Income Tax Appellate Tribunal - Ahmedabad
Brijlaxmi Leasing & Finance Pvt. Ltd., ... vs Assessee on 31 January, 2003
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C", AHMEDABAD
Before Shri Bhavnesh Saini, JM & Shri A.N. Pahuja, AM
I.T.A. No.1703/Ahd/2003
(Assessment year 1995-96)
Brijlaxmi Leasing & Finance Pvt Ltd vs Dy.CIT, Circle-1
204, Sterling Centre, Aaayakar Bhavan, Race Course
R.C. Dutt Road,Alkapuri, Circle, Baroda
Baroda 390 005
[PAN : AAACB9524F]
(Appellant) (Respondent)
Assessee by : Shri MK Patel,AR
Revenue by : Shri MC Pandit,DR
ORDER
AN Pahuja : This appeal by the assessee against an order dated 31-01-2003 of the ld. CIT(A)-III, Baroda, raises the following grounds:
"1. The learned CIT(A) erred in confirming the addition of Rs.2,61,359/- on account of disallowance of loss claimed on the sales of shares.
2. It is prayed that the addition of Rs.2,61,359/- on account of disallowance of loss on sale of shares be deleted.
3. The learned CIT(A) erred in holding that the transaction of purchase and lease back the plant & machinery to Gelikeps Pvt Ltd., was only a paper transaction and therefore it was a sham transaction.
4. The learned CIT(A) further erred in confirming the disallowance of depreciation of Rs.9,98,342/- on the plant & machineries so purchased and leased back to Gelikeps Pvt Ltd.
5. It is prayed that the addition of Rs.9,98,342/- on account of disallowance of depreciation be deleted
6. Your appellant craves leave to add, alter or amend any of the grounds mentioned above."2 I.T.A. No.1703/Ahd/2003
2. Adverting first to ground nos. 1 & 2 pertaining to disallowance of Rs. 2,61,359/- on account of loss on sale of shares, facts, in brief, as per relevant orders are return declaring income of Rs.7,43,830/- filed on 31.3.1997 by the assessee, carrying on the business of leasing, finance and investment after being processed on 31.3.1997 u/s 143(1)(a) of the Income-tax Act,1961[hereinafter referred to as the 'Act'], was taken up for scrutiny with the issue of notice u/s 143(2) of the Act on 9.4.1997. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that the assessee had claimed loss of Rs.1,45,747/- on sale of shares after adjusting the profit on sale of shares. To a query by the AO, the assessee pointed out that they suffered loss of Rs.2,29,270 on sale of shares of IPCL, Asian Petroproducts, Finolex Pipes Ltd.. The assessee also suffered loss of Rs.32,089 on other share transactions , for which no details were given. Since the assessee could furnish only the date of sales of shares and failed to furnish name and address of the broker,details of payments for purchase and purchase/ sale bills as also proof of taking delivery of these shares, the AO disallowed the claim of loss of Rs. 2,61,359. On appeal, the ld. CIT(A) restored the matter to the file of the AO for fresh consideration in the light of details in the form of contract notes filed before him. Consequently, the AO reconsidered the issue with reference to the copies of contract notes and concluded that these details were not sufficient to establish the claim of loss. Accordingly, he maintained the rejection of claim of loss as had been done in the original assessment.
3. On appeal, the assessee submitted that as the matter was very old the assessee could not produce all the credit notes required for establishing the claim of loss on sale of shares. Though the bills could not be submitted before the AO, the same being not available, but the audited books of accounts of the assessee and the details of brokers through whom the contract and the transactions were made during the F.Y. 1994-95 were submitted. However, the AO merely overlooked and brushed aside them. However, the ld. CIT(A) rejected the contentions of the assessee on the ground that the assessee 3 I.T.A. No.1703/Ahd/2003 submitted few bills for purchases of shares from one of the broker of Baroda Stock Exchange, Shri. A.K. Naria and Company besides one bill relating to sale of shares of IPCL and these evidences lead nowhere as the required contract note and relevant bills were not made available either before him or the AO , despite sufficient opportunity given. Accordingly, the disallowance of loss on sale of shares was confirmed.
