of the claim made by the assessee specially where the AO is of the opinion that in the deal the assessee has taken resort to a subterfuge or device in order to avoid tax which he is liable to pay or otherwise has acted fraudulently or the transaction is illusory or colourable. In the circumstances, we are of the view that in the instant case assessee has satisfied the conditions for the purpose of claiming depreciation under s. 32 that the depreciable assets are owned by the assessee and the same were used for the purpose of assessee s business.


N.K. KARHAIL, J.M. This appeal of assessee-company is directed against order dt. 17th Dec., 199 8 passed by CIT(A), New Delhi for asst. yr. 1992-93. In substance, all grounds of appeal relate to disallowance of depreciation on assets given on lease by assessee. 2 . Briefly stated, facts are that during year assessee had entered into purchase and leased back agreements as follows : Name of Equipment Actual Dep. lessee leased out cost Amount Sumac Five sugar Rs. International Ltd. mill rollers 41.25 lakhs (SIL) Sethi Second- Rs. Industrial Glasses hand gas 3.36 lakhs (P) Ltd. (SIGL) cylinders Gujarat Acetylene (P) Ltd. -do- (GAPL) Mohan 510 glass Rs. Crystal Glass bottles moulds 14,01,400 Works (MCGW) Continues M/s Punjab Rs. pusher type Potteries (PP) 10,57,500 furnace 3 . In June, 1991 SIL approached assessee for leasing of five sugar mills rollers. These were purchased by SIL from BHEL in February, 1990 for sum of Rs. 6,0 8 ,400 + Rs. 9,12,600. Subsequently, SIL got some machining work done by M/s United Engineering Works who charged Rs. 20,000 per shaft. Thus total cost of SIL came to Rs. 16,21,000. Against this assessee had shown cost at Rs. 41.25 lakhs. AO found that lease with SIL had expired in September, 1994 but assessee had not taken possession of leased asset in accordance with lease agreement. assessee stated that there was litigation with SIL. AO, however, was not satisfied with explanation as litigation was only for recovery of dues and not for securing custody of assets. It was stated before AO that assessee had filed suit against SIL for recovery of outstanding dues as also for repossession of assets and another suit for winding up of SIL before Lucknow High Court. AO observed that assessee was basically exporter and business of leasing was not its main business. leasing transaction had been entered into to derive 100 per cent depreciation and to reduce its tax liability. AO worked out Internal Rate of Return (IRR) with respect to lease transaction at 13.76 per cent whereas in pure finance transaction market rate was around 20 per cent. She found that SIL had unabsorbed losses and did not require benefit of depreciation. She, therefore, held leasing transaction to be colourable device aimed at reducing tax liability. Hence, she treated transaction with SIL as purely finance transaction and claim of 100 per cent depreciation was disallowed. 4 . assessee purchased second-hand gas cylinders SIGL and GAPL and leased back to them. These were purchased by GAPL and SIGL at rate of Rs. 1,400 per cylinder on 21st March, 1992 whereas these were sold to assessee on 24th March, 1992 at rate of Rs. 22,000 per gas cylinder. assessee received security deposit of Rs. 72,000 from SIGL. At end of lease period of three years these gas cylinders were finally sold off for sum of Rs. 532 per gas cylinder to M/s Shah Enterprises. AO asked assessee to show cause as to why this case would not come under purview of Expln. 3 to s. 43(1). assessee submitted that provision of Expln. 3 to s. 41(1) could not be attracted as asset had not been used by SIGL or GAPL and transaction was not entered into with object of reducing assessee s income-tax liability. AO held that had lease been genuine one assessee would have attempted at procuring second-hand asset at prevailing market price. She was of opinion that assessee was not interested in assetper se but it was benefit of 100 per cent depreciation claim that motivated assessee to enter into agreement. IRR in this case was worked to 14 per cent only. In this case SIGL and GAPL had no use of 100 per cent depreciation because they had unabsorbed losses. Hence, she treated transaction entered into with SIGL and GAPL as financing transaction and claim of 100 per cent depreciation was disallowed. 5 . assessee purchased 520 glass bottles moulds from M/s Mohan Crystal Glass Works (MCGW) for Rs. 14,01,400 and leased back to them and at end of lease period of 3 years were sold for Rs. 15,415 only to M/s National Serial Ltd., sister-concern of assessee. IRR in this case was worked out at 14.10 per cent MCGW was loss-making concern during relevant previous year. Therefore, AO treated this transaction as mere financing transaction and claim of 100 per cent depreciation was disallowed. 