TMI Blog1996 (12) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... h July, 1988 disclosed an amount of Rs. 30 lacs in the capacity of a Director of M/s. Patel Dying Printing Mills (P) Ltd. and a further amount of Rs. 10 lacs as undisclosed income of asst. yr. 1989-90 in the case of assessee-company i.e. M/s. Amar Structures (P) Ltd. In the return filed declaring a loss of Rs. 4,428 the surrendered income of Rs. 10 lacs disclosed under s. 132(4) was set off against the claim of depreciation amounting to Rs. 11,60,300, which was claimed by the assessee on machinery valued at Rs. 27,85,000, which was purchased by the assessee from M/s. Patel Dying Printing Mills (P) Ltd. 1st July, 1988. The assessee-company namely, M/s. Amar Structures (P) Ltd. as well as M/s. Patel Dying Printing Mills (P) Ltd. along with M/s. Vimla Silk Mills (P) Ltd. are being controlled by S/Shri Amar N. Shah, Atul N. Shah and Devilal G. Shah. According to the assessee, M/s. Patel Dying Printing Mills (P) Ltd., which had earlier leased the machinery to M/s. Vimla Silk Mills (P) Ltd., was running short of funds and as such, it decided to sell a part of the machinery let out on lease to M/s. Vimla Silk Mills (P) Ltd. by terminating the agreement of lease with M/s. Vimla Sil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that date. The AO also noted that the ink used for making the regular entries was different from the ink used in making the entries relating to the receipt of cash and payment of lease rent by M/s. Vimla Silk Mills (P) Ltd. to the assessee-company. The AO examined the accounts of the assessee also but the same were not rejected on the ground that the accounts were written on a computer and there is no indication to ascertain as to whether these were written regularly during the course of business or these were written afterwards. During the course of assessment proceedings, the assessee explained to the AO that books of account of the assessee were written regularly during the course of business and these were audited in time. However, since there was a loss, no return was filed. It was explained that when the case of M/s. Vimla Silk Mills (P) Ltd. was taken up by the AO, he called for the statement of accounts of the assessee in the books of M/s. Vimla Silk Mills (P) Ltd. and vice versa, and when these were sent by each other for confirmation, it was found that there was omission on the part of M/s. Vimla Silk Mills (P) Ltd. to record the payment of lease rent by them to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was Rs. 40,000 and that amount was bifurcated in two equal half of Rs. 20,000 each between M/s. Patel Dying Printing Mills (P) Ltd. and the assessee—M/s. Amar Structures (P) Ltd. from the date of purchase i.e. 1st July, 1988. (c) The books of account of M/s. Vimla Silk Mills (P) Ltd. were closed and its return filed; while the books of accounts of the assessee as well as M/s. Patel Dying Printing Mills (P) Ltd. were not closed. (d) As stated by the AO at page 4 of the assessment order, the following entries were made in the books of account of M/s. Vimla Silk Mills (P) Ltd: 31st July, 1988.—(a) An amount of Rs. 20,000 was shown as cash received from M/s. Patel Dying Printing Mills (P) Ltd. on account. (b) An amount of Rs. 20,000 was shown as cash paid to M/s. Amar Structures (P) Ltd. on account of machinery rent. (e) Similar entries were made at the end of every month for a period of nine months upto the close of the accounting year on 31st March, 1989 and as such, the machine rent account in the books of M/s. Vimla Silk Mills (P) Ltd. remained unaffected as the total amount of rent for the year remains the same i.e. Rs.40,000 per month. The assessee-company—M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll's case the facts and the legal relationship between various parties were not in dispute. The question in Mc Dowell's case was whether the assessee was liable to pay the sales-tax on the excise duty paid by the purchaser of the goods manufactured by the assessee. The purchaser's of the goods manufactured by the assessee paid the excise duty directly to the State Exchequer by an arrangement with the assessee and, therefore, the assessee had excluded the excise duty element from the bills made by it and consequently, the excise duty was excluded from the turnover also. Accordingly, the assessee—Mc Dowell Co. did not pay sales-tax on the excise duty element. The hon'ble Supreme Court ultimately held that the assessee was liable to pay sales-tax on the excise duty element also although not included by the assessee in the turnover, because it formed a part of the sale price and of the turnover. In that case, the excise duty had been paid by the purchaser although the liability for payment of excise duty was that of the assessee i.e. manufacturer. Consequently, the Court held that it was paid by the purchaser on account of the assessee, as the purchaser could not obtain the