4 The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee submitted that at least loss on sale of shares of IPCL be allowed since the assessee had submitted a copy of contract note dated 25.10.1994 on sale of 7,900 shares besides contract notes for purchase of shares. On the other hand, the ld. DR supported the findings of the ld. CIT(A).
5 We have heard both the parties and gone through the facts of the case. The ld. AR appearing before us put forward their claim for loss on sale of shares of IPCL only. Therefore, we have no option but to uphold the findings of the ld. CIT(A) regarding loss on sale of shares of the other companies . As regards loss on sale of shares of IPCL, we find from copies of contract notes issued by AK Naria & Co[ placed on page 47 to 57 of the paper book] that the assessee is stated to have purchased 500 shares of IPCL on 25.8.1994,1000 each on 30.8.1994 & 31.8.1994,2200 on 1.9.1994,1000 on 13.9.1994 & 1500 on 14.9.1994. Thus, total of 7,200 shares of IPCL are stated to have been purchased until 14.9.1994. Another 600+1400 shares are stated to have been purchased on 11.11.1994. As per copy of contract note placed on page 57 of the paper book, 5500+2400=7,900 shares of IPCL are stated to have been sold on 20.10.1994. How out of purchase of only 7,200 share of IPCL, 7900 have been sold has not been explained before us nor bills and scrip nos. of these shares or evidence of delivery and payment for purchase of these shares has been placed before the lower authorities and even before us. In these circumstances; especially when the relevant evidence is not forthcoming from the assessee 4 I.T.A. No.1703/Ahd/2003 despite sufficient opportunity allowed by the AO and the ld. CIT(A), we are not inclined to interfere with the conclusion drawn by the ld. CIT(A). Consequently, ground nos. 1 & 2 in the appeal are dismissed..
6. Next ground nos. 3 to 5 relate to claim of 100% depreciation amounting to Rs.9,98,342 on machineries purchased from Gellikeps Pvt Ltd, Baroda and subsequently leased back to them. During the course of assessment proceedings, the AO noticed that the assessee purchased vide invoice number nil dated 25.3.1995 following machinery from Gellikeps Pvt Ltd, Baroda :
S No Item Qty Amount
1 SS Mould Pin bars for size "O" 450 217080
mounted on steel plates
2 SS Steel bars mounted steel plates 1150 554760
for size "O"
3 146 plates of 334 mould pins each 146 226502
Total 998342
The bill for purchase of machinery did not contain mode of transportation and the details of payments. During the course of hearing on 13.11.1997 and in subsequent notice dated 31.12.1997, the AO sought certain details relating to aforesaid purchase of machinery as mentioned on page 6-7 of the assessment order dated 30.3.1998.In response, the assessee vide letter dated 8.1.1998 submitted that the machinery was purchased for manufacturing empty gelatine capsules and subsequently leased out to the aforesaid company .Lease rentals accrued as a result were offered for taxation. The assessee also submitted that M/s Gelikeps purchased machinery in the earlier years and submitted the following relevant details:
Name of party Item Quantity Rate Amount
Date including
S.T.
1.a. Harrison Chromium plated Pin 146 150 22,863
Engineers plates
28.6.83
5 I.T.A. No.1703/Ahd/2003
1.b. ...do. S.S. Mould pin s per 48764 4 2,03,639
28.6.83 drawing GKP/MP/2
2. Ace S.S. Pin Bars with 4 450 450 2,17,080
Multitechs prelocks
22.3.90
3. ....do.... ...do.. 1150 450 5,54,760
16.4.90
6.1 It was further pointed out by the assessee the individual items of plant
and machinery were less than Rs.5000 each. According to the assessee, the
aforesaid machinery was leased to M/s Gelikeps Pvt Ltd on 27th March, 1995 for 48 months. What happened on expiry of this period as to whether or not machinery was returned, is not known nor the basis of valuation of machinery on the date of its purchase is evident, though it was mentioned before the AO that purchase was made after ascertaining the prevailing market price.. Admittedly, the aforesaid machinery remained in the custody of Gallikept Pvt Ltd since this were not handed over to purchaser but was shown as taken back on lease. The lease rent was required to be paid in five years' time with interest, however, actually lease rent was paid upto 2/3 instalments and payment was stopped because of cash crunch. According to Shri Bharat Patel, Director of Gelikeps Pvt Ltd., entire deal was made for getting the finance since their company was facing cash crunch.
