Vildirect: IncomeTax-caselaws-2001-VIL-151-ITAT-CHD

2001-VIL-151-ITAT-CHD

Equivalent Citation: TTJ 091, 422,

Income Tax Appellate Tribunal CHANDIGARH

Date: 28.08.2001

BANK OF PUNJAB LTD.

JOINT COMMISSIONER OF INCOME TAX.

BENCH

Member(s) : R. K. BALI., D. R. SINGH.

JUDGMENT

This is an appeal by the assessee against the order dt. 28th Feb., 2001, passed by learned CIT(A). The assessee has taken the following grounds:

"I. That, on the facts and in the circumstances of the case, the CIT(A) erred in not holding that the order passed by the AO was bad in law, violative of principles of natural justice, bad in law and void ab initio.

A. That CIT(A) erred on facts and in law in not holding that the assessment was framed without affording adequate opportunity of being heard to the appellant.

B. That the CIT(A) erred on facts and in law in holding that the appellant was given sufficient opportunities and confronted with material gathered against him and, therefore, it was a valid assessment.

C. That the CIT(A) erred on facts and in law in not appreciating that the AO while completing the assessment relied upon ex parte enquiries conducted at the back of the appellant without bringing on record and confronting the appellant with all such material and without affording the appellant adequate opportunity to lead evidence to rebut the same.

D. That the CIT(A) erred on facts and in law in not appreciating that the AO relied on ex parte statements recorded at the back of the assessee without affording the appellant an opportunity to cross-examine the deponents.

II. That the CIT(A) erred on facts and in law in confirming the action of the AO in making disallowance of depreciation on assets given on lease amounting to Rs. 14,65,94,400 holding the lease of the assets to be sham transaction and colourable device to evade tax.

A. That the CIT(A) erred on facts and in law in holding that transaction of lease of assets entered into by the appellant were short of actual genuine transactions.

B. That, on the facts and circumstances of the case, the CIT(A) erred in completely ignoring the contractual rights and liabilities of the parties to the lease transactions statutorily recognised by law wherein the ownership of the assets remained with the appellant.

C. That, on the facts and circumstances of the case, the CIT(A) erred in not dealing with the elaborate submissions made by the appellant and in ignoring the abundant evidence placed before him to prove the existence of the assets and their ownership.

D. That the CIT(A) erred on facts and in law in holding that transaction of purchase and lease back of assets with PSEB and NACAST were sham transactions as the appellant had in fact advanced the loan and interest is taken back in the garb of lease rentals at the same time claiming 100 per cent depreciation to reduce taxability.

E. That, on the facts and circumstances of the case, CIT(A) erred in not appreciating that it was a bona fide purchase and lease back transaction wherein the ownership of the assets remained with the appellant.

F. That the CIT(A) erred on facts and in law in not having regard to the findings in the inquiry report conducted by the independent consultant in respect of assets leased to NACAST.

G. That the CIT(A) erred on facts and in law in confirming the disallowance of depreciation on assets leased out alleging that the lease transactions were colourable device to evade tax and purely financial transactions.

III. That the CIT(A) erred on facts and in law in confirming the action of the AO in treating the lease rental income of Rs. 34.26 lakhs as income from undisclosed sources on the ground that the entire transaction of lease of assets was a sham transaction.

I. With prejudice that the CIT(A) erred on facts and in law in not directing the AO to exclude the portion of lease rental attributable towards repayment of principal amount while holding the lease transactions as purely financial transactions.

II. That the CIT(A) erred on facts and in law in confirming the action of the AO in making disallowance of Rs. 5,42,526 being 50 per cent of expenditure on software holding the same to be capital expenditure."

2. The assessee is a banking company incorporated under the Companies Act, 1956. For the assessment year under consideration, the assessee filed its return declaring income at Rs. 31,86,741, which was reduced to Rs. 28,23,019, after setting off the brought forward loss, on 19th Nov., 1994. Return filed was accompanied by audited balance sheet, P&L a/c and tax audit report, as required under s. 44AB of IT Act. This return was processed under s. 143(1)(a) on 30th April, 1997. The case was subsequently taken for scrutiny and after issuing various notices under s. 142(1)/143(3) and questionnaire and after calling for details from the assessee, assessment was framed by the AO under s. 143(3) at an income of Rs. 15,03,23,667, after making several additions/disallowances to the returned income. The assessee challenged those additions and disallowances by taking various grounds before learned CIT(A) who, however, upheld the action of the AO and dismissed the appeal vide his order dt. 28th Feb., 2001.

