Income Tax Appellate Tribunal - Delhi
Deputy Cit vs John Tinson & Co. (P) Ltd. on 2 August, 2004
Equivalent citations: [2005]1SOT47(DELHI)
ORDER
S.K. Yadav, J.M. These appeals are preferred by the revenue against the orders of the CIT (A) passed in different assessment years. Since common issues are involved in these appeals, these were heard together and are being disposed of, for the sake of convenience, by this single-consolidated order.
2. We have heard the rival submissions and carefully perused the orders of the authorities below and documents placed on record. Since all appeals are based upon the facts and findings of the assessment order pertaining to the assessment year 1992-93, we feel it proper to adjudicate the appeal first for the assessment year 1992-93 vide I.T. Appeal No. 4660 (Del) of 1992. In this appeal, the revenue has assailed the order of the CIT (A) on various grounds, which are as under :-
1. The learned CIT (A) erred in holding that the assessee's income was to be assessed as business income and not income from other sources without properly appreciating the material on record. He also ignored the fact that assessee's cases for assessment years 1988-89 to 1991-92 have already been reopened under section 147 by the assessing officer;
2. The learned CIT (A) erred in allowing depreciation on used gas cylinders which was rightly denied by the assessing officer by invoking the Explanation (3) to section 43(1) of the Act;
3. On the facts and circumstances of the case, the CIT (A) erred in allowing the claim of irrecoverable rent and directing the assessing afficer to tax the amount of rent when realized as per section 25-A of the Income Tax Act ignoring the fact that the rent was realized and deposited in the court as the assessee had refused to accept the rent;
4. On the facts and circumstances of the case, the CIT (A) erred in allowing business expenses of Rs. 3,68,374 by holding that the assessee's income was assessable under the head income from business."
3. Ground No. 1, relating to the re-opening of the assessment, has been wrongly taken by the revenue in this appeal as it is not a case of the reopened assessment. We, therefore, reject this ground being not arising out of the order of the CIT (A).
4. Ground No. 2 is the main ground of appeal and the sole bone of contention in the entire appeal relates to the disallowance of depreciation on gas cylinders and on this issue after giving a thoughtful consideration to the rival submissions and from a perusal of the record, we find that the assessee has claimed the lease rental income from the gas cylinders besides income derived from the house property. Having noticed that the assessee was not engaged in the regular business of leasing out the cylinders the Income Tax Officer treated the leased rental income as income from other sources, but while dealing with a question of depreciation, the assessing officer has examined the purchase agreements and the other facts of the case and he noticed that the assessee company has shown a sale of 500 used gas cylinders to M/s. Uttam Air Products Pvt. Ltd. for a consideration of Rs. 50,000 only whereas these cylinders were purchased by the assessee from M/s. Gopala Gas Pvt. Ltd. for a sum of Rs. 7,50,000. The assessing officer has also observed that during the impugned assessment year the assessee company purchased 125 gas cylinders from M/s. Pratap Steel Rolling Mills Ltd. for a consideration of Rs. 5,15,625. About the purchase price of these cylinders the assessing officer asked the assessee to justify the rate differences in the sales and purchase prices of these gas cylinders as it had purchased the cylinders at the rate of Rs. 4,125 each from M/s. Pratap Rolling Mills and later on it sold the same gas cylinders for Rs. 100 each. The lease agreements and the purchase bills were placed before the assessing officer in order to prove the genuineness of the cost of the cylinders and also in support of his claim of hundred per cent depreciation on these cylinders. Being not convinced with the explanations of the assessee, the assessing officer invoked the provisions of section 43(1) Explanation (3) of the Income Tax Act, 1961 (hereinafter referred to as the Act) and estimated the cost of cylinders at NIL and disallowed the depreciation on these cylinders. Against the disallowance the assessee preferred an appeal before the CIT (A) and the CIT (A) being convinced with the explanations of the assessee directed the assessing officer to allow the hundred per cent depreciation over the cylinders.