6.2 As mentioned in the assessment order, the AO deputed his Inspector on 20th March, 1998 to visit the factory of Gallikeps Pvt Ltd.at Atladra, Baroda to identify the machinery ,since the assessee in his submission dated 16-02-1998 pleaded that machinery purchased by them is lying in the factory premises of Gelikeps Pvt Ltd. at Baroda. However, Inspector did not find any machinery in the said premises and instead he was informed that machinery has been transferred to r another factory at Willstrong Enterprises, 155 GIDC Vithal Udyog Nagar, VV Nagar, Anand on 15th September, 1995. It was also stated that the unit at Baroda was lying closed since August, 1995, the production of '0' size hard gelatin capsules having substantially reduced from assessment year 1994- 6 I.T.A. No.1703/Ahd/2003
95. The AO observed that the assessee did not explain as to how could M/s Gelikeps Pvt Ltd transfer the machinery to some other unit without the knowledge of the assessee. Shri Bharat Patel, Director of the company admitted that transfer of this old machinery to the assessee was only on paper because machinery was never transported and such arrangement was made to receive cash for running their factory. In nutshell, the AO concluded that -
i). The purchase of this machinery is a paper transaction; the assessee purchased very old and obsolete machinery like SS Mould Pin Bars and Plates which are 6 to 13 years old at an exorbitant price of Rs.9,98,342/-. Such machinery was never transported to assessee but remained there in the factory of Gelikeps Pvt Ltd.
ii). Gelikeps Pvt Ltd entered in to this paper transaction of sale of SS Mould Pin Bars and Plates not only with assessee but also with F.A. Chasmawala Pvt Ltd, Ajay Corrugating Inds. Pvt Ltd. and World Trade Impex Pvt Ltd., all of which are doing different business and have no connection whatsoever with Capsule Manufacturing. These concerns have only two things in common that their chartered accountants were M.V. Dey & Vo and all of them are making positive income and therefore, such depreciation claim at 100% rate on purchase of second hand machinery from Gelikeps Pvt Ltd helped them to reduce their taxable profit.
iii). As admitted by Shri Bharat Patel, Director of Glikeps Pvt Ltd., their machinery for manufacturing hard gelatne capsules had become obsolete and unviable. In such circumstances, purchase of such machinery by assessee is not a business transaction but a transaction for avoidance of tax. This company is manufacturing hard gelatine capsules since 1965 and they stopped the production of hard gelatine capsules in Aug.1995 because it was unviable. A manufacturing activity becomes unviable over a period of time looking to obsolete machinery resulting into high production cost, reduction of demand, loss 7 I.T.A. No.1703/Ahd/2003 on carrying of such manufacturing activity etc. In these circumstances, it was known to the management of Gelikeps Pvt Ltd in advance i.e. in A.Y. 1995-96 that their machinery has become obsolete and they have to stop production. In normal circumstances no body will purchase such an old and obsolete machinery with which production activity is not viable. Therefore, purchase of such machinery by assessee is purely a paper transaction.
iv). The unit of Gelikeps Pvt Ltd manufacturing hard gelatine capsules has been closed down since July, 1997 by tThe Order of Gujarat High Court because it was considered a high pollution industry and was taken over by Gujarat Pollution Control Board.
v). Assessee has not submitted full details of payment of Rs.9,98,342/- to Gelikeps Pvt Ltd. The cheque numbers, drawee bank details alongwith dates are not submitted. The Bank statement from which such payment was made, was not produced for verification.
