TMI Blog2005 (2) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) M/s Seethapur Plywoods Industries (6) M/s Patheja Forgings Auto Parts Ltd. III. Mortgage transactions : (1) M/s Marvel Sales Services Ltd. 2. The learned counsel for the assessee has relied on the following case laws, commentaries and Acts: 1. The extracts of Law of Practice of Income-tax, Vol.-I, Ninth Edn. of Kanga, Palkhivala and Vyas. 2. The extracts of Indian Contract Specific Relief Acts of Pollock Mulla, Twelfth Edn., Vol. II. 3. Rukmanand Bairsoliya vs. State of Bihar AIR 1971 SC 746 4. Mysore Minerals Ltd. vs. CIT (1999) 156 CTR (SC) 1 : (1999) 239 ITR 775 (SC) 5. CIT vs. Salkia Transport Association (1983) 33 CTR (Cal) 198 : (1983) 143 ITR 39 (Cal) 6. Jeypore Timber Veneer Mills (P) Ltd. vs. CIT (1982) 137 ITR 415 (Gau) 7. Kishanchand Chellaram vs. CIT (1980) 19 CTR (SC) 360 : (1980) 125 ITR 713 (SC) 8. National Thermal Power Co. Ltd. vs. CIT (1999) 157 CTR (SC) 249 : (1998) 229 ITR 383 (SC) 9. CIT vs. Orissa Corpn. (P) Ltd. (1986) 52 CTR (SC) 138 : (1986) 159 ITR 78 (SC) 10. Mid East Portfolio Management Ltd. vs. Dy. CIT (2003) 81 TTJ (Mumbai)(SB) 37 : (2003) 87 ITD 537 (Mumbai)(SB). On the other hand, the learned Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance in respect of these transactions. 5. First, we will deal with the issue with regard to sale and lease back transaction in the case of M/s Khoday India Ltd. The AO while framing the assessment found that the assessee has entered into a lease agreement with M/s Khoday India Ltd. for leasing of 4167 oak wood barrels which were purchased from M/s Khoday India Ltd. and were leased back to the same party. In this transaction the cost of each oak wood barrel was Rs. 4,800. During the assessment proceedings, the AO found that for asst. yrs. 1982-83 to 1988-89, the lessee purchased empty oak wood barrels at various rates and sold the same barrels during the period 1992-93 to 1994-95 at a higher price. The lessee purchased the oak wood barrels in 1988-89 @ 720 per barrel and these were put to use up to the period of 1994-95. The AO found that the value of each barrel could not in any case be more than the cost of acquisition and moreover, the lessee has claimed 100 per cent depreciation in its books of account. The AO could not identify the barrels purchased and leased out by the assessee by referring the invoices; he took the average cost price of each barrel at Rs. 559 and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher value than the actual cost of the asset, (ii) the WDV of most of these assets in the books of account of the alleged lessee prior to the date of the sale was very low and information was not furnished by the lessee's for obvious reasons, (iii) whereas the funds were provided by the lessor to the lessee's for purchase of the machinery, the assets covered by alleged transactions continued to remain in the possession and use of the lessee's prior to and after the date of the alleged sales, (iv) the lessee required the funds for its working capital requirement and not for the purchase of acquiring of any new assets. In view of this, the CIT(A) has restored the matter to the AO for calling remand report with the following directions: "I had restored the issue to the AO with the direction that he should find out the cumulative effect of all the circumstances and see whether transactions were genuine or not and whether the depreciation was at all admissible, and if the transactions were found to be genuine, it should be ascertained what was the actual cost of the assets in question. In that case, the AO was also required to make a reference to the Departmental valuer and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e depreciation allowance to the value as opined by the Departmental Valuation Officer has to be upheld, particularly as the assessee has not been able to justify the valuation given by the chartered engineer of the assessee-company. In view of this, he confirmed the disallowance of depreciation and held that these transactions are financial transactions representing money lent on interest. He further directed the AO to bring to tax the interest to be assessed on the amount charged by the assessee and exclude the component of principal in the lease rent received by the assessee on pro rata basis. Aggrieved, the assessee is in second appeal before the Tribunal on these issues. 