NARANGS INTERNATIONAL HOTELS P.LTD,MUMBAI vs. DCIT RG 1(2), MUMBAI

Per Shamim Yahya (AM) :- & 7549/Mum/2016 These are cross appeals by the assessee and Revenue arising out of the order of learned CIT(A) dated 21.12.2012 and pertaining to A.Y. 1994-95.

raised by the Revenue read as under :-

2. "Whether, on the facts and circumstances of the case and in Law, the Ld. CIT(A) has erred in partly allowing the appeal of the assessee by applying the decision of Hon'ble Apex Court in the case of Avasarala Technologies Ltd. (Civil Appeal No.2996 of 2O04) without bringing out the similarity of facts of that case with the present case and also without giving directions for inclusion of similar income of 18% of the value of asset in other years till the amount of cost of non-existent asset was returned back to the assessee?

3. The grounds of appeal raised in assessee’s appeal read as under :- 1. Validity of the Order:

(i) On the facts and in the circumstances and in law, the order dtd. 1.8.2016 passed by the Id. Commissioner of Income tax (Appeal) [CIT(A)j is abinitio void, illegal and bad in law insofar as it is passed in violation of the principles of natural justice.

(ii) The Id. CIT(A) erred in not giving any opportunity to the appellant to cross examine the lessees despite specific directions dtd. 6.10.2015 given by the CIT(A) in the present appellate proceedings to the A.O. to give "proper opportunity to cross examine the lessees" and the Id. CIT(A) further erred in ignoring his own specific requirement to comply with the law.(Reliance on H. R. Mehta v ACIT (Bom) of 2001 dtd. 30.6.2016).

2. The impugned order is also void and not sustainable in law insofar as the Id. CIT(A) erred in failing to appreciate that in the leasing agreements with Agrtiech Hatcheries, Patheja Forgings and Kedia Distilleries (a) assessee's case is that of operating lease as averted on affidavit before the Bombay High Court claiming absolute ownership in the leased equipments and for their repossession, (b) No new material was brought on record till the date of passing the appellate order under appeal on 1.8.2016 to contravert the findings of the Id. CIT(A) in the order dtd. 26.3.2002 who allowed the appeal and still the A.O. and the Id. CIT(A) made the orders based on the findings of the A.O. in the original assessment orders, which stood rejected in the order dated 26.3.2002, (c) after a lapse of 22 years, the assessee should not be placed upon the rack, and (d) the order is against the principles of "lex not cogit immpossibile" and "impossibilum nulla oblignto est".

The appellant submits that on this ground alone the order is a nullity and not sustainable in law.

3. Disallowance of depreciation on assets leased to Agritech Hatcheries & Food Ltd. i) The Id. CIT(A) erred in confirming the addition of Rs. 1,10,36,000/- made by the A.O. and thus disallowing depreciation on the leased equipments and holding the lease agreements as bogus. ii) The assessee's case is supported by the decision of the Supreme Court in the case of M/s Andaman Timber Industries vs. Com. of Central Excise, Kolkata-11, dtd. 2.9.2015. iii) The Id. CIT(A) erred in relying on the findings of the A.O. in the earlier orders dtd. 26.3.1997 and 30.3.2000 which were rejected by the Id. CIT(A) in the order dtd. 26.3.2002 and no new material was brought on record in the set aside assessment to take a different view from that of learned CIT(A). iv) The learned CIT(A) erred in failing to appreciate that :- a) the ITAT directed the A.O. to reconsider the transaction of leasing in the light of additional evidence affirmed on affidavits filed by the assessee in the Bombay High Court averting absolute ownership in the leased equipments and for their return to it, and the findings of the Id. CIT(A) in the order dated 26.3.2002 not disturbed; b) in the restored assessment, the A.O. did not bring any new material to disprove the claim of depreciation, earlier allowed by the Id. CIT(A), and the assessee having averted on affidavit absolute ownership and prayed for re-possession of the leased equipments in the High Court, the A.O. ought to have followed the CIT(A) order; c) the reliance on the order of ITAT, SMC Bench Mumbai in Shree Anand Impex Pvt. Ltd. is misplaced, wherein there is no reference of the appellant. The appellant did not rely on it as incorrectly recorded; d) the assessee's claim of depreciation in the case of operating lease and the reliance of the Id. CIT(A) on the decision in the case of Avasaria Technologies Ltd. is erroneous.

