THE COMMISSIONER OF INCOME TAX vs. M/S MAA COMMUNICATION BOZELL LTD

IN THE HIGH COURT OF KARNATAKA AT BANGALORE

DATED THIS THE 4TH DAY OF SEPTEMBER 2013

PRESENT

THE HON'BLE MR.JUSTICE DILIP B.BHOSALE

AND

THE HON'BLE MR.JUSTICE B.MANOHAR

ITA NO.523/2006 BETWEEN

... Appellants

(By Sri.M.Thirumalesh, Adv)

AND

M/s.MAA Communication Bozell Ltd., No.6, Service Road, Domlur, Bangalore – 560 071.

... Respondent

(By Sri.S.Parthasarathy, Adv)

This ITA filed U/S.260-A of I.T.Act, 1961 arising out of order dated 16-09-2005 passed in ITA.No.616/Bang/2005 for the Assessing year 1996-97, praying that this Hon’ble Court may be pleased to formulate the substantial questions of law stated therein, and to allow the appeal and set aside the order passed by the ITAT, Bangalore in ITA.No.616/Bang/2005 dated 16-09-2005 and confirm the order passed by the Appellate Commissioner confirming the order passed by the Deputy Commissioner of Income Tax, Circle-12(1), Bangalore, in the interest of justice and equity.

This ITA coming on for Hearing, this day, the Court delivered the following:

JUDGMENT (B.MANOHAR.J)

The Revenue has preferred this appeal under Section 260A of the Income Tax Act, (for short ‘the Act’) challenging the order dated 16-09-2005 made in ITA No.616/Bang/2005 passed by the Income Tax Appellate Tribunal, Bangalore (hereinafter referred to as ‘the Tribunal’) for the assessment year 1996-97.

income and claiming deduction under Section 80M and also 100% depreciation under Section 32 of the Act. The return was processed under Section 143(1) on 27-03-1997.

M.S.Rolls. The assessee has claimed that these rolls were manufactured by M/s. B.H.International, Mumbai. The said Rolls were purchased by the assessee under the Hire Purchase Agreement from Kotak Mahindra Finance Limited (for short ‘KMFL) and the same was leased to the BSAL. On verification of the records, it was found that these lease transactions are bogus transactions and there is no transaction of 103 M.S.Rolls from Mumbai to Bellary. On the basis of the said survey report, a show cause notice was issued to the assessee calling upon them to furnish certain information as to why remedial action be not taken to disallow the depreciation on assets leased to BSAL. However, no reply has been received by the assessee. The Assessing Authority after recording the reasons, issued notice under Section 148 of the Act for reopening the assessment made for the year 1996-97 and calling upon the assessee to file the revised return.

During the course of investigation proceedings in the case of BSAL, the following points have been observed:

(i) There are no written orders/documents like quotations, enquiry letters, installation reports and delivery challans in the possession of the above company.

(ii) Even the photocopies of same delivery challans found do not bear the seals of sales-tax check post.

(iii) Usually machineries like SGCI Rolls are tailor made to the specification of the purchaser which required time to manufacture and deliver. Before the orders are placed, correspondences like enquiries, quotations are usually followed, but in this case no such correspondence is available.

(iv) No stock register is kept for Rolls obtained on lease in the absence of which, it is not known how the lessee will be in a position to return the Rolls to lessors after the period of lease.

(v) The photocopy of Transport Bills found do not contain check-post seals though consignments are stated to be transported from Chennai and Mumbai.

(vi) During the course of survey, 361 Rolls were found but, as per information furnished by the lessee, it should have been in possession of 3702 Rolls which were obtained on lease. It could not explain the discrepancy and whereabouts of the remaining rolls.

(vii) None of the Rolls in its possession contained distinctive markings of the financiers lessors who leased these Rolls.

(viii) All the three transporters viz., Noble Roadlines, Mumbai, Sri.Balaji Roadways and M/s. Madras Goods Movers, Chennai have clearly stated that they transported only bulk scrap and coal to the above company and denied to have transported M.S.Rolls. Further, both the Chennai transporters stated that the bills and signature found in assessee’s premises are forged.

(ix) Any machinery parts including SCGI Rolls transported into Karnataka State is liable for 2% of entry tax but, lessee could not produce any evidence for payment of entry tax.

(x) The so called suppliers viz., M/s. B.H. Enterprises, M/s. B.H.International at Mumbai and B.M.Steels (P) Ltd., Chennai were enquired as to whether they had supplied the Rolls to the lessee. Both the suppliers of Mumbai have denied that they have supplied any Rolls to the assessee but confirmed the fact that these bills were raised to facilitate financing from credit institutions and sale proceeds received from credit institutions were returned to the lessee immediately. The supplier of Mumbai had expired but, the company’s Bank pass book showed that after receiving sale proceeds from Banks, they were immediately sent back to the lessee.

