Income Tax Appellate Tribunal - Mumbai
Olympia Capitals Ltd., Mumbai vs Assessee on 14 December, 1998
आयकर अपील य अ धकरण,
धकरण मंुबई यायपीठ 'जे' मंुबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL "J "J" BENCH, MUMBAI
सव ी वजयपाल राव,
राव या.स
या स एवं एन.
एन के. बलै या,
या लेखा सद य ।
BEFORE SHRI VIJAY PAL RAO, JM & SHRI N. K. BILLAIYA,
BILLAIYA, AM
आयकर अपील सं./I.T.A
I.T.A . No.2083/Mum/1999
No. 2083/Mum/1999
( नधारण वष / Assessment Year :1995-96)
M/s Olympia Capitals Ltd. बनाम The Asstt. CIT Cir.t h 3(4),
बनाम/
52 Level, 11, Dewan Aaykar Bhavan, 5 Floor,
Vs.
Centre, S. V. Road, M. K. Road,
Jogeshwari (W), Mumbai-400020
Mumbai-400102
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. :AAACO0645E
(अपीलाथ /Appellant
Appellant)
Appellant .. ( यथ / Respondent)
Respondent
राज ब क ओर से/ Revenue by : Shri R. K. Sahu
नधा
नधा रती क ओर से/Assessee by : Shri Rajiv Khandelwal
सनवाई
ु क तार ख / D at e o f H e a ri n g : 9th October 2013
घोषणा क तार ख/D
ख a te O f P ro n o u n c e m e n t: 25th October 2013
आदे श / O R D E R
PER : वजयपाल राव, या.स. / VIJAY PAL RAO, JM
This appeal by the assessee is directed against the order dated 14.12.1998 of Commissioner of Income Tax(Appeals) for the assessment year 1995-96.
2. The assessee has raised the following grounds in this appeal:
"1. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in confirming the order passed by the learned Assessing Officer holding the lease agreement as "Sham" transaction. Reasons assigned by her for doing the same are wrong and insufficient.
2. On the facts and in the circumstances of the case and in law the learned CIT(A) has further erred in confirming the order passed by the Assessing Officer denying the depreciation at the 2 ITA No.2083/M/1999 Olympia Capitals Ltd.
rate of 100% claimed by the appellant on leased assets of ` 50 lacs in respect of purchases of cops. Reasons assigned by her for doing the same are wrong and insufficient.
3. On the basis of the facts and in the circumstances of the case and in law she has further erred in relying on the decision of McDowel & Co. 154 ITR 148 when no tax evasion is proved in the instant case nor is there any basis to consider the transaction as colourable device to gain a fiscal advantage when the transaction of sale and leaseback is plain and bonafide commercial transaction. There is no evidence on record to prove that the price paid by the Assessee is abnormal or higher than the market price. As a consequence thereof she has erred in confirming the disallowance of depreciation made by the Assessing Officer.
4. She has further observed that the matter requires consideration from the point of view of Explanation 3 to Section 43(1), but instead of directing the Assessing Officer to fix a reasonable price as the actual cost to the Assessee as per the provisions of Explanation 3 to Section 43(1), she has proceeded to hold that the claim of depreciation of the appellant is hit by the above explanation which on the basis of the evidence on the record is unsustainable.
5. She has further erred in not properly appreciating the decision of the Bombay High Court in the case of Famous Cine Lab 121 ITR 648 and thereby erred in confirming the order passed by the Assessing Officer holding that the appellant is not entitled to claim depreciation at all.
6. There being not an iota of evidence that the transaction was entered into with the main purpose of reducing the tax liability by claiming depreciation on the enhanced cost, it is wrong on the part of the authorities to deny the depreciation claimed by the appellant.
7. She has further erred in holding that there is a reduction of tax liability in the case of the appellant when the fact remains that lease rentals have been offered for tax and as such it is wrong to say that there is a reduction in the tax liability.
8. On the basis of the facts and the circumstances of the case cops being self contained units it would be entitled to be termed as a plant in itself to qualify for allowance in its own right. The authorities below have not appreciated the contention of the appellant and thereby erred in denying the claim of the appellant with regard to the depreciation not treating the same as a plant by itself.3 ITA No.2083/M/1999
Olympia Capitals Ltd.
9. She has further erred in rejecting the alternative contention of the appellant regarding the allowance of normal depreciation on the cops purchased. Reasons assigned by her for doing the same are wrong and insufficient.
10. Alternatively, it is contended that the authorities below, having considered the transaction as a finance transaction, have erred in holding lease rentals as tantamounting to interest received. Instead of taxing the lease rentals as the income the authorities below ought to have included in the income the probable rate of interest in lieu of lease rentals having regard to the facts and the circumstances of the case.
