TMI Blog2001 (4) TMI 926X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. 3(ii) Without prejudice to the above, the learned CIT(A) further erred in holding that addition of alleged payment of ₹ 25 lakhs in cash to M/s National Plastic Industries Ltd. for procuring large order should be made under s. 69C of the IT Act and no deduction of the said amount which is paid on account of interest against excess advance and cash discount should be allowed under s. 37(1) of the IT Act. 4(i) The learned CIT(A) further erred in confirming the action of the AO in computing undisclosed income on account of lease transactions with Punjab State Electricity Board (PSEB) and Rajasthan State Electricity Board (RSEB) at ₹ 11,64,89,975. 4(ii) The learned CIT(A) further erred in holding that the lease transactions with Punjab State Electricity Board (PSEB) and Rajasthan State Electricity Board (RSEB) were of the nature of loan transactions with the assets purchased and leased back are mere security and the appellant was never the real owner of assets. 4(iii) The learned CIT(A) further erred in heavily relying on the power of attorney issued in favour of PSEB and RSEB which authorises them to sell the leased asset to any intending purchaser a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er s. 158BFA(1) of the IT Act. 6. The learned CIT(A) further erred in holding that surcharge is chargeable on the tax rate of 60 per cent on the undisclosed income computed for the block period. 7. The appellant-company craves leave to add to, alter or amend the above grounds which are without prejudice to each other, at the time of hearing. 2. The assessee is engaged in the business of injection mounding machinery. A survey was conducted under s. 133A(1) of the IT Act, 1961, on 26th Sept., 1997 at the corporate headquarters and the factory of the assessee-company at Thane. It is the case of the Revenue that simultaneously a search was also conducted under s. 132 of the Act at the address of the chairman of the assessee, viz. 88C, Old Prabhadevi Raod, Mumbai. During the course of the search at 88C, Old Prabhadevi Road, certain documents were seized showing the assessee's transactions with M/s National Plastic Industries Ltd. and other state of affairs of the assessee-company. On enquiry, it was submitted before the AO that the transactions are duly recorded in its books of account. During the course of survey under s. 133A(1) at the corporate headquarters and fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 8 lacs as interest and ₹ 17 lacs as further discount (2.25 per cent). We will have to recover approx. ₹ 10 lacs (as discount adjustment). 3. The AO concluded that the payment of ₹ 25 lacs was made to M/s National Plastic Industries Ltd., which included ₹ 8 lakhs as interest and ₹ 17 lacs as further discount at the rate of 2.25 per cent. The AO further noted that a recovery of ₹ 10 lacs would have to be made as discount adjustment because of cancellation of order for three machines. It is pointed out by the AO that p 2 reveals similar noting dt. 1st Oct., 1996 on the same subject as is mentioned in page No. 1, though containing additional information. This contains information about the details of six machines proposed to be supplied to M/s National Plastic Industries Ltd., an additional column of cash discount at the rate of 2.25 per cent is also mentioned. The total discount shown in respect of the six machines is mentioned as ₹ 17 lacs. On the lower portion of the page, the fresh status as on 28th Sept., 1996 is noted in addition to the notings which were on page No. 1 as under : Status : (28th Sept., 1996) Custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. As the entire industry was also aping a liquidity crunch, the company was facing problems. National Plastics offered to give us ₹ 2 crores as advance. For this high advance, company offered then a cash discount. However, owing to poor market conditions, National Plastics did not honour their commitment and did not lift all the machines. In fact they lifted only 2 machines finally. The cost of these machines was adjusted against the advance and the balance, the amount is lying as credit balance in our account. As they did not honour their commitment, our company also did not offer the cash discount to them. 5. During the course of assessment proceedings, the assessee-company was again questioned in respect of these documents and it was submitted by the assessee that there are no entries of either the cash discount or any other payment made or received in its books of account, apart from the advance of ₹ 2 crores received and the sale of only two machines, which had been delivered as per the notes on these papers. It was put to the assessee that in view of the noting showing that the sum of ₹ 25 lakhs had already been received and because of the proposed can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty as the party has ultimately purchased only two machines and returned back the third machine delivered to them and cancelled the order for the three remaining machines. The regular discount allowed to the party is of 20 per cent from the list price which is the general practice followed by the assessee-company to grant the discount ranging between 15 to 20 per cent depending on the business relation which party, quantity and value of the order as well as the amount of advance received from the party. The assessee-company does not have any details in respect of remarks and status as on 28th Sept., 1996, given on page No. 2 of the paper. The two concerned persons namely Shri R. Venkatachalam and Shri Alok Tibrewala have already left the services of the assessee-company long back and, therefore, the assessee-company is unable to explain these remarks. We would, therefore, submit that whatever transactions taken place with National Plastic Industries Ltd. are duly recorded in the books of the accounts of the assessee-company and they are duly confirmed by National Plastic Industries Ltd. The AO considered the contentions of the assessee vis-a-vis the documents found at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is applicable on expenses incurred which are not accounted for by the assessee-company in its books of account. It is strange to digest that a businessman will pay a sum of ₹ 25 lakhs as discount for getting large order during the course of business; but will not record the same in his books of account as if the same is recorded in the books of account, it will be allowed as business expenditure. 