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Income Tax Appellate Tribunal, “E”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM
Date of Hearing : 13/01/2017 Date of Pronouncement : 21/03/2017 आदेश / O R D E R PER BENCH: These are the cross appeals filed by the assessee and revenue against the order of CIT(A) for the Assessment Years 1993-1994 to 2002-2003 in the matter of order passed under Section 143(3) read with section 254 of the I.T. Act as well as orders passed u/s.271(1)(c) of IT Act..
Similar grounds have been taken by the assessee and revenue in all the years which pertains to disallowance of claim of depreciation on sale and lease back transactions inspite of the fact that the assessee has satisfied the conditions laid down by Income Tax Appellate Tribunal, Special Bench in the case of Mideast Portfolio Management Limited.
3. Grounds taken by the assessee in the assessment year 1993-1994 (ITA No.1363/M/2006 reads as under:-
3 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) 1.1 The Learned Commissioner of Income Tax (Appeals) VIII, Mumbai hereinafter referred to as CIT(A) erred on facts and in law in confirming the disallowance of depreciation on all Sale and Lease Back transactions inspite of the fact that the assessee has satisfied the conditions laid down by the Hon'ble Income Tax Appellate Tribunal (SB) in the decision in the case of Mideast Portfolio Management Limited. 1.2 The Id. CIT(A) erred on facts and in law in confirming the disallowance of depreciation on all Sale and Lease Back transactions entered into in earlier years even tough the transaction were subject to assessment under section 143(3) and no disallowance was made in those orders. 1.3 The Id. CIT(A) erred on facts and in law in confirming the disallowance of depreciation on Motor Vehicles given on lease during the year. 1.4 The Id. CIT(A) erred on facts and in law in confirming the disallowance of depreciation on Plant and Machinery given on lease during the year.
2. The Id. CIT(A) failed to appreciate that the AO erred on facts and in law in passing the assessment order without giving sufficient and adequate opportunity to the appellant and therefore the said order being passed in violation of the principles of the natural justice is liable to be quashed or alternatively set aside.
All the above grounds of appeal
are without prejudice to one another.
4. The Appellant reserves the right to add, alter,amend and or delete any of the above grounds of appeal and craves leave of the same.
4. Rival contentions have been heard and record perused.
From the record we found that for the assessment year 1993-1994 the assessee company filed its return of income on 30/12/1999 declaring loss of Rs.19,23,508/-. The return was accompanied with audited balance sheet, profit and loss account and tax audit report. Assessment was completed u/S. 143(3)
4 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) r.w.s. 147 on 31-3-1999 determining the total income at Rs.2,40,85,573/-. The main reasons for enhancement of income was disallowance of depreciation on leased assets claimed by the assessee. The disallowances made by the AO were contested in the appeal by the assessee. The CIT(Appeals) XXXVII, Mumbai vide his order No. CIT(A)XXXIII/ST.19/IT/07/99-2000 dt. 26-2-2001 set- aside the assessment with the direction to reframe the assessment order with the specific directions. Accordingly, the order u/s. 143(3) r.w.s. 250 of the I.T. Act was passed on 26-3-2002 determining the total income of Rs.1,98,70,900/-. In the said assessment order the assessee was granted relief in respect of the capital recoveries amounting to Rs.42,15,675/- which was computed in accordance with the directions of the CIT(A) for assessee’s own case in A.Y.1997-98. The assessee preferred appeal against the said order and the appeal was dismissed by the CIT(Appeals) – VIII, Mumbai. Assessee aggrieved by the order of the CIT(Appeals)VIII, Mumbai, filed an appeal with the Tribunal. The Hon'ble Tribunal vide its order no. ITA NO. 4327/MUM/2003 dated 12·1- 2004 set-aside the order of CIT(Appeals) and sent back the matter to the assessing officer with the direction to examine the issue in light of the decision in the case of Mid East Portfolio Management Ltd by Hon'ble Special Bench, I.T.A.T., Mumbai 87 ITD 537.
In the assessment orders framed under Section 143(3) r.w.s 254 dated 29/03/2005 AO observed that the details submitted were perused and after
5 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) careful study and analysis of the paperbook furnished by the assessee which was also produced before the Hon'ble ITAT, the following facts were emerged which are discussed as under:
The pages 1 to 89 of the paperbook contain copies of lease agreement, copies of invoices, copies of installation certificates and copies of insurance papers etc. in respect of following parties.
1. Kedia Distilleries Ltd., 2. Western Pacgues India Ltd., 3. DCM Shriram Consolidated Ltd., 8. AO noticed that these transactions are basically in the nature of Sale and Lease-Back transaction, the depreciation on which were disallowed in the assessment order u/s. 143(3) r.w.s. 147 of the I.T. Act dated 31-03-1999. In the assessment so framed u/s.143(3) r.w.s.254, AO again disallowed assessee’s claim of depreciation which was confirmed by CIT(A) and assessee is in further appeal before us.
We have considered rival contentions and carefully gone through the orders of the authorities below and also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us.
