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TMI Blog2007 (7) TMI 370X X X X Extracts X X X X X X X X Extracts X X X X ..... peal is the one filed by the Department. Ground No. 1 On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the disallowance of Rs. 6,90,303 which represented expenses on gift articles and in the absence of the logo/emblem, the same were held as non-business expenses by the AO. 3. The assessee had incurred expenses of Rs. 9,64,578 on gift articles, out of which Rs. 41,731 was worked out as not allowable under Rule 6B. The AO found that Rs. 6,90,303 represented the cost of items/articles which did not have the company logo--articles like sweets, dry fruit boxes, etc. The CIT(A) was of the view that the entire expenditure was incurred 'for furtherance of business', and that it be regulated by Rule 6B. 3.1 We find that this issue is covered in favour of the assessee by the decision of Tribunal Pune, in the assessee's own case in ITA No. 299/Pn/1997 for asst. yr. 1993-94, dt. 23rd June, 2006. In para 5 of its order dt. 23rd June, 2006 (supra) the Tribunal held as under: Ground No. 5 is against the findings of the learned CIT(A) that the assessee is not entitled to deduct fully the expenditure of Rs. 6,90,303 incurred on gift items an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) allowed it. 5.1 We have considered the matter. It is seen that the assessee had supplied goods to MTNL and for certain defects/shortages deductions were made by the buyer in the bills submitted by the assessee. The CIT(A) has held that this claim was allowable under Section 37 of the Act and we see no reason to disagree with him. This ground is accordingly rejected. Ground No. 4 On the facts and in the circumstances of the case, the learned CIT(A) erred in directing to allow the loss of Rs. 45,05,000 claimed by the assessee on sale of investments merely relying on the decision for the earlier assessment year. 6. The AO has noted in para X of his order that in the P&L a/c, expenses claimed under the head 'Administration and selling expenses', included Rs. 1,00,35,152 as 'loss on sale of investments', that the assessee had separately claimed in the statement of total income, Rs. 45,05,000 as tax-free interest, that the assessee had claimed deduction for tax-free interest' in relation to purchase and sale of securities and had at the same time claimed loss on the sale of such securities, that even the interest paid in respect of the loan raised for purchasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uming both for the assessee and the AO. Therefore, they amended the law to provide for allowing of the depreciation on the entire block of assets instead of each individual asset. The block of assets has also been defined to include the group of assets falling with the same class of assets. Hence, after the amendment w.e.f. 1st April, 1988, the individual asset has lost its identity and for the purpose of allowing of depreciation, only the block of assets has to be considered. If a block of assets is owned by the assessee and used for the purpose of business, depreciation will be allowed. Therefore, the test of user has to be applied upon the block as a whole instead of upon on individual asset. In the instant case when the two trucks out of the three in the block were used for the purpose of business, the depreciation had to be allowed on the WDV of the said block of assets, as per the percentage of depreciation prescribed in respect of the block of assets. Therefore, the depreciation was allowed on all the trucks of the assessee. On the same basis, the disallowance of depreciation on jeep, car, motor cycle was also deleted. 7.3 The CIT(A) allowed the assessee's claim for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er that the bona fides of the leased transaction are not questioned The AO has accepted the fact of purchase of machinery and leasing of the same to FIL. 45. The AO only felt that this was tax planning to reduce the tax liability. 46. The appellant's computation shows that no doubt during the year the tax liability would be reduced. However, overall, the appellant would gain from the transaction, and there would be income. The appellant had obtained the consent by amending the memorandum only during 1991-92 hence this was a new business. In any case, I do not consider anything mala fide in the transaction. In my opinion, this was a bona fide transaction that had been entered into by the appellant. Under the circumstances and in view of the fact that the use of the assets is not disputed, I hold that the appellant is entitled to the depreciation on the leased assets, hence this ground of appeal is allowed. 8.3 Shri. B.K. Khare, the learned Authorised Representative reiterated the arguments which were put forward on behalf of the assessee before the AO and the CIT(A). The submissions made by him are summarized below. * that the SLB transaction was a genuine commercial arra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d RSEB. The assessee claimed 100 per cent depreciation on the said equipment. The Department rejected the claim on the basis of rule laid down in McDowell and Co. Ltd. v. CTO (supra), holding that the aforesaid transaction in truth was a borrowing of money by the RSEB on the security of asset but the documentation had been so prepared as if it was a sale and lease back (SLB) transaction and, therefore, the assessee was not entitled to depreciation. On second appeal, the Division Bench of the Tribunal was of the view that the true effect of the documentation needed to be considered in deeper perspective and therefore referred the matter to the Special Bench. 