Income Tax Appellate Tribunal - Chennai
Marg Constructions Ltd. vs Deputy Commissioner Of Income Tax on 24 March, 2006
Equivalent citations: (2006)102TTJ(CHENNAI)997
ORDER
Mahavir Singh, J.M.
1. In this appeal, the assessee has raised two issues by way of 9 grounds. The summarised issues are as under:
(1) Whether the lease transactions entered by the assessee with 6 parties are sham transactions or genuine transactions for allowance of claim depreciation in the given facts and circumstances of the case, And further whether the asset was purchased by the assessee before 31st March, 2001 and put to use ?
(2) Whether the amount received from Das Lagerway Windfarm Ltd. (DLWL) being claimed as advance is income of the assessee for the relevant assessment year or not, in the given facts and circumstances of the case ?
2. For the assessee, Shri K. Ravi, the learned senior chartered accountant argued and for the Revenue, Shri Shaji P. Jacob, the learned Departmental Representative argued,
3. The assossee filed the following paper books and written submissions:
(1) Paper book 1 consisting of pp. 1 to 149. In this paper book, the assessee has filed the details of lease transactions.
(2) Paper book IT with pp. 1 to 127 consisting of details of lease transactions, (3) Paper book 111 in the shape of written submissions where Annexures are provided in regard to lease transactions including copies of lease agreements consisting of pp. 1 to 77.
(4) Paper book IV with pp. 1 to 95 consisting of transactions between the assessee and DLWL.
(5) Paper book consisting of Vol. 1 pp, 1 to 239, Vol. II pp. 243 to 509 and Vol. III pp. 510 to 732 comprising of various case laws.
(6) Written submissions in the shape of paper book named as written submissions from pp. 1 to 41.
4. During the course of hearing, the learned Counsel of the assessee however relied mainly on written submissions i.e. paper book III and paper book IV consisting of Annexures.
5. The learned Departmental Representative has also filed a paper book consisting of pp, 1 to 36 and written submissions.
6. In view of the Hon'ble jurisdictional High Court order dt. 2nd Feb., 2006, this case was taken up for hearing on day-to-day basis and it was heard. The Hon'ble High Court has extended the time for disposal of this appeal by 8 weeks from 2nd Feb., 2006. The Hon'ble High Court has directed the Tribunal and directions are mentioned in para 4 of the order which read as under:
Considering the fact that IREDA is a Government of India undertaking and having its office at New Delhi and it may riot be possible for the petitioner to get all the details within a week's time, it is just and proper that the time fixed for disposal of the appeal by the first respondent--Tribunal should be extended by eight weeks from today. Accordingly, the first respondent is directed to dispose of the appeal preferred by the petitioner within a period of eight weeks from today. No further extension of time will be granted.
7. The first issue is as regards to the claim of depreciation on lease transactions. The facts relating to this issue are that the assessee claimed to have purchased 5000 solar photo volatic lanterns hereinafter called as SPVL from 23rd March, 2001 to 31st March, 2001 from M/s Photo Energy Systems Ltd. hereinafter called as 'PESL' @ Rs. 4,260 per lantern. The assessee claimed to have leased these SPVL, to the below mentioned 6 parties for a period of 5 years at an annual lease rent of Rs. 3,000 each:
S. No. Name & address of lessee Number of
units leased
1. Kizhakethil Agencies, Kizhakethil Complex, Ooty Road, 100
Mr. Private Bus Stand, Porinthalrnanna, Malapuram
District, Korala
2. Sunlino Energy Solutions 3200
l-B-2/28/2 ChikkadapaUy, Hyderabad-- 500020
3. Energy Management Society 50
Pullad Post, Pathanamthitta, Kerala- - -689548
4. Catholic Charities, 1350
PatelBagan, Sundornagar, Jarnshedpur, Bihar -- 832107
5. Bhagalpur Social Service Society 200
Chancery Office Post Box No. 61 Nawab Bagi Colony,
Bhagalpur 812001
6. Solar ' Alternatives, St. Mary's Compound Church, 100
Phulwari Sharif. Patna, Bihar 800505
Total 5000
From the payment details, it is noticed that the money that was received by PESL from the assessee, was remitted back to the assessee, the very next day, In all the instances money paid and received is same. It is also noticed that the money that was received by PESL from IREDA was remitted back to the assessee towards lease rentals.
8. The assessee capitalized these SPVL worth Rs. 2.13 crores during the relevant assessment year and claimed depreciation @ 50 per cent, being used for less than 180 days at Rs. 1.06 crores. The assessee got the loan from IREDA sanctioned vide letter dt. 14th Feb., 2001 and after that the assessee ordered for the purchase of 5000 SPVL @ Rs. 4,260 from PESL, Hyderabad, on 19th March, 2001. Subsequently the assessee entered into lease agreements for these SPVL with the lessees on various dates from 22nd March, 2.001 to 31st March, 2001 against the invoices raised by the PESL on various dates from 24th March, 2001 to 31st March, 2001. The assessee claimed to have taken delivery of SPVL at a godown taken on rent at Hyderabad by PKSL One interesting feature in the purchase of these SPVL is that the employees of PESL wore authorized by the assessee to take delivery of these SPVL and the employees of PESL undertook the marketing of SPVL on lease basis. However, the SPVL were supplied after manufacturing to sub lessees of these 6 lessees after May, 2001. The end user received these SPVL after May, 2001. Even the freight charges of the SPVL for delivery to the end-users were borne by the PESL. The assessee has not made any payment for the purchase of these SPVL in the relevant assessment year. During the financial year 2001-02 relevant to asst. yr. 2002-03, the assessee paid a sum of Rs. 34.51 lakhs as margin money and a sum of Rs. 172.40 lakhs was paid by IRKDA to PESL for the purchase of SPVL. The assessee received lease rentals in advance amounting to Rs. 1,51,18,057 and a further sum of Rs. 1,40,49,304 was received during the financial year 2001-02 and a sum of Rs. 6,22,000 was received during the financial year 2002-03 from the lessees. The amount of Rs. 4,46,753 was declared as outstanding as on 31st March, 2003 The assessee claimed to have received lease rentals from the lessees, but in reality these lease rentals have come from PESL immediately alter the assessee paid the margin money to PESL. On enquiry, the AO found that the payment was made by PESL towards the advance lease rental through account maintained at Dona Bank, Hyderabad. The AO has brought out this fact in the assessment order. It is also noted by the AO that the payment made by the assessee towards the margin money was received back instantaneously as advance lease rentals.
9. The AO made enquiries by issuing summons under Section 131 to the lessees. In some of the cases, summons could not be served as the parties were not available at the given' addresses. Some of the replies received from the remaining persons. The two alleged lessees i.e., Bhagalpur Social Service Society and Solar Alternative have confirmed that they have purchased SPVL from PESL and not from the assessee and they have produced the copies of invoices of PESL towards the purchase of SPVL. Another party, Catholic Charities replied to the summons that they purchased the SPVL only from PESL and payments were made directly to PESL only. From the payment details of various parties, it was noticed by the AO that the payments were made by the various lessees even before the fmalization of lease agreements and placing of orders by the assessee to PESL. The AO has brought out the details, which read as under:
Name Date Amount (Rs.)
Catholic Charities 19-12-2000 3,85,000
Bhagalpur Society 14-2-2001 3,85,000
Sunline [including
sub-lessees (6 parties)] 18-9-2000 to 8-3-2001 50,36,700
Cash 18-9-2000 to 8-3-2001 43,900
--------
Total 58,50,600
------------
10. It is also a fact that the loan by IREDA was disbursed in the month of May, 2001, whereas the lease transactions by way of lease agreements were entered in the end of March, 2001. However, these SPVL were supplied to the end-users only in May, 2001.
11. The AO in view of these facts has narrated various discrepancies in his order at pp. 24 to 27 numbering (i) to (xxii), Even the AO found that the assessoe had failed to produce the 6 lessees or their books of account during the course of assessment proceedings.
12. In view of these facts, the AO held that the lease transactions are sham and accordingly disallowed depreciation. The CIT(A) confirmed the action of the AO. Aggrieved the assessee is before us in second appeal.
