TMI Blog2004 (3) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... 280/CTK of 2001. The facts as narrated in the impugned order of the Tribunal briefly are that the appellant is a public limited company wholly owned by the State Government of Orissa and has been incorporated with, inter alia, the object of promoting and establishing industries which are likely to advance the industrial development of Orissa. On September 29, 1995, the appellant entered into a purchase-cum-lease agreement with the Orissa State Electricity Board (in short, "OSEB"), an undertaking of the State Government of Orissa for generation, distribution and supply of electricity. By the said agreement, the appellant purchased electrical machinery of some sub-stations of OSEB for a price of Rs. 25 crores and leased out the said machinery back to the OSEB for a lease rent of Rs. 34,38,00,000 (rupees thirty-four crores thirty eight lakhs) for a period of 60 (sixty) months. Towards the price of Rs. 25 crores the appellant paid Rs. 20 crores to the OSEB and retained the balance of Rs. 5 crores as security money. The said sum of Rs. 20 crores was borrowed by the appellant from the Industrial Promotion and Investment Corporation of Orissa Limited (for short "the IPICOL") at an inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted the following errors: (i) The Assessing Officer allowed depreciation at the rate of 100 per cent, on the machinery termed as energy monitoring systems shown to have been purchased at a cost of Rs. 25 crores. The valuation report submitted in support of the cost of the machinery shows that the concerned machinery are not new machinery but old installations of the OSEB at various transmission sub-stations such as 220/132 KV at Brajarajnagar, 220/33 KV at Nayagarh, 132/33 KV at Bidanasi, etc. These transmission sub-stations consist of the usual circuit breakers, transformers, lightining arrestors, isolators, control panel, etc. All these are normal components of voltage step-down system where high voltage transmission is stepped down to lower voltage. The Income-tax Rules provide 100 per cent, depreciation for specific "energy saving devices" as mentioned in rule 5, Appendix I, Part III(3)(iii)B. In the case of the appellant, the machinery of Rs. 25 crores mentioned in the valuation report do not at all fall under the above category. Therefore, the appellant was not entitled to depreciation at the rate of 100 per cent, on these machinery. Hence, the allowance of 100 per cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter could have been dealt by the AC on the basis of regular assessment under section 143(3) and having found no adverse evidence completed the assessment which the Commissioner of Income-tax tried to find error in quoting it as prejudicial to the interests of the Revenue. From the foregoing discussion we are of the view that the AC had much more to assess which apparently was not made available to him on account of apparent interaction scheme of business activity and undertaken by the assessee as can be visualised from the public reported accounts for the financial year 1995-96. The AC failed to pinpoint as to how and why the assessee did not have any profitable share on investments as against earning less amount thereby disturbing the main objection of the assessee-company hitherto. We, therefore, uphold the initiation proceedings under section 263 as justified and we do not find any merit in the appeal filed by the assessee for quashing the order under section 263 of the Act. 6. In the result, the appeal of the assessee is dismissed." The appellant has filed the present appeal against the aforesaid order dated February 7, 2003, of the Tribunal and on March 27, 2003, this court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y interference by the Commissioner under section 263 of the Act. In the order dated March 29, 2001, of the Commissioner under section 263 of the Act, the Commissioner has taken the view that the Income-tax Rules provide for 100 per cent, depreciation on specific energy saving devices as mentioned in rule 5, Appendix I, Part III(3)(iii)B, but the machinery of Rs. 25 crores mentioned in the valuation report submitted by the appellant do not at all fall under the aforesaid category and, for this reason, the appellant was not entitled to depreciation at the rate of 100 per cent, on these machinery and the allowance of 100 per cent, depreciation was a clear error and was prejudicial to the interests of the Revenue. The Tribunal has upheld the aforesaid order passed by the Commissioner. Thus, according to the Tribunal, the plant and machinery which have been purchased by the appellant and leased out to the OSEB is not eligible to 100 per cent, but 25 per cent, depreciation. The third substantial question of law is whether this finding of the Tribunal that the plant and machinery which have been purchased by the appellant and leased out to the OSEB is eligible for 25 per cent, depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Assessing Officer is unsustainable in law. He argued that in this case the view taken by the Assessing Officer in the assessment order dated March 31, 1999, that 100 per cent, depreciation is to be