C.I.T.UDAIPUR vs. M/S SHREE RAJASTHAN SYNTEX LTD.

Date of Order: 12th December 2013 HON'BLE THE JUSTICE MR. DINESH MAHESHWARI HON'BLE MR. JUSTICE V.K. MATHUR Mr. K.K. Bissa, for the appellant. . BY THE COURT: [Per Dinesh Maheshwari, J.], By way of this appeal under Section 260A of the Income Tax Act, 1961 [‘the Act’], the Revenue seeks to question the order dated 30.11.2011 passed by the Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur [‘ITAT’] in ITA Nos. 541/Jodh/2007 and 406/Jodh/2007 relating to the Assessment Year 1999-2000 whereby, the ITAT has affirmed the part of the order dated 16.03.2007 passed by the Commissioner of Income Tax (Appeals), Udaipur [‘CIT(A)’] whereby, the CIT(A) had essentially allowed the appeal preferred by the assessee and held, following the decisions in the case of the same assessee for the Assessment Years 1996-97, 1997-98 and 1998-99, that no ground was left for the Assessing Officer [‘the AO’] to re-open the assessment for the year under consideration i.e., the Assessment Year 1999-2000. Put in brief, the relevant background aspects of the matter could be noticed in the following: The respondent-assessee had leased out certain plant and machinery to M/s. Rajasthan Texchem Limited under different agreements, for specified period of time and at the stipulated monthly rent. The assessee-lessor has its registered office at Udaipur, while the lessee company has its registered office at Mumbai. The AO assessed the assessee for the Assessment Years 1996-97, 1997-98 and 1998-99 so also for the Assessment Year 2001-02, and in these assessment proceedings, the assessee claimed depreciation on the leased out capital assets under Section 32 of the Act. In respect of three Assessment Years i.e., 1996-97, 1997-98 and 1998-99, the assessee was allowed depreciation as claimed. It so happened that the lessee, who was being assessed at Mumbai, claimed revenue expenditure for the lease rent paid to the lessor, but the Assessing Officer at Mumbai, instead of allowing the expenditure, allowed depreciation on the capital value of the plant and machinery. Upon this fact coming to the notice of the AO of the lessor, the proceedings under Section 147 were initiated by issuing notice under Section148 of the Act. So far as the Assessment Year 2001-02 was concerned, since the assessment at Mumbai had already been made by then, the AO of the respondent assessee did not allow deduction for depreciation. All these orders were challenged in appeals before the CIT (A), who upheld the addition while deciding the appeals relating to the Assessment Years 1996-97 and 1997-98. However, on further appeals, the ITAT held the assessee entitled for depreciation on these assets, and the addition was ordered to be deleted. The common order was passed by the ITAT in relation to the Assessment Years 1996-97 and 1997-98 on 22.12.2003. The appeals relating to the Assessment Years 1998-99 and 2001-2002 remained pending before the CIT(A) who, following the judgment of ITAT dated 22.12.2003, deleted the addition made by the AO regarding depreciation. Aggrieved of this order of the CIT (A) dated 18.10.2005, the Revenue filed the appeals before the ITAT which were dismissed by the common order dated 13.07.2006. In the above backdrop, 4 appeals relating to the respondent-assessee for the Assessment Years 1996-97, 1997-98, 1998-99 and 2001- 2002 came up before this Court and were considered on the following questions in the common judgment dated 06.05.2008 [reported in (2009) 313 ITR 231]:- “i) Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the assumption of ju- ri iction under section 147/148 of the Income- tax Act,1961, is bad in law and accordingly in quashing the reassessment proceedings? ii) Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal was jus- tified in holding that the assessee is entitled to get depreciation under section 32 on the as- sets claimed to be taken on lease, as owner of the assets?” After a thorough analysis of the facts of the case and the law applicable, this Court found unjustified the process of re-opening by the AO on the basis of the assessments made in relation to the lessee at Mumbai; and the order of the ITAT was upheld, inter alia, with the following observations:- “…..Thus the net result which comes to is that simply be- cause after the Assessing Officer here had formed a particular opinion on a particular set of documents simply because the As- sessing Officer at Mumbai had formed a different opinion on the same set of documents the action was sought to be initiated here for re-assessment which, in our view, has rightly been found by the learned Tribunal that it was a “borrowed satisfaction” under the opinion of the Assessing Officer at Mumbai and has