13. Before us, the learned Counsel of the assessee, Shri K. Ravi first of all argued that the principles of natural justice are violated reason being that in paras 4 and 5.1 of the assessment order it is recorded that the statement from one Mr. Sharath Saxena, the CEO of PESL was recorded and the same statement was never put to the assessee nor any opportunity was given to cross-examine Shri Sharath Saxena. He argued that reliance placed on this statement for the purpose of making an assessment order should be taken to be in violation of the rules of natural justice and assessment itself should be vitiated. Learned Counsel of the assessee relied on the case law of Hon'ble apex Court in the case of Sukhdev Singh v. Bhagat Ram and in the case of Vasant D. Bhavsar v. Bar Council of India .
14. He argued that it is clearly recorded in assessment order that the lease rentals wore quoted by PESL on behalf of the assessee. It was argued by the learned Counsel of the assessee that further in the assessment order, it is clearly recorded that assets were leased out for a period of 5 years lor a lease rent of Us. 3,000 whereas the assessee has purchased the assets at Rs. 4,260, Further learned Counsel of the assessee argued that the assessee took a business decision to lease out assets i.e. SPVL purchased from PESL since it would get 100 per cent depreciation in two assessment years and further because IREDA has funded the purchase of the assets at a very low interest of 2.5 per cent per annum and the money from IREDA can be rotated. However, it is not clarified by the assessee that the rate of interest is 2.5 per cent because in the assessment older it is shown as 2 per cent. The learned Counsel of the assessee further argued in view of lease agreements entered into among assessee and various parties that once written evidence are available in the form of contract between two contracting parties and subsequently if any party says anything which is contrary to the agreement then the statutory authority is bound by the rule of natural justice to ask those parties to explain their stand with reference to the contract. No such opportunity was provided to the assessee. Further learned Counsel of the assessee has drawn our attention to para 7(v) on p. 7 of the assessment order which clearly recalls as per him the bank statement which was highlighting the transaction and the lessee's personal accounts to corroborate the stand of the assessee. The AC) in order to draw an adverse inference only questions the wisdom of the assessee in receiving a small portion in cash while generally all transactions have happened by cheque. The learned Counsel oi the assessee further reiterated the same arguments regarding three parties namely Catholic Chanties, Solar Alternatives, Bhagalpur Societies which produced bills of purchase of lanterns from PESL and when these facts were put during the course of survey to the managing director, he cannot reply, ft is also stated that the parties have denied the existence of the lease deed. Ho argued that apparently the AO has chosen to extract soil-serving statement from these three parties. The AO in fairness should have confronted these three parties when the lease deeds are available and asked them for their reactions. In view of this, the learned Counsel of the assessee argued that those statements cannot be relied upon. He further argued that it is not sure that the SVPLs said to have been purchased by the lessees and leased out by the assessee are one and the same.
15. In view of this, it is said that, the AO writes in the assessment order that the assessee claimed that 3200 numbers of SVPL were leased out to Sunline Energy Solutions and received money against the same but from the end-user list submitted by IREDA that only 45 SVPL were leased to them. The assessee claimed that Sunline Energy Solutions subleased remaining SVPL to various other parties and the payments were made by the sub-lessees directly to PESI, as a measure of precaution. According to learned Counsel of the assessee this is contrary to what the AO has observed in the last throe lines of p. 2 of the assessment order which reads as under:
Sunline Energy Solutions retained 45 lanterns and subleased the balance lanterns to 23 parties and 192 individual users. In effect the lanterns wore given to 29 nodal agencies and 192 individual users, The learned Counsel of the assessee has also drawn our attention to the following submissions:
(i) With regard to point No. (i) the assessee stated that, due to our critical financial conditions, we were not in a position to have a branch office in Hyderabad. Moreover, it is not financially viable and economically feasible to have cither a branch office or infrastructure for the limited purpose of executing this purchase and lease transaction. Therefore, we requested Photon Energy Systems Ltd. to act on our behalf in these transactions which took place during February, March, 2001 and thereafter. We have taken a godown on lease at Hyderabad to receive and store the materials from Photon Energy Systems Ltd. At our request Photon deployed some of their staff to take care of the godown and they had acted on our instruction. Hence it is clearly evident that the transactions are carried out at Hyderabad by Photon Energy Systems Ltd. on behalf of Marg Constructions Ltd. as representative. This is legally permissible and not vioiative of any law for the time being in force.
(ii) With regard to point No. (ii) the assessee stated the IREDA, the financial institution which financed the project had insisted on proof of transfer of margin money through bank and they had asked us to submit a copy of the bank statement and chartered accountant's certificate authenticating the transfer of money. Hence instead of passing journal entries, money was transferred between the PESJ, and Marg.
(iii) With regard to point No. (iii) the assessee stated that Photon Energy Systems Ltd. had taken the responsibility of marketing the lanterns on behalf of Marg Constructions Ltd. on lease basis. The marketing exercise was started in August, 2000 and PESL started collecting lease rentals in advance. This was done in anticipation of the loan application of Marg being approved by IREDA and the said term-lending institution had been giving impression that it is likely to sanction at any time, Those lease rentals were utilised by PKSL for working capital needs since no margin money was received from Marg. Since advance rentals utilized by PKSL, the margin money received from Marg returned to them later.
(iv) With regard to point No. (iv) the assessee stated that PESL started the marketing activity in August, 2000, in anticipation of IREDA .loan, the prospective lessees had agreed to give lease rentals in advance because they were offered solar lanterns on lease at a lower price than the prevailing market rate at that time. The lessees prepared to wait for deliveries because of lower prices. However, IREDA sanction of loan was delayed and therefore release of purchase order and delivery delayed.
(v) With regard lo point No. (v) the assessee stated that it is submitted that the cash received is only Rs. 3,13,000 and not Rs. 4,99,000. This amount is withdrawn from the bank account of Photon Energy Systems Ltd. on various days and deposited on the same day into the UTI bank account of Marg in Hyderabad and are reflected in the books of both Photon Energy Systems Ltd. and Marg.
(vi) With regard to point No. (vi) the assessee stated that Photon has received the money from lessees on various dates and utilized the money for working capital. The inter-company accounts were reconciled at regular intervals and the parties details obtained for making necessary entries.
(vii) With regard to point No. (vii) the assessee stated that our company is adopting accrual system of accounting and as such we have passed lease rental receivable for every year in advance and the payment was received later as such there is a mismatch between the date of passing the journal entry and receipt of money. We have received the entire money from Photon and not from the lessees and hence treated the excess money as advance rental as per the accounting policies adopted by the company. Therefore, the difference if any in the individual lessees' account will not have any bearing in view of the accounting policy and the reconciliation of individual lessee's account is done at Photon end.
(viii) With regard to point No. (viii) the assessee stated that an agreement contains various clauses which imposes rights and duties of the parties to the contract. As per the lease agreement, the lease amount payable is one of the conditions and other conditions such as maintenance, alter sales service of lanterns, etc. exists, till the currency of the lease. Marg cannot unilaterally terminate the lease for not fulfilling any of the conditions of the lease. Moreover, the format of the lease agreement is prescribed by IRKDA and the lessor had no role to play in changing the terms and conditions of the said lease agreement.
(ix) With regard to point No. (ix) the assessee stated that we have contacted Catholic Charities, Bhagalpur Society and Solar Alternatives and they have informed us that they had inadvertently intimated to you that they have not leased from us. It is now understood that Catholic Charities have now confirmed the lease transaction with Marg Constructions Ltd. to the AO and Bhagalpur Society and Solar Alternatives shall confirm the transaction shortly and their delay in confirmation is on account of Shri P.K. Jose, director, is out of station. The confirmations from thorn are awaited.
(x) With regard to point No. (x) the assessee stated that Marg did not have Andhra Pradesh general sales-tax registration and waybills (form X, issued by Andhra Pradesh Government). To facilitate free movement of goods through sales-tax check posts, at the request of Marg, PKSL had issued their invoices and waybills for transportation of lanterns on behalf of Marg. The lessees had wrongly produced these bills meant for transportation instead ol Marg bills leasing the lanterns.
(xi) With regard to point No. (xi) the assessee stated that the AO in the earlier question stated that the Catholic Charities produced some invoices raised by Marg for the lanterns towards purchase. It may please be noted that first of all it is not a purchase by Catholic Charities from Marg. It is a transaction of lease. This has been specifically mentioned in the said delivery challan which may be taken note of.
