2002 (6) TMI 169 - AT - Income Tax

Summary

Issues Involved:
1. Ownership and business operations of the assessee's proprietary units.
2. Transactions related to the purchase and loaning of LPG cylinders.
3. Tax treatment of security deposits received from loaning cylinders.
4. Claim of 100% depreciation on cylinders.
5. Genuineness of the transactions and compliance with statutory regulations.

Detailed Analysis:

1. Ownership and Business Operations of the Assessee's Proprietary Units:
The appellant-assessee is the proprietor of three units: Kabsons Control, Hyderabad; Kabsons Industries, Hosur, Tamil Nadu; and G.K. Kabra Enterprises, Pune. Separate sets of accounts are maintained for each unit. The main issues in these appeals relate to transactions in Kabsons Control, Hyderabad. The appellant has a distinguished career as an engineer with various awards and patents to his credit, and his family is involved in industry and trade. Kabsons Industries and G.K. Kabra Enterprises run LPG gas filling stations under the brand name 'Kabsons Gas,' while Kabsons Control manufactures regulators and valves used with appliances/cylinders.

2. Transactions Related to the Purchase and Loaning of LPG Cylinders:
The assessee allegedly purchased 7,200 cylinders in the year relevant to the assessment year 1994-95 from M/s. Detective Devices P. Ltd., utilized them in its gas business, and loaned them to M/s. PKL Limited, receiving Rs. 17,28,000 as a security deposit. Similarly, for the assessment year 1995-96, Kabsons Control purchased 14,800 cylinders from M/s. Ideal Engineers at a cost of Rs. 32,58,476, loaned them to M/s. PKL Ltd., and received Rs. 36 lakhs as a security deposit. The cylinders were filled with 1/2 kg. of gas each and sold to M/s. PKL Ltd. The assessee raised separate invoices for the sale of gas and disclosed the profit on the sale of gas in its return.

3. Tax Treatment of Security Deposits Received from Loaning Cylinders:
The assessee claimed that the security deposit was refundable and not taxable. The Assessing Officer (AO) observed that the so-called loan of cylinders was actually a sale transaction, as the sale of cylinders was not allowed under the Indian Explosives Act. The AO treated the security deposit as sale proceeds and added Rs. 17,28,000 for the assessment year 1994-95 and Rs. 36,00,000 for the assessment year 1995-96 to the assessee's income. The AO also disallowed the depreciation claimed by the assessee on the cylinders.

4. Claim of 100% Depreciation on Cylinders:
The assessee claimed 100% depreciation on the cylinders under section 32(1)(ii) of the Act, arguing that each cylinder's cost was less than Rs. 5,000. The AO disputed the ownership of the cylinders, holding that they were sold and not used as plant by the assessee, and thus disallowed the depreciation claimed. The AO subsequently passed modification orders allowing the cost of cylinders as a deduction from the security deposit treated as sale proceeds, determining the total income at Rs. 23,60,140 for the assessment year 1994-95 and Rs. 34,10,722 for the assessment year 1995-96.

5. Genuineness of the Transactions and Compliance with Statutory Regulations:
The CIT(A) held that the entire transaction of purchase of cylinders, utilization in the gas business, and the so-called loan to M/s. PKL Ltd. was a sham. The CIT(A) upheld the disallowance of depreciation but directed the AO to delete the profit on the sale of cylinders, noting that the transactions did not have any genuine commercial purpose and were solely to reduce taxable income. The CIT(A) relied on his appellate order in the case of Kabsons Gas Equipment Ltd. for the assessment years 1995-96 and 1996-97, concluding that the transactions were colorable devices and dubious tax planning.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the entire scheme of purchasing and loaning cylinders was a sham, aimed at claiming 100% depreciation and exemption on the security deposit received. The Tribunal dismissed the assessee's appeals, affirming that the transactions were not genuine and were designed to avoid tax liability.