11. She has further erred in rejecting the ground with regard to the charge of interest u/s 234B and 234C. Reasons assigned by her for doing the same are wrong and insufficient."
3. The first issue arises is regarding disallowance of depreciation @ 100% claimed by the assessee on leased out assets. The brief facts of the case emerge from record are that the assessee company is engaged in the business of leasing of equipment, dealing in shares and merchant banking. During the year under consideration the assessee has inter alia entered into a sale and lease back transaction with M/s Sri Synthetics Ltd. (SSL), Ujjain, M.P. In the said transactions the assessee claimed to have purchased COPS numbering 1,00,000/- for a consideration of ` 50,00,000/- @ ` 50 per COP. During the course of the assessment proceedings the assessee produce sale bills to show that purchases have been made. The assessee also submitted the details of cheque in favour of SSL of ` 50,00,000/- and the lease agreement dated 27.3.1995 by which the assets were leased back to the seller at quarterly lease rental of ` 4,80,000/-. The Assessing Officer got conducted an inquiry through the ADI (Inv.)-II, Indore, in respect of the transaction of purchase and lease back. The 4 ITA No.2083/M/1999 Olympia Capitals Ltd.
ADIT(Inv.)-II, Indore, informed the results of inquiry to the Assessing Officer.
4. It was explained in the inquiry report that the COPS are made of Aluminium/Steel on different size. These are of cylinder shape and used for raping the yarn which is the final product of yarn manufacturing process. The COPS are fitted in the machine and after wrapping the yarn thereupon the same are detached for sale. The blank COPS which received back from the party to whom the yarn is sold and after some repair they are put to reuse. After receiving the investigation report the AO issued a show-caused to the assessee as to why the transaction of sale and lease back of COPS should not be treated as financial transaction and disallow the depreciation and tax interest income. Alternatively, the assessee was asked to show-cause as to why the COPS should be treated as plant as eligible to 100% depreciation. The assessee filed its explanation and detail reply on 24.3.1998 which has been reproduced by the AO at page no. 6 to 18 of the assessment order. The AO did not accept the explanation/reply of the assessee and held the lease as a sham transaction and treated the same as purely a financial transaction which is shown in the colour of the so-called sale and lease back transaction. Accordingly, the AO disallowed the claim of depreciation and added back to the total income of the assessee. Alternatively, without prejudice to the total disallowance of depreciation the AO held the depreciation can be allowed @ 25%. On appeal, the CIT(A) concurred with the view of the AO that the transaction is not genuine buy and lease back transaction. The 5 ITA No.2083/M/1999 Olympia Capitals Ltd.
CIT(A) has also held that in view of explanation 3 to section 43(1) even normal depreciation is not allowable.
5. Before us the Ld. AR of the assessee has submitted that the assessee is in the business of lease of assets. Out of several transaction of lease only one is treated as Sham transaction by the AO because of 100%depreciation was claimed by the assessee. He has further submitted that the assessee got the valuation of the COPS through a Government Approved Charter Engineer and as per the valuation report dated 8.3.1995 COPS have been valued at a price of 50 each. After the necessary verification and internal discussion as well as considering the valuation report, the assessee company informed the SSL of its intention to buy 1,00,000/- COPS for its business of leasing. The Ld. AR has pointed out that the deal was finalised on 24.3.1995 and accordingly SSL raised an invoice dated 24.3.1995 in respect of 1,00,000/- number of COPS at a price of ` 50 each. One of the directors of the assessee company Shri Ram Ratan Kanoongo alongwith Mr. Samir Shah, Assistant Vice-President and Mr. B. L. Agarwal went to the plant of SSL for completing the deal of purchase of 1,00,000/- COPS as well as to finalise the lease proposal of SSL. The COPS as segregated and valued by Government Approved valuer were inspected by the officials of the assessee company and accordingly, the assessee made full payment of ` 50,00,000/- vide cheque no. 110414 dated 27.3.1995. The Ld. AR has further contended that the assessee got the possession of the COPS at the site and since the same were leased back to the SSL therefore, the COPS were handed over to the SSL. The 6 ITA No.2083/M/1999 Olympia Capitals Ltd.