8.7 An identical issue arose in the case of ICICI Ltd. (supra) in respect of boiler purchased from and leased back to Gujarat Electricity Board (GEB) and therefore the same was also referred to the Special Bench and the ICICI Ltd., was added as an appellant. 8.8 While discussing the judgment of the Supreme Court, in the case of McDowell and Co. Ltd. (supra), the Tribunal (SB) had, inter alia, noted that the Courts and Tribunals had to expose subterfuges, colourable device, and dubious methods in tax cases, that the lawful dues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lessee after the lease. The assessee, thus, becomes the owner of the asset though the asset continues to remain with the seller who has now become the lessee. Normally in such a transaction if it is viewed as a pure financing transaction with the asset continuing to be owned by the assessee who has lent the money merely for purpose of security, what is received by the assessee from the lessee must be considered as interest on the monies advanced. The business would be that of money-lending. The assessee would not be entitled to the depreciation on the asset because it is not used in the business of money-lending, and in order to get over this situation, the SLB agreement was thought of. If the SLB agreement is viewed as a leasing transaction, the assessee lessor would be entitled to depreciation on the asset leased out since his business would be that of leasing and not mere money-lending. 8.10 It was, therefore, noted by the Tribunal (SB) that, all SLB transactions as such cannot be considered to be dubious or colourable devices or subterfuges aimed at tax evasion. The enquiry which a Court or the Tribunal can make, when faced with an SLB transaction is to find out the real i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that most of the above items of assets were those which were eligible for depreciation at 100 per cent, that FPL (now FIL) purchased these assets in the months of February to September, 1992, that from September, 1992 to February, 1993 they were sold by FPL to the assessee company, that while FPL was a loss making company, the assessee was making huge profits, that FPL was itself a reputed company having its units in Pune and Ratnagiri, with investments of hundreds of crores raised by way of loans, debentures and shares. In view of the above facts and circumstances the AO formed the opinion, and rightly so, that SLB transactions were motivated by a desire to reduce the taxable income of a profit-making company. He, accordingly, disallowed the total claim of depreciation and interest aggregating to Rs. 11,02,61,427. However, the income of Rs. 1,85,76,096 offered as lease rent was taxed on protective basis. 8.16 The CIT(A) allowed the assessee's claim after making bald and cryptic remarks, in paras 44 to 46 of his order, saying that in the assessment order the bona fides of the leased transaction were not questioned, that the AO accepted the fact of purchase and lease back of ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciding the issue in favour of the assessee, had observed in para 17 of its order that, "the Revenue had not established that the underlying motive of the assessee company in claiming depreciation at the rate of 100 per cent has resulted in some economic detriment or prejudice to the Revenue". 8.21 In the case of Bombay Burmah Trading Corporation Ltd. (supra), the Tribunal Mumbai, while allowing the assessee's claim, had observed, on the facts of that case, that no aspect of the transaction had been found to be of dubious nature. 8.22 The facts of the case in the present appeals are, manifestly, distinguishable, and therefore, the above two decisions of the Tribunal Mumbai do not render any help to the assessee. Similarly, in the other cases, which were cited during the hearing, the facts were distinguishable, and hence those cases are not discussed here. 8.23 The learned Authorised Representative had also drawn our attention to the observations made by the Supreme Court in the case of Union of India v. Azadi Bachao Andolan (supra) in relation to its earlier judgment in the case of McDowell and Co. Ltd. (supra). In the case of Azadi Bachao Andolan (supra) the Circular No. 789 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowable 8,533 8,533 2,68,17,874 30,92,79,222 Add : Customs duty paid on opening stock 1,53,83,606 32.46,62,828 Less : Depreciation as per IT Act 1,82,22,148 30,64,40,680 Less : Customs duty paid on closing stock 2,16,43,410 Profit of new undertaking 28,47,97,270 Deduction under Section 80-1 (25% of profit) 7,11,99,318 9.1 The AO was of the view that, in order to increase the quantum of deduction under Section 80-1, the allocation of expenses to the Urse unit was kept proportionately low so as to artificially increase the profit of the Urse unit. The total income, before deduction under Chapter VI-A, was 30,98,92,907, out of which the income of the Urse