rightly been found to be not sufficient to confer power on the Assessing Officer to initiate reassessment proceedings. Likewise, we may just take another hypothesis that if the Assessing Officer at Mumbai had not allowed depreciation al- lowance to the lessee and would have come to the conclusion on the basis of these very lease deeds about the lessor being contin- uing as owner it is not in dispute that the reassessment proceed- ings would not have been initiated here. This obviously makes it clear that reassessment proceedings had been initiated only on account of the opinion arrived at by the Assessing Officer at Mum- bai. Thus, question No.1, as framed in three appeals is answered in the affirmative, i.e., against the Revenue and in favour of the assessee.” In question No.2, this Court held the assessee entitled to claim depreciation with reference to the decision of the Hon'ble Supreme Court in the case of Shaan Finance: [1998] 231 ITR 308 while observing, inter alia, as under:- “We need not multiply all the cases as the best and near- est case we find is that of the hon'ble Supreme Court in the CIT v. Shaan Finance P. Ltd. [1998] 231 ITR 308 in paragraph 17 where- of it has been held by the hon'ble Supreme Court as under (page 316):

“17. Neither of these cases deals with an agreement of hire of machinery in contradistinction to an agreement of hire purchase. When the machinery is given on hire by the owner to the hirer on payment of hire charges, the income derived by the owner is business income. The owner is also entitled to depreciation on the machinery so hired out. The hirer, on the other hand, who pays hire charges, is en- titled to claim these as revenue expenditure. The hirer has not acquired any new asset. A transaction of hire is, there- fore, of bailment of the machinery. There is no extinguish- ment of any right of the owner in the machinery. There is merely a license given to the hirer to use, for a temporary period, the machinery so hired. In the case of Damodar Valley Corporation v. State of Bihar [1961] 12 STC 102; AIR 1961 SC 440, this court examined the contract under which the machinery and equipment was supplied by the Corporation to the contractors. The question was whether it was a mere contract of hiring or a sale or a hire pur- chase. The court said (page 445): ‘It is well-settled that a mere contract of hiring, without more, is a species of the contract of hiring, without more, it a species of the contract of bailment, which does not create a title in the bailee, but the law of hire purchase has undergone considerable de- velopment during the last half a century or more and has introduced a number of variations, thus leading to cate- gories, and it becomes a question of some nicety as to which category a particular contract between the parties comes under.’ We need not dwell on the niceties of a hire purchase contract since we are concerned only with con- tracts of hire simpliciter.” With this, it is required to be considered that the basic dis- tinguishing feature between the lease being finance lease or oper- ating lease would be that in case of finance lease, at some point of time, the ownership transfers to the lessee, or the lessee has the option to purchase the hired assets in consideration of a token price. Obviously, in that event, the lease rent or hire charges called by whatever name with passage of time partake of the character of the price of the asset in possession of the lessee or hirer under the finance lease agreement as distinct from the lease in question where there is a very specific stipulation in clause 8 that on termination of the lease the leased plant and machinery are to be returned to the lessor in the condition as they were tak- en except normal wear and tear….” This Court proceeded to examine Clause 8 of the lease deed and found the controversy concluded by the judgment of the Hon'ble Supreme Court in Shaan Finance’s case (supra). Thus, question No.2 was also answered in favour of the assessee. It is not in dispute that the petition for special leave to appeal against the judgment aforesaid was dismissed by the Hon’ble Supreme Court on 30.03.2009. In relation to the Assessment Year relevant for the present appeal i.e., 1999-2000, the return of income was filed by the respondent-assessee on 23.12.1999, declaring a loss of Rs.31,17,294/-, which was processed on 03.04.2001 under Section 143(1) of the Act. Subsequently, the assessment was re-opened by issuing notice under Section 148. It was contended before the AO that the notice issued under section 148 was bad in law. However, AO was not satisfied with the reply; and proceeded to disallow the depreciation claimed on the leased assets and the excise duty was also included in the closing