TMI Blog2007 (10) TMI 637X X X X Extracts X X X X X X X X Extracts X X X X ..... ets to APSEB even while holding that this was a lease finance transaction, ignoring the various material and evidence gathered by the Assessing Officer during the assessment proceedings who had made all necessary enquiries and gave convincing reasons in the assessment order as to why the claim of 100% depreciation on these assets was not admissible as the entire transaction was held to be financial transaction and in that view of the matter neither the assessee could be treated as the owner of the assets nor it could be held that the assets in question were used for the assessee's business. 4. The assessee, in this case, is a Public Limited Company, engaged in the business of manufacture and sale of cables. The assessee-company filed its return of income, for the impugned assessment year 1996-97 on a income of Rs-22,61,28,600. Thereafter the return was revised by reducing the total income to ₹ 19,33,26,400. In the course of assessment proceedings, the Assessing Officer made a number of additions and disallowances and finally determined the total income at ₹ 43,96,97,124. 5. One of the disallowances made by the Assessing Authority related to the depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e undertaken by the lessee. (v) It is a purchase and lease back arrangement entered into by the assessee-company and APSEB to avail undue advantage in the matter of tax liability of assessee-company by claiming 100% depreciation. (vi) This is only, a financial transaction and not an asset leasing transaction. This is mainly because the lessee, APSEB, has already claimed depreciation on the very same assets and the written down value in the books of APSEB was very negligible and the price was boosted for the purpose of lease transaction on the basis of a valuation report, This arrangement also helped APSEB, the lessee, to raise finance on the security of assets. The International Accounting Standard No. 17 (IAS No. 17) wherein the lease accounting is discussed, clearly brings the impugned transaction under a. financing lease. 8. In first appeal, the CIT(A) examined the matter in detail. On the basis of the records of the case and the submissions mode by the assessee, the Commissioner of Income-tax arrived at the following findings:- (i) The transactions, of purchase as well as lease back are supported by proper documents and confirmations. (ii) The equipme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to APSEB. 10. We heard Shri Anil Mehta, the learned Commissioner of Income-tax, appearing for the Revenue. 11. The learned Commissioner contended that the analysis of the various clauses of the lease agreement made by the Assessing Authority has proved that the transaction entered into between the assessee-company and APSEB was a financing transaction whereby the assessee was advancing money to APSEB in the garb of executing an operating lease. The learned Commissioner explained that the total money outflow from APSEB to the assessee-company and the total money paid by the assessee-company for purchasing the asset, both put together speak a lot that the assessee is receiving more than what was advanced by way of cost of machinery which clearly implied that the assessee was in fact getting back the principal amount along with finance charges and interest. In such circumstances, one has to look into the fact whether the assessee-company has become the true owner of the asset, or whether the asset remained still under the ownership of APSEB. The contracts and agreements entered into by the assessee-company with APSEB and the terms reflected in those contracts and agreements ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court decision cited above. The Tribunal has also referred to the arguments of the Revenue that in such a transaction, the assessee cannot be said to be the owner of the asset in view of the judgement of the Supreme Court in the case of Asea Brown Boveri Ltd. In paragraph 13 of the order, the Tribunal has held that a sea change has taken place by delivery of the judgement of the Supreme Court in the case of Asea Brown Boveri Ltd, wherein it has been held Chat in case of finance lease, it is the lessee who, for all practical purposes, the owner of the assets and not the lessor. This legal position would have an impact on the question in a case dealing with the nature of lease. The Tribunal held that every case has to be appreciated in its appropriate context. In the said case also the terms of the Lease were almost similar to the terms available in the present lease. After examining those terms of the lease, the Tribunal has held that a combined reading of the relevant terms of the lease agreement clearly reveals that all the features of the finance lease exist in the agreement between the parties, and therefore, the transaction has to be treated as a finance lease in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision for renewal is made, if necessary, matter of security deposit is incorporated, and ultimate disposal of the machinery at the end of the lease period is also specified. This is the usual formal of an operating lease. The operating lease agreement executed by the assessee-company with APSEB is strictly in accordance with the above general parameters. 