allowed on the machinery in question is permissible in law and if the Commissioner does not agree with the view taken by the Assessing Officer, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue and the order passed by the Commissioner under section 263 is not correct in law. Mr. Mohapatra, learned counsel for the Income-tax Department, on the other hand, submitted that 100 per cent, depreciation is allowable for specific gadgets as mentioned in rule 5, Appendix I, Part III(3)(iii)B, but all the machinery purchased and leased back by the appellant to the OSEB do not fall under the aforesaid category. He relied on a report dated November 7, 2003, of the Chief Electrical Officer, Bhubaneswar, a copy of which was furnished to us at the time of hearing and it was stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the errors made in the order cannot be rectified under section 154 of the Act by the Assessing Officer. Such power of the Commissioner under section 263 is much wider than the power of the Assessing Officer under section 154 of the Act. He cited the decision of the Supreme Court in South India Steel Rolling Mills v. CIT [1997] 224 ITR 654, wherein it was held that Explanation (b) in section 263 clearly prescribed that the word "record" includes all records relating to any proceedings under the Act available at the time of examination by the Commissioner under section 263 of the Act. He argued that the Commissioner, therefore, can take into consideration any fact which comes on record, whether before or after the assessment, while exercising power under section 263 of the Act. He also cited the decision of the Supreme Court in CIT v. Shree Manjunathesware Packing Products and Camphor Works [1998] 231 ITR 53, wherein it has been clarified that section 263 of the Act empowers the Commissioner to make such further inquiries as may be considered necessary and the Commissioner can draw an inference that an order is bad in law even with reference to a document brought on record sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd., AIR 1962 SC 1314, the Supreme Court held: "(7) Applying these tests it would be clear that the question involved in this appeal, that is, the construction of the managing agency agreement is not only one of law but also it is neither simple nor free from doubt. In the circumstances we have no hesitation in saying that the High Court was in error in refusing to grant the appellant a certificate that the appeal involves a substantial question of law. It has to be borne in mind that upon the success or failure of the contention of the parties, they stand to succeed or fail with respect to their claim for nearly 26 lakhs of rupees." Thus, in the aforesaid case of Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd., AIR 1962 SC 1314, the Supreme Court found that the question involved in the appeal before them involved the construction of the managing agency agreement which was not only one of law but also neither simple nor free from doubt and that on the answer to the said question of law, the success or the failure of the contention of the parties depends. In the present case, we find th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (c) Micro-processor based control systems (d) Infra-red thermography (e) Meters for measuring heat losses, 100 furnace oil flow, steam flow, electric energy and power factor meters (f) Maximum demand indicator and clamp on power meters (g) Exhaust gases analyser (h) Fuel oil pump test bench C. Waste heat recovery equipments : (a) Economisers and feed water heaters (b) Recuperators and air pre-heaters (c) Heat pumps 100 (d) Thermal energy wheel for high and low temperature waste heat recovery D. Co-generation systems: (a) Back pressure pass out, controlled extraction, extraction-cum-condensing turbines for co-generation along with pressure boilers 100 (b) Vapour absorption refrigeration systems (c) Organic renkine cycle power systems (d) Low inlet pressure small steam turbines E. Electrical equipments: (a) Shunt capacitors and synchronous condenser systems (b) Automatic power cut off devices (relays) mounted on individual motors (c) Automatic voltage controller (d) Power factor controller for AC 100 mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ......... This is to certify that the property valued for M/s. Industrial Development Corporation of Orissa Ltd., as per schedule are electrical installation and instruments used in the sub-station for controlling and monitoring energy flow. The items of machinery comprise of circuit breaker, transformer, isolater, arrestor, control panel, capacitor bank, etc., which are required for control, flow and monitoring of energy. These items are having automatic devices for proper functioning of the system. They are necessary for ensuring safe and economical distribution of electrical energy. (Sd.) H. C. Palo (Sd.) K. B. Swayin (H. C. Palo) Er. K. B. Swayin A. M. S. E. E. F. I. E. (India), M. A. C. I. (U. S. A.), M. I. Superintending Engineer A. B. S. E., M. CON'e, FI V, C. Eng. (I), (Electrical) Retd. HALTD Chartered Engineer (F-11081)." The aforesaid certificate given by an expert shows that the items of machinery in the sub-stations purchased by