(xi) Shri. S.Madhava, M.D. of the lessee company has admitted vide letter dated 3/10/2000 (copy enclosed) that all the lease transactions are only financing transaction obtained to repay the earlier loans outstanding and he is not in a position to prove the existence of the supplier of the M.S.Rolls or his capacity to manufacture or produce the equipments which are supplied to them as per the invoices.

the assessee found that there is no actual transactions of 103 M.S.Rolls from Mumbai to Bellary. M/s.B.H. International, Mumbai has no capacity for production of said M.S.Rolls. In the Check-Post at Mumbai as well as Karnataka, there is no entry with regard to movement of goods from Mumbai to Bellary. The BSAL has made similar transactions with other financial institutions, and one of the financial institutions admitted that it is only a financial transaction and sought for withdrawal of 100% depreciation on the basis of the alleged lease of M.S. Rolls to BSAL. The Appellate Authority taking into consideration all these aspects of the matter by its order dated 4-3-2005 dismissed the appeal. Being aggrieved by the said order, the assessee preferred an appeal before the Income Tax Appellate Tribunal (for short ‘the Appellate Tribunal’). The Appellate Tribunal after considering the matter in detail and taking note of the Xerox copy produced by the assessee with regard to transaction of M.S.Rolls from Mumbai to Bellary; the

agreement entered into between the respondent and KMFL, and also payment of Central Sales Tax, Policy of Insurance and finance charges by its order dated 16-09-2005 allowed the appeal in part and observed that lease agreement entered into by the assessee is genuine operating lease. The assessee would be in a position to identify its assets leased out at the lessee’s place and that the number of steel rolling mills leased is about 100 which was in custody of the lessee. Hence, the Tribunal held that there is genuine transaction of the goods. The reasoning of the Appellate Tribunal in paragraphs 5.4, 5.5, 5.6, 5.9 read as under: 5.4. ………….. The Assessing Officer did not make any verification as stock inventory prepared at the time of survey indicated that no identification marks were available on steel rolls. When the appellant is challenging a finding, which has been recorded in his absence at the premises of another assessee then it was obligatory on the part of the Assessing Officer to have given the opportunity to the appellant to prove its contention. During the course of appellate proceedings, the learned Commissioner of Income Tax (A) asked for the remand report

as it was also contended before him that assets can be identified. The Assessing Officer deputed his inspector. The inspector in the presence of the A.R. of the appellant and Director of BSAL verified that 103 rolls with identification mark of the appellant are available at the premises of BSAL. Even photograph was also enclosed. The learned D.R. argued that those markings have been done subsequently. For this conclusion, the learned D.R. submitted that as per hire purchase agreement, such assets should have identification marks of KMFL instead of appellant company. This mistake suggests that it was done as an after thought. Such an argument may look attractive but no evidence furnished in support of such argument. The revenue has not made any effort to establish the above arguments as fact. What is apparent is real unless proved otherwise.

5.5 KMFL filed a suit before Hon’ble High Court of Chennai against the appellant for recovery of installments of hire purchase not paid by the appellant. Thereafter a compromise was arrived at. Such details were filed before the Assessing Officer along with letter filed on 14-3-2002. In the suit filed, KMFL attached an affidavit of Shri.Ramesh, an executive of KMFL. In para 7 of the plaint, it was submitted as under:

“The plaintiff states that thereafter on 29-9-95, the plaintiff disbursed a sum of Rs.1,49,23,582/- to one M/s. B. H. International the supplier of the machinery and the 1st defendant herein also took

delivery of the machinery from the supplier.”

First defendant is the appellant. In para 5 of the affidavit of Shri Ramesh, the fact of delivery of machinery is mentioned. It shows that KMFL recognized that delivery of machinery has been made.

5.6 Another important aspect is that the revenue has not allowed deduction of hire purchase amount. In case, the transaction was purely a financial transaction, then amount paid as hire purchase to KMFL was to be allowed as deduction. By not allowing this deduction, revenue has accepted that assets have been delivered. The appellant has not claimed deduction of amount paid under hire purchase, corresponding to the cost of machinery as depreciation has been claimed. Such deduction has not been claimed in subsequent years also. The department in consistent with its finding that depreciation is not to be allowed should have allowed the amount paid under hire purchase. In case depreciation is not allowed then lease rental in its entity are not to be taxed. Lease rental in subsequent years have been offered for tax assessment for Assessment Year 1997-98 has become final as no reopening is possible at this moment. Moreover it will be relevant to analyse the hire purchase transaction and lease transaction.

