Income Tax Appellate Tribunal - Jodhpur
Shree Rajasthan Syntex Ltd. vs Asstt. Commissioner Of Income-Tax on 22 December, 2003
Equivalent citations: [2005]93ITD78(JODH), (2005)93TTJ(JODH)41
ORDER
Hari Om Maratha, Judicial Member
1. Both these appeals pertain to same assessee for two A.Ys., namely, 1996-97 and 1997-98 and identical issues are involved in both these appeals. So, for the sake of convenience, these are being disposed off by this common order.
2. We would like to mention that these appeals were taken out of turn for hearing in view of the Hon'ble Rajasthan High Court decision while disposing off the stay application. The Hon'ble High Court gave a direction to expeditiously dispose off these appeals.
3. The appellant company, namely, M/s Shree Rajasthan Texchem Ltd., Udaipur [hereinafter referred to as the Lessor Company] and M/s Shree Rajasthan Texchem Ltd., Mumbai [hereinafter referred to as the Lessee Company] are the companies incorporated under the Company's Act, 1956. The lessor company had given on lease certain plant and machinery to the lessee company for both these years and had claimed depreciation. While passing the assessment orders Under Section 143(3), the ld. AO allowed the depreciation.
4. Before we come to the real controversy in question, it is worthwhile to give a profile of relevant facts which gave rise to these appeals.
5. This company purchased plant and machinery worth Rs. 14,62,94,568/- and vehicles worth Rs. 4,27,267/- for which the appellant company had entered into lease agreement with M/s Shree Rajasthan Texchem Ltd., Mumbai, which is also another company incorporated under the Company's Act vide lease agreement dated 14.10.95 and 25.11.95 during A.Y. 1996-97 and vide another lease agreement dated 9.11.96 during the A.Y. 1997-98 for leasing out machinery worth Rs. 61,57,028/-. As per the terms of the lease agreement, the appellant company had received lease rent from the lessee company and had claimed depreciation on the leased assets. The assets in question were purchased by the assessee-company [hereinafter referred to as the lessor-company]. While computing assessment of the lessee company, the ld. AO at Mumbai allowed depreciation on the same leased assets although it was not claimed by the lessee-company.
6. On the basis of the fact that the AO at Mumbai had allowed depreciation on the leased assets in the hands of the lessee-company, the ld. AO at Udaipur framed an opinion that income chargeable to tax has escaped assessment and initiated reassessment proceedings by issuing notice Under Section 148 of the At on 20.9.2000 for A.Y. 1996-97 and by issuing notice on 17.4.2000 for A.Y. 1997-98.
7. The lessor-company took various objections to these notice but the ld. AO completed the reassessment for both the years by passing separate order Under Section 143(3)/143(3) on the same date i.e. 31.1.2003. While computing reassessment, the ld. AO disallowed the claim of depreciation which was earlier allowed in the original assessment.
8. The lessor-company went in appeal before the ld. CIT(A) against these impugned assessment orders and assailed the findings of the ld. AO. But the ld. CIT(A) also confirmed the disallowance of depreciation by passing a lengthy but common order for both the years.
9. The appellant-lessor-company is further aggrieved and has assailed the findings of the revenue on legal grounds as well as on merits.
10. We have heard the rival submissions as advanced by the ld. AR Shri Amit Kothari, appearing on behalf or the appellant-lessor-company and shri D.R. Zala, appearing on behalf of the revenue. We have also perused the evidence on record. We have also gone through the Paper Books and have perused the orders of the authorities below. We have also circumspectiously gone through the relevant provisions of law and the decisions relied by both the parties. We give our findings on the contentious issues as under.
11. At the very outset, the ld. AR Shri Am it Kothari vehemently argued and pleaded with us that the department has not produced the 'reasons' recorded for the reopening of these assessments, and so he was of the opinion that either there were no reasons recorded, hence the whole matter will go to hogs being not tenable in the eyes of law; or in case the department has recorded the requisite reasons, these should be got produced for the perusal of the Tribunal and the satisfaction of the appellant. This objection of the ld. AR was well reasoned as the. acquisition of jurisdiction Under Section 147/148 was based on the reasons recorded by the revenue that some income chargeable to tax had escaped assessment. This being a sine-qua-non condition for assumption of jurisdiction, we directed the ld. DR to produce the reasons in question but the ld. DR himself offered to produce the reasons so required. The ld. DR produced the copies of the reasons recorded by the ld. AO. The copies of the reasons were also supplied to the ld. AR Shri Amit Kothari.
12. The ld. AR Shri Kothari has now argued that the perusal of the reason so recorded by the ld. AO shows that these are not the reasons which can result in re-opening of assessment orders which have been passed after considering all the relevant documents on record and that there seems to be no further evidence or material which can justify the reopening of the same.
13. In reply to this contention of the ld. AR, the ld. DR Shri Zala has submitted that on the basis of the same lease deeds, the AO at Mumbai, in the case of the lessee [since the lessee is assessed at Mumbai] has come to different conclusion, that the assets in question are owned by the lessee-company because these have been transferred to it under a "financial lease" by lessor-company. According to Shri Zala, when the department has allowed depreciation to the lessee on the same assets, this is a relevant material and important piece of evidence on the basis of which the ld. AO at Udaipur could form an opinion that income chargeable to tax has escaped assessment. The ld. AO has thus rightly assumed jurisdiction Under Section 147 of the Act.
14. We have considered the arguments as advanced by both the ld. representatives. We have gone through the lease deeds in question. We have also carefully perused the assessment orders and the appellate order. This question regarding assumption of jurisdiction raised and opposed by the parties is a very vital question and the decision of the same will also have a important bearing on the disposal of the matter on merits.
15. The objections of the ld. AR are two-folds:
i) One, that the finding of the ld. AO in the case of the lessee that these assets are owned and used by it as the lease is a financial lease, cannot be considered by the ld. AO of lessor/appellant company because these are two different findings on the basis of identical facts, so this does not cover the requisite conditions for re-opening of assessments Under Section 147/148 of the Act and the jurisdiction cannot be validly assumed for reopening on that basis alone.
ii) Secondly, the borrowed satisfaction cannot be a reason for reopening.
16. Before we come to the real controversy, we would like to detail the undisputed facts of this case as under :
i) There is no dispute that M/s Shree Rajasthan Texchem Ltd., Udaipur [which is assessee-appellant company] is the Lessor Company of the assets in question; and that M/s Shree Rajasthan Texchem Ltd., Mumbai is the Lessee Company.
ii) That before the lease in question the assets were purchased and owned by the Lessor Company, i.e. appellant.
iii) That the reasons for reopening were recorded after considering the findings of the ld. AO at Mumbai, in the assessment order of the lessee company.
iv) That 'apparently' the Mease deeds' in question are for 'operating leases' only.
v) That the lessee-company did not claim depreciation on the leased assets, but the same was allowed by the ld. AO after coining to the conclusion that the lease are 'Financial Lease' and the lessee is the owner of these 'assets'.
vi) The assessment in the case of the lessee company was done on 24.2.2000 for A.Y. 1997-98 and the assessment order in the case of the lessor was passed on 18.2.99 for A.Y. 1996-97 but the original assessment order for A.Y. 1997-98 was passed on 25.2.2000.
