Income Tax Appellate Tribunal - Mumbai
Jik Industries Ltd. , Mum vs Assessee on 17 September, 2012
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES 'B' MUMBAI
सव[ौी डȣ. मुमोहन, उपाÚय¢ /एवं
एवं
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT /AND
ौी राजेÛि, लेखा सदःय
SHRI RAJENDRA, ACCOUNTANT MEMBER
I.TA. No. 685/Mum/2005
Assessment Year 1996-97
JIK Industries Ltd. DCIT Circle 2(2),
16, Gundecha Chambers, Room No. 545,
Nagindas Master Road, Aayakar Bhavan,
Fort, Mumbai - 400 023. Vs. M.K. Road,
Mumbai-400 020.
PAN: AABCJ 2982 J
(अपीलाथȸ /Appellant) (ू×यथȸ / Respondent)
अपीलाथȸ ओर से / Appellant by : Shri K. Shivaram &
Shri Ajay R. Singh
ू×यथȸ कȧ ओर से/Respondent by : Shri Mohit Jain
सुनवाई कȧ तारȣख / Date of Hearing : 17-09-2012
घोषणा कȧ तारȣख / Date of Pronouncement : 23-10-2012
आदे श / O R D E R
PER RAJENDRA, A.M.
The appellant has filed this appeal against the Order dt. 27-08-2004 of the CIT(A)-II, Mumbai on the following Grounds:
1. The ld. Commissioner of Income Tax (Appeals)-II, Mumbai [hereinafter referred to as CIT(A)] has grievously erred in law and on facts in confirming the disallowance of depreciation of Rs. 90.00 lacs on the assets acquired by the Appellant company and used for the purposes of its leasing business in total disregard of the facts of the case.
2. The ld. CIT(A) has grievously erred in law and on facts in ignoring the confirmation of the lessee who has used the assets as lessee and has thus failed to appreciate the terms of the lease agreement in its (the right spirit) proper perspective.2 I.TA. No. 685/Mum/2005
JIK Industries Ltd.
3. The ld. CIT(A) has grievously erred in law and on facts in confirming the disallowance of the brokerage of Rs. 45,000/- paid on the lease transaction.
4. The ld. CIT(A) has grievously erred in law and on facts in confirming that the ratio of the judgment of the Mcdowells' case is applicable to the facts of the case of the Appellant company.
5. The Appellant company craves leave to, add to, alter, amend, modify, substitute, change any of the grounds as and when the occasion may arise.
2. Assessee, engaged in the business of Merchant Banking and dealing in foreign exchange, filed return of income on 29-11-1996 declaring a total income of Rs.10,28,740/-. Assessing Officer (AO) finalised the assessment u/s. 143(3) of the Income Tax Act,1961(Act) on 31-03-1999. CIT(A) vide his order dated 29-02-2000, set aside the assessment on the issue of assets leased to M/s. Hanuman Industries (HIL) Calcutta.
3. Effective Grounds of Appeal is about disallowance of depreciation of Rs.90 lakhs in respect of machinery leased out by the assessee. Second ground is about payment of brokerage amounting to Rs. 45,000/- in connection with the lease transaction. During the assessment proceedings AO found that assessee had claimed depreciation of Rs. 90,00.000/- @100% in respect of sugarcane crushers stated to have been purchased from one M/s. Shree Annapurna Financing Co. Pvt. Ltd (SAFC) and leased to HIL. In the original assessment order, it was observed by the AO that though the assessee produced purchase bill NO. SFC/ 101/95-96 dated 07-08-1995 of SAFC, the relevant columns of challan number, date, C/N etc., were not mentioned in the bill. The AO noted that on none of the letter heads any phone number was mentioned. He also noted that though sale bill was allegedly issued from Calcutta and delivery challan from Branch Office at Bombay but the signature on both the documents were of the same person. There were no transport receipts, octroi receipts etc., regarding transportation of goods from Calcutta to Motihari (North Bihar). Though the AO gave opportunity to the assessee to produce these documents as well as installation certificates etc., no such documents were furnished. AO further noted that assessee had paid Rs. 45 lakhs on two occasions on 23-08-1995 and on 28-08-1995 on a/c. of purchase of machinery. On 25-08-1995 and 31-08-1995 it received deposit of Rs. 77.4 lakhs from the lessee.AO made inquiries with HIL by issuing a notice u/s. 133 (b) of the Act. In response to the notice, HIL confirmed the transaction, but did not furnish any of the detail called for by the AO. Notice u/s. 133(6) was also issued to SAFC. AO held that assessee had not purchased any asset, that only bills were purchased, that depreciation was not allowable.
