9911796707
TMI Blog2003 (12) TMI 296X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. - Member(s) : HARI OM MARATHA., N. K. SAINI. ORDER Per Hari Om Maratha, J.M. - Both these appeals pertain to same assessee for two assessment years, namely, 1996-97 and 1997-98 and identical issues are involved in both these appeals. So, for the sake of convenience, these are being disposed of by this common order. 2. We would like to mention that these appeals were taken out or turn for hearing in view of the Hon'ble Rajasthan High Court decision while disposing of the stay application. The Hon'ble High Court gave a direction to expeditiously dispose of these appeals. 3. The appellant company, namely, M/s. Shree Rajasthan Texchem Ltd., Udaipur [hereinafter referred to as the Lessor Company] and M/s. Shree Rajasthan Texchem Ltd., Mumbai [hereinafter referred to as the Lessee Company] are the companies incorporated under the Companies Act, 1956. The lessor company had given on lease certain plant and machinery to the lessee company for both these years and ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e findings of the revenue on legal grounds as well as on merits. 10. We have heard the rival submissions as advanced by the ld. AR Shri Amit Kothari, appearing on behalf of the appellant-lessor-company and Shri D.R. Zala, appearing on behalf of the revenue. We have also perused the evidence on record. We have also gone through the Paper Books and have perused the orders of the authorities below. We have also circumspectiously gone through the relevant provisions of law and the decisions relied by both the parties. We give our findings on the contentious issues as under. 11. At the very outset, the ld. AR Shri Amit Kothari vehemently argued and pleaded with us that the department has not produced the 'reasons' recorded for the reopening of these assessments, and so he was of the opinion that either there were no reasons recorded, hence the whole matter will go to hogs being not tenable in the eyes of law; or in case the department has recorded the requisite reasons, these should be got produced for the perusal of the Tribunal and the satisfaction of the appellant. This objection of the ld. AR was well reasoned as the acquisition of jurisdiction under section 147/148 was based on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identical facts, so this does not cover the requisite conditions for re-opening of assessments under section 147/148 of the Act and the jurisdiction cannot be validly assumed for reopening on that basis alone. (ii) Secondly, the borrowed satisfaction cannot be a reason for reopening. 16. Before we come to the real controversy, we would like to detail the undisputed facts of this case as under: (i) There is no dispute that M/s. Shree Rajasthan Texchem Ltd., Udaipur [which is assessee-appellant company] is the Lessor Company of the assets in question; and that M/s. Shree Rajasthan Texchem Ltd., Mumbai is the Lessee Company. (ii) That before the lease in question the assets were purchased and owned by the Lessor Company, i.e., appellant. (iii) That the reasons for reopening were recorded after considering the findings of the ld. Assessing Officer at Mumbai, in the assessment order of the lessee company. (iv) That 'apparently, the 'lease deeds' in question are for 'operating leases' only. (v) That the lessee-company did not claim depreciation on the leased assets, but the same was allowed by the ld. Assessing Officer after coming to the conclusion that the lease are 'Financial Lease' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plain reading of the lease agreements reveal that the lease is a 'operative lease' and the lessor is the owner of the assets leased therein; (ii) The lessor and the lessee are the companies incorporated under the Indian Companies Act and are separate and legal entities. So, even if it is alleged that these are "sister-companies", as has been alleged, this factum goes in favour of the appellant-company. The department has not stated as to what was the benefit of tax to lessor company if the depreciation is allowed to it and what is the loss of tax to revenue by that. Needless to say, such a depreciation is to be allowed to one of them. (iii) The ld. CIT(A) has tried to put his own meaning to various clauses of these lease agreements in his order at pages 12 onwards, particularly, which according to us, is too far fetched. In this regards, clauses 8, 12, 13, 16, 17,27, 29 of these agreements which have been mentioned by ld. CIT(A) in his order at pages 8 onwards, have been lightly ignored by him. (iv) That it is not the case of the department that the lessee-company is claiming itself to be the owner of these assets. It is the department who is making the lessee-company as the owner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceedings, disallowed the claim of depreciation in respect of the assets given on lease to Shree Rajasthan Texchem Ltd., Mumbai. Such claim of depreciation was disallowed due to the fact that during the course of assessment proceedings of the lessee company at Mumbai, the ld. Assessing Officer of the lessee company held that lease is in the nature of financial lease and the lessee company is the owner of the Plant Machinery. This order was passed by the Assessing Officer of lessee-company at Mumbai who is another person and the same cannot determine the allowability of depreciation in the hands of this assessee. The allowability of depreciation is to be decided on the basis of (i) ownership and (ii) user of the assets. It has further been submitted that while passing the original assessment order, these aspects were fully and duly considered by the ld. Assessing Officer and on the basis of all materials placed before him, the claim of depreciation was allowed. The appellant, during the course of original assessment proceedings, had placed copy of the lease agreement, Memorandum of Association, copies of bills, funds used for purchase of assets, loans details from financial institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 27. 