20. APSEB has not claimed any depreciation on the asset, APSEB has not said that it was not an operating lease. Therefore, in these circumstances, what else could the assessees have done to further prove that it was an operating lease? The law has not prescribed or the Income-tax Act does not prescribe any further steps in this regard. The assessee-company and APSEB have followed the normal practice prevailing in the industry and the normal rules and practice of conveyance. The Revenue has not stated what further should have been done by the assessee or by APSEB. Therefore, it is very clear that the conclusion arrived at by the Assessing Authority was only on the basis of his suspicion that the lease agreement was in the nature of a financing agreement. 21. The learned Counsel submitted that the lessee in this case is a Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5.2005. He has also referred to the decision of the ITAT Mumbai H Bench in the case of Orix Auto and Business Solutions Ltd. vs. ACIT in ITA No. 2954/Mum/2004 dated 26.7.2007. 24. In the light of the above decisions, the learned Counsel submitted that the very same issue under similar circumstances has been considered by Mumbai Tribunal in a number of cases and has taken a consistent view that the assessee as a lessor would be the owner of the asset entitled for depreciation. 25. We heard both sides in detail and considered the issue raised by the Revenue in its appeal. There is nothing available on record against the legality and validity of the agreement executed between the assessee and APSKB. The existence of the asset is also not doubted as the same has been certified by a public authority like APSEB. They have certified that the asset is installed at their plant at Vijayawada. Observation made by the Assessing Authority in the light of the various clauses of the lease agreement that all risk and responsibility of the asset have been undertaken by the lessee is not relevant in deciding the exact nature of the agreement. In an operating lease, it is quite common that l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst that. Any of the parties involved in the process would be entitled to claim the said 100% depreciation in its hands. Because that is a grant of the Legislature. In the present case, the depreciation has been claimed by the assessee-company alone. It has been certified that APSEB, lessee, has not claimed depreciation on the subject asset leased out by the assessee-company. Therefore, the apprehension of the Revenue that the transaction has prejudiced the interest of the Revenue seems to be presumptive. 29. In the present case, it has not been established that the transaction was a sham transaction. The lease agreement executed by the assessee-company and APSEB and the transactions concluded thereupon are not prohibited by law. They are within the four comers of law. Therefore, in obedience of the decision of the Orissa High Court as stated above, we have to hold that the assessee is entitled to claim depreciation at the rate of 100% on the assets leased out by it to APSEB. 30. It is the argument of the Revenue that the transactions involved in the present case did not answer the tests laid down by the Supreme Court in the case of Asea Borwn Boveri Ltd. vs. Industrial Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what where transferor or the transferee is government or statutory bodies, there cannot be any scope for collusion between the parties. The Court has further held that when government or statutory bodies is party to a transaction, the question of evasion of tax does not arise. In the present case, the lessee is a statutory authority authored by the Government of Andhra Pradesh. Therefore, in the facts and circumstances of the case and in the light of the principle laid down by the Courts on the matter of rules of evidence in similar cases, we find that the decision of the CIT(A) granting 100% depreciation to the assessee is just, proper and sustainable in law. 33. This ground raised by the Revenue fails, and therefore, it turns out that the appeal filed by the Revenue is liable to be dismissed. 34. Next, we will consider the cross appeal filed by the assessee in ITA No. 2416/Mum/2000. 35. The first ground raised in the appeal filed by the assessee is against the order of the CIT(A) confirming the addition of ₹ 10,44,351 made by the Assessing Authority u/s. 43B of the Income-tax Act towards unpaid excise duty. The case of the assessee is that it has not made any provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etail. The reason for making addition on account of excise duty element is seen to be the change in the closing stock valuation method made by the assessee from assessment year 1992-93 onwards. Now we are concerned with the assessment year 1996-97. The assessee has been following the new method on a consistent manner from the assessment year 1992-93 onwards. The assessee has stated the reason for the change that it was following the guideline issued by the ICAI. But the Assessing Officer has made the addition, u/s. 43B. We are not able to follow the reasoning of the Assessing Authority to make such an addition u/s. 43B. The assessee has made it very clear and the Assessing Officer also has no case that the assessee has debited the said excise duty element in its Profit and Loss Account. Section 43B comes into play when the assessee claims by way of expenditure the statutory duty without paying it. In the present case, the assessee has neither claimed the excise duty as a deduction nor paid it to the Government. Therefore, Sec. 43B has no role to play in the present case. The CIT(A) has also grossly erred in endorsing the addition of ₹ 10,44,351 made by the Assessing Authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of the above, we hold that the CIT(A) is justified in confirming the disallowance. This ground raised by the assessee is dismissed. 