4. Disallowance of depreciation on the assets leased to Patheja Forgings & Auto Parts Mfg. Ltd. i) The Id. CIT(A) erred in confirming the addition of Rs. 1,99,93,250/- made by the A.O. for the grounds taken in the case of Agritech, and disallowing depreciation on the leased equipments also by holding that the transaction is a mere financial one. ii) The Id. CIT(A) failed to appreciate that the appellant filed additional evidence in the Bombay High Court duly affirmed averting absolute ownership and praying for return of the leased equipments, and the A.O. not having brought any evidence to disprove the claim of depreciation, ought to have followed the order of the CIT(A) dated 26.3.2002 in earlier appellate proceedings. iii) The assessee's claim of depreciation is on the basis of operating lease and the reliance of the Id. CIT(A) on the decision in the case of Avasaral Technologies Ltd. is erroneous.

5. Disallowance of depreciation on the assets leased to Kedia Distilleries Ltd. i) The Id. CIT(A) erred in confirming the addition of Rs. 1,51,50,000/- made by the A.O. for the grounds taken in the case of Agrtiech and disallowing depreciation on the leased equipments also by holding that the transaction is a mere financial one. ii) The Id. CIT(A) failed to appreciate that the appellant filed additional evidence in the Bombay High Court duly affirmed averting absolute ownership and praying for return of the leased equipments, and the A.O. failed to bring any evidence to disprove the claim of depreciation, he ought to have followed the earlier order of the CIT(A) dated 26.3.2002.

6. Disallowance of claim for deduction u/s 80HHC i) The Id. CIT(A) erred in not allowing a deduction u/s 80HHC of the profits attributable to the Company's export sales effected from the flight kitchens by supply of cooked food in bulk to various international airlines. ii) The appellant's claim of deduction u/s 80HHC, is supported by the order dtd. 27.8.2007 of the ITAT, Mumbai 'D' Bench in the case of Indian Hotels Co. Ltd., for A.Y. 1997-98 wherein the facts are identical.

7. Disallowance of claim for deduction u/s 80HHD: The Id. CIT(A) erred in not allowing a deduction u/s 80HHD of a sum of profits derived from the services rendered to foreign tourists by the appellant's hotels to which the appellant was entitled, and allowed in earlier years in accordance with law for which requisite audit report and audited accounts were filed during assessment proceedings.

8. Disallowance of claim u/s 80G: The Id. CIT(A) erred in not allowing a deduction of Rs. 1,33,000/- u/s. 80G on the donations given by the appellant to the approved charitable institutions.

9. Deduction of claim of lease expenses The Id. CIT(A) erred in disallowing Rs. 2,20,720/- out of lease expenses, insofar as the disallowance was made merely on surmises and conjectures.

The Id. CIT(A) erred in disallowing Rs. 1,30,310/- for depreciation on the Plant and Machinery at Aurangabad Hotel, each item costing less than Rs. 5,000/-.

4. Apropos ground No. 1 to 6 of Assessee’s appeal and the Revenue’s appeal.

The facts of the case are that in the previous year ended 31.3.1994 the appellant company besides hoteliering business, entered into leasing business and for that purchased certain equipments and leased out to 3 lessees viz. (1) Patfieja Foregings & Auto Parts Mfg. Ltd., (2) Kedia Distilleries Ltd., and (3) Agritech Hatcheries & Food Ltd. for which it entered into lease agreements. In terms of the lease agreements the appellant received cheques towards payments of the lease rentals in the year 31.3.1994 and for the balance received cheques over the period of the lease from the years ending 31.3.1994 to 31.3.1998. The summarized position is asunder:- Lessees Agreement dated Equipments leased Cost of equipment Lease rentals taxed and depreciation claimed - A.Y. 1994-95 Patheja 02.02.1994 Steel Bins 1,99,93,250 2,37,51,972 Forgings 25.03.1994 Drums, etc. 1,51,50,000 1,68,45,089 Kedia Distilleries 18.3.1994 Crates 1,10,36,000 1,27,13,472