4. Assessee preferred an appeal before the First Appellate Authority (FAA) who, as stated earlier, directed the AO to afford a reasonable opportunity of hearing to the assessee. During the re-assessment proceedings, AO again held that the assessee had failed to prove the genuineness of lease transaction, that transaction is question was a circulating transaction. Depreciation claimed on the assets was disallowed along with the brokerage of Rs. 45,000/-. However, AO excluded the lease rental amounting to Rs.10.32 lakhs from the taxable income of the assessee-company. Assessee again preferred an appeal before the FAA. After considering the submissions of the assessee, case law relied upon by the AR of the assessee and the assessment he held 3 I.TA. No. 685/Mum/2005 JIK Industries Ltd.
that assessee had simply produced a copy of purchase bill of SAFC during assessment/re-assessment/appellate proceedings, that bill did not bear details of Challan No, Date, C/N No.etc., that details of assets in the bill were very general, that bill simply stated. one set sugarcane crusher each having rollers size 42' X 84',that supplier company was not manufacturer of the assets in question, that there was no gate pass number/ goods receipt number for the machineries entering the factory, that name of the person receiving machinery at HIL as well as date of delivery were not furnished by the assessee, that assessee did not produce Octroi receipt/transport receipt as an evidence for transportation of assets, that documents related to insurance of machinery were not produced, that assessee did not produce any inspection report, that there was absolutely no evidence that such an asset ever existed/ever purchased/leased, that even at the time of re-assessment proceedings, that assessee failed to produce any evidence, what-so-ever, regarding purchase and existence of asset, that assessee in its Paper Book filed before him (i.e., FAA) did not file any evidence in this regard other than a copy of bill and a cryptic challan, that assessee did not discharge onus of proving genuineness of transaction, that HIL did not provide distinctive details like number and description of the assets, make, year of manufacturing, capacity regarding installation, place of installation, transporters' receipt- to the AO, that as owner of the assets assessee did not obtain/furnish the said details, that basis of the valuation of the assets sold to HIL was not known ,that immediately after making payment of Rs. 90 lakhs for purchase of assets, assessee received back Rs. 77.4 lakhs as security deposit from the lessee, that purpose of the so called lease transaction was to obtain a purchase bill to claim 100% depreciation and to reduce the income of the AY under consideration, that all the lease rentals had been adjusted by the assessee against the security-deposit, that assets were sold for Rs. 50,000/- to HIL, that assessee did not furnish details as to how the said figure of Rs. 50,000/- was arrived at, that seller and the lessee were parties to the tax avoidance device adopted by the assessee, that in absence of any other documentary evidence regarding purchase and lease of asset confirmations of the seller and the lessee were more in nature of self serving statements, that a photograph of machinery cannot be accepted as an evidence, that by claiming 100% depreciation amounting to Rs. 90 lakhs in respect of non-genuine transaction the assessee had deferred the payment of taxes to subsequent years, that case laws relied upon by the assessee were distinguishable on facts, that circular No. 1978 dt. 31-12-1999 issued by the CBDT did not support the case of the assessee. Finally, he held that in the case of the assessee purchase and existence of assets was not proved by the assessee and therefore, AO was justified in disallowing depreciation( Rs. 90 lakhs) and brokerage (Rs.45,000/- ) in respect of alleged purchase of sugarcane crushers from SAFC.
5. Aggrieved by the order of the FAA, assessee has filed the present appeal. Before us Authorised Representative (AR) submitted that the it was a case of genuine lease, that lease rents of subsequent years were assessed by the AO as income of the assessee, that payment to SAFC were made through banking channels, that deposit form HIL was received by cheques, that assessee had offered the capital gain tax when machinery were sold, that even if it was a finance lease depreciation was allowable. He relied upon the cases of Orix Auto & Business Solutions (ITA No.2954/M/04, AY1998-99 dtd.26.7.2007), M/s. Cable Corporation of India Ltd (ITA No.2366/M/ 2000, AY 1996-97 dtd. 29.10.2007), M/s. Investwell Publisher P.L. (ITA No. 2154 / M/1999, AY 1995-96 dtd. 5.5.2006), The West Coast Paper Mills Ltd. (ITA No. 5403/M/1999, AY 1996-97 dtd. 21.6.2005), M/s.Taida Trading & Ind. L. 4 I.TA. No. 685/Mum/2005 JIK Industries Ltd.