5. Now the revenue has preferred an appeal before the Tribunal and during the course of hearing invited our attention to the lease agreements with the submission that it is not a case of ordinary lease of any machinery/equipments because the assessee has recovered the cost of the equipment along with interest within a lease period of three years. After the end of the lease, equipments were also finally sold to the lessee against a nominal amount. Though there was a clause of renewal of lease, but in none of these cases the lease was renewed. If the lease is examined properly and the transactions are minutely viewed, one would find that these are a mere financial arrangements and not a grant of lease of the gas cylinders. The learned Departmental Representative further contended that unfortunately the assessing officer has not examined this aspect and has invoked the provisions of section 41(1) of the Act. Once it is proved that the gas cylinders were never leased out to the seller, the assessee would not be entitled for the depreciation thereon. He further invited our attention to a chart showing the details of lease rental credited to the P&L account with the submission that if this chart is carefully examined, one would find that in each and every lease agreement, the assessee has received more amount than the cost of lease equipments within a period of 36 months. For example, the gas cylinders worth Rs. 7,50,000 were leased out to Uttam Air Products by lease agreement dated 15-3-1989 and the assessee has collected a sum of Rs. 8,87,508 within a period of three years in the shape of lease rent. This amount cannot be called to be a lease rent of the gas cylinders of which total cost is only Rs. 7,50,000. The learned Departmental Representative further contended that in the light of these facts all these transactions should be treated as an advancement of loan or the finance arrangements between the assessee and the so-called lessee and the depreciation on these cylinders should not be allowed to the assessee.
6. The learned counsel for the assessee, on the other hand, has submitted that the assessing officer has invoked the provisions of section 43(1) ,Explanation (3) in order to determine the cost of cylinders and disallow the claim of depreciation. The assessing officer has never doubted the genuineness of the lease agreement. As such, new argument relating to the genuineness of the lease transactions cannot be entertained at this stage. The learned counsel for the assessee further contended that the assessee has filed all the relevant evidence to prove that the cylinders were purchased by it and were leased out to various lessee against the lease rental income and, as such, he is entitled for depreciation at the rate of hundred per cent because their cost is lesser than Rs. 5,000.
7. Having given our thoughtful consideration to the rival submissions and from a careful perusal of the record, we find that no doubt the revenue has invoked the provisions of section 43(1) Explanation (3) to determine the cost of cylinders and also in order to disallow the claim of depreciation on cylinders, but in any case the depreciation claim on cylinders was disputed by the revenue and the same dispute now has travelled to the Tribunal, which we are required to examine in the light of the material available on record. Since the lease agreements are placed on record, we have to examine the nature of the lease agreement and also to find out whether there was in fact a lease of equipments or it was a financial arrangements and these documents were executed to give a colour to these transactions as lease transactions. In case of a lease, the equipments or the machineries are given by the lessor to the lessee for its use against monthly rent for a particular period and after the end of the lease period the machinery and the equipment are required to be returned back to the lessor. The lessor always keeps a control or access to the equipments or machineries. But in the instant case if we examine these lease agreements, we would find that the cylinders were delivered by the manufacturer/ supplier at the location specified by the lessees and the lessor would not be liable or responsible for the damage to the equipment either before or in the process of delivery or during the process of installation. The lessee was also required to pay all charges including the transit insurance incurred by the manufacturer or supplier for delivery of the equipments. The lessee was also required to pay or cause to be paid all the rates, taxes, licence fees, duties, surcharges, registration charges and the outgoing payable in respect of the equipments. The lessor was only required to purchase the equipment selected by the lessee from the supplier designated by the lessee. The equipment as also the size, design, capacity and manufacturer were also to be selected by the lessee. Though a provision was made in this lease agreement that the lease would be renewed for another term, but it was never renewed and according to the stipulated terms and conditions of the agreements the equipments /cylinders were sold to the lessee at the fixed nominal price. Having carefully examined this lease agreement only one inference can be drawn that the assessee has simply made the finance available to the lessee for the purchase of the equipments of its own choice and the cost of the equipments would be repaid within three years along with interest. This conclusion is also fortified by the chart showing the cost of leased equipments and the total lease rental received by the assessee. For the sake of reference, we reproduce the relevant portion of the chart, as under:
"S.No. Name of the Party Date of lease Cost of lease Total lease Rental
1. Uttam Air Products 15-3-1989 7,50,000 8,87,508.00
2. Uttam Air Products 30-12-1989 5,25,000 6,16,250.00
3. Partap Steel Ltd. (BLBGH) 26-3-1991 3,00,000 3,90,000.00
4. Partap Steel (1935) Asr.
27-3-1991 9,90,000 13,40,220.00
5. Partap Steel (1935) Asr.
28-3-1992 5,15,625 6,85,800.00
6. Partap Steel (193 5) Asr.
15-3-1993 9,00,000 10,40,832.00'
8. A similar type of situation was dealt with by me in the case of India Management Advisors & Leasing (P) Ltd. v. Dy. CIT (IT Appeal Nos. 4078 and 4122 of 1997) in which soft drink bottles were leased out by the assessee to the lessor through lease agreement and the amount higher than the cost price of the lease equipments was received by the assessee within a period of three years and ultimately the lease equipments were retained by the lessor. The f acts of that case are quite similar to the present case except the nature of lease equipments. These types of situation were also dealt with by the Agra Bench of the Tribunal in the case of S.E. Investment Ltd. v. Asstt. CIT (IT Appeal Nos. 15 to 19 (Agra) of 2002) in which the Tribunal has adjudicated this nature of hire purchase agreement through which vehicles were given to the hirers and the instalments of the cost of vehicles were recovered by the assessee along with the interest. In this case the Tribunal has also examined the issue in the light of the land mark judgment of the Apex Court in the case of Sundaram Finance Ltd. v. State of Kerala AIR 1966 (SC) 1178 and K.L. Johar & Co. v. Dy. CTO AIR 1965 SC 1082 and held that in fact it was not a hire purchase agreement and it was a financial arrangements and a loan was advanced on interest to the so-called hirer of the vehicle. In the case of Indian Management Advisors & Leasing (P) Ltd. (supra) of which facts are quite identical to that of the impugned case, we have categorically held that the authorities concerned should not be swayed away by the recital of a title of a document and the authorities should examine the intention of the parties to the transactions or agreements. Whether there was an intention of grant of equipment on lease or the loan was advanced to the other party and the lease document was executed only to claim the higher depreciation. In that case the Tribunal has categorically held that it was not a lease transaction and the assessee has made the finance available to the consumers of these bottles because the quantum of rent payable suggest a story otherwise. In the instant case too the assessee has recovered an amount much higher than the cost price of the lease equipments within a short span of three years and finally the equipments were also transferred to the so-called lessees. It is also evident from the record that since beginning the assessee has no control over the lease equipments, as the lease equipments were identified and the delivery of the same was also affected at the instance of the lessee. Since the assessee has no control at any point of time over the lease agreement and the quantum of lease rent also speaks that this much of amount cannot be a lease rent, qua the cost of the leased assets. Through executing a document the nature of transactions cannot be changed and whenever the documents executed is not in consonance with the nature of transactions the authorities concerned should examine the intention of the parties to the transactions. If we examine this entire transaction as a whole in the light of the aforesaid judgments referred herein before we find that the impugned equipments were not leased out against these so-called lease rent. It is a case of financial arrangement between the assessee and the so-called lessee and, as such, the assessee is not entitled for depreciation over the impugned equipments. So far as the rental income is concerned, we are of the view that the assessing officer has wrongly taxed the rental income in the hands of the assessee because it was only a re-payment of the loan with interest advanced by the assessee in order to purchase the impugned equipments. At the most the interest earned in the year under account can only be taxed. So far as invocation of provisions of section 43(1) Explanation 3 is concerned, we are of the view that this provision was wrongly invoked by the assessing officer. Accordingly we set aside the order of the CIT (A) and restore the matter to the file of the assessing officer with the directions to tax only the interest income earned by the assessee during the year under account.
