Income Tax Appellate Tribunal - Chandigarh
Ajay Gupta vs Assistant Commissioner Of Income-Tax on 23 March, 1998
Equivalent citations: [1999]69ITD203(CHD), [1999]240ITR78(CHD)
ORDER
Bali
1. These two appeals filed by Shri Ajay Gupta and Shri Anoop Bansal involve some common points and are, therefore, taken up together and disposed of by a common order for the sake of convenience.
2. ITA No. 786 of 1992 is the appeal by Shri Ajay Gupta wherein the grounds taken are as under :-
"2(a) That the learned CIT(A)'s estimate at 10 per cent (on sales of Rs. 10,05,000) is excessive.
(b) That the learned CIT(A) has erred in not allowing any expenditure against the profit (estimated) on sales of Rs. 10,05,000.
(c) That in any case, the addition of Rs. 1,00,500 confirmed by the learned CIT(A) (out of the addition of Rs. 1,80,000 made by the ACIT) is excessive.
3(a) That the learned CIT(A) has erred in holding that the machinery installed for the manufacturing of plywood did not work during the previous year.
(a) That the learned CIT(A) has erred in holding that no manufacturing was done by the assessee during the previous year.
"(c) That the learned CIT(A) has not appreciated the fact that whereas the assessee had purchased 'Keruing Logs', Eucalyptus Timbers etc., it had sold plywood, block board and flush doors etc.
(d) That the learned CIT(A) has erred in confirming the ACIT's action in confirming the disallowance of depreciation on machinery costing Rs. 35,96,984 (Rs. 37,34,732 - 1,37,748) installed and used for manufacture of plywood/boards etc.
4. That the learned CIT(A) has erred in confirming the addition of Rs. 3,88,333 for alleged suppression of sales."
ITA No. 180 of 1994 is the appeal by Shri Anoop Bansal wherein the grounds taken are as under :-
"1. That the learned CIT(A) as well as the assessing authority has failed to appreciate the facts and circumstances of the case and have thereby erred in denying the assessee the benefit on the depreciation on machinery.
That the learned CIT(A) has confused the issue in holding that the depreciation on the entire machinery was claimed in the hands of Shii Ajay Gupta to whom the machinery had been leased out and the same was disallowed in his hands. The depreciation on machinery belonging to Shri Ajay Gupta was not allowed as Shri Ajay Gupta had not claimed any depreciation on the leased machinery. This confusion has resulted into gross miscarriage of justice and the upholding of the order under appeal before the CIT(A) is against the facts. I satisfied all the ingredients of section 32 and am, thus, entitled to depreciation on the machinery leased out. The lease money for the leased machinery has been assessed. It is, therefore, prayed that the order under appeal be quashed and the assessing authority be directed to allow depreciation, as claimed.
2. That the learned CIT(A) has erred in law in upholding the disallowance of interest of Rs. 1,79,792 paid to M/s. Goodwill India Ltd. on loan for machinery. It has wrongly been termed as penalty.
The CIT(A) has not upheld the observation of the assessing authority, but has still upheld the disallowance of interest for the reasons that no income from the machinery has been shown. This is contrary to the facts on record, as the machinery was leased out and was utilised by Shri Ajay Gupta."
3. Briefly the facts are that Shri Ajay Gupta and Shri Anoop Bansal are brothers and their premises were searched by the departmental authorities on 16-2-1990 and 17-2-1990 at Chandigarh and Sirhind wherein certain incriminating documents were found and seized. Shri Ajay Gupta enjoys income from rent, share as a partner from M/s. Glass Palace, income from plying of trucks and also from a proprietary concern M/s. Punjab Plywood manufacturing various items related to plywood like boards etc. Shri Anoop Bansal is the prop. of M/s. Standard Carrier earning income from freight and plying of trucks. He has also rental income from property and also income from other sources. In the case of Shri Ajay Gupta, return for the assessment year 1988-89 was filed on 15-2-1990 declaring a net loss of Rs. 5,09,880. Subsequently, a revised return was filed on 11-1-1991 when loss was revised to a figure of Rs. 2,63,880. In the statement of income and expenditure attached to the revised return, the assessee claimed an amount of Rs. 13,02,796 on account of depreciation on building, machinery and equipment. The main item of depreciation was of machinery which is claimed to have been purchased in the assessment year under consideration for a sum of Rs. 37,29,770 over which claim of depreciation at 33.33% comes to Rs. 12,43,132. In the schedule of fixed assets, the value of machinery as on 31st March, 1988 was shown at Rs. 34,22,510 and a sum of Rs. 3,07,259 was the amount capitalised on account of pre-operative expenses thereby bringing the value of machinery over which depreciation was claimed to Rs. 37,29,770. This was the machinery which was claimed to have been purchased by the assessee in his proprietary concern M/s. Punjab Plywood from which the assessee has claimed to manufacture plywood and other related articles for purposes of his business.