6. assessee purchased pusher type furnace from M/s Punjab Potteries (PP) for sum of Rs. 10,57,500 and leased back to them. furnace was said to be erected by Associated Furnaces (P) Ltd. AO found that period of lease in this case had expired on 31st March, 1997 but assessee had not taken repossession of asset. She found that M/s Punjab Potteries was not in operation for last 3-4 years and there was no rational as to why Punjab Potteries Ltd. should pay lease rent for asset which was not being used. It could have gone for premature termination of lease. Lessee had book profits of Rs. 1,17,129 only and could easily forego depreciation in favour of assessee. On local enquiry it was revealed that Director of assessee- company was interested in M/s Punjab Potteries. She treated transaction as financial transaction and disallowed claim of 100 per cent depreciation. 7 . Thus, AO held that all five transactions entered into by assessee with SIL, SIGL, GAPL, MCGW and PP were aimed at avoiding payment of tax. She was of view that assessee had resorted to colourable devices in form of purchase and leased back transactions and relying upon decision in case ofMcDowell & Co. Ltd. vs. CTO (19 8 5) 47 CTR (SC) 126 : (19 8 5) 154 ITR 14 8 (SC)she held transaction not genuine and disallowed entire claim of depreciation. 8 . Being aggrieved assessee preferred appeal before CIT(A). learned counsel for assessee submitted that AO was not correct in observing that assessee was basically exporter. He explained that exports constituted very small percentage of assessee s business. assessee- company was duly authorized to enter into leasing transactions and same was stated in memorandum of association. AO, therefore, should not have drawn adverse inference on this account. It was also not correct to say that all these lessees were suffering losses. It was submitted that profits of five concerns namely SIL, SIGL, GAPL, PP and MCGW were at Rs. 59.25 lakhs, . 8 7 lakhs, .21 lakhs, 1.07 lakhs and 116.74 lakhs respectively. Therefore, contention that lessee and lessor mutually stood to gain by entering into these transactions was not valid. With regard to IRR of lessee transaction it was submitted that Revenue cannot draw adverse inference by comparing IRR rates of leasing transactions with that of finance transaction as these were not similar transactions. AO had acted purely on suspicion without any evidence. All five lease transactions were with regard to specific items on goods and they were properly evidenced by invoice. They have effectively delivered to owner and any payment in excess of limits laid down by s. 40A(3) were made by way of crossed cheque or crossed demand draft. In case of SIL payment of Rs. 41.25 lakhs had been as cost of assets. assessee filed comprehensive suit against SIL for winding up as also for recovery of rental and of leased assets. He pointed out that AO was not correct in working out cost of five Sugar Mill Rollers at Rs. 16,21,000 only. It was stated that sugar mill rollers had two shafts and each shaft was purchased for sum of Rs. 3,23,942 from BHEL. cost of 10 shafts were, therefore, Rs. 32,39,420 over and above matching over of Rs. 20,000 was done through M / s United Engineering Works. Certain bills of Central Foundry Forge Plan, showing sale of sugar mills roller to SIL dt. 27th Feb., 1990 and 3rd March, 1990 had also been filed. 9. In case of gas cylinder it was stated that though AO had issued show cause for invoking Expln. 3 to s. 43(1), AO did not invoke section finally. These assets after expiry of lease period recovered from lessee and sold to third party. He mentioned that continuous pusher type furnace had not been recovered from M/s Punjab Potteries as assessee was arranging for buyer of equipment and till such time it had been agreed asset remain with lessee. learned counsel explained that due to Supreme Court order lessor was not able to locate buyer in National Capital Territory of Delhi as this item causes environmental pollution. In case of glass bottle moulds assessee-company had received back sum of Rs. 17,37,732 as lease rental and at termination of lease asset had been sold for Rs. 15,415. Thus, in all cases of lease assets were purchased by assessee and their existence had not been doubted by Revenue. learned CIT(A) has held thus : "7. All five transactions are sale and lease back transactions. assessee has purchased equipment as per invoice, equipment had been in ownership and custody of lessee before its purchase by assessee and same were leased back to assessee on payment of lease rentals. In case of SIL lease agreements for five sugar mill rollers. AO has computed its value in hands of SIL at Rs. 16,21,000 whereas appellant has stated total cost in hands of SIL at Rs. 33.39 lakhs. On comparison