1994-VIL-59-ITAT-DEL

Equivalent Citation: ITD 051, 566,

Income Tax Appellate Tribunal DELHI

Date: 07.10.1994

INDIAN MANAGEMENT ADVISERS & LEASING (P.) LTD.

Vs

DEPUTY COMMISSIONER OF INCOME-TAX.

BENCH

Member(s)  : A. KALYANASUNDHARAM., VIMAL GANDHI.

JUDGMENT

Per Vimal Gandhi, J.M. --- These two appeals, one by the assessee and the other by the revenue for the assessment year 1990-91 are directed against order of CIT (Appeals)-I,New Delhi dated22-12-1993. As common points are involved, these appeals were heard together and are being disposed of through this consolidated order.

2. The first issue relates to disallowance of depreciation on bottles. The assessee-company in the relevant period carried production of Punching, binding and laminating machines and leasing business. It had claimed 100% depreciation on soft drink bottles which the company purchased from M/s. Arizona Printers and Packers Ltd. and leased out to M/s. Residency Food and Brewerages Ltd. vide Lease agreement dated1-2-1990. The learned revenue authorities disallowed the claim mainly on the ground that these bottles were not put to use and, therefore, conditions of section 32 of the Act were not satisfied. The CIT (Appeals) held that only 11 out of 50 trucks of bottles sent by the manufacturer (Supplier) had entered into the factory premises of the lessee before31-3-1990as evidenced by the Gate Entry Register. Even for these trucks, there was no sufficient time to debag and make them ready for use. Secondly, it was held that these bottles were to be printed with logo, "SEVEN UP ERA" (should be LEHAR SEVEN UP) for which approval of the Ministry of Food and Processing industry was obtained much after the end of the accounting year and only on19-4-1990. It was accordingly held that assets were incapable of being used. The learned CIT (Appeals) in the impugned order has further observed that whole thing was only a paper transaction. The assessee has come up in appeal before the Appellate Tribunal.

3. In appeal, Shri O.P. Vaish, the learned counsel for the assessee drew our attention to agreement dated1-2-1990between the assessee and its lessee. Clause 3 of the said agreement stipulated that the lease would commence from the date of delivery of the equipment or the date of payment for equipment, whichever was earlier. In this case, payment for equipment was made by means of three bank drafts on20-2-1990,26-2-1990and2-3-1990for supply of 1.38 million bottles. The supplier despatched bottles from its premises between 26th to28th March, 1990. Shri Vaish drew our attention to details of despatch filed before the Assessing Officer and made available in the Paper Book. He further pointed out that even rent for the quarter, February-April, 1990, amounting to Rs. 3,98,735 was received and credited on26-2-1990. This was offered for assessment and assessed accordingly. It was further submitted that in the case of a leasing business, the assets are put to use when lease commences. In other words, assets are deemed to be used when the lessor becomes entitled to rent. It is not necessary that assets should be put to actual use by the lessee to entitle the lessor to claim depreciation. The lessor cannot remain at the mercy of the lessee to put the leased assets to actual use. No such condition can be read in section 32 of the Act. In support of propositions canvassed, Shri Vaish relied upon the decision of ITAT, Delhi, in the case of Oriental Leasing Co. v. Dy. CIT [IT Appeal No. 1590 (Delhi) of 1992 dated 6-11-1992]. Shri Vaish further relied upon decision of Bombay Bench in the case of Mulraj Dwarkadass Goculdas v. Dy. CIT [1984] 48 TTJ (Bom.) 531. The learned Departmental Representative, on the other hand, supported the impugned order of CIT(A) and of Assessing Officer.

4. After examining carefully, the rival submissions of the parties in the light of material available on record, we are of view that submissions advanced by Shri Vaish have substance and are required to be accepted. As pointed out by learned CIT(A), for claiming allowance of depreciation the assessee has to satisfy that---

(i) the assets were owned by the assessee; and

(ii) that assets were used for the purposes of assessee's business.