transaction of purchase and lease back was completed vide leased agreement dated 27.3.1995. The Ld. AR has further contended that there is no dispute regarding the payment of consideration of ` 50,00,000/- which was duly received by SSL and acknowledged by issuing a receipt. The valuation of the assets and payment of consideration has not been questioned by the AO. The Assessing Officer questioned the nature of lease whether it is an operational lease or finance lease by issuing the show-caused notice however, the AO has concluded that the purchase and lease back transaction is a sham transaction. Once, the AO was of the view that the transaction in question is a financial transaction then it cannot be held that the same is a sham transaction. The Ld. AR has further submitted that for the transaction of purchase of COPS in question the assessee took a loan from bank wherein the COPS, the assets in question was hypothecated. The Ld. AR of the assessee has submitted that even the insurance policy clearly mention the hypothecation of the asset with the bank then the transaction in question is genuine and cannot be doubted. The insurance has been renewed from time to time over the lease period. The Ld. AR has referred the copies of insurance policy issued by the insurance company. The assessee has included the entire lease rental as income and forming part of the profit and loss account. If the transaction is not a lease transaction but only financial transaction then only the interests' component of the instalment can be considered as income. Thus, the Ld. AR has submitted that when the assessee has offered full amount of lease rental as income then depreciation on the asset is also an allowable claim. Since the value of each COP is less than 7 ITA No.2083/M/1999 Olympia Capitals Ltd.
5,000/- therefore in view of the first proviso to section 32(1)(ii) of the Income Tax Act 100% depreciation is allowable. The Ld. AR has contended that the CIT(A) has placed reliance on the decision of Hon'ble Jurisdiction High Court in case of Famous Cine Lab 121 ITR 648 whereas in the case of the assessee the value of the asset has not been doubted and the AO has not given any finding that the valuation report of the government approved Charter Engineer is not correct. He has further submitted that in the case of the assessee it is a permissible transaction though it may be an efficient tax planning exercise. The Ld. AR has relied upon the decision of Hon'ble Supreme Court in case of ICDS Ltd. Vs CIT 350 ITR 527 and submitted that the asset must be owned wholly or partly by the assessee and used for the purpose of business for a claim of depreciation u/s 32. The Ld. AR has submitted that the assessee has established the fact that the assessee has purchased the asset in question against consideration and proper invoice issued by the seller and thereafter leased back the asset to the seller and therefore, the assets has been used by the assessee for its business of leasing of asset. The Ld. AR has forcefully contended that once the twin condition of ownership and uses for business are satisfied then the claim of depreciation cannot be denied. He has referred the documents of purchase, insurance policies, loan taken from the bank and the charge of the bank is shown in the insurance policy and submitted that the assessee has proved the transaction of purchase and lease back by producing all the relevant record and evidence. The SSL has also certified and confirmed the transaction of sale and lease back as well as the continuance ownership of the asset with the assessee. The Ld. 8 ITA No.2083/M/1999 Olympia Capitals Ltd.
AR has referred the certificate/confirmation at page no. 110 and 111 of the paper book and submitted that SSL has confirmed the transaction as well as reaffirm the clauses of the agreement whereby the COPS are in good working condition at the time of lease transaction. The Ld. AR has further pointed out that an identical issue has been considered and decided by the Co-ordinate Bench of this Tribunal in case of Larson & Toubro Ltd. in ITA No. 220/2000 vide order dated 1.5.2013. The Co- ordinate Bench of this Tribunal has followed the decision of Hon'ble Supreme Court in case of ICDS Ltd. Vs CIT (supra) and held that the claim of depreciation on sale and lease back of asset is allowable. The Ld. AR has also relied upon the decision of Delhi Benches of this Tribunal in case of Modipon Ltd. Vs ITO 22 TTJ 108 and submitted that an identical issue of depreciation on COPS has been decided by the Tribunal in favour of the assessee by holding that the COPS are also covered by the term plant appearing in section 43(3) of the Income Tax Act. The Ld. AR has referred various clauses of the lease agreement and submitted that all rights, title and interest in the assets in question remains with the assessee and shall not pass to the lessee by virtue of the lease transaction. He has referred the lease agreement and submitted that as per the terms of the lease agreement the assets shall all time remain the property of the assessee. As per the inspection clause the assessee or a representative of its designated banker shall have right from time to time during the normal business hours to inspect the asset in question for the purpose of confirming the existence, condition and proper maintenance of the same. The Ld. AR has further pointed out that as per the lease agreement any 9 ITA No.2083/M/1999 Olympia Capitals Ltd.
item of assets is lost, stolen or destroyed or damaged beyond repair for any reason the lessee shall promptly pay the lessor the remaining unpaid amount of lease rentals. He has then referred the surrender clause of the lease agreement and submitted that upon expiration or earlier termination of lease, the lessee shall deliver to the lessor the equipment in question which shows that the ownership of the asset remains with the assessee. In case of default the lessee has to return all the equipments to the lessor at its own risk and expenses. Therefore, the ownership right of the asset vested with the assessee. Thus, the Ld. AR has submitted that the COPS under lease agreement are the property of the assessee and after expiry of lease period the assessee is entitled to get them back. He has pointed out that at the end of the lease period the assessee sold the COPS to the lessee against consideration which established that the COPS were the property of the assessee. Hence, the Ld. AR has submitted that the assessee is entitled for 100% depreciation as the individual caused of COPS is less than ` 5,000/-.
