Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM & SHRI RAJESH KUMAR, AM
O R D E R
PER RAJESH KUMAR, AM :
The aforesaid appeal has been filed by the assessee against the impugned order dated 20.3.2015, passed by Ld. Principal Commissioner of Income Tax -3, Mumbai under section 263, setting aside the order of the Assessing officer dated 20.3.2013 for passing it afresh. The assessee in this appeal has taken following grounds of appeal: “1. Ground no.1 (i) The learned Pr. Commissioner of Income tax- 3, (hereinafter referred to as CIT) erred in passing the order under section 263 of the Act, by holding that the Assessment Order passed by the Oy. Commissioner of Income Tax, Circle -3(3), Mumbai (hereinafter
2. I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 referred to as AO.) u/s.143(3) of the Act dated 20.03.2013 is erroneous so as to be prejudicial to the interest of the revenue. (ii) The Appellant submits that the order u/s.263 of the Act for modifying the order u/s. 143(3) of the Act is bad in law, illegal, ultra- virus, in excess of and /or in want of jurisdiction and otherwise void. (iii) The CIT failed to appreciate that the AO. while passing order u/s 143(3) dated 20.03.2013 has considered the facts of the case and had taken the legally correct view of allowing depreciation to the appellant as per the provisions of the Income Tax Act and hence the order passed by the assessing officer is not erroneous so as to be prejudicial to the interest of the revenue within the meaning and as contemplated u/s 263 of the Income Tax Act. (vi) The CIT further erred in viewing the leased transaction with a jaundiced eye and applying the same view as taken in the case of leasing banks and financial institutions, to the appellant, disregarding the fact that the appellant was not a normal leasing company, but was an industrial company. (v) He failed to appreciate that the appellant was a regular corporate assessee and the assets given on lease were the assets owned by it and the lease rent income was offered as business income. (vi) He further failed to appreciate that the fact of leasing such asset and claiming of depreciation thereon was duly explained during the assessment proceedings to the AO. and the assessment was made by the AO by applying his mind to the facts of the case. (vii) The appellant submits that the order and direction given by CIT are totally unwarranted and no interference is called for in the assessment order u/s 143(3) passed by the AO. on 20.03.2013.”
2. The brief facts qua the issue, as noted in the impugned order are that, the assessee had given on lease its Polymer Plant located at, 5, TTC Industrial Area, Ghansoli, Navi Mumbai, Thane to M/s Reliance Industries Ltd (lessee) as per the lease agreement dated 31.12.2008. The assessee while computing its total income had added back actual lease rent including 3 I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 principle amount of Rs.37,14,49,999/- as it was not considered in the profit and loss account. Similarly, it has reduced lease finance charges of Rs.21,45,45,000/- credited to Profit and loss account. Further, the assessee has reduced the value of leased plant and machinery of Rs.159.81 crores in the depreciation chart as per Companies Act in the books. However, it has not reduced the same value of plant and machinery from the block of assets for the purpose of income tax. On these premises the Ld.Principal Commissioner of Income under revisionary powers u/s 263 has observed that :- Firstly, under the Income Tax Act, in terms of section 32, the depreciation on asset is allowed to the assessee who is „owner‟ of the assets and such asset has been used for the purpose of business or profession; and in case of leased assets, ownership of the assets is to be determined in terms of contract between Lessor and lessee. He also referred to treatment as provided by Accounting Standard-19 which provides allocation of depreciation in the hands of the assessee in the financial lease; Secondly, the assessee has entered into financial lease agreement with RIL (Lessee) for the fixed period of 10 years; and on successful discharge of lease payments, the ownership gets transferred to the Lessee. The leased asset has been used in lessee‟s manufacturing business with risk and rewards assigned to lessee, therefore, the depreciation is allowable to the lessee.
