2007 (9) TMI 709 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal failed to examine the entire transaction of the assessee which would have disclosed that the assessee was a mere financier and claim of purchasing the assets and entering into lease agreement and thereafter claiming depreciation over it was a device created for the purpose of avoiding tax?
2. Whether the Tribunal failed to take into consideration the relevant materials like the certificate issued by Gujarat Energy Development Agency and statements made by the Director of REPL, and lease transactions entered into by the assessee with third parties like REPL were bogus transactions and the assessee had claimed depreciation falsely on these non-existing assets and consequently recorded a perverse finding?
3. Whether the Tribunal relied on relevant materials like invoices for having purchased the assets, payment made, and clearing agents' certificates which did not disclose the actual existence of assets as held by the assessing officer?
4. Whether the Tribunal, having held that opportunity had to be granted to the assessee to cross-examine the persons whose statements the assessing officer had relied on, should have remanded the matter back for fresh consideration as was done by the Appellate Commissioner?

Issue-wise Detailed Analysis:

1. Examination of the Entire Transaction:
The Tribunal failed to properly examine the entire transaction of the assessee, which would have revealed that the assessee was merely acting as a financier. The claim of purchasing the assets and entering into lease agreements to subsequently claim depreciation was a device created to avoid tax. The assessee did not provide substantive evidence to establish ownership of the assets, which were allegedly leased to REPL. The burden of proof lay with the assessee to demonstrate that it had acquired and used the assets in its business, which it failed to do.

2. Consideration of Relevant Materials:
The Tribunal did not adequately consider relevant materials such as the certificate issued by Gujarat Energy Development Agency (GEDA) and statements made by the Director of REPL. The GEDA certificate, which was crucial in establishing the existence of the assets, was denied by GEDA. The statements from REPL's directors indicated that the lease agreements were not genuine and the assets did not exist. The Tribunal's failure to consider these materials led to a perverse finding that the transactions were genuine.

3. Reliance on Invoices and Certificates:
The Tribunal relied on invoices, payments, and clearing agents' certificates, which did not conclusively prove the existence of the assets. The assessing officer had found that the assets were not installed at the claimed location and that the documents presented by the assessee were fabricated. The Tribunal's reliance on these documents without verifying their authenticity was erroneous.

4. Opportunity for Cross-examination:
The Tribunal held that the assessee should have been given an opportunity to cross-examine the persons whose statements were relied upon by the assessing officer. However, the Tribunal should have remanded the matter back for fresh consideration, as done by the Appellate Commissioner. The failure to do so was a procedural error. Despite this, the substantive evidence indicated that the assets did not exist, and the transactions were not genuine.

Conclusion:
The High Court concluded that the Tribunal and the Commissioner of Income Tax Appeals had erred in their findings. The substantial questions of law were answered in favor of the revenue. The block assessment order passed by the assessing officer was restored, confirming that the assessee had falsely claimed depreciation on non-existing assets, and the transactions were merely financial arrangements to evade tax. The appeals were allowed, and the orders of the Tribunal and Commissioner of Income Tax were set aside.