4. Besides this machinery valuing Rs. 37,29,770, Shri Ajay Gupta has also claimed to have taken on lease machinery belonging to Shri Anoop Bansal valuing Rs. 35,97,252 which was claimed to have been used by the assessee Shri Ajay Gupta in respect of which depreciation was not claimed by him but was claimed by Shri Anoop Bansal. Shri Ajay Gupta has claimed a sum of Rs. 1,80,000 on account of lease charges having been paid to Shri Anoop Bansal for the lease of machinery belonging to Shri Anoop Bansal. The Assessing Officer, however, found that out of the value of Rs. 35,97,252 the machinery which was claimed to have been hired by Shri Ajay Gupta from Shri Anoop Bansal, the machinery valuing Rs. 19,67,752 was shown in the books of account maintained by Shri Anoop Bansal and machinery of the value of Rs. 16,29,500 was not recorded in the books of account maintained by Shri Anoop Bansal. The Assessing Officer in the case of Shri Ajay Gupta held that although the machinery valuing Rs. 37,29,770 was installed at the premises of the assessee at Sirhind, the same was not actually used for purposes of business of the assessee because there was no debit to the manufacturing account on account of wages, electricity and other incidental expenses. The Assessing Officer also gave a finding that the assessee was not sanctioned the requisite electric connection as the assessee had not fulfilled the conditions laid down for the installation of electric connection. The Assessing Officer noted that no expenditure under the head 'Wages' was debited to the so-called manufacturing account but nominal labour charges were debited which could not be sufficient to run a large and heavy machinery valuing Rs. 37,29,770. Accordingly the Assessing Officer denied the claim of depreciation to the assessee for the reasons given in paras 8 to 8.3 of the assessment order at pages 8 to 12.
5. The assessee appealed and the learned CIT(A) upheld the action of the Assessing Officer in refusing the claim of depreciation in respect of majority of the machinery but directed to allow depreciation on a part of the machinery mentioned in para 6.3 of the impugned order which was used for sawing, the details of which are as under :-
Rs.
(i) DD Saw 34,840 (ii) Belt Sender 36,400 (iii) Multiple Ripsaw 30,160 (iv) Thickness planner 18,200 (v) Electric motor 18,148
6. Aggrieved with the above order, the assessee is in second appeal before us. The learned Counsel for the assessee submitted that the disputed machinery valuing Rs. 37,29,770 had been installed by the assessee in his premises in July, 1987 but the manufacturing processes were undertaken by the assessee w.e.f. 1-1-1988 as full-scale production could not be undertaken as the load required had not been sanctioned by the Punjab State Electricity Board. It was submitted that an application for extension of load was made by the assessee and necessary deposits were made in the shape of security and installation charges for Rs. 43,580 on 7-3-1988. It was submitted that the Asstt. Engineer of the PSEB had raised objections that the load could not be sanctioned in the same premises for two units but the position was clarified that it was the same unit under a different name which was carrying on the business. It was submitted that due to paucity of funds the assessee had undertaken the production with the employment of 4-5 workers who had to be utilised for working on different machines as all the machines could not be run with the electric load available. It was submitted that the assessee had also done the job work to cover up the expenses. It was also submitted that the assessee had carried on the manufacturing activity only in the last quarter of the accounting year under consideration and the Assessing Officer had admitted the sale of goods manufactured by the assessee to M/s. Punjab Plywood in para 7 of the asst. order itself and had recorded the sales made by the assessee in Annexure 'A' to the assessment order. As such, the action in holding that the machinery did not work during the accounting period was without any basis. It was submitted that the books of account of M/s. Punjab Plywood, a proprietary concern of the assessee, were not complete and expenses were incurred by the assessee outside the books of account as sufficient funds were not available in the books. The payment of wages as well as electricity was made by the assessee from his own pocket without debiting the same in the books of account. In support of the above, the learned Counsel for the assessee has filed a copy of the written statements filed before the ld. CIT(A) dated 20th January, 1992 at pages 42 to 45A of the paper book. The ld. counsel for the assessee also furnished a copy of certificate from the Asstt. Engineer, PSEB, Sirhind indicating that the units consumed in the months of January to March, 1988 were 7,240,7,920 and 5,280 respectively. The electricity charges paid were Rs. 2,741, Rs. 5,971 and Rs. 4,493 respectively which were not debited in the books of account of M/s. Punjab Plywood. He further submitted that the assessee had purchased raw material worth Rs. 33,33,946 which was debited to the manufacturing/trading account out of which sales were made to the extent of Rs. 6,04,236 and the closing stock was shown at Rs. 