6. On the other hand, the Ld. DR has submitted that the transaction of sale and lease back is a Sham transaction with the motive to provide the Finance to the SSL and further to avoid to tax liability by claiming 100% depreciation. The Ld. DR has referred the submissions/reply of the assessee before the A.O and submitted that the valuation of the COPS was got by SSL and not by the assessee. He has further submitted that no identification of the assets was made. He has referred the report of ADIT(Inv.)-II, Indore, and submitted that there were 3 lakhs COPS in the 10 ITA No.2083/M/1999 Olympia Capitals Ltd.
factory of SSL and there is no marking which COPS were purchased by the assessee and given back on lease. He has further submitted that the COPS were of different size and there is nothing either in the invoice or valuation report or lease agreement to indicate the size of the COPS purchased by the assessee and given back on lease. The Ld. DR has further submitted that the cost of the new COPS varies from ` 25 to ` 50 each whereas the assessee has purchased the COPS @ ` 50/- each which is not the actual price of the COPS which are old and not new therefore, the valuation is not proper and correct. The Ld. DR has submitted that the entire transaction is paper transaction and no physical or actual transfer of the asset is made. The assessee itself has accepted that the COPS were already with the SSL and even after the payment the same remained with the SSL which shows that the entire transaction has been shown on the paper but nothing has been changed on the ground. When there is no identification of the asset then it is not possible to make out which of the COPS were purchased and lease back by the assessee. The Ld. DR has referred various clauses of the lease agreement and submitted that some of the clauses regarding the payment of octrai etc. are frivolous because when the asset in question was not moved form the factory of SSL then the question of payment of octrai does not arise. He has also referred the clause regarding delivery and disbursement and submitted that when there is not actual delivery then the clause in the lease agreement is vague and contrary to the actual transaction. The investigation team did not find any identification mark on any of the COP during the survey carried out therefore, the asset in question is not verifiable. Even as per 11 ITA No.2083/M/1999 Olympia Capitals Ltd.
the lease agreement the assessee has no control either in selection of asset or on purchase but the SSL has already owned the asset at the time of alleged purchase by the assessee therefore, the assessee had no control over the asset. The Ld. DR has then referred the inspection clause of the agreement and submitted that when there is no identifiable asset then how it is possible to inspect the asset in terms of the agreement. There is no description of size or age of the COPS whether new or old either invoice or in the lease agreement or in the valuation report and the maximum price of the new COP is ` 50/- each then the valuation of the COPS which are not identified @ ` 50/- each itself is not correct. Thus, the valuation report is not giving the correct valuation and the same is a vague report. Even otherwise the price is determined by the lessee and not by the assessee. The rate of ` 50 per COP is not a fair market price because as per the report of the ADIT(Inv.)-II, Indore. He has relied upon the orders of the Assessing Officer and CIT(A) and submitted that the COPS are inseparable part of the machine and no separate depreciation is allowable. The Ld. DR has relied upon the decision of Special Bench of this Tribunal in case of Mid East Port Folio Management Ltd. Vs DCIT 87 ITD 537 as well as decision of Hon'ble Karnataka High Court in case of Avasarala Automation Ltd. Vs JCIT 266 ITR 178. The Ld. DR has also relied upon the decision of this Tribunal in case of DCIT Vs Prithvi Prakashan (P) Ltd. 53 SOT 187 (Mum)(URO) and submitted that the Tribunal has held that the assessee's claim for depreciation on the iron role was rejected on the ground that the assessee has not taken physical possession of the roles and thus it was Sham transaction.
12ITA No.2083/M/1999
Olympia Capitals Ltd.
7. In rebuttal the Ld. AR has submitted that the agreement is standard/master agreement which is use for all type of lease transactions therefore, some of the clause which are out of context for a particular transaction have to be ignored. He has further submitted that the decision relied upon by the Ld. DR are not applicable to the facts of the assessee's case because there is no dispute about the consideration, valuation and existence of the asset. He has further submitted that at the end of the expiry of the lease period the assessee sold the asset at the agreed value/price to the lessee. The Ld. AR has referred the letter dated 23.3.1998 of SSL and submitted that the COPS in question have been segregated at the request of the Chartered Engineer prior to the valuation and accordingly the valuation was done after one lakh COPS were segregated and inspected by the Chartered Engineer as well as by the directors and other officers of the assessee therefore, at the time of transaction the asset was very much identified and verified. The Ld. AR has further submitted that the life of the COP is maximum upto 5 years therefore, the COPS which were purchased by the assessee and given back on lease were new COPS as proper safeguard were taken at the time of inspection and valuation.