9. With regard to ground No. 3 it is noticed that the assessing officer had disallowed deduction of irrecoverable rent of Rs. 18,000 against which an appeal was filed before the CIT (A) and the CIT (A) following its order for the assessment year 1991-92 has directed the assessing officer not to include this amount in the year under account.
10. We have carefully perused the relevant provisions of the Act and we find force in the directions of the CIT (A). We, therefore, confirm the order of the CIT (A).
11. So far as ground No. 4 is concerned, we have carefully examined the Memorandum and Articles of Association and we find that the assessee was not engaged in the finance business. Though leasing of the equipments is permissible under the Memorandum of Associations, but when we have arrived at a conclusion in fore-going paras that it was not a leasing of equipment and it was rather advancement of loan and this activity of the assessee do not form part of the nature of activities envisaged in its memorandum of association. Since the advancement of loan is not the regular activity of the assessee, the income earned therefrom cannot be held to be his business income. We are, therefore, of the view that the assessing officer was justified in treating this income as income from other sources and the expenditure incurred on regular business activities cannot be allowed to be deducted therefrom. We are, therefore, of the considered view that the CIT (A) has erred in allowing set off of the business expenditure from the aforesaid income earned from the so-called lease of gas cylinders. We, therefore, set aside the order of the CIT (A) and restore that of the assessing officer and direct the assessing officer to treat the interest income as discussed in foregoing paras as income from other sources.
12. In the result, the appeal filed by the revenue is partly allowed, for statistical purposes.
ITA No. 5392 (Delhi) of 1996:
13. This appeal is for the assessment year 1993-94 in which the revenue has assailed the order of the CIT (A) on the following grounds:-
"1. The learned CIT (A) erred in holding that assessee's income was to be assessed as business income and not income from other sources without properly appreciating the material on record. He also ignored the fact that assessee's cases for the assessment years 1988-89 to 1991-92 have already been reopened under section 147 by the assessing officer;
2. The learned CIT (A) erred in directing the assessing officer to assess rental income and misc. receipts as business income as against income from other sources assessed by the assessing officer;
3. The learned CIT (A) erred in directing that provisions of Explanation 3to section 43(1) is not applicable and further directing to allow depreciation on gas cylinders;
4. The learned CIT (A) erred in directing not to include the amount of irrecoverable rent of Rs. 18,000 in computing the income from house property;
5. The learned CIT (A) erred in directing the assessing officer to allow expenses of Rs. 3,14,511 as claimedbythe assessee after disallowing a sum of Rs. 6,436 on account of repairs;
6. Thelearned CIT(Appeals) has erredin directing the assessing officer to allow a sum of Rs. 1,08,541 being interest paid to the bank.'
14. With regard to ground Nos. 1 to 4, identical issues were examined by us in the foregoing appeals and following the reasons adopted by us, we decide ground Nos. 1 to 3 against the assessee and ground No. 4 in favour of the assessee.
15. With respect to ground No. 5, an identical issue was also examined by us in the foregoing appeals in ground No. 4 and following the decision taken therein, we decide this issue against the assessee.
16. With respect to ground No. 6 it is noticed that the assessing officer has disallowed the payment of interest at Rs. 1,08,541 paid to the bankers on borrowed funds obtained for the business activities. Since the income earned on advancing a loan to the so-called lessee in order to purchase the cylinders is held to be an income from other sources, no deduction of any expenditure incurred for business of the assessee company will be allowed therefrom. We, therefore, do not find any justification in the order of the CIT (A) who has allowed a set off of this expenditure from the so-called income of lease rent on leased cylinders. We, therefore, set aside the order of the CIT (A) on this count and restore that of the assessing officer.
