1996 (12) TMI 88 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of the claim of depreciation amounting to Rs. 11,60,300.
2. Exclusion of Rs. 1,80,000 from the total income of the assessee on account of lease rent.
3. Disallowance of Rs. 11,000 from the professional fees of Rs. 21,000 claimed by the assessee.

Issue-wise Detailed Analysis:

1. Disallowance of the Claim of Depreciation Amounting to Rs. 11,60,300:
The main point of dispute relates to the disallowance of the claim of depreciation amounting to Rs. 11,60,300. The assessee, a private limited company engaged in the construction of a commercial complex, filed its return for the assessment year 1989-90 declaring a loss of Rs. 4,428. During a search and seizure operation, a disclosure of Rs. 10 lacs was made as undisclosed income. The assessee set off this disclosed income against the depreciation claimed on machinery purchased from M/s. Patel Dying & Printing Mills (P) Ltd. for Rs. 27,85,000. The AO concluded that the purchase of machinery was an afterthought and a device to evade tax. The AO's reasoning included discrepancies in the books of M/s. Vimla Silk Mills (P) Ltd., which showed irregular entries and different ink usage for certain transactions. The AO also noted that the machinery was already let out, and the lease rent entries were made post-audit. The CIT(A) confirmed the AO's order without independent reasoning.

The Tribunal, however, found that the assessee had made a substantial payment of Rs. 10 lacs and accepted the liability for the balance, which was reflected in the balance sheets of both the purchaser and seller. The Tribunal held that the ownership of the machinery passed legally and validly to the assessee and that the assessee was entitled to depreciation under Section 32(1) of the IT Act. The Tribunal also distinguished the facts of this case from the Supreme Court's decision in McDowell & Co. vs. CTO, stating that the legal relationship of purchaser and seller was clear and valid.

2. Exclusion of Rs. 1,80,000 from the Total Income of the Assessee on Account of Lease Rent:
The AO excluded Rs. 1,80,000 from the total income of the assessee, claiming that no lease rent was actually received. The Tribunal found that the payment of lease rent was made in discharge of legal liabilities and obligations. M/s. Vimla Silk Mills (P) Ltd. paid the rent to the assessee, which was then transferred to M/s. Patel Dying & Printing Mills (P) Ltd. for the balance sale price of the machinery. The Tribunal held that the receipt or non-receipt of rent could not displace the concrete evidence regarding the sale of machinery and that the assessee was entitled to include the lease rent in its income.

3. Disallowance of Rs. 11,000 from the Professional Fees of Rs. 21,000 Claimed by the Assessee:
The assessee claimed a sum of Rs. 21,000 for professional fees, out of which the AO disallowed Rs. 20,000. The CIT(A) found the disallowance excessive and reduced it to Rs. 10,000. The Tribunal upheld the order of the CIT(A) as no specific arguments were advanced by the assessee in support of this ground.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal directed that the assessee was entitled to depreciation and that the lease rent of Rs. 1,80,000 should be included in the income of the assessee. The disallowance of Rs. 11,000 from the professional fees was upheld.