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Berlia Chemicals & Traders (P) Ltd. Versus. Assistant Commissioner of Income Tax

1999 (10) TMI 740 - ITAT MUMBAI

ITA No. 7510/Bom/1993 - Dated:- 25-10-1999 - Pradeep Parikh, A.M.,And D. Manmohan, J.M. For the Appellant : V.H. Patil & S.M. Lala For the Respondent : Rajkumar, ORDER PRADEEP PARIKH, AM.: The assessee is in appeal before us against the order of the learned CIT(A), dt. 18th Oct., 1993, for asst. yr. 1990-91. First ground in the appeal is against disallowance of ₹ 26,00,000 being depreciation on wastage heat recovery 2. The assessee-company is engaged in the business of trading in chemi .....

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. Payment was made by book entries. Barium Chemicals Ltd. in the fact owed some amount to the assessee-company and hence by adjusting the purchase price of the boiler, the debt due by Barium Chemicals to the assessee-company was reduced to ₹ 19,15,538. On acquiring the plant, assessee-company leased it to Barium Chemicals Ltd. on a rent of ₹ 39,000 per month. Since the plant carried a depreciation rate of 100 per cent assessee-company claimed the same on the ground that on purchase o .....

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epreciation of ₹ 26 lacs. Thus, in his opinion, it was not a genuine transaction, but was merely a paper transaction and hence disallowed the claim of depreciation of ₹ 26 lacs. The CIT(A) endorsed the view of the AO by observing that the transaction was entered into between two sister concerns with the sole object of evading tax. 3. Shri V.H. Patil, the learned counsel for the assessee strongly objected to the CIT(A)'s observation terming the transaction as a tax avoiding, desig .....

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there can be no question of any tax avoidance design. To substantiate the genuineness of the transaction, we are taken to the copies of invoice issued by the selling company, the object clause in the memorandum of association of the assessee-company authorising it to give assets on lease and so on and thus urged for the allowance of the depreciation disallowed by the AO. It was also submitted that Expln 4A to s. 43(1) inserted w.e.f. 1st Oct., 1996, was not clarificatory in nature and hence did .....

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April, 1991. Thus this, according to him amply proved the collusive nature of the transaction entered into by two sister concerns. He relied on the decisions of theh Supreme Court in Juggilal Kamlapat vs. CIT (1969) 73 ITR 702 (SC), Union of India vs. Gosalia Shipping (P) Ltd. (1978) CTR (SC) 76 : (1978) 113 ITR 307 (SC), McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 1TR 509 (SC) and Workmen of As .....

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ould be appropriate if we first deal with the effect of Expln. 4A inserted in s. 43(1) of the Act w.e.f. 1st Oct., 1996. If it has a retrospective operation, as contended by Shri RajKumar, then perhaps, the assessee may not have any case on merits. In this respect, the learned Departmental Representative has relied on the decision of the jurisdictional High Court in the case of CJT vs. Banque Nationale De Paris (supra). The Hon'ble High Court, at p. 179 of the Report observed as follows : &q .....

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iguity in the section and it should be so read as to harmonise it with the section and to clear up any ambiguity in the main section." It would be advantageous to refer to the background in brief to understand the context in which the High Court made the above observations. The case related to the computation of chargeable profits for the purpose of Companies (Profits) Surtax Act, 1964 (Surtax Act for short). As per the scheme of the Surtax Act, total income had to be computed under the IT .....

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ividends within India. The High Court held that the exclusion, therefore, of such interest income could only be of that income which formed part of the total income computed under the IT Act. Such income, therefore, must necessarily be the net income which formed part of the total income after making permissible deductions. This was made clear, the Court held, by the Explanation added to r. 1 by the Finance Act, 1981., 6. In this connection, it was contended on behalf of the assessee in that cas .....

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d. vs. Addl. CIT (1979) 10 CTR (SC) 393 : (1979) 118 ITR 243 (SC), the Supreme Court held that, in computing the taxable income for the purposes of the IT Act, the deduction in respect of intercorporate dividends should be allowed on the gross amount of such dividends received by the company and not with reference to net amount, i.e., after giving deduction in respect of interest paid on borrowings, etc. Since this decision ran counter to the legislative intent to grant such deduction with refer .....

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has actually been included in the total income and, accordingly, the High Court rulings have resulted in giving an unintended benefit to companies in respect of dividends received by them from domestic companies." 7. From the above discussion, it can be observed that the Explanation to r. 1 was added as a consequence to the insertion of new s. 80AA in the IT Act with retrospective effect from 1st April, 1968. Thus, insertion of s. 80AA with retrospective effect formed the foundation of the .....