Rs. 4,61,79,250 5,33,10,533 ---------------- --------------- Agritech Hatcheries

6. The assessee having title in the equipments as the owner was eligible for depreciation @ 100% of the cost u/s 32((i)(ii) First proviso (deleted w.e.f. from 1.4.1996) leased out as the cost of each item was less than Rs. 5,000/-. The assessee filed its return of total income on 30.11.1994 declaring loss of Rs. 83,46,669/-.The original assessment was made u/s 143(3) vide order dtd. 26.3.1997, wherein the A.O. disallowed depreciation on the leased equipments by holding that the lease agreements were only paper agreements without any underlying assets by referring to statements of third parties. Without giving any opportunity to the assessee for cross examination of the lessees in spite of requests. The A.O. in order dated 26.3.1997 on one hand disallowed depreciation of Rs. 4,61,79,250/- and at the same time treated lease rentals amounting to Rs. 5,33,10,533/- as taxable income over the period of lease. In the appeal filed by the assessee, the CIT(A) set-aside the assessment order dated 26.3.1997 by holding in the order dtd. 6.10.1997 (para 17) as under:- "17. I agree with the appellant's contention that a go by of the rule of natural justice cannot result into an assessment which is valid and fair in the eye of law. In the interest of justice and fair-play, I have to set aside the assessment, directing the A.O. to reframe the same after granting necessary opportunities and after fully implying the provisions enshrined in the rule of natural justice."

8. The Department as well as the assessee filed appeals against the order of the CIT(A) in ITAT. The 1TAT Bench, Mumbai vide order dtd. 2.8.2006 disposed off the cross appeal and admitted the additional evidence affirmed affidavits by the assessee (para (iv) and (v) of the order), by holding as under:-

"(iv) Certain court proceedings to show that the assessee is persuing the matter of recovery of lease rentals due under the lease agreements with Kedia Dist., Agritech Hatcheries and Patheja Forgings.

(v) Notice of Motion taken before the Bombay High Court for repossession of the leased equipments from Kedia Dist; Agritech Hatcheries; and Patheja Forgings.

And passed the order as under (para 9] "9. AII these grounds pertain to leasing transactions and disallowance of depreciation on the assets leased. We have already admitted evidence, which is relevant for deciding these issues and therefore, the same are restored back to the Assessing Officer with the direction that the relevant leasing transactions may be reconsidered in the light of the additional evidences filed by the assessee and after allowing adequate opportunity to the assessee."

9. The A.O. to give effect to the directions of the ITAT made the order dtd. 27.9.2007, without issuing any summon to the lessees and again disallowed depreciation of Rs. 4,61,79,250/- without bringing any new material on record to take a different view from the findings of the CIT(A) given in the order dated 26.3.2002, on the basis of which the CIT[A) had allowed depreciation. The A.O. did note that the 3 lessees which were public limited companies were already in liquidation in the proceedings before the Bombay High Court, at the relevant time when the impugned order was made by the A.O. on 27.9.2007, and the lessee companies did not exist in law, and the Court Receiver was already in possession of the leased equipments. For re-possession of the leased equipments, the assessee as the absolute owner took out three Notices of Motion dtd. 23.11.2005 duly affirmed on Affidavit and filed before the Bombay High Court during the proceedings. In view of the 3 lessee companies being wound up and not existing in law, a situation had arisen where it was impossible for further compliances.