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. The Memorandum of Association of the Company vide para 15 makes it amply clear that leasing is one of the objects of the company. So it cannot be said that the assessee-company is not doing the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne provisions, it has been mentioned that the lease agreement shall be non-cancelable. This means that the lessee does not have any right to cancel the agreement even if there are circumstances which require him to do so. The total risk, therefore, lies with the lessee. By this clause the appellant is only ensuring recovery of the finance in a fixed period of time and is not bothered about the circumstances which can be faced by the lessee. This also indicates that the agreement is a finance lease. Clause - 9: "The lessee acknowledges and agrees with the lessor: (a) That "no warranty or fitness that said machinery is merchantable shall apply to this contract. (b) That said machinery is accepted by lessee with all faults and defects and delivery by lessor shall be conclusive evidence that said machinery is in good working condition and order. (c) That lessor has not made and does not hereby make any representation of warranty with respect, to merchantability, quality, condition, durability or suitability of said machinery in any respect." 28. The conclusion drawn by the CIT(A) that the appellant is not responsible in any manner about fitness, quality, suitability, of the said machin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer. In such a case, law does not permit reassessment on change of opinion. There are catena of decisions on this point, a few are as under which are relevant:- (a) Joint CIT v. George Williamson (Assam) Ltd. [2002] 258 ITR 258 (Gau.) "The duty of the assessee does not extend beyond making a full and true disclosure of primary facts. Once he has done so, his duty ends. It is for the assessing authority to draw the correct inference from the primary facts. It is not the responsibility of the assessee to advise the assessing authority with regard to the inferences which he should draw from the primary facts. If the assessing authority draws an inference which appears to him, subsequently, to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening the assessment. The power to reopen the assessment proceedings would only be available if the assessing authority has reason to believe that any income chargeable to tax had been under assessed and also that he has reason to believe that such under assessment had occurred by reason of either omission or failure on the part of the assessee to make a return of his income or omi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l review to go into the sufficiency or adequacy of the material. (e) CIT v. Hickson Dadajee Ltd. [1980] 121 ITR 368 (Bom.) Under section 147(b) of the Income-tax Act, 1961, reassessment is permissible if the ITO has, in consequence of information in his possession, reason to believe that income chargeable to lax has escaped assessment. An assessment cannot be reopened on a mere change of opinion. (f) Garden Silk Mills (P.) Ltd. v. Dy. CIT [1999] 237 ITR 668 (Guj.) Reassessment - Condition precedent - Reason to believe that income has escaped assessment - Reason must be based on material - Change of opinion will not justify reassessment -Assessee allowed adjustment in valuation of his closing stock -Subsequent reassessment proceedings on ground that adjustment was erroneous - Reassessment proceedings were not valid -Income-tax Act, 1961, sections 147, 148. (g) CIT v. Corporation Bank Ltd [2002] 254 ITR 791 (SC) Held, affirming the decision of the High Court, that since the assessee had furnished particulars pertaining to the sum of Rs. 54,485, as not recoverable and had filed statements alongwith the original return disclosing full details of the interest suspense account, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1 (SC) followed: The scope and effect of section 147 as substituted with effect from April 1, 1989, by the Direct tax Laws (Amendment) Act, 1987, and subsequently amended by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989, as also of sections 148 to 152 have been elaborated in Circular No. 549 dated October 31, 1989. 