17. Now the picture is clear to the extent that the assessment order on which the opinion has been formed by the ld. AO at Udaipur in the case of the lessee was passed on 24.2.2000 for A.Y. 1997-98 by the ld. AO at Mumbai. Thus this order was passed after the original assessment order was passed at Udaipur for A.Y. 1996-97. but before the order of A.Y. 1997-98. One original assessment order, namely for A.Y. 1997-98 was passed after the order of 24.2.2000 on 25.2.2000 by the AO at Udaipur and for A.Y. 1996-97 it was passed on 18.2.99, i.e. before 25.2.2000.
18. We have to see the implications of both these orders so far as the applicability of Section 147/148 of the Act are concerned. There cannot be two opinions about the fact that AO has changed his opinion on the basis of the findings of AO at Mumbai. There are no other supporting material which can be referred to in this connection. For on? year the original assessment order was passed after the lessee's assessment order, on the basis of which the reopening has been done. So, this cannot be said that this order was not available at the time of passing of the original assessment order for that year.
19. Obviously, the findings of the ld. AO at Mumbai and the ld. AO at Udaipur are the findings arrived at after considering the 'same facts', namely, the lease agreements only. In a way it can be said that these are two different opinions of two different officers of same capacity. Then a question validly arises as to why the AO at Udaipur, should reopen the assessment of the lessor-company and why not the AO at Mumbai should reopen the assessments order of the lessee-company. Be that as it may, the AO at Udaipur has reopened the assessment order of the lessor company.
20. After considering the whole gamut of facts and circumstances of this case, we come to the conclusion that the following facts are relevant to arrive at a just decision:
i) The plain reading of the lease agreements reveal that the lease is a 'operative lease' and the lessor is the owner of the assets leased therein;
ii) The lessor and the lessee are the companies incorporated under the India Company's Act and are separate and legal entities. So, even if it is alleged that these are "sister-companies", as has been alleged, this factura goes in favour of the appellant-company. The department has not stated as to what was the benefit of tax to lessor company if the depreciation is allowed to it and what is the loss of tax to revenue by that. Needless to say, such a depreciation is to be allowed to one of them.
iii) The ld. CIT(A) has tried to put his own meaning to various clauses of these lease agreements in his order at pages 12 onwards, particularly, which according to us, is too far fetched. In this regards, Clause 8, 12,13, 16, 17, 27, 29 of these agreements which have been mentioned by ld. CIT(A) in his order at pages 8 onwards, have been lightly ignored by him.
iv) That it is not the case of the department that the lessee-company is claiming itself to be the owner of these assets. It is the department who is making the lessee-company as the owner of these assets by interpreting the lease as a 'financial lease', and the lessee-company as the owner of the assets.
v) That "opinion" of another AO under similar circumstances cannot be the reason for the AO (Udaipur) to change his opinion.
vi) Except the "opinion" or finding of the ld. AC at Mumbai, no other material has come to the knowledge of the AO at Udaipur.
vii) The appellant company neither hid any material information from the department nor gave any wrong information so as to conceal the income so that it may escape assessment.
viii) That in the P & L Balance Sheet filed with the Returns of Income for both the years, the lease rentals were shown separately in the main body of the P & L account. The assets given on lease were shown separately in Schedule IV. The note on accounts also referred to the lease income as income from operating lease.
ix) The lease agreements dated 14.10.1995 and 25.11.1995 including the copies of all the bills in respect of assets given on lease, details of cost of each leased assets and other information were submitted to the department by letter dated 25.10.1999 on 8.2.1999.
21. After considering all these information and material facts disclosed by the assessee; the ld. AO allowed depreciation on the "leased assets" in both the orders passed Under Section 143 (3) for both the years.
22. The arguments of the ld. DR Shri D.R. Zala are that the assessment in the case of the lessee company for A.Y. 1997-98 was made on 29.4.2000 and this material was not available with the AO while passing the original assessment order on 18.2.1999 for A.Y. 1996-97. Original assessment order for A.Y. 1997-98 was passed on 25.2.2000. So the assessment order passed in the case of lessee company on 20.4.2000 by AC at Mumbai could not have been available with the AO at Udaipur. So, according to the ld. DR the information about the assessment order in the case of the lessee company was a relevant piece of material on the basis of which the AO could have recorded reasons for reopening the original assessment.
23. To controvert the above submissions of the ld. DR Shri Zala, the ld. AR Shri Kothari has submitted that the ld. A.O has during the course of reassessment proceedings, disallowed the claim of depreciation in respect of the assets given on lease to Shree Rajasthan Texchem Ltd., Mumbai. Such claim of depreciation was disallowed due to the fact that during the course of assessment proceedings of the lessee company at Mumbai, the ld. A.O of the lessee company held that lease is in the nature of financial lease and the lessee company is the owner of the Plant & Machinery. This order was passed by the A.O of lessee-company at Mumbai who is another person and the same cannot determine the allowability of depreciation in the hands of this assessee. The allowability of depreciation is to be decided on the basis of (i) ownership and (ii) user of the assets. It has further been submitted that while passing the original assessment order, these aspects were fully and duly considered by the ld. A.O. and on the basis of all materials placed before him, the claim of depreciation was allowed. The appellant, during the course of original assessment proceedings, had placed copy of the lease agreement, Memorandum of Association, copies of bills, funds used for purchase of assets, loans details from financial institutions etc. After careful examination of all these pieces of evidence and details, a conscious and judicious decision was taken by the ld. A.O. and depreciation was allowed on the leased assets.
24. It was also submitted that there are no facts or materials from which it could be inferred that there was any failure on the part of the assessee to disclose material facts necessary for its assessment, nor there is any material to suggest that any income liable to tax had escaped assessment. During the course of assessment proceedings, the ld. AO required vide letter dated 8.1.1997 to examine and in fact 37 questions relating to the appellant company. The appellant company duly produced all the requisite details vide its letter dated 18.1.1999 which were duly examined by the AO and after fully convincing himself the claim of depreciation was allowed.
25. The ld. AR further submitted that in the P&L Balance Sheet filed with returns of both the years, the lease rentals were shown separately in main body of P&L Account. The assets given on lease were shown separately in Schedule IV. The note on accounts also referred to the lease income as operating income. The lease agreements dated 14-10-1995 and 25-11-1995, copies of all the bills in respect of assets given on lease, details of cost of each leased assets and other information were submitted vide letter dated 25-10-1999 on 08-02-1999 and also from time to time in various hearings. After considering all these material facts disclosed by the assesses fully and truly the depreciation on leased assets was allowed in both the order Under Section 143(3). Except the findings of the ld. AO at Mumbai that the lease is finance lease and the lessee is the owner, there is no other material fact on which the AO Udaipur can form his opinion.
26. We have considered the rival submission in depth. Section 147 authorises and permits the AO to asses or reassess income if he has reason to believe that the said income for any A.Y. has escaped assessment. The expression "escaped assessment" clearly connotes a very basic postulate that the income for a particular A.Y. went unnoticed by AO and because of it not being noticed by him for any reason, it escaped assessment. The meaning of expression "escaped assessment" is so simple and straight that it does not leave any one in doubt that the provisions of Section 147/148 of the Act could be invoked by AO if it is a case of escapement of income for a particular year. The words 'escaped assessment' are apt to disclosure of mistake in the assessment caused by either erroneous constructions of the transaction or due to its non consideration; or caused by mistake of law applicable to such transfer or transaction even there has been a complete disclosure on all relevant facts upon which a correct assessment could have been based.