7. Before us, the learned senior counsel, Shri Aravind Dattar, along with Shri V.S. Jayakumar, appeared for the assessee. They filed paper book I consisting of pp. 1 to 235 and paper book II consisting of pp. 1 to 29 and response to the Department s written submissions. First of all, the learned counsel for the assessee argued that the directions given by the CIT(A) in his remand order dt. 17th Dec., 1998, have not been carried out by the AO. The learned counsel for the assessee has drawn our attention to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction of assets, etc., in respect of transactions of M/s Khoday India Ltd. and M/s Mohan Breweries Distilleries Ltd. were never raised by the Department at the earlier stage and it was undisputed or unquestioned by the lower authorities at any time that is the reason why lease deeds relating to these transactions were not made part of the assessee's paper book and no adverse inference can be drawn against the assessee. The learned counsel for the assessee further argued that the Department can confine itself only to the difference in valuation of the assets in question and it cannot travel beyond the scope of the said objection and in this matter, the Department has made out totally a new case and the argument, if accepted, it would amount to enhancement by the Tribunal which is beyond the scope and powers of the Tribunal. He further stated that the learned Departmental Representative very clearly considered that he is only bringing to the attention of the Bench that the AO had not gone on that footing. The learned counsel for the assessee further argued that the Department is relying only on the assessment orders in the case of M/s Five Brothers Trading Investment Co. (P) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the barrels have been admittedly used for more than 5 years and the lessee has availed the depreciation on these assets. Accordingly, the value was determined at Rs. 500 and also the AO has given set off of 50 per cent on account of wear and tear and usage, and accordingly, determined the market value by invoking the Expln. 3 to s. 43(1) at Rs. 279 per oak wood barrel. He further argued that the value determined by the AO is on scientific reasoning and this is not on the basis of conjectures or surmises but on the actual cost of the assets, the period of use, and fully depreciated asset was sold to the assessee by the lessee. He has drawn our attention to the valuation report submitted from one Shri P.S. Manohar, chartered engineer of Bangalore, which found place at p. 2 of the assessee's paper book I which is being reproduced as it is: "P.S. Manohar Chartered Engineer Bangalore. Valuation Certificate This is to certify that the value of empty oak wood barrels which is under consideration of sale per proforma invoice dt. 7th Oct., 1994, of Khoday India Ltd. to M/s First Leasing Co. of India Ltd., Madras, is Rs. 4,800 each. Sd/- P.S. Manohar, BE, MIE, C. Engg. Certi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der appeal is 1995-96. However, the invoice is of dt. 7th Oct., 1994, and after such agreement entered into between the lessee and the assessee, even the installation of the equipment shown as on 6th Oct., 1994, which is also prior to the date of invoice. In view of this, he doubted the genuineness of the lease agreement and the claim of depreciation. He further argued that as to how the assessee chose to buy a fully depreciated assets at such inflated price, as the intention is very clear that the assessee only wanted to fund the lessee and opted for an old asset so that it can claim bogus depreciation on inflated prices to avoid the incidence of income-tax in its hands and then transaction is in the guise of a lease transaction which is nothing but purely a financial transaction. The learned Departmental Representative further objected to the admission of additional grounds as Shri P.S. Manohar, the valuer of the assessee, is not the Departmental valuer in the case of M/s Khoday India Ltd. and Shri A.S. Anandram in the case of M/s Mohan Breweries Distilleries Ltd. is the Departmental valuer. He argued that there are several other compelling and surrounding circumstances in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation officer and registered valuer for the purpose of IT Department and further, the valuation of the chartered engineer is not based on any evidence or details whereas the Departmental valuation is based on the reasons and the report is a detailed one. The learned Departmental Representative further argued that in the case of sale and lease back transaction, the assessee has purchased old equipment owned by the lessee and leased out by the lessee and all the equipments are depreciated to the maximum extent, and the assessee has not given any evidence as regards to the cost of equipment purchased by the assessee originally. The AO time and again asked for original invoices from the assessee relating to the purchase of assets but those have not produced by the assessee. He further argued that the AO has rightly asked for the original invoice as he has doubted the value of the assets which has been fixed at very higher rate without any basis. Since the AO himself being not competent to value the equipments, referred the matter to the Departmental Valuation Officer who is an expert, qualified and competent to value the assets as per the authority under the IT Act and accordingly, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on the valuation report of Shri P.S. Manohar, as to why the Department should provide the cross-examination of such a person to the assessee. In view of this, there is no substance in the contention of the assessee as regards to the cross-examination of Sri P.S. Manohar, valuer of the assessee. 