42. The third ground raised by the assessee is that the CIT(A) has erred in confirming the addition of ₹ 1,66,280 estimated by the Assessing Authority as expenses relating to the lease transaction. The contention of the assessee is that the expenses incurred in connection with the lease transaction which the CIT(A) himself has held to be genuine, were the genuine business expenses and should not have been disallowed. It is also the case of the assessee that the CIT(A) has failed to appreciate that adhoc disallowance should have been struck down where the records maintained by the assessee were destroyed in the collapse of office building. 43. In the course of assessment proceedings, the assessee was directed to furnish all the expenses relating to the lease transaction entered into with APSEB. The assessee replied that it was not possible to give the details of expenses as the records were destroyed as the building wherein it was kept was collapsed. As details were not forthcoming, the Assessing Officer has disallowed 0.5% of the claim a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Authority that the loss was incurred for the purpose of reducing the capital gains tax liability on sale of other properties made by the assessee-company during the relevant previous year. 45. The assessee has submitted before the Assessing Authority that the debentures were sold after considering the fact that the financial position of M/s. Khatau Junker Limited was deteriorating and holding of the debentures was not advisable in the interest of the business of the assessee-company. It was also submitted that the assessee-company itself was in need of funds for its working capital requirements. On a detailed examination of the composition of Board of Directors of all the parties concerned, the Assessing Officer found that the concerns are group concerns and many of the Directors are common Directors in both the companies. In response to a detailed questionnaire issued by the Assessing Authority, assessee-company submitted that all the transactions relating to the purchase and sale of debentures are supported by resolutions of the Board of Directors, who are authorized by the Articles of Association of the assessee-company to take such decisions. The assessee also ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been authorized by the resolutions passed by the Board of Directors of the assessee-company. The debentures were sold for ₹ 5 crore. The Assessing Officer has no case that the debentures commanded higher price on the day of sale, Moreover, the assessee had offers received from different companies like Garden Silk Mills Limited, Savani Finance Limited and Kotak Mahindra Finance Limited. In all those offers, the price offered was less than ₹ 50 per debenture. The price of ₹ 50 per debenture offered by M/s. Priyamvada Holdings Limited was the highest price. Therefore there cannot be any distrust on the actual amount of consideration received by the assessee against the sale of debentures. If the Assessing Authority is proceeding to presume so many things, there is no limit for that. The payments were made through banks and all the aspects of transactions are well documented. There is no ground for the Assessing Officer to hold that the short term loss was created by the assessee which is for the purpose of offsetting the long term capital gains tax liability. 48. The Assessing Authority himself has made an observation that the loss was created by the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the apparent consideration recorded by the assessee on the sale of debentures needs to be accepted as the actual consideration received by it. 52. The learned Commissioner appearing for the Revenue invited our attention to the relevant discussions made by the Assessing Authority in his order, in a very detailed manner. The explained that all these companies being group companies were in a position to manipulate their transactions in such a way that tax liabilities are skillfully reduced to the minimum by executing necessary transactions on the basis of agreements and understanding said to be arrived at among them. The learned Commissioner explained that the assessee had huge amount of long term capital gains on sale of properties held by it. Therefore, it was necessary for the assessee-company to reduce the said long term capital gains tax liability. It is in this context the assessee-company has managed a stage show of selling