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 form the basis for reopening a completed assessment. A statute conferring an arbitrary power may be held to be ultra views article 14 of the Constitution of India. If two interpretations are possible, the interpretation which upholds constitutionality should be favoured. In the event it is held that by reason of section 147 the Income-tax Officer may exercise his jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 33. It is true in this case that notice under section 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. In this regard the following decisions relied by the Ld. AR are relevant. (a) Hotel Appolo v. P.S. Rashtrapal, ITO [1995] 213 ITR 762 (Guj.) Held, that the Income-tax Officer, "J" Ward, could have formed only a tentative view regarding the benami character of S's wife as the matter before him was granting a registration of the firm. It was clear from the facts that the Income-tax Officer, "E" Ward, did not himself apply his mind to any fact in order to come to the belief that there was omission or failure on the part on S to disclose primary facts necessary for his assessment "R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies. 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 under section 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, after considering all the facts and the circumstances of the case, we come to the conclusion t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it is used for the purpose of assessee's business. The claim of assessee appellant is that the leased assets are owned by it and leasing is one of the objects of assessee company's business and as such, both the conditions requisite under this provision are fulfilled. 40. On the other hand ld. DR has submitted that the assessee is no longer owner of the leased assets and the lessee company is the actual owner of the assets in question. 41. After going through the whole gamut of facts, we conclude as under. When the assessment orders were originally passed for these two years, the ld. Assessing Officer allowed depreciation under section 32 of the Act by holding that the assessee company is the owner of lease assets which are being used for the business i.e. lease business of the appellant company. But on the basis of assessment order passed in the lessee's case, the same was reopened, and in the reopened assessment, the Assessing Officer tried to come to the conclusion by referring to various clauses in the lease agreement that the lease in question is not an 'operating lease', rather, it is a 'financial lease' and in case of financial lease the lessor no longer remains the owne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the companies are independent legal entities which are incorporated under the companies law. The evidence on record reveals that the suppliers of equipment have supplied and delivered these assets to the appellant company and the payment of taxes etc. have also been made by it. The Insurance Cover Note also mentions the appellant company as the owner of the equipment and has agreed to insure the goods in question. 44. In the financial statements of the appellant company, the leased assets have been separately shown. The accounts have been audited by the statutory auditors and have been approved by the Board of Directors of the company (which is also comprised of representatives from financial institutions and members of the public) and the same have been approved by the shareholders of the company and have also been filed with the Registrar of companies and the stock exchanges. 45. The salient features of these lease agreements are as under which make it amply clear that the assets leased are owned by the appellant company: (a) Clause (3) of the lease agreement dated 25th November, 1995 read with the Schedule thereof provides that the lease period is 120 months and the monthly re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon and/or deal with or part with possession of the said machinery any part thereof without consent in writing of the lessor. In the event of any breach of this sub-clause by lessee, the lessor shall be entitled (but shall not be bound) to pay to any third party such sum as is necessary to procure or release of the said machinery from any charge, encumbrances or lien and shall be entitled to recover any such from lessee forthwith". (e) Clause (12) declares that the lessee cannot offer the machinery taken on lease as security. (f) Clause (13) declares that the lessee shall fix a brass plate and/or such other identification mark on each of the said machinery denoting that same belongs to the lessor. The same shall not be removed or defaced by lessee so long as the said property remains the property of the lessor. (g) clause (15) provides that the lessee shall be solely responsible for property upkeep and maintenance of said machinery and shall carry out periodical repairs and normal overhaul. The lessor shall not be responsible for any repairs whether major or minor and repairs and upkeep and maintenance expenditure will be borne solely by the lessee. It is also provided that: "The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the lessee company amounting to Rs. 78,25,584 and Rs. 2,92,72,399 in the assessment years 1996-97 and 1997-98 respectively. These incomes have also been shown as lease rental income in the P L Account. 48. It is submitted that this is also not a case of sale and lease back because in this case right from the inception the owner of the assets is the appellant company. The delivery and possession of the assets was given to the lessee company only after obtaining possession of the assets by appellant. 49. The lease rental were periodically received by the appellant company. Hence it is clear that the assets given on lease were owned by the assessee company and used for its business of leasing and were used during the relevant accounting year because the assessee was entitled to receive the lease rentals and possession of assets was given to the Lessee Company. Therefore the Assessing Officer was justified in allowing the depreciation in respect of business of leasing of the assessee company on leased assets under section 143(3), while framing the original assessment. 50. The Vouchers of the Leased Assets added during the Financial Year 1995-96 and given on lease amounting to Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving the respective amount, break up, dates of lease are enclosed. The custom duty, bank charges, freight charges were also paid by the Lessor (SRSL). We have perused the same which proves that the appellant is the owner of the leased assets. 55. Further it is relevant to mention that the Lessee-Company did not claim depreciation in the assessment years 1996-97 and 1997-98 in the returns filed in respect of these assets under Lease. The ld. Assessing Officer and CIT(A) had wrongly observed that on these leased assets the depreciation was claimed by the lessee, which was subsequently withdrawn. The lessee company had never claimed depreciation on these leased assets. It claimed depreciation on its own assets, which was foregone and no depreciation was claimed even on owned assets. The ld. Assessing Officer in the assessment of lessee, directed to allow depreciation on assets owned by the lessee, and also on assets taken on lease from the appellant. However, in appeal the CIT(A), directed that depreciation is optional and if the lessee do not claim, the same cannot be thrust upon it. Therefore no depreciation on leased assets allowed to lessee. 56. The facts of company's leasing busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence on the basis of which some conclusions can be drawn against claim of the assessee. We have circumspectiously treaded through appellate order particularly, the paras where the ld. CIT(A) has referred to various clauses of the lease agreement to arrive at a finding that actually the lease in question is a 'financial lease'. When there is no clear cut evidence to support the finding of the CIT(A) and there being two opinions available with the department, the one which favours the assessee should be accepted. 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditions: (1) the machinery should be owned by the assessee; (2) it should be wholly used for the purposes of the business carried on by the assessee, and (3) the machinery must come under any of the categories specified in section 32(2). Therefore, a leasing or finance company, which owns machinery and leases it to third parties who use the machinery for manufacture of articles or thing as specified in section 32A(2)(b)(iii), is entitled to investment allowance in respect of such machinery under section 32A. When machinery is given on hire by the owner to the hirer on payment of hire charges, the income derived by the owner is business income. The hirer, on the other hand, who pays hire charges is entitled to claim these as revenue expenditure. The hirer has not acquired any new asset. A transaction of hire is, therefore, of bailment or the machinery. There is no extinguishment of any right of the owner in the machinery. There is merely a licence given to the hirer to use, for a temporary period, the machinery so hired. In the absence of any element of sale, there is no reason for treating such an agreement as "transfer" or disallowing the grant of investment allowance, when the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in respect of any machinery or plant, the assessee must prove that the machinery was owned by him and that it was wholly used for the purpose of the business carried on by him. The assessee must also satisfy that the machinery or plant was installed in any industrial undertaking for the purpose of manufacture or production as specified in sub-section (2) of section 32A. In the instant case, there was no dispute about the fact that the items of machinery in respect of which investment allowance was claimed were owned by the assessee. So far as the user of the machinery for the purposes of the business of the assessee was concerned, there was nothing to show the nature of financing and leasing-whether it was a case of hiring simpliciter or leasing simpliciter or hire purchase or any other form of transfer. (g) Mulraj Dwarkadas Goculdas v. Dy. CIT [1994] 48 TTJ (Bom.) 531. Depreciation-Allowability-Leasing of gas cylinders-Gas cylinders purchased by assessee in the relevant previous year and an agreement of lease was also entered into-Lease rent relatable to relevant previous year accounted in books and offered for taxation-It was never stated that lease agreement had commenced on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achine and the typesetting machine. The facts as above are not disputed which indicate that the assessee had been delivered with the system and the assessee on its part had given the same on lease to the party and had received the lease charges, its usage for business and ownership having been established, it is entitled to depreciation. Assessee engaged in leasing business, having leased out various assets to vendors itself from whom the assets were purchased, was entitled to depreciation thereon once assessee established its ownership. 60. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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