Madras High Court
Newdeal Finance & Investment Ltd. vs Deputy Commissioner Of Income Tax on 10 September, 1999
Equivalent citations: [2001]74ITD469(MAD)
ORDER
N. Bharathvaja Sankar, A.M. This is an appeal preferred by the assessee, M/s. Newdeal Finance and Investment Ltd., Chennai for the assessment year 1995-96 against the appellate order dated 2-1-1999 of the Commissioner (Appeals)-X, Chennai-34.
2. The assessee-company had raised 4 grounds of appeal relating to -
(i) disallowance of claim of bad debts in a sum of Rs. 5,31,097,
(ii) disallowance of claim of depreciation at 100 per cent in a sum of Rs. 75,00,100,
(iii) disallowance of T.D.S. credit of Rs. 5,45,031 and
(iv) levy of interest under sections 234B and 234C in sums of Rs. 20,60,496 and Rs. 1,84,656 respectively.
3. Out of the above four grounds, at the time of hearing, the assessee's learned counsel informed the court that the assessee-company was not pressing the ground relating to disallowance of T.D.S. credit of Rs. 5,45,031, as rectification order was passed by the lower authorities in this regard. Hence this ground of appeal is dismissed as not pressed for.
4. Let us take up the ground relating to disallowance of bad debts. Briefly stated, the facts of the case are that while processing the assessment of the assessee-company under section 143(3) of the Income Tax Act, 1961, the assessing officer noticed that the assessee had claimed a sum of Rs. 5,31,097 as bad debts. The assessing officer found that the assessee-company had leased certain assets to M/s. Narang Industries Ltd. of New Delhi. After certain initial payment of lease amount, they were not paying the lease amount to the assessee-company. The assessee's correspondence did not produce any result. Therefore, the assessee-company had filed a legal notice and a petition for winding-up under sections 434, 433 and 439 of the Companies Act, 1956 in the Delhi High Court. On these facts available on records, the assessing officer addressed a letter to M/s. Narang Industries Ltd. for which the said company replied that though there was some delay in making the lease instalments, it could not be said that it was bad debt. The company had no intention of stopping the payment to the assessee. The assessing officer noticed that the said company, viz., M/s. Narang Industries Ltd. was a live company and recovering the lease amount was not difficult. Hence the assessing officer in view of the letter of M /s. Narang Industries Ltd. and the fact that this was a live company, held that the debt had not become bad and hence disallowed the claim of the assessee as bad debt in a sum of Rs. 5,31,097.
5. The assessee was aggrieved and moved the matter in appeal before the first appellate authority who also endorsed the view of the assessing officer for the same reasons recorded by the assessing officer and confirmed the disallowance. Still aggrieved, the assessee has preferred this second appeal before this Tribunal on this issue.
6. The learned counsel for the assessee submitted that the amount claimed as bad debt was on account of lease rentals which had been outstanding, from the lessee M/s. Narang Industries Ltd. for a considerable period of time, and this had been confirmed by the lessee. He further submitted that the amount receivable from the lessee, viz. M/s. Narang Industries Ltd. was in the ordinary course of business carried on by the appellant and had been taken into account in computing the income of the appellant in an earlier previous year. The appellant had not only initiated legal proceedings against the lessee under section 434 of the Companies Act for winding-up of their company as it was unable to pay its debt, but had also undertaken steps vigorously to recover the said amounts. It was also submitted that in the subsequent years, when certain amounts had been recovered from the lessee, the same had been offered for tax in the year of recovery.
7. On the other hand, the learned Departmental Representative strongly supported the orders of the authorities below and contended that no interference was warranted in this regard.
8. We have heard the rival submissions and considered the facts and material on record. According to clause (vii) of sub-section (1) of section 36, a deduction shall be allowed in respect of any bad debt which is written off as irrecoverable in the accounts of the assessee in the relevant previous year. This is of course subject to the condition of section 36(2), i.e., the debt must have been taken into account in computing the income of the assessee. For qualifying as deduction under section 36(1)(vii), the same must have become irrecoverable. Section 36(1)(iii) was amended by the Direct Taxes Laws (Amendment) Act, 1987 with effect from 1-4-1989. Before amendment, ie., upto 31-3-1989, the sub-section read as follows :-
"subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year".
whereas after the amendment, the sub-clause (vii) of sub-section (1) of section 36 reads as follows :-
"subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year".
