TMI Blog2003 (12) TMI 296X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation. While passing the assessment orders under section 143(3), the ld. Assessing Officer allowed the depreciation. 4. Before we come to the real controversy in question, it is worthwhile to give a profile of relevant facts which gave rise to these appeals. 5. This company purchased plant and machinery worth Rs. 14,62,94,568 and vehicles worth Rs. 4,27,267 for which the appellant company had entered into lease agreement with M/s. Shree Rajasthan Texchem Ltd., Mumbai, which is also another company incorporated under the Company's Act vide lease agreement dated 14-10-1995 and 25-11-1995 during assessment year 1996-97 and vide another lease agreement dated 9-11-1996 during the assessment year 1997-98 for leasing out machinery worth Rs. 61,57,028. As per the terms of the lease agreement, the appellant company had received lease rent from the lessee company and had claimed depreciation on the leased assets. The assets in question were purchased by the assessee-company [hereinafter referred to as the lessor-company]. While computing assessment of the lessee company, the Ld. Assessing Officer at Mumbai allowed depreciation on the same leased assets although it was not claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasons recorded by the revenue that some income chargeable to tax had escaped assessment. This being a sine qua non condition for assumption of jurisdiction, we directed the ld. DR to produce the reasons in question but the ld. DR himself offered to produce the reasons so required. The ld. DR produced the copies of the reasons recorded by the ld. Assessing Officer. The copies of the reasons were also supplied to the ld. AR Shri Amit Kothari. 12. The ld. AR Shri Kothari has now argued that the perusal of the reasons so recorded by the Ld. Assessing Officer shows that these are not the reasons which can result in re-opening of assessment orders which have been passed after considering all the relevant documents on record and that there seems to be no further evidence or material which can justify the reopening of the same. 13. In reply to this contention of the ld. AR, the ld. DR Shri Zala has submitted that on the basis of the same lease deeds, the Assessing Officer at Mumbai, in the case of the lessee [since the lessee is assessed at Mumbai] has come to different conclusion, that the assets in question are owned by the lessee-company because these have been transferred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease are 'Financial Lease' and the lessee is the owner of these 'assets'. (vi) The assessment in the case of the lessee company was done on 24-2-2000 for assessment year 1997-98 and the assessment order in the case of the lessor was passed on 18-2-1999 for assessment year 1996-97 but the original assessment order for assessment year 1997-98 was passed on 25-2-2000. 17. Now the picture is clear to the extent that the assessment order on which the opinion has been formed by the ld. Assessing Officer at Udaipur in the case of the lessee was passed on 24-2-2000 for assessment year 1997-98 by the Ld. Assessing Officer at Mumbai. Thus this order was passed after the original assessment order was passed at Udaipur for assessment year 1996-97, but before the order of assessment year 1997-98. One original assessment order, namely for assessment year 1997-98 was passed after and for assessment year 1996-97 it was passed on 18-2-1999 i.e. before 25-2-2000. 18. We have to see the implications of both these orders so far as the applicability of section 147/148 of the Act are concerned. There cannot be two opinions about the fact the Assessing Officer has changed his opinion on the basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who is making the lessee-company as the owner of these assets by interpreting the lease as a 'financial lease' and the lessee-company as the owner of the assets. (v) That "opinion" of another Assessing Officer under similar circumstances cannot be the reason for the Assessing Officer (Udaipur) to change his opinion. (vi) Except the "opinion" or finding of the ld. Assessing Officer at Mumbai, no other material has come to the knowledge of the Assessing Officer at Udaipur. (vii) The appellant company neither hid any material information from the department nor gave any wrong information so as to conceal the income so that it may escape assessment. (viii) That in the P L Balance Sheet filed with the Returns of Income for both the years, the lease rentals were shown separately in the main body of the P L account. The assets given on lease were shown separately in Schedule IV. The note on accounts also referred to the lease income as income from operating lease. (ix) The lease agreements dated 14-10-1995 and 25-11-1995 including the copies of all the bills in respect of assets given on lease, details of cost of each leased assets and other information were submitted to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used for purchase of assets, loans details from financial institutions etc. After careful examination of all these pieces of evidence and details, a conscious and judicious decision was taken by the ld. Assessing Officer and depreciation was allowed on the leased assets. 