TMI Blog2001 (4) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 25 lakhs under section 69C of the Income-tax Act, 1961. (ii) Without prejudice to the above, the learned CIT (A) further erred in holding that addition of alleged payment of Rs. 25 lakhs in cash to M/s. National Plastics Industries Ltd. for procuring large order should be made under section 69C of the Income-tax 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 section 37(1) of the Income-tax Act. 4. (i) The learned CIT (A) further erred in confirming the action of the Assessing Officer in computing undisclosed income on account of lease transactions with Punjab State Electricity Board (PSEB) and Rajasthan State Electricity Board (RSEB) at Rs. 11,64,89,975. (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 the assets. (iii) The learned CIT (A) further erred in heavily relying on the Power of Attorney issued in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that the appellant company is liable for interest under section 158BFA(1) of the Income-tax Act, 1961. 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 added to, alter or amend the above grounds, which are without prejudice to each other, at the time of hearing." 3. The assessee is engaged in the business of Injection Moulding Machinery. A survey was conducted under section 133A(1) of the Income-tax Act 1961 on 26-9-1997 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 section 132 of the Act at the address of the Chairman of the assessee, viz., 88C, Old Prabhadevi Road, 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 Plastics Industries Ltd. and other state of affairs of the assessee-company. On enquiry, it was submitted before the Assessing Officer that the transactions are duly accorded in its books o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscount too. Approx. of Rs. 8 lacs as interest and 17 lacs as further discount (2.2596). We will have to recover approx. Rs 10 lacs (as discount adjustment)" The Assessing Officer concluded that the payment of Rs. 25 lacs was made to M/s. National Plastics Industries Ltd., which included Rs. 8 lacs as interest and Rs. 17 lacs as further discount at the rate 2.25%. The Assessing Officer further noted that a recovery of Rs. 10 lacs would have to be made as discount adjustment because of cancellation of order for three machines. It is pointed out by the Assessing Officer that page 2 reveals similar noting dated 1-10-1996 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 Plastics 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 Rs. 17 lacs. On the lower portion of the page the fresh status as on 28-9-1996 is noted in addition to the notings, which were on page No. 1 as under: "Status :( 28/9/96 ) Customer wants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also aping a liquidity crunch, the company was facing problems. National Plastics offered to give us Rs. 2 crores as advancer For this high advancer company offered them 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 balances 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 Rs. 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 Rs. 25 lakhs had already been received and because of the proposed cancellation, certain sums were to be recover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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 with the 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 28-9-1996 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 Plastics Industries Ltd. are duly recorded in the books of the account of the assessee-company and they are duly confirmed by National Plastics Industries Ltd." The Assessing Officer considered the contentions of the assessee vis-a-vis the documents found at the time of search and survey and came to the conclusion that the assessee could not explain the paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t accounted for by the assessee-company in its books of account. It is strange to digest that a businessman will pay a sum of Rs. 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 Rs. 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 Assessing Officer 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 125 ITR 713. In this case, the assessee had an office in Bombay and one in Madras. On receiving information that a sum of Rs. 1,07,350 was remitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1989] 31 ITD 114 (Mad.) (iii) In the case of Nishant Housing Development (P.) Ltd. v. Asstt. CIT [1995] 52 ITD 103 (Pat.) (iv) In the case of Sharma Associates v. Asstt. CIT [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 Assessing Officer for the detailed reasons given at pages 13 to 17 of his order. He has further mentioned that the assessee is not entitled to any deduction under section 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 Alok Tibrewala and since both of them are no longer in the service of the assessee-company, as they have already left the employment of the assessee-company, they are not able to comment on the same. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, since it is an expenditure deduction of the same should be allowed to the assessee under section 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 Plastics Industries Ltd. an 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.M. Wadia; M K. Mathivathanan's case; Nishant Housing Development (P.) Ltd.'s case and Sharma Associates case. It is also that the proviso to section 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 bock with effect from 1-4-1999. The Circular No. 772 dated 23-12-1998 clearly states that unexplained expenditure is treated as income under section 69C. But there is no corresponding provision for disallowance of such expenditure as the taxpayers are claiming deduction of such expenses under section 37(1) of the Act and in order to curb this practice the amendment is brought on the statute bock from assessment year 1999-2000 and subsequent years. It is pointed out that in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purchase of six machines and as per the papers found, part of the money, given on account of discount, (approximately Rs. 10 lakhs) was to be recovered as discount adjustment, since M/s. National Plastics 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 Plastics 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 Plastics Industries Ltd. The basic argument of the learned counsel for the assessee is 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 Melatur 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 opportunity was given to the assessee to controvert the documents or to adduce any evidence and, therefore, relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 Rs. 25 lakhs to M/s. National Plastics Industries Ltd. in cash out of the books against the expected orders f or six machines to be placed on the assessee and the receipt of Rs. 2 crores as advance by the assessee, Rs. 8 lakhs as interest and Rs. 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 section 69C of the Act, whether the deduction of the same should be allowed en the basis of the same papers, under section 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 section 69C of the Act was brought en the statute book, which could be considered to be retrospective in nature. So far as this contention of the Departmental Representative is concerned, we would like to mention that the explanation to the section generally clarifies the scope of the section, but the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Board (RSEB) amounting to Rs. 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 Assessing Officer 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 Assessing Officer conducted enquiries by the Investigation Wing of the deportment with both these Electricity Boards. The Assessing Officer 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 was also brought to the notice of the assessee that in view of these circumstances, the depreciation claimed by it in respect of these assets was not allowable and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epredation on the assets leased. Therefore, the depredation claimed by the assessee en these assets was disallowed. 12. This was challenged before the CIT(A). The CIT(A), in fact incorporated the order of the Assessing Officer as well as the submissions of the assessee. A tabular chart was also furnished before the CIT(A). For the sake of conveniences the same is reproduced below: -------------------------------------------------------------------------------------------- Sr. Observations of A.0. Contention of Appellant-Company No. -------------------------------------------------------------------------------------------- 1 2 3 -------------------------------------------------------------------------------------------- OWNERSHIP OF The ASSETS 1. There was no genuine sale of Sale Lease back is one of the recognised equipments and several terms of legally accepted modes of raising finance. the lease agreements are contrary By purchasing the assets from Electricity to the claim of absolute Boards and paying th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by the assessee and leasing of the assets to the Electricity Boards are different transactions.The rights of ownership acquired by the assessee by means of purchasing the assets cannot be mixed up with the obligations cast on the lessee as per the lease agreement. 4. Owner must give warranty for the At the time of purchase of the asset it fitness, suitability, etc. of the was the Electricity Boards who gave equipments In the instant case, warranty for the fitness, suitability), etc. however, the lease agreements of the equipment as they were the stipulate that the lessor does not owners at that point of sale. Immediately make any representation or thereafter the assessee acquired warranty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 LEASE AGREEMENT OR NOT 1. If any option to buy the In this case no option to buy the leased equipment is given in the lease equipments is given to the lessee in the agreements, the agreements lease agreement. It is only a power of would not be 'true lease' agree- attorney given in favour of the Secre ments. tary, PSEB, authorising to negotiate and sell these equipments to any intending purchaser at a price not less than minimum mentioned in the power of attorney on the expiry of the lease period. 2. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... breach of terms of the lease by the lessee. 4. In order to construe the transactions The substance and essence of the agree one has to look to the ment will clearly show that it is a genuine substance or essence of it rather lease transaction. The parties to the trans- than its form. action 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 Lease is a contract of bailment. Hence, case of defaults the lessor would the lessor gets the right to repossess the have been entitled to terminate equipment at the end of the lease period the lease, repossess the assets or in a case of breach of terms, is entitled claim damages. However, in the to recover damages as per lease agree instant case the lessor does not ment and also repossess the equipments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to a contract of bailment, the lessor has absolute right over the asset. 