A simple comparison of sub-clause (vii) as it existed before amendment and as it exists today would clearly show that the phrase "which is established to have become a bad debt in the previous year" is conspicuously absent in the post-amended sub-clause. This would clearly show that it is not for the assessee now, i.e., after the amendment of the sub-clause with effect from 1-4-1989, to establish that the debt had become bad in the previous year. On the other hand, if it has been written off as irrecoverable in the accounts of the assessee for the previous year, it will suffice for claiming it as bad debt, as per the post-amended clause. In such situation, now we have to consider whether the assessee itself or the assessing officer who is the right person to decide the writing off of the debt as bad in the accounts of the relevant previous year. In our considered opinion and also according to various courts, the best judge in deciding a matter on the commercial aspects of the business is the assessee itself and not the assessing officer. It appears, the assessee was satisfied that the debt had become bad and hence it had passed the necessary entry for writing off the debt as bad in the profit and loss account. Even before the amendment, the Hon'ble Madras High Court in the case of Devi Films Ltd. v. CIT (1963) 49 ITR 874 (Mad) observed that while the onus of establishing that the write off of the alleged debt is proper and permissible is undoubtedly on the assessee, the department cannot insist on demonstrative proof which is quite infallible. When such is the situation, for writing off of a debt in the books of account as bad debt, after the post-amendment period, the assessee can never be called upon to prove that the debt had become bad. In this case the assessee had taken into account the said sum in computing the income of the assessee in the earlier years and in the relevant previous year the assessee-company felt that it had become bad and hence had written off in its accounts as bad debt. As already observed by us, it is for the assessee to decide whether the debt has become bad or not and the assessing officer can never insist on production of demonstrative and infallible proof that the debt had become bad. Hence we are very much inclined to set aside the order of the appellate authority in this regard and allow the claim of the assessee.
9. Let us now turn to the ground relating to disallowance of the claim of depreciation in a sum of Rs. 75,00,100. Briefly stated, the facts of the case are that the assessee had leased electrical meters used by various customers of Rajasthan State Electricity Board. These meters were fixed in the residences as well as in the industrial places and were owned by the Rajasthan State Electricity Board. This was formally sold to the assessee and the assessee in turn leased out these items back to the Rajasthan State Electricity Board. Each item of these meters being less than Rs. 5,000 in value, the assessee had claimed 100 per cent value as depreciation. The total claim was Rs. 75,00,100. This is one of the deals known as sale and lease back arrangement for financial purposes. The assessing officer while framing the assessment under section 143(3) of the Income Tax Act, observed that this agreement to sell these meters to the assessee was ab initio void and there was no intention to sell the meters to the assessee. Thus, according to the assessing officer the assessee did not get the title over the meters involved. According to him, the essential condition of allowing depreciation was that the assessee shall own the property and shall utilise for its business. In this case no assets were acquired from anybody and no delivery of the same was done and the assessee has not in any way utilised the same for its business. It only helped the assessee to take these assets as a security at best. According to the assessing officer, the sale to the assessee by, a fake one inasmuch as the normal ingredients of sale were not there, i.e., offer and acceptance of sale, inspection of the items, pricing of the items and passing of the sale value. Hence the assessing officer felt that the depreciation could not be allowed in the hands of the assessee. Accordingly, he disallowed the claim of the assessee in a sum of Rs. 75,00,100.
10. The assessee was aggrieved and moved the matter in appeal before the Commissioner (Appeals). The first appellate authority after hearing the assessee disallowed the claim of the assessee by confirming the order of the assessing officer for the following reasons :-
(i) The assets under reference (9945 numbers of old 3 phase whole current meters) were owned by the Rajasthan State Electricity Board and already fixed by the Electricity Board in the premises of the customers in Kota area of Rajasthan. The same were stated to have been purchased by the appellant and leased back. This involved no physical delivery or possession. The invoice cum delivery challan dated 30-3-1995 is only a formality.
(ii) A correspondence dated 19-6-1998 from the Rajasthan State Electricity Board to the appellant (No. RSEB/FA & COA/L&F/415 dated 19-6-1998) shows that the meters had been purchased by the Rajastlian State Electricity Board from different manufacturers on various dates and used for installation at various sites. The appellant entered into the transaction without insisting for the exact specifications of the items, ie., what was the quality of the items, who manufactured the same and when etc. This does not happen in genuine transaction of purchase /sale.
(iii) According to the appellant, the meters were valued at Rs. 75,00,100 as per a report of M/s. M. Chowdhary & Associates, New Delhi and the appellant paid consideration on this, basis. The report of the valuer does not contain any basis. Only a general observation has been made by the valuer, reading as follows :-
"I ascertain the fair market value of the plant & machinery assets. This is done after taking into account technical obsolence and depreciation of the plant and machinery assets. Certain empirical formulae are used to compute the fair market value of the plant and machinery assets."
(iv) The appellant was requested to furnish the basis of valuation. A letter dated 14-12-1998 has been submitted from the valuer. The valuer's reply is that he used certain specific formulae in the valuation, but the details are now not available, the valuation having been done in 1995.
(v) The comments of the valuer, both in his valuation report and in his subsequent reply are ambiguous. This would only indicate that even the valuation of the impugned assets, have been made without basis. Such valuation could have never formed the basis of a genuine transaction of purchase or sale.