24. It was also submitted that there are no facts or materials from which it could be inferred that there was any failure on the part of the assessee to disclose material facts necessary for its assessment, not there is any material to suggest that any income liable to tax had escaped assessment. During the course of assessment proceedings, the ld. Assessing Officer-required vide letter dated 8-1-1997 to examine and in fact 37 questions relating to the appellant company. The appellant company dully produced all the requisite details vide its letter dated 18-1-1999 which were duly examined by the Assessing Officer and after fully convincing himself the claim of depreciation was allowed. 25. The ld. AR further submitted that in the P L balance Sheet filed with returns of both the years, the lease rentals were shown separately in main body of P L Account. The assets given on lease were shown separately in Schedul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o it cannot be said that the assessee-company is not doing the business of leasing of assets. The appellant company is the owner of assets given on lease which is very much evident from the lease agreement of the appellant and the lease assets have been disclosed in t he balance sheet. The assets were acquired by the appellant company and the same were delivered to the lessee. The transportation charges were paid by the appellant company, for transporting the assets in question to the premises of lessee company and the same formed part of the value of assets given on lease. The assets were covered under transit insurance risk and the premium was paid by the appellant company till the assets were delivered to the premises of the lessee company. The appellant lessor company has received rentals from the assessee (sic-lessee) company amounting to Rs. 78,25,584 and Rs. 2,92,72,399 which have been shown as lease rental income in the P L account. So it is clear from the above lease agreements in question that the risk and reward incidental to the ownership of the assets were with the lessor company and the lease was an 'operating lease' and the appellant was entitled to depreciation on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is not responsible in any manner about fitness, quality, suitability, of the said machinery at the end that the mere delivery of the machinery shall be conclusive evidence that the said machinery is in good condition. All the risks lie with the lessee company and there is no responsibility with the lessor. So the lessor company is no longer owner of these assets makes the transaction in question as financial lease and not as an operating lease is not a correct finding to our mind. The department has got no cogent evidence to support the findings that the lease in question is a financial lease and not an operating lease. The ld. CIT(A) has assumed such a conclusion without the benefit of any legal or statutory assistance. 29. It is brought to our notice that in the assessment order and the appellate order passed in the case of the lessee company it has been held that the lease agreement was not an operating lease but a financial lease and depreciation was allowed in the hands of the lessee company by Assessing Officer. The lease rental has been treated as recovery of the capital amount alongwith interest. We would like to mention here that the AR Shri Amit Kothari has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son of either omission or failure on the part of the assessee to make a return of his income or omissions or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year." (b) Mercury Travels Ltd. v. Dy. CIT [2002] 258 ITR 533 (Cal.) Reassessment - Reassessment after four years - Failure to disclose material facts necessary for assessment - Assessee claiming special deduction under section 80HHD and submitting requisite certificate from Chartered Accountant - Special deduction granted in original assessment -Reassessment proceedings to recalculate special deduction - Mere change of opinion - Reassessment proceedings not valid - Income-tax Act, 1961, section 147? (c) Garden Silk Mills Ltd. v. Dy. CIT (No. 2) [1996] 222 ITR 68 (Guj.) Reassessment - Information that income had escaped assessment - Mere change of opinion is not sufficient - Original assessment after considering explanation of assessee - No new information that income had escaped assessment - Reassessment was not valid - Income-tax Act, 1961, section 147. (d) Jindal Photo Films Ltd. v. Dy. CIT [1998] 234 ITR 170 (Delhi) Where the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overable and had filed statements alongwith the original return disclosing full details of the interest suspense account, there was no failure on the part of the assessee to disclose fully and truly material facts necessary for the assessment and section 147(a) had no manner of application and was not attracted to the facts of