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TMI Blog1999 (10) TMI 740X X X X Extracts X X X X X X X X Extracts X X X X ..... Chemicals Ltd. in the fact owed some amount to the assessee-company and hence by adjusting the purchase price of the boiler, the debt due by Barium Chemicals to the assessee-company was reduced to ₹ 19,15,538. On acquiring the plant, assessee-company leased it to Barium Chemicals Ltd. on a rent of ₹ 39,000 per month. Since the plant carried a depreciation rate of 100 per cent assessee-company claimed the same on the ground that on purchase of the boiler, it had become the owner thereof and also had used it for the purpose of its business. AO was of the view that the transaction was on paper only, insofar as that there was neither the sale by Barium Chemicals, nor was there any purchase by the assessee-company. According to him, the assessee had merely taken advantage of the debit balance of Barium Chemicals in its books and had leased it back on a monthly rent. Moreover, the assessee-company had avoided payment of tax by claiming depreciation of ₹ 26 lacs. Thus, in his opinion, it was not a genuine transaction, but was merely a paper transaction and hence disallowed the claim of depreciation of ₹ 26 lacs. The CIT(A) endorsed the view of the AO by observing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended that the Expln. 4A to s. 43(1) had retrospective operation for which reliance was placed on the decision of the Bombay High Court in CIT vs. Banqaue Nationale De Paris (1991) 91 CTR (Bom) 163 : (1994) 194 ITR 167 (Bom). 5. We have given our thoughtful consideration to the issue before us. The material on record has also been duly considered. It would be appropriate if we first deal with the effect of Expln. 4A inserted in s. 43(1) of the Act w.e.f. 1st Oct., 1996. If it has a retrospective operation, as contended by Shri RajKumar, then perhaps, the assessee may not have any case on merits. In this respect, the learned Departmental Representative has relied on the decision of the jurisdictional High Court in the case of CJT vs. Banque Nationale De Paris (supra). The Hon'ble High Court, at p. 179 of the Report observed as follows : It is submitted that r. l(x) can be interpreted as referring to the net income only after the insertion of the Explanation and not prior to it. This submission, in our view, must be rejected. An Explanation may be appended to a section to explain the meaning of the words used in the section. There is no presumption that an Explanation w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss amount of such dividends received by the company and not with reference to net amount, i.e., after giving deduction in respect of interest paid on borrowings, etc. Since this decision ran counter to the legislative intent to grant such deduction with reference to the net income by way of dividends only, the Finance (No. 2) Act, 1980, inserted a new s. 80AA in the IT Act clarifying the intention with retrospective effect from 1st April, 1968. In several cases, High Courts have held that even for the purposes of determining chargeable profits under the Companies (Profits) Surtax Act, the gross amount of dividends should be excluded from the total income. The legislative intent could have only been to exempt from surtax the amount of dividends which has actually been included in the total income and, accordingly, the High Court rulings have resulted in giving an unintended benefit to companies in respect of dividends received by them from domestic companies. 7. From the above discussion, it can be observed that the Explanation to r. 1 was added as a consequence to the insertion of new s. 80AA in the IT Act with retrospective effect from 1st April, 1968. Thus, insertion of s. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legislature, there is nothing clarificatory about it. The situation never existed on the statute book earlier which needed clarification. It is added as an Explanation to s. 43(1) merely because what would be the actual cost in such a situation has to be specified, As a matter of fact, Expln. 3 is there to deal with the situation in Expln. 4A, but the legislature thought it appropriate to deal with that situation in a manner different than provided in Expln. 3. Thus, a different mischief was carved out with a different remedy which never existed earlier. We, therefore, repeat that there can be no clarification of a thing which never existed earlier. If the intention was to make it retrospectively effective, it would have specified so in no uncertain terms as was done when Expln. 8 was inserted by the Finance Act, 1986, with retrospective effect from 1st April, 1974. The situation in the present case is clearly distinguishable from the one which was before the Bombay High Court in the case of Banque Nationale De Paris (supra). In view of the foregoing discussion, we hold that Expln. 4A has no retrospective operation. In holding so we derive strength from the decision of the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. Besides economic reasons, other considerations like technology, financial reporting, etc. also come into play. As is the legitimate want of any businessman, tax considerations also has a role to play. However, it need not be emphasised that in the wake of all business considerations, legitimate or otherwise, legal fundamentals cannot be given a go-by. It is with this overall perspective in mind, we proceed to examine the case before us. 11. Assessee-company purchased the equipment for ₹ 26 lacs from its associate concern Barium Chemicals Ltd, This is duly reflected as addition to its fixed assets by the assessee in its balance sheet. It is also shown as reduction in fixed assets by Barium Chemicals Ltd. The said company has also shown Rs, 26 lacs as profit on sale of fixed assets in its P L a/c. The said amount has been offered for taxation as short-term capital gains. All these facts are on record and are not in dispute. However, Department is of the view that actually there is no sale and purchase of equipment. Following three aspects appear to have guided the Department in arriving at such a conclusion : (a) The asset was leased back to the seller; (b) The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing it from Barium Chemicals. 13. We come to the second aspect that assessee reduced its tax liability by claiming 100 per cent depreciation. In other words, this has been described as a colourable device to avoid tax. In the earlier paras we have held that the decision to purchase the asset and lease it back to the seller was purely a business decision to earn income by way of lease rental. In the process, if assessee gets tax sops to which it is entitled under the law, it cannot be described as a colourable device. When the seller of the asset has offered ₹ 26 lacs for taxation as short-term capital gain and when the lease rentals earned by the assessee have suffered tax, it is difficult to conclude that the transaction was entered into with the sole motive of getting tax benefit by claiming 100 per cent depreciation. It needs to be appreciated that while striking a business deal, tax aspect will always be considered, because it directly affects the fund flow and cash flow situation of the business. Thus, the tax aspect is very much an integral part of the business decision which should not be looked down as a taboo. If tax aspect is not taken into consideration, it is q ..... X X X X Extracts X X X X X X X X Extracts X X X X
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