10. Against the above order of the Assessing Officer, the assessee was in appeal before learned CIT(A). As regards the assessee’s challenge to the validity of the assessment learned CIT(A) noted the submissions of the assessee’s counsel as under :- “The Authorised Representative submitted that the appeal related to the year 1994 i.e. 22 years old during which period assessment orders have been made 3 times dated 26.3.1997, 30.3.2000 and 27.9.2007. He further submitted that the appellant entered into lease agreements in the previous year ended 31.3.1994 with (1) Patheja Forgings, (2) Kedia Distilleries, (3) Agritech Hatcheries all Public Ltd. Co. which companies have since then been taken in liquidation in the proceedings before the Bombay High Court and Court Receiver has taken possession of the leased equipments and the lessees do not exist in law. He further submitted that the original assessment order was set aside by the CIT(A) as the A.O. did not issue summons to the parties for cross examination by the appellant. During the second assessment proceedings the A.O. issued summons u/s 131 to the 3 lessees, which were duly served which were fully complied with and the lessees also appeared before the Courts in the proceedings taken out by the appellant and confirmed the lease transactions, existence of the leased equipments and agreed to return the leased equipments to the appellant, but inspite of requests by the appellant, no opportunity for cross examination was given by the A.O. as required in law. The Authorised Representative further submitted that the A.O.'s failure to given an opportunity to the appellant was against the principles of natural justice insofar as no inference can be drawn against the assessee without following due process of law and thus the order is void, ab-initio. Further, in view of the assessment being 22 years old and a situation had arisen where it was impossible for further compliance with the provisions of law, the impugned order was ab- initio, void, illegal and bad in law. It was further submitted that this view was supported by the orders dated 6.10.1997 and 26.3.2002 of the first appellate authority. He referred to Para 17 of the order of the CIT(A) dated 6.10.1997, reading as under:

"17.1 agree with the appellant's contention that a go by of the rule of natural justice cannot result into an assessment which is valid and fair in the eye of law. In the interest of justice and fair-play, I have to set aside the assessment, directing the A.O. to reframe the same after granting necessary opportunities and after fully implying the provisions enshrined in the rule of natural justice.

The Authorised Representative further submitted that the above proposition of law was fully supported by the decisions of the Courts and were rightly applied by the first appellate authority, and that the appellant's case is fully supported by the decisions of the Supreme Court in the case in 45 ITR 206(SC), 49 ITR 112(SC) and 159 ITR 78(SC). The appellant therefore, submitted that the Asstt. Order is ab-initio, void and illegal and is liable to be cancelled”.

"4.4 Therefore, failure on the part of the A.O. to follow the directions on a few amongst several of appeal cannot make the entire assessment void ab-initio. This ground of appeal is therefore dismissed”.

12. As regards challenge of the assessee to the decision of depreciation on the assets leased to Agritech Hatcheries and Foods Ltd., Patheja Forgings & Auto Parts Mfg. Ltd. and Kedia Distilleries Ltd., learned CIT(A) elaborately noted the submissions of the assessee.

13. Learned CIT(A) rejected the assessee’s submission that there is failure of the principle of natural justice in as much as assessee has not been given adequate opportunity for cross examination of the lessees. Learned CIT(A) in this regard noted as under :- 8.1 I have considered the submissions made by the Authorised Representative. I find that in the previous year ended 31.3.1994 the appellant had purchased equipments the value of each item was below Rs. 5,000/- and claimed depreciation at 100% of the equipments costing Rs. 4,61,79,350/- and leased them to the three lessees viz. 1) Agritech Hatcheries, 2) Patheja Forgings and 3) Kedia Distilleries. It is seen that the assessment relates to previous year ended 31.3.1994, i.e. 22 years old. The appellant repeatedly argues that no cross examination was allowed during the course of assessment. Further, Hon’ble ITAT also vide its order dated 02/08/2006 directed the AO to give necessary opportunity to the appellant after considering evidences filed before the Hon'ble Bombay High Court and do the assessment afresh. The Ld. AO has reported in the assessment order that necessary summons were issued to the lessee however no one has responded.