(xii) With regard to point No. (xii) the assessee stated that PESL had agreed at the time of accepting the purchase order to procure lease rental of Rs. 3,000 per system for a lease period of 5 years. As per the agreement they have effected payment @ Rs. 3,000 per system. It was further substantiated/ confirmed in the sworn statement recorded in the course of survey by Sharad Saxena. CEQ of PESL that Photon Energy remitted Rs. 1,45,27,850 towards lease rentals.
(xiii) With regard to point No. (xiii) the assessee stated that we had leased 3,200 lanterns to Sunline Energy Solutions and they have retained 45 lanterns for self use and in turn leased out the balance 31515 lanterns to various end-users, We enclose a letter of confirmation with the names and addresses of the parties in this regard received from Sunline Energy Solutions. PESL collected the lease rental as a measure of precaution from the various users. Therefore, it will be seen that the answers have been given for every alleged discrepancy and it would be very clear that the AO is trying to presume a discrepancy while in fact it does not exist. To prove this, a few examples are taken.
16. Further, learned Counsel of the assessee argued that the AO has sent summons to the six lessees and also pointed out that conflicting statements was made by one of the parties namely, Catholic Charities and in para 10.2 of the assessment order, the AO stated that the assessee has not been able to produce the parties to verify the transaction and thus failed to discharge onus cast on it. Me pointed out that assessee has already stated that it will not be possible for them to compel lessees to produce their records. Therefore, confirmation letters must be accepted. The learned Counsel of the assessee stressed that the assessee having taken that stand, was it not the duty of the AO to issue summons under Section 1 31 and compel the attendance' of the lessees ? Why the AO chose not to exercise this power particularly in the context of the assessee specifically stating that it will not be able to compel their attendance ? For this, he relied on the following case laws:
(a) In Food Corporation of India v. Provident Fund Commr. , the Supreme Court has held that it was the obligation of the authority to exercise his powers to enforce the attendance of the witnesses and .enable a party to produce evidence of witness in his report,
(b) In case of Munnalal Murlidhar v. CIT (1971) 79 /TO 540 (All), the Allahabad High Court held that if the AO does not exorcise his power to call the witness, the assessee's version of the fact cannot be disbelieved for that reason.
(c) In Nalhu Ram Prcmchand v. CIT (1963) 491TR 561 (All), the Court held that no inference can be drawn against an assessee merely because he had taken Dasti summons for production of witness. It was the duty of the ITO to enforce the attendance of the witness if his evidence is material, in exercise of his powers under section 131 of the Act r/w order 16, Rule 10 of CPC.
(d) Sadaram Puranchand v. CJT (1937) 51TC 459 (Cal)
(e) Munnalal Murlidhar v. CIT (supra)
(f) S. Velu Palandar v. Dy. CIT (1972) 83ITR 683 (Mad)
(g) Addl CIT v. Radhey Sham Jagdish Prasad .
At last, the learned Counsel of the assessee argued that broadly it might be stated that, assessment order upto para 13.8 is surmises and conjectures of the AO who presumed the transaction must happen in a particular manner and furtherance of the manner in which the AO wanted that these transactions must happen, evidences are called for and since those evidences were not available, the AO in para 13.9 concluded that the transaction is sham with a view to avoid tax. However, the AO only goes to disallow depreciation, therefore, the inevitable conclusion is that the AO is unable to assert with clear and cogent evidence that the transaction is sham and chooses only to disallow the depreciation. The AO should have and must have considered all the consequences of a sham transaction and disregarded the lease income which the AO has chosen not to do. Accordingly learned Counsel of the assessee argued that AO upto para 13.8 has made an attempt to confuse higher authorities and no more. The learned Counsel of the assessee also argued about the ownership and possession. The learned Counsel of the assessee further relied on para from the book of Circular on Evidence 14th Edn. 1993 by Sudipto Sarkar and V.R. Manoharan which reads as under:
Section 91 of the Indian Evidence Act, 1872 lays down that when terms and conditions of the contract, or of a grant, or of any other disposition of property have been set out in writing by agreement of parties and in the case of documents required by law to be in writing, the document is intended to be a record of the transaction and, therefore, no other evidence shall be given to prove the transaction except the document itself.
17. For interpretation of the Contract Act, the learned Counsel of the assessee has taken us to p. 13 of the written submissions, wherein he has mentioned that the result would be the same if the subsequent oral agreement had been regarded as a recession; the guarantor or purchaser would not have boon liable on the original contract because it was rescinded, nor under the new agreement because it was oral. But the distinction between (on the one hand) a rescission followed by a now agreement and (on the other) a variation would have crucial if H had been the guarantor or the purchaser who (had) been suing to assort rights under the original contract. Had the oral agreement been a rescission, he could have sued on the original agreement; this would have remained in force, and the subsequent oral agreement would not have been effective to vary it, though it might have had some effect as a waiver (in the sense of forbearance), or in equity.
18. The learned Counsel of the assessee further discussed the following case law as regards to onus to prove that the lease transaction is sham on the person alleging the same.
(a) Kishmchand Chellearam v. CIT .
(b) Smt. Parma Devi Chowdhaiy v. CIT wherein it was held "In all cases in which a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within the taxing provision". Further at p. 859A it was held that "the burden was on the Department to prove that the money belongs to the assessee by bringing proper evidence on record".
(c) Sumati Dayal v. CIT
(d) Parimisetti Seetharamamma v. CIT
(e) CIT v. Chan & Chati Ltd. (I) Janki Ram Bahadur Ram v. CIT
(g) Sir Shadi Lal Sugar & Genera/ Mills Ltd. & Am. v. CIT
(h) Bhogilal PI. Patel v. CIT (1969) 74 H'R 692 (Bom)
(i) Dihp Kumar Roy v. CIT (1974) 94 m 1 (Bom)
(j) Addl. CIT v. S. Krishnaswamy Roddmr (1978) 115 H'R 505 (Mad)
(k) Maharaja Chmtamam Saran Nath Sah Dco v. CIT : Dr. K. George Thomas v. CIT ; CIT v. Gindhanam Hartmrn Bhagat wherein it was held that burden is on Revenue to prove that the receipt (is) of revenue character.
(1) Bishnu Pnya Choduram AIR 1924 Cal : ILR 50 Cal 907 wherein it was held that where an assessee should deny that he is in receipt of income from a particular source, it is for the ITO to prove that he made the income.
(m) Sovaiam Jokhiram v. CIT AIR 1945 Pat 79 : (1944) 12 ITR 112 (Pat), wherein it was held that where property stands in the name of the assessee's wife, it is for the ITO to prove that she is only the benamidar.
Where, therefore an assessee makes out a ptima facie case, the burden rests on the Department to disprove to avoid it. [R.B.N.J. Naidu Cinema Exhibitor v. CIT AIR 1956 Nag 157 at p. 59]
(n) Ganga Ram Balmakund v. CIT Am 1937 Lah. 721 : (1937) 5 ITR 464 (Lah), wherein it was hold that the IT authorities are abound to prove by "positive evidence" that the accounts are unreliable and their finding cannot be disturbed unless it is altogether capricious and injudicious.
(o) Dhiiajlal v. CIT , wherein it is observed by their Lordships of the. Supreme Court that when a Court of fact acts on material, partly relevant and partly irrelevant and arrives at its finding, such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises, Kalappa Shicldappa Uppar v. Bhima Govind Uppai .
19. The learned Counsel of the assessee also merited the reasons arrived by the AC) for concluding the transactions as sham transactions as under:
(1) That your assessee failed to produce those six parties.
(2) That there are some contradictions in the statements of your assessee.
(3) All the dealings were done by PESL except the receipt of goods by the assessee and there is no written documentary evidence.
(4) Rates in the invoices differ.
(5) Inter-company transactions between PESL and the asssessee are not reconciled.
20. In this, he replied and stated that assessee proved that it is a genuine transaction by submitting the following:
(1) Invoices raised by PESL on assessee for sale of solar lanterns--(refer page Nos. 11-17 of Annexure).
(2) Statement of sales made by PESL during that year--(refer page Nos. 14-23 of paper book 1).
(3) Copies of lease agreements--(refer page Nos. 24-77 of / Annexure).
(4) Detailed summary showing the LR and AWB and Form X for proof of deliveries to each individual lessees (refer page Nos. 18-2 ,3 of Annexure). Copies of bills (refer page Nos. 74-126 of paper book 2).