There is no dispute regarding assessee's ownership of bottles. The Assessing Officer in para 3 of the order specifically admits "the assessee-company purchased soft drink bottles worth Rs. 40,54,933 from M/s. Arizona Printers and Packers Limited". This fact was not disputed by learned CIT(A) or by the revenue during the course of hearing before us. Even otherwise, there is documentary evidence of purchase and payment and, therefore, condition No. (i) regarding ownership is treated as fully satisfied. The dispute revolves round the user of the assets for purposes of business. Before discussing above aspect, we deem it necessary to comment on CIT(A)'s observation that entire transaction appeared to be a paper transaction entered solely to claim depreciation. In this case, the lease of bottles is supported by a lease deed. The lessee paid rent through bank accounts which was credited and assessed. There is no dispute on orders placed with suppliers M/s. Arizona Printers and Packers Limited and despatch of bottles to the premises of the lessee. In fact, lower authorities admit that 50 trucks entered the premises of the lessee before the end of the accounting period. In the light of the above facts and circumstances, it is not known as to how and on what basis the learned CIT(A) affirmed the finding of the Assessing Officer that entire transaction was merely a paper transaction. Having regard to the documentary evidence available on record, we hold that transaction as stated by the assessee was genuinely entered to earn rental income by leasing soft drink bottles.

5. We also find force in the submission of Shri Vaish that in the case of lease of assets, the revenue cannot insist on actual use of assets by the lessee to entitle the lessor to claim depreciation on assets. The expression, "owned by the assessee and used for purposes of business or profession" in section 32 of the Act is to be given wider meaning. (Kindly see in this connection decision of Hon'ble Jurisdictional High Court in the case of Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404 (Delhi). The words, "used for purposes of business" in the above section are to be read conjunctively and along with the words "by the assessee". Thus the use of the assets has to be seen in the hands of the assessee and not with its lessee. Having parted with the asset on delivery to the lessee, the lessor cannot possibly control the use of the assets in the hands of the lessee. So far as a lessor is concerned, particularly in a case where leasing is its business, the assets are used for business when these are leased out and are exploited by the lessee. The lease would commence when the lessee takes over the leased assets and becomes liable to pay rent. Without possession, a lease of an asset normally cannot commence. Whether in a given case, the lessee has or would be deemed to have taken over the leased assets would depend upon facts and circumstances of the case. It would also depend upon the nature of assets leased and agreement between the parties.

6. In the present case, the assessee claimed that lease with Residency Food & Brewereges Limited, as per clause 3, commenced on the date of payment for equipment to M/s. Arizona Printers and Packers Ltd. The payment was made by means of three bank drafts exchanged betweenFebruary 20, 1990toMarch 2, 1990. Thus even if the last date of payment is adopted, the lease commenced on2nd March, 1990. The lessee became liable to pay and in fact paid rent for quarter February - April, 1990 amounting to Rs. 3,98,735 which was credited in accounts and duly disclosed. The learned revenue authorities have not challenged payment or date of commencement of lease as claimed by the assessee. We see no disagreement on facts to dispute or doubt the claim made by the assessee.

7. Apart from clause 3, clause 4 of lease agreement dated1-2-1990is relevant and provides as under:---

"4. Delivery of equipment

The equipment will be delivered by the supplier to the location specified by the lessee. The lessor will not bear responsibility for any damage prior to or during delivery. The lessee shall pay any charges in respect of delivery from the supplier to the lessee, and shall accept delivery at such location. The lessor will request the supplied to effect delivery on or before the date of commencement of the leasing but if for whatever reason delivery is not effected by that date the lessor shall not be liable for any loss suffered by the lessee thereby and the leasing shall be deemed to commence from that date and all charges and obligations to be payable and enforceable as if delivery had been effected on that date."