8. Without prejudice to the above, it is submitted that if at all the appellant-company had made the alleged payment of ₹ 25 lakhs in cash to National Plastics, which is not recorded in its books of account, the same should be considered as commission paid for getting large order of machines as held by the AO and, therefore, the same should be allowed as deduction on account of commission paid during the course of the business. Since the payment of the commission is not made from books of account, the deduction of the same shall set off against the addition made as undisclosed income. 9. We rely on the decision of the Supreme Court in the case of Kishinchand Chellaram vs. CIT (1980) 19 CTR (SC) 360: (1980) 125 ITR 713(SC). In this case, the assessee had an office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gments : (i) In the case of S.F. Wadia vs. ITO (1987) 27 TTJ (Ahd) 437: (1986) 19 ITD 306(Ahd); (ii) In the case of M.K. Mathivathanan vs. ITO (1989) 31 ITD 114(Mad); (iii) In the case of Nissan Housing Development (P) Ltd. vs. Asstt. CIT (1995) 52 ITD 103(Pat); and (iv) In the case of Sharma Associates vs. Asstt. CIT (1996) 54 TTJ (Pune) (TM) 207: (1995) 55 ITD 171(Pune) (TM). After considering the arguments of the learned counsel for the assessee and the case laws relied in this behalf, as mentioned above, the CIT(A) concurred with the view taken by the AO for the detailed reasons given at pp. 13 to 17 of his order. He has further mentioned that the assessee is not entitled to any deduction under s. 37(1) of the Act also. 7. The learned counsel for the assessee, in brief submitted that during the course of survey action it was clearly stated in the statement recorded of Shri Ganesh Melatur, Dy. General Manager (Finance) and Shri Shantanu Aditya, executive director, that these papers pertained to the earlier period when the executive director was one Shri R. Venkatachalam and the Dy. General Manager (Sales) was one Shri Ashok Tibrewala and since both of them are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f at all the addition is to be confirmed as deemed income of the assessee under s. 69C of the Act, since it is an expenditure deduction of the same should be allowed to the assessee under s. 37(1) of the Act. It is pointed out that it is clear from these two papers that the alleged payment was made to M/s National Plastic Industries Ltd. on account of cash discount and interest on the advances received on large order. Reliance was also placed on the Tribunal decision in the case of S.F. Wadia (supra); M.K. Mathivathanan (supra); Nishan Housing Development (P) Ltd. (supra) and Sharma Associates (supra). It is also submitted that the proviso to s. 69C of the Act was inserted by the Finance Act, 1998, which is not applicable to the facts of the present case because the said proviso was brought on the statute book w.e.f. 1st April, 1999. The Circular No. 772, dt. 23rd Dec., 1998 [published at (1999) 151 CTR (St) 9] clearly states that unexplained expenditure is treated as income under s. 69C. But there is no corresponding provision for disallowance of such expenditure as the taxpayers are claiming deduction of such expenses under s. 37(1) of the Act and in order to curb this practice t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately ₹ 8 lakhs represented the interest and ₹ 17 lakhs as discount at the rate of 2.25 per cent. This discount was for the purchase of six machines and as per the papers found, part of the money, given on account of discount (approximately ₹ 10 lakhs) was to be recovered as discount adjustment, since M/s National Plastic Industries Ltd. had cancelled order for three machines and had not lifted the third machine manufactured by the assessee. As per the documents found, the special payment/discount given to M/s National Plastic Industries Ltd. for the 6 machines had to be recovered in respect of 4 machines, which were either cancelled or not lifted by M/s National Industries Ltd. The basic argument of the learned counsel for the assessee that Shri R. Venkatachalam, the then executive director, and Shri Alok Tibrewala, the then Dy. General Manager (Sales), were not examined, since they have left the service of the assessee and the statements recorded of Shri Ganesh Malatur and Shri Shantanu Aditya clearly state that these papers pertained to earlier period when they were not in the service of the assessee-company. Under these circumstances it was argued that no oppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invested in purchasing the wrist watches and could be held to be the owner of the wrist watches and their value could be deemed to be his income by virtue of s. 69A. Applying the said principle laid down by the Hon'ble Supreme Court, we are of the opinion that the transactions noted in the loose papers clearly stipulate that the assessee had made the payment of ₹ 25 lakhs to M/s National Plastic Industries Ltd. in cash out of the books against the expected orders for six machines to be placed on the assessee and the receipt of ₹ 2 crores as advance by the assessee, ₹ 8 lakhs as interest and ₹ 17 lakhs as cash discount. 