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TMI Blog2001 (4) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-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 PSEB and RSEB which authorises them to sell the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 of account. During the course of survey under section 133A(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 W1100 in February/March and is offering to keep advance of Rs. 10 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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 recovered out of the payments made, it was proposed to treat the sum of Rs. 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egular 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 payment of Rs. 25 lakhs made outside the books of account. So he added the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gest 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 by the assessee by two telegraphic transfers from Madras to Mumbai through Bank. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, it is to be noted that the Assessing Officer had not made any efforts to examine these persons. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 of the assessee the survey took place on 27-9-1997 and the transactions recorded in these two pap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, (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, reliance cannot be placed en them. In this connection, the learned counsel for the assessee relied en the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly 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 proviso carves out an exception to the provision and the same rule cannot be applied in the case of the proviso. Ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that out of the lease rental it was proposed to tax only the interest portion. The assessee was given opportunit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; agreement, found by the Assessing Officer to be contrary to the claim of absolute ownership were intended to protect the assets which in fact go to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; assessee after purchase of the assets. from SEBs had not assumed any The lease agreement casts certain duties risks of ownership. In fact, all and liabilities on the lessee for use of the losses in respect of the said equipment as a bailee of the equipment equipment were to be borne the which is as per the second proviso to lessee. section 26 of the Sale of Goods Act. The &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 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 ..... ; regard to the fitness, suitability, etc. of the equipment leased. 5. Under section 151 of the Indian A lease is a contract of bailment and the Contract Act, the hirer is only parties to the contract are free to bind responsible for taking as much themselves in respect of rent, maintenance, care of the goods hired by him as risk on account of use, etc. as a man of ordinary prudence & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; It will be appreciated that the lease agree ment in this case is a special contract between the bailor and the bailee and &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The Assessing Officer has stated It will be noted that the observation of that a true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & in clause the lease agreement in case of any 7(a) for PSEB that in spite of lease agree default by the lessee. The lessor ments, the appellant continues to remain had not taken any risk of the owner of the assets. If there are ownership but had reserved the no express stipulations as regards taking right to recoup the full back of the assets, it could not be argued investment. that rights of the owner have ceased. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; possession given under the Contract Act. WHETHER THE TRANSACTIONS WERE LOANS 1 . The substance of the arrange- A sale and lease back transaction con ment is one of lending against templates sale of assets by a person using security of fixed assets: the asset and in need of finance to a 2. SEBs were looking for availing of person who is willing to finance by pur- finance at cheap rates and since chase of the asset and the corresponding 100 per cent depreciable assets lease of same asset to the seller. Thus &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; (c) The person willing to finance is able to carn a reasonable rate of return consequent to the lease of the said asset; &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 into in respect of specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducing 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, propose to provide in the Income-tax 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 effecting bona fide transaction will prevent loss making concerns from indulging in unhealthy trade off of depreciations" (para 95 of the speech). Thus it is clear that even prior to the amendment the lessors were entitled to depreciation on leased assets. The only difference that was brought in this amendment was that the cost of acquisition in the hands of the lessor was restricted with effect from 1-10-1996 to the WDV in the hands of the previous owner, that is the lessee. The learned counsel for the assessee also invited our attention to Instruction No. 1978 dated 31-12-1999 (F. No.225/190/98/IR(A-II)), according to which the Board has given guidelines for investigation in the finance lease agreements. He submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 existences. 15. The learned counsel for the assessee further relied on the Circular No. 2 of 2001 dated 9-2-2001, which also mentioned the criteria laid down in Instruction No. 1978 dated 31-12-1999 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. v. CTO [1985] 154 ITR 148. This circular also mentions that though the new accounting standard pronounced by the Institute of Chartered Accountants of India makes distinction between operating lease and finance lease and also requires capitalisation of assets by the lessee in financial lease transaction, but directed that the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act. In view of this circulars it is submitted that none of the conditions mentioned in Instruction No. 1978 dated 31-12-1999 are found in the lease transaction entered into by the assessee-company. It is also submitted that the applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 43(1) was introduced with effect from 1-10-1996 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 depredation in the hands of the lessor with effect from 1-10-1996 on the written down value in the hands of the previous owner, i.e., the lessee. So that amendment by way of Explanation 4A to section 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 dated 31-12-1999 has pointed out that it has come to its notice that in some of the finance lease agreements, lease assets had never existed or purchase price for the lease assets came back to the lessor by discounting the lease rental cither directly from the lessee or through circuitous route from intermediary. Under these circumstances, this circular was issued with a view to making enquiries to identify and verify about the existence of lease assets so that the fake transfer of assets on paper should be discouraged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n claimed by PSEB and RSEB on these assets. Under these circumstances it cannot be treated as a sham transaction of lease f or the purpose of claiming depreciation. We find that the Tribunal has considered the question of granting depreciation in sale and lease back transaction in the case of Unimed Technologies Ltd. That was a case where the assessee has purchased an asset on hire purchase agreement f or 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 depreciation cannot be disallowed. Similar view was expressed by the Mumbai Bench of the Tribunal in the case of Coronet Investments (P.) Ltd., wherein the Tribunal, following its order in the case of Berlia Chemicals & Traders (P.) Ltd. [IT Appeal No. 75 10 (Bom.) of 1993, dated 25-10-1999], had allowed the claim of the assessee. The facts of these cases are identical to the facts of the present case. Similar view was also taken in the cases of (i) Karam Chand Thaper & Bros. v. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is within the time and, therefore, the assessee is not liable for any interest under section 158BFA of the Act. The order of the CIT(A) on this issue is set aside and the Assessing Officer 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 tax rate of 60 per cent on the undisclosed income computed for the block period. The Assessing Officer has charged income-tax at the rate of 60 per cent and surcharge also at the rate of 7.5 per cent. As per the provisions of section 113, tax on the undisclosed income for the block period is chargeable at the rate of 60 per cent. The CIT(A) was of the view that the first proviso to section 2 of the Finance Act, 1997 provides for levy of surcharge on the amount of income-tax computed under sections 112 and 113. Part I of the First Schedule of the Finance Act, 1997 provides the rates of income-tax and which also provides the levy of surcharge at the rate of 7.5 per cent of income-tax even on the income-tax levied as per the provisions of section 113 also, which comes to 4.5 per cent. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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