27. A perusal of lease agreements in question show that the lease- was an operating lease. In this connection Clause (8), (12), (13), (16), (17), (27) and (29) of the lease agreements are very much relevant. In Clause (8) of the agreement it has been made clear that at all times, the machinery shall remain sole and exclusive property of lessor and the lessee shall have no right or title or interest thereon. The Memorandum of Association of the Company vide para 15 makes it amply clear that leasing is one of the objects of the company. So it cannot be said that the assessee-company is not doing the business of leasing of assets. The appellant company is the owner of assets given on lease which is very much evident from the lease agreement of the appellant and the lease assets have been disclosed in the balance sheet. The assets were acquired by the appellant company and the same were delivered to the lessee. The transportation charges were paid by the appellant company, for transporting the assets in question to the premises of lessee company and the same formed part of the value of assets given on lease. The assets were covered under transit insurance risk and the premium was paid by the appellant company till the assets were delivered-to the premises of the lessee company. The appellant lessor company has received rentals from the assessee company amounting to Rs. 78,25,584 and Rs. 2,92,72,399/- which have been shown as lease rental income in the P & L account. So it is clear from the above lease agreements in question that the risk and reward incidental to the ownership of the assets were with the lessor company and the lease was an 'operating lease' and the appellant was entitled to depreciation on the said assets. The unstinted finding is that the assessee company is the owner of these assets which are used for its business of leasing. The oft quoted decision of the Hon'ble Supreme Court in the case of CIT v. Shaan Finance (P) Ltd. 231 ITR 308 (SC) and First Leasing Company of India Ltd. are also applicable. So his findings regarding entitlement to depreciation on the leased assets by a leasing company including the investment allowances is considered, the ld. CIT(A) at page 12 of the order has observed which we are reproducing for ready reference.
"This clause means that the lessee will be paying the rental also for the period for which the machinery cannot be used for any reason. Lease rental should be related to actual use of the machinery. The alleged lease rent is, therefore, not in the nature of lease rent but in the nature of recovery of a finance loan given by the appellant to the lessee. The appellant is only ensuring the payment of installments of the finance loan irrespective of the fact that the machine is actually used or not. This clearly shows that the said agreement is only in the nature of a finance lease and the payment of rental is repayment of the finance provided by the appellant.
Clause -8 : In Clause 8, apart from the routine provisions, it ahs been mentioned that the lease3 agreement shall be non cancelable. This means that the lessee does not have any right to cancel the agreement even if there are circumstances which require him to do so. The total risk, therefore, lies with the lessee. By this clause the appellant is only ensuring recovery of the finance in a fixed period of time and is not bothered about the circumstances which can be faced by the lessee. This also indicates that the agreement is a finance lease.
Clause -9 : 'The lessee acknowledges and agrees with the lessor :
(a) That "no warranty or fitness that said machinery is merchantable shall apply to this contract.
(b) That said machinery is accepted by lessee with all faults and defects and delivery by lessor shall be conclusive evidence that said machinery is in good working condition and order.
(c) That lessor has not made and does not hereby make any representation of warranty with respect to merchantability, quality, condition, durability or suitability of said machinery I in any respect.""
28. The conclusion drawn by the CIT(A) that the appellant is not responsible in any manner about fitness, quality, suitability, of the said machinery at the and that the mere delivery of the machinery shall be conclusive evidence that the said machinery is in good condition. All the risks lie with the lessee company and there is no responsibility with the lessor. So the lessor company is no longer owner of these assets makes the transaction in question as financial lease and not as an operating lease is not a correct finding to our mind. The department has got no cogent evidence to support the findings that the lease in question is a financial lease and not an operating lease. The ld. CIT(A) has assumed such a conclusion without the benefit of any legal or statutory assistance.
29. It is brought to our notice that in the assessment order and the appellate order passed in the case of the lessee company it has been held that the lease agreement was not an operating lease but a financial lease and depreciation was allowed in the hands of the lessee company by AO. The lease rental has been treated as recovery of the capital amount alongwith interest. We would like to mention here that the AR Shri Amit Kothari has submitted at Bar in this regard that the lessee company never claimed any depreciation with regard to leased assets. The lessee company claimed depreciation with regard to some other assets which were owned by the lessee company. The lessee - company later withdrew the claim of depreciation claimed in respect of other assets. The AO in Mumbai, even without a claim of depreciation by the lessee company allowed depreciation as has been discussed above. The argument that the lessor company and the lessee-company are the sister concerns is not tenable in the eyes of law because when the companies are incorporated under the Companies Act, they are separate legal entities, rather, in both cases the companies have out right share holding and are independently managing and professionally run. The lease agreement had been entered into on competitive terms after inviting tenders. The Rajasthan Syntex Ltd. was the lowest bidder.
30. In this case the AO of the appellant company had taken decision after considering all the facts and the opinion of another AO and the same cannot be made the base for changing the opinion by the AO of the appellant company. The opinion of one AO cannot replace the opinion of other AO. In such a case, law does not permit reassessment on change of opinion. There are catena of decisions on this point, a few are as under which are relevant:-
a) Jt. CIT (Assessment) and Ors. v. George Williamson (Assam) Ltd. (2002) 258 ITR 258 (Gau) "The duty of the assessee does not extend beyond making a fill and true disclosure of primary facts. Once he has done so, his duty ends. It is for the assessing authority to draw the correct inference from the primary facts. It is not the responsibility o the assessee to advise the assessing authority with regard to the inferences which he should draw from the primary facts. If the assessing authority draws an inference which appears to him, subsequently, to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening the assessment. The power to reopen the assessment proceedings would only be available if the assessing authority has reason to believe that any income chargeable to tax had been under assessed and also that he has reason to believe that such underassessment had occurred by reason of either omission or failure on the part of the assessee to make a return of his income or omissions or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year.
b. Mercury Travels Ltd. v. Dy. CIT and Anr. (2002) 258 ITR 533 (Cat) Reassessment--Reassessment after four years--Failure to disclose material facts necessary for assessment--Assessee claiming special deduction under Section 80HHD and submitting requisite certificate from Chartered Accountant--Special deduction granted in original assessment--Reassessment proceedings to recalculate special deduction--Mere change of opinion--Reassessment proceedings not valid--Income-tax Act, 1961, Section147 c. Garden Silk Mills Ltd. v. Dy. CIT (No. 2) (1996) 222 ITR 68 (Guj) Reassessment--Information that income had escaped assessment-Mere change of opinion is not sufficient--Original assessment after considering explanation of assessee--No new information that income had escaped assessment--Reassessment was not valid--Income-tax Act, 1961, Section 147.
d. Jindal Photo Films Ltd. v. Dy. CIT and Anr. (1998) 234 ITR 170 (Del) Where the Income-tax Officer attempts to reopen an assessment because the opinion formed earlier by him was in his opinion incorrect, the reopening could not be done.