3. A perusal of the grounds indicates that the main dispute as projected in grounds I and II and its various sub-grounds is that the AO as well as learned CIT(A) were not justified in disallowing the claim of the assessee relating to depreciation on assets given on lease to Punjab State Electricity Board (for short PSEB) and Nagpur Alloys Castings Ltd. (NACAST) and various other concerns totalling to Rs. 14,65,94,400 holding that the lease of assets by the assessee to these concerns were sham and colourable devices to evade tax. The facts relating to this major dispute are that the assessee, a banking company, has during the relevant previous year provided assets on lease to PSEB, NACAST and various other concerns. In the case of PSEB and NACAST, the assets in question were purchased by the assessee from them and then leased back to them on lease rental as per the terms of the lease deeds. However, in relation to other concerns, the assets were purchased from third parties and leased out to the lessees. Details regarding the names of the parties, the date of lease, value of assets leased and depreciation claimed in asst. yr. 1996-97, as incorporated by the AO in the assessment order, are as under:

"Name of the party	Date of lease	Value of assets	Total depreciation claimed in asst. yr. 1996-97
PSEB	29-9-1995	3,25,00,000	3,25,00,000
PSEB	30-3-1996	8,37,00,000	4,18,50,000
NACAST	28-3-1996	6,65,16,000	3,32,58,000
Vatan Dye Chem (E) Ltd.	21-3-1996	1,61,00,500	80,50,250
-do-	23-3-1996	1,06,42,800	53,21,400
Prakash Inds. Ltd.	30-3-1996	1,56,91,000	78,45,500
-do-	30-3-1996	3,33,38,500	1,66,69,250
Apex Carbonix (P) Ltd.	30-3-1996	22,00,000	11,00,000
	Total:			14,65,94,400"

The AO in the course of assessment proceedings doubted the genuineness of the abovereferred transactions of leased out assets by the assessee and held that the assessee has falsely claimed depreciation on leased assets on the ground that either the assets were not actually in existence or that the lease arrangements were nothing but pure financing transactions. The AO held the above transactions of lease of assessee as a colourable device to evade tax and accordingly disbelieved the assessee's claim of depreciation on leased assets. A perusal of the assessment order indicates that the AO carried out some enquiries at the back of the assessee with reference to abovementioned, leased transactions which, according to him, revealed that the transactions were only paper transactions for securing finance and in several cases the assets which were the subject-matter of lease were not in existence. A perusal of the assessment order shows that the AO partly confronted the assessee with the result of such enquiry only on 8th March, 1999, 12th March, 1999 and 30th March, 1999, when the assessment was getting 'time-barred' on 31st March, 1999, and the assessment order was in fact passed on 31st March, 1999.

4. After passing of the assessment order by the AO when the assessee filed appeal before learned CIT(A), it furnished voluminous evidence to support the claim of depreciation in respect of leased assets which were filed before learned CIT(A) in the form of additional evidence. Learned CIT(A) furnished copies of the evidence furnished by the assessee to the AO during the course of appellate proceedings and called for his comments relating to leases entered into between the assessee and PSEB and NACAST. With regard to other leases entered into between the assessee and other lessees, the assessee pleaded before learned CIT(A) that the enquiry conducted by the AO was at the back of the assessee and the assessee was not allowed any opportunity to cross-examine the persons on whose statements the AO was relying upon to hold that the suppliers of equipment to those lessees, either were non-existent or they have denied having supplied any equipment to the lessees in relation to which the assessee has claimed depreciation. Learned CIT(A), however, recorded the submissions made by the assessee before him during the course of assessment proceedings but without contradicting the reasoning and submissions made on behalf of the assessee, he agreed with the reasoning and finding of the AO and dismissed the appeal filed by the assessee.