4 I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 On the basis of above observations, the Ld.PCIT observed that the assessee could not have claimed depreciation on plant and machinery given on lease and since the assessee has not reduced the lease value of plant and machinery from block of assets, therefore, the assessee has claimed excess depreciation of Rs.3,22,55,807/- 3. In response to the show cause notice as to why the following amount should not be considered as underassessment :- Add: Finance lease rentals 21,45,45,500 deduced in computation of income Less: lease rentals including -37,14,49,991 principal from computation of income Add: Depreciation as per IT Act 34,75,58,071 (Plant and machinery) Net under assessment 19,06,53,580 The assessee, after explaining the entire facts and background of the lease agreement, submitted as under: i) The polymer plant which has been leased by the assessee to RIL was an asset which was held for more than five years; ii) The assets could not be utilized at its present location, i.e.. 5, TTC Industrial Area, Ghansoli, Navi Mumbai, Thane that is why, it was decided to lease the said asset to RIL which had needed it for its Dahej Manufacturing Division, PO Dahej, Bharuch, Gujarat. Accordingly all expenditure in addition to the actual cost of such asset in the books of Rs.97.37 crores was incurred for dismantling the aforesaid asset from its current location and transporting and reassembling the same at 5 I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 Dahej. All such expenses have been capitalized which has not been claimed as revenue expenditure; iii) The confirmation of RIL (Lessee) was filed before the Ld.PCIT stating that, they have not claimed depreciation on this plant, therefore, there is no case of double deduction of depreciation; iv) With effect from 1.4.2001, Accounting Standard -19 dealing with treatment of leased assets, has come into effect. Accordingly the entries were passed in the books of accounts in the year of leasing plant and machinery to RIL as required by the said AS-19; v) A reference was also made to various clauses of lease agreement, which closely provided that at every step, the assets were owned by the lessor/owner and will remain asset of lessor/owner during the period of lease. This fact was clearly mentioned that lessee have been given right only for use of the assets for the term of the lease on payment of specified leased rent for a lease period of 10 years. vi) Apart from the above, further detailed submissions were made along with the decisions which have been dealt with by the Ld.PCIT in the impugned order at pages 5 to 7 of the appellate order.
It was also pointed out before the ld.PCIT that, figures of claim of depreciation on plant and machinery of Rs.34,75,58,071/-, was for all plant and machineries and not confined to lease assets; and against the lease rent of Rs.37.14 crores, the assessee has claimed depreciation of Rs.25.56 6 I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 crores. Thus, there is no excess claim of depreciation as mentioned in the show cause notice. The details of income offered and depreciation claimed was given in the following manner: Offered as income (lease rent) Rs.37,14,49,991/- Claimed as deduction Rs.25,56,00,000/- Depreciation as claimed u/s 32(on lease assets)
Lastly, it was also pointed out that the entire matter was placed before the AO during the course of assessment proceedings in response to query raised by him and only after due verification, the AO has passed the order u/s 143(3). Hence such an order cannot be held to be erroneous and prejudicial to the interest of the revenue.
However, the ld.PCIT rejected all the contentions of the assessee after assigning various reasons as discussed in the impugned order from pages 8 to 11. The reasons assigned by him by and large were same which has been given in the show cause notice. Finally, he held that the assessment order is erroneous and prejudicial to the interest of revenue and therefore, the same was set aside with a direction to the AO to make fresh assessment after conducting inquiries in details and the submissions as offered by the assessee in the return of income. 7. Before us, Ld. Counsel Shri Arvind Sonde, submitted that, first of all, it is not a case of lack of inquiry or partial inquiry, because precisely on the same issue, a query was raised by the Ld.AO during the course of the assessment proceedings and the assessee vide letter dated 5.2.2013 have 7 I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 explained the entire matter in detail along with a copy of lease agreement and treatment in the books of account; as well as CBDT Circular No. 2/2001 dated 9.2.2001. This reply was filed along with all the relevant annexures which will go to show that the assessee has given the entire details as well as explanation and on examination of such details and explanation, the AO has accepted the assessee‟s contention as well as claim of depreciation on lease assets. He further submitted that in a leasing transaction, the Lessor is entitled to claim depreciation as long as he continued to be the owner of the assets and ownership depends upon the terms of the contract. In support of this contention that the assessee was the owner of the assets, he referred to the various clauses and paragraphs of the lease agreement between the assessee and the RIL. He pointed out that this aspect has been accepted by the Ld.PCIT alsoin the impugned order. He also explained the accounting treatment under AS-19 and submitted that it mainly required capitalization in the books of accounts of the Lessor which do not, has any effect under Income Tax Act. In support of his various propositions; he referred and relied upon the following decisions which are as under : i) S.B.I. Home Finance Ltd V. CIT (280 ITR 006)(CAL); ii) Rajshree Roadways V. Union of India (263 ITR 206)(RAJ); iii) KM Sugar Mills Ltd. v. CIT –(2015) 57 taxmann.com 68(SC); iv) I.C.D.5. v. CIT (2013) 29 taxmann.com 129 (SC); v) Minda Corporation Limited V DC IT (2016) 69 taxmann.com 317(Del-Trib); vi) Industrial Development Corporation of India v. CIT - 268 ITR 130 (Orissa High Court) vii) CIT V/s Zuari Finance Ltd. and Another – 271 ITR 538(Bom); viii) CIT V/s v. Gujarat Gas Co. Ltd. - - 308 ITR 243(Guj); 8 I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 ix) CIT V/s Cosmo Films Ltd. - - 338 ITR 266 (Del); x) CIT V/s George Williamson (Assam) Ltd. - 265 ITR 626(Guw); xi) Bharti Hexacom Ltd. v. ACIT (2016) 68 taxmann.Com 357 (Del-Trib) xii) IClCI Bank Ltd vs. JCIT (ITAT Mumbai) & 3644/Mum/2001; xiii) SICOM Ltd. v. JCIT [2013]40 taxmann.com 469 (Mumbai - Trib.) xiv) Parle Soft Drinks (P.) Ltd.v. JCIT[2015]63 taxmann.com 338 (Mum- Trib.)