The power to reopen an assessment was conferred by the Legislature not with the intention to enable the Income-tax Officer to reopen the final decision made against the Revenue in respect of questions that directly arose for decision in earlier proceedings. If that were not the legal position it would result in placing an unrestricted power of review in the hands of the assessing authorities depending on their changing moods.
If an expenditure or deduction was wrongly allowed while computing the taxable income of the assessee, the same could not be brought to tax by reopening the assessment merely on account of the Assessing Officer subsequently forming an opinion that earlier he had erred in allowing the expenditure or the deduction.
If a notice under Section 148 of the Income-tax Act, 1961, has been issued without the jurisdictional foundation under Section 147 being available to the Assessing Officer, the notice and the subsequent proceedings will be without Jurisdiction, liable to be struck down in exercise of wit jurisdiction of the High Court. If "reason to believe" be available, the writ court will not exercise its power of judicial review to go into the sufficiency or adequacy of the material.
e. CIT v. Hickson & Dadajee Ltd. (1980) 121 ITR 368 (Bom) Under Section 147(b) of the IT Act, 1961, reassessment is permissible if the ITO has, in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessment. An assessment cannot be reopened on a mere change of opinion.
f. Garden Silk Mills Pvt. Ltd. v. Dy. CIT (1999) 237 ITR 668 (Guj) Reassessment--Condition precedent--Reason to believe that income has escaped assessment--Reason must be based on material--Change of opinion will not justify reassessment--Assessee allowed adjustment in valuation of his closing stock--Subsequent reassessment proceedings on ground that adjustment was erroneous--Reassessment proceedings were not valid--Income-tax Act, 1961, Sections 147, 148.
g. CIT v. Corporation Bank Ltd. (2002) 254 ITR 791 (SC) Held, affirming the decision of the High Court, that since the assessee had furnished particulars pertaining to the sum of Rs. 54,485, as not recoverable and had filed statements alongwith the original return disclosing full details of the interest suspense account, there was no failure on the part of the assessee to disclose fully and truly material facts necessary for the assessment and Section 147(a) had no manner of application and was not attracted to the facts of the case.
h. Sheth Brothers v. Joint CIT (2001) 251ITR 270 (Guj) Reassessment--Failure to disclose material facts necessary for assessment--Claim for deduction allowed by 1T0 but withdrawn in revision proceedings and allowed again on further appeal--No failure to disclose material facts regarding deduction--Reassessment not valid--Income-tax Act, 1961, Sections 147, 48.
i. CIT v. Sambhar Salt Ltd. (2003) 262 ITR 675 (Raj) Reassessment--Information that income had escaped assessment-One possible view taken--Another view possible--Not ''information" within the meaning of Section 147(b)--Reassessment not valid-Income-tax Act, 1961, Section 147 j. CIT v. Kelvinator of India Ltd. (2002) 256 ITR 1 (Del) It is a well-settled principle of interpretation of statutes that the entire statute should be read as a whole and the same has to be considered thereafter chapter by chapter and then section by section and ultimately word by word.
It is not in dispute that the Assessing Officer does not have any jurisdiction to review his own order. His jurisdiction is confined only to rectification of mistakes as contained in Section 154 of the Income-tax Act, 1961. The power of rectification of mistakes conferred upon the Income-tax Officer is circumscribed by the provisions of Section 154 of the Act. The said power can be exercised when the mistake is apparent. Even a mistake cannot be rectified where it may be a mere possible view or where the issues are debatable. The Income-tax Appellate Tribunal has limited jurisdiction under Section 254(2) of the Act. It is a well-settled principle of law that what cannot be done directly cannot be done indirectly. If the Income-tax Officer does not possess the power of review, he cannot be permitted to achieve the said object by taking recourse to initiating a proceeding of reassessment. In a case of this nature the Revenue is not without remedy. Section 263 of the Act empowers the Commissioner to review an order which is prejudicial to the Revenue.
The Board has power to issue circulars. Circulars which are issued by the Central Board of Direct Taxes are legally binding on the Revenue.
UCO Bank v. CIT (1999) 237 ITR 889 (SC) and CIT v. Anjum M.H. Ghaswala (2001) 252 ITR 1 (SC) followed.
The scope and effect of Section 147 as substituted with effect from April 1, 1989, by the Direct Tax Laws (Amendment) Act, 1987, and subsequently amended by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989, as also of Sections 148 to 152 have been elaborated in Circular No. 549 (see (1990) 182 ITR (St.) 1), dated October 31, 1989. A perusal of Clause 7.2 of the said circular makes it clear that the amendments had been carried out only with a view to allay fears that the omission of the expression "reason to believe" from Section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on a mere change of opinion. It is, therefore, evident that even according to the Central Board of Direct Taxes a mere change of opinion cannot form the basis for reopening a completed assessment.
A statute conferring an arbitrary power may be held to be ultra views Article 14 of the Constitution of India. If two interpretations are possible, the interpretation which upholds constitutionality should be favoured. In the event it is held that by reason of Section 147 the Income-tax Officer may exercise his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion, the same may be held to be unconstitutional.
An order of assessment can be passed either in terms of Sub-section (1) of Section 143 or Sub-section (3) of Section 143. When a regular order of assessment is passed in terms of the Sub-section (3) of Section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of Clause (e) of Section 114 of the Indian Evidence Act, 1872, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi judicial function to take benefit of its own wrong. Hence, it is clear that Section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate reassessment proceedings upon a mere change of opinion. "
31. After going through the above decision it is clear that the AO does not have any jurisdiction to review his own order. His jurisdiction is confined only to rectification of the mistakes as allowed Under Section 154 of the Act and that power can be exercised when a mistake is apparent. It cannot be rectified where it may be a mere possible view or where the issues are debatable.
32. The scope and effect of Section 147 as substituted with effect from April 1, 1989, by the Direct Tax Laws (Amendment) Act, 1987, and subsequently amended by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989, as also of Sections 148 to 152 have been elaborated in Circular No. 549 (see (1990) 182 ITR (St.) 1), dated October 31, 1989. A perusal of Clause 7.2 of the said circular makes it clear that the amendments had been carried out only with a view to allay fears that the omission of the expression "reason to believe" from Section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on a mere change of opinion. It is, therefore, evident that even according to the Central Board of Direct Taxes a mere change of opinion cannot be a basis for reopening a completed assessment. It is a settled principle that when a regular order of assessment is passed in terms of sub Section (3) of Section 143, it is presumed that such an order has been passed after application of mind.
