Delhi H.C : The appellant was not entitled to claim depreciation on the machinery bought by it on hire purchase basis and leased by it to a third party

High Court Of Delhi

Sai Industries Ltd. VS. ACIT, Company Circle 3(1)

Assessment Year : 1995-96

Section ; 32

Sanjiv Khanna And R.V. Easwar, JJ.

IT Appeal No. 45 Of 2004

November 28, 2011

JUDGMENT

R.V. Easwar, J. – This appeal has been filed by the assessee and it relates to the assessment year 1995-96. The assessee is a company engaged in the business of leasing. While completing its assessment under Section 143(3) of the Income Tax Act, 1961 (Act, for short), the Assessing Officer noted that the assessee had claimed depreciation on assets worth Rs. 38,50,000/- which were claimed to have been purchased during the year. The rate of depreciation claimed was 100%. The assessee assessed relevant details relating to the depreciation and it was submitted that the assets purchased represented effluent treatment plant, aerate lagoon system, scrubber – venturi & packed bed and burner, which were all entitled to depreciation at the rate of 100%. These assets were purchased from a company by the name M/s U B Pharmaceuticals Ltd. of Bangalore (hereinafter referred to as UBPL) under hire-purchase agreement entered into between the assessee and another company by name First Leasing Company of India Ltd. (FLCIL, for short). The assessee also submitted that the assets were leased back to UBPL.

2. In order to verify the claim for depreciation, the Assessing Officer called upon the assessee to furnish a copy of the lease agreement. The assessee filed the same. It was found to have been executed on 15.9.1994. The lease agreement was stated to have commenced on the date of delivery of equipment or payment to the supplier of the equipment, whichever is earlier. It was also stipulated in the lease agreement that the lease rentals will be payable by UBPL to the assessee in advance. The assets were to be installed and put to use before 30th September, 1994. On these facts, the Assessing Officer was of the view that the assets were already in the possession of and were being used by UBPL even before the date on which the assessee claimed to have purchased them from UBPL and this fact had also been admitted by the assessee in its letter dated 10.2.1998. He also noted that as per order sheet entry dated 24.3.1998, it was admitted by the assessee that there was no movement of the assets from the premises of UBPL to that of the assessee pursuant to the purchase by the assessee. They remained stationary in the place where they were before the assessee purchased them. After noticing these facts, the Assessing Officer proceeded to examine the question regarding the user of the assets. Though the assessee had claimed that it had put the assets to use in the business of leasing, which it was carrying on. According to the Assessing Officer it was UBPL, which was using the assets both before the date of sale and after the date of sale. He was of the view that the transaction between UBPL and the assessee under which the assessee claimed to have purchased the assets from UBPL was a paper transaction and that in fact it was UBPL which was the owner and in possession of the assets. The Assessing Officer thereafter observed that the assessee had deliberately adopted the colourable device in collusion with UBPL to avoid its tax liability and proceeded to demonstrate the same. He noted that the net profit of the assessee as per its profit and loss account was Rs. 25,10,284/-, which was converted into a loss of Rs. 14,00,380/- mainly on account of the claim of depreciation on the assets at the rate of 100% of the cost of assets. Thus, according to the Assessing Officer, what would have taxable income was converted into a loss resulting in no tax liability. The Assessing Officer also noticed certain other contradictions in the case. The assets were purchased on 26.9.1994, but there was no physical movement of the assets from UBPL to the assessee. On the very same day assets were claimed to have been delivered to the lessee i.e. UBPL. However, the details of lease rentals received by the assessee showed that first installment was received by the assessee only on 21.1.1995 from UBPL. This chain of events, according to the Assessing Officer amounted to a colourable device to avoid the legitimate tax dues of the assessee, attracting the rule laid down by the Supreme Court in the case of McDowell & Co. Ltd. v. Commercial Tax Officer [1985] 154 ITR 148/22 Taxman 11 (SC). The Assessing Officer thus held that the transactions entered into by the assessee vis-Ã-vis the assets on which the depreciation was claimed was not genuine. He therefore disallowed and had added back the depreciation of Rs. 38,50,000/- to the loss declared by the assessee.

