2017 (4) TMI 345 - AT - Income Tax

Disallowance of depreciation on all Sale and Lease Back transactions - Depreciation on assets leased to Kedia Distilleries - Held that - There were search and seizure operations carried out in the case of Kedia Group of companies on 23rd September, 1996. The search revealed that the group has entered into finance lease transactions with various banks, financial institutions and companies during the accounting years 1990-1991 to 1995-96. On the basis of statement of Managers of KDA Distilleries, AO declined assessee s claim of depreciation. The allegation by the AO is that the assessee is a fictitious supplier and manufacturer without any basis and material on record. The existence of the assets leased to Kedia Distilleries is doubted by the AO by placing reliance on the documents collected during search action of the Kedia Group and admissions of persons of the group. The AO has not even named the person on whose statement he has relied on and has not given the same to the assessee for rebuttal, and the documents collected during search have also not been given to the assessee for, their comments and rebuttal. This is in gross violation of the principles of natural justice and the observation made by us for WPL squarely applies here. We also found that all the details in relation to the assets leased to Kedia Distilleries are on the records of the AO. These details and documents include photo copy of lease agreement, invoices of the assets purchased which have been leased, details of payment, installation certificates, details of insurance, details of lease rent received, details of assets either having been received back or sold at the end of the lease term, valuation report, amongst other details.In view of the above disallowance of depreciation in respect of assets leased to KDS Distilleries is not sustainable. Assets leased to DCM Shriram Consolidated the genuineness of the transaction has not been doubted by the AO to disallow the claim of the assessee. It is merely on the basis of the aforesaid alleged non-verified letter, which cannot be the basis of the impugned disallowance. We also found that the assessee has got the gas cylinders insured by a nationalised insurer namely, National Insurance Company Ltd, who has issued a policy no 350100/11/13, for ₹ 34,76,000 which has been filed by the assessee with the AO during the course of original assessment proceedings. This policy document means two things, first, that the fair market value of the gas cylinders is ₹ 34,76,000, as no insurance company will insure goods at a higher value, and second, the existence of the leased assets, though no lower authorities have doubted the existence of the assets for the impugned disallowance. In all fairness, we restore the matter back to the file of AO to again verify the certificates issued by lessee confirming that no depreciation is found that issue has not claimed any depreciation. Assessee should be allowed its claim of depreciation. Assets leased to Searsole Chemicals Ltd. - Held that - Assessee has filed with the AO and CIT(A) complete details in respect of lease transaction with Searsole Chemicals Limited which includes photo copy of lease agreement, invoices of the asset purchased which have been leased, details of payment, installation certificates, details of insurance, details of lease rent received, valuation report, amongst other details. Under these facts and circumstances matter cannot be restored back to the file of AO. We therefore direct the AO to delete the disallowance of depreciation. No merit in the disallowance of depreciation pertaining to parties in category B as in respect of transactions with these parties regarding sale of lease back of assets, we found that complete details in respect of each lease transaction which includes photo copy of lease agreement, invoices of the assets purchased which have been leased, details of payment, installation certificates, details of insurance, details of lease rent received, details of assets either having been received back or sold at the end of the lease term, valuation report, amongst other details. Respective lease rentals have been received and offered by assessee as its income is very important point. We found that lease rent so collected and offered as income was more than the depreciation claimed by the assessee. It indicates that assessee has no reason to evade tax in so far as income shown on lease rent is more than the depreciation so claimed in respect of these sale and lease back transactions. We also verified the facts of leased assets and found that the leased assets have either been received back from lessee at the end of the lease period or sold to the lessee and the resultant income or loss has been incorporated in the profit and loss account of said period. In category C The depreciation in respect of this category transactions pertain to assets that have been purchased and leased in the earlier years, that is, the disallowance is not in respect of the assets that have been purchased/ given on lease during the previous year ended on 31st March, 1993. The AO for income-tax assessment year 1992-93 passed the assessment order dated 22.02.1995 under section 143(3) wherein the entire claim of depreciation on these assets has been allowed by him. Thus, once the AO has applied his mind and allowed depreciation on the assets leased, then, in the subsequent year, the AO is obliged to allow depreciation on such assets, and cannot take a different view, without bringing any adverse material on record that would suggest otherwise of the assets acquired in the earlier year(s). Assets given on lease and returning back to the assessee and again given on lease depreciation is required to be allowed once the assets purchased in the earlier year have entered the block of assets, and depreciation in respect of such assets has been allowed in that year, depreciation in respect of such assets is necessarily to be allowed for the subsequent year that is, the year under reference. If the AO wants to take another view and disallow depreciation, then he has necessarily to reopen the assessment of the earlier year to disallow the depreciation and then and then only, can disallow depreciation in the year under reference; this has not been done by the AO, even though it was open to him to do so while passing the assessment order on 31.3.1999. The fact that he has not reopened the assessment of the immediately preceding year, thus, the view taken by the AO to disallow the depreciation for the year under reference is not consistent with the view taken by him in the immediately preceding previous year, and hence, not sustainable in law. Disallowance of depreciation in respect of motor cars and other vehicles - Held that - We found that vehicles have registered in the name of respective lessees in the registration book also indicated the lessee as the owner of the vehicle and name of the assessee appears only under the caption of hypotheticated to . In terms of these observations, we do not find any infirmity in the order of CIT(A) for decline of claim of depreciation in respect of motor cars and other vehicles. Sale and lease back of plant and machinery CIT(A) observed that the agreement does not stipulate wholesale buyer of the cost of the dismantling at the end of the lease period of transportation. As per our considered view, it does not matter in so far as it is now going to change the character of the arrangement and if the assets has to be repossessed the expenses of repossession is to be borne by the lesser only. Penalty u/s.271(1)(c) - disallowance of depreciation on the assets leased out by assessee - Held that - CIT(A) has deleted the penalty imposed u/s.271(1)(c) on the plea that claim of assessee was debatable and after applying the various judicial pronouncements reached to the conclusion that no penalty should be imposed for such debatable issue. In terms of the findings recorded by CIT(A), we do not find any reason to interfere in his order deleting the impugned penalty.