goods witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es fittings 12,91,000.00 (2) 'Sanjay' High Pressure Steam-agers No 75,000.00 (3) 'Tex Print' flat bed colours Semi-auto Screen Printing Machine 50 table length with Dryer 5,26,000.00 (4)'Nipurna' 8 colour semi-automatic flat bed Screen Printing Machine 4,31,000.00 (5) 'Sanjay' perforated Beam Batching Machine No.1 51,000.00 (6) Thermosat Model H-1000 coal-cum-oil fire device with furnace 4,11,000.00 It was submitted that the fact of presentation of bills by M/s. Patel Dying Printing Mills (P) Ltd. to the assessee has not been disputed by the AO. Thus, it was pleaded that property in the goods i.e. machinery passed from the seller i.e. M/s. Patel Dying Printing Mills (P) Ltd. to the assessee legally and validly. This is fully reflected in the balance-sheet of the purchaser as well as the seller. It was pleaded that in the face of this documentary evidence to say that machinery has not been sold by M/s. Patel Dying Printing Mills (P) Ltd. to the assessee would be to go clearly against the established fact. The conclusion of sale rests on the presentation of the bill, a fact undisputed by the AO and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or adjustment against the balance sale price payable by the assessee to M/s. Patel Dying Printing Mills (P) Ltd. towards the cost of machinery. It was submitted that assuming but not admitting that the AO is right on this count, this cannot displace the concrete evidence regarding the sale of machinery from M/s. Patel Dying Printing Mills (P) Ltd. to the assessee- company. The receipt or non-receipt of rent is merely a consequence of the ownership of machinery and that cannot decide the question of ownership which rests on the raising of bills and consequent payment in respect of the machinery. It was submitted that the whole approach of the AO is full of prejudice against the assessee as the AO has stated at page 4 of the assessment order that the assessee had thought of the scheme after the close of the relevant accounting period. It was submitted that there is no evidence of this thought process of the assessee except the imagination of the AO as according to the AO, it was not possible to make payment by cheque or cash, so the aforesaid entries were passed. It was submitted that payment by means of entries in the books of account is a perfectly legitimate way of making the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilk Mills (P) Ltd. conclusively proved that at the time of audit of the books of account of M/s. Vimla Silk Mills (P) Ltd., entries regarding payment of machine rent amounting to Rs. 1,80,000 were not appearing, and that they have been inserted at a later date. It was submitted that the assessee had accepted this finding that the entries in the books of M/s. Vimla Silk Mills (P) Ltd. were, in fact, recorded at a later date and for that, it has given a reasonable explanation. But the AO has rejected that explanation and has denied the claim of depreciation on machinery wrongly making several flimsy observations in points (2) to (16) on pages 7 to 9 of the assessment order and also regarding the re-writing of journal ledger and unreliability of minute book of the assessee-company. It was submitted that the fact of purchase and lease of machinery was not disclosed at the time of search and the agreement of lease was not found in the search action cannot go against the assessee and the assessee had in fact stated that it has entrusted the job of executing the lease agreement to his CA, who in turn has asked an Advocate to purchase the requisite stamp-paper for writing the lease agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Departmental Representative, supported the order of the AO. He extensively read from the order of the AO from para 6 onwards from page 3 to 10 of the assessment order. It was submitted that M/s. Patel Dying Printing Mills (P) Ltd.—a sister concern of the assessee had huge claim of brought forward business losses, unabsorbed depreciation and investment allowance. Therefore, some addition to its income by way of profit under the capital gain did not matter to it as no tax liability was created there. On the other hand by simply showing the sale of machinery by M/s. Patel Dying Printing Mills (P) Ltd. to the assessee a fictitious claim of depreciation was made in the hands of the assessee to nullify the entire tax which was legitimately payable by the assessee on the disclosure of Rs. 10 lacs made by one of the Directors in a statement recorded under s. 132(4) in the case of the assessee-company for the assessment year under consideration. On a query from the Bench as to whether any search warrant was issued in the case of the assessee, the learned Departmental Representative replied that there was no search warrant and there is nothing on record to indicate the compul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12th/16th July, 1988. It