vi). According to assessee, this machinery was leased back to Gelikeps Pvt Ltd as per lease agreement dated 27.3.95. The lessee is required to pay lease rent in sixteen quarters. However, lessee has paid only one or two installment and Shri Bharat Patel submitted that they could not pay further installment of lease rent to assessee due to cash crunch. However, assessee as a lessor never demanded till date any lease rent from lessee and there is no correspondence made by assessee in this regard. The assessee also did not issue any legal notice to Gelikeps P Ltd for recovery of lease rent.
vi). According to assesse this machinery purchased by assessee on 25.3.95 is lying at the factory premises of Gellikeps Pvt Ltd at Atladara, Baroda. As pointed out above, the said machinery was not found in that premises during a survey U/s 133A of the Act 8 I.T.A. No.1703/Ahd/2003 6.3 In the light of aforesaid facts, relying upon the decision of the Hon'ble Delhi High Court in the case of Goyal Gases Pvt Ltd vs DCIT,227 ITR 536(del) the AO disallowed the claim for 100% depreciation on second hand machinery .
7. On appeal, the ld. CIT(A) set aside the issue to the file of the AO for affording an opportunity for cross examination of Shri Bharat Patel. In pursuance to these directions, since the assessee could not produce Shri Bharat Patel for the cross examination, presumably due to disturbances in the city, the AO disallowed the claim .
8.. On appeal, the ld. CIT(A) remanded the matter to the AO for affording an opportunity for cross examination of Shri Bharat Patel. In his cross examination, Shri Bharat Patel stated that the machinery sold and leased back by them were used for their manufacturing activity and the AO is not correct in stating that the same were not usable and were obsolete. These machineries were usable and not obsolete and they were in fact used by M/s Gellikeps in their manufacturing activity. The learned counsel for the assessee, accordingly, pleaded before the CIT(A) that the statement of the Assessing Officer regarding unusability of the machinery is not corroborated by the statement of Shri Bharat Patel and therefore, the depreciation should be allowed. However, the ld. CIT(A) maintained the disallowance in the following terms:
"4.4 On consideration of the facts of the case, I find that the machineries under consideration were very old and the seller i.e. Gellikpes have already availed of 100% depreciation on such machineries in their case. It is a matter of great surprise that such old machineries which were purchased in 1982-83 to 1990-91 by M/s Gellikeps were again sold at the same price to the appellant in the present assessment year and that too for taking them back on lease. The statement of Bharat Patel in the cross examination that the machineries were not obsolete and were used by M/s Gellikpes in their manufacturing activity does not stand on solid ground. Firstly because during cross-examination the appellant's counsel has put to Shri Bharat Patel leading question and secondly earlier 9 I.T.A. No.1703/Ahd/2003 Shri Bharat Patel has admitted on 19-03-1998 that they have stopped production because of their obsolete machineries / plant for the last two years. Further the lease rent has also not been paid after two three installments. Also the machineries under consideration have been sold at their original prices even after their use for a number of years. All these indicate that sale and lease back of the machinery under consideration are nothing but only paper transaction and therefore sham, in which a colorable device has been used by the appellant to reduce its tax liability. Therefore, the disallowance made by the Assessing Officer is upheld. In doing so, I am also following the order of CIT(A) in the case of M/s F.A. Chasmawala (Appeal No.CAB/IV-68/98-99 dated 04-09-98 0- A.Y. 1995-96) wherein the similar issue of purchase of similar machineries from the same seller i.e. M/s Gellicaps and leasing them back to them only, was considered and the disallowance made in respect of depreciation relates to the alleged purchases of machineries in the hands of lessor of the machineries i.e. M/s F.A. Chashmawala was confirmed by the CIT(A)."
9. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee while carrying us through the impugned order contended that the transaction was not a paper transaction . As regards reliance on the decision of FA Chasmawala by the ld. CIT(A), the ld. AR while submitting a copy of certificate issued under KVSS pleaded that in that case issue was settled under KVSS.On the other hand, the ld. DR supported the findings of the ld. CIT(A).