28,01,829 and the Assessing Officer in para 7 of the asst. order had more or less admitted that the assessee had sold plywood to M/s. Glass Palace which was manufactured by the assessee although his finding was that this plywood was not actually manufactured by the assessee but was purchased from the market readymade and sold as such to M/s. Glass Palace. The ld. Counsel also furnished a copy of letter dated 21-2-1992 at page 59 of the paper book giving the details of purchases made by the assessee which indicated that out of the total purchases of Rs. 33,33,946 debited to the manufacturing/trading account, glue was purchased for Rs. 2,58,525, keruing logs worth Rs. 15,89,013, eucalyptus timber valuing Rs. 13,02,192 and the other misc. items like chemicals and hardware worth Rs. 1,53,765 together with freight and cartage of Rs. 30,449. It was submitted that the details of purchases clearly indicated that the timber logs were processed with the help of glue and chemicals into plywood which was sold by the assessee to M/s. Glass Palace and also to other parties. Accordingly it was submitted that the departmental authorities were not justified in denying the claim of depreciation to the assessee in respect of the machinery owned by the assessee merely because the payments on accounts of wages, electricity etc. were partly debited in the books and were partly made outside the books by the assessee.
7. The ld. D.R. supported the order of the ld. CIT(A) and further submitted that the Assessing Officer had exhaustively dealt with the claim of the assessee in paras 8 to 8.3 of the assessment order and had clearly established that the sanctioned load was just sufficient to carry on the sawing activity of timber into logs but was not sufficient for carrying on the manufacturing of plywood which was a continuous process and required a higher sanctioned load. She accordingly submitted that the departmental authorities were justified in denying the claim of depreciation to the assessee because the machinery although installed was not actually used for purposes of business and the sale by the assessee of plywood to M/s. Glass Palace was on account of readymade goods purchased by the assessee from the market. It was submitted that since no manufacturing of plywood was done by the assessee, claim of depreciation in respect of the machinery which was installed for the manufacture of plywood was rightly denied by the departmental authorities.
8. We have carefully considered the rival submissions and have gone through the orders passed by the Assessing Officer as well as the ld. CIT(A). The assessee had purchased machinery valuing Rs. 37,29,770 including pre-operative expenses of Rs. 3,07,259 which was found at the premises of M/s. Punjab Plywood, Sirhind, the proprietary concern of the assessee at the time of the search and seizure operation which was carried out on 16-2-1990 and 17-2-1990 which is quite apparent from the inventory prepared by the search partly. Besides the machinery valuing Rs. 37,29,770 owned by the assessee Shri Ajay Gupta, machinery valuing Rs. 35,97,252 (Rs. 19,67,750 debited in the books and Rs. 16,29,500 outside the books) belonging to M/s. Standard Carrier, a proprietary concern of Shri Anoop Bansal, was also found at the premises of M/s. Punjab Plywood. Copies of the purchase bills furnished indicate that most of the machinery was purchased in July, 1987 and was installed by 31st December, 1987 as is evident from the charges paid by the assessee to M/s. Indian Sugar & General Engineering Corporation for the erection of Hydraulic Hot Press and charges paid to Thermax Private Limited for the installation of boiler. It is no doubt true that the sanctioned loan in the case of M/s. Punjab Plywood, Prop. Shri Ajay Gupta, was not sufficient to run the heavy machinery used for the manufacture of plywood but the explanation of the assessee is that he had used the electric connection in the name of Shamsher Nagar Cold Store which was also located in the premises of M/s. Punjab Plywood, G.T. Road, Sirhind which was earlier in the name of Shamsher Nagar Cold Store. It is no doubt true that the expenditure on account of consumption of electricity charges and wages have not been debited in the books of account maintained by the assessee but that alone will not be sufficient to hold that the installed machinery was not used for purposes of business of the assessee particularly because the Assessing Officer had given a finding that the assessee had sold goods manufactured by it in the form of plywood to M/s. Glass Palace valuing Rs. 4,31,481 although in the books the sale price was shown at Rs. 43,148 only. The finding of the Assessing Officer that these Sales represented the plywood purchased by the assessee locally was not borne out from record as no such purchases were debited in the books of account nor any evidence found at the time of search that the assessee had purchased plywood from the market. In this view of the matter, we are of the opinion that the departmental authorities were not justified in denying the claim of depreciation to the assessee Shri Ajay Gupta in respect of machinery belonging to him worth Rs. 37,29,770. We accordingly reverse the order of the CIT(A) on this point and allow the ground of the assessee.