(ITA No. 6602 to 6604/M/97, AYs. 1990-91 to 1992-93, dtd. 16.7.2004), Soni Capital Markets Ltd (ITA No. 4091/M/2000, AY 1996-97, dtd. 16.3.2004). He also relied upon the order of Shaan Finance (P) Ltd.(231ITR308). He further stated that decision of the Special bench in the case of Induslnd Bank Ltd.(135ITD165s) was not applicable to the facts of the case under consideration. He further advanced an alternate submission that in case depreciation was not to be allowed then there was a need for reworking of income for subsequent AYs. Departmental Representative (DR) submitted that there was no proof of purchasing or installation of assets, that in spite of various opportunities made available to the assessee it did not file required details. He relied upon the case of Induslnd Bank Ltd. (supra)
6. We have heard the rival submissions and perused the material put before us. We are of the opinion that before discussing the facts and other issues of the case it will be useful to go through the relevant terms of the agreement entered in to by the assessee with the HIL. We are reproducing important terms and conditions of the agreement:
6.1. 3. AGREEMENT OF THE LESSEE TO PAY:
3.1 The Lessee hereby agrees unconditionally and irrevocably to pay to the Lessor a Lease Deposit by (date of payment and place at which payments are required to be made) and part payments may also be accepted by the lessor which will be adjusted towards lease rentals.The Lessee shall pay the lease rentals, after adjusting the advances, if any, regularly and punctually, without any deductions or abatement, and irrespective, as to whether or not the equipment is being used by the Lessee or/and irrespective as to whether or not it is working for one or more shifts or is under repairs of maintenance or replacement for any period whatsoever.
18. Security Deposit:
18.1 The lessee shall prior to the commencement of the Lease period place with the lessor an interest free security deposit of the amount specified in the schedule as and by way of assurance by the Lessee of the due and proper performance of all its obligations under this agreement.
18.2 the Lessor shall refund such deposit, but without any interest therein, on a pro-
rata basis computed with reference in the rent payable (but not due) by the Lessee under this agreement.
18.3 the Lessor, however, shall at all time be entitled to adjust such security deposit or any part, thereof against any amount due from the Lessee in terms of this agreement whether on account of rent, liquidated damages of otherwise and exempt to the extent of treating such liability as discharged to the extent that is so adjusted, the rights of the lessor and the terms and conditions of this agreement shall not be modified or affected in any manner by such adjustment.
18.4 The Lessor shall also be entitled to forfeit the whole or the balance of the security deposit in the event of premature termination of the lease before the expiry of the lease period for any of the reasons specified in column 17 hereof.
5 I.TA. No. 685/Mum/2005JIK Industries Ltd.
6.1 The Lessee hereby declares and confirms to the Lessor that it has inspected or arranged for such inspection so as to satisfy himself/itself about the suitability of the equipment and that he/it shall not be entitled to reject the equipment as and when delivered by the supplier.
11.A The equipment shall be insured by the Lessee in the Lessee's own name and shall protect the lessor's interest, if any.
O. The equipment taken on lease will be used by the Lessee in his business immediately on taking delivery thereof and necessary proof to be submitted to Lessor as would satisfy the requirements of section 32 of the Income Tax Act, 1961. However, they would be permitted to sub-lease the assets.
8C. The Lessor has not at any time made nor does it hereby make any representation or warranty whatsoever with respect to the merchant ability, quality, condition, durability, suitability of fitness for the purpose, use, operation of performance of the equipment and that the Lessor has purchased the equipment with the approval of the Lessee as to its quality and suitability and effective working of the same and that the Lessee has not relied upon any statement or representations made by the Lessor or its agents or servants.
9.A The equipment is of the required size, design, capacity and manufacture, suitable for its purpose and has been selected by the Lessee relying entirely on its own judgment and not on the statements or representation, if any, made by the Lessor or its agents or servants;
9.B The Lessor is not the supplier of dealer of the equipment and that the essential function of the Lessor in this lease transaction is to purchase the equipment selected by the Lessee from the supplier who has been designated by the Lessee.
14. Exclusions:
The Lessee acknowledges and agrees with the Lessor that:
a.The equipment is or shall be accepted by the Lessee with all faults and defects (if any) and delivery whether, punctual or delayed shall be conclusive evidence that the equipment is in good condition and substantial working order and condition.'