6 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) 10. From the record, we found that for the A.Y/1993-94 the AO passed the assessment order dated 31.3.1999 under section 143(3) r.w.s. 147 of the Act against which the assessee filed an appeal with the CIT(A). The CIT(A) directed the AO to pass a fresh assessment order for reasons mentioned therein. The AO passed a fresh assessment order and the assessee again preferred an appeal with the CIT(A). Against the CIT(A) order, the assessee preferred an appeal with the Tribunal. The Tribunal by their order dated 12.01.2004 remitted the matter back to the AO with directions to re-do the assessment. The AO passed an order dated 29.03.2005 under section 143(3) r.w.s. 254 of the Act. Against the assessment order, the assessee preferred an appeal with the CIT(A). The CIT(A) gave partial relief. Against the order of the CIT(A), the assessee and the Department have filed an appeal with the Tribunal. These are the present appeals before the Tribunal. In the assessment so framed u/s.143(3) r.w.s 254, the AO had given relief of Rs.5,59,648/-. The sole issue in these appeals is disallowance of depreciation in case of normal lease transactions and sale and lease back transaction. Disallowance of depreciation - Rs 2,54,02,406 is summarised hereinbelow – Category Pertaining to No.of Parties Amount (Rs.) A Depreciation pertaining to parties 10 1,63,31,184 specifically dealt with by the AO B Depreciation pertaining to parties 11 64,52,104 to whom summons were issued but there was no response C C Depreciation pertaining to 37 31,68,566 parties for which no enquires were conducted by the AO Total 58 2,59,52,054 Less: Relief granted by the AO 5,49,648 as mentioned above Balance 2,54,02,406
In relation to assets leased to Western Pacgues India Limited (WPIL), we found that the AO has doubted the existence of the assets leased to WPIL and the genuineness of the lease transactions by placing reliance on the documents that have been collected in pursuance to a survey action conducted at the premises of WPIL and further, placing reliance on the statement of various persons recorded during the survey action. From the record we found that the above enquiries / documents have been obtained even prior to commencement of assessment proceedings in the case of the assessee. We also observe that the assessee has not been given copies of the above documents at any stage of the assessment or appellate proceedings, till date, though repeatedly requested for by the assessee time and again and inspite of specific directions given by the CIT(A) when he set aside the original assessment order. These inquires/ reports have till date not been made available to the assessee.
It was also brought to our notice that the above documents have been gathered behind the back of the assessee and the AO was duty bound to give
8 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) the material collected to the assessee for their rebuttal and! or cross examination; having not done so, the AO is precluded to use the material so gathered during the survey action at WPIL and hence, cannot draw adverse inference in the case of the assessee, on the principles of natural justice. This is because the assessee, in the absence of the survey report and various statements referred to by the AO, cannot make any submissions against those documents collected behind the back of the assessee. Thus, the impugned disallowance made by the AO in violation of the principles of natural justice is not sustainable in law.
Learned AR also brought to our notice that assessee has not been informed of the investigations and statements recorded during the course of survey action at WPIL and hence, the assessee could not have rebutted the reports and / or their findings and the assessee has also not been given an opportunity to cross examine the persons whose statement has been so recorded. This is in total violation of principles of natural justice.
For this purpose learned AR placed reliance on the following decisions:-
Kishinchand Chellaram 125 ITR 713 (SC) Andaman Timber Industries Civil Appeal No.4228 of 2006 – Supreme Court H.R. Mehta 72 taxmann.com 110 (Bom) Sahara India (Firm)300 ITR 403 (SC) 15. From the record, we also found that all the details in relation to the assets leased to Western Pacques India Limited are on the records of the AO. These
9 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) details include purchase invoice of the asset, lease agreement, bank statement in support of payment made for purchase of asset, supporting bills and vouchers and most importantly hypothecation agreement with the bank. It is on the basis of this hypothecation agreement that the assessee has availed loan from the bank. Moreover, from the perusal of the assessment order dated 31.03.1999, page nos 17 to 19 of the order, the AO himself mentions that during the course of survey and inquiries, two biogas plants were found to be installed out of 14 biogas plants taken on lease by WPIL from different companies - one in distillery unit and the other in paper unit. However, these two biogas plants were supplied by the assessee. The AO has not brought anything on record to prove that the 2 biogas plants found at the premises of WPIL do not belong to the assessee. In this scenario, the observation in the assessment order supports the fact that assets are found to be installed and cannot be treated as sham, consequently, denying the depreciation is on facts, erroneous and contrary to the material on record. However, without giving the evidence gathered behind the back of the assessee, how can the assessee rebut the contents of such evidences.
In relation to assets leased to Kedia Distilleries, we found that the AO has on the basis of the facts given below disallowed depreciation of Rs.9,27,764 on assets leased during the year. The AO issued summons under section 131 to Kedia group together with a detailed questionnaire. The summons has been returned unserved by postal authorities. There were search and seizure
10 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) operations carried out in the case of Kedia Group of companies on 23rd September, 1996. The search revealed that the group has entered into finance lease transactions with various banks, financial institutions and companies during the accounting years 1990-1991 to 1995-96. On the basis of statement of Managers of KDA Distilleries, AO declined assessee’s claim of depreciation. The allegation by the AO is that the assessee is a fictitious supplier and manufacturer without any basis and material on record. The existence of the assets leased to Kedia Distilleries is doubted by the AO by placing reliance on the documents collected during search action of the Kedia Group and admissions of persons of the group. The AO has not even named the person on whose statement he has relied on and has not given the same to the assessee for rebuttal, and the documents collected during search have also not been given to the assessee for, their comments and rebuttal. This is in gross violation of the principles of natural justice and the observation made by us for WPL squarely applies here.
We also found that all the details in relation to the assets leased to Kedia Distilleries are on the records of the AO. These details and documents include photo copy of lease agreement, invoices of the assets purchased which have been leased, details of payment, installation certificates, details of insurance, details of lease rent received, details of assets either having been received back or sold at the end of the lease term, valuation report, amongst other details.