It is clear from the aforesaid clause that bottles were to be carried and delivered to the lessee at lessee's risk and cost. The assessee lessor was not liable for any loss to the lessee on account of late delivery or otherwise caused. The legal effect of the stipulated clause was that the leased property passed to the lessee when the supplier agreed to carry the bottles to the location specified by the lessee. The supplier thus became agent of the lessee. There is material on record to show that bottles were despatched by the supplier to the locations specified much before the end of the previous year. The lessee thus took over and became liable to pay rent for the bottles to the assessee. With the commencement of the lease commercial exploitation of assets started and assets were used by the assessee. The exploitation of assets is synonymous with user of the assets which started and continued with the right of the assessee to receive rent. The lessor cannot control decree of actual user of assets or non-user of assets by the lessee. The lessor's commercial exploitation has to be confined to its rights to receive rent. As stated earlier, there is no dispute on legal right of the assessee to receive rent for the bottles leased. The assessee, therefore, has to be held to have used bottles prior to the end of the year. Therefore, both the conditions envisaged in section 32 of the Act to entitle the assessee to claim depreciation are fulfilled. We accordingly hold that learned revenue authorities were not justified in denying the depreciation as claimed by the assessee. Accordingly, we direct that depreciation be allowed.

8. The next issue pertains to disallowance of depreciation amounting to Rs. 38,72,479 claimed on 22 computers worth Rs. 2,20,12,320 purchased from M/s. Pertek Computers Ltd. (PCL). These computers were claimed to have been purchased vide invoices dated23-3-1989and15-3-1989. The said computers were claimed to have been leased out to M/s. Altos India Ltd. which incidently have a common Director with PCL. M/s. Altos sub-leased these computers to PCL. According to the assessee, these computers were despatched to various locations and were used for in-house requirements before30th March, 1989. Out of the total consideration, the assessee paid Rs. 1,10,00,000 to PCL and balance amount was claimed to have been paid by the lessee, i.e., M/s. Altos. The assessee further showed hire charges of computers aggregating to Rs. 47,70,408 in the relevant period.

9. The Assessing Officer denied claim of depreciation on grounds which are summarised in the assessment order as under:---

"(i) There is no actual delivery of the computers to the assessee-company or to the lessee. The computers never left the premises of M/s. PCL.

(ii) Sub-lease was not permissible because of the 'Non-assignable Interest Clause' (clause 21). Since both the lease and sub-lease agreement took place simultaneously there was no necessity for the assessee-company to have this clause if it is to be violated simultaneously. Violation of an expressed term of arrangement cannot be equated with modification of the arrangement by implied conduct and intention. Since the whole transaction was a paper transaction from the very beginning, the assessee-company was not bothered about the clauses of the agreement or their violation.

(iii) The sale invoices did not carry the distinctive number of computers. They are also not mentioned in the Schedule to the Lease Deed. Even the information subsequently furnished during the assessment as such give the serial No. COMP/IRS/009/001 to 022 only places the Repographic System Pvt. Ltd. (the former name of the assessee-company). The identification, specification number of the company at the time of manufacture is still not available even after three years of the agreement. Therefore, the computers, the subject-matter of the above transaction, cannot be stated as specific, ascertainable goods.

(iv) There was no payment of security deposit by M/s. Altos India Ltd. to the company. The adjustment by M/s. Altos India Ltd. against the sale price with M/s. PCL only shows a pre-planned exercise where only part payment is required to be made whereas depreciation will be available on the full amount. Even the payments mostly made in April 1989 show the whole transaction is contrived for claiming depreciation. Similar transaction was carried and by PCL-AC in the other cases as well. The disallowance of depreciation claimed was confirmed by CIT(A) in M/s. Goyal Gases Pvt. Ltd. (89-90) and M/s. Avanti Overseas Pvt. Ltd."

She held that it was a colourable and sham transaction in which no transfer of goods took place. The whole thing was shown to claim depreciation. Otherwise, it was a fraudulent financial arrangement to earn interest which give return of roughly 17%.

10. The assessee impugned the above disallowance in appeal before CIT(A) but remained unsuccessful. The CIT(A) in principle agreed with the view taken by the Assessing Officer. Hence this appeal.

11. During the course of hearing of appeal, learned departmental representative sought to produce statements of Shri Dadan Bhai, Chairman of CPL and Director of Altos. Statement of Shri Bharat Goenka, Director of Altos recorded under section 132 in the course of search operations carried on above mentioned companies, it was claimed that from the statement and other material like details of computers with PCL, principal amount and interest payable shown by them, new facts have come to light which have a direct bearing on the matter involved in these appeals. The revenue, therefore, sought permission of this Bench to file additional evidence under Rule 29 of Income-tax Rules. Copies of statements and additional evidence sought to be produced were placed on record. The aforesaid request of Revenue was opposed by the assessee.