the case. (h) Sheth Brothers v. Joint CIT [2001] 251 ITR 270 (Guj.) Reassessment - Failure to disclose material facts necessary for assessment - Claim for deduction allowed by ITO but withdrawn in revision proceedings and allowed again on further appeal - No failure to disclose material facts regarding deduction - Reassessment not valid - Income-tax Act, 1961, sections 147, 148. (i) CIT v. Sambhar Salt Ltd. [2003] 262 ITR 675 (Raj.) Reassessment - Information that income had escaped assessment - One possible view taken - Another view possible - Not "information within the meaning of section 147(b) - Reassessment not valid - Income-tax Act, 1961, section 147 (j) CIT v. Kelvinator of India Ltd [2002] 256 ITR 1 (Delhi) It is a well-settled principle of interpretation of statutes that the entire statute should be read as a whole and the same has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upholds constitutionality should be favoured. In the event it is held that by reason of section 147 the Income-tax Officer may exercise his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion, the same may be held to be unconstitutional. An order of assessment can be passed either in terms of subsection (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the subsection (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act, 1872, judicial and official acts have been regularly performed. If it beheld that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi judicial function to take benefit of its own wrong. Hence, it is clear that section 147 of the Act does not postulate conferment of power up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply his mind to any fact in order to come to the belief that there was omission or failure on the part on S to disclose primary facts necessary for his assessment "Reassessment - Information that income had escaped assessment - Inspection note of IAC - Not sufficient for issue of notice under section 147(b) - Income-tax Act, 1961, sections 147,148 Constitution of India, Article 226." (b) Sitaram Jindal v. ITO [1972] 84 ITR 162 (Cal.) The belief of the ITO that income has escaped assessment due to failure on the part of the assessee to disclose primary facts must be held in good faith. It is open to the court to examine the question whether the reasons for the belief have a rational connection or relevant bearing to the formation of the belief. The conditions necessary for the issue of notice under section 148 were not satisfied and the notice was invalid. In our view, the opinion framed by the Assessing Officer of another assessee cannot be a base to initiate reassessment proceedings. 34. To further substantiate our finding we would like to give a finding that on same set of facts and evidence one Assessing Officer has come to the conclusion that the depreciation is allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this case under section 147/148 is bad in law and as such not tenable. Hence, after considering all the facts and the circumstances of the case, we come to the conclusion that the assumption of jurisdiction by the ld. Assessing Officer of lessor at Udaipur is illegal, and as such is quashed. 35. Now we will decide this appeal on merits 36. The next ground relates to claim of depreciation under section 32 of the Act. The ld. AR has submitted that the CIT(A) has erred in holding that the disallowance of depreciation amounting to Rs. 1,83,29,547 on assets given on lease by appellant company, the disallowance so made is bad in law and on facts. The CIT(A) has erred in not accepting the apparent as real without the burden being discharged by revenue. It has been submitted that the authorities below have erred in not appreciating the lease agreement executed by the appellant. He has submitted that the CIT(A) has erred in confirming the action of the ld. Assessing Officer without application of mind and without going into real and true nature of lease transactions and in holding the action in the case of the appellant on the basis of proceedings in the case of lessee company. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to various clauses in the lease agreement that the lease in question is not an 'operating lease', rather, it is a 'financial lease' and in case of financial lease the lessor no longer remains the owner of assets. While carrying out reassessment proceedings, the Assessing Officer issued query to the appellant company that he proposed to disallow the claim of depreciation on the assets leased during the year on the basis of order passed in the case of the lessee company, namely Shree Rajasthan Taxchem Limited where the ld. Assessing Officer in the lessee's case was of the opinion that the lessee company was the owner of the leased assets. The relevant extract of the query is as under: "Since your company has not used these assets for own business and the lessee company also claimed/was granted depreciation on these assets your company is not entitled for depreciation." 