2013 (11) TMI 658 - HC - Income Tax

Depreciation on non-existing assets - Allowability of depreciation on MS Rolls - Assessee claimed 100% depreciation of Rs.1,67,23,582/- on the plant and machinery leased to BSAL Held that - In the survey conducted under Section 133A of the Act in the premises of the BSAL, Bellary, it was found that M.S.Rolls said to have been leased by the assessee were not in existence. The M.S.Rolls was obtained by the assessee under hire purchase from KMFL and the assessee is not the real owner of the goods. The entry tax is payable on the goods entering into a local area for consumption or for sale. The assessee has neither consumed nor used the Rolls. No document has been produced with regard to payment of tax and also with regard to transportation of the goods from Mumbai to Bellary. While surveying, authorities noticed that no documents were found to support the lease, no stock register was found. The photocopies of the delivery challans do not bear the seal of sales-tax check post either in the State of Maharashtra or in the State of Karnataka. There is no evidence for payment of entry tax. The transporter has denied the transportation of Rolls from Mumbai to Bellary. The Supplier of M.S.Rolls also denied the supply of M.S.Rolls either to the Transporter or to BSAL. The Managing Director of BSAL admitted that it is only a paper transaction. Assessing Officer on the basis of the survey conducted in the premises of BSAL found that lease has been created on the basis of the non-existing assets. Accordingly, notice has been issued. All the above facts go to prove that hire purchase and lease transaction between the assessee and KMFL on one hand and the assessee and BSAL on the other hand were only paper transactions and there was no genuine purchase of lease of assets. By entering into paper transaction, the assessee has benefitted by availing depreciation at the rate of 100% of the value of the assets in question - Substantial question of law framed is required to be answered in favour of the Revenue and against the assessee

Summary

Issues Involved:
1. Legitimacy of the lease transactions and the existence of the leased assets.
2. Justification for the reopening of the assessment.
3. Entitlement to 100% depreciation claimed by the assessee.

Detailed Analysis:

Legitimacy of the Lease Transactions and Existence of the Leased Assets:
The primary issue revolves around the legitimacy of the lease transactions and the existence of the leased assets (103 M.S. Rolls). A search under Section 133A of the Income Tax Act at the premises of Bellary Steel and Alloys Limited (BSAL) revealed that the M.S. Rolls leased by the assessee were non-existent. The Managing Director of BSAL admitted that the lease transactions were merely financial transactions. Further investigation showed discrepancies such as lack of written orders, delivery challans without seals, and no stock register for the Rolls. The suppliers denied supplying the Rolls, and the transporters confirmed that they only transported bulk scrap and coal, not the M.S. Rolls. The Tribunal initially found that the lease agreement was genuine, but the High Court concluded that the transactions were bogus and intended to avail 100% depreciation fraudulently.

Justification for the Reopening of the Assessment:
The reopening of the assessment was justified based on new material found during the survey under Section 133A. The Assessing Officer issued a notice under Section 148 after recording reasons within the permissible period. The High Court found no procedural flaws in the reopening of the assessment, emphasizing that the new material justified the reassessment.

Entitlement to 100% Depreciation Claimed by the Assessee:
The assessee claimed 100% depreciation on the M.S. Rolls, which was denied by the Assessing Officer. The Tribunal initially allowed the depreciation, considering the lease agreement and some documents provided by the assessee. However, the High Court found that the assessee failed to substantiate the claim with cogent evidence. The Rolls were not physically transported from Mumbai to Bellary, and the transactions were deemed paper transactions. The High Court upheld the denial of 100% depreciation by the Assessing Officer and the First Appellate Authority, citing the lack of genuine purchase or lease of assets.

Conclusion:
The High Court concluded that the substantial question of law was to be answered in favor of the Revenue. The appeal was allowed, upholding the orders of the Assessing Authority and the First Appellate Authority, and setting aside the order passed by the Income Tax Appellate Tribunal. The High Court emphasized that the burden of proof was on the assessee to demonstrate the legitimacy of the transactions and the existence of the assets, which the assessee failed to do.