7. Un-disputed facts of the case can be summarised as under :
i).Neither the assessee nor the supplier of the crushers i.e., SAFC, is manufacturer of sugar cane crushers.Assessee is not in the business of manufacturing sugar.
ii).Crushers purchased were as per the requirements of the lessee.
iii).Rs.77.4 lakhs were received by the assessee firm from the HIL as 'interest free security deposit' and machinery was sub-leased by HIL to M/s. Shree Hanuman Sugar and Industries Ltd.(SHSIL).6 I.TA. No. 685/Mum/2005
JIK Industries Ltd.
iv).100% depreciation (Rs. 90,00,000/-) was claimed by the assessee for the aforesaid assets in the AY under consideration.
v).Machinery was designed for the specific requirements of HIL(terms 9A,9B and 14)
vi). Certification of installation of machinery as well as inspection report were not produced before the AO/FAA.
vii).Date of first use of the installation of machinery is not known.
viii).Finally, crushers were sold to HIL for Rs. 50,000/-.
ix).As pet the term 'O' of the lease agreement 'necessary proof' was to be submitted to by the lessee to the Lessor 'as would satisfy the requirements of section 32 of the Income Tax Act, 1961',but such a certificate was never submitted.
7.1. Term 'depreciation' means wear and tear of the assets used for the purposes of earning revenue. Courts are of the view that the purport and object of law relating to depreciation, as envisaged u/s. 32 of the Act, has to be meaningfully interpreted, consistent with the object. We find that in the AY under consideration depreciation was permissible in the case of machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession. In our opinion when the Legislature has used the word 'used' full meaning must be given to it. The machinery has to be actually used in terms of the statute. The words 'used for the purposes of business' are capable of larger or narrower interpretation. For claiming depreciation any of the two meaning (actively or passively used) can be adopted, but the basic factum of use of asset has to established. The interpretation of phrase 'used for the purpose of business', by the courts, lays down that machinery should be installed. Thus, installation of the machinery is a pre-condition for active/passive use. We can sum up the position in other words by holding that whenever an assessee procures a particular machinery to be used for his business or profession, it would certainly involve installation of the machine with all integrated facilities, trial run and commissioning. Even assuming that keeping the machinery ready for use itself is sufficient for claiming depreciation, the assessee has to establish that the machinery was brought to its site and installation and commissioning were done which was possible only after trial run.
7.2. Where an exemption/deduction/rebate/claim is made on the basis of an agreement entered into between the parties, a close scrutiny of the terms and conditions of such an agreement becomes vital to decide the issue of allowability or otherwise of the claim. If the claim of depreciation, made by the appellant, is tested on the touchstone of the agreement and surrounding circumstances, it becomes absolutely clear that in the case under consideration basic ingredients of lease are missing. Issue of whether it was a finance lease or an operation lease comes later.
7.3. It is established principle of taxation jurisprudence that every business man has full right to conduct his affairs in the manner he wants, because he is the best judge for conducting his business activities. But, it is also true that his if his judgment affects the taxes, due to the Sovereign, Tax-officials are duty bound to disallow claims made by him. We find that the AO has performed his assigned duties going 7 I.TA. No. 685/Mum/2005 JIK Industries Ltd.
behind the transaction to bring the reality of the transaction in rational manner. He has brought certain facts on record to prove that assets for which 100% depreciation was claimed never existed nor installed. If the agreement and all the circumstance and facts of the case are analysed one thing become clear that assessee-company failed to prove the existence of machinery. Clinching evidences like Transportation bills, installation certificate, on-the-spot-inspection-report, production result of SHSIL before and after the installation of machinery were never produced by the assessee at any stage of proceedings. Assessee had appeared twice before the AO in this regard. Reasons for not submitting these basic evidences before him are best known to it.FAA has given a categorical finding of fact that evidence of installation of the assets in question were not produced before him. We find that in the Paper Book submitted by the assessee, there is not a single evidence that goes against the findings given by the AO and upheld by the FAA. Photograph of a crusher, till it is proved that same was installed and was utilised at premises of SHSIL; is nothing more than a photo of a machinery and that has no relevance for claiming/ granting depreciation in the case under consideration. Curiously SHSIL, who was the final user of the crusher as per the evidences produced, was never contacted by the assessee to prove his claim. For claiming the deduction on account of depreciation had to produce prima-facie factual evidence, but in our opinion Paper Book submitted by it do not contain such evidences. Payment by cheque or an agreement cannot be considered primary/leading evidence as far as transportation/installation/actual utilisation of machinery is concerned. In the case under consideration basic facts are non-existent-neither installation nor use is proved. In absence of such vital basic facts claim of depreciation of an asset cannot be allowed. As per the assessee it was the owner of the machinery. If so, then there was no justification for the assessee in not obtaining a certificate from SHSIL to the effect that it (SHSIL) was actually using the machines for production. As per the term 'O' of the agreement actual user was to issue a certificate about the assets. In pursuance of such a clause assessee was entitled to get a certificate from HIL or from the sub-lessee. But, appellant chose not to obtain and produce such a certificate.