Summary

Issues Involved:
1. Disallowance of depreciation on sale and lease-back transactions.
2. Violation of principles of natural justice.
3. Penalty under Section 271(1)(c) of the IT Act.

Detailed Analysis:

1. Disallowance of Depreciation on Sale and Lease-Back Transactions:

The primary issue in these appeals was the disallowance of depreciation on assets involved in sale and lease-back transactions. The assessee argued that they had satisfied the conditions laid down by the ITAT Special Bench in the case of Mideast Portfolio Management Limited. The AO disallowed the depreciation claimed by the assessee on various grounds, including questioning the existence of assets, the genuineness of transactions, and non-compliance by parties to whom summons were issued.

The Tribunal observed that the AO had doubted the existence of assets leased to Western Pacgues India Limited (WPIL) and Kedia Distilleries based on documents collected during surveys, which were not shared with the assessee, violating principles of natural justice. The Tribunal emphasized that the AO must provide the assessee with the opportunity to rebut such evidence.

For assets leased to DCM Shriram Consolidated, the AO relied on a letter from the lessee claiming depreciation, which was not shared with the assessee. The Tribunal directed the AO to verify the lessee's certificate stating no depreciation was claimed and to allow the assessee's claim if verified.

Regarding assets leased to Searsole Chemicals Ltd., the AO did not discuss these in his order. The Tribunal directed the AO to delete the disallowance of depreciation as the necessary documents were provided by the assessee.

In cases where summons were issued but not responded to, the Tribunal noted that non-compliance by parties does not automatically render transactions non-genuine. The AO should have taken further steps to verify the transactions.

The Tribunal also highlighted that once the AO has allowed depreciation in earlier years, he cannot disallow it in subsequent years without reopening the earlier assessments. The Tribunal directed the AO to allow depreciation for assets purchased in earlier years and forming part of the block of assets.

2. Violation of Principles of Natural Justice:

The Tribunal found that the AO had violated principles of natural justice by not providing the assessee with copies of documents and statements collected during surveys and used to disallow depreciation. The Tribunal emphasized that the AO must give the assessee an opportunity to rebut such evidence before drawing adverse inferences.

3. Penalty under Section 271(1)(c) of the IT Act:

The CIT(A) had deleted the penalty imposed under Section 271(1)(c) on the ground that the issue of disallowance of depreciation was debatable. The Tribunal agreed with the CIT(A) that no penalty should be imposed for such debatable issues, especially when the assessee had disclosed all relevant facts and the disallowance was based on a difference in interpretation of law.

Conclusion:

The Tribunal allowed the assessee's appeals in part, directing the AO to allow depreciation on assets leased out, except for motor vehicles where the disallowance was confirmed. The Tribunal also restored certain matters to the AO for fresh verification. The appeals filed by the Revenue were dismissed, and the deletion of penalties by the CIT(A) was upheld.