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finition is followed by eight Explanations (before the insertion of Expln. 4A. These eight Explanations are nothing but eight different situations for which the law mandates the adoption of a particular cost for an asset for the purpose of depreciation. Though it may not be the actual cost to the assessee, it is deemed to be so under s. 43(1) of the Act. In other words, apart from these eight situations, actual cost always means actual cost to the assessee and it is well-settled that actual cost .....

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has the discretion to determine the actual cost having regard to all the circumstances of the case. 9. The ever-growing complexities of trade and commerce will always throw up new situations. It is not possible to envisage all the situations while enacting the law. Hence, whenever a situation arises, which the legislature thinks it should be curbed, a new Explanation can be added. Expln 4A is one such situation which, in the opinion of the legislature needed to be discouraged and accordingly in .....

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as an Explanation to s. 43(1) merely because what would be the actual cost in such a situation has to be specified, As a matter of fact, Expln. 3 is there to deal with the situation in Expln. 4A, but the legislature thought it appropriate to deal with that situation in a manner different than provided in Expln. 3. Thus, a different mischief was carved out with a different remedy which never existed earlier. We, therefore, repeat that there can be no clarification of a thing which never existed .....

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e derive strength from the decision of the Supreme Court in the case of Keshavji Ravji & Co. vs. CIT (1990) 82 CTR (SC) 123 : (1990) 183 ITR 1 (SC). In that case, the Supreme Court was dealing with the provisions of s. 40(b) and with Expln. 1 inserted by the Taxation Laws (Amendment) Act, 1984, in cl (b) of s. 40. One of the arguments advanced on behalf of the assessee was that the insertion of Expln. 1, though later in point of time, constituted a legislative exposition of the correct impor .....

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uation of the Explanation might, perhaps, be a factor necessarily detracting from any evincement of the intent on the part of the legislature that the Explanation was intended more as a legislative exposition or clarification of the existing law than as a change in the law as it then obtained." In the present case also, memorandum explaining the provisions in Finance (No. 2) Bill, 1996, through which Expln. 4A was inserted to s. 43(1), makes it expressively clear that the amendment will com .....

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ance either drying up, or with a view to conserve available resources for operational purposes, or to circumvent capital budget constraints and such other cash management considerations, diversification of financing sources appears to be making good business sense, This need has helped evolve various modes of financing a business and leasing is just one of them. Thus, economic reasons form the foundation for the evolution of leasing as a means of finance. Besides economic reasons, other consider .....

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Chemicals Ltd, This is duly reflected as addition to its fixed assets by the assessee in its balance sheet. It is also shown as reduction in fixed assets by Barium Chemicals Ltd. The said company has also shown Rs, 26 lacs as profit on sale of fixed assets in its P&L a/c. The said amount has been offered for taxation as short-term capital gains. All these facts are on record and are not in dispute. However, Department is of the view that actually there is no sale and purchase of equipment. F .....

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olely a business decision. The dynamics which guided Barium Chemicals to sell the equipment was to raise finance, or, as is the case here, to reduce its indebtedness towards the assessee-company, The dynamics which guided the assessee to purchase and lease back the equipment was to earn additional income by way of lease rentals. The essential characteristic of a sale is that the property in the goods passes to the buyer. It is not necessary that the asset should physically move to the buyer in o .....

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to understand what is illegal in the entire transaction or what is sham or non-genuine about it. Is it not unfair to recognise only that part of the transaction which is beneficial to the State and show disrespect to that part which is beneficial to the subject and which is also permissible under the law? Yes, we do agree that had the parties agreed to abysmally low rentals not ensuring adequate returns to the assessee on its investment, perhaps there was a case for the Department to reject the .....

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ssee did become the owner of the asset on buying it from Barium Chemicals. 13. We come to the second aspect that assessee reduced its tax liability by claiming 100 per cent depreciation. In other words, this has been described as a colourable device to avoid tax. In the earlier paras we have held that the decision to purchase the asset and lease it back to the seller was purely a business decision to earn income by way of lease rental. In the process, if assessee gets tax sops to which it is ent .....

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ctly affects the fund flow and cash flow situation of the business. Thus, the tax aspect is very much an integral part of the business decision which should not be looked down as a taboo. If tax aspect is not taken into consideration, it is quite unbusiness like for the businessman to do. This is not to suggest that assessees do not ever adopt colourable devices to dodge the Revenue. But wherever benefit is derived by the assessee, it cannot automatically attract the label of a colourable device .....

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he transaction. It is on record that assessee has leased its assets not only to Barium Chemicals, but to other unrelated parties also and has continued to do so in the subsequent years as well. In the face of these facts, therefore, the allegation is wild enough to be left as allegation only with no substance. 15. In view of the foregoing discussion, we are of the confirmed view that the transaction was genuine, that it was not merely a paper transaction and hence the assessee be allowed depreci .....

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