11 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) 18. In view of the above disallowance of depreciation in respect of assets leased to KDS Distilleries is not sustainable.
In relation to assets leased to DCM Shriram Consolidated, we found that the assessee has during the year under reference entered into a sale and lease back agreement with DCM Shriram Consolidated for gas cylinders. The AO has on the basis of a letter dated 16.03.99 allegedly addressed to him by the lessee stating that they have claimed depreciation at the rate of 100% on the value of the gas cylinders, disallowed depreciation in the hands of the assessee. The AO however, has never given a copy of this letter to the assessee. The CIT(A) in para 64 on page nos 18 and 19, has upheld the disallowance of depreciation on the ground that the transaction is a sham.
From the record, we found that the assessee, contrary to the alleged letter, has furnished a certificate issued by the lessee which confirms that they have not claimed depreciation on the gas cylinders leased out to them. This certificate is with the AO which has been filed by the assessee, whereas the existence of the letter alleged by the AO is in doubt inasmuch as it has neither been given to the assessee nor attached to the assessment order. The CIT(A) also has not seen this letter. Thus, the impugned disallowance on the basis of non-existent non- verifiable letter is without any basis. The impugned disallowance by the AO is by placing reliance on the letter dated 16.03.99. The AO has not given the same to the assessee for rebuttal, or for their comments. This is in gross violation of the 12 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) principles of natural justice and hence the observation made by us hereinabove in case of WPL squarely applies to the case of DCM Shriram Consolidated. Further, the genuineness of the transaction has not been doubted by the AO to disallow the claim of the assessee. It is merely on the basis of the aforesaid alleged non-verified letter, which cannot be the basis of the impugned disallowance. We also found that the assessee has got the gas cylinders insured by a nationalised insurer namely, National Insurance Company Ltd, who has issued a policy no 350100/11/13, for Rs 34,76,000 which has been filed by the assessee with the AO during the course of original assessment proceedings. This policy document means two things, first, that the fair market value of the gas cylinders is Rs 34,76,000, as no insurance company will insure goods at a higher value, and second, the existence of the leased assets, though no lower authorities have doubted the existence of the assets for the impugned disallowance. In all fairness, we restore the matter back to the file of AO to again verify the certificates issued by lessee confirming that no depreciation is found that issue has not claimed any depreciation. Assessee should be allowed its claim of depreciation.
In relation to assets leased to Searsole Chemicals Ltd, we found that the Assessing Officer has not even discussed the plant and machinery leased to Searsole Chemicals Ltd in his assessment order under section 143(3) r.w.s 254 dated 29.03.2005.
13 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) 22. By the impugned order CIT(A) confirmed the disallowance by observing that assessee’s representative has not made any separate submissions in respect of sale and lease back arrangements it had with Searsole Chemicals Ltd., in respect of plant and machinery leased. We found that the above reasoning of the CIT(A) is baseless inasmuch as photo copy of the lease agreement between the assessee and Searsole Chemicals Ltd together with photo copy of supplementary lease schedule, rental schedule, invoice, payment vouchers, valuation certificate and insurance schedule have been furnished to the Assessing Officer as well as the CIT(A).
23.We also found that the assessee has filed with the AO and CIT(A) complete details in respect of lease transaction with Searsole Chemicals Limited which includes photo copy of lease agreement, invoices of the asset purchased which have been leased, details of payment, installation certificates, details of insurance, details of lease rent received, valuation report, amongst other details. Under these facts and circumstances matter cannot be restored back to the file of AO. We therefore direct the AO to delete the disallowance of depreciation.
In Category B, the AO has dealt with assets pertaining to parties to whom summons were issued but there was no response. In this regard, we found that the assessee has filed with the AO and CIT(A) complete details in respect of each lease transaction which includes photo copy of lease agreement, invoices of the assets purchased which have been leased, details of payment, installation
14 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) certificates, details of insurance, details of lease rent received, details of assets either having been received back or sold at the end of the lease term, valuation report, amongst other details. These details have been filed at the time of original assessment proceedings itself and have once again been filed with him pursuant to the directions of the Tribunal to the AO to examine the claim of the assessee afresh.
The AO on the basis of the details given by the assessee has issued summons to the parties and these summons have been served on the parties. Mere non-compliance by the parties has led the AO to disallow the claim of depreciation in respect of the said lessees. The fact that the summons has been served on the parties itself proves that the parties do exist. It is not a case that the parties do not exist at the given address and the summons have returned unserved. There could be many reasons for the parties to not respond to the summons, one of them being that they are already involved in a legal battle with the assessee and hence, may have chosen not to respond. If the summons were served, the AO could have taken other steps like, sent his Inspector at the given address for enquiries, or could have written to the AO of the lessees requiring them to respond to the summons.
In support of the proposition that merely because summons could not be served upon the same parties or they did not appear before the AO, the 15 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) transactions could not be held to be non-genuine. Reliance can be placed on the following judicial pronouncements.
