MCORP GLOBAL PVT. LTD. vs. COMMISSIONER OF INCOME TAX, GHAZIABAD

This civil appeal filed by the assessee is directed against judgment and order dated 22.9.2006 in ITA No. 164/04 by the Delhi High Court. By the impugned judgment, confirming the decision of the Tribunal, the High Court has held that the appellant (assessee) is not entitled to claim depreciation under Section 32(1)(ii) of the Income-tax Act, 1961 (“1961 Act” for short) in respect of two separate transactions dated 15.2.1991 and 15.3.1991. The impugned

Before coming to the facts, the following is the relationship between the parties: - M/s Glass & Ceramic Decorators was the manufacturer of soft drink bottles. - Assessee was the ‘lessor’. - M/s Coolade Beverages Pvt. Ltd. was the ‘lessee’.

During the relevant assessment year, the assessee carried on the business of trading in lamination machines & binding and punching machines. In addition, it was also engaged in the leasing business. During the year in question, the assessee had bought 5,46,000 soft drink bottles from M/s Glass & Ceramic Decorators worth Rs. 19,54,953/-. The bottles were directly supplied to M/s Coolade Beverages Pvt. Ltd. (“M/s Coolade” for short) in terms of Lease dated 15.2.1991. Vide Assessment Order dated 28.3.1994, the AO found that M/s Coolade had received only 42,000 bottles out of the total of 2

At this stage, it may be noted that out of the total claim for depreciation of Rs. 1,80,30,489/- (in respect of both the transactions), as claimed by the assessee, the AO disallowed depreciation of Rs. 18,04,572/- in respect of the First Transaction and depreciation of Rs. 30,17,122 under the Second Transaction. In all, she disallowed depreciation of Rs. 48,21,694/- in the first round. In other words, the AO allowed depreciation in respect of both the transactions amounting to Rs. 1,32,08,795 as against the claim of Rs. 1,80,30,489/-. Findings:

In the case of Hukumchand Mills Ltd. v. CIT reported in (1967) 63 ITR 232 this Court has held that under Section 33(4) of the Income-tax Act, 1922 (equivalent to Section 254(1) of the 1961 Act), the Tribunal was not authorized to take back the benefit granted to the assessee by the AO. The Tribunal has no power to enhance the assessment. Applying the ratio of the said judgment to the present case, we are of the view that, in this case, the AO had granted depreciation in respect of 42,000 bottles out of the total number of bottles (5,46,000), by reason of the impugned judgment. That benefit 4

There is one more aspect which needs to be mentioned. According to the impugned judgments of the High Court and the Tribunal, the transaction dated 15.2.1991 was a financial transaction and not a lease. If depreciation is to be granted for 42,000 bottles under transaction dated 15.2.1991 then it cannot be said that 42,000 bottles came within the lease dated 15.2.1991 and the balance came within the so-called financial arrangement. In the circumstances, we hold that the benefit of depreciation given to the assessee by the AO in respect of 42,000 bottles out of 5,46,000 bottles cannot be withdrawn by the Department and to that extent alone the assessee succeeds in this civil appeal. Lastly, as stated above, in this case the CIT(A) had remitted the matter to the AO who on remand came to the conclusion that all 5,46,000 bottles stood sold before 31.3.1991. This finding of fact has become final. It has not been challenged. Hence, the Department has erred in disallowing depreciation of Rs. 18,04,572/-. 5

Before coming to the facts, the relationship of the parties, namely, stated: - Assessee was the ‘lessor’ - M/s Aravali Leasing Ltd. was the ‘lessee’ - M/s Unikol Bottlers Ltd. was the ‘sub-lessee’ - M/s Arizona Printers & Packers was the ‘manufacturer’ of the bottles

On 15.3.1991, lease was executed between the assessee as lessor and M/s Aravali Leasing as lessee whereas there was a sub- lease between M/s Aravali Leasing and M/s Unikol Bottlers dated 8.3.1991. The AO came to the conclusion that transaction dated 15.3.1991 was not proved. It was a sham. The reasons given by the AO were as follows. Firstly, none of the parties owed up the liability to pay transport charges though in terms of the lease the liability to pay transport charges was undertaken by M/s Aravali Leasing. Secondly, no evidence was brought on record as to who transported the bottles from the manufacturer, M/s Arizona Printers and Packers, 6

It was argued vehemently on behalf of the assessee that the findings given by the AO were perverse. It was urged that the transport charges were, in fact, paid by M/s Unikol Bottlers, who could not produce evidence as there was a lock-out/closure in its factory at the relevant time. According to the assessee, the evidence of the manufacturer, M/s Arizona Printers, clearly shows that bottles were manufactured before 31.3.1991 and they were delivered to M/s Unikol Bottlers directly by them. According to the said evidence of 7

We do not find any merit in the above arguments. In this case, we are concerned with the nature of transaction dated 15.3.1991. The question to be asked is - whether the assessee has proved the transaction dated 15.3.1991? The question of “appropriation” of the bottles to a particular contract is different from the concept relating to the nature of the transaction. In this case, the tell-tale circumstance against the assessee was that sub-lease is dated 8.3.1991. It is between M/s Aravali Leasing (lessee) and M/s Unikol Bottlers (sub- lessee). This sub-lease precedes the lease dated 15.3.1991 between the assessee (lessor) and M/s Aravali Leasing (lessee). As rightly questioned by the AO as to how M/s Aravali Leasing (lessee) could have entered into a sub-lease in favour of M/s Unikol bottlers on 8.3.1991 when it had not acquired leasehold rights till 15.3.1991 from the assessee as the lessor. Moreover, there is nothing in the alleged lease deed dated 15.3.1991 indicating commencement of the lease from a prior date. There is nothing in the so-called lease dated 15.3.1991 as to the arrangement between the parties prior to 9

1991. There is nothing in the so-called lease dated 15.3.1991 indicating any prior practice as submitted on behalf of assessee. On the contrary, the so-called lease dated 15.3.1991 recites that it shall commence only from 15.3.1991. Moreover, under the sub-lease between M/s Aravali Leasing and M/s Unikol Bottlers it is stated that M/s Aravali Leasing is the absolute owner of the bottles. Lastly, the so-called lease dated 15.3.1991 stipulated that the lessee, M/s Aravali Leasing, shall have no right, title or interest to create a sub-lease without the permission of the lessor. No such permission has been produced. For the aforestated reasons, we find no infirmity in the concurrent findings of fact recorded by the authorities below. We

Before concluding, we may mention that an alternative submission was advanced on behalf of the assessee in the context of the second transaction that, if the said transaction was a financial arrangement, as held by the Department, even then the assessee could be taxed only on Interest embedded in the amount of lease rentals 10

In conclusion, we delete the disallowance of depreciation of Rs. 18,04,572/- under the First Transaction but we disallow the depreciation of Rs. 30,17,122/- under the Second Transaction.

Accordingly, the civil appeal filed by the assessee is partly allowed with no order as to costs. 11