10. We have heard both the parties and gone through the facts of the case. An assessee who claims depreciation has to satisfy the Revenue that he is entitled for grant of depreciation on items claimed by it. The burden of proof is on the assessee. In the instant case, the Assessing Officer as well as the appellate authority , after careful consideration of the case pleaded by the assessee and the materials placed by it before the Assessing Officer, have recorded a finding that the transaction set up by the assessee is not a genuine one and is a colourable transaction intended to avoid payment of tax. They have not believed the case of the assessee that the assessee, by means of sale agreement dated 25.3.1995 had purchased the machinery/equipment from M/s Gelikeps Pvt. Ltd. and on 27.3.1995 the same machinery was leased back to the seller.
10 I.T.A. No.1703/Ahd/2003Undisputedly the said machinery was never transported. In fact M/s Gelikeps Pvt. Ltd. had purchased the machinery in June,1983 & March/April,1990. Undisputedly, the unit of the said company at Ataldra is closed since August,1995 while the production of '0' sized hard gelatin capsules in the period relevant to the AY 1994-95, which was 5,43,25,000 had reduced to only 1,18,90,000 in the year under consideration. The said company was facing resource crunch and needed funds. The written down value as per section 43(1) of the Act in respect of the said machinery in the hands of M/s Gelikeps P Ltd. was nil, each item having cost below Rs. 5,000 each.. The market value of the machinery without valuer assessment also could not be ascertained nor there is any material before us that there was actual delivery or handing over of possession of the machinery/equipment by M/s Gelikeps P Ltd to the assessee on completion of the sale of the said machinery/equipment; even there was also no redelivery or handing over of the possession of the machinery/equipment by the assessee to the M/s Gelipeps P Ltd. As pointed out by the AO, the assessee did not submit the relevant details and dates of making payment to M/s Gelikeps P Ltd. while the machinery was not found in the factory premises of the said company at Baroda. Even though a copy of statement of Shri Bharat Patel and the relevant lease deed have not been placed before us , impugned orders reveal that the lease agreement was for a period of four years. What happened to the said machinery after four years is not evident from records. There is nothing to suggest that said machinery was returned by the lessee company or that the lease agreement was renewed. It is also not even in dispute that lease rentals were not paid by the lessee after paying first two or three instalments. Even the purported purchase price of the machinery in the year under consideration is stated to be same as the original cost of M/s Gelicaps P Ltd. There is no material before us suggesting that for fixing the said price, any valuation was got done through an approved valuer. This shows the real intention of the parties. Sale and lease back (SLB) transactions have been recognised commercially but the judicial eye can certainly unearth a device or a smoke-screen created to conceal the real intention of the parties and for this 11 I.T.A. No.1703/Ahd/2003 purpose, authorities can examine the genuineness of the transaction in question
- the enquiry is to find out the real intention of the parties and ascertain whether a simple loan transaction masquerades as an SLB transaction. In the facts of the case, we find that the entire transaction and the sequence of events were preordained or pre-planned - Overriding consideration appeared to be the prospect of getting 100 per cent depreciation and there was no intention to convey any property to the assessee and the lease was a mere paper arrangement and a simple finance transaction was put under the garb of lease. The Assessing Officer, in our view, is entitled to go into the genuineness or otherwise of the transaction entered into for the purpose of determining, whether any attempt is made by the assessee to avoid payment of tax. In the instant case, as noticed by us earlier, both the authorities below have come to the conclusion that the transaction in question is a colourable transaction. Even we are unable to appreciate as to what prompted the assessee to purchase second hand machinery/equipment, which never came to be moved from the place where it was located by M/s Gelikeps P Ltd. and again to lease it back to the seller within two days at the fag end of the relevant accounting year. As rightly observed in the orders impugned, there was no material before the lower authorities nor even before us regarding payment made by the assessee nor the