As directed by the Hon'ble ITAT, a letter dated 06.10.2015 was issued to the concerned AO ACIT 1(2) that the appellant company pleads that the principle of natural justice has not been followed and adequate opportunity for cross examination of lessees M/s Patheja Forgings, Kedia Distilleries and Agritech Hatcheries. Accordingly, directed the AO to issue necessary summons to the lessees to carry out necessary enquiry and give opportunity for cross examination of the lessees. In response to the above letter, the DCIT 1(2J(2) vide his letter dated 25/07/2016 filed a copy of the letter addressed to the AO ACIT 1(2) by the appellant company expressing its inability to trace the lessees since 22 years has already been passed and lessees may not be available in the old addresses. The relevant portion is as under :-

"5. You will also please appreciate that the above lessees may now not be available at their old addresses as the matter relates to the period past over 22 years and now are not concerned with the lease transaction as presently the Bombay High Court is in seized of the matters, besides the fact that lessee No.l is in liquidation, lessee No.2 is absconding and police warrants are issued by the Bombay Police for the arrest of the Mg. Director of Patheja and lessee No.3 has settled the assessee's claim by making payments towards arrears of lease rental by confirming the lease transaction as genuine and the existence of the leased equipments."

So as per the direction of Hon'ble ITAT, efforts were made to give proper opportunity to the appellant for cross examination of lessees and it is a known fact that this is a case pending for more than 22 years but no fruitful result is going to come. Accordingly, the appeal is decided on the basis of material available on record.

9.3 Considering the above fact on record, modus operandi of the appellant company which is in the business of Hotelering and I am of considered opinion that the appellant company entered into the financial transaction with Agritech Hatcheries Foods P.Ltd. (AHFL) and thereby earned interest income and therefore whatever income offered by the appellant company in this transaction is very well be treated as income from other sources i.e. Interest income. Respectfully following the Hon'ble Supreme Court decision given in the case of Avasaral Technologies Ltd. 2996/2004 dtd. 30.03.2015, the interest income @ 18% on the cost of machinery treating it as income and therefore respectfully relying on the Hon'ble Supreme Court's decision in cited above. I direct the AO to assess 18% interest on cost of machinery which was passed to Patheja group in the form of finance.

Considering the Hon'ble Supreme Court decision in the case of Avasaral Technologies Ltd. [2996/2004 {SC} dtd. 30.03.2015], I am constrained not to give full relief. The jurisdictional Hon'ble 1TAT SMC Bench 1TA No. 3139/Mum/2002 dated 29.11.2004 and 14.12.2005 has given ruling in favour of the appellant company.

Lease Transaction of M/s. Patheja Forgings & Auto Spareparts Ltd. 17. Learned CIT(A) in this regard referred to the findings of the Assessing Officer as under :- "Investigations carried out by various departmental authorities have shown that a large number of lease transactions shown to have entered into by M/s Patheja Forgings are fictitious lease, as there were no assets in existence."

"Enquiries carried out by Inspectors at the addresses given in respect of Prudent Auto Accessories and M/s Kayson Engineers revealed that no such concerns were ever available at those addresses. Further enquiries could not get any clue as to the whereabouts of the companies. Similarly the address given of the third concern M/s Apex Indl. Casting Pvt. Ltd. was actually found to be the main office address of M/s Patheja Forgings. Bank statement of M/s Prudent and M/s Kaysons Engineers had been obtained by the Assessing Officers by tracing out the cheques issued by the assessees. These statements showed that the accounts were operated by Shri Paranjitsingh Patheja who was a authorized signatory and also Director of M/s Patheja Forgings. A survey u/s 133A had been carried out on 18.10.95 through the investigation wing at Pune in the case of M/s Pathena Forgings. It was found at the time of survey that there were only about 59000 Bins available at the premises.