now appears that there was no specific search warrant under s. 132 in the case of the assessee—M/s. Amar Structures (P) Ltd. However, Shri Amar N. Shah, who is a Director of M/s. Patel Dying Printing Mills (P) Ltd. as well as M/s. Amar Structures (P) Ltd. during the course of statement recorded under s. 132(4) on 16th July, 1988 by the Asstt. Director of IT, Investigation 3(1), Ahmedabad offered to make a disclosure of Rs. 30 lacs in the case of M/s. Patel Dying Printing Mills (P) Ltd. and Rs. 10 lacs in the case of M/s. Amar Structures (P) Ltd. There were also disclosure by Shri Atul N. Shah, Managing Director of M/s. Vimal Silk Mills (P) Ltd. of a sum of Rs. 45 lacs as income. Besides the above major three disclosures, there were other disclosures of Rs. 3 lacs in the case of M/s. Acon Builders, Rs. 2 lacs in the case of M/s. Vishal Builders, Rs. 2 lacs in the case of M/s. Bhairav Textiles, Rs. 2 lacs in the case of M/s. Vardhaman Silk Mills and Rs. 6 lacs in the case of M/s. V.G. Twisting Industries. Thus, a total sum of Rs. 1 crore was disclosed by the various persons under different names over which ordinarily tax of about Rs. 56 to Rs. 57 lacs ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by M/s. Patel Dying Printing Mills (P) Ltd. in favour of the assessee-company. The part payment of Rs. 10 lacs by the assessee to M/s. Patel Dying Printing Mills (P) Ltd. has not even been doubted by the AO on 25th July, 1988 and the assessee has accepted the liability of Rs. 17,85,000 which was payable by the assessee to M/s. Patel Dying Printing Mills (P) Ltd. The above liability is duly shown in the balance-sheet of the assessee-company. Similarly, the amount of Rs. 17,85,000 has been shown as an asset in the balance-sheet of M/s. Patel Dying Printing Mills (P) Ltd. The accounts of the assessee as well as M/s. Patel Dying Printing Mills (P) Ltd. are duly audited. It is no doubt true that the entries in the books of account of M/s. Vimla Silk Mills (P) Ltd. were made subsequently to the filing of the return by M/s. Vimla Silk Mills (P) Ltd. and after its accounts was audited by the CA and the assessee has accepted this, but the assessee has a reasonable explanation to offer for non-inclusion of the name of the assessee in the list of persons to whom payment exceeding Rs. 10,000 were made in cash as required under s. 40A(3), which was not noted by the auditors at the tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return of income due to the fact that the returned income was a loss and no tax was payable. The claim of the assessee with regard to depreciation on the purchase of machinery is governed under s. 32(1) of the Act, because as per s. 32(1) it is the owner of asset who is entitled to depreciation on assets purchased and put to use. In the present case, the assessee-company has purchased the machinery and the payment of Rs. 10 lacs against the machinery is not doubted by the AO. The machinery was actually used by the lessee in its premises, which is also not doubted. As such, the assessee becomes entitle to depreciation under s. 32(1). The error of compensatory nature which was committed by the lessee company due to omission of recording entries during the course of business though payment of lease rent was made, cannot be the ground for disallowance of depreciation in the case of the assessee, because it is an error in the books of the lessee company and not in the books of the assessee-company. The contention of the AO that the stamp-paper was not purchased either by the assessee or by M/s. Vimla Silk Mills (P) Ltd. cannot be the basis for treating the agreement of lease as non-genu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. In that case, certain deeds of trust were to be considered on the question whether certain rights of the assessee under those deeds alone were to be capitalised for inclusion in the assessee's wealth or some other elements for a future potential benefit had also to be taken into account. The hon'ble Supreme Court held that only rights of the assessee which were existing on the relevant date could be capitalised and so included and that the possibilities of future benefit which were in the discretion of the trustees could not be included in the calculation of net wealth of the assessee. All pleas raised on behalf of the Revenue that this was a scheme to avoid tax were rejected on the ground that the trust deed was unambiguous and clear. The hon'ble Supreme Court stated, "in any event, however, where the true effect on construction of the deeds is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration." Referring to McDowell's case, their lordships stated, "that decision cannot advance the case of the Revenue, because the language of the deed of the settlement is plain and admits of no ambiguity." Similarly, in the instant case, the legal r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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