stock. In appeal, it was submitted before the CIT (A) that on identical facts, the assessments for Assessment Years 1996-97 and 1997-98 were also re-opened but the ITAT had quashed the re-opening of the assessment for both the years. It was also submitted that the proceedings under Section 148 for the Assessment Year 1998-99 were initiated but same had been quashed by the CIT (A). The CIT(A), after considering the submissions and perusing the material on record, observed that the point on which re-opening of the assessment was made, had already been decided in favour of the assessee and hence, there was no ground left for re-opening the assessment. Accordingly, the CIT (A) cancelled the re-opening of the assessment while holding the re- assessment void ab initio. Without prejudice to the foregoing, the CIT (A) also proceeded to decide the issues on merit and certain additions were sustained whereas certain additions were deleted. In the appeals preferred by the assessee as also the Revenue, the ITAT took up the question of validity of re-opening of the assessment and, following the decision in the assessee’s case, as referred hereinabove [313 ITR 231], found justified the order of CIT (A) in quashing the re-assessment proceedings. The ITAT said,- “10. After considering the orders of the Assessing Officer and ld. CIT (A) and the contention of both the parties, we find that issue squarely covered by the order of Hon'ble Rajasthan High Court for assessment years 1996-97 and 97-98 reported in 217 CTR 209, copy of the same is placed on record. The Hon'ble High Court has concluded that reopening of the assessment was invalid. Since the facts are identical for the year under consideration as on the same reasoning the assessment was reopened for A.Y. 1999-2000, therefore, respectfully following the decision of Hon'ble Rajasthan High Court in case of assessee itself, we hold that ld. CIT(A) was justified in quashing the assessment. Accordingly the order of ld. CIT(A) is confirmed.” In view of the above, the ITAT found no need to decide the remaining grounds of appeal of the Revenue or of the assessee and disposed of the appeals as such. Seeking to question the order so passed by the ITAT, it is essentially contended on behalf of the appellants that the legal issue involved in the appeal before the ITAT was not exactly identical to the referred decision in relation to the respondent-assessee for the Assessment Years 1996-97 to 1998-99 inasmuch as, for the said years, the assessment had been completed under Section 143(3) of the Act whereas for the relevant Assessment Year 1999-2000, the return was only processed under Section 143(1) of the Act. It is, therefore, suggested that a question of law does arise in the matter as to whether there was no question of forming an opinion by the AO at the stage of processing the return under Section 143(1) of the Act, particularly when no order had been passed under Section 143(3) of the Act. Having heard the learned counsel for the appellant and having perused the material placed on record, we are unable to find any merit in this appeal. The facts stated in the orders impugned make it clear that return of income for the Assessment Year 1999-2000 was filed on 23.12.1999 and the same was processed on 03.04.2001 under Section 143(1) of the Act. Subsequently, the case was re-opened by issuing notice on 17.05.2005 under Section 148 of the Act, which was served on the assessee on 19.05.2005. Even in the impugned order dated 31.08.2006, the AO essentially proceeded to rely upon his own orders passed in relation to the respondent-assessee for the Assessment Years 1996-97 and 1997-98. The AO also observed that the order passed by the ITAT for those years had not been accepted by the Department and the appeal under Section 260A was pending before the Rajasthan High Court. As noticed, the said appeal, which was pending on the date of passing of the order by the AO, was ultimately decided by this Court on 06.05.2008 and both the material questions, regarding validity of the re-assessment proceedings as also regarding entitlement of the assessee to claim depreciation, were decided against the Revenue and in favour of the assessee. The decision so rendered by this Court squarely applies, on all the material aspects, to the present case relating to the Assessment Year 1999-2000. In the given set of facts and circumstances, we find the CIT(A) perfectly justified in not approving the re-assessment proceedings for the Assessment Year 1999-2000 and the ITAT also perfectly justified in dismissing the baseless appeal filed by the Revenue. In view of the above, this appeal, being totally bereft of substance, stands dismissed. [V.K. MATHUR], J.

[DINESH MAHESHWARI], J. cpgoyal/-