42. As we have observed above, the ld. AR had made a statement at par that the lessee company did not claim depreciation on the leased assets. This fact gets fortified from this proposed notice reproduced above where the Assessing Officer has used the words "claimed/was granted" and also the fact that the ld. DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assets leased are owned by the appellant company: (a) Clause (3) of the lease agreement dated 25th November, 1995 read with the Schedule thereof provides that the lease period is 120 months and the monthly rent is Rs. 15 per thousand. The monthly rent was increased to Rs. 16.50 per thousand w.e.f 1-4-1996 vide letter dated 11-8-1996. Clause 3 of the other agreement dated 9th November, 1996 read with the Schedule thereof provides that the lease period is 120 months and that the monthly rent is Rs. 18 per thousand. (b) Clause (8) of both agreements clearly provides for ownership of the appellant lessor company. The said clause read as follows: "The said machinery shall at all times remain sole and exclusive property of lessor and lessee shall have no right, title or interest thereon. The lessee irrevocably undertakes that at no time during currency of lease agreement, which shall be non-cancelable, not to capitalize lease assets in lessee's Balance Sheet. It has been agreed that the ownership of said assets during tenure of lease, and inclusive of any renewal that lessor may concur, indisputably rest with the lessor. Lessee shall not claim any relief by way of any de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arry out periodical repairs and normal overhaul. The lessor shall not be responsible for any repairs whether major or minor and repairs and upkeep and maintenance expenditure will be borne solely by the lessee. It is also provided that: "The lessor shall have the right to inspect through its representative or agents and to bring to the notice of the lessee the periodical repairs and maintenance problems which may arise during the currency of the agreement and in the event of the lessee failing to carry out the repairs of, to make maintenance or overhaul or remedy such deficiency when called upon to do so by the lessor, the lessor shall have the right, but without obligation to carry out the repairs, overhauling or maintenance of the said machinery, in such event, the lessee shall immediately on receipt of a demand notice from the lessor reimbursed the expenditure which might have been incurred by the lessor. Without prejudice to what is stated above, the lessor, in the event of lessee failing to carry on the maintenance or overhaul or to remove such deficiency when called upon to do so, shall have the right to terminate this agreement and to retake possession of the said machin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation in respect of business of leasing of the assessee company on leased assets under section 143(3), while framing the original assessment. 50. The Vouchers of the Leased Assets added during the Financial Year 1995-96 and given on lease amounting to Rs. 14,62,94,568 and Rs. 4,27,287 were furnished before ld. A.O. vide letter dated 25-1-1999 on 8-2-1999. The assets were not secondhand. It would also be worthwhile to mention that the lessee company, had purchased various other assets, and only some of the assets were taken on hire from the lessor company. There are various steps in the manufacturing process. Only few of the machinery were taken on lease. The total investment was about Rs. 40 cr. by the lessee company, but assets valuing only Rs. 15 cr. were taken on lease. In number out of about 100 machines purchased by the lessee, only about 20 machines were taken on lease, which was about 20% in terms of machine requirements. 51. We would like to state that it is not necessary that assets which are given on lease should be brought to the premises of Leasing Company and then only it may be given on lease. However in this particular case machines were received at the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taken on lease from the appellant. However, in appeal the CIT(A), directed that depreciation is optional and if the lessee do not claim, the same cannot be thrust upon it. Therefore no depreciation on leased assets allowed to lessee. 56. The facts of company's leasing business being continued and increased in lease rentals during the assessment year 1997-98 were also informed to the Assessing Officer vide our letter dated 12-1-2000. It may be pertinent to state that in case of lease transaction, what is actually received is the rental charges or the hire/lease charges for providing facility to use the asset with the inherent risk of wear and tear, obsolescence, consumption, loss of value arising by efflux of time and no element of interest is at all earned in such transactions. This contention is further supported by the fact that in these type of transactions, the ownership continues to be in the hands of the original owner. 57. In lease agreement, a party (called lessee) acquires the right to use an asset for an agreed period in consideration of rent to another party (called lessor). 