D & H Enterprises 72 taxmann.com 91 (Guj) Crystal Networks (P) Ltd 353 ITR 171 (Cal) Creative World Telefilms Ltd 333 ITR 100 (Bom) 27. In respect of transactions with these parties regarding sale of lease back of assets, we found that complete details in respect of each lease transaction which includes photo copy of lease agreement, invoices of the assets purchased which have been leased, details of payment, installation certificates, details of insurance, details of lease rent received, details of assets either having been received back or sold at the end of the lease term, valuation report, amongst other details. Respective lease rentals have been received and offered by assessee as its income is very important point. We found that lease rent so collected and offered as income was more than the depreciation claimed by the assessee. It indicates that assessee has no reason to evade tax in so far as income shown on lease rent is more than the depreciation so claimed in respect of these sale and lease back transactions. We also verified the facts of leased assets and found that the leased assets have either been received back from lessee at the end of the lease period or sold to the lessee and the resultant income or loss has been incorporated in the profit and loss account of said period.
16 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) 28. In view of the above discussion, we do not find any merit in the disallowance of depreciation pertaining to parties in category B.
In category C, the AO has dealt with assessee’s claim of depreciation pertaining to parties for which no queries were conducted by the AO. The AO in these cases has disallowed the claim of depreciation without assigning any concrete reasons. The AO merely mentions that in light of the pattern emerging from the individual lease transactions C discussed earlier in above categories), the impugned category of lease is a finance lease and therefore, the claim of depreciation is disallowed.
After going through the lease agreement we found that the lease are genuine lease on the basis that the assessee has filed with the AO and CIT(A) complete details in respect of each lease transaction which includes photo copy of lease agreement, invoices of the assets purchased which have been leased, details of payment, installation certificates, details of insurance, details of lease rent received, details of assets either having been received back or sold at the end of the lease term, valuation report, amongst other details. The depreciation in respect of this category transactions pertain to assets that have been purchased and leased in the earlier years, that is, the disallowance is not in respect of the assets that have been purchased/ given on lease during the previous year ended on 31st March, 1993. The AO for income-tax assessment year 1992-93 passed the assessment order dated 22.02.1995 under section 143(3) wherein the entire
17 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) claim of depreciation on these assets has been allowed by him. Thus, once the AO has applied his mind and allowed depreciation on the assets leased, then, in the subsequent year, the AO is obliged to allow depreciation on such assets, and cannot take a different view, without bringing any adverse material on record that would suggest otherwise of the assets acquired in the earlier year(s). Reliance in this respect is placed on the decision of the jurisdictional High Court in the case of Paul Brothers, wherein the High Court has held that " unless the relief granted for the assessment year 1980-81 was withdrawn, the ITO could not have withheld the relief for the subsequent years. Gujarat High Court decision in the case of Saurashtra Cement & Chemical Industries Ltd v. ClT (1980)123 ITR 669 also supports the case of assessee
With respect to the assets given on lease and returning back to the assessee and again given on lease depreciation is required to be allowed once the assets purchased in the earlier year have entered the block of assets, and depreciation in respect of such assets has been allowed in that year, depreciation in respect of such assets is necessarily to be allowed for the subsequent year that is, the year under reference. If the AO wants to take another view and disallow depreciation, then he has necessarily to reopen the assessment of the earlier year to disallow the depreciation and then and then only, can disallow depreciation in the year under reference; this has not been done by the AO, even though it was open to him to do so while passing the assessment order on 18 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) 31.3.1999. The fact that he has not reopened the assessment of the immediately preceding year to disallow depreciation, suggests that the AO accepts the genuineness of the transaction and the existence of the leased asset. Thus, the view taken by the AO to disallow the depreciation for the year under reference is not consistent with the view taken by him in the immediately preceding previous year, and hence, not sustainable in law.
One of the allegations of the AO for decline of claim of depreciation is that it was a simple transaction of sale and not sale of lease back. In the case of sale and lease back transactions, the property in the asset(s) is transferred by the seller to the assessee as the first limb of the transaction. This is clear from the invoice, valuation report and payment details. The purchase has been made on the basis of the price determined on the basis of a valuation report of approved valuer.
We had carefully gone through the various sale and lease back transactions entered by the assessee and found that assessee has leased vehicles, plant and machinery, office equipment, Computers, Furniture and fixtures etc., to the various parties of sale. The sale and lease back transactions in the cases on hand cannot be termed as Finance leases inasmuch as such a situation can arise only when the purchase price of assets is higher than the valuation price. The assessee has valued the asset through qualified, engineers approved by the Government and hence, there is not much left to the Department to object, that it
19 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) was done with an intention to defraud the Revenue unless the transaction is between associate or related parties, which is not the case here. Here the lease transactions are entered into between a public limited company and a totally unrelated concern, that is, the transaction can be said to be at arm's length. Furthermore, there is no such allegation by the AO that the value per the valuation report is on higher side and hence, the sale and lease back transactions are finance leases. The valuation reports are on the records of the AO and in none of the cases, the value of the asset leased is higher than the value per valuation report.
Furthermore, as per the terms of lease deed both lessee / lesser has given right to terminate the lease agreement. Refer Explanation 4A to section 43(1) inserted in the statute books effective from 1.10.1996 - the Legislature has itself recognised and brought the concept of sale and lease back of assets, and consequential benefits to be provided for such transactions, within the provisions of law. A perusal of the said provisions clearly shows that legislature has given legal recognition to the transactions where assets are purchased by an assessee from a person and the same are leased back to the same person under the terms of an agreement. Thus, the legislature has itself recognised that such kind of transactions may fall within the four corners of law and the assessee can claim the benefit of depreciation under the realm of law. This proposition has been dealt with by the Hon’ble High Court in case of Cosmo Films Ltd., 338 ITR 266.