10.1 Now, the point at issue is regarding the valuation of assets. We have gone through the valuation certificate of Shri P.S. Manohar and seen that this is repetition of sale proforma invoice dt. 7th Oct., 1994, and the copy of valuation certificate has already been reproduced above in para 7. In view of this, the assessee's valuation has no basis except the sale proforma invoice. The AO as well as the CIT(A) have treated the transaction as a collusive transaction. The AO suspected the bona fide of the lease transaction and held this to be a device adopted by the assessee to claim depreciation in their guise and accordingly held to be financial and lease transaction. We have seen that the AO while valuing the lease asset has invoked the provisions of s. 43(1), Expln. 3 of the Act and accordingly determined the value at Rs. 279 per barrel. Now, we go through the provisions of s. 43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have been made by the assessee at the assessment stage but no claim whatsoever was made by the assessee. The AO while determining the value given the reasons for invoking the Expln. 3 to s. 43(1) of the Act which were that the lessee has purchased the oak wood barrel during the period from 1984-85 to 1988-90 which was sold to various lessors including the assessee. During the assessment years from 1993-94 to 1995-96, the cost of purchase ranged from Rs. 380 to 720 by the assessee during the abovementioned period. In view of this, the AO has taken an estimated value at Rs. 559 in the absence of any information submitted by the assessee regarding the quality, size, dimension, age, type of wood and machinery of original. Since the assets were already used by the lessee and the value was depreciated, the AO valued the assets by giving set off of 50 per cent and accordingly determined the value by invoking the provisions of s. 43(1), Expln. 3 of the Act at Rs. 279 per each oak wood barrel. In view of this, we uphold the AO in valuing the assets and accordingly disallow the depreciation in the respect of the assets given on sale and lease back in the case of M/s Khoday India Ltd. wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the leased assets. The AO has adopted the lower rate as valued by the Departmental valuer on the ground that nothing was produced either before the AO or before the CIT(A) to show that the value of the assets was Rs. 5,50,05,000. The assessee has submitted the invoices of machineries, lessee s valuation certificate and Departmental valuation certificate in its paper book I at pp. 29 to 43. The assessee's valuer has valued the assets vide reports dt. 20th May, 1993, and 15th Sept., 1994. The valuation done by the assessee's valuer is being reproduced from its paper book which reads as under: "The valuation of the machinery is made on the basis of the details and records furnished by the owners and brief comments on the machineries inspected are as under: Qty. (in Nos.) Each @ Rs. Present Market Value 1. Storage Tank Made up of Mild Steel Fabricated by Century Engineering, Madras, year of Mfg. 1982 Capacity : 80,000 litres 62,000 litres 52,000 litres 25,000 litres 2 2 2 3 11,00,000 9,00,000 7,00,000 3,50,000 22,00,000 18,00,000 14,00,000 10,50,000 2. Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Tapoica Spirit Column Plant M.S. 1.5 mtrs. x 30 ht. fully insulated consisting of hammer mill, cyclone, slurry tank, pump, hold-up tanks, conveyors, elevators and heat exchangers has been valued at Rs. 3,00,04,000 and for this no basis is given by the chartered engineer. It is to be noted that the value is to be determined by taking into consideration total anticipated life, utilised life, purchase value of the machines, the present market value of the plant and machinery, but the chartered engineer has not given any basis as to how he has valued the assets, what was the purchase value and present market value of the plant and machinery, etc. Even before us, it was not challenged as to how the value determined by the Departmental valuer was wrong and no bills/invoices were produced before the AO and it was valued on the basis of physical inspection of the assets. It was stated that the company from where it was purchased was M/s Vorion Chemicals Distilleries Ltd. which was merged with M/s Mohan Breweries Distilleries Ltd. w.e.f. 1st April, 1993, by amalgamation scheme as approved by the BIFR vide order dt. 20th May, 1994. As far as the assessee's additional ground regardin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter stating that there were lease transactions between the assessee