12. Shri O.P. Vaish, learned counsel for the assessee and Smt. Sinha, learned departmental representative also addressed us on merit of the claim. Shri Vaish submitted that in the case of sale-cum-lease transaction, no physical movement of equipment was necessary and title passed to the lesser from the supplier when lease agreement was complete and the lessee started paying lease rent. Shri Vaish submitted that assessee actually paid Rs. 1.1 crores to PCL and balance amount was paid by M/s. Altos through book adjustments. There was no difference between actual payment and incurring of liability to pay as per system of accounting if definition of word, "paid" given as per clause (2) of section 43 of Income-tax Act is taken into account. It was, therefore, not right for the revenue to contend that title of computers did not pass on to the assessee because full consideration was not paid. With regard to the objection that, 'intrinsive identification numbers" of computers were not furnished, Shri Vaish submitted that there was no practice to state manufacturer's computer numbers, if at all there is one. At any rate, the lease equipment is identifiable by a sub-identification number put on all items of equipments. The assessee was getting regular information from the lessee and sub-lessee regarding location of computers from time to time and said information was supplied to the revenue authorities. Shri Vaish, in this connection, drew our attention to letter of Altos Ltd. dated30th March, 1989and PCL Ltd. available at pages 177 and 178 of the Paper Book. Shri Vaish also drew our attention to assessee's offer made before CIT(A) in letter available at pages 1 to 15 of the Paper Book to verify identification of computers. Shri Vaish further submitted that purchase price was paid and rent received through bank drafts. Copies of accounts of PCL and Altos as placed on record would further show that these companies are having very large volume of business. The conclusion of the learned revenue authorities that purchase and leasing of computer was a colourable devise was based on surmises and conjectures and not on material available on record. The aforesaid conclusion totally disregards documentary evidence available on record and is unjustified.

13. Turning to the additional evidence in the form of statements of Directors of PCL & Altos, Shri Vaish submitted that these persons said nothing against transaction in dispute. The so-called admission against the assessee was based on misreading of statements. Shri Vaish further submitted that the Tribunal's decision in the case of Goyal Gases (P.) Ltd. v. Dy. CIT [1994] 49 ITD 317 (Delhi), was not applicable to the case of the assessee-appellant. In the said case, M/s. Goyal Gas were not able to prove any delivery of leased equipment whereas here constructive delivery of identified equipments has been established. The lease and sub-lease have also been proved. Besides in that case the Hon'ble Tribunal was not properly apprised of the implication of sale-cum-lease back transaction. Shri Vaish strongly relied upon decision in the case of Oriental Leasing Co.

14. The Departmental Representative submitted that assessments made for the assessment years 1989-90 and 1990-91 in the case of PCL & Altos have been set aside. The claim relating to lease transactions has not been accepted. Some appeals are pending before the Appellate Tribunal. Even in cases of "sale-cum-lease back" transactions, the genuineness of transaction and actual delivery of goods are required to be proved. The present case was only a case of financial arrangement to earn interest. There was no intention to sell/purchase computers but transaction was entered in a fraudulent manner to claim depreciation to reduce incidence of taxation. The assessee in spite of repeated enquiries could not give intrinsic number or location of equipments. In this connection, Smt. Sinha drew our attention to letters dated15-9-1992and26-11-1992of Assessing Officer and assessee's inability to give intrinsic numbers or location or detail of movement of computers. Without intrinsic numbers, no verification could be carried in this case. The revenue has brought sufficient material on record to show that PCL and Altos are involved in shady deals relating to leasing of computers. Such actions were approved and confirmed right upto Tribunal in the case of Goyal Gases (P.) Ltd. Another case, namely Avanti Overseas (P.) Ltd. was now pending before the Settlement Commission. Smt. Sinha relied upon decision of ITAT in the case of Goyal Gases (P.) Ltd. and in the case of apogee International Ltd. v. Asstt. CIT [IT Appeal No. 750 (Delhi) of 1993 dated3-1-1993] (available at page 64 of the Paper Book).