(vi) A consideration of the above facts makes it amply clear that no real purchase or sales took place between the appellant and the Rajasthan State Electricity Board. The appellant actually advanced the sum of Rs. 75,00,100 to Rajasthan State Electricity Board and received the compensation in the form of lease rentals. The agreement between the Rajasthan State Electricity Board and the appellant was entered into only to give the financing transaction a colour of purchase and sale, by which the appellant would get additional benefit in the form of full depreciation. This is a colourable device for availing undue benefits under the Income Tax Act. It cannot be held that the appellant actually purchased the impugned assets. It cannot be equally held that the appellant actually owned the assets. Thus the appellant will not be entitled for depreciation on the assets.
11. Thus it can be seen that the first appellate authority also has confirmed the order of the assessing officer in this regard. The assessee is still aggrieved and is on second appeal before this Tribunal for adjudication on this issue.
12. The learned counsel for the assessee submitted that the learned Commissioner (Appeals) dismissed the appeal on grounds that as the assets were purchased from and leased back to the Rajasthan State Electricity Board, it involved no physical delivery and that the invoice cum delivery challan dated 30-3-1995 was only a formality. He submitted that the contention of the learned Commissioner (Appeals) was that the appellant entered into the transaction without insisting on the exact specification of the items and hence it was not a genuine transaction of purchase and sale. He contended that the learned Commissioner (Appeals) failed to take into consideration the valuation report of the valuer, and presumed that the appellant had entered into the transaction to only avail the benefit of depreciation. He contended that the Commissioner (Appeals) was not justified in stating that no real purchase or sale had taken place between the appellant and the Rajasthan State Electricity Board as the appellant had time and again furnished all necessary papers relating to the same whenever requested for. The learned counsel for the assessee contended that the Rajasthan State Electricity Board, a State Government Organization, through public announcements in leading national newspapers advertised their intention to sell the assets under reference and the appellant responding to such advertisement had purchased the assets in utmost good faith. The learned Commissioner (Appeals) was not justified in stating that it was a device for availing undue benefits under the Income Tax Act as the appellant could not have envisaged that a State Government Organisation would lure an unsuspecting assessee to enter into any fraudulent transactions and that such premise would tantamount to casting aspersions on the credibility of a government organisation and accusing the State Government to be the perpetrator of a fraud, which would be unjust and unfair.
13. The following materials were submitted before the lower authorities :-
1 . lnvoice-cum-delivery challan for purchase of the above assets.
2. Lease agreement.
3. Valuation report provided by the registered valuer.
4. Certificate from Rajasthan State Electricity Board confirming the lease transaction.
5. Installation certificate.
6. No depreciation claim certificate from Rajasthan State Electricity Board.
7. Relevant notification of the Government of Rajasthan in the Gazette in connection with the related sales-tax issues, i.e., exempting the transaction from sales-tax.
14. It was further submitted that the agreement with the Rajasthan State Electricity Board, which is a State Government concern, should not be considered as void, since the same would mean questioning the bona fide of the State Government by the income-tax department. It was further pleaded that the assessing officer was not justified in concluding that there was no utilisation, since the appellant used the assets in its leasing business. In this connection reliance has been placed in the decision of the Madras Bench of the Tribunal in the case of Shriram Investments Ltd. v. Assistant CIT (1996) 59 ITD 570 (Mad-Trib). It was also submitted that depreciation was allowable in respect of the transaction of purchase from and lease back to the same party in the light of the decision of the Tribunal in the case of Oriental Leasing Co. v. Deputy CIT (1996) 55 TTJ (Del-Trib) 294.
15. The learned counsel for the assessee also relied on the decision of the Apex Court in the case of CIT v. Shaan Finance (P) Ltd. (2) First Leasing Co. of India Ltd. (1998) 2 DTC 628 (SC) : (1998) 231 ITR 308 (SC) wherein it was held that:
"Where the business of the assessee consists of hiring out machinery and/or where the income derived by the assessee from the hiring of such machinery is business income, the assessee must be considered as having used the machinery for the purpose of its business.
xx xx xx Therefore, a leasing or finance company, which owns machinery and leases it to third parties who use the machinery for manufacture of articles or things as specified in section 32A(2)(b)(iii), is entitled to investment allowance in respect of such machinery under section 32A", Relying on the above decision of the Apex Court, the learned counsel for the assessee contended that the leased assets should be construed as assets owned by the assessee and once investment allowance is allowable to the assessee on leased assets there cannot be any bar for allowing depreciation on the leased assets.
16. The assessee also placed on record a small paper-book consisting of the following :-
1 . Lease agreement.