and KDL. The AO by going through the facts disallowed the claim of the assessee in respect of depreciation on leased transactions by holding that these transactions are financial transactions. The CIT(A) confirmed the action of the AO. Aggrieved, the assessee is in second appeal on this issue before us. 12. Before us, the learned counsel for the assessee argued that the statements were recorded from the employees but no cross-examination was permitted despite of directions of the CIT(A) and the request for cross-examination was made even before the AO which can be verified from the assessment order. He further argued that the entire theory that machineries have not been supplied is absurd. For this, he has taken us through the suit filed before the Hon ble Madras High Court in CS No. 692 of 2003 and where the Hon ble High Court vide order dt. 30th March, 2004, in Application No. 457 of 2003, an advocate-commissioner was appointed to proceed to Bhilai to seize the machineries with police protection. The advocate-commissioner has initially taken inventory of the machinery at Bhilai which is set out in the sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 and invoices of supply of machines which is dt. 25th March, 1995. In view of this, he argued that it shows that no machinery was in existence when the lease agreement was entered into on 1st March, 1995. Even, the assessee has not furnished any proof as regards to movement of machineries. The learned Departmental Representative argued that (if) the payments were made on 31st March, 1995, then how the machines can be purchased and delivered before 31st March, 1995, and how the assets can be put to use in the absence of lease agreement entered into on 1st March, 1995. As far as the other lease agreement dt. 8th Sept., 1994, for the lease value of Rs. 1,66,32,000 is concerned, the invoice is dt. 5th Sept., 1994, prior to the lease agreement. However, the assessee has not furnished any proof of delivery of machines either to itself or to the lessee. Even, in the invoices for both the transactions, there is no address of any factory where the equipments were manufactured and there was no registration with the Central Excise Department of those parties and no such registration number is evidenced from the invoices except for the Madhya Pradesh Sales-tax and Central Sales-tax registra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... giving opportunity to cross-examine but the assessee has not availed this opportunity. The AO has specifically required the assessee to let him know the persons to whom he wanted to cross-examine but it chose not to avail this opportunity. In view of these facts, we do not say that the AO has denied the opportunity to cross-examine various persons, even otherwise, all the officials of KDL are within the approach of the assessee. But, the assessee has not made any efforts on this account. In view of these facts, we feel that the Departmental has not denied the opportunity to cross-examine various persons of KDL to the assessee. The next argument of the assessee is in respect of the Hon ble Madras High Court s order appointing advocate-commissioner for verification of assets and the advocate-commissioner in his report has submitted the details of assets in its schedule of equipment annexed to Application No. 457 of 2003 in CS No. 692 of 2003. After going through the Hon ble High Court s order which was relied on by the assessee's counsel, it is seen that the Hon ble High Court has passed an order for seizure of assets as per schedule of equipment and in the event of resistance, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pure financial transactions and accordingly, confirm the order of the CIT(A) who has confirmed the action of the AO in disallowing the depreciation. Accordingly, this issue is decided against the assessee. 15. The next issue in the assessee's appeal is against the disallowance of the claim of depreciation in respect of boilers leased out to the Mahalakshmi Sugar Mills Company Ltd. (hereinafter referred to as M/s MSMCL) which was raised by way of ground No. 4, reads as under: "4(a). The CIT(A) erred in confirming the disallowance of the claim for depreciation in respect of boilers leased out to the Mahalakshmi Sugar Mills Company Ltd. (b) The appellant submits that the CIT(A) was not justified in not considering the certificate filed by the lessee of the machinery." The AO while framing the assessment, found the fact that the assessee has claimed the depreciation on the machineries stated to be leased to M/s MSMCL. The assessee in support of its claim filed the copies of invoices/leased agreement. The AO after going through the invoices, found that the machineries were purchased from Rachana (P) Ltd. and the address given by the assessee was ultimately found to be wrong. Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... installation certificate of the asset are filed. The documents regarding the payment receipt, installation certificate and the confirmation letter by the lessee were filed at pp. 99, 100 and 101, respectively. In view of this, he argued that there is no doubt about the existence of assets and address of Rachana (P) Ltd. He further argued that no doubt, Rachana (P) Ltd. is started by one of the employees of M/s MSMCL but this does not give rise to any finance transaction. This is purely on suspicion, conjecture and surmises, and held that there cannot be any assets or this is collusive transaction. The AO has disallowed the depreciation just on the basis of surmises and not on the definite finding. Accordingly, the depreciation should have been allowed to the assessee. 17. On the other hand, the learned Departmental Representative argued that by going through the paper book of the assessee, Vols. I to III, it can be noticed that the assessee has not furnished the copy of lease agreement. However, there are two lease agreements between the assessee and the lessee. The first lease agreement is dt. 6th Sept., 1994, which is valuing Rs. 75 lakhs and this is placed in DPB II at p. 57. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department has filed the lease agreements entered into between the assessee and the lessee. The first agreement is dt. 6th Sept., 1994, for an amount of Rs. 75 lakhs and this finds place in DPB II at p. 57. Subsequently, the assessee entered into second lease agreement which is dt. 13th Sept., 1994, which finds place in DPB II at p. 52 wherein the assets are valued at Rs. 1.10 crores. For this, the learned counsel for the assessee argued that supplementary agreement is normal trade practice and if the credit committee has approved the credit limit which operates at different level. He further argued that credit committee has approved Rs. 75 lakhs as limit first and enhanced the limit. He further argued that the lease agreement, an exposer agreement, which operates as master agreement and at the time of agreement lessee might not even choose the asset or brand over the supplier or negotiate the price. Here, we do not agree with the learned counsel for the assessee's argument that this is trade practice but there should be some basis for enhancement of value from Rs. 75 lakhs to Rs. 1.10 crores. Hence, we reject this argument. The learned Departmental Representative has pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.1 The next issue is against the disallowance of depreciation in respect of leased assets to M/s Prakash Industries, Carews Pharmaceuticals Ltd. and Sitapur Plywoods Industries. This issue is raised by way of ground No. 5 which reads as under: "5. (a) The CIT(A) erred in confirming the disallowance of depreciation in respect of assets leased to Prakash Industries, Carews Pharmaceuticals Ltd. and Sitapur Plywoods Industries. (b) The appellant submits that the failure of the suppliers to reply to the AO cannot be a ground for inferring that the assets were non-existent." The AO while framing the assessment found that the assessee has claimed depreciation @ 100 per cent on plant and machinery leased to M/s Prakash Industries. The supply of machinery to M/s Pioneer Engg. Company has categorically denied having any transaction with the First Leasing Company of India Ltd. and also denied supply of any pollution control equipment. The lessee s claim was that the equipment was purchased by the assessee from M/s Pioneer Engg. Co. The depreciation claimed by the assessee was amounting to Rs. 2,38,09,500 on the plant and machinery claimed to have been supplied by M/s Sahib Engineer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rary to statutory documents and the machinery is available for verification in the lessee's premises. He further argued that the particulars in respect of M/s Sahib Engineering Works are also taken into consideration. The learned counsel for the assessee further argued that the authorities below have not allowed to cross-examine Shri Baldev, the employee of M/s Prakash Industries, before disallowing the depreciation. He has drawn our attention to the assessee's paper book I at pp. 102 to 123 wherein lease agreement, invoices, delivery challans, lorry receipts, assets confirmation, etc. in favour of supplier, M/s Pioneer Engg., have been filed. He has also drawn our attention to the assessee's paper book II where the documents as regards to M/s Sahib Engineering Works at pp. 26 and 27 have been filed. In view of these statutory documents and evidences, the learned counsel for the assessee argued that the depreciation should have been allowed. 