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TMI Blog2012 (9) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... 996 in spite of the fact that both agreements were signed by the same person these facts leads to the conclusion that the said arrangement of lease and sublease is not bona fide genuine - against assessee Disallowance of depreciation on renovation - ITAAT allowed it - Held that:- As the transaction of lease and sub lease was proved to be bogus no question of allowance of depreciation arises here - against assessee - ITA Nos.551/2010 & 738/2010 - - - Dated:- 12-9-2012 - MR. JUSTICE S. RAVINDRA BHAT, MR. JUSTICE R.V. EASWAR, JJ. For Appellant: Mr. Sanjeev Rajpal, Sr. Standing Counsel. For Respondent: Mr. Surinder Goel, Advocate. MR. JUSTICE S.RAVINDRA BHAT The questions of law framed in these appeals by the revenue, impugning the order of the Income Tax Appellate Tribunal (ITAT) dated 22.8.2008 in ITA No. 4505/Del/2003, are as follows: a. Whether the Appellate Tribunal fell into error in allowing deduction to the extent of Rs.26 , 21,049/- claimed by the assessee towards renovation of the property and treating as revenue expenditure in the facts and circumstances of this case? b. Whether the Tribunal was correct in permitting depreciation at 100% on R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... witnesses. 5. In pursuance of the said directions, the AO initiated de novo proceedings upon which he, by order dated 19.02.2003, observed that the lease and sublease agreements with PWHA and PWH respectively were bogus transactions, and were in fact, finance/loan arrangements. He, thus, disallowed deduction of depreciation @ 100% on Rs. 11,98,600/- capitalized by the assessee; disallowed deduction of renovation expenses of Rs. 29,10,985/- claimed by the assessee as revenue expenditure; and also disallowed lease rental of Rs. 3,85,000/- payable to PWHA. He also worked out interest payable at Rs. 3,21,000/- for five years and made addition of Rs. 4,54,140/- to the income of the assessee attributable to the present year. The AO further observed that the depreciation, even if held to be allowable, was available only at 10%. 6. The Assessing Officer s reasoning and conclusions are given in para 4.1 to 4.3 of his order. Before him, the assessee argued that its Japanese collaborator had not approved of the location of the premises on the ground of its distance from down town, and thus the assessee was left with no alternative but to sub-lease the premises. The AO reasoned that it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; that at this time, it was agreed between PWHA and the assessee that the latter would get the renovation work at its expense and sublease the premises to PWH. Furthermore, the CIT (A) s reasoning in holding that there had been no difference in the tax effect borne by the assessee and PWH is reproduced as follows: In case of lease transaction the amount paid by appellant to the lessor at Rs. 21 lacs is taxable in the hands of lessor whereas the same is deductible in the hands of the appellant. The appellant had received Rs. 92.3 lacs as lease rentals as against the expenditure of claimed at Rs. 41,09,585/-. Thus, the appellant has admitted net income of Rs. 30.21 lacs (Rs. 92.39 lacs Rs. 41.09 lacs Rs. 21 lacs). In the case of Price Water House, the decusion of lease rental would have been claimed at RsS. 92.3 lacs over the period of 5 years. On the other hand, if the transaction is to be treated as finance or loan, the intt. of Rs. 30.21 lacs was chargeable to tax in the hands of the appellant. Price Water House would have claimed deduction of Rs. 41.09 lacs on account of repairs and intt. of Rs. 30.21 lacs and Rs. 21 lacs rentals payable to Price Water House Associates Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and held that the lease transaction between the assessee and M/s. Price Water House is a genuine lease transaction. Thus, we do not find any merit in the appeal of revenue. 10. The main argument advanced by learned counsel for the revenue was that the lease agreements entered into by the assessee were bogus, and the entire arrangement instead was a loan/finance arrangement. It was contended that the Tribunal did not appreciate that the lease and sublease agreements was a paper arrangement to show the cost of renovation as expenditure and to thus to charge higher lease rental. Both the lease agreements were signed by the same person on behalf of PWHA and PWH. The whole purpose of entering into such an arrangement was to reduce the tax liability of both the parties. The assessee s tax liability would stand reduced by claiming cost of renovation as deduction, and PWH s tax liability would stand reduced by claiming deduction of higher sub-lease rental paid to the assessee, whereas through such payment PWH would, in fact, advance the principal loan amount to the assessee. It was contended that the Tribunal s ruling on this issue, even though on fact, is unsustainable in law as it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiles etc. The appellant has also incurred expenditure of Rs. 3,45,835 on designing supervision charges. This expenditure is to be bifurcated proportionately. Therefore Rs. 2,03,449 [Rs. 3,45,835 x Rs. 24,17,600) divided by Rs. 41,09,585] will relate to construction of wooden partition etc. The total expenditure on wood work will be Rs. 26,21,049/- (Rs. 24,17,600 Rs. 2,03,449). The amount incurred on wood work will therefore, provide benefit to the appellant over a period of five ears. The expenditure incurred at the Rs. 14,88,536/- (Rs. 13,46,150/- - Rs. 3,45,835/- Rs. 2,03,449/-) is in