20 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) 35. From the record, we also found that sales tax has been charged on and paid on transactions both sale and lease back and normal lease transactions which have been subject matter of sales tax assessments and accepted by the sales tax authorities. The assessee accounts for lease rentals as revenue receipts and the lessee treats the payments as operational expenses. Further, it is pertinent to note that the legislature has introduced a new provision, explanation 4A to sec 43(1) w.e.f. 1.10.1996 wherein it provides that in case of such sale and lease back transactions, the written down value of the asset in the hands of the seller has to be taken into account for the purpose of allowing depreciation in the hands of the lessor. Hence, it is to be noted that the Act recognised all the sale and lease back transactions and allowed depreciation on the cost of the asset incurred by the assessee prior to 1.10.1996. This is further strengthened by the speech of the Finance Minister while introducing Finance (No.2) Bill 1996 in which it was stated as under:
The practice of sale and lease back of assets results in passing of very high depreciation to the leasing concerns. This practice needs to be curbed. Hence, I propose to provide in the Income- Tax Act that in case of Sale-and-lease back transactions, the written down value of the asset, in the hands of the lessee, who was the previous owner, will be treated as cost in the hands of the lessor. This measure, while not affecting bonafide transactions will prevent loss making concerns from indulging in unhealthy trade off of depreciation.
In view of the above amendment, the cost of acquisition in the hands of the lessor was restricted w.e.f.01/10/1996, to the written down value in the hands of
Looking at the overall tax treatment of the whole transaction, it cannot be said that the transaction was intended to reduce the tax liability by claiming depreciation on the cost of the asset. It is to be noted that though in the first year, there was a reduction in, tax liability, but in subsequent years, the assessee has offered full lease rentals for tax. Hence, it cannot be categorically said the assessee has reduced the tax liability, only by looking into the very first year, ignoring the tax effect in subsequent years. From the record, we also found that total lease rentals offered by the assessee for taxes during the period of lease was more than the claim of depreciation. Thus, there is no evasion of tax due to the lease back transactions and the assessee’s claim of depreciation. Recently, the Mumbai Tribunal in the case of Bombay Dyeing & Mfg. Co. Ltd. (ITA No 45991M12002) has after referring to the various decisions of Supreme Court, High Courts and Tribunals allowed depreciation on assets on sale and lease back transactions. Further, reliance can be placed on the following decisions -
CIT vs. West Coast Paper Mills (ITA No.389 of 2008) (Bombay HC) 2. West Coast Paper Mills vs. Jt CIT 100 TTJ 833 (Mumbai) 3. Development Credit Bank vs. Dy CIT (40 taxmann.com 532) (Mumbai-Trib) 4. Bombay Burmah Trading Co. Pvt. Ltd v. Asstt CIT (82 ITD 531) (Mum) 5. Dy CIT vs. Mls. Sheba Properties Ltd. (ITA Nos. 1954/Mum/2003) 6. Jt CIT vs. Mls Cable Corporation ofIndia Ltd. (2007-TIOL- 397-IT AT-Mum) 7. CIT vs. Cosmo Films Ltd. (2011) (12 taxmann.com 217) Delhi High Court) 8. Industrial Development Corp of Orissa Ltd. vs. CIT (137 Taxman 556) (Ori) 9. CIT vs. Punjab State Electricity Board 183 Taxman 419 (Punj & Har)
To ascertain the exact nature of transaction as to mere sale or sale and lease back, we had gone through the terms and conditions of the lease agreement dated 30th April 1992, between the company and Mahatma Gandhi Mission, the lessee, Clause 11 of which indicates that No right, title or interest in the said equipment shall pass to the Lessee by virtue of these presents. The Company may affix or cause to be affixed on the said equipment or any part or parts thereof such plates or other mark indicating that the said equipment is the property of the Company and / or indicating the interest of its Bankers as the Company may think fit, and the Lessee shall allow such plates or marks to remain as affixed and will not obliterate, deface or cover up the same ..... Clause 12 - The Lessee agrees and undertakes during the continuance of this Agreement not to sell, let, pledge, mortgage, charge, encumber or part with possession of or otherwise deal with the said equipment or any part or parts thereof or with any interest therein or in this Agreement but shall keep the said equipment in his own possession. Lessee to pay rent -Clause 13 - The Lessee shall duly and punctually pay all rents, rates, taxes, licence fees, in respect of the equipment. Loss, theft, etc -Clause 9 - The Company shall not be liable to the Lessee for any loss, theft, damage, destruction or any claim whatsoever . Lessee - not the owner, therefore, no depreciation Clause 14 - Lessee is not the owner of the said equipment, the Lessee shall not claim any relief by way of any 23 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) deduction, allowance, or grant, available to the Company as owner of the said equipment under the Income-tax Act, 1961, or under any other statute, rules or regulations which it would have been entitled to if it were the owner thereof. Certificate from lessee -Clause 15 - The Lessee shall at the end of each financial year of the Company provide to the Company such information as it may require to claim relief by way of any deduction, allowance or grant as the owner of the said equipment under the provisions of the Income-tax Act, 1961 Right to inspect - Clause 17 - The Company through its servants and agents including the representative of its Bankers to inspect for the purpose of viewing and examining the condition thereof and …. Lien – Clause 18 – The company shall have a lien on the goods until such repayment but exercise of such lien shall not prevent the accrual of the monthly rents hereunder. No alternations allowed – without consent –Clause 19. Clause 20 – The Lessee shall insure the said equipment and keep the same insured for the entire term of this Agreement.. Default in payments - Clause 27 - If the Lessee shall make default in payment of the sums payable hereunder or if the Lessee shall commit an act of bankruptcy or have a receiving order made against him or shall have any arrangement with his creditors he shall execute any assignment for the benefit of or compound with his creditors or if the Lessee shall fail to observe and perform the terms and 24 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) conditions of this Agreement on his part to be observed and performed or if the Lessee shall do or cause to be done or permit or suffer any act or thing whereby the Company's rights in the said equipment may be prejudiced or put in jeopardy, then in each and every of such events it shall be lawful for the Company- (a) Without prejudice to the Company's claim for arrears of rent or for damages for breach of this Agreement forthwith without notice to terminate this Agreement and to retake possession of the said equipment and for that purpose by itself, its servants or agents enter upon any land, buildings or premises where the said equipment is situated and detach and dismantle the same and the Company shall not be responsible for any damage which may be caused by such detachment or removal of the said equipment (b) By written notice either served personally on the Lessee or forthwith and for all purposes absolutely to determine this Agreement and the lease hereby constituted, and thereupon the Lessee shall no longer be in the possession of the said equipment with the Company's consent, nor shall either party thereafter have any right hereunder, but such determination shall not discharge any pre- existing liability of the Lessee to the Company Clause 28 - On the determination of this Agreement, the Lessee shall immediately return the said equipment to the Company at the Lessee's expenses at the Company's address in the event of the Lessee failing so to do, the Company, its servants and agents shall be entitled without any notice to enter 25 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) upon any premises where the said equipment may be and take possession thereof….