20. On the other hand, the learned Departmental Representative argued that the lease agreement dt. 5th Sept., 1994, which is placed in assessee's paper book at p. 102 is valued at Rs. 2.50 crores and the leased equipment is air pollution cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kers, financiers and does not even bother to find out whether any asset is purchased by any supplier. As far as the second lease agreement dt. 26th April, 1994, is concerned, the value is Rs. 2 crores in respect of equipments like flameless furnace purchased from M/s Sahib Engg. Works on 8th Sept., 1994, and the lease agreement was dt. 26th April, 1994. The lease was entered into much before the existence of the asset. The learned Departmental Representative further brought to our notice that there is packing list of delivery challan-cum invoice and the supplier showing goods sent by truck and that list does not include the furnace. He further argued that even there is no proof of movement, delivery of furnace which is a very massive structure and cannot possibly be transported in one truck which carried other items also. He further argued that the CIT(A) has referred the matter to the Investigation Wing of the Department at Ludhiana for making enquiries and on the basis of enquiries conducted by the Investigation Wing, he came to the conclusion that M/s Sahib Engg. Works does not exist. This information was not available with the AO at the time of assessment and he brought into th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was plant and machinery claimed to have been supplied by M/s Pioneer Engg. Company Ltd. which denied the transaction and admitted the supply of air pollution control equipment during the financial year 1994-95. The leased value of this equipment was Rs. 2.50 crores which was installed at the assessee's place at Bilaspur. The supplier of the equipment was M/s Pioneer Engg. Company Ltd., Jamshedpur, Bihar, and the invoice was dt. 19th Sept., 1994, whereas the lease agreement was dt. 5th Sept., 1994. Due to denial of the supplier, the AO has written a letter to the assessee that the supplier has denied the supply of machinery/equipment but the assessee has filed in support of his claim, lease agreement and invoice on the basis of which the AO made enquiries and the same was denied. The assessee could not substantiate its claim with cogent evidence to ask for examination of the other party which has denied the supply of machinery. Even before us, the assessee could not adduce any evidence in support of its claim except the invoice and lease agreement which were produced before the AO. In these circumstances, the AO has rightly denied the opportunity of cross-examination as the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incidence of tax. Therefore, we confirm the order of the CIT(A) on this issue and accordingly, the assessee fails on this issue. 22. Now, we will deal with the transaction with Carews Pharmaceuticals. The AO while framing the assessment found that the suppliers, M/s Goutam Enterprises, S.K. Enterprises and Universal Engg. Co., supplied plant and machinery to the assessee and the assessee has leased it out to M/s Carews Pharmaceuticals and claimed depreciation on these plant and machineries. The AO sent letters to find out the genuineness of the parties but they were returned by the postal authorities with the comment "not known". In view of this, the AO wrote a letter to the lessee, M/s Carews Pharmaceuticals, for confirmation but the lessee, vide letter dt. 15th Jan., 1998, replied that the documents required are not readily available, hence one month s time was sought. In view of no feed back, the AO disallowed the depreciation as the assessee has not been able to establish the existence of suppliers and the lessee has also not furnished any details which would help the verification. Therefore, the AO inferred that the assets were not in existence and the CIT(A), in view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... armaceuticals Ltd. are joined lessee's and it is not explained by the assessee as to how two lessee's can be the party to the same lease agreement and the same equipments, and the same equipments can be leased to different parties one at Calcutta and the other at Bangalore. He further argued that the transaction is nothing but a loan transaction and putting the name of UB Pharmaceuticals Ltd. is nothing but only to take UB Pharmaceuticals as a guarantor for the amount of Rs. 1.5 crores advanced in the shape of lease agreement and the transaction as per the lease agreement is not a lease transaction but this is a financial/loan transaction. 