(5) Details of amount received by PESL as advance lease rentals on behalf of assessee.--(refer page Nos. 8-17 of paper book 2) (6) Copy of Insurance taken by assessee (refer page FQS. 27 of paper book 1).
(7) The logo 'IREDA/KWE/MARG PROJECT No. 1371 engraved on all solar lanterns leased by assessee.
(8) Names and addresses of individual lessees (refer page Nos. 8-17 of paper book 2) (9) Copy of the confirmation letters from major parties with whom the lease transaction has been entered into by the assessee (refer page Nos. 32-36 of paper book 1) (10) Detailed summary showing the number of .sets-sent to individuals lessees--(refer page Nos. 41-149 of paper book 1) (11) Confirmation from the PESL that it has collected the advance lease r from the individual lessees on behalf of your appellant in the sworn staters.
21. In view of these arguments, the learned Counsel of the assessee st the lease transactions entered by the asseasee with the above six r with sub-lessees are genuine transactions and in no way it can be held as sham transactions and accordingly he urged the Bench to allow depreciation on these assets (SVPLs) leased to various lessees.
22. On the other hand the learned Departmental Representative opened his arguments that the PESL is the manufacturer of SVPL and it collected advances from various customers proposing to sell SVPL, At the same lime the assessee was looking for finance from IREDA which offers finance at the rate of 2 per cent per annum. IREDA offers finance only on solar lanterns and wind mills, etc., i.e., energy equipments. The assessee's regular business is that of construction and not that of financing or leasing, The assessee approached PESL to show as if the SVPLs were sold to it and the same can be transferred to the buyers directly by PESL without making anyone realise who was the seller, etc. These SVPLs were delivered by employees of PESL who dealt with the buyers in the normal course as they do in a normal sales transaction. The buyers having received the SVPLs were never interested in knowing who were the owners/sellers/lessees, etc. on paper. The consideration was directly negotiated by PESL with the buyers and collected the same. The learned Departmental Representative further argued, that, that is the only reason why the amount paid by different buyers was different irrespective of what was mentioned in the so-called lease agreement. He argued that the sale took place directly between the PESL and the buyers, i.e., so-called lessees of the assessee,
23. But to enable the assessee to get the benefit of depreciation and to avail long-term finance from IREDA, PESL and the assessee colluded in making a facade of PESL raising invoices on the assessee and the assessee in turn delivering the SVPL to buyers and entering into lease agreements with the buyers and as per the learned Departmental Representative this is only an arrangement and some paper work done by PESL and the assessee to claim depreciation and to get soft loan from IREDA. Learned Departmental Representative further argued that as per the assessment order which is exactly on facts, it is established that the paper work done by the assessee and PESL is not reflecting the true intention of the transactions and they are only paper transactions. The learned Departmental Representative further argued that assessee never produced the lessees for cross-examination in spite of repeated opportunities and the assessee could not produce any correspondence it had with the lessees regarding the payment of advance lease rentals as well as cooperation with the IT Department. Even after making full payments, the lease agreements were not terminated by the lessees. In view of these facts and circumstances of the case, the learned Departmental Representative further argued that the so-called lease agreements executed are prepared by the assessee to suit its own convenience. The assessee never wanted the documents to be examined in detail by putting them to strict test in Die presence of the lessees. Actually the lessees who are none other than the buyers of SVPL from PESL and only the sales transactions of PESL to buyers were extrapolated and routed through the assessee's books to enable the assessee to make a bogus claim of depreciation and obtain soft loans from IREDA. The learned Departmental Representative further relied on the decision of Hon'ble Supreme Court in the case of CIT v. Durga Prasad More 1973 CTR (SC) 500 : (1971) 821TR 540 (SC).
24. As regards to the onus the learned Departmental Representative argued that to claim depreciation primary onus is on the assessee to prove beyond doubt the genuineness of the transactions. The assessee was requested to produce the said parties along with their books of account and bank statements for verification. There was no compliance, even (when) summons under Section 131 were issued to all six lessees at the addresses given by the assessee.
Two lessees were not at the given addresses and the summons returned back. As per the claim of the assessee one party changed the address. The new address was furnished by the assessee only on 15th March, 2004 whereas the assessment was getting barred by limitation on 31st March, 2004. The unique situation is that two parties have confirmed that they have purchased SVPLs only from PESL and not from the assessee. Only one party first stated that they purchased SVPLs from PESL but later on the assessee produced confirmation from this party stating that they procured SVPL from assessee through PEST,,. Specifically assessee was asked to produce the party but (there was) no compliance. The learned Departmental Representative in his written statements stated 14 reasons to meet the assessee's allegations and the reasons stated by the learned Departmental Representative are reproduced as under:
(i) Assessoe claims that PESL acted as its agent in marketing of lanterns by lease, taking delivery of lanterns, its despatch, advance collection of lease rentals, etc. But there is no evidence/written agreement/MoU to this effect.
(ii) The first step in the transaction is assessoe placing order with PESL on 19th March, 2001 Much before that date, how PESL can collect money from end-users as advance lease rent on behalf of assessee.
(iii) When Catholic Charities, Solar Alternatives and Bhagalpur Social Service Society purchased lanterns from PESL (a) Rs. 1,925 where is the necessity for them to enter into lease agreement with assessee & Rs. 3,000 when the purchase cost itself is lesser than that.
(iv) Though the abovementioned parties made payment (c) Rs. 1,925 to PESL, how assessee received lease rent advance @ Rs. 3,000 from PESL on behalf of these parties.
(v) Margin money received by PESL from assessee as well as loan received by PESL from IREDA were returned to assessee immediately (paras 6 and 7 of AO's order) whereas advance lease rental collected by PESL on behalf of assessee were not remitted to the assessee with such eagerness.
(vi) There is no correlation between the lease rental advance received from various parties by PESL and the amount remitted to assessee whereas perfect correlation exists between the remittance back of margin money and loan received by PESL.
(vii) It is seen that PESL issued invoices to the alleged lessees. If it was not sale, why invoices evidencing sale by PESL were issued ?
(viii) In such invoices issued by PESL to the alleged lessees rate of each unit was mentioned at Rs. 1,925 and Rs. 2,000 whereas lease agreements were for Rs. 3,000.
(ix) It is seen that payments were made by the alleged lessees for the rate and price mentioned in the sale bills.
(x) Two parties have confirmed (that) the invoices issued by PESL are for purchase and payments were made against this bill.
(xi) The upfront lease advance for the entire period of 5 years was paid by the so-called lessees much in advance of receipt of the asset which is an unknown practice. Further, such a payment was alleged to assessee who does not have any previous experience in production/marketing of such a commodity. It is to be noted that such advance was made much before entering into the lease agreement which is also uncommon.
(xii) The godown rent deed, lease agreements, receipt of goods at godown, delivery challans to end-users are all signed by employees of PESL on behalf of assessee.
(xiii) PESL collected different sums from each party though the lease rent as per agreement was @ Rs. 3,000. Not a single party paid exactly Rs. 3,000. What is the sanctity of such a lease agreement ? Flow an agent (PESL) can make such arbitrary collections ?
(xiv) PESL gave only Rs. 3,000 per unit to assessee as lease rent advance when it collected much from several parties. How an agent can act like this?
25. Further the learned Departmental Representative on the allegation that sufficient opportunity was not allowed by the 'AO for the cross-examination, first of all he argued that assessee has claimed depreciation and primary onus is on the assessee to prove the transactions beyond doubt by adducing necessary evidence. The learned Departmental Representative further argued that the primary evidence relied on by the AO are books of account of the assessee, various lease agreements as well as copies of invoices issued in favour of assessee which were available in the premises of assessee and were impounded subsequent to the survey in the assessee's premises. The result of enquiry conducted with third parties were put to the assessee in the form of letters dt. 18th Feb., 2004, 3rd March, 2004 and 16th March, 2004 as well as sworn statement recorded from Shri G.R.K. Reddy, managing director of the assessee-company on 22nd Feb., 2004. Further the learned Departmental Representative relied on the decisions of Tribunal Murnbai Bench in the case of O.T.C. Industries Ltd, v. Asslt CIT (1998) 60 TTJ (Mumbai) 308 : (1998) 66 ITD 380 (Mumbai) and on the decision of Supreme Court in the case of C. Vasantial & Co. v. CIT . In view of this, learned Departmental Representative argued that the order of lower authorities be upheld.