9. As regards the claim of Shri Anoop Bansal for the depreciation in respect of the machinery leased out by him to Shri Ajay Gupta for which Shri Ajay Gupta had paid a sum of Rs. 1,80,000 to Shri Anoop Bansal, the learned Counsel for the assessee has not been able to furnish a copy of the lease agreement between Shri Ajay Gupta and Shri Anoop Bansal although specifically asked by the bench during the course of hearing on the plea that the same had been misplaced or it may be with the departmental authorities. In the absence of lease agreement it is not clear as to which machinery was given on lease to Shri Ajay Gupta by Shri Anoop Bansal in relation to which the lease rent was charged. The claim of Shri Anoop Bansal is that the entire machinery valuing Rs. 35,97,252 out of which Rs. 19,67,752 have been accounted for in the books of account of M/s. Standard Carriers, Prop. Shri Anoop Bansal and Rs. 16,29,500 spent outside the books of account, was given on lease and since Shri Ajay Gupta has not claimed any depreciation in respect of machinery taken on lease, Shri Anoop Bansal being the lessor was entitled to depreciation in respect of the leased machinery by him to Shri Ajay Gupta. A perusal of the profit and loss account of M/s. Standard Carriers, Prop. Shri Anoop Bansal, indicates that the assessee had claimed to have received lease rent of Rs. 1,80,000 from Shri Ajay Gupta in respect of the machinery in relation to which depreciation of Rs. 6,55,852 was claimed which was in relation to machinery valuing Rs. 19,67,752 only and there is no indication as to whether the machinery which was found at the time of search and which was claimed by Shri Anoop Bansal to have been purchased by him outside the books of account, was in any way given on lease to Shri Ajay Gupta. It is also pertinent to note that it is not clear as to how the valuation of the machinery purchased outside the books of account by Shri Anoop Bansal had been claimed at Rs. 16,29,500 because in the computation of income, Shri Anoop Bansal had surrendered only a sum of Rs. 7,50,000 in respect of the machinery purchased outside the books of account. Ordinarily a lessor is not entitled to claim depreciation on the asset leased out by him because, in that case, the leased out asset is used for purposes of the business not of the lessor but of the lessee. However, if an assessee is engaged in the business of letting out similar assets, he may become entitled to claim depreciation in respect thereof but that will depend on the interpretation of the terms of the lease deed. In the case before us i.e., Shri Ajay Gupta Prop. M/s. Punjab Plywood and Shri Anoop Bansal Prop. M/s. Standard Carriers, Shri Ajay Gupta has not claimed any depreciation in respect of leased assets belonging to Shri Anoop Bansal although the orders passed by the lower authorities are not very clear about it as to whether they have denied the claim of depreciation in respect of the assets owned by Shri Ajay Gupta as well as the assets leased out by Shri Anoop Bansal to Sh. Ajay Gupta. However, on the case of Sh. Anoop Bansal the finding is that since the claim of depreciation in the case of Shri Ajay Gupta has been denied as the machinery was not actually used for purposes of manufacturing, the claim of depreciation in the case of Shri Anoop Bansal was also denied. In this view of the matter, we are of the opinion that the matter regarding claim of depreciation in the case of Shri Anoop Bansal Prop. M/s. Standard Carriers requires fresh examination in the light of the agreement of lease entered into by Shri Anoop Bansal with Shri Ajay Gupta pursuant to which lease rent of Rs. 1,80,000 was received by Shri Anoop Bansal from Shri Ajay Gupta and the decision regarding the claim of depreciation will depend upon the interpretation of the terms of the lease agreement as to whether it is the lessor or the lessee who is entitled to depreciation in respect of machinery leased out by the lessor to the lessee. Accordingly we restore the matter with regard to claim of depreciation in the case of Shri Anoop Bansal to the file of the Assessing Officer for fresh adjudication in terms of our directions given above.