25. We have heard the rival submissions and gone through the case records. It is seen from the lease agreement that the assets described are located at Thumkur, Karnataka. These documents have not been verified by the AO at the assessment stage. The documents including bills and delivery challans of supplier, S.K. Enterprises, Goutam Enterprise and Universal Engg. Company, have been furnished and these have not been verified by the Department. The learned Departmental Representatives, contention was that no proof has been furnished in support o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 167. He argued that the installation certificate has already been submitted before the AO which has been certified by the lessee that the assets have been installed properly and this installation certificate has been placed at p. 168 of the assessee's paper book I. According to the assessee, in the installation certificate, the assets are described as under: "Sl. No. Description of asset Quantity 1. Dust Collecting System 1 No. 2. Thermic Fluid Heater 2.5 millions Koal/hr. Coal, fired, including all Fittings 1 No. 3. Solid Waste recycling and Resource Recovery System (based on Waste Bagasse) complete system From Filtration fabrication to dyring. 1 No." Even, the performance certificate has also been submitted before the AO which is placed at p. 169 of the assessee's paper book I which was dt. 2nd Feb., 1995. In view of this, the learned counsel for the assessee argued that there is no dispute about the existence of assets and even the AO as well as the CIT(A) have not disputed this fact. He further argued that the allegation of the Department that sales-tax number does belong to somebody al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., a letter was addressed to the assessee by the bank. The invoice issued by the supplier to the assessee was thus proforma invoice and not an invoice of purchase of equipment. In view of this, he concluded that the assessee possibly sought to import this equipment to the said supplier for some purpose but it also entered into lease agreement with the lessee as if the said equipment was sold to the assessee by the supplier and then leased it out to the lessee. He further argued that the lessee is required to pay lease rentals @ Rs. 18,13,500 for initial six months and after that for 60 months the lease rentals will be @ Rs. 3,02,250 as per the lease agreement. He further argued that the total value of the equipment was Rs. 1.5 crores and in the very first six months the value would have been recovered at Rs. 84,81,000 before the installation. In view of this, he argued that this is nothing but a security against the lease value which is, according to him, commonly known as a loan transaction. To conclude, he argued that the transaction is only a finance transaction and this is to avoid tax incidence and, therefore, the CIT(A) has rightly confirmed the disallowance of depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an transaction in the guise of lease transaction to claim the depreciation. In view of this, we confirm the order of the AO and accordingly, the assessee fails on this issue. 30. The next issue raised by way of ground No. 7 is against the disallowance of depreciation in respect of asset given on lease to M/s Patheja Forgings Auto Parts Ltd. (hereinafter called as M/s PFAPL) which reads as under: 7 (a) The CIT(A) erred in confirming the disallowance of depreciation in respect of asset given on lease to Patheja Forgings Auto Parts Ltd. (b) The appellant submits that the failure of the suppliers to respond to the letters of the AO cannot be a ground for disallowing the claim for depreciation. (c) The appellant submits that it has furnished the confirmation letters from the lessee which has not been refuted by the AO. (d) The appellant submits that the disallowance of the claim for depreciation was unwarranted. The AO while framing the assessment under s. 143(3) found that the assessee has claimed the depreciation on the assets leased out to the lessee, M/s PFAPL. These assets were stated to be supplied by M/s Orion Finances and M/s Kalpataru Engineers. The AO during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In view of these facts and circumstances of the case, he upheld the disallowance of depreciation. 31. Before us, the learned counsel for the assessee argued that the assessee does not know the suppliers of the machineries but as long as the machinery (is) in existence can be verified and the depreciation cannot be disallowed. He further argued that it is impossible to verify the antecedents of individual suppliers as the assessee entered into more than 1000 transactions per year. Further, he argued that no leasing companies can conduct investigation on the genuineness of the machinery suppliers since the transactions are often handled by finance brokers/independent marketing agents on commission basis. He has drawn our attention to the letter of Asstt. DIT (Inv.)