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TMI Blog2012 (6) TMI 443X X X X Extracts X X X X X X X X Extracts X X X X ..... s in excess of Rs. 20,000/- in respect of several purchases for awards, the aggregate expenditure under which head stood claimed at Rs. 14.19 lakhs – Held that:- it does not take much strain to infer that the books of account stand manipulated to reflect the impugned payments in installments of Rs. 20,000/- in an orchestrated manner to apparently accord with the provision of law, so as to circumvent its rigour and effect, i.e., as contended by the Revenue, so that its findings cannot be faulted with. In the case of McDowell Co. Ltd. (1985 - TMI - 40038 - SUPREME Court - VAT and Sales Tax), it stands held that there was as much moral sanction behind the taxation laws as is behind any other welfare legislation, and that it stood on no less a moral plane than honest payment of tax. That, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provision should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. It is up to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee carrying on business in running lending libraries 100" The assessee contends the books to have no enduring value, being required to be purchased year after year, comprising largely of guide books for students taking professional engineering and medical entrance examinations. Also, the students preferred to have fresh books, and also do not return them. The Assessing Officer (AO) did not find the assessee's claim acceptable for the reason that these were not annual publications, for which an exception stands laid down by the Act itself by providing depreciation at the rate of 100% thereon. The contents of the books would remain more or less the same; after all, college level science and mathematics do not change annually. The assessee's contention of it carrying on business and not a professional activity, for which alone (other than where used in the business of running lending libraries) the depreciation rates of 100% and 60% stand provided under the Act, was met by him with reference to the decision by the apex court in the case of P. Krishmna Menon v. CIT (1959) 35 ITR 48 (SC), holding vocation of teaching to be a profession, besides decisions in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad correctly mentioned that the syllabus of science and mathematics at the high school level, the content of which is largely time-tested theories and their application, is not subject to frequent changes, much less on an annual basis. The recipients of coaching are mainly Class XII students, who are at that stage not exposed to innovative and fast paced technological changes taking place in the field of science and technology on a day to day basis. As such, it was not correct to say that the books purchased during the year would yield no or little benefit for the subsequent period. The AO had visited the assessee's premises, finding the assessee to have properly bound the books, which goes to suggest of their having a continuing utility or an enduring value. As regards the books not returned by the students, the same are essentially study materials provided by the assessee, and are meant for a particular examination, so that these having little value for the subsequent year. He, therefore, confirmed the disallowance effected by treating the books as capital expenditure, exigible to depreciation at 60%. Aggrieved, the assessee is in appeal. 4. Before us, the matter was again ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssional activity can also be categorised as an activity of carrying on business if it is carried on like a commercial activity. The ld. DR, on the other hand, would submit that the books have been correctly classified by the Revenue authorities as a 'plant', allowing depreciation as prescribed by the Act. The stipulated rate of 60% allowed write off of expenditure to the extent of 85% (approx.) in the first two years of acquisition itself, and which is only on account of the changing developments; updation or upgradation in any activity being normal. In fact, if the AO regarded the assessee's claim of its activity as being a business activity, the same would rather work against it, as in that case, depreciation would be allowable at the general rate of 25% only. The argument with regard to the partners being not qualified, and undertaking the core activity through staff consisting of retired professors is a new argument, which has not been factually examined by the authorities below, so that the assessee is precluded from agitating the same before the tribunal, and for all we know the partners may well be professionally qualified, if not actually engaged in teaching themselves. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter, we find the assessee to have not made any case at all. We are, as such, prima-facie of the clear view that the 'books' under reference stand rightly considered as 'plant' in the instant case. 5.2 The assessee's principal case, as we discern, is that the 'books', though no doubt a tool of its trade (of teaching/coaching), do not, however, have any enduring value in the peculiar facts and circumstances of its case, as borne out by the need for and, consequently, the purchase of a large number of books every year. The same, thus, in the facts and circumstances of its case represents a revenue expenditure, notwithstanding that the same stand defined as a 'plant' by the Act. The Revenue finds the same unacceptable, finding the same to confer a benefit that extends beyond the particular year, and that not considering so would be a travesty of facts; the asssessee having maintained a library, binding all the books purchased during the preceding years. 5.3 We would, therefore, be required to examine the matter factually, i.e., as a matter of fact; the onus to establish which though, given the law in the matter, is without doubt on the assessee. This is as if the benefit does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue would stand resolved, i.e., in effect. The assessee had, in fact, after a year's use, got the books bound, which, as also emphasised by the ld. DR during hearing, would itself show of their continuing to be of value and relevance. Imparting coaching, training for competitive examinations requires high levels of education, skill and aptitude, so that the firm is only in a profession and, accordingly, the prescribed rate of 60% is apposite. 5.5 We shall first dwell on the nature of the books under reference. Books, including annual publications, are per se capital expenditure and, thus, 'plant'. They, particularly in the field of science, contain knowledge, the basic principles covering the various phenomena. The students are (under various courses of study) introduced to underlying concepts and the laws governing 'matter', illustrated by experiments and real life examples, and problems, where these find application. Their understanding of the same is examined by questioning them on both, i.e., the basic concepts, and by posing problems requiring their application, for resolution and/or explanation. How would the principle of gravitation be introduced or explained best, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly the case, there would be a sharp decline in the resale value of the cars of the existing makes, and consequently of old car of those makes. It may thus make more business sense to dispense with the old stock, again not impacting the treatment of the expenditure on the purchased cars, which would continue to a capital expenditure, and would in any case not be governed in any manner by future developments, which are at best uncertain. Coming back to the facts of our case, this is precisely what is meant by the AO when he states that changes in school level maths and science would not take place annually. But that does not either imply permanence (i.e., no change) therein or a rapid change or on annual basis, which (change) would obviously be in a particular year, implying a change from the immediately preceding year. Permanence is not an attribute of a capital expenditure (capital asset), but only of it being 'enduring'. That is, the change is neither a regular feature and, secondly, extends to a small part of the total syllabus. This is not a surmise, but a common observation, nor a technical matter, so that it was impermissible for the Revenue authorities to comment thereon d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax Reports' (ITR) (besides others), an annual publication, of the earlier years, and which would, exhibit, if at all one was required, of the enduring benefit that inures even from annual publications. What changes have been made; which topics are better discussed/explained in the books in stock, etc. are all technical matters, on which of course the Revenue has offered no comment. Suffice to add that the different books represent the different editions of the same book. Under the circumstances, in our considered view, the books form part of the profit making apparatus of the assessee's enterprise, and have been correctly allowed depreciation thereon by the Revenue at the prescribed rate of 60%. This would imply a write off of almost 94% of the cost by the third year. The study materials supplied by the assessee-firm to the students for their use and retention, being examination specific, has already been directed to be allowed by the ld. CIT(A) as revenue expenditure. Though the Revenue has contested this finding (per its Ground # 2), on the ground that the said study material is not sold to the students by the assessee, we consider that the cost thereof would stand to be cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e., of the assessee pursuing a profession or being a business firm. Merit apart, we find the controversy as mis-conceived. How could, where the article being used is the same (books), and the purpose for which it is used also the same, i.e., for imbibing knowledge and understanding the subject, as well as teaching it, it matter whether the coaching classes and tutorials is a 'profession' or 'business'. A capital expenditure would not become revenue, depending upon whether the income is considered as arising from exercise of profession or undertaking a business; the purpose of expenditure being the same, as also its contribution to the earning of the income or the income generating process. Why, books, where used in a lending library business, are exigible to depreciation at the rate of 100% per Entry III (9)(ii) itself, i.e., the same entry which provides for depreciation at 60% on the books used in carrying on a profession, proving beyond doubt, if one was required, to what stands afore-stated by us. As such, we are in agreement with the ld. DR that the books, if not used in carrying on a profession (or a specified business), would carry the general depreciation rate of 25%, and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue's appeal, is in relation to the disallowance, partly confirmed by the ld. CIT(A), in respect of an aggregate expenditure of Rs. 5,10,718/- claimed by the assessee toward cost of 'books' (Rs. 3,10,410/-) and 'awards' (Rs. 2,00,308/-). The basis for the AO's disallowance qua the assessee's said claim u/s. 37(1), is that the relevant expenditure is not supported by any vouchers, and coupled with the fact that these were incurred in cash, could not, under the circumstances, be regarded as genuine. The ld. CIT(A), in appeal, however, was impressed with the assessee's argument that the awards were generally of nominal value, so that obtaining vouchers for all a practical impossibility, which business reality had to be reckoned with. He, therefore, finding that the purchase of awards as varying from a figure as low as Rs. 4/- a piece, deleted the disallowance on that score, while confirming that in respect of books. Aggrieved, both the parties are in appeal. 7. Before us, it was contended on behalf of the assessee that the AO had, as mentioned per para 3 and 5 of his order, visited the assessee's premises and found it to have maintained a library. Books were physically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cover itself. The books are standard books, purchased from regular sources. It has also not explained in any manner, before any authority, including us, as to why, under the circumstances, these books were purchased sans any vouchers nor even furnished the details of those books, and the names and addresses of the seller/s. It is, thus, difficult to accept the assessee's stand, nor can that of the Revenue be faulted. All that the assessee says is that the AO visited its premises, and found it to have maintained the books. The Revenue does not deny that, but it nowhere emanates from the reading of the assessment order, including para 3.5 thereof, adverted to by the assessee, that the AO had physically verified the books on his visit. All that the AO says, and which stands noted by the ld. CIT(A), is that the vouchers in respect of books and awards, claimed in the sum of Rs. 21.88 lakhs and Rs. 14.19 lakhs respectively, were verified in his office in the presence of the ld. AR on 10.7.2008, finding shortfall therein to the stated extent. With regard to the AO's visit, all that the AO did was to carry out a physical inspection with a view to see first-hand the state of maintenance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect could not be obtained, and which, again, cannot be until those items were specified, along with the source/s thereof (the sellers). That alone would make its case complete and comprehensible. Under the circumstances, we, therefore, only deem it fit to restore this matter back to the file of the ld. CIT(A) for a speaking order in the matter in accordance with law, and after allowing a reasonable opportunity of hearing to the assessee. We decide accordingly. 9. The last Ground No. 7 of the assessee's appeal is in relation to disallowance of Rs. 46,052/- effected u/s. 40A(3) of the Act. The AO found the assessee to have made cash payments in excess of Rs. 20,000/- in respect of several purchases for awards, the aggregate expenditure under which head stood claimed at Rs. 14.19 lakhs. The same was observed to be in pursuance to bills, in each case, of even date, consecutively numbered, i.e., from the same party, which numbered two. Though the amount, which stood in each case paid in cash, was less than Rs. 20,000/-, i.e., bill wise, the total (party-wise) on each occasion worked to more than Rs. 20,000/-. As such, these were essentially single transactions, segregated into mult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial, and not its form. A bare browse of the impugned transactions would show that the same items, purchased from the same party, at the same time, have been invoiced per two or more bills, clearly splitting the transaction to appear as more than one. As such, the inference that these represented, in effect, a single transaction, paid for simultaneously, i.e., at one go, is unexceptional. The Tribunal (Cochin Bench) has also under similar circumstances, upheld the application of s. 40A(3) in the case of Sree SakthiPaper Mills Ltd. v. CIT (in ITA No. 388/Coch/2008 dated 03/6/2010 for AY 2004-05); its relevant findings being as under: "4.5 .. The standard of proof required to exhibit or prove a matter of inferential fact under the Act is as required under civil law proceedings, i.e., preponderance of probability [refer: CIT v. H. Abdul Bakshi Bros. , 160 ITR 94 (AP)(FB); CIT v. India Sea Foods , 218 ITR 629 (Ker.)(FB)], so that the inference drawn by the Revenue, apart from being cogent, is in conformity with the law. Even otherwise, it is a fundamental rule of law that a transaction is to be viewed in its substance, ignoring the form. In the present case, this would b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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