In terms of the above clauses, it is clear that ownership of the assets belongs to the assessee. The assessee has paid for the asset(s) and using the same for the purpose of their business of leasing. The assessee has secured a security deposit from the lessee. The assessee is getting lease rentals every month as per the terms of lease agreement. The assessee by virtue of the lease agreement possesses complete right to take back the asset, dispose of, remove the asset, etc. The lease agreement empowers the assessee to remove the asset(s) on the completion of the lease period or otherwise. The asset is being shown in the accounts of the assessee as they hold the title to the asset. The owner of the asset possesses the authority to re-possess the asset on completion of the lease period or on the happening of some event as mentioned in the agreement, and in such case, the lessee will have no legal right to prevent the assessee from re- possessing the asset. The terms of the lease agreement do not bring out any case that the transactions are of a nature other than a lease transaction. The conduct of the parties to the agreement is in tune with the terms of the agreement.
Now, coming to the disallowance of depreciation in respect of motor cars and other vehicles, we found that vehicles have registered in the name of respective lessees in the registration book also indicated the lessee as the owner of the 26 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) vehicle and name of the assessee appears only under the caption of “hypotheticated to”. In terms of these observations, we do not find any infirmity in the order of CIT(A) for decline of claim of depreciation in respect of motor cars and other vehicles.
With regard to sale and lease back of plant and machinery CIT(A) observed that the agreement does not stipulate wholesale buyer of the cost of the dismantling at the end of the lease period of transportation. As per our considered view, it does not matter in so far as it is now going to change the character of the arrangement and if the assets has to be repossessed the expenses of repossession is to be borne by the lesser only.
With regard to observation regarding default of payment by the lessee, it may be a situation where lessee has defaulted any payment of lease rentals. In such cases, we found that assessee has taken legal measures including u/s.138 of Negotiable Instruments Act and winding up of the defaulting companies. Thus, mere default on the part of the lessee cannot be made a reason for decline of depreciation when the lease agreement itself stipulate for payment lease rent and the right of the lesser in case of the default. Furthermore, where assets have been sold at a residual value to the lessee, there is no occasion to take re- possession of such assets. Even if we compare the facts of the assessee’s case with the facts of the case decided by tribunal in case of Mid East Portfolio Management Pvt. Ltd., we observe as under:-
27 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) Finding/ observation of the SB in Facts of appellant's case Mid East Conclusion of the Tribunal in the case of Mid East Portfolio Management Ltd. However, very broadly and without limiting ourselves to what has been stated in our order, the following may be considered to be relevant factors to be kept in view: (a) Was there an intention to pass the Yes, it is there in the case of appellant property in the equipment to the assessee? (b) Was the equipment identified / Yes, the equipment can be easily ascertained with reasonable clarity? identified/ascertained (c) Was the equipment valued, and if All the equipments have been so, whether it was a bonafide purchased at the prevailing market valuation? Was the value inflated? How rate. It is not the claim of the A.O. that credible is the report of the valuer, if the value is inflated. The value is duly there is one? supported by valuation reports, which have not been specifically controverted by the A.O.
(d) What are the terms of the lease? Is In each and every case, the terms of the document more of an arrangement the lease are clear and the document is for security for the loan and less of a a lease deed and not an arrangement lease? for security. (e) Is there any parallel or collateral There are no such parallel or collateral documentation or correspondence or documents throwing doubts on an understanding between the parties, intention professed by the principal which throws doubt on their intention documentation. professed by the principal documentation? (f) What is the conduct of the parties? The conduct of the parties has been How transparent has it been? transparent (g) If the lessee is a public utility
28 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) undertaking, whether the sale of the The 2 parties in question are not public equipment would be in conformity with utility undertakings and hence this point the rationale for its existence and is not applicable. whether it would have an adverse impact on its working?