8. We have considered the rival submissions and carefully gone through the relevant material on record as well as the decisions relied upon by either of the parties. The question before us is regarding genuineness of transaction of sale and lease back of COPS and consequential claim of 100% depreciation. In order to verify the 13 ITA No.2083/M/1999 Olympia Capitals Ltd.
genuineness of the transaction the AO made a reference to ADI(Inv.)-II, Indore, for verification of the COPS which are the subject matter of the sale and lease back between the assessee and SSL, Ujjain. Consequently the ADI(Inv.)-II, Indore, carried out a limited survey at the place of SSL. The report of the ADI(Inv.)-II, Indore, has been reproduced by the AO as under:
"On a reference to the A.D.I. (Inv)-II, Indore, by the undersigned regarding verification of cops which your company stated to have entered into sale and lease back transactions with Shri Synthetics Ltd., Ujjain. A report in this regard has been received by Fax on 16.3.1998. The relevant points are reproduced hereunder:-
1. The company is carrying on business of manufacture of Synthetic Yarn. The finished product i.e. Yarn is wrapped on COPS. On verification of assets as per aforesaid inventory, it is noticed that they are not shown as assets (depreciation) in block of assets. As such statement of Shri R. S. Toshniwal, Manager (Accounts) as also Shri Ashok Mehta, Asstt. Manager, COPS section of the company were taken. They have explained the function and necessity of COPS. It is explained that COPS are made of aluminium/steel of different size viz. 340mm, 380mm and 420mm. These are of cylinder shape. Both the ends of these COPS are fitted with plastic adopters and a plastic sleeve is wrapped on it. It is stated that COPS are part of machinery which are very essential for wrapping final product (Yarn) on it. The COPS are sold alongwith yarn to other parties under the condition that blank COPS are to be returned back to the company. The cost of COPS is not included in the sale of yarn.
Some security amount is also kept by the company from purchaser towards the COPS. On receiving back the COPS are collected in COPS section and after some repairs/cleaning the same are again sent to respective section for its reuse.
2. On further verification, it is seen that COPS are found in huge number counting of which is not possible as some COPS are lying for repairs, some are fitted on the machines, some are in transit and some are in circulation of processing. These facts are also stated by the Accounts Manager. The record of COPS is maintained in COPS section.
3. As regards the transaction with M/s Olympia Capitals Ltd., Bombay (under sale & lease back - agreement) the Manager, 14 ITA No.2083/M/1999 Olympia Capitals Ltd.
Accounts was specifically required to explain the nature of the same and his statement was again recorded. The modus operandi of the transaction with M/s Olympia Capitals Ltd., Bombay is "that the company M/s Shri Synthetics Ltd., Ujjain, has sold one lacs of COPS for ` 50,00,000/- to M/s Olympia Capitals and it obtained the right of use of COPS under the Agreement of Lease" termed as lease agreement.
The point wise details collected are as follows:-
1. The company M/s Shri Synthetics Ltd., Ujjain, is purchasing the COPS year to year as and when it required.
2. The cost price of COPS is different in respective years i.e. ranging from ` 25 to ` 50 each.
3. As per statement of Shri R. S. Toshniwal and Shri Ashok Mehta, COPS are essential for wrapping the yarn for sale. The COPS are fitted in the machine and after wrapping the yarn thereon the same are detached for sale and after selling the yarn to party the blank COPS are received back and after some repairs as stated in para 3, page-1 they are put to reuse on the machine.
4. The COPS are separate and independent unit but are used for wrapping the yarn on relevant machinery. The independent and separate COPS are not usable unless it is inserted in the machine.
5. As stated by R. S. Toshniwal, no depreciation is being claimed on the COPS. It is being charged to Profit & Loss Account being treated as Revenue Expenditure.
6. The company has sold one lakh COPS to M/s Olympia Limited, Mumbai for ` 50 lakhs vide sale bill dated 24.3.1995. On the same day the COPS are taken on lease through a lease agreement. The lease rent is paid quarterly through post dated cheques amounting to ` 4,80,000/- quarterly, quarterly payment upto O. E. 27.6.1997 has been made. Sale proceeds of ` 50 lakhs has been received by the company through cheques. The sale proceeds of COPS is shown under the head 'Misc. Sale A/c'. In the books of shri Synthetics Ltd., Ujjain. The sale proceed has been taken as profit on sale of COPS & shown as other income, since the initial cost of COPS has already been charged to P & L A/c.