10. In the case of Shri Anoop Bansal, there is another ground with regard to payment of interest to M/s. Goodwill India Ltd. on loan taken for purposes of purchase of machinery which was treated by the departmental authorities as a penalty. The ld. CIT(A) has held that the finance charges for the equipment or interest were a part of the cost of machinery and these were to be included in the cost of machinery as and when the machinery was put to use by the assessee for purposes of his business. We are in agreement with the above finding of the ld. first appellate authority because the finance charges paid by the assessee to M/s. Goodwill India Ltd. will go to increase the cost of machinery to the assessee and this will be a part of the capital expenditure on the purchase of machinery. Accordingly we do not find any merit in this ground of appeal in the case of Shri Anoop Bansal which is hereby rejected.
11. Coming to next ground in the case of Shri Ajay Gupta relating to estimate of profit, it is seen that the Assessing Officer made an addition of Rs. 1,80,000 which was reduced in appeal by the ld. CIT(A) to Rs. 1,00,500. Admittedly, the accounts of the assessee were totally unreliable. The assessee was indulging in large scale purchases and sales of goods outside the books of account for which he made a surrender also. The ld. CIT(A) has decided this issue in para 5.3 of the impugned order as under :-
"I have considered the facts and circumstances of the case as also the submissions of the ld. Counsel of the appellant. Apparently, the Assessing Officer has estimated the sales at Rs. 18 lakhs (wrongly typed out as Rs. 18,000 in the assessment order) without any basis. The appellant had purchased drafts worth Rs. 13 lakhs only and, therefore, if at all the Assessing Officer was interested in estimating the sales, he should have estimated the same at Rs. 13 lakhs and not at Rs. 18,00,000. However, even the estimate of sales at Rs. 13 lakhs would not have been correct because the appellant has admittedly used the sum of Rs. 8 lakhs for the purchase and sale of goods but out of the second draft of Rs. 5 lakhs, purchases have been made only to the extent of Rs. 2,05,000 as is clear from the copy of account of the appellant confirmed by M/s. Varat Timber Assam Private Limited, and extracted above. Thus the total purchases and sales can be adopted to the extent of Rs. 10,05,000, only (Rs. 8,00,000 + Rs. 2,05,000). As regards the application of gross profit rate at 10 per cent, the submission of the appellant cannot be accepted because no proper accounts of the sales have been maintained and sales are outside the books of account. Therefore, the estimate of 10 per cent gross profit rate seems to be the fair estimate of gross profit and no interference is called for. So is the case with not allowing any expenditure out of the gross profit so worked out by the Assessing Officer by applying G.P. rate of 10 per cent because there is no evidence of any expenditure having been incurred. Thus, the action of the Assessing Officer in applying gross profit rate at 10 per cent and in not allowing further deduction on account of expenditure was justified and is accordingly confirmed. However, the figures of sales have to be adopted at Rs. 10,05,000 instead of at Rs. 18 lakhs and, therefore, the addition would work out to Rs. 1,00,500. (10 per cent of Rs. 10,05,000). Thus the addition is restricted to Rs. 1,00,500 and the appellant gets relief of Rs. 79,500, (Rs. 1,80,000 minus Rs. 1,00,500). This ground of appeal is, therefore, partly allowed."
12. After hearing the parties to the dispute, we are of the opinion that the order of the ld. CIT(A) requires no interference. We accordingly uphold the same and for that, we adopt the reasons and conclusion of the ld. CIT(A) as reproduced above as our own. This ground is decided against the assessee.
