THE ACIT CIR 3(2), MUMBAI vs. M/S. KOTAK MAHINDRA FINANACE LTD., MUMBAI

This appeal has been filed by the revenue against the order dated 30/03/2005 passed by the Ld. Commissioner of Income Tax (Appeals)-III, Mumbai, for the assessment year 1995-96, whereby the Ld. CIT (A) has allowed the appeal filed by the assessee against assessment order passed u/s 143 (3) read with section 147 of the Income Tax Act, 1961 (for short ‘the Act’) and deleted the addition made on account of disallowance of depreciation on leased assets.

Brief facts of the case are that the assessee company filed its return of income for the assessment year 1995-96 declaring the total income of Rs. 4.48 crores. The assessment was completed u/s 143 (3) determining the total income at Rs. 10.13 crore. AO also passed assessment order giving effect to the CIT (A) order determining the total; income of the assessee at Rs. 13.14 crore. Subsequently, on the basis of investigation report of DDIT (Inv.), Unit-II, Kanpur, the AO reopened the assessment after issuing notice u/s 148 of the 2 Assessment Year: 1995-96 Act. In response thereof the assessee filed the return. During the course of reassessment proceedings, the appellant submitted the details called for. The AO also issued show cause notice seeking justification for allowing 100% depreciation in respect of assets given on lease to Prakash Industries Ltd. In response to the show cause notice, the assessee submitted copy of invoice-cum delivery challan, transporter receipts, material inward note, insurance policy, put to use certificates and other correspondence with Prakash Industries Ltd. and also furnished copy of site inspection report along with the written submissions. After going through the submissions in the light of the documents submitted by the assessee, the AO disallowed depreciation claimed by the assessee holding the lease rent transaction bogus.

Aggrieved by the assessment order, the assessee carried the matter to the CIT (A) in first appeal. The assessee challenged the assessment order inter alia on the grounds that the re-opening of assessment is bad in law and the AO has wrongly disallowed the depreciation on lease assets. The Ld. CIT (A) after hearing the assessee justified the action of the AO in reopening of the case, however, allowed the second ground of appeal and held that the assessee is entitled to depreciation of Rs. 3,00,59,875/- . The revenue is in appeal against the said order passed by the Ld. CIT (A) on the following effective ground:

On the other hand, the Ld. counsel for the assessee relying on the order passed by the Ld. CIT (A) submitted that there is no merit in the appeal of the revenue as the findings of the Ld. CIT (A) are based on the evidence on record and in accordance with the established principles of law. The Ld. Counsel contended that concerned official/officials of Prakash Industries approach the assessee company at Delhi office for taking certain assets on lease for their plant at Champa, Distt. Bilaspur, Madhya Pradesh. The said officials informed the assessee that they have selected M/s Pioneer Engineering Company, Jamshedpur for supply of Electro Static Precipitator System and Dust Collector System. Accordingly, the assessee company entered into a lease agreement with Prakash Industries in September, 1994. As per the terms of agreement, Prakash Industries requested for payment of Rs. 2,53,91,250/- in favour of the supplier Pioneer Engineering Company in the month of September. Accordingly, the assessee issued the Demand Draft of the said amount in the favour of Pioneer Engineering and sent to Prakash Industries. Prakash Industries sent put to use certificate in the month of October. Similarly, in the month of August a letter was sent from Delhi office by the assessee to Mumbai office with the request to sent proposed lease agreement for leasing Pollution Control System. The assessee issued a Demand Drat of Rs. 93,37,250/0 in favour of Pioneer Engineering company and same was sent to Prakash Industries. The assessee received put to use certificate. The concerned officials of the assessee visited the site of Prakash Industries Ltd. in the month of April, 4 Assessment Year: 1995-96 1996 and carried out a site inspection of the assets in the presence of the witnesses.

During the course of assessment proceedings, the requisite details were submitted by the assessee and after going through the same in the light of the contention of the assessee, assessment order was completed u/s 143 (3) in March, 1998. The assessee received show cause notice in the month of October, 1998. The Ld. counsel further submitted that the assessment was reopened on the ground that a search action was conducted in the month of March, 1998 in the case of Rajender Group of companies and various establishment of the group at Kanpur, Mumbai and Raipur and during the course of search it came to the notice the assessee entered into a fake lease transaction with M/s Rajender Group of companies in the F.Y. 1994-95 relevant to the assessment year under consideration in relation to the asset i.e. Forming Roll Stand Posting amounting to Rs. 4.96 crores and claimed depreciation @ 25% contrary to the report received from DDIT (Inv.) Unit-II, Kanpur, that leased machines were not found existing in the factory premises of Rajender Steel Ltd. and the machines found in the factory premises were shown as self owned by M/s Rajender Steel Ltd. in their records.