15. We have given careful thought to the rival submissions of the parties. Under the law, there is no bar on a manufacturer to take back on lease an equipment manufactured and sold to the purchaser and pay rent for it. If such a transaction is genuine, the revenue cannot disallow the claim of rent and depreciation by doubting/challenging the necessity of manufacturer to take back the manufactured goods on lease. It is common knowledge that several banks and financial institutions are carrying on leasing business by financing purchase of equipments taken back and used by them on lease. The depreciation and interest to the financier and lease rent and interest etc. to banks are being allowed. However, in all such cases, it has to be proved that transactions were entered into bonafidely and there is material to show that these were given effect to. The transactions are to be proved by the person relying upon them to claim deductions.

16. In the case of Apogee International Ltd., the Tribunal was concerned with sale, lease and sub-lease of computers by M/s. PCL and its sister concern M/s. Altos in almost similar circumstances. The Tribunal after considering in detail the facts and circumstances of case admitted similar additional evidence in the form of statements of Directors of PCL and Altos and remitted the matter back to the file of the Assessing Officer to enable the assessee to establish genuineness of transaction and then allow depreciation accordingly. Having regard to the similarities of facts involved, we are of view that here too additional evidence sought to be used should be admitted and matter restored to the file of the Assessing Officer to re-examine the question of genuineness of transactions and accordingly decide the claim of depreciation. All the additional evidences collected by the revenue should be put to the assessee to clarify and rebut. As at present evidence relating to intrinsic number of computers, their delivery and movement, their user and passing of title to the purchaser is not clear at all. In our opinion, the revenue, having regard to number of transactions carried on by PCL and Altos with different concerns is justified in insisting upon getting manufacturer's number (intrinsic number). It is necessary in this case to verify which computers were sold to the assessee. After all a computer which already stood sold or subject to material incumbrance could not be sold again to the assessee. In case intrinsic number of computers are not furnished by the assessee, the Revenue would be entitled to draw adverse inference. Likewise, it is necessary to consider evidence relating to movement and stationing of the computers at the time when the title is claimed to have passed to the purchaser. Such evidence was not filed before the Assessing Officer. Some offer was made before the CIT(A) but the same was not noticed. The cumulative effect of all circumstances is to be seen for arriving at a conclusion whether transaction involved was genuine or not. With the above hopeful observations that proper test would be applied and matter would be considered objectively, we set aside order of lower authorities on this point and restore the matter to the file of the Assessing Officer.

17. The last issue involved in these appeals relates to claim of investment allowance. The Assessing Officer disallowed the claim as in her view, firstly, the transaction of purchase and lease was not genuine. Secondly, she held that as assets were admittedly leased out, the assessee was not entitled to depreciation. She placed reliance on decision of Hon'ble Supreme Court in the case of Mahavir Cold Storage v. CIT [1991] 188 ITR 91. On appeal, the CIT(A) allowed some relief to the assessee. The revenue has come up in appeal.

18. We have heard both the parties. As far as second objection of the Assessing Officer is concerned, we are of view that assessee is entitled to investment allowance on assets leased out by the assessee. This view is supported by decision of Hon'ble Calcutta High Court in the case of CIT v. Eastern Spg. Mills & Industries Ltd. [1994] 74 Taxman 318. The decision of Hon'ble Supreme Court in the case of Mahavir Cold Storage relied upon by the Assessing Officer has no application to the facts of the case. However, this question is linked with question of ownership of computers considered by us in earlier paragraphs. The claim of investment allowance has to be considered in the light of finding recorded on genuineness of transaction relating to purchase and lease. As above question is to be re-examined by the Assessing Officer, the question of investment allowance as a consequent relief has also to be re-examined by the Assessing Officer. In the above background, orders on this issue are also set aside and matter restored to the file of the Assessing Officer.

19. In the result, both the appeals are allowed for statistical purposes in terms stated above.

 

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