COMMISSIONER OF INCOME TAX vs. BHAGWATI SPHEROCAST LTD.

Facts

The revenue (Commissioner of Income Tax) appealed against an order dated 27.12.2001 passed by the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench 'A', for assessment years 1990-91 and 1991-92. The assessee, Bhagwati SpheroCast Ltd., a manufacturer of High Cast Iron specialized casting, had installed certain equipment in the premises of its sister concern, M/s. Bhagwati Autocast Ltd., due to space constraints. The assessee claimed lease rent expenses of Rs. 11,69,262/- for the relevant year. The Assessing Officer disallowed this deduction, deeming it as income to avoid tax, as the sister concern used the machinery without paying rent. The CIT(A) upheld this decision. The ITAT, however, allowed the assessee's appeal, holding that no tax planning was involved and the lease rent was allowable.

Held

The High Court agreed with the Tribunal's reasoning and findings of fact, holding that there was no instance of tax evasion. The court noted that the assessee was recovering service charges of Rs. 5,000/- for the use of machinery by the sister concern. Furthermore, the lease rent paid by the assessee for the machinery was allowed as a deduction in assessment year 1988-89 after scrutiny, and the Tribunal had allowed lease rent for assessment years 1986-87 to 1988-89. Citing the Supreme Court's decision in Commissioner of Income Tax vs. Excel Industries Ltd & Mafatlal Industries P. Ltd., which referred to the principle of not allowing reconsideration of an issue for subsequent assessment years if the same fundamental aspect permeates through different years, the court found no material change justifying the revenue's different stand. Consequently, the court confirmed the Tribunal's finding of fact and answered the question of law in favour of the assessee.

Key Issues

1. Whether the amount of lease rent paid in respect of machinery which was given to a sister concern without charging any rent can be allowed as deduction while computing the income of the assessee? (Question of law) Assessee's contentions: - The Tribunal's order was passed in accordance with law and requires no interference. - The agreement between the assessee and the sister concern was irrevocable. - The assessee company offered to tax capital gains for assessment years 1995-96 & 1996-97. - The Tribunal had previously allowed lease rent for assessment year 1986-87. - The assessee claimed expenditure on technical know-how as deduction under Section 35AB. - Relied on the Supreme Court decision in Commissioner of Income Tax vs. Excel Industries Ltd & Mafatlal Industries P. Ltd. [2013] 358 ITR 295 (SC). Revenue's contentions: - The Tribunal overlooked that the arrangement was a veil for illegal tax planning to divert profits to the sister concern. - The Assessing Officer provided cogent reasons for disallowing the deduction. - By debiting lease rent for machinery used by the sister concern, the assessee reduced its profits.