26. We have heard the rival submissions and gone through the facts of the case. We have also gone through the precedents relied on by both the parties including the material placed before us and the orders of the lower authorities. PESL is a manufacturer of SVPLs and the assessee got loan sanctioned from IREDA vide letter dt. 14th Feb., 2002 and placed purchase order on PESL for purchase of 5000 SVPLs at the rate of Rs. 4,260 on 19th March, 2001. PESL raised invoices in favour of various lessees during the period 24th March, 2001 to 31st March, 2001 for supply of SVPLs, The assessee entered into lease agreement with the 6 lessees during the same period, i.e., from 23rd March, 2001 to 31st March, 2001 for lease of these SVPLs lor 5 years for a sum of Rs. 3,000 each. PESL raised invoices in the name of six lessees, i.e., (i) Kizhakethil Agencies, Kerala, (ii) Sunline Energy Solutions, Hyderabad, (iii) Energy Management Society, Kerala, (iv) Catholic Charlies, Bihar, (v) Bhagalpur Social Service Society, Bhagalpur, and (vi) Solar Alternatives, Bihar and assessee took delivery of the SVPLs at the godown taken on rent by PESL. It is here pertinent to mention that the employees of PESL wore authorised to take delivery of the SVPLs and even the same employees of PESL did marketing of these SVPLs by way of lease. Ultimately PESL dispatched these SVPLs only after May, 2001. The invoices were raised during the period 24th March, 2001 to 31st March, 2001 by PESL on these six lessees and other sublessees. Even the freight charges were borne by PESL. The lease rentals were also collected by PESL. The assessee offered these lease rentals as income in each of the five years, i.e., l/5th in each year and claimed 100 per cent depreciation on these assets but during the year the assessee claimed 50 per cent as the transaction was after September, 2000. PESL collected advance lease rent from these six lessees proposing to sell SVPLs. The assessee was also looking for finances from IREDA which offers soft loans at the rate of 2 per cent per annum but, the finance is offered only on solar lanterns, i.e., SVPLs and windmills, etc. From the above facts it is clear that the assessee is not in the business of finance or leasing rather is in the business of construction. The assessee only approached PESL to show as if it has sold the SVPLs to the assessee and same was delivered to the buyers directly by PESL. The so-called buyers or lessees do not know that who is the seller or lessor. Even the so-called lessees/buyers (who) have received the SVPLs were never interested in knowing who were owners/scllers/lessors, etc. on paper. The consideration was directly negotiated by PESL with the buyers and collected directly from them, ft is seen that the money received by PESL that IREDA was remitted back to the assessee towards lease rentals as mentioned below:
Payments made by IREDA to PESL Rentals received by 'assessee from PUSI,
Date DDNo. Amount Date DD A/o. Amount
19.5.2001 014810 60,52,575 22.5.2001 224498 9,00,000
22.5.2001 224499 9,00,000
22.5.2001 224500 9,00,000
22.5.2001 224501 9,00,000
22.5.2001 224502 2,47,300
29.6.2001 224612 5,00,000
29.6.2001 224613 5,00,000
30.6.2001 224614 3,50,000
28.6.2001 208257 48,05,259 30.6.2001 224615 9,00,000
30.6.2001 224616 9,00,000
30.6.2001 224617 9,00,000
22.10.2001 224828 2,00,000
23.11.2001 224872 3,00,000
13.11.2001 502970 35,50,350 17.11.2001 971940 17,02,004
Adjustment
made by
IREDA
30.6.2001 towards 15,91,838
dues
From PESL
31.12.2001 ¯ 2,00,605 12.02.2002 Cash 3,00,000
31.3.2002 11 6,68,304 14.02.2002 Cash 99,800
31.3.2002 H 3,68,923 21.02.2002 Cash 1,00,000
Total 1,72,37,884 Financial year 2002-03 1,12,21,104
27. It is further noticed that the money that was received by PESL from the assessee was remitted back to the assessee the very next day and, the money received and paid is the same. The details are as under:
Payments made by assessee to PESL Rentals received by assessee from PESL Date DD No. Amount Date DD No. Amount 17.4.2001 258496 9,14,250 18.4.2001 224429 9,14,250 11.5.2001 259248 4,00,000 12.5.2001 224480 7,59,000 11.5.2001 259248 1,59,000 25.5.2001 224509 4,83,000 11.5.2001 496554 2,00,000 29.5.2001 224520 8,62,500 24.5.2001 591706 4,83,000 28.5.2001 224518 4,31,250 25.5.2001 496587 8,62,500 25.5.2001 260083 4,31,250 Total 34,50,000 Total 34,50,000 It is seen that the payments made by assessee to PESL in the month of April, and May, 2001 and the advance rentals received by assessee from PESL only in April and May. It is also noticed that the money received by PESL from IREDA was remitted back to the assessee towards lease rentals only in the month of May, June and November, 2001 and the same was received by the assessee from PESL as advance rentals received. This clearly shows that the assessee got soft loans from IREDA and the same was utilized for making paper entry to show these SVPLs leased out to these six lessees whereas it is a fact that SVPLs were supplied to these lessees by PESL and not by assessee. When survey was conducted in the business premises of the assessee along with the business premises of PESL at Hyderabad, the managing director of the assessee in his sworn statement admitted that only PESL and their people know about the transactions and he is not aware about these transactions except that they have purchased SVPLs in financial year 2000-01 and leased out to six parties, i.e., lessees. The relevant question and answer No. 8 of the statement recorded on 20th Feb., 2004 is being reproduced from the statement of the managing director."
"Q. You have purchased solar lanterns in the financial year 2000-01 and leased it to six (6) parties, out of this three parties namely, Sunline Energy Solutions, Kizhakethil Agencies and Energy Management Society Kerala, given are not traceable. Letters sent to them by Department have been returned unserved. You are directed to furnish the names, address and contact numbers of the contact person of the abovementioned parties.
A. These lanterns have been purchased from Photan Energies (P) Ltd., Hyderabad and the same have been distributed to the end-users on lease basis. Photan Energies System is regular in touch with the abovementioned parties for servicing of the lanterns and the required information is available with them. We will reiterate with them and we will get the parties and will get the correct address and we will give to you at the earliest.
Further in reply to question No. 11, managing director has particularly replied that he is not aware of the addresses of the nodal agencies including the lessees. The question No. 11 along with reply is reproduced from the statement.
Q. You have leased your assets to the nodal agencies, my question is how you have secured the payment towards lease rentals when you don't know the address of the nodal agencies which are controlled and supervised by Government agencies and IREDA.
A. The lease rentals as per the lease agreement has been received by us in advance and the same is being apportioned every year in our books. The address of three people whom we have leased the lanterns are being collected from M/s Photon Energy Systems Ltd and we undertake to give the latest addresses along with the contact persons and telephone numbers at the earliest.
Even vide question Nos. 18. 19 and 20 it is clearly stated by the managing director that he does not know about the lessee parties or about the correspondence. The relevant question and answer for 18, 19 and 20 are reproduced as under:
Q. Do you have any correspondence from the lessees ?
A. I do not have any correspondence with the lessees. All the correspondences are done by the PESL with the lessees.
Q. Where is the covering letter for the cheque payments ?
A. The covering letters have been misplaced.
Q. Did you contact any of the lessees personally or through your representatives ? Furnish the names of the persons.
A. No. I have not contacted any lessee in person nor through our representatives. Only PESL has contacted the lessees.
In question No. 22 he has admitted that even the sales agreement were signed by PESL. The relevant question No. 22 and answer to the same is reproduced as under:
Q. Who has signed the lease agreement ?
A. I am going through all the correspondence and lease agreements for the first time and I don't know who has signed the lease agreement. I have authorized PESL to sign the lease agreement.
Further vide question Nos. 45, 46, 47 and 48, the Revenue has clarified that the assessee was not aware about the six lease transactions and even these lease rentals and the objection of the assessee that it was not confronted with the result of enquiry with these six lease parties, proves wrong. The relevant question and answer Nos. 46, 47 and 48 are reproduced as under:
Q. Enquiry was conducted with M/s Bhagalpur Social Service Society. They have stated that they have purchased the lanterns from PESL, Hyderabad. In support of their claim, they have produced a copy of the invoice issued by PESL. They have confirmed that no purchase of lease was entered with you. Please go through the reply received from them and also the invoice. What is your explanation ?