2. Invoice cum delivery challan.
3. Valuation report.
4. Certificate from RSEB confirming the lease.
5. Installation certificate.
6. No depreciation claim certificate from RSEB.
7. Sale deed.
8. Notification by Rajasthan State Government in the Gazette in connection with the related sales-tax Issues.
9. Letter requesting for disbursement from RSEB.
10. RSEB's letter to State Bank of Bikaner & Jaipur alongwith annexure confirming RSEB's transaction with new deal.
11. Letter from RSEB regarding insurance of leased assets.
12. Letter from RSEB dated 19-6-1998 once again confirming the lease transaction.
13. Specimen of advertisement issued by RSEB (latest) in this regard, and it was stated that the same were placed before the authorities below.
17. On the other hand, the learned Departmental Representative strongly supported the order of the Commissioner (Appeals) and that of the assessing officer and contended that the transaction was a sham transaction and it was clearly a colourable device as observed by the Commissioner (Appeals). He vehemently, contended that no interference was warranted in this regard to the order of the Commissioner (Appeals).
18. We have heard the rival submissions and perused the facts and materials on record including the small compilation filed by the assessee's counsel and the decisions relied upon by him. In view of the insertion of Explanation 4A to section 43(1), which deals with the actual cost of the transferred assets in respect of leased assets, it is as clear as crystal that the concept of sale and lease back transactions are recognised ones and not unknown to the Income Tax Act. In such situations it is wrong to consider the agreement between the Rajasthan State Electricity Board and the appellant as the one entered into only to give the financing transaction a colour of purchase and sale by which the assessee would get additional benefit in the form of full depreciation. From the perusal of the orders of the learned first appellate authority it transpires that he confined the disallowance made by the assessing officer mainly because the transactions between the assessee and the Rajasthan State Electricity Board involved no physical delivery or possession and that the invoice cum-delivery challan was only a formality. Also, the Commissioner (Appeals) was much worried about the fact that the appellant entered into the transaction without insisting on the exact specification of the items, though the appellant relied on the valuation report of an independent valuer. He also had observed that the appellant cannot be held to be the owner of the assets. More surprising is that the lower authorities considered this transaction as a colourable device for availing undue benefits under the Income Tax Act, although the transactions were with a State Government undertaking, namely the Rajasthan State Electricity Board, particularly in response to a public advertisement which appeared in the leading news-papers. We are now living in "Internet world' and many transactions including the bank transactions, shares and securities transactions etc. are all done through Internet even without the usage of the basic documents such as cheques, drafts and share scripts. When the world has so advanced, it is a wonder that the Commissioner (Appeals) is insisting for physical delivery of the goods to confirm a purchase in 'sale and lease bank' transaction. In our considered opinion it is only for the assessee and not for the Income Tax authorities to decide whether to enter into any transaction without insisting on the exact specification of the items or not. In fact, by avoiding the physical delivery of meters which had already been installed in various residences and industrial places, to the appellant by the Rajastban State Electricity Board, the appellant company had not only avoided unnecessary expenditure for removing and re-fixing of the meters but also had helped the consumers by providing uninterrupted supply of power, because the consumers cannot use the power without there being a meter of the Electricity Board. In our considered opinion, the assessee by not insisting for physical delivery of the goods and by accepting the valuer's report had in fact acted more sensibly to avoid hardships to the consumers and to avert wasteful national expenditure. By this act of the assessee, the Government of Rajasthan had also been saved from loss of revenue by way of power charges for the intervening period of removing and refixing the meters at respective locations. Hence we do not agree with the authorities below that the transaction is not genuine due to the absence of physical movement of the assets.
19. According to the decision of the Apex Court in First Leasing Co. of India Ltd.'s case (supra), as had been already extracted elsewhere in this order, the assessee, the leasing company is to be considered as the owner of the leased assets and once the assessee is the owner of the assets, it is eligible for depreciation. In this case each of the meters was costing less than Rs. 5,000 and hence the assessee had claimed 100 per cent depreciation on each of the meters as provided in the depreciation schedule to the Income Tax Rules. We do not find any illegality in this claim of the assessee because once the assessee is to be considered as the owner of the assets, the assessee-company is eligible for the allowances under the Income Tax Act, namely depreciation according to the depreciation schedule incorporated to the Income Tax Rules. Once the assessee had claimed depreciation so long as the same is according to the depreciation schedule under the Income Tax Rules, the same is to be allowed as we have already held that the assessee is the owner of the assets and is eligible for depreciation on the lines of the decision of the Apex Court. In the light of the above discussions, we are inclined to allow the claim of the assessee as regards depreciation in a sum of Rs. 75,00,100.
20. Let us now advert to the ground relating to levy of interest under sections 234B and 234C of the Income Tax Act. This is only consequential in nature and we direct the assessing officer to give consequential effect, while giving effect to our order in respect of the other grounds, as decided above.
21. In the result, the appeal filed by the assessee is partly allowed.