The CIT(A) has analysed the transactions keeping in view the ratio of the Special Bench in the case of Mid East Portfolio Management Ltd., however a lot of water has flown after that decision which was delivered on 14th August, 2003 till today. The latest decision of Bombay Dyeing of Mumbai Tribunal has dealt with the decisions on the subject in great detail and hence, the order of the CIT(A) to that extent may be out of times.
The CIT(A) in respect of violation of principles of natural justice regarding the non-furnishing of the evidences on the basis of which the AO has arrived at adverse conclusion has stated that no evidence has been produced by him also in this respect to rebut the findings that were known to the assessee without appreciating the fact that how can the assessee rebut without going through such evidences; its an impossibility that the CIT(A) expects, and hence, ought to be quashed. The CIT(A) has also not dealt with the evidences that the assessee has filed in respect of claim of depreciation. 45. Even if we make comparison of the terms and conditions of sale and lease back transactions entered by assessee vis-à-vis terms and conditions of agreement entered in case of Bombay Dyeing and Avasarala Technologies, we found the following similarities / dissimilarities.
Sr Nutech Corporate Services Ltd., .No. Particulars Avasarala Technologies Bombay Dyeing (Formerly, IIT Capital Services Ltd.,)
Andhra Pradesh State Electricity Board (APSEB) Andhra Pradesh State Electricity Board (APSEB) DCM Sriram Consolidated Ltd., (Page 1 Transaction with i.e., PSU (page 3 Para2) i.e., PSU No.72 to 89 of the paper book)
2 Nature / description of asset Water Treatment Plant (Page 6 Para 9) Coal Fired Boilder Chlorine Gas Cylinders (79 nos.)
Property is movable as per the valuation report Property is movable as per the valuation Registration of lease agreement / and therefore not required to be registered as report and therefore not required to be 3 deed Documents not registered (Page 5 Para 8) per Registration Act, 1908 registered as per Registration Act, 1908
Gas cylinders are identified as (79 nos) gas cylinders have been purchased from Sriram Vinyl & Chemical Industries, Kota, Identification of asset under the Machinery is identified explicitly in the schedule Rajasthan and the bill is part of the 4 agreement / deed Asset not identified (page 5 para 8) forming part of lease agreement Agreement - refer page no.87) N/A. Since Explanation is applicable w.e.f. N/A. Since Explanation is applicable Application of explanation 4A to Sec 01/10/1996 and is not retrospective in w.e.f. 01/10/1996 and is not 5 43(1) WDV as per 43(1) not identified (page 5 para 8) operation retrospective in operation Ascertained as per Independent Valuation 6 Determination of market value (MV) MV not ascertained (page 5 para 8) Report
No actual delivery, however, constructive Physical delivery of asset under No actual delivery has taken place (Page 5 Para delivery is also a very much acceptable mode of 7 agreement / deed 8) delivery under the Act. Physical delivery taken from the supplier Physical conditon of asset under the Water treatment plant is embedded to earth Boiler can be removed as per the Registered 8 agreement / deed (page 5 Para 8) Valuer's report Chlorine gas cylinders can be removed Invoices, insurance policy, vouchers and Production of invoices, installation Invoices / other basic details were never Invoices, installtion certificate and all basic all basic details were produced before certificate and other basic details produced before lower authorities (page 6 para details were produced before authoritties and lower authorities and the same have 9 before lower authrorities 10) verified by them. been verified by them. Lease rental offered to tax by the assessee were Lease rent has been taxed as business Tax treatment accorded by the AO excluded from assessable income by the AO Lease rent has been taxed as business income income for the year under 10 to lease rental income (page 3 Para 2) for the year under consideration consideration. Assessee did not furnish details of installation, All the required details called for were copies of invoices, depreciation claimed by submitted, including the certificate from previous owner etc., which were called for by the lessee that depreciation has not Furnishig of details to AO and the AO nor did it extent cooperation during the All the required details called for were been claimed by them, and due co- cooperation during the assessment course of assessment proceedingts (page 4 para submitted and due cooperation was extended operation was extended during the 11 proceedings 5) during the assessment proceedings assessment proceedings Valuation Report not clear whether equipment can be detached and removed form the place Valuation Report clear that the equipment can 12 Details in Valuation Report whether it is installed (para 6 para 9) be detached and removed. All lower authorities after considering materials placed before them have recorded a finding CIT(A) after considering the factual details, 13 Decisions of Lower Authorities that it is a sham transaction (page 3 para 2) concluded that it was a genuine transaction 30 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) 46. In view of the above discussions, we do not find any merit for the disallowance of the depreciation in respect of plant and machinery leased out by assessee.
As discussed hereinabove, we confirm the action of the lower authorities for decline of claim of depreciation in respect of vehicles. However, in respect of two instances where after the expiry of the lease period, the vehicles have been transferred to third parties after taking possession of the vehicles from the lessee, the CIT(A) did not accept this evidence for the reason that only debit notes have been filed in evidence which does not contain acknowledgement of the buyer for receipt of the vehicle; though however, no evidence has been brought on record by the lower authorities that the vehicles have not been transferred in the name of the buyer or no notice, either under section 131 or 133(6) has been issued to the buyer to take his confirmation. We restore the matter back to the file of AO for deciding afresh after verifying these evidences. In respect of assets leased to DCM Sriram Consolidated Ltd., we had restored the matter back to the file of the AO in terms of our observation made in para 20. Accordingly, AO is to decide afresh in terms of the direction given in para 20.