the debentures issued by M/s. Khatau Junker Limited to M/s. Priyamvada Holdings Limited. The learned Commissioner submitted that it is very pertinent to note that the assessee-company has not held the debentures even for one full year. The debentur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of debentures. There is no law prohibiting the assessee from selling the debentures to a concern known to it. There is nothing available on record to show that the price of ₹ 50 per debenture was less than the market price or the price offered by any other prospective buyer. In these circumstances, there is no other way but to accept the version explained by the assessee in the light of the documentary evidences available with it. The fact that the assessee had good amount of long term capital gains for the same assessment year and the assessee has availed the benefit of setting off of the short term capital loss against the long term capital gains, in our opinion, cannot be a substantive reason to reject the claim of the capital loss made by the assessee-company. If we do so, it would be against the principle laid down by the Supreme Court in the ease of K.P. Varghese vs. ITO [131 ITR 597]. 55. In addition to the above, it is an acclaimed fact in the present case that the Khatau Group were dividing their interest available to them in the group. The group was dividing its assets and liabilities through a settlement. In the course of such a settlement, as rightly argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the receipt of the valuation report of the DVO to whom a reference was made for the purpose. 60. The assessee-company had sold a property known as Culoopwadi situated at Borivilly (East). The sale was made during the previous year relevant to the assessment year under appeal. As it was an old property, the assessee had an option of choosing the actual cost of acquisition or the fair market value as on April 1, 1981. The assessee-company opted for the second line and arrived at a fair market value of ₹ 3,23,66,774. The above valuation is supported by the report of an approved valuer. The property was sold by the assessee-company for a consideration of ₹ 22 crore. As per the computation made by the assessee-company, the long term capital gains after indexation of the fair market value aggregated to ₹ 12.91 crore. But in the course of assessment proceedings, the Assessing Officer adopted a fair market, value of ₹ 19 lakhs as on 31.3.1984, which was the value of the property disclosed by the assessee in their return of wealth for the assessment year 1984-85. The valuation for the wealth-tax purposes was done by another approved valuer at ₹ 19 lakhs as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion, the fair market value disclosed by the assessee is less than the fair market value. Whereas in the present case the fair market value disclosed by the assessee is higher than the fair market value opined by the Assessing Authority. He has also relied on the decision of the ITAT Mumbai Bench A in the case of Sajjankumar M. Harlalka vs. JCIT [100 ITD 418] in support of his contention where the Tribunal has held that where the fair market value estimated by assessee's registered valuer was higher than its actual fair market value, the Assessing Officer could not make reference to valuation cell u/s.55A(a). 62. The Learned Commissioner appearing for the Revenue contended that the wealth-tax valuation disclosed by the assessee as on 31.3.1984 has to be treated as one of the ingredients in working out the fair market value as on 1.4.1981. He also submitted that the Assessing Authority has the freedom to refer the matter for valuation u/s.55A(b)(ii). In such circumstances, the fair market value considered by the assessee would not be accepted as real. 63. We considered the matter in detail We agree with the contention of the learned Counsel that the wealth-tax valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of sale of similar properties within a reasonable proximity of time. It is on the basis of that verifiable evidences, that the approved valuer has determined the fair market value as on 1.4.1981 at ₹ 3,23,66,774. 66. Therefore, we are of the opinion that the fair market value reported by the assessee is the one sustainable in law. Accordingly, we direct the Assessing Authority to work out the long term capital gains accepting the fair market value as on 1.4.1981 as reported by the assessee-company on the basis of the report of the registered valuer: 67. This issue is decided in favour of the assessee and the ground is allowed. 68. The sixth and last ground raised by the assessee in its appeal is regarding the deduction available u/s.80HHC The ground of the assessee is that the CIT(A) has erred in confirming that sales tax should be included in total turnover while computing the deduction u/s. 80HHC. The Supreme Court in the case of CIT vs. Lakshmi Machine Works [290 ITR 667] has held that the excise duty and sales tax need to be excluded from the computation of total turnover for the purpose of See. 80HHC. In view of the above judgement, we direct the Assessing Au ..... X X X X Extracts X X X X X X X X Extracts X X X X
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