5. Before us, learned Authorised Representative pleaded that as far as the leases between the assessee and PSEB and NACAST are concerned, the assets were purchased by the assessee from PSEB and NACAST and these were leased back to these two concerns. Learned Authorised Representative has filed a chart regarding assets leased to PSEB incorporating the cost of acquisition of those assets to PSEB, date on which these were put to use by PSEB, their W.D.V. in the books of PSEB at the time of purchase of those assets by the assessee, report of the approved valuer estimating value of assets purchased by the assessee from PSEB and then leased back to PSEB estimating the cost of those assets and the actual amount paid by the assessee for the purchase of those assets by the assessee from PSEB which were leased back by the assessee to PSEB on which depreciation was claimed, as under:

"Details reg. Assets leased to PSEB

(Rs. in crores)

	Waste heat recovery equipment (Unit 2)	Air pollution control equipment (Unit 3)	Air pollution control equipment (Unit 6)
Cost of acquisition to PSEB	6.04 (pg. 79)	3.96(pg. 45)	6.59 (pg. 58)
Date of commissioning by PSEB	1-10-1985	25-9-1988	14-12-1993
W.D.V. in books of PSEB at the time of purchase	3.66 (pg. 80A)	2.82(pg. 80B)	5.55 (pg. 80B)
Valuation as per VO	5.33 (pg. 80)	2.82(pg. 66)	5.55 (pg. 73)
Cost of purchase to bank	3.25 (pg. 25)	2.82 (pg. 39)	5.55 (pg. 39)"

It was submitted that the abovereferred equipment which was purchased by the assessee from PSEB and then leased back by it to PSEB constitute distinct, separate and independent sub-systems of the boiler installed at the plant of PSEB at Ropar. It was pleaded that the assessee has offered for taxation lease rental of Rs. 27.79 lakhs as its income and claimed 100 per cent depreciation on equipment purchased by the assessee and given on lease to PSEB, as provided in Appendix I to IT Rules (50 per cent depreciation where assets were put to use for less than 180 days in the year under consideration). It was pleaded that the Departmental authorities have disallowed the assessee's claim in respect of abovementioned leased assets holding that the transaction was a colourable device to evade tax and was nothing but a pure financial transaction on the following grounds:

(i) The entire transaction was a paper transaction and the assessee had falsely claimed depreciation on assets leased out to PSEB which was actually not a lease finance but purely a financial transaction;

(ii) The assessee had at no point of time enjoyed any right of ownership over these assets and as such it was not entitled to claim depreciation;

(iii) The agreement with PSEB have been intentional drafted in such a way to avoid creation of any charge over the assets and the assessee had no right to take possession of the assets;

(iv) The sub-systems identified by PSEB for the purposes of sale and lease back were part and parcel of the main equipment, i.e., boiler itself, which had been purchased as a composite equipment;

(v) The prices at which the equipments have allegedly been sold has no nexus with cost or W.D.V. and sale price was ostensibly decided on the basis of finance required by PSEB or/and funds which the assessee agreed to invest or/and the amount by which the assessee wanted to reduce its taxable profit by claiming depreciation on assets; and

(vi) The cost as well as W.D.V. of the equipment sold and leased back to PSEB were not separately recorded in the books of PSEB. It was pleaded that the action of the AO as confirmed by learned CIT(A) in denying the claim of depreciation of Rs. 7,43,50,000 on assets leased out to PSEB is based on conjectures and surmises without appreciation of the fact that the transaction was a bona fide purchase and lease back transaction, wherein the ownership of assets vested and remained with the assessee. It was submitted that denial of depreciation of assets purchased and given on lease by PSEB under purchase-cum-lease back agreement is not sustainable both in law and on facts. It was pleaded that the assessee is a banking institution/company engaged in the business of, inter alia, finance, lease, hire-purchase, etc. RBI vide Circular No. PSC BC 18/24th Jan., 2001/1993-94, dt. 19th Dec., 1994, authorised bank to undertake leasing business. Pursuant thereto, the assessee in the year under consideration has carried out business of lease of assets. It was pleaded that the assessee had purchased various assets/equipment from PSEB and purchase price was paid by the account payee cheque. Simultaneously, the assessee has entered into lease agreement with PSEB for leasing of assets in question to PSEB. It was submitted that title in the equipment vested with the assessee on payment of consideration for same to PSEB, although the equipment continued to remain with PSEB and there was no physical transfer of possession, but there was constructive delivery in favour of the assessee. It was submitted that the ownership of the assessee is established by the following evidence which was furnished before the AO also, namely,

âInvoice-cum-challan from PSEB

âSale deeds dt. 29th Sept., 1995 and 30th March, 1996

âConfirmation for installation and commissioning of machinery by PSEB

âInsurance cover note in favour of the assessee

âRequest for disbursement of the amount from PSEB

âDeclaration to the Government from Mr. A.S. Rekhi, authorised signatory of the assessee, to the effect that the machinery in question were taken possession by the bank.