33. It is true in this case that notice Under Section 148 has been issued on the basis of change of opinion and there being no other reasonable basis for doing so. The AO was himself satisfied about the claim of depreciation and appreciated all the facts and he allowed the same. Simply on the basis of inference drawn by other Officer, he intends to replace the opinion drawn by him. On the basis of borrowed satisfaction no opinion can be framed. In this regard the following decisions relied by the ld. AR are relevant.
a) Hotel Appolo v. U.P.S. Rashtrapal, I.T.O. (Guj.) 213 ITR 762 Held, that the Income Tax Officer, "J" Ward, could have formed only a tentative view regarding the benami character of S's wife as the matter before him was granting a registration of the firm. It was clear from the facts that the Income tax officer, "E" Ward, did not himself apply his mind to any fact in order to come to the belief that there was omission or failure on the part of S to disclose primary facts necessary for his assessment "Reassessment- Information that income had escaped assessment -Inspection note of IAC- Not sufficient for issue of notice under Section 147(b) - Income-Tax Act, 1961, Sections 147,148 - constitution of India, Article 226."
b. Sitaram Jindal v. ITO 841 TR 162(Cal) The belief of the ITO that income has escaped assessment due to failure on the part of the assessee to disclose primary facts must be held in good faith. It is open to the court to examine the question whether the reasons for the belief have a rational connection or relevant bearing to the formation of the belief. The conditions necessary for the issue of notice under Section 148 were not satisfied and the notice was invalid."
In our view, the opinion framed by the AO of another assessee cannot be a base to initiate reassessment proceedings.
34. To further substantiate our finding we would like to give a finding that on same set of facts, and evidence one AO has come to the conclusion that the depreciation is allowable; and on the similar or identical facts and evidence, the other AO (in the case of the lessee) has come to a different conclusion that the lease transaction is a financial transaction and he allowed depreciation to the lessee without any claim. Thus on the same set of facts, one AO has arrived at one conclusion and on the same set of facts, the other AO has arrived at a different conclusion. So it is our considered opinion that on the basis of opinion of another AO, the reassessment proceedings cannot be started by assuming jurisdiction Under Section 147/148 unless some other material facts come to the notice to the AO for forming his reason to believe that escapement of income has taken place. The AO in the case of the lessor had considered all the available facts on record and came to the conclusion that the lessor is the owner of the leased assets and the leasing is a part of the business of the lessor company and, as such, the assessee is entitled to depreciation on leased rentals. When the AO of the lessee company concluded that the lease agreement is a financial lease agreement and not an operating lease and that the lessee is the owner of these assets and that the transaction is the sham transaction having entered into between the sister companies. This is some thing strange that the AO in the case of the lessee granted and allowed depreciation despite the fact that the same was not claimed by the lessee company. We would like to mention here that the fact that the lessee company did not claim any depreciation on the leased assets was stated at bar by ld. AR Shri Amit Kothari. The ld. DR Shri D.R. Zala could not state at bar that the lessee had claimed any depreciation nor could produce any other document to counter the same. This is not evident from the records that the lessee had claimed depreciation. Had the lessee claimed, the AO would have got good argument to support his action. So, we hold that the change of opinion of one AO which is further based on the opinion of the other AO in case of another assessees, cannot be a ground for assuming jurisdiction Under Section 147/148 to initiate reassessment proceedings. We are of the considered opinion that the assumption of jurisdiction in this case Under Section 147/148 is bad in law and as such not tenable. Hence, after considering all the facts and the circumstances of the case, we come to the conclusion that the assumption of jurisdiction by the ld. AO of lessor at Udaipur is illegal, an as such is quashed.
35. Now we will decide this appeal on merits.
36. The next ground relates to claim of depreciation Under Section 32 of the Act. The ld. AR has submitted that the CIT(A) has erred in holding that the disallowance of depreciation amounting to Rs. 1,83,29,547/- on assets given on lease by appellant company, the disallowance so made is bad in law and on facts. The CIT(A) has erred in not accepting the apparent as real without the burden being discharged by revenue. It has been submitted that the authorities below have erred in not appreciating the lease agreement executed by the appellant. He has submitted that the CIT(A) has erred in confirming the action of the Id AO without application of mind and without going into real and true nature of lease transactions and in holding the action in the case of the appellant on the basis of proceedings in the case of lessee company. According to him the depreciation is fully allowable as all the conditions required Under Section 32 of the Act for claim of depreciation are fully satisfied. For the A.Y. 1997-98 the ground and arguments are same except the depreciation amount which was disallowed for this year is Rs. 3,36,18,101/- both these grounds of appeal are being disposed off simultaneously.
37. On the other hand the ld. DR Shri D.R. Zala has supported the orders of the authorities below and has mainly relied on the findings of the AO, Mumbai in the case of lessee by referring to the relevant observation in the impugned appellate order.
38. We will have to revert to the provisions of Section 32 of the Act which reads as under:-
"In respect of depreciation of-
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed."
39. The two requisite conditions for claiming depreciation under this section are :
(i) That depreciable asset is owned by assessee
(ii) That it is used for the purpose of assessee's business The claim of assessee appellant is that the leased assets are owned by it and leasing is one of the objects of assessee company's business and, as such, both the conditions requisite under this provision are fulfilled.
40. On the other hand Id. DR has submitted that the assessee is no longer owner of the leased assets and the lessee company is the actual owner of the assets in question.
41. After going through the whole gamut of facts, we conclude as under. When the assessment orders were originally passed for these two years, the Id. AO allowed depreciation Under Section 32 of the Act by holding that the assessee company is the owner of lease assets which are being used for the business i.e. lease business of the appellant company. But on the basis of assessment order passed in the lessee's case, the same was reopened, and in the reopened assessment, the AO tried to come to the conclusion by referring to various clauses in the lease agreement that the lease in question is not an 'operating lease', rather, it is a 'financial lease' and in case of financial lease the lessor no longer remains the owner of assets. While carrying out reassessment proceedings, the AO issued query to the appellant company that he proposed to disallow the claim of depreciation on the assets leased during the year on the basis of order passed in the case of the lessee company, namely Shree Rajasthan Tax Chem Limited where the Id. AO in the lessee's case was of the opinion that the lessee company was the owner of the leased assets. The relevant extract of the query is as under :-
"Since your company has not used these assets for own business and the lessee company also claimed/was granted depreciation on these assets your company is not entitled for depreciation."
42. As we have observed above, the Id. AR had made a statement at bar that the lessee company did not claim depreciation on the leased assets. This fact gets fortified from this proposed notice reproduced above where the AO has used the words "claimed/was granted" and also the fact that the Id. DR could not deny this fact or could not confirm that such a claim was made by the lessee company. We are convinced that the Id. AO has wrongly observed that the lessee had claimed depreciation on the leased assets which was allowed. There cannot be any doubt about the factum that in case the assessee company used assets for purpose of leasing business, which undoubtedly was one of the objects of the assessee company as the Memorandum of Association, etc, it would amount to be using the assets for its own business. There is also no doubt about the fact that the appellant company is authorized by the Memorandum of Association to carry out the business of leasing and hire purchase. The company during the relevant year carried on the business of leasing to more than one person. This is also a fact available on record that the public financial institutions, namely, Investment credit & Investment Corporation of India Ltd.(ICICI), & Industrial Development Bank of India Ltd.(IDBI), provided financial assistance of Rs. 1500 Lacs against security of assets to appellant company for carrying lease business.
43. The lease agreements dated 14/10/95, 25/11/1995 and 09/11/1996 were entered into on competitive terms and conditions with Shri Rajasthan Texchem Ltd, which is independent public limited company, which is listed in Recognized Stock Exchange. We would like to mention that both the companys are independent legal entities which are incorporated under the companies law. The evidence on record reveals that the suppliers of equipment have supplied and delivered these assets to the appellant company and the payment of taxes etc. have also been made by it. The Insurance Cover Note also mentions the appellant company as the owner of the equipment and has agreed to insure the goods in question.
