2013 (1) TMI 338 - HC - Income Tax

Depreciation on sale and lease back contracts and lease contracts - disallowance as the supplier of the material was not traceable or for other technical reasons - Sale and lease transactions from Asian Electronics Limited - Held that - In the light of the specific averment made by the assessee that the documents, the purchase invoices filed before this Court were also available with the Officer, in fairness to the claim of the assessee, we feel that the consideration of sale and lease back transactions has to be restored to the file of the Assessing Officer so as to enable the assessee to produce the original purchase invoices for the purpose of satisfying the Assessing Authority as regards the ownership of the machinery by the assessee. The assessee is directed to produce the same before the Assessing Officer. On such production and on satisfaction, the Assessing Officer may pass such orders on the claim in accordance with law - in favour of assessee for statistical purposes. BPL Systems and Products Limited - Held that - The claim of the assessee was rejected was on account of discrepancies in the payment of rental by the lessee and received by the assessee and the Revenue had not disputed the purchase by the assessee from BPL Systems and Products Limited. A mere discrepancy in the lease rental payment per se does not negate the claim of the assessee as owner of the machinery. In the circumstances, reverse the order of the Tribunal, thereby allow the claim of the assessee and the Assessing Officer is directed to grant relief of depreciation - in favour of assessee. Enterprising Enterprises Limited - Held that - The Chartered Accountant certificate dated 26.7.95 states that Tata Model 320 Crane Sl.No. T 3684 and T 3694 belonging to Enterprising Enterprises are free from encumbrance. A reading of this document starting from the invoice in the name of First Leasing Company in the year 1991 to the Chartered Accountant certificate dated 26.7.95 referring to TATA Model Crane, no ground to accept the case of the assessee. The documents produced before the authorities concerned, this had not in any manner helped the assessee in establishing the fact that the assessee had purchased these cranes from Enterprising Enterprises and leased out the same to the lessee company. In the absence of the materials to substantiate the claim, that they had purchased these cranes for the purpose of leasing out, we have no hesitation in rejecting the claim of the assessee - against assessee. Indian Organic Chemicals Limited - Held that - Considering the nature of the machinery which was the subject matter of the sale of lease back transaction, doubting the bona fide of the transaction, the Tribunal confirmed the findings of the Officer. Even though the assessee submitted that the assets were movable asset, hence, constructive delivery concept could not be negatived, in the absence of any specific ground taken on the findings of the Tribunal that the machines in question were available as independent machinery and not part of the larger manufacturing process, no justification to accept the plea of the assessee on the aspect of constructive delivery. There is no explanation as to how the assets in question were singled out from the larger constitution of manufacturing system to contend that there was a sale of machinery for lease back transaction. In the absence of any specific explanation in this regard, the assessee is not entitled to claim on depreciation - against assessee. Patheja Forgings & Auto parts Manufacturing Limited - Held that - Tribunal came to the conclusion that it was only a finance transaction and actually the assessee lent the money to M/s. Patheja Forgings & Auto Parts Manufacturing Limited and the assessee was not entitled for depreciation on the same transaction. Assessee contended that the lessee was manufacturer of the assets & since the matters were pending before BIFR, the assessee could not produce original invoice. On a query raised by this Court as to the stage of BIFR proceedings, it was informed that a reference was made to the Court as early as 2002, but nothing was heard about pendency of the proceedings, the assessee had not taken any steps in this regard to find out how its interest are secured. Whatever be the reasons for that, the fact remains that even the valuation report could not rest on the value indicated in the original invoices and just on the basis of the valuation report, the assessee could be said to have discharged its burden - against assessee. NEPC MICON Limited - Held that - The assessee could not explain as to why the valuer had requested NEPC to place the name Board mentioning the details Financed by First Leasing Company . Whatever be the correctness of the claim of the assessee, the document herein show that the transaction, even though the invoices filed by the assessee indicated that there was a sale, yet, in view of the observation made in the inspection report that boards mentioning Financed by First Leasing Company , Madras be kept, we have no hesitation in confirming the order of the Tribunal holding that the assessee had not discharged the burden of prove - against assessee. Navbharat Industrial Linings & Equipment Limited - Tribunal rejected the assessee s plea that the actual use by the lessee was immaterial and the assessee used the assets in its business of leasing - Held that - As decided in CIT v. SHAAN FINANCE LIMITED 1998 (3) TMI 8 - SUPREME COURT to which the assessee is also a party, considering the nature of business of the assessee in leasing out machinery, what is required is that the asset is put to use in the business of the assessee for the purpose of granting 100% depreciation - in favour of assessee. K.K.NAG Limited - Held that - A reading of the document filed before this court show sale of electric motor, moulding machine type and dimineralisation plant. While some of the documents related to sale by lessee company to the assessee, there are also documents evidencing sale of machineries in favour of the lessee. There are no explanation from the assessee regarding this. In the circumstances, there are no materials to substantiate the real transaction evidencing sale of machineries by lessee in favour of the assessee herein and subsequent lease in favour of the lessee - against assessee. Universal Starch Chemical Limited - Held that - In the written submission placed before the Commissioner of Income Tax (Appeals), the assessee pointed out that the Assessing Officer had omitted to include the charges in original cost of the machineries at Rs.86,55,699/-. Taking the actual cost at Rs.75,73,737/-, the Assessing Officer allowed depreciation at 25%. The total cost claimed by the assessee as Rs.1 crore stands explained. In the circumstances, we allow the claim of the assessee in this regard. The order of the Tribunal stands set aside - in favour of assessee. Direct lease transaction with IPCA Lab Limited & Galaxy Indo Fab Limited - Held that - Do not find that the claim of the assessee herein could be accepted considering the fact that the sale invoices given by supplier contains no evidence and even their existence through registration number quoted in the invoice before Sales Tax Authorities was not substantiated, particularly, in the case of direct lease - againt assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on sale and leaseback contracts and lease contracts.
2. Justification of disallowance due to untraceable suppliers or technical reasons.
3. Valuation of leased assets for specific companies.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Sale and Leaseback Contracts and Lease Contracts:

The court examined various sale and leaseback transactions and direct lease transactions to determine the legitimacy of the depreciation claims. The transactions involved multiple companies, including Asian Electronics Limited, BPL Systems and Products Limited, Enterprising Enterprises Limited, Indian Organic Chemicals Limited, Patheja Forgings & Auto Parts Manufacturing Limited, NEPC MICON Limited, Navbharat Industrial Linings & Equipment Limited, K.K.NAG Limited, Universal Starch Chemical Limited, IPCA Lab Limited, and Galaxy Indo Fab Limited.

For Asian Electronics Limited, the court found that the assessee had provided sufficient documentation, including purchase orders and evidence of lease rentals, to substantiate the sale and leaseback transaction. The court directed the Assessing Officer to reassess the claim upon the production of original purchase invoices.

In the case of BPL Systems and Products Limited, the court noted discrepancies in lease rentals but found no dispute regarding the sale and subsequent lease. The court reversed the Tribunal's decision and directed the Assessing Officer to grant depreciation relief.

For Enterprising Enterprises Limited, the court found inconsistencies in the documentation, including discrepancies in invoice dates and the mortgaging of assets by the lessee. The court upheld the Tribunal's decision to reject the depreciation claim.

Regarding Indian Organic Chemicals Limited, the court confirmed the Tribunal's findings that the assets were integral to the manufacturing system and could not be hived off without significant disruption. The court upheld the disallowance of depreciation.

In the case of Patheja Forgings & Auto Parts Manufacturing Limited, the court noted the lack of original invoices and the questionable valuation of old and non-working machinery. The court upheld the Tribunal's decision to treat the transaction as a financial arrangement rather than a genuine sale and leaseback.

For NEPC MICON Limited, the court found that the windmills in question were not installed in the assessee's name during the relevant financial year, and there was a significant delay in the change of ownership records. The court upheld the Tribunal's rejection of the depreciation claim.

In the case of Navbharat Industrial Linings & Equipment Limited, the court applied the precedent set in CIT v. SHAAN FINANCE LIMITED, granting full depreciation relief based on the nature of the leasing business.

For K.K.NAG Limited, the court found no evidence of actual transfer of assets and upheld the Tribunal's decision to reject the depreciation claim based on the lack of substantive documentation.

Regarding Universal Starch Chemical Limited, the court found that the Assessing Officer had incorrectly applied Explanation 4A to Section 43(1) and failed to account for customs duty in the asset's cost. The court directed the Assessing Officer to reassess and grant the depreciation claim.

2. Justification of Disallowance Due to Untraceable Suppliers or Technical Reasons:

For IPCA Lab Limited and Galaxy Indo Fab Limited, the court noted that the suppliers did not respond to inquiries or the letters returned unserved. The Tribunal restored the Assessing Officer's decision to disallow depreciation due to the lack of evidence substantiating the existence and transfer of assets. The court upheld the Tribunal's findings, emphasizing the need for tangible proof of transactions.

3. Valuation of Leased Assets for Specific Companies:

The court scrutinized the valuation of assets leased to companies like M/s. Sanghi Textiles Ltd., M/s. Enterprising Enterprises, and M/s. Patheja Forgings & Auto Parts Mfg. Ltd. The Tribunal had found that the valuation reports lacked essential details such as the year of manufacture, model, capacity, and expected life of the machinery. The court upheld the Tribunal's decision to reject the depreciation claims based on insufficient valuation evidence.

Conclusion:

The court allowed the appeal partly, granting relief in cases where sufficient documentation and evidence were provided (e.g., Asian Electronics Limited, BPL Systems and Products Limited, Navbharat Industrial Linings & Equipment Limited, and Universal Starch Chemical Limited). However, it upheld the disallowance of depreciation in cases lacking proper documentation or where transactions appeared to be financial arrangements rather than genuine sale and leaseback transactions. The court emphasized the importance of substantiating claims with concrete evidence and documentation.