of items purchased by SIL from M/s Central Foundry Forge Plant copies of bill of which have been filed before me it is seen that these purchases were for Mill roller shaft DRG No. 550 x 4650. Forge number and Heat number in these items is indicated in bills. As against this invoice of SIL of its sale to appellant-company is only with respect to Sugar Mill Rollers serial No. 1 to 5 at rate of 7,50,000 total amount Rs. 37,50,000 + CST. I am, therefore, unable to accept contention of appellant that sugar mill rollers bought by assessee-company from SIL and then leased out to them were same items which were purchased by SIL from Central Foundry Forge Plantvidetheir bills dt. 6th March, 1990, 3rd March, 1990 and 27th Feb., 1990. It is also not clear as what use lessee company had put its equipment to in intervening period between its purchase and its sale to appellant-companyvideinvoice dt. 11th Sept., 1991. Beside whereas appellant-company has claimed depreciation of Rs. 41.25 lakhs in year under appeal it had shown corresponding profits of Rs. 2.79 lakhs + 5.5 8 lakhs + 10 lakhs only on ground that further rentals were not received from lessee. appellant, however, had received sum of Rs. 14.25 lakhs from lessee by way of security deposit which is not liable to tax. asset continuous to remain with lessee till date on ground of litigation before Lucknow High Court. appellant, however, has not submitted any paper or proof indicating that Lucknow Bench of Allahabad High Court has ordered statusquofor which reason delivery of leased asset cannot be taken. In absence of such directions from High Court assessee remains free to recover leased asset for which clearly no efforts have been made. With regard to gas cylinders it is not disputed that whereas market price of per gas cylinder was Rs. 1,400 assessee procure same at enhanced rate of Rs. 2,200 per gas cylinder. On perusal of sale bills of these cylinders it is seen that no details regarding make or even capacity of these cylinders is mentioned. In case of glass bottle moulds these were sold for nominal amount after expiry of lease period to sister-concern of lessee. In case Continuous Pusher Type Furnace against cost of Rs. 10,57,500 lease rental worked out to 3.5 lakhs and asset continues to remain with lessee till date. 8 . On perusal of lease agreement it is seen that agreement stipulates that property will be delivered by supplier of equipments to lessee and lessee shall pay all charges in respect of its delivery. Article 8 of lease agreement states that lessee shall maintain on equipment/property insignia, identification or maker s marks, numbers or plates, etc. Article 24 provides that on termination of lessee shall on its risks and costs return equipment in good condition and perfect working order at place designated by lessor. In present case, stipulation for delivery of asset is paper clause only. In all five cases equipments was with lessee prior to lease agreement. stipulation regarding identification of leased asset also remains on paper only as no identification of leased asset has been made either in schedule of description of leased asset to leased agreement or even in invoice of sale to appellant-company. None of invoices mentioned make, number, design of asset purchased by assessee. Thus basic criteria of identifying asset which belongs to assessee-company has not been fulfilled. Besides, in two cases, i.e., five Sugar Mill Rollers and Continuous Pusher Type Furnace leased out asset continuous to remain with lessee much after expiry of lease. In third case, i.e., Glass Bottle Moulds asset has been disposed of for nominal price to sister-concern of lessee. In all these cases basic ingredients of ownership of defined asset leasing. essential difference between finance transactions and leased transaction is ownership of asset. assessee having failed to pass criteria on this account cannot be stated to be ownership of asset. ownership has not been conclusively proved in absence of failure to retrieve asset and complete lapse of identification on leased asset. It is also not irrelevant that actual cost as shown by assessee does not compare to market cost of asset as has been shown in case of gas cylinders and Sugar Mills Rollers. I, therefore, uphold order of AO treating transactions as finance transaction. appeal on this ground is dismissed." 