On the other hand, the ld.CIT DR after referring to the various observations of Ld.PCIT submitted that it is a case of a „financial lease‟ and in such cases the assets with all its title passes on to the Lessor and hence, it is only Lessor which is entitled for depreciation. He also referred to the decision of the Hon‟ble Supreme Court in the case of Asea Brown Boveri Ltd V/s Industrial Finance Corporation of India (2006) 154 Taxman 512 (SC), wherein the Hon‟ble Supreme Court has explained what constitutes financial lease; and that in the case of financial lease, the borrower becomes the owner of the property inasmuch as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use and occupation of the property, maintains and operates the machinery, etc., undertakes indemnity and agrees to bear the risk of loss or damage, if any. Thus, the ratio of the Hon‟ble Supreme Court if applied on the present facts, then ostensibly the depreciation has to be allowed in the case of lessee and not the lessor. He also relied upon the various decisions as to the scope of section 263 and under what circumstances the assessment order can be held to be erroneous so far as prejudicial to the interest of the revenue.
9 I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 9. We have heard the rival submissions and perused the relevant record and impugned orders and the case law as referred by both the parties. The main issue which has been raised in the impugned order by the Ld.PCIT in his revisionary jurisdictional order is that, the assessee has wrongly claimed depreciation on the leased assets as a Lessor and the AO has erroneously allowed such claim of depreciation. However, he has not categorically specified as to what has been the lack of inquiry or non-application of mind by the AO at the time of assessment. He has not highlighted as to what kind of inquiry should have been made by the AO before allowing depreciation on leased assets. Here it is not the case whore some bogus assets or fictitious transaction has been found on which the depreciation has been claimed. The main issue here is, whether the assessee in law or on facts should have claimed depreciation on leased assets, or not. The facts as pointed out in the earlier part of the order is that the assessee has leased Polymer Plant to RIL for a period of 10 years. The plant which was leased to the Lessee was held by the assessee for more than 5 years and from the terms of lease agreement it has been pointed out before us that the assessee till the period of lease continued to be the owner of the assets for all practical purpose. This is the most important and distinguishing feature here in this case, that ownership, title etc., has not been passed to the Lessee during the period of Lease. This fact has not been properly appreciated by the Ld.PCIT, who got swayed by the fact that it is a „financial lease‟ and therefore, the depreciation should have been claimed by lessee 10 I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 and not the Lessor. The assessee had also filed a copy of confirmation from the Lessee, wherein it has been stated that the assessee has not claimed depreciation on the leased plant and this fact has not been rebutted by the Ld.PCIT in his order. On several times it was re-iterated by the assessee after pointing out from various paras of the lease agreement that it was assessee who only owns by the assets and it remained the property of the Lessor during the period of lease and therefore, it was only Lessor who was entitled for claim of depreciation. This aspect too has not been rebutted by the Ld.PCIT.