A. As I have explained already, entire transaction in this regard was carried out by PESL on our behalf. We have no role in this transaction. I will contact PESL and let you know the details in this regard. I don't have any explanation now for the details furnished by Bhagalpur Social Service to you.
Q. You are requested to go through the reply of Bhagalpur Social Service again. Money by way of DD for Rs. 3.85 lakhs has been paid to PESL towards cost of the lanterns. What is your explanation ?
A. I have to check with PESL and come back to you. I don't have any reply at present.
Q. I am showing you the invoice of PESL towards sale of lanterns 28 numbers @ Rs. 1,925 to Bhagalpur Social Service. On the other hand, you have purchased from PESL @ Rs. 4,260 and leased 200 lanterns to Bhagalpur Social Service @ Rs. 3,000. What is your explanation ?
A. I don't have any reply at present. I will check with PESL and get back to you.
Q. I will show you another reply from Solar Alternatives to whom you have leased 100 lanterns. They have stated that they have purchased these lanterns from PESL and they have made the payment by DD dt. 9th June, 2001 for Rs. 19,500. I will show you the invoice raised by PESL for the sale of 100 numbers of lanterns @ Rs. 1,925 to Solar Alternatives. You are requested to go through the reply and the invoice mention and to give your explanation regarding the same.
A. I don't have any explanation right now. I have to check with PESL and get to back you.
Even from question Nos. 49 and 50 it is clear that the assessee was not aware about the invoices raised and amount received. The relevant questions and answers are reproduced as under:
Q. I'll now show you the invoices raised by Marg Constructions Ltd. and Catholic Charities for the sale of lanterns as received by them is in reply to summons under Section 1 31 directive No. 014/2000-01 dt. 30.th March, 2001 for 300 numbers of lanterns @ Rs. 1,925 for Rs. 5,77,500.
SI. No. Invoice No. Date Qty. of solar Rate Total amount
lanterns (Rs.) (Rs.)
2 019/2000-01 30.03.2001 500 1,925 9,62,500
3 001/2000-01 30.03.2001 400 1,925 7,70,000
How have you recorded the transactions mentioned above in your books especially, in view of the fact that you have leased 1350 lanterns to Catholic Charities.
A. These invoices have not gone from our office nor we have any information, these are also not recorded in our books.
Q, In the invoice No. 019/2000-01, it is stated that 'received on 6th June, 2001'. In the invoice No. 0144/2000-01, it is stated that 'received on 6th May, 2001'. This means that the goods are received only in the month of May, 2001, althpugh the invoices are dt. 30th March, 2001. Do you agree with this ?
A. The invoices have not gone from our office.
Vide question Nos. 53 and 54, the assessee replied that he is not aware about the payment details made by Bhagalpur Charities to PESL on 19th Jan., 2001 and 30th March, 2001. Vide question No. 55, the assessee was put to test whether he is aware about the transaction of money received from Catholic Charities on various dates, he was not aware and the relevant question No. 55 and answer reads as under:
Q. Catholic Charities have stated that payments made to PESL on the various dates. The payments have not been made to Marg Construction.
Dates of Payment Amount (in Rs.)
19.12.2000 3,85,000
25.4.2001 3,85,000
21.5.2001 5,77,000
14.7.2001 9,62,500
19.9.2001 2,88,750
Q. You have claimed that money received by you from Catholic Charities, on various dates through demand drafts. Please explain Catholic Charities should pay twice the number of lanterns A. I don't know.
Vide question Nos. 61 and 62 the assessee clearly admitted that he is unable to produce the correspondence or evidences and relevant questions 61 and 62 along with the answer read as under:
Q. What is the basis with which you say that the receipts from PESL are towards lease rental ?
A. I don't have the details now. There will be so much correspondence which I am not able to produce now.
Q. We are in your office. You are requested to go through your documents and produce the details linking the receipts from PESL to lease rental deposits.
A. I am not able to produce the correspondence.
The Revenue vide question No. 67 put the query to the managing director of the assessee for giving any explanation about refusal to three lessee parties regarding lease transaction with the assessee, the assessee was not able to give any explanation. The relevant question No. 67 along with the answer reads as under:
Q. Out of 6 nodal agencies, 3 are not traceable and the other 3 have denied any transaction with you ? What is your explanation ? They have further stated that they have purchased the lanterns from PESL directly. What is your explanation ?
A. I'll not be able to give any explanation.
28. The assessee was put to every allegations and he was confronted but the assessee could not offer any explanation and even the mode of payment received by the assessee from PESL and payments made by assessee to PESL clearly show that these payments are just paper transactions and the assessee is not aware about these six lessees, as comes out from the above facts.
29. The assessee also has not contested the issue on facts and he has filed written statements which were already before the AO as well as CIT(A). The assessee before us has produced one certificate from Non-Conventional Energy Development Corporation of Andhra Pradesh Ltd., which is dt. 3rd March, 2006 issued by the Dy. General Manager (SE) Fac, who certified that the supply of SVPLs was manufactured by PESL, Hyderabad. Even the assessee has not made any request for admission of additional evidence and even there is no such party to whom the assessee has supplied SVPLs is not coming out of the orders of authorities below and hence the same cannot be admitted.
30. The learned Counsel of the assessee argued that the principles of natural justice have been violated, as no opportunity was provided. It is seen from the statement of managing director of the company recorded during the course of survey on 20th Feb., 2004 that the assessee himself refused that he is not having any explanation, when he was confronted with the discrepancies. It is seen that the assessee could not produce the six parties along with the books of account, bank statements with whom it has entered into lease agreements. Even the addresses supplied in few of the cases were wrong and summons issued by IT Department could not be served. Even the assessee is not aware of the names and addresses of the parties as is evident from the above facts. The AO has narrated 22 discrepancies in his assessment order that, many parties have claimed to have purchased SVPLs from PESL and not from the assessee. One party M/s Catholic Charities confirmed that they have purchased SVPLs from PESL and not from the assessee. Later on at the fag end of conclusion of assessment, the assessee produced confirmation from Catholic Charities that they have taken the asset on lease from the assessee. However, from the annual report of Catholic Charities for asst. yrs. 2001-02 and 2002-03, it seems that they are owner of the asset and not the lessees. As against the claim of the assessee regarding lease rental, charges varied from Rs. 1,900 to 2,300 as against the lease rentals admitted by the assessee at Rs. 3,000. All the transactions are entered by PESL or its employees and the assessee has nothing to do with these transactions. Even the assessee has obtained loan from IREDA on soft rates that was for the purpose of funding the end-users i.e., the tribal areas and to help the tribal people and not for the utilization of assessee for its own working capital. It is seen that the end-users have made full payments of these SVPLs, through the nodal agencies from these six lessees or sub-lessees not even over a period of five years but advance rentals. The assessee's counsel has argued purely on token issues, i.e., burden of proof, natural justice, ownership, interpretation of contract and evidences. Here the assessee has claimed lease transactions and in lieu of these lease transactions claimed depreciation. The primary burden is on the assessee to prove that it has leased these SVPLs only then the burden will shift on the Revenue, Here during the course of survey, the assessee has not offered any explanation regarding these lease transactions and he could not adduce any evidence that these are genuine lease transactions entered by way of lease agreements. The primary burden is on the assessee to prove the transactions only then the burden will shift on the Revenue. The assessee could not prove the lease transactions as genuine. Almost all the parties denied the transactions with the assessee and all these lessees admitted that they have purchased SVPLs directly from the PESL. It is pertinent to note that the decisions relied on by the learned Counsel of the assessee regarding burden or onus being on the Revenue, are relating to the income which means whenever a particular item of receipt is subjected to tax then definitely onus will be on the Revenue to prove that such item is in the nature of income. However, in the case before us, the issue relates to allowance of depreciation and, therefore, the decisions relied on by the learned Counsel of the assessee cannot apply because in case of claim of expenditure and or depreciation the onus always will be on the assessee to prove that it has incurred such expenditure or claim of depreciation is justified.
31. As regards to natural justice the assessee was confronted at the time of survey whatever evidences the Department has discovered/recovered as is evident from the statement of the managing director of the assessee recorded on 20th Feb., 2004 wherein he has shown his inability .to prove these transactions. Extract of the statements are reproduced above.