It was submitted that PSEB as the lessee during the period of lease was to hold the assets as the bailee of the assessee (owner-lessor) and PSEB could not claim any right, title or interest in assets other than that of a lessee or contest the assessee's right to sole and exclusive ownership thereof. In support, the learned Authorised Representative referred to various clauses of the lease agreement. Learned Authorised Representative accordingly pleaded that since assets have been used by the assessee in its business of leasing and the assessee has earned lease rental from PSEB in respect of assets given on lease which amount has been offered for tax and has been so taxed and as such the assessee cannot be denied the claim of depreciation in respect of those assets. Reliance was placed on the decision in the cases of CIT vs. Shaan Finance (P) Ltd. (1998) 146 CTR (SC) 110 : (1998) 231 ITR 308 (SC), United Technologies Ltd. vs. Dy. CIT (2000) 69 TTJ (Ahd) 25 : (2000) 73 ITD 150 (Ahd), New Deal Finance & Investment Ltd. vs. Dy. CIT (2000) 69 TTJ (Chennai) 410 : (2000) 74 ITD 469 (Chennai) and Mulraj Dwarkadas Gokuldas vs. Dy. CIT (1994) 48 TTJ (Bom) 531.

6. As regards lease of assets by the assessee to NACAST, the assessee has given on lease the following assets:

Rs.
"Steam generator supplied by Thermax Babcock & Wilcox Ltd., Bhopal	4,25,50,000
Dust Collector, self-fabricated by NACAST	2,39,66,000"

It was submitted that the AO had conducted enquiry through Dy. DIT (Inv.), Raipur, which is alleged to have revealed the following:

(i) the lease did not have invoice in support of receipt of steam generator as indicated in the invoice of Thermax Babcock and Wilcox Ltd., Bhopal and consignor's name mentioned in the transportation bills (GRS) were different;

(ii) the materials were despatched by truck No. MOT 4869 on 16th Sept., 1995, from Bombay to Siltara and the same truck was again loaded and despatched from Bombay to Siltara on 19th Sept., 1995. The AO has alleged that it was not possible for the truck to cover a distance of 2000 kms. in three days; and

(iii) the name of the assessee was not affixed on dust collector, claimed to have been fabricated and sold by NACAST to the assessee. It was submitted that the AO on the basis of aforesaid enquiry came to the conclusion that the assets in question did not exist and he, therefore, disallowed the claim of depreciation. It was pleaded that the result of the above enquiry was communicated to the assessee vide letters dt. 12th March, 1999 and 30th March, 1999, compliance of which could not be made as the assessment order was passed by the AO on 31st March, 1999. It was submitted that after receipt of the assessment order, the assessee engaged an independent consultant, Shri Dalbir Singh, to carry out necessary investigations with regard to the aforesaid asset given on lease to NACAST and the result of said enquiry is reproduced in the impugned order at pp. 25 to 28. It was pleaded that all this information collected by the assessee subsequent to the passing of the assessment order was furnished before learned CIT(A), who forwarded the same to the AO, who for the reasons best known to him did not offer any comments. Accordingly, it was pleaded that the observations of the AO in the assessment order that (i) the impugned equipment did not exist; and (ii) it was an integral part of the main blast furnace and, therefore, not separately marketable, is unfounded and baseless. Accordingly, it was pleaded that denial of depreciation in respect of steam generator as well as dust collector owned and used by the assessee in the business of leasing purchased by it from NACAST and then leased back to NACAST is not justified and is required to be allowed in accordance with law.

