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4. The facts relevant to the aforesaid issue are as under. During the assessment year the assessee-company mainly carried on business in 5 major divisions i.e., (a) Coal Sale Division; (b) Produce Exchange Division; (c) Distillery Division; (d) Printing Division; and (e) Construction Division. In the immediately preceding year the company was also dealing in shares but in the year under consideration, the said business was stopped and it switched over to the investment in shares. The assessee claimed to have undertaken leasing business for the first time during the accounting year relevant to the asst. yr. 1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T. Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them. The cops are of no use in the business of the assessee-company in any of the aforementioned divisions. The assessee entered into a lease transaction with JCT Ltd. on usual terms. In the year under consideration, assessee claimed 100 per cent. depreciation on the aluminium cops purchased as the value of each cop is below Rs. 5,000. The AO did not accept the sale and lease back transaction on the ground that it is a colourable transaction. In his opinion the decision of the Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC), squarely applies to the facts of the case, as the real purpose of the transaction was purely to finance JCT Ltd. which has been given the colour of a leasing transaction. The AO further observed that in the guise of lease transaction, assessee-company reduced its profits by claiming depreciation and JCT Ltd. continued to enjoy the assets even after the sale and the capital gains arising from high-pitched sale was set off against the losses of the year thereby paying no tax on capital gains. He thus concluded that the transaction is not lease transaction but merely a lending transaction. He, therefore, disallowed the claim of depreciation and in place of taxing the lease rentals, he sought to bring to tax the probable interest on the sale consideration at 21 per cent.

Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons :

(a) Payment was made by account-payee cheque;

(b) Sale and lease back is an accepted method in the market;

(c) Financing the companies by this method is a commercially convenient procedure; and

(d) In the hands of the vendor-company, the sale price was already subjected to capital gains tax.

Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no tax evasion is proved in the instant case nor is there any basis to consider the transaction as colourable transaction. He further submitted that in the case of sale and lease back transaction, it is not necessary to take physical delivery of aluminium cops and, in fact, the constructive delivery is accepted as a valid mode by the CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with JCT Ltd., which is a sister concern, it cannot be attributed that the transaction is colourable, inasmuch as, JCT Ltd. has entered into similar transaction with outsiders also at around the same price. Thus, the assessee-company cannot be said to have done a favour by purchasing the cops at such price. In other words, it is the case of the learned counsel that the price paid by the assessee-company was the market price during the relevant point of time and the fact that the transaction was between the assessee-company and its sister concern, would not change the bona fide transaction into a colourable transaction, so as to apply the decision of McDowell's case (supra). Adverting our attention to the material papers furnished before us, learned counsel submitted that the original cost of 18,25,000 cops in the hands of JCT Ltd. was Rs. 8,55,18,922 whereas, after the depreciation, the WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop. The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO as well as the first appellate authority have not properly appreciated the facts and circumstances of the case and disallowed the claim by merely holding that the transactions are colourable. Learned counsel submitted that the decision of the Hon'ble Supreme Court in the case of McDowell (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions :

(a) M. V. Valliappan & Ors. vs. ITO (1988) 170 ITR 238 (Mad); and

(b) CWT vs. Arvind Narottam (1988) 173 ITR 479 (SC).

Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.

8. On the other hand, learned Departmental Representative submitted that both the parties belonged to Thapar Group and the very first transaction of lease was by purchase of second hand cops, that too from the sister concern, and the facts and circumstances would, unequivocally prove that the transaction is not with a bona fide intention to carry on leasing business. He further submitted that aluminium cops are used in textile manufacturing and the assessee-company was never in the business of textile and the fact that two days before the closure of the financial year assets were purchased and leased back would also show that the main intention of entering/into this transaction is to claim tax advantage both by the assessee-company as well as by JCT Ltd. and the tax avoidance being the prime consideration, McDowell's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the purchase price was higher than the price for which JCT Ltd. purchased the cops and this highlights that the transaction is not bona fide. He further submitted that the transaction is only a financial arrangement and also to claim depreciation and for such colourable transaction, judicial sanction should not be given. Drawing our attention to Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard. In support of his contention that subsequent legislation should be taken as legislative exposition of the existing law, learned Departmental Representative relied upon the following two decisions :

10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 43(1) of the Act. It is well settled that 'actual cost' to the assessee is the cost paid by the assessee in purchasing assets. There is no legal prohibition for purchasing the assets at a particular value and legitimate transaction cannot be viewed as a colourable transaction so as to apply McDowell's case (supra) unless there is sufficient evidence on record to prove that the price paid by the assessee is abnormal or higher than the market price. In the instant case, assessee submitted before the tax authorities that cops were not only purchased by the assessee but were also purchased by other companies (not connected with JCT Ltd.) from JCT Ltd. at the same price and hence it cannot be said that the price paid by the assessee is not the market price. Even otherwise, to safeguard the interests of the Revenue, the legislature provided for substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO is satisfied that the main purpose of the transaction was reduction of liability to income-tax by claiming depreciation with reference to enhanced cost. Explanation 3, by implication, says that merely because the price paid by the assessee is higher than the market value, McDowell's case (supra) should not be pressed into service. But nevertheless, the AO was authorised under the Explanation to fix reasonable price as the actual cost to the assessee in the facts and circumstances of the case. In our opinion, AO as well as first appellate authority have not considered the issue from this angle. In the case of sale and lease back transaction, physical delivery is not relevant and it is not necessary that the items purchased are capable of being used in the lessor company, inasmuch as, in a leasing business, assessee is concerned with earning income by leasing the assets but not in utilising the same for his own business.