-2, Pune, dt. 18th March, 1998 which is placed at APB I at p. 224, wherein the Asstt. DIT has admitted that the assets are in existence and are located at Waluj at Aurangabad as mentioned in the delivery challan. He further argued that physical count of machineries tallied with leased out furnaces supplied by M/s PFAPL. In view of this, no adverse inference can be drawn out of the Asstt. DIT s letter. He further argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he location of equipment at Waluj, Aurangabad. The AO has obtained the copy of the lease agreement which finds place at p. 129 of the DPB II. In Annex. B to this agreement; the schedule of asset and location of asset has not been filled but left blank and this costs doubt on the lease transaction. Even, the invoice evidencing the purchase of equipment is dt. 27th Sept., 1994, which is about 7 days after the lease agreement and that means the asset was not in existence at the time of lease agreement. Even, the assessee has not furnished any evidence in regard to the movement and delivery of equipment to the lessee. As regards to second lease agreement, he argued that this agreement is dt. 1st March, 1995, valued at Rs. 1.96 crores. As per the lease agreement which finds place at p. 220 of APB I, in Annex. B, describing the equipment located at Waluj, Aurangabad, and the copy of the lease agreement obtained by the AO shows the description about the equipment and location of assets leased left blank. The portion of leased agreement was left blank only to be filled up later at the convenient of the lessor or lessee. The learned Departmental Representative has also drawn our attention t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not proved that as to whether it is a loan transaction or finance transaction or lease transaction. Since the assessee is duty-bound to prove that these are lease transactions which was not done by the assessee, in the absence of evidence, it can only be held that these are loans/finance transactions. In view of these facts, we hold that these lease transactions are nothing but finance transactions. Therefore, we uphold the order of the CIT(A) who has confirmed the order of the AO. 34. The next issue in the assessee's appeal is with regard to lease transaction with M/s Marvel Sales Services Ltd. which was claimed by the assessee as an agreement for mortgage and lease. The assessee has raised this issue by way of ground No. 6 which reads as under : "6.(a) The CIT(A) erred in holding that the lease transaction with Marvel Sales Services Ltd. was an agreement for mortgage and not lease. (b). He should have found that the various documents supported the lease transaction. (c) The appellant submits that the mere fact that the supplier received the payment through the lessee would not reduce the lease transaction to a finance transaction." The AO during the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y much existence. He further argued that the telephone number and telex number were available and he could easily be contacted. Therefore, he contended that complete details like sales agreement, invoice, letter of reimbursement, final payment letter and termination invoice were already enclosed in assessee's paper book at pp. 172 to 188. He further argued that the assets are in existence and this is not a mortgage transaction but this is a lease transaction. In view of this, he urged the Bench to allow the depreciation to the assessee. 36. The learned Departmental Representative argued that as per the lease agreement which is placed at p. 70 of the APB I which is dt. 20th Sept., 1994, shows lease value of Rs. 2 crores and there are two co-lessee's. One is the assessee and the co-lessee is M/s Magma Leasing Ltd. Even, from the letter dt. 6th Oct., 1994, which is placed at APB I at p. 186, which is addressed to the assessee by the supplier, says that the supplier has received this sum of Rs. 2 crores which is the lease value from the lessee vide its invoice dt. 15th Sept., 1994. He further argued that the supplier gave no objection to the assessee to reimburse the sum to the lesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, otherwise, the alleged supplier has received the full sum of Rs. 2 crores which is lease value vide its invoice dt. 15th Sept., 1995, and the same supplier gives no objection to the assessee to reimburse this sum to the lessee. The whole transaction reveals that the assessee itself paid the value of the equipment to the supplier and acquired it, (by) its own invoice dt. 15th Sept., 1995. In this case, the lessee has paid the cost of equipment to the lessee and not to the supplier and the reason for the same is that there was no equipment and the assessee has merely financed the transaction. The lease rental structure also shows that out of Rs. 2 crores, Rs. 60 lakhs have been paid in the very first month and remaining lease rental of Rs. 3,16,000 from 7th month to 60th month was paid. This shows that the transaction is merely a finance transaction and not a lease transaction. Therefore, we are of the view that the CIT(A) has rightly held this transaction to be the case of mortgage and not lease. This lease transaction was made just to claim depreciation to reduce the tax incidence. Accordingly, we uphold the order of the CIT(A) on this issue and dismiss this ground of appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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