the appellant from the OS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, namely, 63 MVAR capacitor bank and 100 MVAR capacitor bank at different sub-stations come under "energy saving devices". In the communication dated November 7, 2003, of the Chief Electrical Inspector (T D) quoted above, he has not stated that the other items of machinery in the different grid sub-sections purchased by the appellant from the OSEB are not devices which can form part of "automatic electrical load monitoring systems". The Commissioner himself has observed in the order dated March 29, 2001, under section 263 of the Act that the transmission sub-stations consist of usual circuit breakers, transformers, isolators, arrestors, control panel, capacitor bank, etc., which are normal components of voltage step-down systems where high voltage transmission is stepped down to lower voltage. What the Commissioner lost sight of is that transmission of electrical energy is made at high voltage with a view to prevent loss of electrical energy during transmission and if after such transmission, any plant and machinery are used for stepping down the high voltage transmission to lower voltage, such plant and machinery for stepping down the high voltage to lower voltage are part of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the transaction has created legal rights and obligations of three parties, namely, the appellant, the OSEB and the IPICOL, which are all State Government undertakings in which the State Government of Orissa owns 100 per cent, shares. In accordance with the transaction, the appellant has taken a loan of Rs. 20 crores by cheque from IPICOL and paid interest to IPICOL at 16.5 per cent, per annum by account payee cheques. The appellant has also paid a sum of Rs. 20 crores to the OSEB by an account payee cheque and retained a sum of Rs. 5 crores towards security deposit. The lease rent of Rs. 57.30 lakhs has also been paid by the OSEB to the appellant by account payee cheques every month. In the books of account of the appellant-company, all these transactions have been reflected and accounted for. The transaction therefore is a genuine one. He further submitted that the Commissioner while observing in the order that the entire arrangement between the parties was a colourable device was perhaps influenced by the observations of Chinnappa Reddy J., in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148, at page 160, that the principle of avoidance of tax liability known as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fected the freedom of the citizen to act in a manner according to his requirements and his wishes in the manner of doing any trade, activity or planning his affairs with circumspection within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. Dr. Pal contended that the appellant thus was free to carry on its business activity and plan its affairs within the framework of law in such a manner so as to reduce its tax burden. He referred to the memorandum of association of the appellant-company to show that the purchase of the plant and machinery by the appellant from the OSEB and lease of the same to the OSEB were within the objects of the appellant-company as enumerated in the memorandum of association. He further submitted that sale and lease back agreements are a common feature in present-day business and have been recognised by the Institute of Chartered Accountants in their Accounting Standard No. 19. He referred to the decisions of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, and in Collector of Central Excise v. Dai Ichi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 148 in support of his aforesaid arguments. Finally, he submitted that any finding as to whether a transaction was colourable one or not is essentially one of fact and cited the decisions in CIT v. Shri Prithvi Raj Daga [1986] 159 ITR 193 (Raj); CIT v. Assam Frontier Tea Ltd. [1996] 221 ITR 311 (Gauhati) and Bhagat Construction Co. (P.) Ltd. v. CIT [2001] 250 ITR 291 (Delhi). Question No. 2 in the present appeal is not whether the sale and lease back agreement as found by the Commissioner and the Tribunal is a colourable device or not but is whether the finding of the Commissioner as concurred in by the Tribunal on this factual question is based on any legal evidence or material or is based on conjectures, suspicion and surmises and is otherwise perverse. In our view, such a question is a question of law and since the success and failure of the parties in this appeal will depend upon our answer to the said question of law, this question of law is a substantial question of law. In CIT v. Shri Prithvi Raj Daga [1986] 159 ITR 193 (Raj) cited by Mr. Mohapatra, the question referred to the High Court by the Tribunal was whether, on the facts and in the circumstances of the case, the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be clear from the aforesaid judgment of the Delhi High Court that only if the conclusion that a particular transaction is colourable is supported by material or evidence, the question is one of fact, but where such a conclusion that a transaction is colourable one is based on no material or evidence, the question is one of law and an