13. The next ground in the case of Shri Ajay Gupta relates to the addition of Rs. 3,83,333, which had been treated by the Assessing Officer as "suppression of sales or sales outside the books of account" and made the addition accordingly. The ld. CIT(A) has decided this issue in para 7.3 of the impugned order as under :-
"I have considered the facts and circumstances of the case as also the submissions of the ld. Counsel of the appellant but find no force in them. Admittedly the appellant had made sales of Rs. 4,31,481.64 as per the relevant bills issued on different dates and there is no evidence to the effect that goods mentioned in the bills were not of the value as mentioned in the bills. There may be some pressure from the banks but that would not entitle the appellant to adopt the practice of issuing bills for a higher amount than the value of items mentioned therein. Considering all the facts and circumstances of the case, I am of the considered opinion that the appellant had indeed suppressed the sales worth Rs. 3,83,333 and, therefore, the Assessing Officer was justified in making the corresponding addition on that account. Accordingly, the action of the Assessing Officer is confirmed and this ground of appeal is dismissed."
14. After hearing the parties to the dispute, we are of the opinion that the order of the ld. CIT(A) requires no interference. We, therefore, uphold the same and for that, we make the reasons and conclusion of the ld. CIT(A) reproduced above as our own.
15. In the result, both the appeals are partly allowed.
Bedi
1. After going through the proposed order of my learned brother, I have found myself to be not in agreement with the findings and conclusions as arrived at by him in the said order for the reasons and basis hereinafter given.
2. As regards ground of appeal pertaining to depreciation in the case of Shri Ajay Gupta, I.T.A. No. 786/Chd./1992, the facts, arguments of the respective representatives of the parties are very well recorded in the proposed order in paras 1 to 7 and in order to avoid repetition, these are not being reproduced again. After having heard the rival submissions, perusing the record, I find that search operation was carried out on 16-2-1990 and 17-2-1990 and machinery etc. found at that time could not establish the factum of machinery having been installed in the year under appeal and would not help the assessee's case. Similarly, erection of hydraulic hot press and payment of charges of installation of boiler too cannot be the decisive factor for allowing depreciation in the hands of the assessee. Since the basic requirement for running of machinery is the sanction of electric load, which was admittedly not there, and there is also no concrete evidence of manufacturing of plywood and because there are lot of things out of books in this case and taking into consideration all the facts and circumstances of the case and adopting the basis and conclusion of the learned first appellate authority as mine, I am not inclined to accept this ground of appeal of the assessee which is dismissed and ld. CIT(A)'s order for the same reasons and conclusions is hereby upheld.
3. As regards the depreciation dispute in the case of Shri Anoop Bansal in I.T.A. No. 780/Chd./94 in respect of the machinery leased out by him to Shri Ajay Gupta, the facts and arguments and the conclusion are recorded in para 9 of the proposed order and since claim of depreciation in Shri Ajay Gupta's case has not been accepted. I am therefore, not inclined to accept the ground of appeal of the assessee in view of the facts and circumstances of this case and base my conclusion on the conclusion as arrived at by the ld. CIT(A) in his order and adopt the same as my own and reject this ground of the assessee.
4. On remaining issues, I concur with the view taken by my learned brother.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 On a difference of opinion between the Members who heard this appeal, the following point of difference is referred to the Hon'ble President for the opinion of the third Member :-
"Whether, on the facts and in the circumstances of the case, the view of the Accountant Member that the issue of depreciation on machinery leased out by the assessee should be looked into afresh after due enquiry is correct or the view taken by the Judicial Member that the claim of depreciation even in the case of the assessee should be disallowed when claim of depreciation has not been accepted (by JM) in Ajay Gupta's case (ITA No. 786 of 92) ?"
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 On a difference of opinion between the Members who heard this appeal, the following point of difference is referred to the Hon'ble President for the opinion of the third Member :-
"Whether, on the facts and in the circumstances of the case, the view of the Accountant Member that the assessee is entitled to depreciation on machinery installed and used for manufacturing ply is correct, or the view of the Judicial Member that the assessee is not entitled to depreciation because basic requirement of sanction of electric load was not admittedly there and, moreover, factum of machinery having been installed in the relevant year, does not get established, if the same is found to be there at the time of search in February, 1990, is correct ?"