32.1 In view of the entire spectrum of facts, it is seen that the assessee has already received the advance lease rentals before (he) entered into lease transactions/agreements and adjusted the advance sale consideration against the advance lease rentals. The so-called lease agreements never intended to be implemented and there was no need for such agreement as the money was already received and the buyers received the goods. The entire lease rentals payable over a period of five years were received or adjusted mostly much before the delivery of SVPLs.
32.2 As regards to second part of this issue, i.e., whether the assets were purchased by the assessee before 31st March, 2001 and put to use, the assessee claimed that it is entitled for depreciation as the assets were thoroughly tested and put to use by charging and discharging the batteries at godown before despatch. The assessee has purchased the assets for the so-called lease and these SVPLs were not delivered to the lessees on or before 31st March, 2001. This fact has been established that these SVPLs were despatched after 31st March, 2001. The AO has brought out the complete details regarding test of assets at godown which reads as under:
14.2 The assessee has purchased the assets for lease purpose. The assets will be put to use only if they are delivered to the lessees. In the present case, 5,000 lanterns were not delivered to the lessees on or before 31st March, 2001. In fact none of the lanterns were despatched from the godown on or before 31st March, 2001. This is established by various facts mentioned below:
(a) IREDA has done inspection of lanterns before delivery to the end-users on various dates mentioned below at the godown :
Date of Inspection No. of System Place of Inspection 25/3/2001 1325 Godown, Hyderabad 8/5/2001 1100 Godown, Hyderabad 27/5/2001 2575 Godown, Hyderabad
(b) The way bills, Form X, issued by Andhra Pradesh Government is valid from 1st April, 2001 to 31st March, 2002
(c) From the way bills and lorry receipts submitted by the assessee it is noticed that the goods are transported only after May, 2001 to the various nodal agencies.
14.3 Since the assessee has not despatched the goods to the end-users, the assets have not been put to use before 31st March, 2001. The assessee is hence not entitled for depreciation.
32.3 In view of these facts and circumstances, we fairly feel that the lease transactions entered into by the assessee with the above six lessees through PESL are only paper transactions. This is to claim depreciation hence these transactions are held as sham transactions and nothing else. Even from the above facts, it is gathered that the testing in most of the assets was done in the month of May, 2001 and the asset was not put to use during the relevant assessment year. As we have already held that the transaction is sham, hence, we need not deliberate on this issue. But we agree with the contention of the learned Counsel 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 the assessee has admitted in the returns of income. In view of this, we direct the AO to allow relief on these lease rentals received by the assessee in consequence to lease agreements entered into with six lessees. Accordingly, the AO is directed to exclude the income returned on account of lease rentals. Accordingly, this issue of the assessee's appeal is allowed partly.
33. Coming to the second issue, under dispute is the amount received from Das Lagerway Windfarm Ltd. (DLWL) amounting to Rs. 1,82,92,369 being claimed as advance by the assessee for the relevant assessment year and assessed as income.
34. The brief facts relating to this issue are that the assessee entered into contract with DLWL for installation of windmills in Ananthapur District, Andhra Pradesh. The execution of civil and electrical work was completed in March, 1999 and March, 2000. The assessee received remittances from DLWL during the financial years 1999-2000 and 2000-01 and treated the remittances as advances in its books of account as on 31st March, 2001 and part of remittances were offered as income. As on 31st March, 2000 a sum of Rs. 2,79,00,000 was outstanding as credit. During the relevant assessment year pertaining to financial year 2000-01, the assessee received a sum of Rs. 158 lakhs from DLWL and offered a sum of Rs. 98 lakhs as income. The balance of Rs. 185.9 lakhs was shown as outstanding credit as on 31st March, 2001. The assessee was receiving money on regular basis on the basis of bills raised upto October, 2000. Thereafter the money was received consequent to signing of MoU dt. 11th July, 2001 and 11th April, 2002. Before the AO it was claimed by the assessee that the advances were received but due to dispute the work could not be completed. Hence the money received was shown as liability. The AO after going through the documents placed before him assessed the amount of Rs. 1,85,92,269 as income of the assessee. It is a finding of fact by the AO that the assessee is following accrual basis of accounting and the assessee is recognising the income as per the Accounting Standards issued by the ICAI. Even the assessee vide letter dt. 6th March, 2004 stated that the company is following accrual basis of accounting as recognised by ICAI and guidelines issued as per Accounting Standards. The income is accounted for on the basis of stages of completion of each project. The moment the bills are submitted, the DLWL is making payments and the assessee is recognising the same as income from the very beginning. The AO noticed from the assessee's books of account that during the financial year 2000-01 the assessee has shown credit as advances received as on 31st March, 2001 amounting to Rs. 1,85,92,269. The AO has brought out the details of receipt and income offered in the tabulated chart and the relevant portion in para 15.2 as detailed is being reproduced :
Financial Receipts Payments Income Credit showed as advance
year (Rs. in lacs) (Rs. in lacs) (Rs. in lacs) received as on 31/03
(Rs. in lacs)
1998-99 518.08 12.8 318.00 187.74
1999-2000 699.30 -- 607.35 279.09
2000-01 158.30 153.0 98.31 185.92
2001-02 37.10 86.0 NIL 137.00
2002-03 7.00 -- NIL 144.00
35. It was noticed by the AO that as on 1st April, 2000, the assessee has shown receipt of Rs. 279 lakhs and out of which the assessee has offered a sum of Rs. 98 lakhs as income. It was further noticed by the AO that during financial year 2000-01 relevant to asst. yr. 2001-02 the assessee has received a sum of Rs. 158 lakhs from DLWL on account of execution of civil and electrical work and out of this a sum of Rs. 108 lakhs was paid to M/s Wescare India Ltd., a sister-concern of DLWL, on account of DLWL and a sum of Rs. 45 lakhs was returned back to M/s DLWL. When the AO enquired from the assessee these details, the assessee could not submit any reply. The AO then issued notice under Section 133(6) for calling of information from M/s DLWL. M/s DLWL vide reply dt. 31st March, 2004 stated that no money or material is due from or to Marg Construction Ltd. DLWL further stated that all these payments have been made for the execution of civil and electrical work at Tadeperi, Ananthapar District, Andhra Pradesh for installation of windmills for which the work was completed in two phases, i.e., March, 1999 and March, 2000. It was further stated by DLWL that as per MoUs dt. 11th July, 2001 and 11th April, 2002 the final statement regarding payment of bill have already been made. The AO in view of these facts came to the conclusion that these advances shown by the assessee are nothing but payment received on account of completion of contract work executed by the assessee. The AO made the addition. Aggrieved the assessee preferred appeal before learned CIT (A). Learned CIT(A) confirmed the addition. Aggrieved the assessoe is in appeal before us.
36. Before us learned Counsel of the assessee filed the written submissions and relied on cl. XI of MoU dt. 1st April, 2002. He argued that MoU has not been acted upon and the matter is pending in various Courts and it is evidenced by the letter of advocate and copy of which is enclosed herewith in the paper book. He further argued that as late as 16th Dec., 2003 the notice from Police Department was received with reference to Crime No. 989/03 which is enclosed and in response to that notice, letters were handed over to the sub-inspector of Police, Central Crime Branch, Egrnore, Chennai. He further stated that, in this respect, the FIR has already been lodged on 6th Dec., 2003 and the copy of the same is enclosed. In view of these facts he argued that MoU has not been acted upon. Accordingly, the payment is a liability standing in the name of DLWL as credit.