3. The assessee appealed to the CIT(Appeals) and contended that the conditions of Section 32 of the Act were satisfied and that the assessee owned the assets on which depreciation was claimed and also used them for the purpose of its business. Several authorities were cited in support of the assessee’s contention that it was entitled to the depreciation. It was pointed out that the assessee was in the leasing business and there was no condition that in order to be eligible for depreciation the assets should have been “used” by the assessee itself. The assessee also contested the finding of the Assessing Officer that the entire transaction was a colourable and non-genuine transaction entered into merely to reduce its tax liability.

4. The CIT(Appeals) took note of the aforesaid contentions of the assessee and also adverted to certain other facts. The assets had originally been acquired by a company by name U B Ltd. (UBL, for short), between 1990-95 for Rs. 1,07,00,000/- and they were transferred to UBPL, which was its sister concern for Rs. 1,04,00,000/-. These assets after two months of acquisition by UBPL were purchased by the assessee company for Rs. 38,50,000/-, which was stated to be the value fixed on the basis of valuation. On these facts collected by the CIT(Appeals) from the assessee itself, he raised the question whether the transaction was not a made-up affair. The assessee responded by saying that there might have been some arrangement between UBL and UBPL but so far as the assessee was concerned it was a pure and simple transaction of purchase of asset and leasing them back to the same company from whom the assets were purchased. The funds or the finance for the transaction were made available to the assessee by a third entity namely FLCIL. It was pointed out that there was no arrangement or transaction between the assessee and UBPL on the basis of which it could be said that they colluded to enable the assessee to reduce the tax.

5. The CIT(Appeals) agreed that the assessee’s submissions and decided the appeal in its favour by making the following observations :

“6. I have carefully considered the facts of the case and the submissions of the appellant. I am inclined to agree with the submissions made by the appellant in the light of the facts and in the light of the various cases cited by the appellant. The appellant has met both the objections of the Assessing Officer regarding the movement of the machinery and regarding use of the machinery. Accordingly, the Assessing Officer is directed to allow depreciation as per law.”

6. Aggrieved by the aforesaid order of the CIT(Appeals), the Revenue carried the matter in appeal to the Income Tax Appellate Tribunal (Tribunal, for short). The Tribunal examined the facts in detail and also the lease agreement entered into between FLCIL and the assessee. Before the Tribunal the assessee appears to have filed a copy of the resolution passed on 26.12.1994 by the Board of Directors of UBPL. The Tribunal considered this to be a vital document in the case. It referred to the resolution in para 10 of its order and came to the conclusion that it embodied a formal declaration of the lease by UBPL and revealed that up to the date of passing of resolution there was only a proposal to sell its assets for Rs. 38.50 lakhs and take them back on lease and that two persons named therein, namely Dr. S. Chatterjee and T V Venkatarathna were authorized to finalize the terms and conditions of the sale and lease back arrangement with the assessee. According to the Tribunal, when even as late as 26.12.1994 the proposal to sell the assets of UBPL to the assessee and take them back on a lease had not been finalized, the earlier agreement dated 8.9.1994 under which UBPL agreed to transfer the assets to the assets at Rs. 35.5 lakhs and the lease agreement entered into between FLCIL and the assessee on 15.9.1994 can only be considered to be proposals pending approval by the assessee company in its meeting of the Board of Directors. The Tribunal also examined the sale invoices for sale of the assets by UBPL and inferred that these invoices did not embody any actual sale of the assets which had materialized prior to the passing of the resolution by the Board of UBPL. According to the Tribunal these invoices were only in the nature of performa invoices. The physical or constructive delivery of the assets was not given to the assessee and no payment was received by UBPL till the date of resolution i.e. 26.12.1994. From these facts and findings, the Tribunal concluded that the assessee cannot held to be the owner of the assets at least before 26.12.1994 and therefore, any use of the assets by UBPL before that date was therefore not a use as a lessee but as an owner in its own right. It was further held by the Tribunal that the assets cannot be said to have been put to use for the purpose of assessee’s business for a period of more than 180 days in the relevant previous year entitled it to claim 100% depreciation.