THIRD MEMBER ORDER Shri V. Dongzathang (Sr. Vice President)
1. The following points of difference are referred to me :
ITA 786/Chd./92 "Whether, on the facts and in the circumstances of the case, the view of the Accountant Member that the assessee is entitled to depreciation on machinery installed and used for manufacturing ply is correct, or the view of the Judicial Member that the assessee is not entitled to depreciation because basic requirement of sanction of electric load was not admittedly there and, moreover, factum of machinery having been installed in the relevant year, does not get established, if the same is found to be there at the time of search in February, 1990, in correct ?"
ITA No. 180/Chd./1994 "Whether, on the facts and in the circumstances of the case, the view of the Accountant Member that the issue of depreciation on machinery leased out by the assessee should be looked into afresh after due enquiry is correct or the view taken by the Judicial Member that the claim of depreciation even in the case of the assessee should be disallowed when claim of depreciation has not been accepted (by J.M.) in Ajay Gupta's case (ITA No. 786 of 92) ?"
2. The facts giving rise to the above points of difference are in the consolidated order of the Tribunal in ITA No. 786/Chd./92 and ITA No. 180/Chd./94. Insofar as the case of Shri Ajay Gupta is concerned the facts are that a search was conducted in his premises and that of Shri Anoop Bansal, his brother on 17-2-1990 at Chandigarh and Sirhind. Certain incriminating documents were found and seized. Shri Ajay Gupta enjoys income from rent, share as a partner from M/s. Glass Palace, income from plying of trucks and also from a proprietary concern M/s. Punjab Plywood. A return for the assessment year 1988-89 was filed on 15-2-1990 declaring a net loss of Rs. 5,09,880 which was subsequently revised on 11-1-1991 wherein the loss was reduced to Rs. 2,63,880. In the statement of income and expenditure attached to the revised return, the assessee claimed an amount of Rs. 13,02,796 on account of depreciation on building, machinery, and equipment. The main item of depreciation was of machinery which is claimed to have been purchased in the assessment year under consideration for a sum of Rs. 37,29,770 on which depreciation of Rs. 12,43,132 was claimed a 33.33 per cent. In the Schedule of fixed assets, the value of machinery as on 31-3-1988 was shown at Rs. 34,22,510 and a sum of Rs. 3,07,259 was the amount capitalised on account of pre-operative expenses. This machinery was claimed to have been purchased by his proprietary concern M/s. Punjab Plywood by which it was claimed to have manufactured plywood and other related articles for the purpose of business.
3. Besides this, machinery valuing Rs. 37,29,770, Shri Ajay Gupta claimed to have taken on lease machinery worth Rs. 35,97,252 belonging to Shri Anoop Bansal. Shri Ajay Gupta did not claim depreciation on this machinery as it was claimed by Shri Anoop Bansal. A sum of Rs. 1,80,000 was paid by the assessee to Shri Anoop Bansal for the lease of the machinery. The Assessing Officer however, found that out of the value of Rs. 35,97,252 claimed to have been taken on lease from Shri Anoop Bansal, the machinery valuing Rs. 19,67,752 only was shown in the books of account maintained by Shri Anoop Bansal and the balance of Rs. 16,29,500 was not recorded in the books of account maintained by Shri Anoop Bansal.
4. The Assessing Officer further held that the machinery valuing Rs. 37,29,770 purchased by Shri Ajay Gupta, though installed at the premises of the assessee at Sirhind, were not actually used for the purpose of business of the assessee because there was no manufacturing expenses on account of wages, electricity and other incidental expenses. It was also found by the Assessing Officer that the requisite electric connection was not sanctioned to the assessee. He, therefore, came to the conclusion that the assessee was not entitled to depreciation on the machinery valuing Rs. 37,29,770.
5. On appeal, the learned CIT(A) allowed depreciation on part of the machinery as follows :
(i) DD Saw Rs. 34,840 (ii) Belt Sender Rs. 36,400 (iii) Multiple Ripsaw Rs. 30,160 (iv) Thickness planner Rs. 18,200 (v) Electric motor Rs. 18,148
Still aggrieved the assessee took up the matter in appeal before the Tribunal. The Tribunal considered the rival submissions. The learned A.M. gave his finding at para 8 and eventually allowed the claim of the assessee of depreciation on the machinery worth Rs. 37,29,770.