During the course of reassessment proceedings, the assessee submitted copy of lease agreement, invoice insurance cover note, installation certificate, annual audited accounts of Rajender Steel Ltd., arbitration proceedings between assessee and Rajender Steel Ltd., High Court order passed in Arbitration Petition No. 281 of 1998 and Court receiver order. The AO after going through the aforesaid documents accepted the contention of the assessee did not make any addition holding the transaction as genuine, however, issued show cause notice seeking justification for allowing 100% depreciation in respect of assets leased to Prakash Industries Ltd. and rejecting the submissions of the assessee disallowed the claim of the assessee holding that 5 Assessment Year: 1995-96 the same a sham transaction. In the light of the above facts, the Ld. counsel submitted that after having verified that the assets which were alleged to be not in existence were found to be in existence, the AO should have dropped the proceedings. Since, there was no mention of the other lease transaction in the notice issued u/s 148, the AO had no jurisdiction to enquire about the other lease transaction in reassessment proceedings. On merits, the Ld. Counsel submitted that since the complete details of the lease transactions were submitted by the assessee during the proceedings the Ld. CIT (A) has rightly deleted the addition made on account of disallowance of depreciation on lease assets in question. The Ld. counsel further invited our attention to the order dated 15.05.2009 rendered by the ITAT in filed by the lessor M/s Prakash Industries Ltd. against the order of the Ld. CIT(A) pertaining to the assessment year 1994-95. Vide the said the H Bench of ITAT Delhi has allowed the lease rent claimed by the assessee paid to different companies including Kotak Mahindra Finance Ltd. i.e., the assessee in the present case. In view of the aforesaid facts the Ld. counsel submitted that the there is no merit in the appeal of the revenue and the same is liable to be dismissed.

We have heard the rival submissions and also perused the material on record. The Ld. CIT (A) has decided the sole ground of the appeal in favour of the assessee, after going through the entire evidence on record. The operative part of the order of the Ld. CIT (A) reads as under:-

We notice that the Ld. CIT (A) has decided this issue in favour of the assessee on the basis of documentary evidence placed on record by the assessee during the initial assessment proceedings as well as during the reassessment proceedings. As pointed out by the Ld. CIT (A) the AO has based his findings on the facts that the lessee’s assessment had not reached finality and it was subject to physical verification of assets at the premises of Prakash Industries Ltd. at Champa, Madhya Pradesh. On the other hand, as per the copy of order dated 15.05.2009 rendered by the ITAT in the case of Prakash Industries Ltd. for the A.Y. 1995-96, Prakash Industries had filed appeal against the order of the CIT (Appeals), Rohtak against the action of AO in making disallowance of lease rent paid to various parties including the present assessee. M/s. Prakash Industries Ltd. had claimed to have paid lease rent of Rs. 16,80,705/- to the assessee i.e., Kotak Mahindra Finance Ltd. on Air Pollution Control Equipment, taken on lease. The ITAT Bench, Delhi after hearing the assessee in the light of the evidence on record 7 Assessment Year: 1995-96 allowed the total lease rent claimed. In the said case, the assessee has taken the plea that spot verification in respect of all the lease assets on the assessee premises had been carried out by the department and the assets were found on the spot. Similarly, the assessee has submitted the copy of order dated 24.09.2013 passed by the D Bench of the ITAT, New Delhi in department’s appeal in ITA No. 3036/Del/2010 for the A.Y. 1996-97 filed against the order of CIT (A), Rohtak passed in the appeal of the assessee M/s Prakash Industries Ltd. We notice that the ITAT has allowed the expenditure on account of lease rent paid by the assessee by following the decision of the Tribunal passed in assessee’s appeal for the A.Ys. 1993-94 and 1995-96. Once it is established that lessee M/s Prakash Industries Ltd had paid lease rent to the present assessee during the year relevant to the assessment year under consideration, there is no reason to decline the claim of depreciation on such assets. So, in our considered view, the Ld. CIT(A) has rightly deleted the addition in question holding that the assessee is entitled for depreciation on the assets in question. Hence, do not find any reason to interfere with the findings of the Ld. CIT (A). Accordingly, we uphold the decision of the Ld. CIT (A) and dismiss the sole ground of appeal of the revenue.