7. The Tribunal thereafter proceeded to refer to a hire purchase agreement entered into between the assessee as “hirer” and FICIL as “owner” on 4-1-1995 under which the assets in question were hired out to the assessee by FICIL. The Tribunal on a perusal of the agreement took the view that since in this agreement the assessee has been described as hirer and FICIL has been referred to as owner, the assessee did not own the assets at any time. The Tribunal also took note of the fact that the payment for the assets had been made by FICIL directly to UBPL on 21-1-1995. From the brokerage bill dated 12-1-1995 for the transaction with UBPL did not also make it clear whether the transaction was a purchase or sale or some other arrangement for vesting or divesting the ownership of the assets from the assessee to FICIL. It was further noticed by the Tribunal that no material was produced before it by the assessee to show its ownership over the assets from 26-12-1994, the date of the board resolution passed by UBPL and 4-1-1995 which is the date of the hire purchase agreement. In the absence of any such material, and on the basis of the documentary evidence referred to above, the Tribunal came to the conclusion that the conduct of the assessee itself shows that it admitted FICIL to be the owner of the machinery. According to the Tribunal, there was no material on record to show that either UBPL, the original owner of the assets, nor FICIL which was described as the owner in the hire-purchase agreement, had given up their ownership right in favour of the assessee.

8. It is thus seen from the findings of the Tribunal that it regarded the claim of the assessee that it was the owner of the assets in question, so as to be entitled to the depreciation on them, as untenable. One of the conditions of Sec.32 for claiming depreciation is that the assessee should be the “owner” of the asset (in addition to using it) on which depreciation is claimed. This condition not having been satisfied in the present case, the Tribunal disallowed the claim. The only relief allowed by the Tribunal was that since the assessee was in receipt of lease rentals which consisted of both the principal amount (towards cost of the assets) and interest element, only the interest element can be added as its income. The AO was directly to bring to tax the interest element alone.

9. It is against the above order of the Tribunal, particularly its decision that the assessee is not the owner of the assets and hence not entitled to the depreciation that the assessee is in further appeal before this court under Sec.260A of the Act. The following question of law was formulated by the Court on 13th February, 2006:

“Whether on the facts and circumstances of the case, the ITAT was justified in holding that the appellant was not entitled to claim depreciation on the machinery bought by it on hire purchase basis and leased by it to a third party?”

10. Before we proceed to deal with the appeal, we must mention that the question framed above appears to proceed on the assumption that the only issue to be decided is whether a hirer of an asset under a hire- purchase agreement is entitled to claim depreciation on the asset which it leases out to a third party. This issue poses little difficulty because the question is concluded by a decision of this Court in Addl. CIT v. General Industries Corporation [1985] 155 ITR 430/ 23 Taxman 347 (Delhi). In that case the Court held, on an examination of the hire-purchase agreement in that case, that it actually was an agreement for sale on installments. Having said so, the Court proceeded to observe that during the period of hire, the purchaser is also paying the price, so virtually it is a sale on installments. Reference was also made to the circular of the Board (circular No.9 dated 23rd March, 1943) in which it was recognized that the hire charges usually consisted of a capital sum towards the price of the asset and a payment for the user of the asset and the assessing officers were directed to (a) allow depreciation on the amount for which the asset could be purchased in cash on the date of the agreement and (b) to allow the amount paid for the user of the asset as revenue deduction. This judgment would certainly apply in favour of the assessee in the case before us if it is a case of a simple purchase of an asset under a hire-purchase agreement. The same can be said of the other judgment of this Court cited on behalf of the assessee, which is that of CIT v. Nagpur Golden Transport Co. [1998] 233 ITR 389 (Delhi), which was also a case of an uncomplicated hire-purchase agreement or a finance agreement.