44. In the financial statements of the appellant company, the leased assets have been separately shown. The accounts have been audited by the statutory auditors and have been approved by the Board of Directors of the Company (which is also comprised of representatives from financial institutions and members of the public) and the same have been approved by the shareholders of the company and have also been filed with the Registrar of companies and the stock exchanges.
45. The salient features of these lease agreements are as under which make it amply clear that the assets leased are owned by the appellant company:
a] Clause (3) of the lease agreement dated 25th Nov., 1995 read with the Schedule thereof provides that the lease period is 120 months and the monthly rent is Rs. 15 per thousand. The monthly rent was increased to Rs. 16.50/- per thousand w.e.f. 01/04/1996 vide letter dt. 11/08/1996, Clause 3 of the other Agreement dt.9th Nov., 1996 read with the Schedule thereof provides that the lease period is 120 months and that the monthly rent is Rs. 18 per thousand.
b] Clause (8) of both agreements clearly provides for ownership of the appellant lessor company . The said clause read as follows:
"The said machinery shall at all times remain sole and exclusive property of lessor and lessee shall have no right, title or interest thereon.
The lessee irrevocably undertakes that at no time during currency of lease agreement, which shall be non-cancelable, not to capitalize lease assets in lessee's Balance Sheet. It has been agreed that the ownership of said assets during tenure of lease, and inclusive of any renewal that lessor may concur, indisputably rest wit the lessor.
Lessee shall not claim any relief by way of any deduction, allowance, or grant available to the lessor as owner of the equipment under Income Tax Act, 1961 or any other statute, rule or regulation issued by the govt. or any statutory authority.
The lessee shall keep machinery at all times for the full term of lease in lessee's possession and control and have right to use said machinery at plant of lessee.
On expiry of the lease period, the lessee shall deliver back the said machinery to lessor in as good condition as at commencement of this agreement, reasonable wear and tear excepted and shall pay all arrears of rent that may be outstanding. Such delivery is to be made to lessor at destination indicated by lessor at the lessee's cost unless otherwise decided by the lessor.
Lessee is a trustee of the machinery teased to it, and, without prejudice to other obligation for the agreement will render himself liable for breach of trust in case of misapplication or misappropriation of the machinery Leased".
c] Clause (10) of both agreements provides that the lessee shall obtain insurance in joint names of the lessor and the lessee and it will be noted in the policy that the lessor and their banker will be the loss payee.
d] Clause (11) declares that the lessee has no right on these assets.
"The lessee not being owner of the machinery has no right to and shall not sell, hypothecate, mortgage, pledge, assign, let or otherwise encumber or suffer a lien upon and / or deal with or part with possession of the said machinery any part thereof without consent in writing of the lessor. In the event of any breach of this sub-clause by lessee, the lessor shall be entitled (but shall not be bound) to pay to any third party such sum as is necessary to procure or release of the said machinery from any charge, encumbrances or lien and shall be entitled to recover any such from lessee forth with "
e] Clause (12) declares that the lessee cannot offer the machinery taken on lease as security.
f] Clause (13) declares that the lessee shall fix a brass plate and/or such other identification mark on each of the said machinery denoting that same belongs to the lessor. The same shall not be removed or defaced by lessee so long as the said property remains the property of the lessor.
g] Clause (15) provides that the lessee shall be solely responsible for property upkeep and maintenance of said machinery and shall carry out periodical repairs and normal overhaul. The lessor shall not be responsible for any repairs whether major or minor and repairs and unkeep and maintenance expenditure will be borne solely by the lessee.
It is, also provided that:
"The lessor shall have the right to inspect through its representative or agents and to bring to the notice of the lessee the periodical repairs and maintenance problems which may arise during the currency of the agreement and in the event of the lessee failing to carryout the repairs of, to make maintenance or overhaul or remedy such deficiency when called upon to do so by the lessor, the lessor shall have the right, but without obligation to carryout the repairs, overhauling or maintenance of the said machinery, in such event, the lessee shall immediately on receipt of a demand notice from the lessor reimbursed the expenditure which might have been incurred by the lessor. Without prejudice to what is stated above, the lessor, in the event of lessee failing to carry on the maintenance or overhaul or to remove such deficiency when called upon to do so, shall have the right to terminate this agreement and to retake possession of the said machinery without prejudice to any claim of the lessor for arrears of rent or damages for breach of this agreement and lessee shall not be entitled to claim any damage, etc."
g] Clause (16) prohibits the lessee from claiming any depreciation under the Income Tax Act, 1961 on the assets taken by them on lease. It is stated "...since the lessee is not the owner of the equipment, the lessee shall not claim any relief.
h] Clause (17) prohibits the lessee from making any additions or improvement to the machineries without the prior consent of the lessor.
i] Clause (27) authorizes the lessor to terminate the agreement in case of breach on the part of the lessee. Clause (28) provides that upon termination, the lessee shall return the said machinery to the lessor at the lessee's risks and costs to a place specified by the lessor.
j] Clause (29) creates a liability to the lessee on indemnify the lessor against any loss / destruction of the machinery.
46. The assets were acquired by the appellant company and the same were delivered to the lessee company. The transportation charges were paid by the appellant company up to the premises of lessee and the same formed part of the value of assets given on lease. The assets were covered under transit insurance risk and the premium was paid by the appellant company till the assets were delivered to the premises of the lessee company.
47. The appellant-lessor Company has received lease rentals from the lessee company amounting to Rs. 78,25,584.00 and Rs. 2,92,72,399.00 in the assessment year 1996-97 and 1997-98 respectively. These incomes have also been shown as Lease rental income in the P&L Account.
48. It is submitted that this is also not a case of sale and lease back because in this case right from the inception the owner of the assets is the appellant company. The delivery and possession of the assets was given to the lessee company only after obtaining possession of the assets by appellant.
49. The lease rental were periodically received by the appellant company. Hence it is clear that the assets given on lease were owned by the assessee company and used for its business of leasing and were used during the relevant accounting year because the assessee was entitled to receive the lease rentals and possession of assets was given to the Lessee Company. Therefore the Assessing Officer was justified in allowing the depreciation in respect of business of leasing of the assessee company on leased assets under Section 143(3), while framing the original assessment.
50. The Vouchers of the Leased Assets added during the Financial Year 1995-96 and given on lease amounting to Rs. 14,62,94,568.00 and Rs. 4,27,287.00 were furnished before Id. A.O. vide letter dated 25.01.1999 on 08.02.99.The assets were not secondhand. It would also be worthwhile to mention that the lessee company, had purchased various other assets, and only some of the assets were taken on hire from the lessor company. There are various steps in the manufacturing process. Only few of the machinery were taken on lease. The total investment was about Rs. 40 cr. by the lessee company, but assets valuing only Rs. 15 cr. were taken on lease. In number out of about 100 machines purchased by the lessee, only about 20 machines were taken on lease, which was about 20 % in terms of machine requirements.