6. Insofar as the claim of depreciation by Shri Anoop Bansal is concerned, the learned A.M. considered it fit to remit it back to the Assessing Officer for fresh adjudication of the claim in terms of the lease agreement as to whether it is the lessor or the lessee who is entitled to depreciation in respect of machinery leased out to the assessee.
7. On the other hand, the learned Judicial Member was of the view that no depreciation is allowable to the assessee as the basic requirements for running of machinery have not been fulfilled. There was no electric connection for the running of the machinery and there also was no concrete evidence of manufacturing of plywood in the case of the assessee. The mere installation of hydraulic hot press and payment of charges of installation of boiler are not decisive factors for allowing depreciation in this case.
8. Similarly, in the case of Shri Anoop Bansal, he was of the view that there is no need of sending it back as depreciation has since been denied in the case of Shri Ajay Gupta for the non running of the machinery.
9. It is on this background that the points of difference are referred to me. Shri B. M. Khanna learned authorised representative appeared for the assessee and Shri Rakesh Goel learned D.R. appeared for the revenue. They were heard at length. The assessee in this case purchased the machinery worth Rs. 37,29,770 including the pre-operative expenses. These machineries were purchased sometime in July, 1987 and were installed by 31-12-1987 as evidenced by the charges paid to M/s. Indian Sugar & Gen. Engg. Corp. for the erection of Hydraulic Hot Press and charges paid to M/s. Thermax Pvt. Ltd. for the installation of the boiler. It was the claim of the assessee that the machineries were run by utilising the power supplied to M/s. Shamsher Nagar Cold Store but the amount of Rs. 65,704 claimed by the assessee as deduction was denied being payment outside the books. While considering the suppressed sale of the assessee and making addition of Rs. 3,88,333 it was observed by the Assessing Officer that the assessee did not produce any evidence that the goods manufactured were defective and no sale of scrap had been shown. In that view of the matter, the sale shown by the assessee at Rs. 43,148 was increased to Rs. 4,31,481 on account of suppressed sale and addition of Rs. 3,88,331 was sustained by the CIT(A) and the Tribunal. It is not the case of the Assessing Officer that these items were purchased as readymade by the assessee and sold as such. This addition was sustained by the CIT(A) and the Tribunal. From the order of the Assessing Officer it is seen that an addition of Rs. 1,80,000 was also made on account of income on the unaccounted turnover. The details of purchases and sales of goods were not available. The said addition was reduced to Rs. 1 lakh by the CIT(A) and the same was upheld by the Tribunal.
10. Having regard to the overall position, I am of the view that the assessee has to be given the benefit of depreciation. Firstly, the purchase of machinery has not been doubted. The installation of the machinery also was not doubted. The main reason why it was alleged that the machinery was not operated was the absence of electric connection in the name of the assessee. This lacuna is duly plugged by the payment of electric charges to the extent of Rs. 65,704 and that electric charges were on account of utilisation of electric connection to M/s. Shamsher Nagar Cold Store. If the assessee has been claiming use of machinery for manufacture on account of this electric consumption only, then it may not be sufficient proof and of little merit. However, the assessee made unaccounted sale to the extent of Rs. 3,88,333. Since the sale of the product has been made outside the books, the expenses also did not figure in the books of the assessee. Once the sale is accepted, the manufacture of the goods also has to be accepted in the light of the evidence enumerated above. The finding of the learned A.M. is in order. I accordingly concur with the learned Accountant Member on this point and the assessee is entitled to depreciation on the machinery worth Rs. 37,29,770.
11. Insofar as the case of Shri Anoop Bansal is concerned, the consequence of my finding in the case of Shri Ajay Gupta follows that the entitlement of depreciation either in the case of Shri Anoop Bansal or Shri Ajay Gupta has to be determined in the light of the terms of the lease agreement as the machineries have been found to be utilised during the previous year relevant to the present assessment year. I, therefore, concur with the learned Accountant Member on this point and the matter will go back to the Assessing Officer for fresh adjudication in terms of the directions given therein.
12. The matter will now go before the regular Bench for orders as per majority opinion.