At the same time credits in the Bank a/c of M/s Prudent and M/s Kaysons during the F.Y. 93-94 and upto 18.10.95 are found to be about Rs 4O Crores. It has been stated by Shri Paramjitsingh Patheja in a letter to the CBDT Group and had shown to have been sold M.S. Bins to various parties which were in turn leased out to M/s Patheja Forgings." With the above findings, the AO came to the following conclusion :-

(a) The concerns M/s Apex Indl. Casting P. Ltd., M/s Kaysons Engineers and M/s Prudent Auto Accessories which are shown to be companies of Patheja group did not ever carry out any business activities. In fact the companies were not found to be in existence at the addresses given.

(b)No evidence in the form of transport receipts etc. which could prove the physical existence of the assets has been furnished by the assessee in spite of repeated opportunities.

(c) No evidence of actual payments made for purchase of the assets has been furnished by the assessee. On the contrary the bank statements of M/s Prudent and M/s Kaysons Engineers do not show any credits of amounts which are stated to have been paid by the assessee to these concerns;

(d) The number of Bins actually found during the course survey in the case of Patheja Forgings was much less than the total quantity of Bins shown to have been sold during the relevant period by M/s Prudent Auto Accessories P. Ltd. and M/s Kaysons Engineers.

In view of the above evidence, it is clear that 4215 M.S. Bins shown to have been purchased by the assessee from three companies were actually never purchased and no such assets were in existence and consequently the lease transition done with M/s Patheja Forgings is a paper transaction. The purpose of lease transaction is obviously to allow Patheja Forgings to avail of working capital finance and enable the asseessee to reduce its taxable income by claiming 100% depreciation.

Accordingly, the depreciation of Rs. 1,99,93,250/-claimed in respect of the alleged lease transaction with M/s Patheja Forgings is disallowed."

In the case of Patheja Forgings & Auto Part P. Ltd. Summary Suit filed before the Hon'bJe High Court Mumbai vide Summary Suit No. 5803 of 1998 dated 30.11.1998 wherein the plaintiff Narang International Hotels P. Ltd. i.e. the appellant claimed principle sum of Rs.27,58,662/- alongwith interest in the sum of Rs.3,58,040/- from defendant Patheja Forgings & Auto Part P. Ltd clearly indicates the financial transaction and not lease transactions.

"9. The Plaintiff submit that the Defendant have no defence to the suit and the Defendants are liable to pay to the Plaintiff the Principle sum of Rs.27,58,662/- alongwith interest in the sum of Rs.3,58f040/- in terms of particulars of claim Exhibit "J" and the consent terms dated 5.12.1997. The plaintiff therefore submits that this Hon'ble Court be pleased to order and decree the defendants to pay to the plaintiff the aforesaid principle sum of Rs.27,58,662/- alongwith accrued interest in the sum of Rs.3,58,040/- alongwith further interest @ 12% p.a. from the date of filing of the suit till payment and or realization."

9.6 Considering the prayer of the appellant company not to assess the leased income offered by it when depreciation denied to them, as per ratio followed in the case of Shree Anand Impex Pvt Ltd. [ITA No. 3139/Mum/2002 dated 29.11.2004 and 14.12.2005] not been considered for the following reason :-

As cited above the Hon'ble Supreme Court in the case of Avasaral Technologies Ltd. [2996/2004 (SC) dtd. 30.03.2015] treated 18% of the cost of machinery treated as interest income for assessment purpose, I am constrained to give part relief to the appellant and therefore this ground of appeal is partly allowed.

Lease transaction with Kedia Distrilleries Ltd.

Copies of letters 10.10.96 and 28.11.96 from M/s KDL and M/s KCDIL addressed to the department were furnished alongwith the letter and in these letters the Kedia group had not only explained the modus operand/, but also specifically mentioned this particular transaction with the assessee as one of the fictitious lease transaction And further the AR of the appellant reiterated the argument that assets were purchased from Kedia Castle & Delleon Industries Ltd, and the lessessee have confirmed that the assets were in existence and no further evidences was furnished by the assessee.