10. Before us, learned counsel for assessee has submitted that assessee-company has been carrying on business of trading, exports, imports, financing and leasing. In this connection he has referred to extract of memorandum of association of assessee-company placed at p. 1 8 1 of paper book, which clearly indicates that leasing of asset is one of objects incidental or ancillary to attainment of main objects. In original assessment made AO disallowed 25 per cent of depreciation claimed on machinery leased out, i.e., Rs. 1, 82 ,745 (25 per cent of Rs. 73,09,900). original assessment was however set aside to AO with specific direction to AO, which directions have not been complied with by AO, hence failure to follow direction of appellate authority is denial of justice. In this connection he has referred to following directions given by CIT(A) in order dt. 22nd March, 1996 : "1 8 .1 have considered facts and circumstances of case and rival submissions. No doubt leasing of assets which are fully depreciated has been one of modes recently employed by certain companies. However, issue to be examined is intention behind these transactions and whether it is done w i t h view to claim depreciation second time on fully or substantially depreciated assets. AO has not even examined as to whether all these assets were fully or substantially depreciated assets when these were purchased assets were fully or substantially depreciated assets when these were purchased and whether main purpose was only to claim depreciation on these assets and set it off against interests income. For this purpose, AO should examine assessment records of sellers of assets to find out whether these were in fact fully or substantially depreciated assets. AO should also have made enquiries (as mentioned in para 16 above) to find out whether appellant had purchased fully or substantially depreciated assets from loss- making concerns. No proper enquiries were made in this regard before making disallowance under s. 32 for depreciation. AO will examine this issue in detail and afford proper opportunity to appellant before he comes to any conclusion in matter. AO will also examine whether case of appellant falls under Expln. 3 below s. 43(1) of IT Act and afford specific opportunity to appellant before reaching any conclusion in matter. 19. In result assessment is set aside to be madede novo in light of above directions." 11. learned counsel has further submitted that in all these cases assets were purchased by assessee-company and they were distinctively identifiable. physical delivery had been taken by assessee-company in all cases. confirmation from each of supplier/seller was duly furnished. These assets were acquired by assessee-company having regard to business requirements of assessee. regular rentals had been shown and accounted for in relevant years. During year assessee had purchased five sugar mill rollers from SIL, company engaged in manufacturing and fabrication and commissioning of machinery for sugar plants. copy of invoice for sum of Rs. 41,25,000 issued by SIL for sale of five sugar mill rollers is placed at p. 133 of paper book. learned counsel has mentioned that said company acquired sick sugar unit known as Khalilabad Sugar (P) Ltd., and thereafter undertaken major expansion and modernization programme of said sugar mill. In June, 1991, M/s SIL approached assessee-company for leasing of sugar mill rolls. Accordingly, lease agreement dt. 10th Sept., 1991 was entered into between assessee- company and M/s SIL, copy of which is placed at p. 1 8 5 of paper book. These assets were purchased by M/s SIL from Bharat Heavy Elecricals Ltd. (a unit of Central Foundry Forge Plant) in February, 1990. In this regard, learned counsel has referred to purchase order placed by M/s SIL on M/s BHEL which is available at p. 99 of paper book. copy of invoice of BHEL is available at pp. 103-105 of paper book. learned counsel further submitted that thereafter SIL sent said rolls to M/s United Engineering Works, Ghaziabad for further processing and machining. In this connection he has referred to bill dt. 11th Sept., 1991 of United Engineering Works placed at p. 9 8 of paper book. M/s United Engineering Works thereafter dispatched said rollers to Khalilabad Sugar Mills unit of M/s SIL at request of lessee. assessee duly paid for acquisition of sugar mill rollers. aforesaid sugar mill rollers had specific serial number embossed on them which could be evident from copy of invoice raised by M/s BHEL. Thus, he has urged that property in said specific case of sugar mill rollers had passed on assessee-company. M/s SIL has confirmed that five sugar mill rollers were taken on lease from assessee and same were put to use, as per copy of letter at p. 96 of paper book. learned counsel has pointed out that AO was not correct in working out cost of five sugar mill rollers at Rs. 16,21,000. It was stated that sugar mill roller had two shafts and each shaft was purchased for sum of Rs. 3,23,942 from M/s BHEL. cost of 10 shafts was, therefore, Rs. 32,39,420 plus CST and over and above this machinery work of Rs. 20,000 per shaft was done through M/s United Engineering Works. As regards observation of AO that lease with SIL had expired in September, 1994, but assessee had not taken possession of leased asset in accordance with lease agreement, learned counsel has pointed out that there was litigation with M/s SIL and in view of order of thestatus quo possession of said assets could not be obtained by assessee. 