4. The terms of finance were worked Normally, the terms of finance are out independent of any specific always worked independent of the equipment to be sold by SEBS. In equipment. fact, it is apparent that the Further, the assessee inspected the transaction has been given the assets identified by the SEBs for colour of lease by simply the purpose of sale and lease back, identifying the assets qualifying obtained valuation report, negotiated the for 100 per cent depreciation terms and purchased the aforesaid valuing them arbitrarily to match assets and then entered into the lease the amount financed by each agreement. Accordingly, it will be appre- lessor. ciated that the said agreements were entered int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned that instances have come to the notice of the Board that in some of the finance lease agreements leased assets had never existed or purchase price for the lease assets came back to the lessor by discounting the lease rental either directly from the lessee or through circuitous route from intermediaries and that the line of investigation is mentioned in that circular. It was also directed that field enquiries are to be made to identify and verify about the existence of the lease assets, the compliance of various provisions of the law relating to transfer of assets, such as payment of sales tax, goods tax, insurance, etc. It has also been directed to examine the books of account to see that the lease rentals are accounted for in conformity with the terms of the agreement. The said circular further directed to examine the applicability of Explanation 3 to section 43 of the Act in the case of sale and lease back transaction to determine the correct fair market value. It has also been directed to examine the applicability of Explanation 4A to section 43(1) in case of sale and lease back transaction. In the concluding para it was directed that if the finance lease transaction is foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of McDowell Co. Ltd. is already examined by the Tribunal in a number of decisions. Further it is very clear from the circular that the Income-tax Act does not differentiate between operating lease and finance lease. 16. The learned counsel for the assessee next submitted that the issue of granting depreciation en sale and lease back transactions has been considered by the Tribunal in a number of eases. It was pointed out that in the case of Unimed Technologies Ltd. v. Dy. CIT [2000] 73 ITD 150 (Ahd.), the issue was similar to the one involved in the present case. Such is the position with regard to the decision of the Tribunal in the case of Coronet Investments (P.) Ltd. [IT Appeal No. 2103, (Mum.) of 1999 dated 7-3-2001]. Regarding the two decisions of the Supreme Court relied upon by the Assessing Officer i.e., in the case of Damodar Valley Corpn. v. State of Bihar 1961] 12 STC 102 (SC) and in the case of Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1176, it was submitted that both these decisions were considered by the Hon'ble Bombay High Court in the case of Prakash Industries Ltd. [Appeal No. 12 of 1999 decided on 28-1-1999]. Therein the lessee, Pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the unreal owner. But that instruction is not applicable to the facts of the present case because the transactions have been entered into between the assessee and the two State Government undertakings and there is no finding of any authority that no such agreements were ever entered into between the parties and consequently the machinery was never purchased and leased back by such agreements. It will be pertinent to mention here that the PSEB and RSEB have removed these assets from their balance-sheets and are now appearing in the balance-sheet of the assessee. So the unreal transaction, which is mentioned in the circular does not at all find place in the case of the assessee. It is not the case of the Assessing Officer that the purchase price of lease assets had come back to the lessor. Rather, we find that the lessor had declared the lease rental in its books of account in every year. The Electricity Boards have reduced the sale price of the assets from their block of assets. It will also be pertinent to mention here that in the present case, the purchase price was paid as per the valuation report obtained from a registered valuer, which had not been challenged or found fal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) New Deal Finance Investment Ltd. v. Dy. CIT [2000] 74 ITD 469 (Mad.) (iii) Oriental Leasing Co. v. Dy. CIT [1996] 55 TTJ 294 (Delhi) (iv) Amar Structure (P.) Ltd. v. Asstt. CIT [1997] 57 TTJ 508 (Ahd.) (v) Peacock Chemicals (P.) Ltd. v. Dy. CIT [1995] 51 TTJ 264 (Delhi) (vi) Accu Dress v. Asstt. CIT [1998] 62 TTJ 755 (Ahd.) We find that the Assessing Officer had relied on the two decisions of the Supreme Court in the case of Sundaram Finance Ltd. and in the case of Damodar Valley Corpn.'s. But these decisions were considered by the Bombay High Court in the case of Prakash Industries Ltd. in Notice of Motion No. 2348 of 1998 in Suit No. 3196 of 1998. We find that the Special Leave Petition against this order of the Bombay High Court has been rejected by the Hon'ble Supreme Court on 11-5-1999. The Hon'ble Bombay High Court, inprinciple, has accepted the sale and lease back of property, though in different context, and it was observed that the ownership had passed on to the respondent. Taking into consideration the facts and circumstances of the case and the evidence on record, we are of the opinion that the assessee is the owner of the assets on buying the same and is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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