5.9 During the course of proceedings before us the learned A.R also filed copy of a certificate which was filed before learned Commissioner of Income Tax(A).

From the said certificate it is clear that the appellant as well as BSAL have admitted that leased assets are lying at the premises of the lessee. This admission is only on the basis of physical inspection of the asset as done in the presence of the inspector of the department. The certificate, therefore, an evidence to show that assets leased are available at the premises of the lessee and depreciation cannot be disallowed on the ground that such assets were not found at the time of survey. The stock inventory was prepared at the bank of the assessee and the assessee contended before the Assessing Officer that assets are available. Hence it is held that the depreciation on such leased assets identified at the premises of BSAL will be considered as assets of the appellant for depreciation and on such asset depreciation may not be allowable to BSAL.

The concluding paragraph of the Appellate Tribunal reads as under: 7. Considering the facts that original documents of delivery, transportation etc., were available with BSAL, statements recorded from various persons to show that transaction of acquisition of M.S.Rolls was

not genuine were recorded before the assessment proceedings and not made available to the appellant, assertion at the premises of BSAL, aggregate of lease rental being less than the amount advanced for acquiring the asset, taxing of lease rental in subsequent years and not allowing deduction of hire charges and the position of law as discussed above, it is held that the appellant is entitled to depreciation on the assets at 100% of the value so leased.

The Revenue being aggrieved by the said order preferred this appeal.

“Whether the Tribunal was right in reversing the finding of the Assessing Officer that the depreciation claimed by the assessee who was running the business of Advertisement in respect of M.S.Rolls numbers 103 to M/s. Bellary Steel and Alloys Limited of a sum of Rs.1,67,23,582/- was denied as such assets did not exist nor any evidence produced to show purchase, payment and installation of the same by correctly re-opening assessments?”

Appellate Tribunal is contrary to law and materials available on record. The Managing Director of BSAL in his letter dated 30-10-2000 admitted that all the lease transactions are only financial transactions obtained to repay the earlier loans outstanding and he is not in a position to prove the existence of supplier of the M.S.Rolls or his capacity to manufacture or produce the equipment which are supplied to them as per their invoices. Further, the supplier of the M.S.Rolls i.e. M/s. B.H. International, Mumbai and M/s. B.M. Steel Private Limited, Chennai have denied the supply of M.S.Rolls to the Lessee. However, they have confirmed the fact that these bills were raised to facilitate financing from the Credit Institutions and the sale proceeds received from the Credit Institutions were returned to the Lessee immediately. Pass Book of the said Companies clearly disclose the said aspect of the matter. There is no actual movement of M.S.Rolls from Mumbai to Bellary. Sri.Dinesh, Executive of KMFL stated that all the

original documents are with the assessee and they do not have any documents. He has stated that he was only a Hire Purchaser and he has paid the amount to the assessee by cheque drawn in favour of the manufacturer, M/s. B.H. International, Mumbai. The Transporter of the said M.S.Rolls i.e. Noble Road Lines, Mumbai, Balaji Road Lines and Madras Goods Movers, Chennai have clearly stated that they have transported only bulk scrap and coal to the BSAL and denied to have transported M.S.Rolls. He relied upon the judgments reported in 266 ITR 178 AVASARALA AUTOMATION LTD., V/S. JOINT COMMISSIONER OF INCOME TAX and an unreported judgment made in ITA No.2611/2005 disposed of on 1-8-2008. He contended that the order passed by the Appellate Tribunal is contrary to law and sought for setting aside the same.

the Appellate Tribunal contending that necessary documents have been placed before the Assessing Authority in respect of the transportation of goods from Mumbai to Bellary and also payment of Central Sales Tax, Insurance Policy and other expenditure incurred by the assessee. The statements have been recorded behind the back of the assessee and no opportunity was given to cross-examine those persons. The burden is on the appellant to prove that there is no transportation of M.S.Rolls from Mumbai to Bellary and it is only a paper transaction. The certificate issued by the Department clearly discloses that the M.S.Rolls were available in the premises of BSAL. The copies of the hire purchase agreement, payment made to the KMFL with regard to hire purchase charges, delivery of goods to BSAL, a copy of the premium paid towards insurance and installment paid to the KMFL with regard to hire purchase charges were also made available. The Assessing Authority or the Appellate Authority did not consider these

documents in proper perspective. The Appellate Tribunal after considering the matter in detail set aside the order passed by the authorities below. There is no infirmity or irregularity in the said order and sought for dismissal of the appeal.

