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TMI Blog2017 (4) TMI 345X X X X Extracts X X X X X X X X Extracts X X X X ..... east Portfolio Management Limited. 3. Grounds taken by the assessee in the assessment year 1993-1994 (ITA No.1363/M/2006 reads as under:- 1.1 The Learned Commissioner of Income Tax (Appeals) VIII, Mumbai hereinafter referred to as CIT(A) erred on facts and in law in confirming the disallowance of depreciation on all Sale and Lease Back transactions inspite of the fact that the assessee has satisfied the conditions laid down by the Hon'ble Income Tax Appellate Tribunal (SB) in the decision in the case of Mideast Portfolio Management Limited. 1.2 The Id. CIT(A) erred on facts and in law in confirming the disallowance of depreciation on all Sale and Lease Back transactions entered into in earlier years even tough the transaction were subject to assessment under section 143(3) and no disallowance was made in those orders. 1.3 The Id. CIT(A) erred on facts and in law in confirming the disallowance of depreciation on Motor Vehicles given on lease during the year. 1.4 The Id. CIT(A) erred on facts and in law in confirming the disallowance of depreciation on Plant and Machinery given on lease during the year. 2. The Id. CIT(A) failed to appreciate that the AO erred on facts and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lysis of the paperbook furnished by the assessee which was also produced before the Hon'ble ITAT, the following facts were emerged which are discussed as under: 7. The pages 1 to 89 of the paperbook contain copies of lease agreement, copies of invoices, copies of installation certificates and copies of insurance papers etc. in respect of following parties. 1. Kedia Distilleries Ltd., 2. Western Pacgues India Ltd., 3. DCM Shriram Consolidated Ltd., 8. AO noticed that these transactions are basically in the nature of Sale and Lease-Back transaction, the depreciation on which were disallowed in the assessment order u/s. 143(3) r.w.s. 147 of the I.T. Act dated 31-03-1999. In the assessment so framed u/s.143(3) r.w.s.254, AO again disallowed assessee's claim of depreciation which was confirmed by CIT(A) and assessee is in further appeal before us. 9. We have considered rival contentions and carefully gone through the orders of the authorities below and also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us. 10. From the record, we found that for the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stage of the assessment or appellate proceedings, till date, though repeatedly requested for by the assessee time and again and inspite of specific directions given by the CIT(A) when he set aside the original assessment order. These inquires/ reports have till date not been made available to the assessee. 12. It was also brought to our notice that the above documents have been gathered behind the back of the assessee and the AO was duty bound to give the material collected to the assessee for their rebuttal and! or cross examination; having not done so, the AO is precluded to use the material so gathered during the survey action at WPIL and hence, cannot draw adverse inference in the case of the assessee, on the principles of natural justice. This is because the assessee, in the absence of the survey report and various statements referred to by the AO, cannot make any submissions against those documents collected behind the back of the assessee. Thus, the impugned disallowance made by the AO in violation of the principles of natural justice is not sustainable in law. 13. Learned AR also brought to our notice that assessee has not been informed of the investigations and statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Kedia Group of companies on 23rd September, 1996. The search revealed that the group has entered into finance lease transactions with various banks, financial institutions and companies during the accounting years 1990-1991 to 1995-96. On the basis of statement of Managers of KDA Distilleries, AO declined assessee's claim of depreciation. The allegation by the AO is that the assessee is a fictitious supplier and manufacturer without any basis and material on record. The existence of the assets leased to Kedia Distilleries is doubted by the AO by placing reliance on the documents collected during search action of the Kedia Group and admissions of persons of the group. The AO has not even named the person on whose statement he has relied on and has not given the same to the assessee for rebuttal, and the documents collected during search have also not been given to the assessee for, their comments and rebuttal. This is in gross violation of the principles of natural justice and the observation made by us for WPL squarely applies here. 17. We also found that all the details in relation to the assets leased to Kedia Distilleries are on the records of the AO. These deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insured by a nationalised insurer namely, National Insurance Company Ltd, who has issued a policy no 350100/11/13, for Rs. 34,76,000 which has been filed by the assessee with the AO during the course of original assessment proceedings. This policy document means two things, first, that the fair market value of the gas cylinders is Rs. 34,76,000, as no insurance company will insure goods at a higher value, and second, the existence of the leased assets, though no lower authorities have doubted the existence of the assets for the impugned disallowance. In all fairness, we restore the matter back to the file of AO to again verify the certificates issued by lessee confirming that no depreciation is found that issue has not claimed any depreciation. Assessee should be allowed its claim of depreciation. 