11. The question of law stated above begins with the expression “whether on the facts and circumstances of the case”. The difficulty for the assessee in this case however is that the Tribunal has found that the assessee was at no point of time the owner of the asset, notwithstanding that it claimed to have purchased the assets from UBPL in September 1994 itself. The documentary evidence led by the assessee in the form of sale agreement with UBPL and the lease agreement with the same company has been frowned upon by the Tribunal on the ground that they were unreliable since UBPL, even till December 1994, can at best be said to have been only negotiating for the sale of the assets to the assessee as can be found from the board resolution dated 26th December, 1994. The invoices for sale raised by UBPL prior to the above date, according to the Tribunal, could only be considered as proforma invoices. These findings, against which no evidence has been led before us on behalf of the assessee, cannot be ignored. Moreover, the assessee itself has claimed to have entered into a hire-purchase agreement with FLCIL on 4-1-1995 in which FLCIL has been shown to be the owner of the assets and the assessee only a hirer. The Tribunal has found that payment for the assets has been made directly by FLCIL on 12-1-1995. The cumulative effect of all these facts is that considerable doubt is thrown on the genuineness of the entire arrangement. If the assessee has hired the assets only in January, 1995 from FLCIL, there has to be an explanation as to how it can claim to be the owner of the assets at any time prior to that date. If the hire-purchase agreement is genuine, then the claim that the assessee acquired the assets from UBPL in September, 1994 cannot bear scrutiny. Nor can it be accepted that the assets so purchased from UBPL were leased back to it in September, 1994. On a question of fact, namely, as to at what point of time the assessee (if at all) became the owner of the asset, there can be no ambivalent stands taken by the assessee. If it had taken such stands – as the present assessee has – then there should be an explanation for the same which is lacking. It needs no reiteration that Sec.32 can be availed of by the assessee only if he can show and establish that he is the owner of the asset. In the present case the Tribunal after examining the factual matrix on preponderance of probabilities has held that the appellant-assessee is not the owner. The said finding is a finding of fact, which is not under challenge. It is not a finding which is perverse.

12. We may refer to two more facets on the basis of facts found by the Tribunal and what is on record before us. One is that FLCIL is also a leasing/finance company and as noted by the Tribunal there was nothing on record to show before them that it had not claimed depreciation on assets. The ld. counsel for the appellant has stated that they have filed affidavits on behalf of UBPL and FLCIL before us that they have not claimed depreciation. The said material or evidence should have been filed before the authorities/Tribunal, who would have examined and verified the said fact. These affidavits cannot be taken into consideration in the appellate proceedings under Section 260A of the Act. This Court has to decide substantial question of law and does not have power to re-examine or re-appreciate the facts as a first appellate forum/Tribunal, which has jurisdiction to determine and decide questions of fact and law. Tribunal is the final fact finding authority. Secondly, it has been noticed that the appellant had entered into an agreement with FLCIL on 4.1.1995 and the payment for assets to UBPL was directly paid by FLCIL on 21.1.1995. These are obviously relevant circumstances, which have been rightly kept in mind by the Tribunal. The agreement between the appellant and FLCIL has been placed on record before us. The said agreement has been given the nomenclature of hire-purchase agreement. The judgments relied upon by the appellant would show and establish that FLCIL is the owner of the assets and not the appellant. If FLCIL is the owner, they are entitled to depreciation and it does not matter if FLCIL had not claimed depreciation.

13. For the above reasons, we hold that the Tribunal was justified in holding that the appellant (assessee) was not entitled to claim depreciation on the machinery bought by it on hire purchase basis and leased by it to a third party. The substantial question of law formulated is answered in the affirmative, in favour of the revenue and against the assessee with costs which we assess at Rs. 20,000/-.

[Citation : 353 ITR 213]

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