10. The next question that arises is that if the addition is construed as deemed income of the assessee under s. 69C of the Act, whether the deduction of the same should be allowed on the basis of the same papers, under s. 37(1) of the Act as the expenditure had been found to have been incurred by the assessee in the form of cash discount and interest. Here the argument of the learned Departmental Representative was that the proviso to s. 69C of the Act was brought on the statute book, which could be considered to be retrospective in na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, the assessee has challenged the computation of undisclosed income on account of sale and lease-back transactions with Punjab State Electricity Board (PSEB) and Rajasthan State Electricity Board (RSEB) amounting to ₹ 11,64,89,975. During the course of survey, lease agreements entered into by the assessee with PSEB and RSEB were found and inventorised as Annexure 'A' to the survey report. Copies of these documents were also mentioned at serial Nos. 6 to 9 of Annexure 'B' to the survey report. The AO examined these lease agreements closely vis-a-vis the terms and status of the agreements entered into between the assessee and the PSEB and RSEB. The AO conducted enquiries by the Investigation Wing of the Department with both these Electricity Boards. The AO collected information and after regularising the terms and the surrounding circumstances, it was put to the assessee that the lease transactions entered into by it with these Electricity Boards were, in fact, in the nature of financial arrangements/loan transactions; that the assets alleged to have been purchased and leased back, acting merely as a security and that the assessee never owned these assets. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be said to be the real owner of the leased equipment having the right to claim depreciation on the assets leased. Therefore, the depreciation claimed by the assessee on these assets was disallowed. 12. This was challenged before the CIT(A). The CIT(A), in fact, incorporated the order of the AO as well as the submissions of the assessee. A tabular chart was also furnished before the CIT(A). For the sake of convenience, the same is reproduced below : Sr. No. Observation of AO Contention of appellant company 1 2 3 Ownership of the Assets 1. There was no genuine sale of equipments and several terms of the lease agreements are contrary to the claim of absolute ownership. Sale and lease-back is one of the recognised and legally accepted modes of raising finance. By purchasing the assets from Electricity Boards and paying the agreed consideration, the assessee became the legal owner of the assets. The transactions were subjected to sales-tax assessment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greements that the lessees i.e. SEBs. were satisfied with regard to the fitness, suitability, etc. of the equipment leased. 5. Under s. 151 of the Indian Contract Act, the hirer is only responsible for taking as much care of the goods hired by him as a man of ordinary prudence would under similar circumstances. However, in the instant case, any loss or damage to the equipment is to be borne by the lessee and in the event of total loss/damage, the lessees would have to replace the equipment at its own cost and the lease will continue. Sec. 152 of the Indian Contract Act provides that 'the bailee' in the absence of any special contract is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of its described in s. 151.' It will be appreciated that the lease agreement in this case is a special contract between the bailor and the bailee and accordingly, the provisions contained in the lease agreement with regard to rent, maintenance, risk on account of use, etc. would prevail. True ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one has to look to the substance or essence of it rather than its form. The substance and essence of the agreement will clearly show that it is a genuine lease transaction. The parties to the transaction have acted accordingly and the other revenue implications like sales-tax and lease tax were and are being fulfilled. 5. In a true transaction of lease, in case of default, the lessor would have been entitled to terminate the lease, repossess the assets and claim damages. However, in the instant case, the lessor does not make any attempt to repossess the equipment but becomes entitled to recovery from the lessee all amounts due under the lease agreements in addition to his rights of damage, etc. Lease is a contract of bailment. Hence, the lessor gets the right to repossess the equipment at the end of the lease period or in a case of breach of terms, is entitled to recover damages as per lease agreement and also repossess the equipment. Hence, a provision to recover all the amounts due under the lease agreement goes to ensure that the lessee does not commit any breach of the terms of the agreement. This right is a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and in sum and substance, concurred with the view taken by the AO for the detailed reasons given in his order, in which he has held that these agreements are, in fact, financial arrangements, which could be treated as loan and not a true lease. He, therefore, confirmed the disallowance. 13. The learned counsel for the assessee submitted that Expln. 