unit, representing as much as 91.90 per cent, was shown at Rs. 28,49,97,270 and the balance of Rs. 2,50,95,637, representing 8.1 per cent only was shown as the income of the Pimpri unit. The details of total turnover and the expenses claimed under major heads, in respect of the two units, are noted in para XIV of the assessment order as under: S. No. Particulars Pi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,40,692 Employee cost 10,00,000 10,00,000 Rollover charges 43,14,243 43,14,243 Finance charges 1,71,90,128 19,95,488 1,51,94,640 Miscellaneous expenses 77,01,189 14,05,747 62,95,442 Dividend income of Urse unit excluded 92,75,000 92,75,000 Interest income of Urse unit excluded 74,665 74,665 Mistake by AO 20,43,366 20,43,366 Total of excess allocation 5,23,94,993 1,91,54,893 3,31,12,510 Profit after reduction of excess allocation 23,37,33,002 26,68,45,512 Claim under Section 80-1 (a) 25% of profit 5,84,33,251 6,67,11,378 82,78,125 9.5 Shri Pradeep Sharma the learned CIT(ITAT) supported the order of the AO. He vehemently argued saying that the order of the CIT(A) be reversed and that of the AO be upheld. 9.6 Shri. B.K. Khare, the learned Authorised Representative reiterated the arguments put forward on behalf of the assessee before the AO and the CIT(A). He took us through the order of the CIT(A) and the relevant details. He pointed that the two units were at a distance of about 100 kms from each other, that separate books of account were maintained for the Urse unit, that the expenses which were di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also argued that since the assessee was running a composite business i.e. industrial undertaking eligible for Section 80-1 benefit as well as other existing manufacturing unit of varieties of cables, therefore, the allocation was made on the basis of salaries and wages of the industrial undertaking. Accordingly, the allocation was based upon the total salaries and wages of the industrial undertaking vis-a-vis the total expenditure on account of salaries and wages incurred by the company as a whole. It was argued that the allocation of common unidentifiable overheads on the basis of the incurrence of salaries and wages was a rational method because such overheads were attributable to the personnel engaged in the conduct of the operation of the company. Now before us, a comparative chart has also been filed according to which, the figures as claimed by the assessee and as assessed by the AO have been compared. According to this chart, the administrative and selling expenses were taken into account by the AO amounting to Rs. 1,28,79,734. However, the facts mentioned in the impugned order by the learned CIT(A) have referred an alternate plea of the assessee that the allocation cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harges to the two units on the basis of their respective turnover. He, accordingly, made a further allocation of Rs. 1,71,90,178 to the Urse unit, as worked out by him in para 11 of his order. The CIT(A) restricted this allocation to Rs. 19,95,488 thereby giving a relief of Rs. 1,51,94,640. 9.14 The break-up of the finance charges and their allocation made by the assessee and by the AO is given at p. 28 of the order of the CIT(A). In this chart, for instance, the items Nos. 6 and 7 are of 'bank charges' and of 'interest on working capital borrowings' of Rs. 26,72,670 and Rs. 1,27,29,942 respectively out of which only Rs. 60,842 and Rs. 1,440 were allocated by the assessee to the Urse unit, whereas the AO allocated Rs. 12,56,155 and Rs. 59,83,073 respectively on the basis of sale ratio. The CIT(A) accepted the assessee's plea for the reasons given at p. 30 of his order as under: The AO had allocated the charges based upon the turnover. The appellant stated that the overdraft account was maintained for the company as a whole at Pimpri unit only. It was urged that reallocation of Urse unit was more than Pimpri. The balance sheet drawn up for Urse unit shows that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted on behalf of the assessee before the AO, CIT(A) and also before us that the apparent difference in the purchase price and the transfer price was because of the excise component. There is merit in this argument. The comparison should be between like and like. We find the order of CIT(A), granting relief on this point, is ambiguous. He has not dealt with the specific objections raised by the AO as reproduced above. Therefore, the CIT(A) has to be directed to re-examine the issue and compare the purchase price and the transfer price after excluding the excise component. 9.19 The expenditure under the head 'miscellaneous expenses' was of Rs. 2,75,41,011 out of which the assessee allocated only Rs. 17,17,285, to the Urse unit. The AO allocated Rs. 77,01,189 to the Urse unit, calculated in proportion to the turnover of the two units. 9.20 Admittedly, separate books of account are maintained for the old unit at Pimpri and the new unit at Urse, and therefore the major part of expenses would be identifiable either with one unit or the other, but still there would be some expenses, which cannot be so identified. The new unit is eligible for deduction under Section 80-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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