7. As per the lease agreement executed between both companies the right of claiming depreciation vested with lesser as per para (G), page-3 of agreement.
After verifying all these facts, it is opined that COPS are useable items again & again after making some minor repair/replacements of sleeves and adopters. The life of COPS is 15 ITA No.2083/M/1999 Olympia Capitals Ltd.
longer one as these are made of Aluminium/Steel (metal) folded with plastic sleeves and plastic adopters (both sides). The COPS is being purchased in numbers. Since its involvement in manufacturing section, wrapping section, warehouse which the parties are very huge. The COPS is not containing any details like make/distinctive numbers etc. The COPS is an item which is in circulation of business, i.e. under use of machine, in transit on sale, lying with the purchaser parties, lying in COPS section for its reuse etc. In the above transaction with Olympia for sale of one lakh COPS it is not verifiable that new COPS has been sold or the COPS which were already in use. It is to be mentioned that no physical delivery of COPS has been made. Only paper transaction has been arranged to make the availability of funds to shri Synthetics Ltd., Ujjain. In respect of sale price is taken at ` 50 each irrespective considering the old or new COPS."
9. It is clear from the investigation made by the ADI(Inv.)-II, Indore that the statement of Shri R. S. Tosniwal (Accounts) and Shri Ashok Mehta, Assistance Manager, COPS, section of SSL were recorded. These two officers of SSL have explained the function and necessity of the COPS as well the material/metal and size and shape of the COPS. It was found that COPS are part of the machinery which are very essential for raping final product (Yarn) on it. The investigation team has stated in the report that M/s SSL has sold one lac of COPS for ` 50,00,000/- to M/s Olympia Capitals Ltd. (the assessee) and the same COPS were taken by SSL under right to use as per the agreement of lease. There is no dispute about the actual consideration paid by the assessee to the SSL and physical existence of the COPS. The main objections of the Revenue against the transaction of purchase and lease back as well as claim of depreciation is that out of about three lacs COPS the identification of one lac COPS which were sold to the assessee and then leased back was not possible and it was not verifiable whether these COPS were new or already in use. Another 16 ITA No.2083/M/1999 Olympia Capitals Ltd.
objection of the revenue is that no physical delivery of COPS has been made and therefore, this transaction is only a paper transaction arranged to make availability of fund to SSL. Though the authorities below have also raised doubts about the value of the COPS however, neither any attempt was made to get the correct valuation nor any finding is given that the valuation of the COPS at ` 50 each is not prevailing market price. It is pertinent to note that the report of the ADI(Inv.)-II, Indore has mentioned that the cost price of COPS is different in respect of years ranging from ` 25 to 50 each. Thus, it is accepted in the report that the latest/current price of the COPS is ` 50 each. Therefore, prima facie the valuation of the COPS at ` 50 each by a Government Approved Chartered Engineer appears to be based on the prevailing market price. The report of DIT(Inv.), Indore, points out the variation in cost of COPS as prevailing in different years. Therefore, the cost of COPS remains same in particular years irrespective of its size. Even otherwise the size has not been stated to be effecting the utility of the COPS. Thus, it appears that all COPS are identical and no difference in the utility due to the difference in size. The assessee has filed the relevant record to show that before entering into the transaction the COPS in question were inspected by the director and the other officers of the assessee, though at the place of SSL therefore, there is no occasion for delivery of the COPS to the place of the assessee because the transaction of sale and lease back is simultaneous. It is pertinent to note that when the assessee has purchased the COPS from SSL and with the intention to lease back to the SSL then there was no need to take the delivery of the COPS in question by transportation from 17 ITA No.2083/M/1999 Olympia Capitals Ltd.
the place of the SSL and then send back again to the place of SSL. Even otherwise the said exercise would not achieve anything but wastage of time and money. Even during the investigation it was found that the transaction of sale of one lac COPS took place thereafter the same were taken back on lease by the SSL from the assessee. Both the parties entered into the lease agreement. The existence of the COPS and payment of consideration against the sale bill dated 24.3.1995 has been again confirmed by the investigation carried out by ADI(Inv.)-II, Indore. Therefore, the genuineness of the transaction has not been doubted even by the ADI(Inv.)-II, Indore in the report. However, a reference has been made that since no physical delivery of COPS has been made it was only a paper transaction. As we have already discussed that when the COPS were pre-existed at the place of SSL prior to the sale then at the time of sale and lease back it is not necessary to transport the COPS first from the SSL to the assessee's place and then again from the assessee's place to SSL. The assessee has placed on record the communication between the parties which shows that the director and the other officers of the assessee physically inspected the COPS at the plant of SSL before completing the deal of purchase of one lac COPS and then leased back the same to SSL.