In respect of appeals filed by the department wherein CIT(A) has deleted the disallowance of depreciation in terms of the finding recorded by CIT(A) vis-à-vis, our observation made hereinabove, we do not find any infirmity in the order of CIT(A) for deleting the disallowance of depreciation.
In the appeals filed by the revenue in the A.Y.1995-96 & 1996-97 for deleting the penalty, we found that CIT(A) after giving detailed finding had come to the 31 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) conclusion that issue was debatable, accordingly, penalty was not imposable. The detailed finding given by CIT(A) in the A.Y.1996-97 reads as under:- The issue has been carefully examined. On perusal of the orders of the A.O., the CIT(A) and the Hon'ble Tribunal, it can easily be seen that the disallowance is indeed made on a debatable issue, on which, various Courts have had different views. The claim of the assessee was for, allowing of depreciation on leased assets which were either on a sale and lease back asset or on actual purchase. Various orders of the Courts including Mid East Portfolio Management Ltd., 87ITD 537 (Mum)(SB) and Development Credit Bank Ltd. (Bombay High Court) have been relied upon by the CIT(A) to come to this conclusion that the disallowance has to be recomputed in a manner which is for the sake of convenience extracted as under- “To conclude with, in the original assessment order passed under section 143(3) of the Act dated 31.03.1999, in view of the findings of the Assessing Officer that the entire arrangement is that of financing only the interest component forming part of the lease rent has been subjected to tax as income: That amount has been repeated in the subsequent orders. However in view of the relief granted both by the Assessing Officer in the order under appeal as well as in this appeal, the amount as also the basis thereof is needed to be changed. Hence the Assessing Officer shall do the needful in terms of the following decisions:- (i) that the lease arrangement having sale and lease back transactions both where such transactions were entered into in the earlier accounting year as well as in the relevant accounting year are in the nature of finance transactions. Hence the findings of the Assessing Officer that the appellant is not entitled for deduction of depreciation while only corresponding interest component forming part of the lease rent is chargeable to tax is upheld. (ii) that in respect of all the transactions other than of sale and lease back entered into in the earlier accounting years, the claim of the appellant is accepted. The Assessing Officer shall allow depreciation in respect of the written down value of assets involved in the said transactions. He will also subject to tax the corresponding lease rent amount credited by the appellant in the profit and loss account. (iii) that in respect of the leasing of motor vehicles made during the accounting year the findings of the Assessing Officer that these represent the finance lease arrangement and therefore, the is not entitled for deduction of depreciation and only the corresponding interest amount forming part of the lease rent is taxable is upheld. . . (iv) that in respect of the plant: and machinery leased out during the year again, the findings of the Assessing Officer that these represented finance leasing and the appellant is not entitled for depreciation is upheld.
(v) that in respect of the other assets leased during the year, the arrangement is to be taken as one of the operating lease. Therefore the Assessing Office shall allow depreciation on the cost of these assets while bringing to tax the corresponding lease rent amount credited to the profit and Loss account. (vi) In respect of the lease arrangements which has been accepted by the Assessing Officer as operating lease in the assessment order under appeal, unless these fall within one of the categories indicated above, he shall bring to tax as its income the entire corresponding lease rent amount credited to the profit and loss account. The Assessing Officer shall re-compute the income of the appellant after carrying out necessary verification from its record on the above lines and taking the correct figures for the purpose. " 1 am in agreement with the argument of the Ld. Counsel that no penalty can be imposed where the disallowances are made on debatable issues especially I when all the details regarding the transactions were before the A. O. and the A. O. concluded differently on the nature of the transactions by taking Cl. different view . Further, in a recent decision, the ·Hon'ble Mumbai tribunal has clearly stated that wherever the issues are debatable, the question of imposition of penalty does not .arise. Reference is invited to decision of the Hon'ble ITAT in the case of ITO Vs Roborant Investments (P) Ltd. ITA No. 3937/Mum.l2002, in the ITAT Mumbai Bench 7 SOT 181(Mum.), the relevant extract of which reads as under:- “It was a debatable issue as to whether the rental income/service charge was assessable " income from business or income from house property. The assessee, instead of giving up its claim, preferred to argue before the departmental authorities that the said income was assessable as income from business The assessee was entitled in law to say so, The fact that the view canvassed by the assessee before the Assessing Officer was not accepted did not ipso facto give rise to concealment of income. Penalty u/ s 271(1)(c) is levied for concealment of income and not for the difference in taking views on a given set of facts provided the facts have been adequately. In view of the above discussion, I am of the view that no penalty u/s.271(1)© could be levied by the A.O. on the facts of the case and therefore, the penalty so imposed in cancelled.”
We have considered rival contentions and carefully gone through the orders of the authorities below. The AO has levied penalty with regard to disallowance of depreciation on the assets leased out by assessee. The CIT(A) has deleted the 33 and other appeals Nutech Corporate Services Ltd., vs ITO 8(2)(1) penalty imposed u/s.271(1)(c) on the plea that claim of assessee was debatable and after applying the various judicial pronouncements reached to the conclusion that no penalty should be imposed for such debatable issue. In terms of the findings recorded by CIT(A), we do not find any reason to interfere in his order deleting the impugned penalty. Accordingly, we confirm the order of CIT(A) for both the assessment orders 1995-96 and 1996-97.
In the result, appeals of the Revenue are dismissed whereas appeals of the assessee are allowed in part in terms indicated hereinabove
Order pronounced in the open court on this 21/03/ 2017.