I.T.A. Nos. 4817, 4818,4819 & 4820 (Del) of 1997:
17. These appeals are preferred by the revenue against the consolidated order of the CIT (A) pertaining to the assessment years 1988-89 to 1991-92. Before going to merits of the case, we set out the facts of the case, which in narrow compass are that in these assessment years, original assessment was framed under section 143(1) of the Act. The claim of depreciation first of all examined by the revenue authorities only in the assessment year 1992-93 in detail and arrived at a conclusion that the assessee has wrongly claimed the depreciation on the cylinders whereas he was not entitled for the same. The assessing officer accordingly disallowed the claim of depreciation in the assessment year 1992-93. Relying upon these information the assessing officer has formed a belief that income chargeable to tax has escaped assessment and he accordingly re-opened the assessment for the impugned assessment years and framed the assessment following the enquiry conducted by the assessing officer in 1992-93. The assessing officer accordingly disallowed the depreciation and the claim of irrecoverable rent. The assessee went in appeal before the CIT (A) and the CIT (A) knocked down the assessment by holding that the assessment was not re-opened properly. The CIT (A) has also given the findings on merit and held that the assessee is entitled for the depreciation on cylinders leased to the lessees and also allowed the claim of irrecoverable rent and directed the assessing officer to allow the claim of irrecoverable rent and tax the same whenever it is realised.
18. Now the revenue is in appeal before the Tribunal assailing the order of the CIT (A) mainly on three grounds. Through first ground the revenue has assailed the order of the CIT (A) that he was not justified in holding that the re-opening of the assessment was not valid. In this regard we have carefully examined the facts of the case and we find that in the impugned assessment years the original assessments were framed under section 143(1)(a) and the assessing officer had no occasion to examine the genuineness of the claim of depreciation of the assessee. The claim of depreciation was examined for the first time during the assessment year 1992-93 and the assessing officer after making a detailed enquiry arrived at a conclusion that the assessee was not at all entitled for the depreciation. These findings of the assessing officer are sufficient to form a belief in the impugned assessment years that the income has escaped assessment and he accordingly re-opened the assessments as per law. We, therefore, do not agree with this finding of the CIT (A) that no material was brought before the assessing officer to form a belief that the income has escaped assessment and it was a mere change of opinion. We, therefore, set aside the order of the CIT (A) on this count and hold that the re-opening of the assessment is valid and is according to law.
19. Now the next question comes with regard to the claim of depreciation over the cylinders, which were allegedly leased out to the so-called lessee. The facts of the case in these years are also quite identical to that of the assessment year 1992-93 in which we have taken a conclusive view that the cylinders were not leased out by the assessee to the lessee and it was mere a financial arrangement and the assessee had advanced a loan to the so-called lessees in order to purchase the cylinders against certain rate of interest and the entire advance amount was repaid by the so-called lessee within a period of three years along with interest. Following the view taken in the assessment year 1992-93, we decide this issue against the assessee and we hold that the assessee is not entitled for any depreciation. Accordingly we set aside, the order of the CIT (A) on this count and restore that of the assessing officer for all the assessment years and direct the assessing officer to compute the interest earned by the assessee during the year and tax the same instead of lease rental income.
20. So far as the issue of irrecoverable rent is concerned, we in the foregoing appeals have uphold the order of the CIT (A). We, therefore, decide this issue against the assessee and confirm the order of the CIT (A). Accordingly all these appeals filed by the department are partly allowed, for statistical purposes.
I.TA. No. 3215 (Del) of 1996:
21. In this appeal the revenue has assailed the order of the CIT (A) on the following ground:-
"On the facts and circumstances of the case, the CIT (A) erred in allowing the claim of irrecoverable rent and directing the assessing officer to tax the amount of rent when realized as per section 25A of the Income Tax Act ignoring the fact that the rent was realized and deposited in the court as the assessee had refused to accept the rent."
22. The impugned issue has already been adjudicated by us in other appeals of the revenue in I.T.A. No. 4820 (Del.) of 1997. As such, it does not require any independent adjudication. We, however, following our view in earlier appeals, decide this issue against the revenue and confirm the order of the CIT (A).
ITA Nos. 3215,4660 & 5392 (Del) of 1996 & ITA Nos. 4817 to 4820 (Del) of 1997:
23. In the result, this appeal filed by the revenue, is dismissed.