21. In relation to assets leased to Searsole Chemicals Ltd, we found that the Assessing Officer has not even discussed the plant and machinery leased to Searsole Chemicals Ltd in his assessment order under section 143(3) r.w.s 254 dated 29.03.2005. 22. By the impugned order CIT(A) confirmed the disallowance by observing that assessee's representative has not made any separate submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... summons, one of them being that they are already involved in a legal battle with the assessee and hence, may have chosen not to respond. If the summons were served, the AO could have taken other steps like, sent his Inspector at the given address for enquiries, or could have written to the AO of the lessees requiring them to respond to the summons. 26. In support of the proposition that merely because summons could not be served upon the same parties or they did not appear before the AO, the transactions could not be held to be non-genuine. Reliance can be placed on the following judicial pronouncements. D & H Enterprises 72 taxmann.com 91 (Guj) Crystal Networks (P) Ltd 353 ITR 171 (Cal) Creative World Telefilms Ltd 333 ITR 100 (Bom) 27. In respect of transactions with these parties regarding sale of lease back of assets, we found that complete details in respect of each lease transaction which includes photo copy of lease agreement, invoices of the assets purchased which have been leased, details of payment, installation certificates, details of insurance, details of lease rent received, details of assets either having been received back or sold at the end of the lease term, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied his mind and allowed depreciation on the assets leased, then, in the subsequent year, the AO is obliged to allow depreciation on such assets, and cannot take a different view, without bringing any adverse material on record that would suggest otherwise of the assets acquired in the earlier year(s). Reliance in this respect is placed on the decision of the jurisdictional High Court in the case of Paul Brothers, wherein the High Court has held that " unless the relief granted for the assessment year 1980-81 was withdrawn, the ITO could not have withheld the relief for the subsequent years. Gujarat High Court decision in the case of Saurashtra Cement & Chemical Industries Ltd v. ClT (1980)123 ITR 669 also supports the case of assessee 31. With respect to the assets given on lease and returning back to the assessee and again given on lease depreciation is required to be allowed once the assets purchased in the earlier year have entered the block of assets, and depreciation in respect of such assets has been allowed in that year, depreciation in respect of such assets is necessarily to be allowed for the subsequent year that is, the year under reference. If the AO wants to take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ports are on the records of the AO and in none of the cases, the value of the asset leased is higher than the value per valuation report. 34. Furthermore, as per the terms of lease deed both lessee / lesser has given right to terminate the lease agreement. Refer Explanation 4A to section 43(1) inserted in the statute books effective from 1.10.1996 - the Legislature has itself recognised and brought the concept of sale and lease back of assets, and consequential benefits to be provided for such transactions, within the provisions of law. A perusal of the said provisions clearly shows that legislature has given legal recognition to the transactions where assets are purchased by an assessee from a person and the same are leased back to the same person under the terms of an agreement. Thus, the legislature has itself recognised that such kind of transactions may fall within the four corners of law and the assessee can claim the benefit of depreciation under the realm of law. This proposition has been dealt with by the Hon'ble High Court in case of Cosmo Films Ltd., 338 ITR 266. 35. From the record, we also found that sales tax has been charged on and paid on transactions both sale an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of lease was more than the claim of depreciation. Thus, there is no evasion of tax due to the lease back transactions and the assessee's claim of depreciation. Recently, the Mumbai Tribunal in the case of Bombay Dyeing & Mfg. Co. Ltd. (ITA No 45991M12002) has after referring to the various decisions of Supreme Court, High Courts and Tribunals allowed depreciation on assets on sale and lease back transactions. Further, reliance can be placed on the following decisions - 1. CIT vs. West Coast Paper Mills (ITA No.389 of 2008) (Bombay HC) 2. West Coast Paper Mills vs. Jt CIT 100 TTJ 833 (Mumbai) 3. Development Credit Bank vs. Dy CIT (40 taxmann.com 532) (Mumbai-Trib) 4. Bombay Burmah Trading Co. Pvt. Ltd v. Asstt CIT (82 ITD 531) (Mum) 5. Dy CIT vs. Mls. Sheba Properties Ltd. (ITA Nos. 1954/Mum/2003) 6. Jt CIT vs. Mls Cable Corporation ofIndia Ltd. (2007-TIOL- 397-IT AT-Mum) 7. CIT vs. Cosmo Films Ltd. (2011) (12 taxmann.com 217) Delhi High Court) 8. Industrial Development Corp of Orissa Ltd. vs. CIT (137 Taxman 556) (Ori) 9. CIT vs. Punjab State Electricity Board 183 Taxman 419 (Punj & Har) 38. To ascertain the exact nature of transaction as to mere sale or sale and l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. No alternations allowed - without consent -Clause 19. Clause 20 - The Lessee shall insure the said equipment and keep the same insured for the entire term of this Agreement.. Default in payments - Clause 27 - If the Lessee shall make default in payment of the sums payable hereunder or if the Lessee shall commit an act of bankruptcy or have a receiving order made against him or shall have any arrangement with his creditors he shall