It has already been brought on record that during the course of the assessment proceedings, the Ld.AO had specifically required the assessee to justify the claim of deprecation on such leased assets. In response to the same, the assessee had given following explanation/submissions along with various details which has been mentioned therein. For the sake convenience the said reply is reproduced below : “To Feb,5,2013. Asst. Commissioner of Income tax, Circle 3(3), Aayakar Bhavan, Mumbai 400 020. Dear Sir, Sub: Assessment proceedings -A Y 2010-11 PAN: AAB CD 7169 H Kindly refer to the hearing attended by our authorized representative on 10.01.2013. As desired by you enclosed herewith please find the following: 1. During the year ended 31.03.2009, RCPTIL (Lessor) had given on lease its polymer plant located at 5, TIC Industrial Area, Ghansoli, 11 I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 Thane Belapur Road, Navi Mumbai - 400 701 to Reliance Industries Ltd. (Lessee) as per lease agreement dt. 31.12.2008 - Annexure 8(1)(i). The entries passed in the books of accounts in the year of leasing plant to Reliance Industries Limited is shown in Annexure 8(1)(ii). We wish to bring to your notice that w.e.f. 01.04.2001, Accounting Standard 19 (AS - 19) issued by Institute of Chartered Accountants of India ( ICAI ) dealing with Treatment of leased assets, has come into effect in respect of assets leased on or after 1.4.2001. Accordingly, when such assets are given on finance lease after 01.04.2001, the lessor, in this case RCPTIL, has reduced the value of such assets from its gross block of fixed assets under the Companies Act and has shown the corresponding amount as 'lease receivable' from RIL. However, since the lessor, i.e. RCPTIL is the owner of such assets as provided in CBDT circular no. 2/2001 dt. 09.02.2001 [copy enclosed Annexure 8(1)(iii)], in the depreciation working given u/s 32 in the TAR, such assets are not reduced from the gross block and depreciation as eligible to the owner / lessor is claimed u/s 32 . Though the polymer plant was given on lease to RIL as per lease agreement dt. 31.12.2008, there was a time period involved in dismantling the plant located at 5, TIC Industrial Area, Ghansoli, Thane Belapur Road, Navi Mumbai - 400701 and which was to be shifted to petrochemicals plant of RIL at Gandhar. Various expenditure was incurred for dismantling the plant and installing the same at Gandhar location of RIL. Such expenditure was incurred during F Y 31.03.2009 and was debited under the head 'Capital work in progress' and accordingly on completion of installation of plant at Gandhar, a sum of Rs. 97.28 crores has been transferred from Capital work in progress to Fixed assets given on lease and capitalized on 01.04.2009. For this reason, there is no separate deduction from the block of fixed assets as per Companies Act in 31.03.2010 as the expenditure was never capitalized under the head Plant & Machinery, but was directly transferred from Capital work in progress to leased assets. Accordingly we started receiving lease rent from RIL from April, 2009. Lease finance charges of Rs. 2145.461akhs as received by us during F Y 2009-10 is duly reflected in income from operations (Refer Annexure 6(22)(i) filed earlier- copy enclosed). We may bring to your notice that though, in the books of accounts we have shown only lease finance charges of Rs. 21,45,45,500/-, but since the actual lease rent received by us including principal is Rs. 37,14,49,991/-, we have offered the lease rent of amount Rs 12 I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 37,14,49,991/- as our income. Copy of computation of income is enclosed as Annexure 8(1)(v).
Reconciliation of Plant & machinery and equipments as per Companies Act and as per Income Tax Act - Annexure 8(2)(i). Reconciliation of depreciation as debited in P&L account and as claimed in Section 32 - Annexure 8(2)(ii). We hope the above details will suit your kind requirements. Thanking you, Yours faithfully, For RELIANCE CORPORATE IT PARK LTD. AUTHORISED SIGNATORI “ From the aforesaid reply it is quite ostensible that not only specific query was raised by the AO but also detailed reply has been made on the basis of which the AO has framed the assessment and allowed the depreciation on the leased asset . It cannot be held that in the light of this record, the AO has not applied his mind or there is any lack of inquiry made by the AO on the impugned issue. Whence, the AO has applied his mind on the given facts and material on record which has been specifically required by him, then it cannot be held that the AO has passed the assessment order without any application of mind. Once, a particular view has been taken by the AO which is a possible view in facts and in law, then unless the Ld. PCIT points out that, such view is not tenable either on law or on facts, then such an assessment order cannot be cancelled within the scope and ambit of section u/s 263 of the Act. This proposition is well settled by the Hon‟ble Apex 13 I . T . A . N o . 2 7 4 8 / M u m / 2 0 1 5 Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83; and in the case of CIT V/s Max India Ltd[2008] 166 Taxman 188 (SC). Thus, on this ground alone that the AO has applied his mind and taken a view therefore, such an order of assessment cannot be held to be „erroneous in so far as prejudicial to the interest of revenue‟, unless it is shown that the view of the AO, itself is untenable in law and on facts. Here the ld.PCIT has not even specified as to what kind on enquiry is to be conducted by the AO. Thus, such an assessment order cannot be cancelled u/s 263 and accordingly, the impugned order of the Ld.PCIT cancelling the assessment is hereby set aside. In view of our above finding, we are not discussing with the various decision as relied upon by the parties contesting the issue.
In the result the appeal of the assessee is allowed.