In the light of the above, the AO came to the following conclusion (a) The assessee has shown to have purchased various items costing Rs.1.51 Croresfrom M/s Kedia Castle Delleon Inds. Ltd. on 25.03.94; (b) The assessee has shown to have leased out these assets to M/s Kedia Distilleries Ltd. by an agreement of the same date; (c) Both M/s KDL and M/s KCDIL have submitted written confessions to the Investigation Wing of the Department stating that they had entered into and had arranged various fictitious lease transactions in order to obtain working capital. The relevant transaction was one of the transactions specifically mentioned by the Kedia Group in these confessions; (d) No evidence to prove physical existence of the assets has been furnished by the assessee.

In view of the above, it is clear that the said lease agreement dt 25.03.94 is only a paper agreement without any underlying assets."

With regard to the ground no. 7 , the argument of the appellant is that when the assets are not accepted to be existing one, lease income thereon also cannot be acceptable, The argument of the AR of the appellant is not found to be sound for the following reasons :-

The appellant company had filed summary suits before the Hon'ble High Court, Mumbai as under:

In the case of Kedia Distilleries, the Summary Suit filed before the Hon'ble High Court Mumbai vide Summary Suit No. 5778 of 1998 dated 01.12.1998 between the Kedia Distilleries Ltd. and the plaintiff Narang International Hotels P. Ltd. i.e. the appellant claimed principle sum of Rs. 61,28,625/- alongwith interest in the sum of Rs. 32,51,279/- from defendant Kedia Distilleries clearly indicates the financial transaction and not lease transactions.

"14. The Plaintiff submit that the Defendant have no defence to the suit and the Defendants are liable to pay to the Plaintiff the Principle sum of Rs.61,28,625/- alongwith interest in the sum of Rs.32,51,279.59 in terms of particulars of claim Exhibit "E". The plaintiff therefore submits that this Hon'ble Court be pleased to order and decree the defendants to pay to the plaintiff the aforesaid principle sum of Rs.61,28,625/- alongwith accured interest in the sum of Rs32,51,279,59 alongwith further interest @ 24% p.a. from the date of filing of the suit till payment and or realization."

9.9 Considering the prayer of the appellant company not to assess the leased income offered by it with depreciation denied to them, as per ratio followed in the case of Shree Anand Impex Pvt. Ltd. [ITA No. 3139/Mum/2002 dated 29.11.2004 and 14.12.2005] not been considered for the following reason :

As cited above the Hon'ble Supreme Court in the case of Avasaral Technologies Ltd. [2996/2004 (SC) dtd. 30.03.2015] treated 18% of the cost of machinery treated as interest income for assessment purpose, I am constrained to give part relief to the appellant and therefore this ground of appeal is partly allowed.

i. Assuming the Revenue can rely upon the statement of these 3 parties then it is respectfully submitted that these parties cannot be reliable witness for the purpose of making disallowance of depreciation because these very parties as stated above have admitted existence of assets before the High Court. Reliance is placed on the decision of the Calcutta High Court reported in 210 ITR 103 and Madras High Court reported in 315 ITR 105 wherein such witnesses who shift their stand have been held to be not reliable witnesses for making addition. j. It is submitted that there is no allegation that the assessee received anything more than lease rentals of Rs.5.33 cr from lessee's. Further the rate of 18% taken by CIT(A) is only a notional percentage. Thus, even if the transaction is assumed as finance transaction then also the total amount received from lessee i.e. principle plus interest aggregates to Rs.5.33 cr only. If one does the analysis of the tax effect by accepting the transaction as genuine lease transaction and by treating the said transaction as a finance transaction, it will be evident that there is no gain on account of tax which the assessee has availed by entering into the so-called alleged transaction. This is proved by the statement attached herewith and even on this account the case of the Revenue falls to ground.