the nature of current repairs. .... In case of CIT Vs. Kisenchand Chellaram (India) P. LTd. 130 ITR 385 (Mad) Hon ble Court held that improvement carried out in leasehold premises by constructing partition walls. Wall panelling, show windows etc. was revenue expenditure. The expenditure incurred has resulted into receipt of higher amount of lease rentals. Following the decision of Hon ble Madras High Court in the case Kishanchand Chellaram (India) Pvt. LTd. is held that the expenditure incurred on wood work at Rs. 26,21,049/- is in the nature of revenue expenditure. It is also a fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easoning to be erroneous, and the ITAT upheld this view. Both these authorities held that the tax liability of the assessee (and PWH) remained same irrespective of whether the transactions are treated as genuine or bogus. 18. In the present case, it is clear from the record that the assessee is engaged in the business of leasing, hire-purchase and finance. The premises in question over which the expenditures were made were leased to the assessee for a period of five years; the assessee further subleased the premises for the same period. Since the assessee itself was a lessee for a period of just five years, it is highly unlikely that a new asset was created by the work done on the premises. Moreover, it must be noted that the assessee, which is engaged in the business of leasing and hire-purchase, would be incurring such expenses (of the nature of work done on premises to be let/sublet) on a regular basis, thus, depriving it of the character of capital expenditure. What is noteworthy is that the expenditure was incurred, according to the assessee, in anticipation of its entering into joint venture agreement; the Japanese collaborator however did not go through the transaction, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght instalments of Rs. 5 lakhs each were made by the assessee to Shri Ranjeet Singh from 16-07-1996 to 24-09-1996 and thus the AO held that it is unbelievable that the renovation even if commenced before 28-05-1996 was complete before 28-05-1996. The AO relied on the statement of Shri BS Dhadwal senior manager of PWH who was well acquainted with the said transactions, recorded on 24-02-2000 wherein Shri Dhadwal confirmed that renovation was done as per requirements of PW- H, renovation was not complete before 28-05-1996 and he himself visited the premises in connection with the work carried out by Shri Ranjeet Singh. The AO held the transaction entered into by assessee with PWH/ PWHA as that of finance. 20. After narrating the above sequence of events the assessment order went on to recapitulate the directions of the Appellate Commissioner to give sufficient opportunity to the assessee to cross-examine the witness. This direction was complied with. The statements recorded under oath and cross examination conducted, were made available to the assessee; it was asked to respond to certain queries also, issued in the form of notice by the assessing officer. The order of the assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-as deduction and in case of PWH tax liability is reduced by claiming deduction of lease rental which includes payment of principal amount also. 4.4 these facts leads to the conclusion that the said arrangement of lease and sublease of the assessee company with PWHA and PWH is not bona fide genuine and in fact an arrangement to give colour of lease to a transaction which in substance is that of finance and/loan. So the transaction entered into by the assessee with the PW- H/PWHA is taken that of a finance. Total rental received from PWH over five years shall be Rs. 92, 30, 000/-(would Rs. 461,500 x 20 quarters) and total lease rental payable to PWHA over five years is Rs. 21,00,000/-(105, 000 x 20 quarters) and thus assessee has would to receive a rent amount of Rs. 71, 30, 000/-against principal amount of Rs. 41, 09, 000/- paid to Shri Ranjeet Singh as finance for cost of renovation and d and ust from these transactions the assessee earns Rs. 30, 21, 000/-over five years as interest on principal of Rs. 41, 09, 000/- to be recovered in quarterly instalments of principal/ interest of Rs. 3,56,500/- (Rs.461,500 Rs. 1,05,000/-). The interest income of Rs. 30,21,000/- is equally d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... soning was faulty or unsound. The other reason was that the tax liability on both PWHA and the assessee remained the same, even if the transaction was not genuine. The CIT (A) however disallowed depreciation of the entire amount, and instead allowed it to be amortized over a period of five years. 24. This court is of opinion that the inferences drawn by the AO were not unfounded. They were based on certain facts: (1) The extremely short duration between the lease and sub-lease agreement; (2) Renovation being carried on even before the sub-lease agreement was entered into; (3) Payment for the renovation being made in eight instalments the last of which was actually paid the next financial year; (4) A valid inference that if PWHA wished to, it could have cancelled the lease, and made the premises to its related concern, or sister concern, PWH. Instead, the continuation of the lease, and creation of sub lease in favour of PWH by the assessee for an amount which was over 300% (as sub lease rental) in comparison with the lease rent paid by it, appeared far-fetched. 25. In addition, this Court notices that the assessee s claims that the Japanese collaborator was not satisfi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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