7. In relation to other leases entered into between the assessee and M/s Prakash Industries Ltd. and M/s Vatan Dye Chem (Export) Ltd. as well as M/s Apex Carbonix (P) Ltd., learned Authorised Representative submitted that the AO has relied on certain enquiry conducted at the back of the assessee and result of which was only partly confronted to the assessee and the assessee was not given an opportunity to cross-examine those persons who have stated before the officer who conducted enquiry on behalf of the AO that they have not supplied any equipment to various lessees in relation to which the assessee has claimed depreciation. It was submitted that as far as the assessee is concerned, it has asked the lessees to identify the suppliers of the equipment which they wanted to take on lease. Since the lessees have identified the suppliers as well as the machinery which they wanted to take on lease and the assessee has in fact paid the amount to the supplier as identified by lessee by account payee cheques and existence of leased assets in the premises of the lessees was verified by the officers of the bank, the assessee should be allowed claim of depreciation. It was submitted that the AO has not made any enquiry in relation to the bank account of the supplier of the machinery to find out as to what happened to the cheques issued by the assessee-bank to the suppliers as pointed out by the lessees and claim of depreciation has been denied to the assessee relying on the statements of some of the representatives of the suppliers as noted in the assessment order without allowing the assessee any opportunity of being heard. Learned Authorised Representative was, however, fair enough to concede that, prima facie, on the basis of enquiry conducted by the AO that some of the suppliers of equipment to whom the assessee paid the amount as per direction of the lessees have denied having supplied any equipment to the lessees, there is a doubt with respect to tripartite transaction entered into between the assessee, lessees of the equipment and suppliers and as such it will be fair and reasonable if the issue with regard to the assessee's claim for depreciation in respect of leased assets to various other concerns other than PSEB and NACAST may be restored to the file of the AO for fresh adjudication in accordance with law, after giving due and proper opportunity to the assessee for a cross-examining the persons on whose statements reliance was placed by the AO.

8. Learned Departmental Representative strongly supported the order of the AO as confirmed by learned CIT(A). It was pleaded that as far as leases relating to PSEB and NACAST are concerned, the alleged assets were purchased by the assessee from lessees and then those very assets were leased back and the assessee has not bothered to verify worth of those assets and there is hardly any provision to safeguard the assessee's interest in those assets claimed to have been purchased by the assessee and leased back to PSEB and NACAST. It was submitted that the entire modus operandi of the assessee was only to claim depreciation to reduce its taxable income and lease rental shown by the assessee as income is more or less equivalent to interest receivable if purchase price of those assets has been given as loan to PSEB and NACAST. As regards remaining lease of equipment by the assessee to M/s Prakash Inds. Ltd., M/s Vatan Dye Chem. (Export) Ltd. and M/s Apex Carbonix (P) Ltd., it was pleaded that the alleged suppliers who supplied assets to them were either not traceable or they are not manufacturers and dealers of such type of assets and in fact some of the suppliers have denied having supplied the disputed machinery to the lessees. It was submitted that the assessee has adopted this colourable device with the sole purpose of claiming depreciation to reduce its tax liability and the assets in question were never purchased and leased out and the entire paper work done in the form of leasing out of assets, issuing of vouchers-cum-delivery challan, etc. was done to give appearance of genuineness of transactions for the purpose of claiming depreciation. Accordingly, it was pleaded that the case of the assessee should be decided in the light of the observations made in the case of McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), as those transactions were nothing but colourable device to evade tax. Reliance was placed on the decisions in the cases of Mysore Dasaprakash vs. CIT (1989) 75 CTR (Mad) 120 : (1989) 177 ITR 38 (Mad), CIT vs. Podar Cement (P) Ltd. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC), Mysore Minerals Ltd. vs. CIT (1999) 156 CTR (SC) 1 : (1999) 239 ITR 775 (SC) and Gowri Shankar Finance Ltd. vs. CIT (2001) 166 CTR (Kar) 137 : (2001) 248 ITR 713 (Kar).

9. We have considered the rival submissions and have also gone through the orders passed by the AO as well as learned CIT(A). As far as lease transactions entered into by the assessee with PSEB and NACAST are concerned, here the machinery or equipment in relation to which the assessee has claimed depreciation was purchased by the assessee from PSEB and NACAST and after purchasing the same was leased back to PSEB and NACAST. Thus, it was a bilateral transaction of purchase and lease back between the assessee and PSEB and the assessee and NACAST. The transaction of purchase and lease back with PSEB was supported byâ

âInvoice copy of which has been given to us at p. 25 of paper book;

âPut to user certificate by PSEB copy at pp. 27-43 of paper book;

âCertificate from PSEB given at pp. 28-42 of paper book, certifying that PSEB has not claimed any depreciation in relation to assets which were purchased and leased back by the assessee to PSEB;

âAfter purchase and lease back, the assessee got the assets insured and copy of insurance cover in favour of the assessee-bank is furnished at pp. 32-36 of paper book;

âThe transaction is supported by confirmation of payment made by the assessee to PSEB as purchase consideration, as per pp. 37-38 of paper book;

âThis is further supported by a declaration to the Government from Sh. A.S. Rekhi, authorised signatory of the assessee to the effect that machinery in question was taken possession by the bank, copy at p. 41 of paper book; and

âAll these evidences were in pursuance to the lease deed executed between the assessee and PSEB copy at pp. 378-402 of paper book.

