2003 (12) TMI 296 - AT - Income Tax

Income Escaping Assessment - Assumption of jurisdiction - depreciation u/s 32 on leased assets -Treatment of lease rents - Nature of financing and leasing - HELD THAT - The expression escaped assessment clearly connotes a very basic postulate that the income for a particular assessment year went unnoticed by Assessing Officer 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 Assessing Officer 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 consideration 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. A perusal of lease agreements in question show that the lease was an operating lease. In this connection clauses (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. 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. It is true in this case that notice u/s 148 has been issued on the basis of change of opinion and there being no other reasonable basis for doing so. The Assessing Officer 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. When the Assessing Officer 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 something strange that the Assessing Officer 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 Assessing Officer would have got good argument to support his action. So, we hold that the change of opinion of one Assessing Officer which is further based on the opinion of the other Assessing Officer in case of another assessees, cannot be a ground for assuming jurisdiction u/s 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, we come to the conclusion that the assumption of jurisdiction by the ld. Assessing Officer of lessor at Udaipur is illegal, and as such is quashed. Depreciation u/s 32 - This is the settled principle of tax laws. The ld. 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. 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 machinery 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. 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 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 of 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. 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 u/s 32 of the Act. This ground of appeal is. 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. In the result both the appeals are partly allowed.

Summary

Issues Involved:
1. Reopening of assessment u/s 147/148.
2. Claim of depreciation on leased assets u/s 32.
3. Treatment of lease rents.
4. Deductions under Chapter VIA.
5. Interest u/s 234B and 234C and withdrawal of interest u/s 244A.

Summary:

1. Reopening of Assessment u/s 147/148:
The Tribunal examined whether the reopening of assessments for the years 1996-97 and 1997-98 was justified. The Assessing Officer (AO) at Udaipur initiated reassessment proceedings based on the findings of the AO at Mumbai, who allowed depreciation to the lessee company on the same leased assets. The Tribunal concluded that the reopening was based solely on the opinion of another AO without any new material evidence. It was held that the change of opinion does not justify reassessment, citing various judicial precedents. Therefore, the assumption of jurisdiction u/s 147/148 was deemed illegal and quashed.

2. Claim of Depreciation on Leased Assets u/s 32:
The Tribunal addressed the disallowance of depreciation on leased assets by the AO and CIT(A). It was established that the appellant company was the owner of the leased assets and that leasing was part of its business. The Tribunal referred to the lease agreements and concluded that the leases were operating leases, not financial leases. The appellant company fulfilled the conditions of ownership and usage of the assets for its business, thus entitling it to claim depreciation u/s 32. The Tribunal relied on several judicial decisions to support this conclusion.

3. Treatment of Lease Rents:
Given the findings on the main issues, the Tribunal did not find it necessary to adjudicate separately on the treatment of lease rents, as the matter became academic.

4. Deductions under Chapter VIA:
Similarly, the Tribunal did not address the deductions under Chapter VIA separately, as the primary issues resolved the matter.

5. Interest u/s 234B and 234C and Withdrawal of Interest u/s 244A:
The Tribunal did not specifically adjudicate on the interest issues due to the resolution of the primary grounds.

Conclusion:
The appeals were partly allowed, with the Tribunal holding that the appellant company was entitled to claim depreciation on the leased assets for both assessment years. The reopening of assessments was quashed as illegal.