12. With regard to gas cylinder learned counsel has submitted that assessee-company had purchased empty gas cylinders from M/s Sethi Industrial Gases (P) Ltd. (SIGL) and M/s Gujarat Acetylene (P) Ltd. (GAPL), Ahmedabad and leased back same to them. copy of invoice raised by above supplier along with challans were duly furnished before AO. said supplier had purchased gas cylinder from M/s Sirhind Steel Ltd. copy of invoice raised by M/s Sirhind Steel Ltd. would show identification number of each of cylinders. In this connection, learned counsel has referred to delivery challans and invoices placed at p. 8 9 of paper book. He has further submitted that these empty oxygen gas cylinders were used by lessee. However, it has been confirmed by lessee that no depreciation has been claimed on leased assets. In this connection, he has referred to copies of letter received from lessees at pp. 139 and 140 of paper book. He has further stated that these assets, after expiry of lease periods were recovered from lessee and sold to third party. He has further mentioned that though AO had issued show-cause notice for invoking Expln. 3 to s. 43(1), however, he did not invoke said section finally. As regards 520 glass bottle moulds learned counsel has submitted that assessee purchased 520 glass bottle moulds from M/s Mohan Crystal Glass Works, unit engaged in manufacture of glass bottle moulds and leased over same to M/s Mohan Meacon Ltd. In this connection, he has referred to invoice dt. 2 8 th March, 1999 issued by Mohan Crystal Glass Works Prop. Mohan Meacon Ltd. placed at p. 88 . reference has also been made to p. 8 7 wherein it has been confirmed that 520 glass bottles were taken on lease from assessee and same were put to use in business of manufacturing of glass bottles. He has further pointed out that M/s Mohan Meacon Ltd. vide their letter dt. 20th Jan., 19 88 placed at p. 135 of paper book have further confirmed that they had taken on lease glass moulds from assessee-firm and assets were duly identifiable. learned counsel has further pointed out that after expiry of lease period glass bottle moulds were sold by assessee company to M/s National Cereals Ltd. at Mohan Nagar for Rs. 15,415 on 31st July, 1996. 13. As regards continuous pusher job furnace, learned counsel has submitted that assessee had purchased above furnaces from M/s Associated Furnaces (P) Ltd. and same were delivered to assessee- company. copy of invoices and challans, site gate pass and transporters GR were duly furnished to AO. supplier of said furnace had also confirmed same. furnace was thereafter given on lease by assessee-company to M/s Punjab Potteries. In this connection, has referred to Punjab Potteries letter placed at p. 13 8 of paper book wherein they have confirmed about taking of lease of aforesaid assets. They have also confirmed that no depreciation have been claimed by them on such assets leased by assessee and assets when purchased was new. He has further pointed out that said assets could not be recovered from M/s Punjab Potteries as assessee was arranging for buyer of equipment and till such time it has been agreed that asset would remain with assessee. Learned counsel has explained that due to Supreme Court order lessor was not able to locate buyer in National Capital Territory of Delhi as these items causes environmental pollution. Thus, learned counsel has contended that in all cases of lease assets were purchased by assessee and their existence had neither been doubted by Revenue. Thus, he has urged that lower authorities were not justified in denying claim of depreciation on aforesaid assets leased to above named parties. 1 4 . learned Departmental Representative, on other hand, has submitted that it is incorrect to say that AO has not followed directions given by CIT(A) in his order dt. 22nd March, 1996 inasmuch as AO has examined matter in great details on lines of directions given by CIT(A). learned Departmental Representative has further argued in support of impugned order on line of reasoning assigned by lower authorities. 