TMI Blog2007 (7) TMI 370X X X X Extracts X X X X X X X X Extracts X X X X ..... y nothing else but to reduce the taxable income of the profit making company'. We fail to understand how the CIT(A) got the impression from the assessment order that the bona fides of the transactions were not questioned by the AO. Admittedly, the assessee was a manufacturing company and was not a finance company. The impugned transactions were between two sister/group companies. The assessee, a profit making company, tried to reduce its profit by as much as by using a device of taking over the claim of depreciation from a loss making group company, by creating the aforesaid facade of SLB transaction. If we look at the arrangement as a whole it becomes abundantly clear that the transactions had no commercial or economic sense. We have no doubt in our mind that it was not a bona fide arrangement. We entirely agree with the AO that the real intention behind this arrangement was to reduce the tax liability of the assessee company. Manifestly, it was a case of a colourable device. Once we have held that the arrangement itself was not bona fide it becomes totally immaterial that there was no illegality about the transactions. In our considered opinion, the present case is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd arbitrary. The principles for the allocation of expenses to the old and new units have been clearly laid down, that the expenses, which were specifically incurred for a particular unit, and were directly attributable either to the Pimpri or to the Urse units should be allocated to the respective units. And the 'common unidentifiable expenses' have to be allocated to the old and the new units as per the order of the Tribunal in the assessee's own case for AY 1990-91. Thus, we are of the considered view that entire issue of the allocation of expenses should be remitted back to the file of the CIT(A). He will re-examine the issue in the light of the directions given and will pass a fresh order after giving adequate opportunity of being heard to the assessee. The ground No. 8 is decided accordingly. In the result, the appeal filed by the Department is partly allowed. - MUKUL SHRAWAT, J.M. AND AHMAD FAREED, A.M. For the Revenue : Pradeep Sharma For the Assessee : B. K. Khare, D. P. Bapat ORDER AHMAD FAREED, A.M. 1. This appeal by the Department is directed against the order of the CIT(A), dt. 23rd Dec., 1996 for asst. yr. 1993 94. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this year are identical, with that year inasmuch as it was affirmed before us that these items did not carry the logo of the assessee. Therefore, relying on those decisions, this ground of appeal is allowed. 3.2 We follow the precedent and reject this ground. Ground No. 2 On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the disallowance of Rs. 7,050 made by the AO to cover the payment made to the club and in not appreciating that the expenses were not incurred wholly and exclusively for the purpose of business as held by the AO. 4. It was admitted by the learned Authorised Representative that this issue was covered against the assessee by the decision of Tribunal, Pune in the assessee's own case for asst yr. 1991-92 in ITA No. 430/Pn/1995, dt. 7th April, 2006. In para 7 of its order, the Tribunal held as under: 5th ground of appeal is against the disallowance of a sum of Rs. 11,146 being the expenditure incurred on corporate membership of directors to the club. The learned counsel referred to the decision of Hon'ble Bombay High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT (1991) 96 CTR (Bom) 14 : (1992) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this issue was covered by the decision of the Tribunal, Pune in the assessee's own case for asst. yr. 1990-91 in ITA No. 481/Pn/1994, dt. 30th Sept., 2005, given in paras 20 and 21 at pp. 10 to 13 of the order. We have perused the aforesaid order of the Tribunal and we find that this statement is not correct. In paras 20 and 21 of the aforesaid order the Tribunal decided an altogether different issue relating to the claim of deduction under Section 80M. 6.2 In view of the fact that the CIT(A), while deciding the above issue, passed a cryptic order, the matter has to be restored back to his file. He is accordingly directed to pass a speaking order after giving an opportunity of being heard to the assessee. The ground No. 4 is decided accordingly. Ground No. 5 On the facts and in the circumstances of the case, the learned CIT(A) erred in allowing the depreciation on flats of Rs. 6,73,080 and in not appreciating the fact that some of these flats remained vacant and some were used for guest house purposes during the year under consideration. 7. The assessee had constructed certain flats for its employees called Antariksha Complex and had claimed depreciation of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal, Jabalpur in the case of Packwell Printers (supra). The ground No. 5 is accordingly rejected. Ground Nos. 6 and 7: 6. On the facts and in the circumstances of the case, the learned CIT(A) erred in allowing the depreciation on leased out assets of Rs. 9,27,69,040 and in not appreciating the fact that the said claim was made not in the interest of commercial expediency but as an attempt to unduly reduce the tax liability. 7. On the facts and in the circumstances of the case, the learned CIT(A) erred in allowing the interest on loan of Rs. 1,74,92,387 taken for purchase of leased assets and in not appreciating the fact that the transaction of leasing was not a bona fide one but a device of tax avoidance and hence cannot be allowed in view of the ratio of the Supreme Court judgment in the case of McDowell and Co. Ltd. v. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC). 8. These grounds relate to the disallowance/additions of Rs. 9,27,69,040 and of Rs. 1,74,92,397. claimed by the assessee as depreciation in respect of assets allegedly leased out, and as interest/financial cost incurred in relation thereto respectively. 