7.4. It is noteworthy that the machinery was manufactured as per the requirements of HIL. From the various terms of the agreement it is clear that sugar cane crushers were designed as per the requirements of HIL. Term 9A and 9B of the agreement are worth reading in this regard. For an asset worth 90 lakhs HIL paid Rs.77.4 lakhs as interest free deposit and later on bought the asset for Rs.50,000'/-.On the other hand assessee-company, dealing in foreign exchange, decided to purchase sugar cane crashers and claimed100%depreciation amounting to Rs. 90 lakhs. If the interest of security deposit is taken in account along with the alleged sale price it becomes clear that surrounding circumstances of the transactions do not lead to a logical or rational end. Assesee has not claimed that it had, in earlier or subsequent years, entered in to such agreements. Though, this itself is not a deciding factor, yet along with other incriminating facts it becomes an important issue. Taxation matters are decided on preponderance of probabilities-hard core evidence, as required in criminal matters are not needed in these matters. Considering the facts and circumstances of the case under consideration we are of the opinion that order of the FAA does not suffer from any infirmity or illegality.
7.5. Now, we would like to discuss the cases relied upon/discussed by the AR of the assessee. We are of the opinion that the cases relied upon by the AR are distinguish-
8 I.TA. No. 685/Mum/2005JIK Industries Ltd.
able facts. In the case of Orix Auto & Business Solutions (supra) the issue to be decided was rate of depreciation and not the nature of the lease agreement. Similarly, in the case of Cable Corporation of India (supra) Tribunal had not doubted the transaction of sale and lease back of the assets. On pg. 13 of the order of the Tribunal has observed as under:
"The existence of energy saving device has been established, its user has been established ...................."
In the case of ICICI Ltd., the issue again was sale and lease back transaction. We are of the opinion that facts and circumstances of the present case are totally different cases relied upon by the assessee-company. In sale and lease back agreements, valuation reports of the valuers and existence of assets had been established, whereas in the case under consideration, as held earlier, basic facts supporting the claim of the assessee are absent. In these circumstances, if a particular view has been taken in sale and lease back transactions, it cannot be followed as a precedent here.AO as well as FAA has given a categorical factual finding about non-existence of the asset. Therefore, they have rightly denied the claim made by the assessee.
7.6. As far as alternate submission is concerned we are of the opinion that income of the assessee for subsequent years will have to be reworked with regard to rental income. For this limited purpose, we remit back the matter to the file of the AO. As we have endorsed the views of the AO and the FAA about non genuineness of the transaction, therefore, rental income of subsequent years should not be taken in to consideration while calculating the taxable income. In our opinion by not considering the rental income for the AY under consideration AO has adopted a fair and just method.
Ground No.1 is allowed in part in favour of the assessee.
8. Ground No.3 is about disallowance of commission amounting to Rs.45,000/-, paid by the appellant, for purchasing the machinery.AO and FAA held that as the lease transaction was not genuine, so, commission payment could not be allowed. In light of the discussion held in paragraphs 7.2.-7.4, we dismiss Ground No.3 filed by the assessee.
As a result, appeal filed by the appellant stands partly allowed.
Order pronounced in the open court on 23rd October, 2012
Sd/- Sd/-
(डȣ. मुमोहन / D. MANMOHAN) (राजेÛि / RAJENDRA)
उपाÚय¢ /VICE PRESIDENT लेखा सदःय /ACCOUNTANT MEMBER
मुंबई Mumbai,
Ǒदनांक Date: 23rd October, 2012
TNMM
9 I.TA. No. 685/Mum/2005
JIK Industries Ltd.
आदे श कȧ ूितिलǒप अमेǒषत/Copy
षत of the Order forwarded to :
1. Appellant
2. Respondent
3. The concerned CIT (A)
4. The concerned CIT
5. DR 'B' Bench, ITAT, Mumbai
6. Guard File
स×याǒपत ूित //True Copy//
/ BY ORDER,
आदे शानुसार
उप सहायक पंजीकार Dy./Asstt.
उप/सहायक Registrar
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई / ITAT, Mumbai