36.1 It is pertinent to note that learned Counsel of the assessee has not disputed the facts. Only he argued that the matters relating to these payments has been pending with various Courts and he has filed copy of FIR, notice of Police Department to the assessee and letter written from the advocate to the sub-inspector of Police
37. On the other hand the learned Departmental Representative argued that this amount is receipt of contract entered into with DLWL for execution of civil and electrical work and the work was completed in phases by March, 2001 and the assessee received money from DLWL and showed part of it as advance and remaining as income of the year. He argued that as per the claim of the assessee, advances outstanding as on 31st March, 2001 was Rs. 185.92 lakhs as advance received, being an outstanding liability due to dispute in various Courts. In reply to this, he argued that the assessee's contention of receipt of advances is not correct. He argued that as per the evidence the assessee raised a bill after completion of each work and after certification of the same by DLWL they used to receive the payments. Further he argued that as per MoU, dt, 11th July, 2001, the issue involved was that some of the bills raised by the assessee wore riot certified by DLWL and this was settled by payments of Rs. 59.95 lakhs. Further, by another MoU dt. 1st April, 2002 the matter was finally settled and the assessee was paid another Rs. 7 lakhs. Even the explanation from the assessee was called on several occasions vide questionnaire dt. 31st Dec., 2003, 3rd Feb., 2004, 10th March, 2004 and order sheet entry dt. 30th March, 2004. Regarding these payments, the assessee failed to offer any explanation but he only explained that there existed a dispute with DLWL arid advance receipt is a liability. Assessment was made on the basis of books of account of the assessee and MoU dt. 11th July, 2001 and 1st July, 2002, to those the assessee is a party, No external material was used for framing the assessment and assessee cannot allege violation of natural justice or non-granting of opportunity of being heard. Even the assessee was given enough opportunity on various dates. In view of this he argued that this addition made by the AO has rightly been confirmed by learned CIT(A).
38. We have heard both the sides and gone through the facts of the case. As regards to calculation of figures are concerned and the facts of the case are concerned neither the assessee nor the Departmental Representative has disputed, it is an admitted fact that the assessee received a sum of Rs. 279 lakhs and shown as credit received as advance as on 31st March, 2000. Similarly the assessee has also shown credit of Rs. 185.92 lakhs shown as advance received in its books as on 31st March, 2001. The assessee's contention in this regard is that this is a disputed amount and it is a liability. The assessee has produced a copy of letter dt. 26th Feb., 2004 written by the advocate to the sub-inspector of Police, City Crime Branch, Egmore, Chennai where he has referred Crime No. 989/03 and OS No. 595/01. Further the assessee has filed a copy of notice under ss. 160 arid 91 Cr.PC by sub-inspector of Police to Shri G.R.K. Reddy of M/s Marg Constructions Ltd. Further a copy of FIR dt. 8th Dec., 2003 is filed, These documents are filed in assessee's paper book, i.e., written submissions, I at pp. 38 to 41. It is a fact that the assessee is a contractor executing civil and contract work for DLWL at Tadaperi in Ananthapur District, Andhra Pradesh for installation of wind mills. The civil and electrical work was completed in March, 1999 and March, 2000. Other related work, i.e., sub-stations, etc. were carried out during the period March, 2000 and March, 2001. The assessee received the payments against the bills raised for various orders and shown part as advance in its books and offered a part as income. As regards to the facts and figures are concerned neither of the parties has disputed. The assessee was receiving payments on regular basis on the basis of bills raised and a part of the said amount was consistently shown as advance. The assessee has also received money consequent to signing of MoU dt. 11th July, 2001 and 1st April, 2002 as per the terms and conditions contained therein. We have gone through these two MoUs. The learned Counsel of the assessee has referred to Clause 9 of MoU dt. 1st April, 2002 which reads as under:
As agreed by both the parties in MoU, dt. 11th July, 2001 the party of the second part have already submitted the MoU in the Courts where cases are filed by party of the second part and withdrawn all the cases and whereas the party of the first part so far not withdrawn the cases. The party of the first part hereby agreed to withdraw all the cases on (or) before 1st April, 2002 and produce the necessary papers as proof from the relevant authorities, to enable the part of the second party to effect the full and final settlement of Rs. 7,00,000 (Rupees seven lakhs only) vide Standard Chartered Grindlays Bank, Hyd Branch, Cheque No. 146753, dt. 1st April, 2002. Further upon signing of this MoU and subsequent to honouring of the commitments mentioned above and clearance of payments all the transactions done before between both the parties become squared up and all liabilities stand cleared on both the parties.
As per the MoU to which both the parties, i.e., the assessee as well as DLWL are signatory. By this MoU 1st April, 2002 vide Clauses 10, 11 and 12 it is admitted that they have finally settled the matter regarding payment of money and material due from either of the parties. The relevant paras 10, 11 and 12 of the MoU dt. 1st April, 2002 read as under:
The party of the first part hereby consciously withdraws all letters alleging the party of the second part as having removed materials illegally.
The party of the first part also acknowledges Rs. 7,00,000 (Rupees seven lakhs only) is towards full and final settlement, and that no money or materials are due from party of the second part.
The party of the first part hereby undertakes to indemnify and keep indemnified the party of the second part against all or any claims that may arise in respect of any statutory dues, wages payable to workers, any amount that may be payable to suppliers, sub-contractors or any of their dues in connection with the work at Pulturu/Tadipatri site, Anandapur District, Andhra Pradesh.
Before that the assessee has also entered into an MoU dt. 11th July, 2001 and the assessee has settled the payment of Rs. 59.95 lakhs as per the schedule given in that MoU and relevant part of the schedule reads as under:
Now this MoU clearly states that upon signing of this agreement, the same will be submitted in the Courts where cases are filed by and on behalf both the parties and a compromise memo will be filed in the appropriate Courts by both the parties. Further, upon signing of this MoU and subsequent to honouring of the commitments mentioned above and clearance of payments on the said due dates all the transactions done before between both the parties become squared up and all liabilities stand cleared on both the parties.
The assessee as well as DLWL agreed in full and final settlement on account of these transactions. In view of the MoU dt. 1st April, 2002, it becomes clear that the assessee has completed the work and nothing is due from the assessee and there is no dispute on this count, Learned Counsel of the assessee has referred to the police complaints and we have gone through the FIR which clearly shows that this dispute in Crime No. 989/03 registered with City Crime Branch, Team I, Egmore, Chennai, and the relevant FIR in Crime No. 989/03 is only dispute regarding the purchase of flat between the managing director of Marg Construction Ltd. Shri G.R.K. Reddy and Shri V.R. Ragunathan of M/s Wescare India Ltd. The relevant part of the FIR is being reproduced:
I am a chairman and managing director in Marg Construction Ltd. 501, Apex Chambers, 20, Sir Thiyagaraya Road, Chennai-600 017, a well known corporate in wind energy sector. The accused is well known to me and approached and informed that he is developing a property situated at 57/2B, East Coast Road, Thiruvanmiyur, Chennai, and it is almost in completing stage and insisted me to purchase two flats. The said Mr. G.R.K. Reddy also informed that the construction of the building will be over within two months. I was interested in purchasing two flats situated at eighth floor known as Sri Sai Sabhodaya in block front and approached the accused and he agreed to sell the flat at the rate of Rs. 1,250 per sq. ft. The total consideration comes to Rs. 68,75,000 (Rupees sixty eight lakhs seventy five thousand only). Believing the words of the accused Mr. G.R.K. Reddy I agreed to purchase flats admeasuring super built area of 2700 sq. ft. and 2500 sq. ft., respectively. Then he asked me to sign in certain agreements for the construction of flats, promised and made me believe within two months the flats would be handed over, i.e., in the month of March, 2000 and obtained from me Rs. 68,75,000 (Rupees sixty eight lakhs seventy five thousand only) between 5th April, 2000 and 31st Dec., 2000 both by the way of cheque and cash and then totally absconded from the same. 1 was looking for him at different places and making enquiries for his whereabouts and he could not be located. In the meanwhile, I have to back the loan borrowed from LIG and 11DFC and he had caused construction of the flats at 57/213, Kast Coast Road, Thiruvanmiyur, Chermai, in unfinished hapha/ard manner. Mr. G.R.K. Reddy remained elusive and avoid his presence and could not be located, lie had cheated me by false promises and pure intention of grabbing huge money from me. Today I happened to locate him and lodging this complaint.
39. It is seen from the above FIR that the dispute is only regarding purchase of flat and not regarding the payments of contract. The assossee could not prove his claim by any evidence that the Court cases are pending on account of this payment which is an outstanding liability. In view of the above facts and circumstances, we fairly feel that, these payments received by the assessee shown as outstanding on account of completion of contract, are contract receipts assessable to tax. Accordingly, the AO has rightly treated this as income and the same has rightly been confirmed by learned CIT(A). Accordingly, this issue of the appeal is dismissed.
40. In the result, the first issue of the assessee's appeal is partly allowed and the second issue of the assessee's appeal is dismissed.