10. With respect to the claim under section 80HHD is concerned the AO has discussed this issue at page 9 of his order and CIT(A) at Page 43 of his order. The CIT(A) has directed the AO to allow deduction u/s 80HHD provided the appellant has created the reserve as stipulated u/s 80HHD(l)(b)(ii). The assessee submits that the AO has not given any effect to the said finding. It is further submitted that the CIT(A) erred in invoking section 80HHD(l)(b) for deciding this issued. It is submitted that section 80HHD(l)(b) is in addition to quantum arrived at 80HHD(l)(a). It is the case of the assesse that in so far as 80HHD(l)(a) is concerned there is no requirement of creating a reserve but the deduction is calculated at 80% of the profit derived from services provided to foreign tourist. It is, therefore, submitted that the appropriate direction is given to the AO to grant deduction u/s 80HHD of the Act to the Appellant.

However Sec. 80HHD provides that an assessee is entitled to the deduction u/s 80HHD equivalent to 50% of the profits computed u/s 80HHD even without creating the reserve. It was submitted that on the basis of the Chartered Accountant's Certificate dated 29.6.2005 (Pg. 123-124) filed before the ITAT which was admitted by the ITAT in the order 2.8.2006 as evidence in support of the claim, the appellant was entitled to the deduction of Rs. 68,06,067/- u/s 80HHD if reserve to that extent was created, and upto 50% thereof, without creating such a Reserve. In support of the claim for deduction u/s 80HHD, the appellant filed alongwith the letter dated 4.12.2008 to CIT(A) Auditors' Certificate u/s 80HHD dated 29.6.2005 and copies of approval letters dated 26.2.1990 from the Govt. of India, Dept. of Tourism (Hotel & Restaurant Division), New Delhi certifying that the three hotels viz. The Ambassador Bombay, Hotel Ajanta Ambassador Aurangabad and Hotel Ambassador Pallava, Madras have been on the approval list of the Department of Tourism w.e.f. 20.3.1989 in relation to Sec. 80HHD of the I.T. Act 1961.

11.2 The AO has denied 80HHD deduction precisely, the appellant has not created any Reserve whereas the AR of the appellant argues that as the company incurred loss and hence it has not created any Reserve and in the event disallowing the depreciation claimed by the appellant, the loss become income and accordingly it can create Reserve. So considering the AR of the appellant's argument, I am of the considered opinion that the AO is directed to allow such deduction u/s. 80HHD provided the appellant has created Reserve as stipulated in section 80HHD(l)(B)(ii), hence for statistical purpose, it is allowed.

read as under:- “On the facts and in law: Gr. No.

1. Validity of assessment u/s 154 The impugned order is ab-initio, null, void and bad in law, insofar as it does not conform to the directions of the Hon'ble ITAT.

Gr. No. 2. Addition of Rs. 15,54,449/- resulting into taxing the same amount twice:

The Id. CIT(A) erred in not deleting Rs. 15,54,4497- for receipt taken credit for lease rental, in the event depreciation on the leased asset is not allowable. Gr. No.

3. Levy of interest u/s 220(2) i) The Id. CIT(A) erred in not deleting interest levied u/s 220(2), insofar as interest u/s 220(2) is not leviable in a set-aside assessment and in not following the decision of the Supreme Court in the case of Vikrant Tyres Ltd. (2001) 247 ITR 821 (SC). ii) Without prejudice to the above, the appellant submits that in the absence of directions by the A.O. in the order dated 27.9.2007 to levy interest u/s 220(2) sought to be rectified, it is not capable of being rectified u/s 154 of the Act, now levying interest u/s 220(2), being a debatable issue. Gr. No.

4. Levy of interest u/s 234D: The Id. CIT(A) erred in not directing the A.O. to delete interest levied u/s 234D insofar as Sec. 234D does not apply to an assessments made for years prior to A.Y. 2004-05.

2. With respect to Ground No.1 and 2, the assessee submits that the AO after having held that the assessee is not entitled to the depreciation on the assets leased then the AO cannot tax the lease rental of Rs.15,54,449/-. This would amount to double taxation once by disallowing the depreciation and again by taxing the lease rental.

Order has been pronounced in the Court on 27.8.2019.