8.1 In the P L a/c the assessee had shown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t reduced if the effect of the arrangement is viewed in totality covering the entire duration of the lease. that reliance was placed on the decisions in the following cases: (i) Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC); (ii) CIT vs. George Williamson (Assam) Ltd. (2004) 187 CTR (Gau) 499 : (2004) 265 ITR 626 (Gau); (iii) Industrial Development Corporation of Orissa Ltd. vs. CIT (2004) 189 CTR (Ori) 417 : (2004) 268 ITR 130 (Ori); (iv) Bombay Burmah Trading Corpn. Ltd. vs. Asstt. CIT (2002) 76 TTJ (Mumbai) 983 : (2002) 82 ITD 531 (Mumbai); (v) West Coast Paper Mills Ltd vs. Jt. CIT, ITA No. 5403/Mum/1999, dt. 21st June., 2005 [reported at(2006) 100 TTJ (Mumbai) 833-Ed.] 8.4 Shri. Pradeep Sharma, learned Departmental Representative, supported the order of AO. He vehemently argued saying that the order of the CIT(A) be reversed and that of the AO be upheld. He placed reliance on the decisions in the following cases: (i) McDowell and Co. Ltd v. CTO (supra); (ii) Mid East Portfolio Management Ltd. v. Dy. CIT (2003) 81 TTJ (Mumbai)(SB) 37 : (2003) 87 ITD 537 (Mumbai)(SB). 8.5 We have considered the rival sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement has to be viewed not in relation to every step taken to achieve the result but in relation to the final result, that one has to look at the truth of the transaction (and if permissible) by going behind the facade of documentation or the series of steps taken, that the Courts (and Tribunals) always have the freedom to 'go behind' the documents to find out the real intention of the party, that the rule presupposes that in a given case the real intention of the parties to a document/transaction/arrangement could be different from what it appears from it ex facie, that the Court must normally proceed on the basis of the professed intention, but if that is under doubt or is disputed or is challenged, then its power to find out the real intention of the parties by ignoring the apparent has to be and has always been conceded, that in cases of make believe arrangement or a subterfuge or a dubious or a colourable device adopted, the Court will be merely removing the facade to expose the real intention of the parties cleverly cloaked and if that intention is discovered to be the evasion of taxes, it cannot be given effect to merely because all the steps taken as component part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st Oct., 1996 is a recognition of the position that all SLB transactions cannot be held to be motivated only by tax evasion. There can be a genuine SLB transaction. The Explanation only seeks to thwart the move to inflate the value of the asset leased out in order solely to obtain the benefit of 100 per cent depreciation. It applies to an otherwise genuine SLB transaction. If SLB transaction itself is not genuine then there is no need to invoke the Explanation. 8.12 In the cases of Mid East Portfolio Management Ltd. (supra) and ICICI Ltd. (supra) it was held by the Tribunal (SB) that the transactions styled as SLB transactions were, in reality, pure finance transactions and the intention of the parties was not that the property in the equipment should pass on to the assessee by way of sale. In the result the assessees were held nor entitled to the 100 per cent depreciation allowance claimed in respect of the assets/equipments leased out. 8.13 We, now, proceed to apply the above decision of the Tribunal (SB) to the facts of the present case. The relevant facts are discussed by the AO in para XIII of his order. The assessee claimed to have purchased assets from its sister/grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taxable income of the profit making company'. We fail to understand how the CIT(A) got the impression from the assessment order that the bona fides of the transactions were not questioned by the AO. 8.18 Admittedly, the assessee was a manufacturing company and was not a finance company. The impugned transactions were between two sister/group companies. The assessee, a profit making company, tried to reduce its profit by as much as Rs. 9,27,69,040, by using a device of taking over the claim of depreciation of Rs. 9,27,69,040, from a loss making group company, by creating the aforesaid facade of SLB transaction. If we look at the arrangement as a whole it becomes abundantly clear that the transactions had no commercial or economic sense. We have no doubt in our mind that it was not a bona fide arrangement. We entirely agree with the AO that the real intention behind this arrangement was to reduce the tax liability of the assessee company. Manifestly, it was a case of a colourable device. Once we have held that the arrangement itself was not bona fide it becomes totally immaterial that there was no illegality about the transactions. 8.19 In our considered opinion, the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leave. The Supreme Court set aside the judgment of the Delhi High Court and declared the Circular No. 789 dt. 13th April, 2000 (supra) as valid. 8.24 In the present case, after examining all the relevant facts and the surrounding circumstances, as discussed in the above paras, we have concluded that the entire arrangement of the impugned SLB transactions was not bona fide, that it was a colourable device, and therefore the assessee's claim could not be allowed. In taking this view we are fortified by the decision of the Supreme Court in the case of Union of India and Ors. v. Play world Electronics (P) Ltd. and Anr. (1990) 184 ITR 308 (SC). In this case it was held by the Supreme Court that, Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious means. 