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TMI Blog2006 (2) TMI 507X X X X Extracts X X X X X X X X Extracts X X X X ..... Name of the lessee Equipment leased out Actual cost Dep. Amount Mohan Crystal Glass Works (MCGW) 510 glass bottles moulds Rs. 14,01,400 M/s. Punjab Potteries (PP) Continues pusher type furnace Rs. 10,57,500 3. In June, 1991 SIL approached the assessee for leasing of five sugar mills rollers. These were purchased by SIL from BHEL in February, 1990 for a sum of Rs. 6,08,400 + Rs. 9,12,600. Subsequently SIL got some machining work done by M/s. United Engineering Works who charged Rs. 20,000 per shaft. Thus the total cost of SIL came to Rs. 16,21,000. Against this assessee had shown the cost at Rs. 41.25 lakhs. The Assessing Officer found that lease with SIL had expired in September, 1994 but the assessee had not taken possession of leased asset in accordance with the lease agreement. The assessee stated that there was a litigation with SIL. The Assessing Officer, however, was not satisfied with the explanation as the litigation was only for recovery of dues and not for securing the custody of assets. It was stated before the Assessing Officer that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion entered into with SIGL and GAPL as financing transaction and the claim of 100 per cent depreciation was disallowed. 5. The assessee purchased 520 glass bottles moulds from M/s. Mohan Crystal Glass Works (MCGW) for Rs. 14,01,400 and leased back to them and at the end of the lease period of 3 years were sold for Rs. 15,415 only to M/s. National Serial Ltd., a sister concern of the assessee. The IRR in this case was worked out at 14.10 per cent. MCGW was a loss-making concern during the relevant previous year. Therefore, the Assessing Officer treated this transaction as a mere financing transaction and the claim of 100 per cent depreciation was disallowed. 6. The assessee purchased pusher type furnace from M/s. Punjab Potteries (PP) for a sum of Rs. 10,57,500 and leased back to them. The furnace was said to be erected by Associated Furnaces (P.) Ltd. The Assessing Officer found that the period of lease in this case had expired on 31-3-1997 but the assessee had not taken re-possession of the asset. She found that M/s. Punjab Potteries was not in operation for the last 3-4 years and there was no rational as to why Punjab Potteries Ltd. should pay lease rent for an asset whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed demand draft. In the case of SIL the payment of Rs. 41.25 lakhs had been as cost of the assets. The assessee filed a comprehensive suit against SIL for winding up as also for recovery of rental and of leased assets. He pointed out that Assessing Officer was not correct in working out cost of five Sugar Mill Rollers at Rs. 16,21,000 only. It was stated that the sugar mill rollers had two shafts and each shaft was purchased for a sum of Rs. 3,23,942 from BHEL. The cost of 10 shafts were therefore Rs. 32,39,420 over and above the matching over of Rs. 20,000 was done through M/s. United Engineering Works. Certain bills of Central Foundry Forge Plan, showing sale of sugar mills roller to SIL dated 27-2-1990 and 3-3-1990 had also been filed. 9. In the case of gas cylinder it was stated that though the Assessing Officer had issued show cause for invoking Explanation 3 to section 43(1), the Assessing Officer did not invoke the section finally. These assets after expiry of lease period recovered from the lessee and sold to a third party. He mentioned that continuous pusher type furnace had not been recovered from M/s. Punjab Potteries as the assessee was arranging for a buyer of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant, however, had received a sum of Rs. 14.25 lakhs from lessee by way of security deposit which is not liable to tax. The asset continuous to remain with the lessee till date on the ground of litigation before the Lucknow High Court. The appellant, however, has not submitted any paper or proof indicating that the Lucknow Bench of the Allahabad High Court has ordered the status quo for which reason the delivery of the leased asset cannot be taken. In the absence of such directions from the High Court the assessee remains free to recover the leased asset for which clearly no efforts have been made. With regard to gas cylinders it is not disputed that whereas the market price of per gas cylinder was Rs.1400 the assessee procure the same at enhanced rate of Rs. 2,200 per gas cylinder. On perusal of the sale bills of these cylinders it is seen that no details regarding the make or even the capacity of these cylinders is mentioned. In the case of glass bottle moulds these were sold for a nominal amount after expiry of the lease period to a sister concern of the lessee. In the case Continuous Pusher Type Furnace against the cost of Rs. 10,57,500 the lease rental worked out to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal on this ground is dismissed." 10. Before us, the ld. counsel for the assessee has submitted that the assessee-company has been carrying on the business of trading, exports, imports, financing and leasing. In this connection he has referred to the extract of Memorandum of Association of the assessee-company placed at page 181 of the paper book, which clearly indicates that leasing of asset is one of the objects incidental or ancillary to the attainment of main objects. In original assessment made the Assessing Officer disallowed 25 per cent of the depreciation claimed on the machinery leased out i.e., Rs. 1,82,745 (25 per cent of Rs. 73,09,900). The original assessment was however set aside to the Assessing Officer with the specific direction to the Assessing Officer, which directions have not been complied with by the Assessing Officer, hence failure to follow the direction of appellate authority is denial of justice. In this connection he has referred to the following directions given by the CIT(A) in the order dated 22-3-1996 : "18. I have considered the facts and circumstances of the case and rival submissions. No doubt leasing of assets which are fully depreciated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it known as Khalilabad Sugar Pvt. Ltd., and thereafter undertaken a major expansion and modernization programme of the said sugar mill. In June, 1991, M/s. SIL approached the assessee-company for leasing of sugar mill rolls. Accordingly, a lease agreement dated 10-9-1991 was entered into between the assessee-company and M/s. SIL, a copy of which is placed at page 185 of the paper book. These assets were purchased by M/s. SIL from Bharat Heavy Elecricals Ltd. (a unit of Central Foundry Forge Plant) in February, 1990. In this regard, the Ld. Counsel has referred to the purchase order placed by M/s. SIL on M/s. BHEL which is available at page 99 of the paper book. A copy of invoice of BHEL is available at pages 103-105 of the paper book. The Ld. Counsel further submitted that thereafter SIL sent the said rolls to M/s. United Engineering Works, Ghaziabad for further processing and machining. In this connection he has referred to bill dated 11-9-1991 of the United Engineering Works placed at page 98 of the paper book. M/s. United Engineering Works thereafter dispatched the said rollers to Khalilabad Sugar Mills a unit of M/s. SIL at the request of the lessee. The assessee duly paid for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the lease periods were recovered from the lessee and sold to the third party. He has further mentioned that though the Assessing Officer had issued show-cause notice for invoking Explanation 3 to section 43(1), however, he did not invoke the said section finally. As regards the 520 glass bottle moulds the Ld. Counsel has submitted that the assessee purchased 520 glass bottle moulds from M/s. Mohan Crystal Glass Works, a unit engaged in the manufacture of glass bottle moulds and leased over the same to M/s. Mohan Meacon Ltd. In this connection, he has referred to the invoice dated 28th March, 1999 issued by Mohan Crystal Glass Works Prop. Mohan Meacon Ltd.) placed at page 88. A reference has also been made to page 87 wherein it has been confirmed that 520 glass bottles were taken on lease from the assessee and the same were put to use in the business of manufacturing of glass bottles. He has further pointed out that M/s. Mohan Meacon Ltd. vide their letter dated 20th January, 1988 placed at page 135 of the paper book have further confirmed that they had taken on lease the glass moulds from the assessee-firm and the assets were duly identifiable. The Ld. Counsel has further poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck are well known transactions. It is a common knowledge that several banks and institutions are carrying out the leasing business by financing purchase of equipment taken back and used by them on lease. Explanation 4A to section 43(1) which came in the statute with effect from 1-10-1996 also recognizes the sale and lease back transactions. However, in all such transactions it has to be proved that the transactions were entered into bona fidely and there is material to show that these are given effect to. The transactions are to be proved by the person relying upon them to claim deductions. Whether a particular transaction is a genuine business transaction or not has to be gathered from the facts of each case. In the case of sale and lease back transactions the same is generally to be treated as a sham if there is finding that the assessee shown to have leased out the asset not exist or where it is found that the same asset is leased out to more than one lessee at the same time. If these findings are not there and if other related facts are not found to be abnormal then there is little scope to apply the ratio of the decision in the case of McDowell Co. Ltd. v. CTO [1985] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a subterfuge clothed with apparent dignity. This accords with our own view of the matter." 16. The assessee is engaged in the business of import and export, financing and leasing. During the year under consideration the assessee has entered into a purchase and lease back agreement with the above named parties. The assessee purchased five sugar mill rollers from M/s. Sumec International Ltd. (SIL), leased back the same to M/s. SIL on 10-9-1991. The Assessing Officer held that this transaction with M/s. SIL as a colourable device to reduce the tax liability. She noticed that M/s. SIL purchased these assets from BHEL (Unit : Central Foundry Forge Plant) at Rs. 16,21,000 including the cost of machining work done to those assets whereas the assessee had claimed to have purchased from M/s. SIL at Rs. 41.25 lakhs. Moreover, after the expiry of lease period the assessee had not got possession of assets leased out to them. The case of the assessee, however, is that one sugar mill roller had two shafts and each shaft was purchased for a sum of Rs. 3,23,942 from BHEL. Thus, the cost of 10 shafts came to Rs. 32,39,420 plus CST and over and above the machinery work of Rs. 20,000 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case." 17. It is one of the essential conditions for invoking Explanation 3 to section 43(1) that before the date of acquisition of the asset by the assessee the asset was used by other person for the purposes of his business. The second condition is that the Assessing Officer is satisfied that the main purpose of the transfer of such assets directly or indirectly to the assessee was for reduction of liability to income tax by claiming depreciation with reference to the enhanced cost. If these two conditions are satisfied, then the actual cost to the assessee shall be determined by the Assessing Officer with the previous approval of JCIT. 18. It may be mentioned that the actual cost to the assessee is entirely a question of fact to be determined with reference to the evidence and the material. The mere production of documentary evidence showing that a contract was made for the purchase of the asset at a certain price does not conclusively establish the correctness of the claim made by the assessee specially where the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se has earned the reward in the form of lease rental by leasing it back to the seller. The profit earned on the sale by lessee is also subject to short-term capital gain. The lease agreement contains a clause that on the expiry of the lease period the lessee shall deliver the assets to the lessor/assessee. It is seen that but for the litigation between the assessee and M/s. SIL as aforesaid, the asset would have been returned to the assessee on the expiry of lease period. It is not the case of the revenue that the agreement in question is not entered into at arm s length inasmuch as both the parties are not of same group of company or otherwise related to each other. In the circumstances, we are of the view that in the instant case assessee has satisfied the conditions for the purpose of claiming depreciation under section 32 that the depreciable assets are owned by the assessee and the same were used for the purpose of assessee s business. We, therefore, direct to allow claim of depreciation in respect of these assets of five sugar mill rollers. 21. The second purchase and lease back transaction relates to gas cylinder. These gas cylinders were purchased by GAPL and SIGL at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed that they have sold/delivered the machinery to its client, M/s. Comecon Overseas (P.) Ltd., the assessee herein vide invoice No. 53 dated 26-3-1992, invoice No. 54 dated 21-3-1992 and invoice No. 55 dated 28-3-1992. They have further confirmed that the said machinery was delivered at Punjab Potteries Premises at Gurgaon Road, New Delhi at the request of M/s. Comecon Overseas vide their letter placed at page 81/PB addressed to Dy. Commissioner of Income-tax, Spl. Range, New Delhi. M/s. Punjab Potteries vide letter dated page 83/PB addressed to Dy. CIT has also confirmed that one continuous pusher type furnace has been taken on lease by them from the assessee and this furnace has been fabricated and supplied by M/s. Associated Ind. Furnaces (P.) Ltd. M/s. Punjab Potteries have further confirmed that they have not sold this furnace to M/s. Comecon Overseas (P.) Ltd. Therefore, in view of above facts, this is incorrect to say that this is purchase and lease back transaction entered into by the assessee and M/s. Punjab Potteries. The fact that the assessee has purchased this furnace at the cost of Rs. 10,57,500 is not in dispute nor the fact that the same was leased out to M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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