appeal will be available under section 260A of the Act to the High Court. Coming now to the decision of the Supreme Court in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 on which great reliance has been placed by Mr. Mohapatra, we find that in the said decision, Chinnappa Reddy J., did observe that the time has come for us to depart from the Westminster principle as emphatically as the British courts have done, but Ranganath Misra J. speaking for the majority, observed that tax planning may be legitimate if it is within the framework of law. He, however, observed 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 resorting to dubious methods. The aforesaid views of Chinnappa Reddy J. and Ranganath Misra J. were examined at length by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e law in this country when the Constitution came into force. This was the law in force then, which continued by reason of article 372. Unless abrogated by an Act of Parliament, or by a dear pronouncement of this court, we think that this legal principle would continue to hold good. Having anxiously scanned McDowell's case [1985] 154 ITR 148 (SC), we find no reference therein to having dissented from or overruled the decision of the Privy Council in Bank of Chettinad's case 1940] 8 ITR 522 (PC). If any, the principle appears to have been reiterated with approval by the Constitutional Bench of this court in Mathuram's case [1999] 8 SCC 667 at page 12. We are, therefore, unable to accept the contention of the respondents that there has been a very drastic change in the fiscal jurisprudence, in India, as would entail a departure. In our judgment, from Westminster's case [1936] AC 1 (HL); 19 TC 490 to Bank of Chettinad's case [1940] 8 ITR 522 (PC) to Mathuram's case [1999] 8 SCC 667, despite the hiccups of McDowell's case [1985] 154 ITR 148 (SC), the law has remained the same. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d transaction only if there were materials or evidence before him to show that the intention of the parties were different from what has been incorporated in the said sale and lease back agreement and the transaction was really a sham or dubious transaction and was a colourable device. In Snook v. London and West Riding Investments Ltd. [1967] 1 All ER 518 (CA), Lord Diplock L.J., explained the use of the word "sham" as a legal concept as follows: "... it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create ..." After quoting the aforesaid observations of Lord Diplock L.J., the Supreme Court has observed in the case of Union of India v. Azadi Bachao Andolan at page 762 of [2003] 263 ITR: "If the court finds that notwithstanding a series of legal steps t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant and was not to lease back the machinery by the appellant to the OSEB. The only conjecture, suspicion or surmise which influenced the Commissioner to think that the whole arrangement was a colourable device and was not a genuine one is that the motive of the said sale and lease back agreement was to reduce the tax liability of both the appellant and the OSEB. The Tribunal in the impugned order has not relied on any other material or evidence but has only confirmed the aforesaid decision of the Commissioner that the sale and lease back agreement was a colourable device and not a genuine one and has refused to interfere with the said decision of the Commissioner. In our view, the decision of the Commissioner and the Tribunal that the sale and lease back agreement between the appellant and the OSEB is a colourable device and not a genuine one is not based on any legal evidence or material but is based on conjectures, suspicion and surmises and is not correct in law and we answer the second and the fourth substantial questions of law accordingly. There is yet another issue raised by the parties before us. In the order dated March 29, 2001, under section 263 of the Act, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reversed in appeal and a re-trial is considered necessary, the appellate court shall have the same powers as it has under rule 23. Under Order 41, rule 23 of the Code of Civil Procedure, the appellate court may, if it thinks fit, by order remand the case, and may further direct what issue or issues shall be tried in the case so remanded. We accordingly remand the matter back to the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack, to decide the aforesaid issue of fact relating to written down value of the machinery and plant purchased by the appellant from the OSEB and leased back to the OSEB for the purpose of determining the exact quantum of depreciation that will be admissible on the plant and machinery under rule 5, Appendix I, Part III(3)(iii)B(a) of the rules. In the result, the conclusions of the Commissioner in the order dated March 29, 2001, under section 263 of the Act and of the Tribunal in the impugned order dated February 7, 2003, on the aforesaid substantial questions of law are set aside, the order of reassessment dated February 25, 2002, passed by the Assistant Commissioner of Income-tax pursuant to the order dated March 29, 2001, of the Commissioner and the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