15. We have heard parties and have perused material to which our attention was drawn during course of hearing of appeal. transaction of sale and lease back are well known transactions. It is common knowledge that several banks and institutions are carrying out leasing business by financing purchase of equipment taken back and used by them on lease. Explanation 4A to s. 43(1) which came in statute w.e.f. 1st Oct., 1996 also recognizes sale and lease back transactions. However, in all such transactions it has to be proved that transactions were entered intobona fidely and there is material to show that these are given effect to. transactions are to be proved by person relying upon them to claim deductions. Whether particular transaction is genuine business transaction or not has to be gathered from facts of each case. In case of sale and lease back transactions same is generally to be treated as sham if there is finding that assessee shown to have leased out asset not exist or where finding that assessee shown to have leased out asset not exist or where it is found that same asset is leased out to more than one lessee at same time. If these findings are not there and if other related facts are not found to be abnormal then there is little scope to apply ratio of decision in case ofMcDowell & Co. Ltd. vs. CTO (supra). It may be mentioned that decision in case ofMcDowell & Co. Ltd. (supra) has been considered recently by Hon ble Supreme Court in case ofUnion of India vs. Azadi Bachao Andolan (2003) 1 8 4 CTR (SC) 450 : (2003) 263 ITR 706 (SC)where Their Lordships at p. 75 8 have held as under : "We may in this connection usefully refer to judgment of Madras High Court inM.V. Valliappan & Ors. vs. ITO (19 88 ) 67 CTR (Mad) 2 8 9 : (19 88 ) 170 ITR 23 8 (Mad), which has rightly concluded that decision inMcDowell (supra) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has effect of reducing tax burden of assessee, must be looked upon disfavour. Though Madras High Court had occasion to refer to judgment of Privy Council inIRC vs. Challenge Corporation Ltd. (19 8 7)2 WLR 24 , and did not have benefit of House of Lord s pronouncement inCraven (Inspector of Taxes) White (Stephen) (19 88 ) 3 All ER 495 (HL) : (1990) 1 8 3 ITR 216 (HL), view taken by Madras High Court appears to be correct and we are inclined to agree with it. We may also refer to judgment of Gujarat High Court inBanyan & Berry vs. CIT (1996) 131 CTR (Guj) 127 : (1996) 222 ITR 8 31 (Guj)at 8 50 where referring to McDowell s case (supra), Court observed : Court nowhere said that every action or inaction on part of taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as device for avoidance of tax irrespective of legitimacy or genuineness of act; inference which unfortunately, in our opinion, Tribunal apparently appears to have drawn from enunciation made inMcDowell scase (supra). ratio of any decision has to be understood in context it has been made. facts and circumstances which lead toMcDowell sdecision leave us in no doubt that principle enunciated in above case has not affected freedom of citizen to act in manner according to his requirements, his wishes in manner of doing any trade, activity or planning his affairs with circumspection, within framework of law, unless same fall in category of colourable device which may properly be called device or dubious method or subterfuge clothed with apparent dignity. This accords with our own view of matter." 1 6 . assessee is engaged in business of import and export, financing and leasing. During year under consideration assessee has entered into purchase and lease back agreement with above named parties. assessee purchased five sugar mill rollers from M/s Sumec International Ltd. (SIL), leased back same to M/s SIL on 10th Sept., 1991. AO held that this transaction with M/s SIL as colourable device to reduce tax liability. She noticed that M/s SIL purchased these assets from BHEL (Unit : Central Foundry Forge Plant) at Rs. 16,21,000 including cost of machining work done to those assets whereas assessee had claimed to have purchased from M/s SIL at Rs. 41.25 lakhs. Moreover, after expiry of lease period assessee had not got possession of assets leased out to them. case of assessee, however, is that one sugar mill roller had two shafts and each shaft was purchased for sum of Rs. 3,23,942 from BHEL. Thus, cost of 10 shafts came to Rs. 32,39,420 plus CST and over and above machinery work of Rs. 20,000 per shaft was done. In this connection, learned counsel for assessee referred to pp. 99 to 105 of paper book. Learned counsel further explained that assets continued to be remained with lessee on account of litigation pending before Hon ble High Court of Allahabad (Lucknow Bench). In this connection, he has referred to pp. 111 to 132 of paper book. perusal of these papers would show that these papers relate to company petition filed under s. 433(e) r/w s. 439(b) of Companies Act, 1956 before Lucknow Bench of Allahabad High Court for winding up of lessee company (M/s SIL) on account of dishonouring of cheque No. 151229, dt. 1st Oct., 1993 of Rs. 22,79,000 and cheque No. 151230, dt. 1st Oct., 1994 for same amount being quarterly rental for respective quarters drawn on Bank of India