Similarly, with regard to lease with NACAST the assessee has furnished the following documents which were also furnished before learned CIT(A), to us to prove the purchase and lease back of the equipment from NACASTâ

Pages of paper book
Copy of proposal reg. estimate for the assets to be installed at NACAST	143
Copy of inv. for dust collector along with supporting break-up	144-145
Copy of insurance policy	146, 149-163, 190
Receipt for payment towards dust catcher	147-148
Copy of invoice for bioler	165-170
Receipt for payment towards boiler	171
Copy of personal guarantee and other correspondence reg. lease of assets to NACAST	172-185
Copy of letter dt. 1-8-1996 from thermax reg. Purchase of boiler by the bank and enclosing performance bank guarantee in favour of bank	186-189
Purchase order for boiler	191
Letter dt. 26-3-1996 from NACAST seeking disbursement of payment	192
Installation certificate	194
Copy of letter dt. 31-3-1996 from NACAST confirming that dust catcher was self-fabricated and was not a second asset	209
Copy of report from Sh. Dalbir Singh dt. 10-8-2000 reg. NACAST, enclosing the followings	210-215
Copy of provisional registration order under the Indian Boilers Act	216
Copy of drawings approved by the Maharashtra Government	217-219
Copy of challans/GRs	220-222
Copy of the contract for transportation of boilers	223-239
Statement of a/cs of supplies made at site of NACAST	240-255
Copy of invoices raised by Thermax and delivery challans, etc.	256-309
Copy of GA drawings of the various boilers	310
Copy of letter dt. 9-8-2000 from authorised signatory of Thermax confirming supply of boilers	311
Copy of photographs of boiler	312-314
Copy of invoices raised by Beekay Engg. for fabrication of dust collector	315-317
Technical note on dust collector	318
Photographs of dust collector	319

All these evidences to prove purchase of equipment by the assessee from PSEB and NACAST and its subsequent lease back in terms of lease deeds was furnished by the assessee before learned CIT(A) who forwarded the same to the AO. However, it appears that the AO for reasons best known to him has not offered any specific comments on these documents/evidences furnished by the assessee but has simply reported before learned CIT(A) that all this paper work and documents were executed with the sole purpose of claiming depreciation and it was a colourable device to avoid payment of tax by the assessee-bank by claiming depreciation. A similar issue came up before the Ahmedabad Bench of the Tribunal in the case of United Technologies Ltd. vs. Dy. CIT, wherein the assessee entered into a purchase and lease back with Rajasthan State Electricity Board and it held that the transaction was a genuine one and the mere fact that the assessee was able to claim huge depreciation in accordance with law which resulted into reduction of its taxable income will not be a ground to reject the claim of the assessee and term the transaction as sham when the State Government has itself exempted the transaction of sale by RSEB to the assessee from sales-tax. In the present case also, the Punjab Government has exempted the sale of equipment by PSEB to the assessee from levy of sales-tax and since PSEB was a Punjab Government Board and accepting that the Punjab Government would be a party to a sham transaction is untenable. As regards the plea that by entering these transactions the assessee was able to reduce its tax liability, we are to observe that every assessee has legal rights to arrange his affairs so as to reduce the burden of taxation to the minimum. The decisions relied upon by learned Departmental Representative are distinguishable on facts. Therefore, taking into consideration the totality of facts and circumstances of the case, particularly that the assets which were purchased by the assessee from PSEB and NACAST are in existence and these were leased back by the assessee to PSEB and NACAST and the assessee had paid the sale price of equipment to PSEB and NACAST and the physical existence of these assets have been proved by periodical verification carried out at the premises of PSEB and NACAST, accordingly, there is no reason to dispute the existence of the assets and the genuineness of the transactions of purchase and lease back and as such the claim of depreciation by the assessee in relation to assets purchased from PSEB and NACAST and then leased back by it to PSEB and NACAST respectively, is directed to be allowed.