10. The Ld. DR though pointed out certain clauses of the agreement which are not relevant to the transaction in question however, we find that the lease agreement entered into by the parties is in a standard format and some of the clauses as pointed out by the Ld. DR are out of 18 ITA No.2083/M/1999 Olympia Capitals Ltd.
context for the transaction of purchase and lease back of the COPS therefore, these clauses are not relevant and also not effecting the transaction of lease back of COPS to SSL. Further when the COPS in question were not transported from Ujjain to the place of the assessee then there is no question of payment of any octrai duty and therefore, the clause in the agreement becomes irrelevant. Even otherwise as per the agreement if any octrai is payable at the time of delivery the said will be borne by the respective parties but when there is no octrai is paid then the question of liability of payment does not arise. The parties have agreed that the ownership of the COPS in question remains with the assessee which has also been confirmed by the SSL during the investigation carried out by the ADI (Inv.)-II, Indore, and therefore, there was no ambiguity on the point of ownership between the parties as the parties have understood and accepted this fact that after the sale of the COPS by SSL to the assessee it became the property of the assessee and the SSL got the right to use under the lease agreement. Another crucial fact is the financial assistance taken by the assessee from the bank by pledging the COPS in question. The assessee has produced the relevant record showing the loan taken from bank against these COPS. This fact is again confirmed by the Insurance Policy taken on these COPS. As per the Insurance Policy the interest of bank of Madura Ltd. has been noted and a relevant endorsement has been made in this regard. The transaction of sale and lease back is permissible under the framework of law. Only because the assessee claim 100% depreciation on these COPS cannot ip- so-facto render the transaction as non-genuine and abuse of law. 19 ITA No.2083/M/1999
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It may be a transaction with pre-plan to reduce the tax liability but the same cannot be called as a device to avoid tax. This is because the entire transaction is Revenue neutral. It is manifest from the report of ADI(Inv.)- II, Indore, that the SSL has shown the sale proceeds of one lac COPS under the head miscellaneous sales account and taken as profit on sale of COPS. Thus, it is clear that the sale proceeds of the COPS was not treated as a capital receipt but was shown as income of the SSL and on the other hand claiming 100% depreciation by the assessee of the same amount neutralise the Revenue effect. Thus, on one hand the transaction of sale and lease back has resulted an income of ` 50,00,000/- in the hand of SSL and on the other hand, the assessee has claimed 100% depreciation on the said amount. Further the amount of lease rent paid by the SSL has been shown as expenditure per contra the said amount has been shown by the assessee as income. Accordingly, taking the holistic view the overall result of the transaction is Revenue neutral and therefore, it cannot be said that it is a colourable device to avoid due tax. The Ld. CIT has also placed reliance on the explanation 3 to section 43(1) of the Income Tax Act to deny the assessee's claim of depreciation. For ready reference we reproduce explanation 3 to section 43(1) as under:
"Explanation 3 - Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income tax by claiming depreciation with reference to an enhanced cost, the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case."20 ITA No.2083/M/1999
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11. The explanation 3 above is in respect of actual cost of assets to the assessee and if the asset acquired by the assessee was used by any other person for the purpose of business or profession before the date of acquisition and the Assessing Officer find that the purpose of such transfer was to reduce the liability of Income Tax by claiming deprecation then the actual cost of the asset shall be determined by the AO. In the case in hand the cost of acquisition is based on the valuation report which has not been held as in correct because the AO has not given any finding or determine the actual cost of the asset in question. Hence in the facts of the present case the explanation 3 has no application. Even otherwise the explanation 3 is relevant only for valuation of the asset for the purpose of depreciation and not for determining the genuineness of the transaction. Once the assessee has established with supporting evidence that the transaction in question has been actually carried out then in the absence of any contrary material or facts brought on record, the action of the authorities below in holding the transaction as bogus is not sustainable. On the question of eligibility of depreciation on the lease out assets has been considered and decided by the Hon'ble Supreme Court in case of ICDS Vs CIT 350 ITR 527. The Co-ordinate Bench of this Tribunal in case of M/s Larsen & Toubro Ltd. in ITA No. 2200/M/2000 (supra) has been decided in para 28 as under:
"28. The issue relating to the claim of depreciation vis-a-vis sale and lease back of assets has been considered by Mumbai Special Bench of the Tribunal in the case of IndusInd Bank Ltd. Vs ACIT 135 ITD 165. However, this entire controversy has been set at rest by the decision of the Hon'ble Supreme Court in the case of I.C.D.S. Ltd. Vs CIT 350 ITR 527 wherein the Apex Court has allowed depreciation in the case of sale and leased back 21 ITA No.2083/M/1999 Olympia Capitals Ltd.