relevant bank statement was produced. In the facts and circumstances of the case, it is not possible to take the view that the ld. CIT(A) was not justified in holding that the transaction in question is not in the nature of tax planning adopted by the assessee intending to avoidance of tax liability by so arranging its commercial affairs so that charge of tax is distributed. As noticed by us earlier, the taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the assessee has chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. Though every person is entitled to so arrange his affairs as to avoid taxation, the arrangement must be real and genuine and not a sham or make-believe one. In the instant case, the appellate authority and the Assessing Officer have recorded a finding that the 12 I.T.A. No.1703/Ahd/2003 transaction in question is not real and genuine; it is not in the nature of a tax planning which is within the framework of law. In the facts of this case, as admitted by Shri Bharat Patel, director of M/s Gelikeps P Ltd., the entire deal was to obtain finance since their company was facing resource crunch and production of gelatin capsules had gone down and ultimately unit had to be closed down . In these circumstances, we are inclined to take the view that while M/s Gelikeps P Ltd was interested in securing financial assistance by way of loan and for the said purpose the machinery/equipment was offered as a security by creating the documents in question to assure repayment of the loan advanced, the assessee found it convenient to enter into such a transaction as a device adopted to avoid payment of tax. Therefore, the subordinate authorities were fully justified, taking into account several circumstances referred to by them in the orders impugned, to determine the nature of the new and sophisticated acumen adopted to avoid payment of tax legitimately due to the State. In a matter like this, we consider that it is the duty of the Revenue authorities not to give judicial vindication to such an act of avoidance of payment of tax in the guise of sophisticated use of language as "tax planning".
10.1 In view of the foregoing, we are of the opinion this is not a genuine lease transaction. It has been given only the garb of lease transaction. There was no intention to effect the sale in truth and reality to the assessee, the machinery/equipment never changed hands nor the assessee cared to ascertain the market value of the assets through an approved valuer. There was no actual delivery or handing over of possession of machinery/equipment by M/s Gelikeps P Ltd. to the assessee on completion of sale and there was also no re-delivery or handing over of possession of the machinery/equipment by assessee to the seller. In any eventuality there was no scope for the assets coming back to the lessor. Hence, on the basis of abovesaid discussions, in our opinion, giving a purely finance transaction, the garb of sale and lease back transaction to claim depreciation, is clearly a colourable device and subterfuge and hence, no depreciation can be allowed in this case. In our view, in the facts and 13 I.T.A. No.1703/Ahd/2003 circumstances of the case, the subordinate authorities were fully justified in not accepting the case pleaded by the assessee for grant of depreciation. But we agree with the contention of the learned counsel on behalf of the assessee that once the AO concludes that the transaction is sham with a view to avoid tax, can the AO only go to disallow the depreciation. The AO should have and must have considered the conclusion of the sham transactions and disregarded the lease income which, according to the ld. AR, the assessee admitted in the return of income. In view of this, we direct the AO to verify and allow relief on the lease rentals received by the assessee in consequence to lease agreement entered with M/s Gelikeps P Ltd. Accordingly, the AO is directed to exclude the income returned on account of lease rental after necessary verification. Accordingly, this issue of the assessee's appeal is allowed partly. With these observations, we are of the view that the ld. CIT(A) was fully justified, in the facts and circumstances of the case, in upholding the disallowance.
11. No additional ground having been raised in terms of the residuary ground no.6, accordingly, this ground is dismissed.
12 In the result, appeal is partly allowed Order pronounced in the open Court on 8thJanuary, 2010.
Sd/- Sd/-
( Bhavnesh Saini) (A.N. Pahuja)
Judicial Member Accountant Member
Ahmedabad,
Dated : 8th January, 2010
Pk/-
Copy to:
1. The Assessee
2. Dy.CIT, Circle-1, Baroda
3. CIT(A)-III, Baroda
4. CIT-concerned
5. DR, "C" Bench
By order
Deputy Registrar, ITAT, Ahmedabad