51. We would like to state that it is not necessary that assets which are given on lease should be brought to the premises of Leasing Company and then only it may be given on lease. However in this particular case machines were received at the premises of lessee company and the same were recorded in the Central Excise records duly received. The appellant has also claimed Central Excise Modvat on these machines. Subsequently the machines were given on lease to the lessee company by issue of Central Excise gate pass and following central Excise Rules as prevalent at that time. Under the Central Excise also, the appellant had been considered as owner of the assets, and consequent benefits had been given accordingly.
52. The assets were delivered to the lessee by truck transport and the freight charges were paid by appellant company and taken into the amount of value of assets. The assets were covered for transit insurance and insurance premium was paid by the appellant and the same were declared as the assets of leasing company to the insurance company.
53. Further when the assets were delivered to the lessee, from that date the lease started. A statement giving the date of lease was given to the Id. A.O. vide letter dated 25.01.99 from where it would be clear as and when the assets were delivered. The dates of leasing is given vide letter dated 25.01.1999 in the statement of leased assets in respect of each of the assets. The Id. A.O. and the CIT(A) had wrongly assumed that the lease had started even before the assets were purchased.
54. The complete details of machines given on lease to Shree Rajasthan Texchem Ltd. in respect of the both the Assessment Years giving the respective amount, break up, dates of lease is enclosed. The custom duty, bank charges, freight charges were also paid by the Lessor (SRSL). We have perused the same which proves that the appellant is the owner of the leased assets.
55. Further it is relevant to mention that the Lessee-Company did not claim depreciation in the assessment years 1996-97 and 1997-98 in the returns filed in respect of these assets under Lease. The Id. A.O. and CIT(A) had wrongly observed that on these leased assets the depreciation was claimed by the lessee, which was subsequently withdrawn. The lessee company had never claimed depreciation on these leased assets. It claimed depreciation on its own assets, which was foregone and no depreciation was claimed even on owned assets. The Id. A.O. in the assessment of lessee, directed to allow depreciation on assets owned by the lessee, and also on assets taken on lease from the appellant. However, in appeal the CIT(A), directed that depreciation is optional and if the lessee do not claim, the same cannot be thrust upon it. Therefore no depreciation on leased assets allowed to lessee.
56. The facts of company's leasing business being continued and increased in lease rentals during the assessment year 1997-98 were also informed to the AO vide our letter dated 12.01.2000. It may be pertinent to state that in case of lease transaction, what is actually received is the rental charges or the hire/lease charges for providing facility to use the asset with the inherent risk of wear and tear, obsolescence, consumption, loss of value arising by efflux of time and no element of interest is at all earned in such transactions. This contention is further supported by the fact that in these type of transactions, the ownership continues to be in the hands of the original owner.
57. In lease agreement, a party (called lessee) acquires the right to use an asset for an agreed period in consideration of rent to another party (called lessor).
58. Now a careful perusal of the CIT(A)'s order makes it crystal clear that the Id. CIT(A) has tried to stretch here and there the clauses of the lease agreement in order to christen the lease agreement as a financial lease agreement. We fail to understand that the CIT(A) has come to a conclusion by inferences ignoring the apparent which should be taken to be real, as has been settled by the Hon'ble Apex Court. We are aware that the tax authorities have got all the right to pierce the veil of the company in order to find out the real state of affairs but, piercing of such a veil should not be done with a motive or preoccupation which is based on the findings of some other authority or Officer, as has been done in this case. Had it been the case that the lessee company had claimed depreciation on the leased assets the department would have been up in arms and would have claimed, that look, lessee company has claimed depreciation as owner of this assets so how there can be two owners of one asset. But unfortunately, this is not the case, rather the department has over drawn the inferences from the available evidence to fit in the definition of "Financial Lease" instead of "Operating Lease". When the lessee company has not claimed to be the owner of the assets and there is no dispute regarding the ownership of the assets between the two companies, this cannot be answered by authorities that both the companies are sister companies and they have entered into a sham transaction to avoid payment of tax. The department has to have some independent evidence on the basis of which some conclusions can be drawn against claim of the assessee. We have circumspectiously treaded through appellate order particularly, the paras where the Id. CIT(A) has referred to various clauses of the lease agreement to arrive at a finding that actually the lease in question is a 'financial lease'. When there is no clear cut evidence to support the finding of the CIT(A) and there being two opinions available with the department, the one which favours the assessee should be accepted. This is the settled principle of tax laws. The Id. CIT(A) has tried to pick up one sentence or phrase from the lease agreement and has tried to stretch too far in order to complete the sense which is not apparent on record. We do not feel a need to take up each and every comment which is given by the CIT(A) in his order and to counter it by our reasons. When a machine is given on lease the parties may agree that the maintenance charges shall be borne by lessee and the lessor can put a condition that the machine given in a working condition should be returned back in a working condition after termination of the lease. The maintenance, security, upkeep and even the rent in case the machine is lost and not working for that period can be agreed to be borne by the lessee company. This is a common practice by which a person would like to get the rental income on lease articles and also ensure the safety of the leased asset. This fact, rather places more weight in favour of the lessor that he being the owner of the assets would like to get the rental income regularly even when the machines are not working, so that the lessee may not be negligent in maintaining the machines in question. So in our opinion, the authorities have unsuccessfully pierced the veil of the company and have come to a wrong conclusion that the lease is a finance lease and the lessee is the owner of the leased assets.
59. There is no doubt that by now it is a settled view that when one of the objects of the assessee company is the leasing of assets, and by such leasing, the user of the machine remains with the lessor for Section 32. So when once it is held that the assessee is owner and it had given assets on operating lease, the assessee company is entitled to the depreciation claimed for being owner and the user of the assets in question. In support, we can rely on few decisions on which the Id. AR has rightly relied. These decisions are:-
a. CIT v. Maharashtra Apex Corporation Ltd. (2002) 254 ITR 98 (SC) "From the decision of the High Court [see (1998) 234 ITR 484] to the effect that (i) investment allowance under Section 32A of the Income-tax Act, 1961, could not be denied to the assesses, whose business consisted of leasing of machinery, on the ground that the machinery had not been used by the assessee, and (ii) the assessee was entitled to extra shift allowance of depreciation, even though it was the lessee who had used the machinery in double shift, the Department preferred an appeal to the Supreme Court. The Supreme Court dismissed the appeal.
b. CIT v. Shaan Finance (P) Ltd. / First Leasing Co. of India Ltd. (1998)231 ITR 308 (SC) 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.
In respect of plant and machinery for which investment allowance under Section 32A of the Income-tax Act, 1961, is claimed in any relevant previous year, an assessee must satisfy the following conditions : (1) the machinery should be owned by the assessee; (2) it should be wholly used for the purposes of the business carried on by the assessee, and (3) the machinery must come under any of the categories specified in Section 32(2).
Therefore, a leasing or finance company, which owns machinery and leases it to third parties who use the machinery for manufacture of articles or thing as specified in Section 32A(2)(b)(iii), is entitled to investment allowance in respect of such machinery under Section 32A.