consumed nor used the Rolls. No document has been produced with regard to payment of tax and also with regard to transportation of the goods from Mumbai to Bellary. While surveying, authorities noticed that no documents were found to support the lease, no stock register was found. The photocopies of the delivery challans do not bear the seal of sales-tax check post either in the State of Maharashtra or in the State of Karnataka. There is no evidence for payment of entry tax. The transporter has denied the transportation of Rolls from Mumbai to Bellary. The Supplier of M.S.Rolls also denied the supply of M.S.Rolls either to the Transporter or to BSAL. The Managing Director of BSAL admitted that it is only a paper transaction. There is no actual transportation of M.S.Rolls from Mumbai to Bellary.

revised returns, the assessee by their letter dated 30-03-2001 informed the Assessing Officer that the return filed earlier be treated as return filed in response to the notice under Section 148 of the Act. Thereafter, after issuing notice under Section 142 of the Act, after considering the documents produced by the assessee, the Assessing Authority passed the order denying the depreciation claimed by the assessee. Under Section 32 of the Act, to claim depreciation, the assessee must either be owned wholly or partly of the M.S.Rolls. In the instant case, the assessee has obtained M.S.Rolls under the hire purchase from the KMFL and leased the same to the BSAL. Hence, the assessee is not the legal owner to claim depreciation.

supply of Rolls to the assessee. However, they have confirmed the fact that the bills were raised to facilitate financing from credit institutions and sale proceeds received from the credit institutions were returned to the lessee immediately. The pass book of M/s. B.H. International, Mumbai shows that after receiving the sale proceeds from the Bankers, they were immediately sent back to the lessee. Further, the Chartered Accountants of the assessee-Company also admitted that the transactions entered are only financing transactions. The Managing Director of the BSAL clearly stated that all the lease transactions are only a financial transactions obtained to repay the earlier loans outstanding and he is not in a position to prove the existence of Supplier of the M.S.Rolls or their capacity to manufacture or produce the M.S.Rolls. Though the assessee produced some documents in support of their case that they had transported the goods from Mumbai to Bellary, the documents produced

by the KMFL and the BSAL are not tallying each other and the original documents were not made available before the Assessing Officer.

been made on the said M.S.Rolls. Apart from that, the life of the M.S.Rolls is around 3 to 5 years. According to the assessee, the lease of M.S.Rolls has been made for the period of five years in the year 1995-96. The fresh inspection has been made in 2004. It is impossible to believe that the very same Rolls which have been leased by the assessee were still available in the premises of BSAL. Further finding of the Appellate Tribunal that M.S.Rolls can be transported in four lorries cannot be acceptable. The weight of 103 M.S.Rolls coil is about 204.34 ton. The said 103 M.S.Rolls cannot be transported in four Lorries. At the most, a lorry can carry, not more than 10 – 15 tones. The further finding of the Tribunal is that check-post of Nippani has signed the invoice is also misconceived. The invoice is for the transportation of scrap and not the M.S.Rolls. The finding of the Appellate Tribunal is perverse in law and not based on the materials available on record. The burden is on the assessee to prove that the M.S.Rolls

which were leased in favour of BSAL have been transported from Mumbai and delivered to Bellary. The specific case of the assessee is that the goods have been transported in four Lorries and it is for the assessee to prove the same by producing cogent evidence and also examining the manufacturer of the coil, the drivers and owners of the Lorries and the officers of the BSAL. It is the responsibility of the assessee to examine those persons to prove their case.

made out a case to interfere with the reopening of the assessment.

100% penalty on BPL Sanyo Finance Limited. The case of the assessee is similar to that of BPL Sanyo Finance Ltd.

and KMFL on one hand and the assessee and BSAL on the other hand were only paper transactions and there was no genuine purchase of lease of assets. By entering into paper transaction, the assessee has benefitted by availing depreciation at the rate of 100% of the value of the assets in question. However, as the assessee has not been able to substantiate or lead any evidence to the effect that assets in question were physically leased to BSAL and there was no physical movement of assets from Mumbai to Bellary. The survey conducted under Section 133A of the Act on the premises of BSAL and on verification of records, it was found that all these lease transactions are bogus. The Managing Director of BSAL admitted that the Company is raising lease finance in respect of non-existing assets with a view to raise funds fro their capital expenditure. As such, the assessee is not entitled for depreciation. The assessee has failed to prove the transaction.

Tribunal is contrary to law and not based on any documents. Hence, the order passed by the Appellate Tribunal cannot be sustained.

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JUDGE

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JUDGE

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