58. Now a careful perusal of the CIT(A)'s order makes it crystal clear that the ld. CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay agree that the maintenance charges shall be borne by lessee and the lessor can put a condition that the machine given in a working condition should be returned back in a working condition after termination of the lease. The maintenance, security, upkeep and even the rent in case the machine is lost and not working for that period can be agreed to be borne by the lessee company. This is a common practice by which a person would like to get the rental income on lease articles and also ensure the safety of the leased asset. This fact, rather places more weight in favour of the lessor that he being the owner of the assets would like to get the rental income regularly even when the machines are not working, so that the lessee may not be negligent in maintaining the machines in question. So in our opinion, the authorities have unsuccessfully pierced the veil of the company and have come to a wrong conclusion that the lease is a finance lease and the lessee is the owner of the leased assets. 59. There is no doubt that by now it is a settled view that when one of the objects of the assessee company is the leasing of assets, and by such leasing, the user of the machinery remains with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the owner in the machinery. There is merely a licence given to the hirer to use, for a temporary period, the machinery so hired. In the absence of any element of sale, there is no reason for treating such an agreement as "transfer" or disallowing the grant of investment allowance, when the assessee complies with the requirements of section 32A. (c) CIT v. Eassan Investments Ltd [2002] 254 ITR 83(Mad.). Held, that the assessee was admittedly engaged in the business of leasing of earth moving equipment. The fact that such earth moving equipment was utilized in industrial activity was not in dispute. It is not necessary that in order to claim this allowance, the assessee himself should be engaged in the manufacture. The fact that the machinery owned by the assessee was leased to manufacturers and used for manufacture was sufficient. The assessee was entitled to investment allowance in respect of the machinery. (d) CIT v. Madan Co. [2002] 254 ITR 445(Mad.) The word "hire" used in entry No. III(2)(ii) of Appendix I to the Income-tax Rules, 1962, is only meant to denote that the use of the vehicle is not by the owner himself for his own purpose, but it is given to another fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Depreciation-Allowability-Leasing of gas cylinders-Gas cylinders purchased by assessee in the relevant previous year and an agreement of lease was also entered into-Lease rent relatable to relevant previous year accounted in books and offered for taxation-It was never stated that lease agreement had commenced on a later date-Assessee had also received money in advance from lessee-Mere fact that delivery of cylinders was given to lessee in subsequent year as certain formalities required to be complied with by lessee were not finalized, would not disentitle assessee to claim depreciation-In a leasing business, what is required before depreciation could be allowed is that the asset must have been formally introduced in the business of lease-It would be immaterial if the lessee has not put to use the leased out asset. (h) Peacock Chemicals (P.) Ltd. v. Deputy CIT [1995] 51 TTJ (Delhi) 264. The trucks have been registered in the name of the assessee before the end of the accounting period. The lease agreement with T Ltd. clearly shows they had clearly agreed to place some security deposit and take the various trucks on hire and on that basis had taken delivery of the trucks from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee entered into were financial leases, whereunder the assessee only held assets in question as a security for the amounts of loans advanced by assessee to lessee. Merely because in the perception of the Assessing Officer, certain clauses of the lease agreements were unreasonable or even incongruous, it could not be concluded that the assessee had not entered into these agreements as a lessor-owner of the assets in the ordinary course of its business of leasing. It is well-settled position in law that Court cannot rewrite an agreement for the parties. Further, an agreement is to be read and construed as a whole, effect being given to all the parts thereof, and no part of it should be ignored unless it is so inconsistent with the rest of its that no meaning can be given to it. On an overall reading of these lease agreements, there was nothing inconsistent therein of the which could show the intention of the parties otherwise. 61. In the result we hold that the assessee company is the owner of the leased assets and has leased out these assets to the lessee company for a rent and thereby the assessee company is also in the user of the asset, and as such, is entitled to depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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