10. As regards the remaining three leases entered into between the assessee and Prakash Inds. Ltd., Vatan Dye Chem. (Export) Ltd. and Apex Carbonix (P) Ltd., the position is slightly different. In the case of these three lessees, the Bank of Punjab Ltd., the appellant-assessee before us, has asked these lessees to identify the equipment required by them and identify the suppliers of that equipment. The assessee has made payments to the suppliers of equipment at the instance of lessees by account payee cheques. However, on enquiry the AO found that some of the suppliers did not exist at the addresses given, while some of them though existing at the place mentioned in the invoice were not capable of manufacturing or supplying the type of equipment needed by the lessees and in some cases like that of M/s Prakash Engg. Works and M/s Ashish Engg. Works whose proprietor and partner Sh. Mohinder Lal Ghia and Sh. R.K. Aggarwal have denied having supplied machinery to the lessees. However, the AO has not made any further enquiry as to what happened to the money paid by the assessee by account payee cheques to these suppliers and whether in fact money came back to the assessee after being withdrawn from the accounts of the suppliers or it was diverted to the lessees to whom the disputed machinery was leased by the assessee having purchased by it from the suppliers, as mentioned by the AO at p. 8 of the assessment order. The case of the assessee before us is that enquiries were conducted by the AO at the back of the assessee and the statements recorded by the Revenue and used against the assessee together with copies of correspondence between lessees and revenue as well as suppliers and the Revenue were not made available to the assessee for its perusal and comments and no opportunity was given to the assessee to cross-examine Sh. Mohinder Lal Ghia, Prop. Rakesh Engg. Works and Sh. R.K. Aggarwal, Prop. Ashish Engg. Works. In this view of the matter, we are of the opinion that it will be fair and reasonable if the issue with regard to the claim of the assessee in respect of depreciation on assets leased by it to Prakash Inds., Vatan Dye Chem (P) Ltd. and Apex Carbonix (P) Ltd. is restored back to the file of the AO with the direction that he should make available all the evidence collected in relation to transactions of purchase of equipment from various suppliers and its lease to Prakash Inds., Vatan Dye Chem. (P) Ltd. and Apex Carbonix (P) Ltd. to the assessee and allow the assessee an opportunity to cross-examine the persons on whose statements the AO wants to rely. The assessment should then be reframed in accordance with law. Accordingly, grounds Nos. I and II are partly allowed.

11. Coming to ground No. III(I), this does not survive in view of our finding that the transaction between the assessee and PSEB and NACAST of purchase and lease back of assets belonging to PSEB and NACAST was a genuine transaction and not a sham one.

12. Coming to ground No. III(II), the dispute is with regard to the claim of the assessee of an amount of Rs. 10,85,052 for purchase of software for the purpose of its business. The details of such expenditure as given by learned CIT(A) at p. 41 of the impugned order is as under:

"Sl. No.	Particulars	Amount (Rs.)
1.	Payment to Infosys for training of Data Base Administrators (DBA) for bank	1,42,598.00
2.	Payment for implementation support provided by Infosys for the month of Aug., and Sept., 1995 (included in total amount of Rs. 24,38,632)	38,632.00
3.	Payment to Spectrum Business Support for purchase of Bankman Software	61,500.00
4.	Payment for software in dealing room and for routers charges	80,672.38
5.	Payment to Tata Consultancy Services for oracle manual	35,600.00
	Total	10,85,052.38"

The AO following his order for earlier assessment year disallowed 50 per cent of said expenditure holding the same to be of capital nature and learned CIT(A) confirmed the same. Learned Authorised Representative pleaded that the expenditure on purchase of software did not result in any enduring benefit or creation of assets in capital field and as such was rightly claimed as a revenue expenditure by the assessee and the Departmental authorities were not justified in treating 50 per cent of that expenditure as an expenditure of capital nature. Reliance was placed on the decisions in the cases of Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC), CIT vs. Associated Cement Companies Ltd. (1988) 70 CTR (SC) 28 : (1988) 172 ITR 257 (SC) and Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC). Learned Departmental Representative supported the order of AO as confirmed by the CIT(A).

12.1 We have considered the rival submissions. Purchase of software is not an expenditure in capital field, as the assessee is required to change the software within a very short span of time may be a year or two and they become outdated because of change of system and change of technology. Computer systems are changing very rapidly and new systems are being developed every day for which softwares are needed like raw material in use for manufacturing. Accordingly, keeping in view the ratio of the decision in the case of Alembic Chemicals Works Co. Ltd., we are of the opinion that software expenses are purely of revenue nature and are directed to be allowed as a deduction.

13. In the result, the appeal is partly allowed.

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