transaction. This decision of the Hon'ble Supreme Court has been followed by the Tribunal in the case of Development Credit Bank Ltd. Vs DCIT in ITA No. 7625/M/2007 and 27 others. After considering the facts of the case in the light of these judicial decisions, we find that the issue is squarely covered in favour of the assessee. Accordingly, we direct the A.O to allow the depreciation on sale and leased back assets (SLB). However, we find that while disallowing the claim of depreciation, the Ld. CIT(A) has directed the A.O to exclude from the assessed income of the value of the capital component of the lease rentals of the year. Since we have allowed the claim of depreciation, the A.O is directed not to give any other benefit to the assessee and if he has excluded the value of capital component of the lease rent of the year, the same should be added back. Ground NO. 11 is accordingly allowed."
12. Further the issue of depreciation on COPS has been considered by the Delhi Benches of this Tribunal in case of Modipon Ltd. Vs ITO in para 94 as under:
"94. We have given consideration to the above arguments. The photographs of the cops as fitted to the plant & machinery of the assessee as also of the cops with the yarn would round them are at pp 103 and 104 of the paper book. We have already held above in the appeal of the assessee that the property in the goods of these cops vests in the assessee. These cops are detachable. The yam is sold by the assessee to the customers who are under the legal obligation to return the cops for which adequate security is taken by the assessee. Admittedly, the filament which goes out of the plant & machinery of the assessee to be wound round these cops is very thin. The object of these cops is to pull filament yarn and to wind it around it. But for the cops the yarn produced by the assessee would be in a jumble and cannot be collected in any container for being would up later on. The plant & machinery is so designed to have these cops fitted with them with the required rotation to pull the filament and to would the yarn round these cops. These cops are, therefore, on the facts and circumstances of the integral part of the plant & machinery of the assessee company independently, these cops are also cover by the definition of the expression "plant" appearing in section 43(5) of the Act. This view of ours finds support from the ratio of the following decisions; Commissioner v. Jai Drinks (Pvt.) Ltd. (1980) 15 CTR (Raj.) 17 :
(1980) 125 ITR 662 (Raj.). Commissioner v. National Air Products Ltd. (1980) 18 CTR (Delhi) 300: 126 ITR196 (Delhi).22 ITA No.2083/M/1999
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Therefore the expenditure to purchase the cops in the year under consideration is capital expenditure and the assessee is entitled to the development rebate on the cost of these cops. This view of ours finds support from the aforesaid decisions of the Tribunal in the case of the assessee for assessment year 1970-71 and 1971 -72 respectively dated 1st November, 1980 and 20th January, 1981 in Income-tax Appeal No.2193 (Delhi)/75- 76 and Income-tax Appeal No.1823 (Delhi) 1977-78 (supra). We, therefore, uphold the order of the Commissioner (Appeals) on this point also."
13. Therefore, the issue is squarely covered in favour of the assessee. Even otherwise the claim of 100% depreciation was otherwise allowed by the revenue on the COPS in the case of SSL other then the COPS in question. Therefore, the Revenue itself has allowed 100% claim on the COPS. The decisions relied upon by the Ld. DR are not applicable in the facts of the present case when there is no dispute regarding the actual payment of consideration, valuation made by the Government Approved Chartered Engineer, ownership of asset and sale at the end of lease period. Further the investigation carried out by the ADI(Inv.)-II, Indore, wherein the transaction in question was confirmed. Accordingly, in view of the above discussion in the facts and circumstances of the case we hold that the assessee is illegible for 100% depreciation on the COPS the cost of which is less then ` 5,000/- each.
14. Ground No. 2 regarding interest u/s 234B and 234C. The levied of interest u/s 234B and 234C is consequential in nature and no specific finding is required.
23ITA No.2083/M/1999
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15. In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on this 25th day of October 2013 Sd/- Sd/-
(एन. के. बलै या) ( वजयपाल राव)
लेखा सद य या यक सद य
(N. K. BILLAIYA) (VIJAY PAL RAO)
Accountant Member Judicial Member
Place: Mumbai : Dated: 25th October 2013
Subodh
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT
4 CIT(A)
5 DR
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai