9911796707
TMI Blog2012 (9) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Assessment Year 1997-98, the assessee declared a total income of Rs. 42,79,660/- on 26.11.1997. During the assessment proceedings, the AO noticed that the assessee had entered into a lease agreement dated 05.04.1996 with M/s Price Water House Associates Ltd. (hereinafter PWHA) for leasing on rent first floor of the building P-1, Aditya Vihar, M.B. Road, New Delhi for a period of five years at a quarterly rent of Rs. 1,05,000/-. The AO further noticed that immediately after two months or so, i.e. on 28.05.1996, the assessee entered into another lease agreement with M/s Price Water House (hereinafter PWH) for giving the same premises on sublease for 5 years from 1st July, 1996 for a quarterly rent of Rs. 4,61,500/-. The AO also noticed that both the agreements were signed by the same person though in the sublease agreement there was no mention of the lease agreement with PWHA. 3. In the return of income, the assessee had declared sub-lease rental of Rs. 13,84,500/- for nine months as income and had claimed lease rental of Rs. 3,85,000/- for 11 months as deduction. The assessee had also declared Rs. 41,09,585/- as expenditure on renovation of the said premises, out of which, Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d been completed. Moreover, in the sub-lease agreement between the assessee and PWH, neither was there any mention of the original lease agreement, nor any mention about the reason why the sub-lease rental payable by PWH was as high as Rs. 4,61,500/- per quarter when the original lease rental was just Rs. 1,05,000/-. The AO inferred that the two agreements were entered into just to reduce the tax liability of both the parties. The assessee's tax liability was intended to be reduced by claiming cost of renovation as deduction, and PWH's tax liability was intended to be reduced by claiming deduction of higher sub-lease rental paid to the assessee; such payment by PWH, in fact, resulted in advancement of the principal loan amount to the assessee. 7. On appeal by the assessee, the CIT (A) set aside the assessment order holding that the lease transaction was a genuine one, that there had been no reduction in tax liability of any party was way of the lease/sublease arrangements. He deleted all the additions except the amount of Rs.41,09,585 claimed by the assessee as depreciation/revenue expenditure, and further held that out of Rs. 41,09,585/-, the amount of Rs. 14,88,536/- was to be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartment." 9. This order was appealed against before Income Tax Appellate Tribunal (ITAT) by both the revenue and the assessee. While the assessee challenged the direction given by CIT (A) for amortization of Rs. 26,21,049/- over the period of lease, the revenue, on the other hand, assailed the finding that the transactions were genuine, along with challenging all the deletions of additions that had been made by the AO. Both appeals were clubbed by the ITAT by order dated 22.08.2008. The ITAT allowed deduction of Rs. 26,21,049/- claimed by the assessee as revenue expenditure. Moreover, ITAT deleted all the additions made by the AO holding that the lease transaction entered into by the assessee with PWH was a genuine one. The ITAT's reasoning on facts was as follows: "The assessee has demonstrated that M/s. Price Water House was in need of premises because one of the landlords of its office premises has already given a notice for vacating the same. Simultaneously on the other hand, the premises taken by the assessee for its use was not approved by its collaborator, so it was seeking permission to sub-lease the premises. These circumstances do indicate that there was no ulterior m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be re-agitated in appeal before the High Court. 12. Furthermore, contended counsel for the assessee, that the expenditure on renovation was revenue in nature, and thus ought to have been allowed as a deduction in terms of Section 30(a) (i). Reliance was placed on the decisions of this Court in the case of Commissioner of Income Tax v. Escorts Finance Ltd [2006] 205 CTR (Del) 574, Commissioner of Income Tax v. Hi Line Pens Pvt. Ltd (2008) 306 ITR 182 and Commissioner of Income Tax v. M/s Amway India Enterprises 4th November 2011 in ITA Nos. 1344/2009 and 1363/2009. Alternatively, it was argued that the expenditure would fall under ambit of section 37(1) of the Act, and thus, would be deductible. 13. On the issue of whether this expenditure was revenue or capital in nature, counsel for the revenue contended, without prejudice to the challenge regarding the genuineness of the lease arrangements, that the amount of Rs. 26,21,049/- incurred on renovation of the leasehold premises was in the nature of capital expenditure. It was argued that Explanation 1 to section 32 was applicable, and reliance was placed on the decision in Ballimal Nawal Kishore and Anr. v. Commissioner of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 225 ITR 802 is applicable. The appellant will be entitled to deduction of Rs. 26,21,049/- during the period of lease in the ration of lease rentals received." 15. On the second question framed, learned counsel for the revenue argued that the Tribunal was incorrect in allowing depreciation @ 100% on Rs. 11,98,600/- to the assessee. It was instead urged that depreciation should have been charged at only 10% per annum. Counsel for the assessee, on the other hand, defended the Tribunal's decision of allowing depreciation at 100% p.a. Analysis 16. This Court shall first deal with the question of whether the finding of the Tribunal about genuineness or otherwise of the lease transactions is unsustainable; and then, if need be, consider the treatment of the amount of Rs. 26,1049/- and the rate of depreciation applicable. Even though under section 260A of the Income Tax Act only substantial questions of law are to be decided this case, there exist authorities for the proposition that where the findings of fact, by the Tribunal are perverse and contrary to materials on record and based on surmises and conjectures, the High Court under Section 260A would be competent to interfere [Ref. Pya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction were. It appears facially improbable for a prudent businessman to undertake substantial and significant expenditure without any modicum of commitment by a potential joint venture partner. It is also significant, that the landlord (PWHC) let out the premises, for a monthly rental of approximately Rs. 35,000/-; the sub-lease was for Rs. 4,61,500/-. The assessee claimed that it incurred an expenditure of Rs. 41,09,585/- (Rs. 24,17,600/- towards construction of wooden partition etc. and Rs. 13,46,150/- on replacement of existing fitting & fixtures floor tiles etc. and expenditure of Rs. 3,45,835 on designing & supervision charges). There is no doubt that the expenditure and the background in which it was incurred is mysterious. The original lease (between the assessee and PWHA) was entered into on 5.4.1996; the sub lease with PWH, was entered into on 28.5.1996. 19. The relevant findings of the AO, after remand by the CIT (A), and after examination and cross examination of the contractor who carried out the renovation, and after examining the books, and corresponding evidence of payment towards the renovation, are as follows: "3.1 During the course of original assessment pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. five lakh each was made by the assessee to Shri Ranjeet Singh from 16-07-1996 to 24-09-1996 while the last payment of Rs. 109, 000/-was made in the next financial year. The AR of the assessee had not submitted any documentary evidence to show that most of the renovation was complete before the assessee entered into the sublease agreement. 4.1 The A R has submitted that the Japanese collaborator did not approve of the location of the premises being far away from downtown and as the assessee left with no alternative but to sublease the said premises. However it is not understandable as to why the original lease could not be cancelled when the original owner P HWA and sublessee i.e. PWH are under the same management And If the Management of PW- HA/PWH could agree to take its own premises on sublease there was no reason would cancel the original lease itself particularly when the effect of even the sublease arrangement same i.e. premises gets back in occupation of PWHA/PWH and does it is only a paper arrangement to show the cost of renovation in the hands of the HSE and thus to charge higher lease rental. 4.2 Even Shri BS Dhadwal has stated in his statement taken on 24-02-2000 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rue character, especially in the documents which describe it, and spell out the terms and conditions. The revenue, like the court, has to look at the real nature of the transaction. Thus, it was held in Sundaram Finance Limited v. State of Kerala, AIR 1966 SC 1178, that "The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In each case the Court has, unless prohibited by the statute, power to go beyond the document and to determine the nature of transaction, whatever may be the form of the document..." 22. Similarly, in Commissioner of Income-Tax, West Bengal II v. Durga Prasad More, (1971) 82 ITR 540 the Supreme Court observed as under: - "Now we shall proceed to examine the validity of those grounds that appealed to the learned judges. It is true that the apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will b e very easy to make self-serving statements in documents either executed or taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that in fact such a prior arrangement had been worked out, or even mooted by the Japanese collaborator; there is no evidence to show what impelled the collaborator to call off the idea, or how the assessee was compensated. The timing of PWHA's lease and the need of PWH for new premises is too close. In April, 1996, PWHA leased out the premises; the very next month, the same premises were sub-leased to PWH. 26. The CIT (A) and the Tribunal blandly, and perhaps uncritically accepted the argument that the tax implications either way were the same, for the assesse as well as PWHA. There is no discussion in this regard; no details about assessment of PWH, or PWHA, or its returns appear in either order. Therefore, the wholesale acceptance by the said authorities that the tax implications were the same cannot be sustained. Equally, these authorities did not furnish any reason why the deductions and findings, based on an elaborate and painstaking examination of the materials on record, by the AO, were unjustified. The findings of the CIT (A) and the Tribunal, therefore, were contrary to the evidence; their reasoning cannot be sustained. 27. In the light of the above discussion, both th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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