4A to s. 43(1), which is introduced w.e.f. 1st Oct., 1996, recognizes the sale and lease-back transactions. The position becomes obvious from the Finance Minister's Budget Speech while introducing Finance (No. 2) Bill, 1996, in which it was stated as under : The practice of sale and lease-back of the assets results in passing of very high depreciation to the leasing concerns. This practice needs to be curbed. Hence, I propose to provide in the IT Act that in case of sale and lease-back transaction, the WDV of the asset, in the hands of the lessee, who was the previous owner will be treated as cost in the hands of the lessor. The measure while not affecting bona fide transaction will prevent does making concerns from indulging in unhealthy trade of depreciation. (para 95 of the speech) Thus, it is clear that even p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for lease assets had not come back to the lessor. The lessor had declared the lease rentals in its books of account every year. The Electricity Boards have reduced the sale price of the assets from their block of assets. Expln. 3 to s. 43 is not applicable in the case of the assessee, as the purchase price was paid as per the valuation reports obtained from the registered valuer, which is not challenged. Expln. 4A to s. 43, which came into force w.e.f. 1st Oct., 1996, is not applicable and, therefore, the transactions entered into by the assessee are genuine, which had been confirmed by the lessee and the plant and machineries were identified and were in existence. 15. The learned counsel for the assessee further relied on the Circular No. 2 of 2001, dt. 9th Feb., 2001, [published at (2001) 165 CTR (St) 25] which also mentioned the criteria laid down in Instruction No. 1978, dt. 31st Dec., 1999 regarding the examination of sale and lease-back transaction in view of the principle laid down by the Supreme Court in the case of McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126: (1985) 154 ITR 148(SC). This circular also mentions that though the new accounting standard pronounced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween a lease and a financial transaction was a retention of title by the lessor. The lessee went in appeal before a Larger Bench of the High Court, where also the contentions of the lessee were rejected. The Special Leave Petition was also rejected by the Supreme Court on 11th May, 1999. 17. The learned Departmental Representative, on the other hand, relied on the orders of the Revenue authorities. 18. We have considered the rival submissions and have gone through the material available on record. We find that Expln. 4A to s. 43(1) was introduced w.e.f. 1st Oct., 1996, with a view to curb the practice of sale and lease back of the assets resulting in passing of very high depreciation to the leasing concerns. This amendment was brought into the statute book to restrict the depreciation in the hands of the lessor w.e.f. 1st Oct., 1996, on the written down value in the hands of the previous owner, i.e., the lessee. So the amendment by way of Expln. 4A to s. 43(1) has accepted the principle of sale and lease-back of assets to restrict the depreciation from cost of acquisition to written down value in the hands of the previous owner. The CBDT, vide its Instruction No. 1978, dt. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the provisions of the IT Act. In view of the above circular, none of the conditions mentioned in the Instruction No. 1978, dt. 31st Dec., 1999, are found in the impugned transactions entered into by the assessee-company. It will be pertinent to mention here that the AO has recorded the statement of all concerned authorities of the two Electricity Boards, who have confirmed the existence of sale and lease-back of assets. It is also found that no depreciation had been claimed by PSEB and RSEB on these assets. Under these circumstances, it cannot be treated as a sham transaction of lease for the purpose of claiming depreciation. We find that the Tribunal has considered the question of granting depreciation in sale of lease-back transaction in the case of Unimed Technologies Ltd. (supra). That was a case where the assessee has purchased an asset on hire-purchase agreement for which consideration was paid by ITC to RSEB on the execution of the agreement for sale. The Tribunal has held that unless it is established that the sale and lease-back transaction was not genuine and it was found that the lease agreement is at arms length with the Government of Rajasthan, the claim for depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nov., 1997, but the same is without jurisdiction. As per the CIT(A), the return is to be filed within a period not exceeding 45 days from the date of service of notice. We find that the CIT(A) has missed the factual aspect of the matter that in this case the notice was dt. 7th Oct., 1997, which was served on the assessee on 14th Oct., 1997, as would be clear from the copy of the notice placed at p 27 of the paper book. If we calculate 45 days from 14th Oct., 1997, the period of 45 days will expire on 28th Nov., 1997. The assessee has filed the return on 28th Nov., 1997, itself. Therefore, from this factual aspect of the matter, the return filed by the assessee is within the time and, therefore, the assessee is not liable for any interest under s. 158BFA of the Act. The order of the CIT(A) on this issue is set aside and the AO is directed to delete the interest. This ground of the assessee is accordingly allowed. 21. The next grievance of the assessee is that the CIT(A) erred in holding that surcharge is leviable on the rate of 60 per cent on the undisclosed income computed for the block period. The AO has charged income-tax at the rate of 60 per cent and surcharge also at the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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