8.25 The grounds Nos. 6 and 7 are accordingly allowed. Ground No. 8 On the facts and in the circumstances of the case, the learned CIT(A) erred in allowing the relief of Rs. 82,78,125 in the computation of deduction under Section 80-1 and in not appreciating the reasons mentioned by the AO for reducing the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Pimpri unit (Rs) Urse unit (Rs) Total (Rs.) 1 Sale 1.29,00,94.454 1,14,68,16,032 2,43,69,10,486 (52.94%) (47.06%) 2 Other Income 9,75,82,218 3,45,46,371 13,21,29,089 Total 1,38,76,76,072 1,18,13,62,903 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 80-1 @ 25% of profit 5,84,33,253 9.3 The excess allocation of expenses of Rs. 4,30,45,328 was worked out by the AO, in para 12.1 of his order, as under: S. No. Particulars (Rs) 1. Transfer of material 85,65,960 2. Traveling expenditure 22,30,442 3. Provision for employees 10,00,000 4. Rollover charges 43,14,243 5. Finance charges 1,71,90,128 6. Miscellaneous expenditure 77,01,189 Total 4,30,45,328 9.4 The CIT(A) allowed part relief, which has been in worked out in a chart submitted by the assessee at Rs. 82,78,125, as under: Particulars AO (Rs) CIT(A) (Rs) Relief by CIT(A) (Rs) Profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses which have no relation to the operations of the Urse unit need not be allocated to this unit. He contended that the CIT(A) had examined in his order each and every item in detail and that this ground needed to be rejected. 9.7 We have considered the rival submissions in the light of material on record. The CIT(A) has noted in para 57 of his order that if the loss from leasing business, claimed by the assessee at Rs 8.89 crores, is excluded, the profit of the Pimpri unit would be Rs. 11.41 crores. In other words, in the total profit of Rs. 39.88 crores the share of the Pimpri and the Urse units is worked out at 29 per cent and 71 per cent respectively. 9.8 The assessee's allocation is given in para 61 of the order of the CIT(A). The AO and the CIT(A) examined and reallocated the expenses under major heads as mentioned above. 9.9 The CIT(A) has noted that separate books of account were maintained by the assessee for the two units of Pimpri and Urse. He held that the expenses, which were incurred for a particular unit and were directly attributable either to the Pimpri or to the Urse unit should be allocated to the respective units and we are in agreement with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the general administrative expenses attributable to Section 80-1 undertaking would amount to Rs. 1,34,18,626 as against Rs. 1,76,96,128 stated to be estimated by the Department. These figures were stated to be worked out on the basis of material consumption of the new industrial undertaking as a percentage of total material consumption related to the corporate entity. This alternate plea has substantial force, however, one thing is glaring that the figures as mentioned in the comparative chart before us do not tally with the figures as stated before the learned CIT(A). Undoubtedly, there was some apparent mistake. This difference in the figures has to be looked into by the AO and thereafter, allocate the same for the purpose of computation under Section 80-1 as suggested hereinabove. With these directions, we hereby restore this ground back to AO to take into account the alternate plea and recomputed the claim. Resultantly, this ground is partly allowed. 9.11 While taking a similar view, in the assessee's own case for asst. yr. 1991 92 in ITA No. 430/Pn/1995, the Tribunal observed in para 8 of its order dt. 7th April, 2006 as under: Ground No. 6 is against the computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no working capital interest should be allotted to Urse unit. I have considered the submissions. I agree that Urse unit has made profit. Urse unit had also obtained loan which is interest-free on account of sales-tax account. Hence, I agree that no allocation should be made on account of working capital borrowings. The work capital was essentially utilized by the Pimpri unit. Hence, I accept the nil allocation made by the appellant. 9.15 The CIT(A) says in his order that since Urse unit made profit no 'interest on working capital' had to be allocated to Urse unit. But he forgot that the Pimpri unit was also making profit. The order of CIT(A) is cryptic and his decision is devoid of logic. We asked the learned Authorised Representative for the relevant material to substantiate the assessee's allocation. He agreed that the matter could be restored to the CIT(A) for the purpose of necessary verification of the factual position in this regard. 9.16 The expenditure incurred on 'inland traveling' was of Rs. 22,01,621 out of which only Rs. 25,871 was allocated by the assessee to the Urse unit and the AO enhanced it to Rs. 10,34,761 on sales basis. The CIT(A) reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, it is necessary to correctly determine the profit of the new unit. An error in the allocation of expenses to the two units can distort their respective profits. The AO was of the view that the profit of the new unit was artificially inflated by erroneously shifting certain expenses from the new unit to the old unit. We have mentioned, in the above paras instances where the approach, of the CIT(A) was, in our opinion, inconsistent, and arbitrary. 10. The principles for the allocation of expenses to the old and new units have been clearly laid down in the above paras--namely, that the expenses, which were specifically incurred for a particular unit, and were directly attributable either to the Pimpri or to the Urse units should be allocated to the respective units. And the 'common unidentifiable expenses' have to be allocated to the old and the new units as per the order of the Tribunal in the assessee's own case for asst. yr. 1990-91 in ITA No. 481/PN/1994, dt. 30th Sept., 2005, as reproduced above. In view of the facts and circumstances discussed in the above paras we are of the considered view that entire issue of the allocation of expenses should be remitted ba ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
