TMI Blog1997 (10) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... arried on business in 5 major divisions, i.e., (a) Coal Sale Division; (b) Produce Exchange Division; (c) Distillery Division; (d) Printing Division; and (e) Construction Division. In the immediately preceding year the company was also dealing in shares but in the year under consideration, the said business was stopped and it switched over to the investment in shares. The assessee claimed to have undertaken leasing business for the first time during the accounting year relevant to the assessment year 1993-94. The assessee purchased 18,25,000 aluminium cops from JCT Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them. The cops are of no use in the business of the assessee-company in any of the aforementioned divisions. The assessee entered into a lease transaction with JCT Ltd. on usual terms. In the year under consideration, assessee claimed 100 per cent depreciation on the aluminium cops purchased, as the value of the each cop is below Rs. 5,000. Assessing Officer did not accept the 'sale and lease back transaction' on the ground that it is a colourable transaction. In his opinion the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally using it and hence, the only inference that is possible in this case is that the purchases were made from a sister-concern for purposes other than for commencing its leasing venture. Commissioner (Appeals) further observed that cops being second hand assets, the value of the same cannot be higher than the cost price in the hands of the seller whereas, assessee paid the price higher than the actual cost to the seller. Out of total cops of 18,25,000, 9,48,600 cops were purchased by JCT Ltd. during the accounting year relevant for the assessment year 1992-93 on which it would have claimed 100 per cent depreciation and hence the w.d.v. in the hands of the seller was zero. Commissioner (Appeals), therefore, held that the Assessing Officer is justified in disallowing the depreciation in respect of the aforementioned cops. However, in respect of the balance of 8,76,400 cops purchased in the assessment year 1993-94, Assessing Officer was directed to allow depreciation on the actual cost of the cops in the hands of JCT Ltd. 7. Both the assessee-company as well as the revenue were aggrieved against the order of the Commissioner (Appeals). Learned counsel for the assessee submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .94 and the average cost as per the w.d.v. worked out to about Rs. 44 per cop. The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central Excise, Sales-tax and other duties (vide page 23 of the paper book). Learned counsel further submitted that the Assessing Officer as well as the first appellate authority have not properly appreciated the facts and circumstances of the case and disallowed the claim by merely holding that the transactions are colourable. Learned counsel submitted that the decision of the Hon'ble Supreme Court in the case of McDowell Co. Ltd.'s is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : (a) M. V. Valliappan v. ITO [1988] 170 ITR 238 at 280/37 Taxman 46 (Mad.) (b) CWT v. Arvind Narottam [1988] 173 ITR 479 at 487/39 Taxman 368 (SC) Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell Co. Ltd.'s case requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court. 8. On the other hand, learned departmental representative submitted that both the parties belonged to T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96 ITR 917. Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell Co. Ltd. and also various Explanations to section 43(1) of the Act, learned departmental representative submitted that the disallowance of depreciation by the Assessing Officer is in order and further submitted that the Commissioner (Appeals) is not justified in directing the Assessing Officer to allow depreciation on the w.d.v. in respect of 8,76,400 cops purchased. In the alternative, learned departmental representative submitted that assets, i.e., aluminium cops, were purchased in the months of March and during the accounting year, relevant to the assessment year under consideration, the assessee-company enjoyed ownership for less than 180 days and hence, only 50 per cent depreciation is allowable in the year. 9. Joining the issue, learned Senior counsel, appearing on behalf of the assessee-company, submitted that for the purpose of financing some protection in the form of mortgage or otherwise, is required and since there is legal hastle in mortgage, the present mode, i.e., sale and lease back, is found to be safer in the commercial circles and hence it cannot be attributed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets at a particular value and legitimate transaction cannot be viewed as a colourable transaction so as to apply McDowell Co. Ltd.'s case unless there is sufficient evidence on record to prove that the price paid by the assessee is abnormal or higher than the market price. In the instant case, assessee submitted before tax authorities that cops were not only purchased by the assessee but also were purchased by the other companies (not connected with JCT Ltd.) from JCT Ltd. at the same price and hence it cannot be said that the price paid by the assessee is not the market price. Even otherwise, to safeguard the interests of the revenue, the Legislature provided for substituting 'actual cost' [vide Explanation 3 to section 43(1)] if the Assessing Officer is satisfied that the main purpose of the transaction was reduction of liability to income-tax by claiming depreciation with reference to enhanced cost. Explanation 3, by implication, says that merely because the price paid by the assessee is higher than the market value, McDowell Co. Ltd.'s case should not be pressed into service. But nevertheless, the Assessing Officer was authorised under the Explanation to fix reasonable p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the removal of doubts". Explanation 4A was inserted to discourage the sale and lease back transactions (entered into on or after 1-10-1996) wherein assessee pays higher value than the w.d.v. in the hands of the vendor. In the instant case, the w.d.v. in the hands of the vendor, in respect of the cops purchased by the assessee, was Rs. 8,20,69,350 and the average cost per cop was around Rs. 44 (vide page 27 of paper book) whereas, the assessee purchased at Rs. 40 per cop and the actual cost in the hands of the assessee worked out to Rs. 56 on account of payment of Central Excise duty and Sales-tax, and this price is very competitive price as compared to the other purchasers (vide page 23 of paper book). The Legislature never intended to disregard the sale and lease back transactions and the intention is made further clear by inserting Explanation 4A to section 43(1) of the Act wherein it was stated that the w.d.v. in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Explanation 4A in the instant case, inasmuch as, it has no application to the assessment year 1993-94. In order to apply Explanation 3 to section 43(1) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the w.d.v. of the assets in the hands of JCT Ltd., as on 31-3-1993", vide page 27 of the paper book, was not furnished before the tax authorities. However, as the facts contained in the aforesaid material paper touch the root of the matter, in the interests of substantial justice, we have admitted the additional evidence: (a) Assessing Officer should examine as to whether reduction of tax liability by claiming depreciation on the enhanced cost is the main purpose behind the impugned sale and lease back transaction. It is needless to observe that if the Assessing Officer is satisfied that the main purpose of the assessee-company is otherwise, then Explanation 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the w.d.v. or market value of the aluminium cops; (b) if the Assessing Officer is satisfied, in terms of Explanation 3, he may examine the facts and circumstances of the case to fix the substituted 'actual cost'. In this regard he may find out the market value of the aluminium cops at the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxable income. 16. Ground No. 3 pertains to the claim of deduction of Rs. 44,995 incurred and shown under the head 'Sales promotion'. It is the case of the assessee that the expenditure incurred was in connection with the coffee, tea and refreshments served to the persons who came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under section 37 of the Act. On the other hand, learned departmental representative submitted that the expenditure incurred in connection with the entertainment in hotels falls within the ambit of section 37(2A) of the Act. 17. In the light of the amended provisions of section 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT v. Patel Bros. Co. Ltd. [1995] 215 ITR 165/81 Taxman 156, the claim of the assessee-company is not tenable. We, therefore, uphold the order of the Commissioner (Appeals). 18. In the result, the appeal filed by the assessee is partly allowed. 19. In the revenue's appeal, Ground No. 1 pertains to the direction of the Commissioner (Appeals) with regard to the depreciation on leased aluminium cops. In the light of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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