When machinery is given on hire by the owner to the hirer on payment of hire charges, the income derived by the owner is business income. The hirer, on the other hand, who pays hire charges is entitled to claim these as revenue expenditure. The hirer has not acquired any new asset. A transaction of hire is, therefore, of bailment of the machinery. There is no extinguishment of any right of the owner in the machinery. There is merely a licence given to the hirer to use, for a temporary period, the machinery so hired. In the absence of any element of sale, there is no reason for treating such an agreement as "transfer" or disallowing the grant of investment allowance, when the assessee complies with the requirements of Section 32A.
c. CIT v. Essan Investments Ltd. (2002) 254 ITR 83 (Mad) Held, that the assessee was admittedly engaged in the business of leasing of earth moving equipment. The fact that such earth moving equipment was utilized in industrial activity was not in dispute. It is not necessary that in order to claim this allowance, the assessee himself should be engaged in the manufacture. The fact that the machinery owned by the assessee was leased to manufacturers and used for manufacture was sufficient. The assessee was entitled to investment allowance in respect of the machinery.
d. CIT v. Madan & Co. (2002) 254 ITR 445 (Mad) The word "hire" used in entry No. III (2)(ii) of Appendix I to the Income-tax Rules, 1962, is only meant to denote that the use of the vehicle is not by the owner himself for his own purpose, but it is given to another for use for a limited period, of that other for a consideration. For this purpose, there is no qualitative difference between lease of the vehicle for a specified period for consideration and letting the vehicle on hire for short duration on payment of hire charges. The fact that the assessee chooses to lease out the trucks does not on that score disentitle him to claim the benefit of the higher rate of depreciation.
Held accordingly, that for the assessment year 1991-92, the Tribunal had rightly granted the higher rate of depreciation to trucks as falling under Entry No. III (2)(ii) of Appendix I to the Income-tax Rules, 1962.
e. Joint Commissioner of Income tax v. Anatronics General Co. (P) Ltd. (2001) 247 ITR 25 (Del) The assessee-company supplied bottles to other concerns on lease basis. Depreciation was claimed on the value of bottles at 100 per cent The Income-tax Officer was of the view that since the bottles were used in a leasing business and were handled only in bulk each bottle could not be treated separately as plant for allowance of 100 per cent depreciation. The Tribunal reversed the order of the Income-tax Officer. On a reference :
Held, that each bottle would constitute a plant and no distinction was permissible merely because the assessee was a leasing concern. Accordingly the Tribunal was justified in upholding the assessee's claim for allowance of depreciation at 100 per cent.
f. CIT v. Rensult Investment & Finance P. Ltd. (1998) 233 ITR 172 (Bom) Held, that from a reading of Section 32A, it is clear that in order to get the benefit of investment allowance in respect of any machinery or plant, the assessee must prove that the machinery was owned by him and that it was wholly used for the purpose of the business carried on by him. The assessee must also satisfy that the machinery or plant was installed in any industrial undertaking for the purpose of manufacture or production as specified in Sub-section (2) of Section 32A. In the instant case, there was no dispute about the fact that the items of machinery in respect of which investment allowance was claimed were owned by the assessee. So far as the user of the machinery for the purposes of the business of the assessee was concerned, there was nothing to show the nature of financing and leasing--whether it was a case of hiring simpliciter or leasing simpliciter or hire purchase or any other form of transfer.
g. Mulraj Dwarkadas Goculdas v. Dy. CIT (1994) 48 TTJ (Bom) 531 Depreciation--Allowability--Leasing of gas cylinders--Gas cylinders purchased by assessee in the relevant previous year and an agreement of lease was also entered into--Lease rent relatable to relevant previous year accounted in books and offered for taxation -- It was never stated that lease agreement had commenced on a later date--Assessee had also received money in advance from lessee-Mere fact that delivery of cylinders was given to lessee in subsequent year as certain formalities required to be complied with by lessee were not finalized, would not disentitle assessee to claim depreciation--In a leasing business, what is required before depreciation could be allowed is that the asset must have been formally introduced in the business of lease--It would be immaterial if the lessee has not put to use the leased out asset.
h. Peacock Chemicals Pvt. Ltd. v. Dy. CIT (1995) 51 TTJ (Del) 264 The trucks have been registered in the name of the assessee before the end of the accounting period. The lease agreement with T Ltd. clearly shows they had clearly agreed to place some security deposit and take the various trucks on hire and on that basis had taken delivery of the trucks from the assessee. The income on hire had also been paid which has been shown as income and has been taxed as such in the hands of the assessee. The invoices, etc., alongwith the insurance of the trucks established that the assessee is the owner. It is also undisputed that one of the business activities of the assessee-company is leasing. Heaving leased out its trucks to the lessee with or without any body thereon, the assessee must held to have used the trucks for the purposes of its business and, therefore, is eligible for depreciation. Accordingly depreciation is allowable on the trucks in accordance with the rules.
After considering the statement of managing director of NAPL and also the invoice that has been raised on the assessee and the undisputed fact that the sale of cylinders by NAPL was assessed in the hands of the company as a sale, nothing remains to be done at the end of the assessee to establish that it has purchased these cylinders. The cylinders being in the nature of movable property, constructive delivery is sufficient enough. Since constructive delivery was also given to NAPL based on which charges were received, the assessee had established ownership, usage of the assets for the purpose of its business. Therefore, it is rightly entitled to depreciation.
The photocomposing and typesetting machine was installed or place din the premises of the lessee on 31st March, 1989. The lease was entered into on 30th March, 1989 and the assessee also received lease charge on the photocomposing machine and the typesetting machine. The facts as above are not disputed which indicate that the assesses had been delivered with the system and the assessee on its part had given the same on tease to the party and had received the lease charges, its usage for business and ownership having been established, it is entitled to depreciation.
Assessee engaged in leasing business, having leased out various: assets to vendors itself from whom the assets were purchased, was entitled to depreciation thereon once assessee established its ownership.
60. The case of the revenue was entirely based on the theory that in view of the nature of agreement between the assessee and its lessees, the assessee should be treated to have ceased to be the owner of assets for the purpose of depreciation allowances. In support of this contention it was argued that the agreement the assessee entered into were financial leases whereunder the assessee only held assets in question as a security for the amounts of loans advanced by assessee to lessee. Merely because in the perception o the Assessing Officer, certain clauses of the lease agreements were unreasonable or even incongruous, it could not be concluded that the assessee had not entered into these agreements as a lessor-owner of the assets in the ordinary course of its business of leasing. It is well-settled position in law that Court cannot rewrite an agreement for the parties. Further, an agreement is to be read and construed as a whole, effect being given to all the parts thereof, and no part of it should be ignored unless it is so inconsistent with the rest of its that no meaning can be given to it. On an overall reading of these lease agreements, there was nothing inconsistent therein of the which could show the intention of the parties otherwise.
61. In the result we hold that the assessee company is the owner of the leased assets and has leased out these assets to the lessee company for a rent and thereby the assessee company is also in the user of the asset, and as such, is entitled to depreciation Under Section 32 of the Act. This ground of appeal is.
62. Now we come to the next grounds taken by the appellant which are as under:
i) Treatment of lease rents
ii) Deductions under Chapter VIA
iii) Interest Under Sections 234B and 234C and withdrawal of interest Under Section 244A.
63. In the light of our above findings for main grounds, these grounds do not require adjudication and have become academic. So these grounds are dismissed.
64. In the result for both the years it is held that the assessee company is the owner and user of the leased assets and is entitled to depreciation as per law as stated above.
65. In the result both the appeals are partly allowed.