execute any assignment for the benefit of or compound with his creditors or if the Lessee shall fail to observe and perform the terms and conditions of this Agreement on his part to be observed and performed or if the Lessee shall do or cause to be done or permit or suffer any act or thing whereby the Company's rights in the said equipment may be prejudiced or put in jeopardy, then in each and every of such events it shall be lawful for the Company- (a) Without prejudice to the Company's claim for arrears of rent or for damages for breach of this Agreement forthwith without notice to terminate this Agreement and to retake possession of the said equipment and for that purpose by itself, its servants or agents enter upon any land, buildings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lessees in the registration book also indicated the lessee as the owner of the vehicle and name of the assessee appears only under the caption of "hypotheticated to". In terms of these observations, we do not find any infirmity in the order of CIT(A) for decline of claim of depreciation in respect of motor cars and other vehicles. 41. With regard to sale and lease back of plant and machinery CIT(A) observed that the agreement does not stipulate wholesale buyer of the cost of the dismantling at the end of the lease period of transportation. As per our considered view, it does not matter in so far as it is now going to change the character of the arrangement and if the assets has to be repossessed the expenses of repossession is to be borne by the lesser only. 42. With regard to observation regarding default of payment by the lessee, it may be a situation where lessee has defaulted any payment of lease rentals. In such cases, we found that assessee has taken legal measures including u/s.138 of Negotiable Instruments Act and winding up of the defaulting companies. Thus, mere default on the part of the lessee cannot be made a reason for decline of depreciation when the lease agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 43. The CIT(A) has analysed the transactions keeping in view the ratio of the Special Bench in the case of Mid East Portfolio Management Ltd., however a lot of water has flown after that decision which was delivered on 14th August, 2003 till today. The latest decision of Bombay Dyeing of Mumbai Tribunal has dealt with the decisions on the subject in great detail and hence, the order of the CIT(A) to that extent may be out of times. 44. The CIT(A) in respect of violation of principles of natural justice regarding the non-furnishing of the evidences on the basis of which the AO has arrived at adverse conclusion has stated that no evidence has been produced by him also in this respect to rebut the findings that were known to the assessee without appreciating the fact that how can the assessee rebut without going through such evidences; its an impossibility that the CIT(A) expects, and hence, ought to be quashed. The CIT(A) has also not dealt with the evidences that the assessee has filed in respect of claim of depreciation. 45. Even if we make comparison of the terms and conditions of sale and lease back transactions entered by assessee vis-à-vis terms and conditions of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase. Various orders of the Courts including Mid East Portfolio Management Ltd., 87ITD 537 (Mum)(SB) and Development Credit Bank Ltd. (Bombay High Court) have been relied upon by the CIT(A) to come to this conclusion that the disallowance has to be recomputed in a manner which is for the sake of convenience extracted as under- "To conclude with, in the original assessment order passed under section 143(3) of the Act dated 31.03.1999, in view of the findings of the Assessing Officer that the entire arrangement is that of financing only the interest component forming part of the lease rent has been subjected to tax as income: That amount has been repeated in the subsequent orders. However in view of the relief granted both by the Assessing Officer in the order under appeal as well as in this appeal, the amount as also the basis thereof is needed to be changed. Hence the Assessing Officer shall do the needful in terms of the following decisions:- (i) that the lease arrangement having sale and lease back transactions both where such transactions were entered into in the earlier accounting year as well as in the relevant accounting year are in the nature of finance transactions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Mumbai tribunal has clearly stated that wherever the issues are debatable, the question of imposition of penalty does not .arise. Reference is invited to decision of the Hon'ble ITAT in the case of ITO Vs Roborant Investments (P) Ltd. ITA No. 3937/Mum.l2002, in the ITAT Mumbai Bench 7 SOT 181(Mum.), the relevant extract of which reads as under:- "It was a debatable issue as to whether the rental income/service charge was assessable " income from business or income from house property. The assessee, instead of giving up its claim, preferred to argue before the departmental authorities that the said income was assessable as income from business The assessee was entitled in law to say so, The fact that the view canvassed by the assessee before the Assessing Officer was not accepted did not ipso facto give rise to concealment of income. Penalty u/ s 271(1)(c) is levied for concealment of income and not for the difference in taking views on a given set of facts provided the facts have been adequately. In view of the above discussion, I am of the view that no penalty u/s.271(1)(c) could be levied by the A.O. on the facts of the case and therefore, the penalty so imposed i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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