in favour of complainant, i.e., assessee- quarters drawn on Bank of India in favour of complainant, i.e., assessee- company herein. It is also mentioned in company petition that M/s SIL entered into lease agreement with complainant (assessee) on 10th Sept., 1991 and took on lease five sugar mills rollers for period of 3 years on rental stipulated in said deed. Thus, fact that assessee-company moved Hon ble High Court for winding up of lessee company as aforesaid would establish that there was purchase and lease agreement for five sugar mill rollers between assessee and lessee company and not merely paper agreement. payment made by cheque to lessee company for purchase of said sugar mill rollers has not been disputed. invoice dt. 11th Sept., 1991 issued by Sumec International Ltd. for sugar mill rollers 1 to 5 in favour of assessee is for sum of Rs. 41.25 lakhs. lessee has also given certificate that it received delivery of five sugar mill rollers on lease from assessee-company as per lease agreement dt. 10th Sept., 1991. Expln. 3 to s. 43(1) reads as under : "Where, before date of acquisition by assessee, assets were at anytime used by any other person for purposes of his business or profession and AO is satisfied that main purpose of transfer of such assets, directly or indirectly to assessee, was reduction of liability to income-tax (by claiming depreciation with reference to enhanced cost), actual cost to assessee shall be such amount as AO may, with previous approval of Jt. CIT, determine having regard to all circumstances of case." 17. It is one of essential conditions for invoking Expln. 3 to s. 43(1) that before date of acquisition of asset by assessee asset was used by other person for purposes of his business. second condition is that AO is satisfied that main purpose of transfer of such assets directly or indirectly to assessee was for reduction of liability to income-tax by claiming depreciation with reference to enhanced cost. If these two conditions are satisfied, then actual cost to assessee shall be determined by AO with previous approval of Jt. CIT. 1 8 . It may be mentioned that actual cost to assessee is entirely question of fact to be determined with reference to evidence and material. mere production of documentary evidence showing that contract was made for purchase of asset at certain price does not conclusively establish correctness of claim made by assessee specially where AO is of opinion that in deal assessee has taken resort to subterfuge or device in order to avoid tax which he is liable to pay or otherwise has acted fraudulently or transaction is illusory or colourable. In such cases AO can go behind contract and ascertain actual cost for purpose of correct ascertainment of income-tax liability of assessee Guzdar Kajora Coal Mines Ltd. vs. CIT 1972 CTR (SC) 231 : (1972) 8 5 ITR 599 (SC),CIT vs. Jogta Coal Co. Ltd. (1965) 55 ITR 8 9 (Cal)refers. Where asset was already in use in hands of one person and its written value has been ascertained by AO and that person transfers asset to another person for price exceeding WDV in depreciation chart of file of AO, it is open to AO to refuse to accept sale price as actual cost to purchaser in purchaser s assessment. It may however be mentioned that there may be genuine case where asset has appreciated in value since its original purchase and consequently market value on date of sale is greater than its WDV in AO s chart. It is all matter to be considered on facts and circumstances of each case. 19. There is no material on record to show that assets were used by M/s SIL prior to impugned purchase and lease agreement nor AO has found out whether these assets were fully or substantially depreciated when these assets were purchased by assessee-company despite direction given by CIT(A) in its order dt. 22nd Feb., 1996. AO merely mentioned that M/s SIL had unabsorbed loss and did not require benefit of depreciation. Nor AO has examined as to whether case of assessee fall under Expln. 3 to s. 43(1) of Act as directed by CIT(A) in said order. Therefore, in absence of such findings no doubt can be cast on cost of assets shown by assessee. 20. essential characteristic of sale is that property or goods passes to buyer. It is not necessary that assets should physically move to buyer in order to constitute valid sale. It is essential that property in goods passes to buyer, risk and reward attached to goods also passes to goods passes to buyer, risk and reward attached to goods also passes to buyer. buyer in instant case has earned reward in form of lease rental by leasing it back to seller. profit earned on sale by lessee is also subject to short-term capital gain. lease agreement contains clause that on expiry of lease period lessee shall deliver assets to lessor/assessee. It is seen that but for litigation between assessee and M/s SIL as aforesaid, asset would have been returned to assessee on expiry of lease period. It is not case of Revenue that agreement in question is not entered into at arm s length inasmuch as both parties are not of same group of company or otherwise related to each other. In circumstances, we are of view that in instant case assessee has satisfied conditions for purpose of claiming depreciation under s. 32 that depreciable assets are owned by assessee and same were used for purpose of assessee s business. We, therefore, direct to allow claim of depreciation in respect of these assets of five sugar mill rollers. 2 1 . second purchase and lease back transaction relates to gas cylinder. These gas cylinders were purchased by GAPL and SIGL at rate of Rs. 1,400 per gas cylinder on 21st March, 1992 and same were sold to assessee at rate of Rs. 2,200 per gas cylinder on 24th March, 1992. These were used by lessee. However, they stated to have claimed no depreciation o n these assets. In respect of these transactions there is no finding as to whether lessee had claimed and was allowed any depreciation on these assets prior to impugned transaction of purchase and lease back nor AO has examined whether case of assessee falls under Expln. 3 to s. 43(1). For reasons mentioned in respect of first transaction of purchase and lease back, we direct to allow claim of depreciation in respect of this transaction. 22. third transaction of purchase and lease back relate to 510 glass bottle mould purchased for Rs. 14,01,400 from M/s Mohan Crystal Glass Works, unit engaged in manufacture of glass mould and lease back same to said concern. copy of invoice issued by Mohan Crystal Glass Works (Prop. Mohan Meacon Ltd.) is pleased at p. 88 of paper book. At end of lease period assets were sold to M/s National Serial Ltd. sister-concern of assessee. grievance of Revenue appears to be that asset purchased at Rs. 14,01,400 were at end of lease of period were sold at paltry sum of Rs. 15,415. Hence, this was not genuine transaction. It seems that revenue is not disputing purchase price nor fact that these assets were leased back to same party nor that lessee used assets during lease period or rental fixed under agreement was abnormally low. In absence of these facts, mere fact that assets sold at end of lease period at meagre price to sister-concerns cannot be said to be material fact which may tilt issue in favour of Revenue. Further, for reasons mentioned in respect of first transaction above, we direct to allow claim of depreciation to assessee in respect of this transaction. 23. last transaction of purchase and lease back relates to continuous pusher type furnace. It is seen that assessee purchased continuous pusher type furnace from M/s Associated Industrial Furnace (P) Ltd. for sum of Rs. 10,57,500, copies of challan and invoices giving details of various items are placed at pp. 67 to 8of paper book. Associated Ind. Furnaces (P) Ltd. has also confirmed that they have sold/delivered machinery to its client, M/s Comecon Overseas (P) Ltd., assessee herein vide invoice No. 53, dt. 26th March, 1992, invoice No. 54, dt. 21st March, 1992 and invoice No. 55 dt. 2 8 th March, 1992. They have further confirmed that said machinery was delivered at Punjab Potteries Premises at Gurgaon Road, New Delhi at request of M/s Comecon Overseasvidetheir letter placed at p. 8 1 of paper book addressed to Dy. CIT, Spl. Range, New Delhi. M/s Punjab Potteries vide letter dt. p. 8 3 of paper book addressed to Dy. CIT has also confirmed that one continuous pusher type furnace has been taken on lease by them from assessee and this furnace has been fabricated and supplied by M/s Associated Ind. Furnaces (P) Ltd. M/s Punjab Potteries have further confirmed that they have not sold this furnace to M/s Comecon Overseas (P) Ltd. Therefore, in view of above facts, this is incorrect to say that this is purchase and lease back transaction entered into by assessee and M/s Punjab Potteries. fact that assessee has purchased this furnace at cost of Rs. 10,57,500 is not in dispute nor fact that same was leased out to M/s Punjab Potteries. reason for not recovering furnace from M/s Punjab Potteries after expiry of lease period has been explained by learned counsel which appears to be justified. leasing of asset being business of assessee. We, therefore, hold that assessee-company has satisfied conditions for purpose of claiming depreciation under s. 32 that depreciable assets are owned by assessee and same were used for purpose of assessee s business. We, therefore, direct to allow depreciation to assessee. 24. In result, appeal of assessee-company is allowed. *** COMECON OVERSEAS (P) LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
Report Error