ORDER
R.K. Bali, A.M.
1. This is an appeal by the assessee against the order, dt. 30th Dec., 1992 passed by the CIT(A), Surat. The assessee has taken as many as 12 grounds and the main point of dispute as projected in ground of appeal No. 1 to 8 relates to the action of the Departmental Authorities in disallowing the claim of depreciation amounting to Rs. 11,60,300.
2. Briefly stated, the facts are that the assessee is private limited company engaged in the activity of organisation of construction of commercial complex putforth by Textile Traders Association, Surat. The return of income for the asst. yr. 1989-90 was filed only on 19th Feb., 1992 in response to notice issued under s. 148 of the IT Act, 1961 declaring a loss of Rs. 4,428. There was a search and seizure operation on 12th July, 1988 under s. 132 of the IT Act at the residential and business premises of Directors of the assessee-company. During the course of statement recorded by the AO under s. 132(4); Shri Amar N. Shah on 16th July, 1988 disclosed an amount of Rs. 30 lacs in the capacity of a Director of M/s. Patel Dying & Printing Mills (P) Ltd. and a further amount of Rs. 10 lacs as undisclosed income of asst. yr. 1989-90 in the case of assessee-company i.e. M/s. Amar Structures (P) Ltd. In the return filed declaring a loss of Rs. 4,428 the surrendered income of Rs. 10 lacs disclosed under s. 132(4) was set off against the claim of depreciation amounting to Rs. 11,60,300, which was claimed by the assessee on machinery valued at Rs. 27,85,000, which was purchased by the assessee from M/s. Patel Dying & Printing Mills (P) Ltd. 1st July, 1988. The assessee-company namely, M/s. Amar Structures (P) Ltd. as well as M/s. Patel Dying & Printing Mills (P) Ltd. along with M/s. Vimla Silk Mills (P) Ltd. are being controlled by S/Shri Amar N. Shah, Atul N. Shah and Devilal G. Shah. According to the assessee, M/s. Patel Dying & Printing Mills (P) Ltd., which had earlier leased the machinery to M/s. Vimla Silk Mills (P) Ltd., was running short of funds and as such, it decided to sell a part of the machinery let out on lease to M/s. Vimla Silk Mills (P) Ltd. by terminating the agreement of lease with M/s. Vimla Silk Mills (P) Ltd. entered earlier. The assessee who purchased a part of the machinery from M/s. Patel Dying & Printing Mills (P) Ltd. decided to keep the same with M/s. Vimla Silk Mills (P) Ltd. on lease at a monthly rent of Rs. 20,000 taking into consideration the following factors :
(i) The assessee will get a monthly rent of Rs. 20,000.
(ii) If the purchased machinery is removed from the premises of M/s. Vimla Silk Mills (P) Ltd. it would result into heavy dismantling and fresh erection cost elsewhere, which would reduce the value of machinery.
(iii) The price of machinery purchased was fixed at Rs. 27,85,000 after taking into consideration the fact that the assessee had to pay only a partial payment of Rs. 10 lacs, which is approximately 35 per cent of the cost and rest of the payment was to be paid in next seven years as per the agreement. Due to this scheme, the assessee will gain income by way of receipt of rent which would be utilised for payment of machinery cost and after some years the entire machinery would be debt free.
The assessee-company had recorded entries for purchase of machinery, lease rent receipt and other relevant transactions in its books of account which were duly audited. However, since the returned income was loss, no return was filed within the time allowed under s. 139(1) and it was filed only after the issue of notice under s. 148 by the Departmental Authorities. The learned AO concluded that the story of purchase of machinery was only an afterthought and was a device to evade the payment of tax in the hands of the assessee. The AO summoned the books of account of M/s. Vimla Silk Mills (P) Ltd. as well as M/s. Patel Dying & Printing Mills (P) Ltd. under s. 131 of the Act. The account books produced by M/s. Vimla Silk Mills (P) Ltd. were impounded under s. 131(3) of the Act. However, the books of account of M/s. Patel Dying & Printing Mills (P) Ltd. were not produced and no penalty under s. 131 was levied on M/s. Patel Dying & Printing Mills (P) Ltd. for non-compliance and non-production of books under s. 131 before the AO. On a perusal of the books of account particularly, the cash book of M/s. Vimla Silk Mills (P) Ltd., the AO noticed that entries regarding introduction of cash and payment to the assessee-company were made at the end of every month by insertion of the said entries at the end of transactions recorded on that date. The AO also noted that the ink used for making the regular entries was different from the ink used in making the entries relating to the receipt of cash and payment of lease rent by M/s. Vimla Silk Mills (P) Ltd. to the assessee-company. The AO examined the accounts of the assessee also but the same were not rejected on the ground that the accounts were written on a computer and there is no indication to ascertain as to whether these were written regularly during the course of business or these were written afterwards. During the course of assessment proceedings, the assessee explained to the AO that books of account of the assessee were written regularly during the course of business and these were audited in time. However, since there was a loss, no return was filed. It was explained that when the case of M/s. Vimla Silk Mills (P) Ltd. was taken up by the AO, he called for the statement of accounts of the assessee in the books of M/s. Vimla Silk Mills (P) Ltd. and vice versa, and when these were sent by each other for confirmation, it was found that there was omission on the part of M/s. Vimla Silk Mills (P) Ltd. to record the payment of lease rent by them to the assessee. At that time, according to the assessee, it was found that due to compensating error of omitting entry of lease rent on one side and omitting the entries of cash receipt from M/s. Patel Dying & Printing Mills (P) Ltd. and also the fact that the amount of lease rent was debited at Rs. 4,80,000 in the name of M/s. Patel Dying & Printing Mills (P) Ltd., instead of debiting Rs. 2,40,000 each in the name of M/s. Patel Dying & Printing Mills (P) Ltd. and M/s. Amar Structures (P) Ltd. – the assessee, rectification entries were passed in the books of M/s. Vimla Silk Mills (P) Ltd. to reconcile the balances of statement of account after considering all transactions with the assessee and M/s. Patel Dying & Printing Mills (P) Ltd. These rectification entries were passed in its cash book and journal ledger in 1991 by M/s. Vimla Silk Mills (P) Ltd., when the return of M/s. Vimla Silk Mills (P), Ltd. had already been filed after being duly audited by C. A and as such, there was no mention of the entries relating to cash payment of lease rent by M/s. Vimla Silk Mills (P) Ltd. to the assessee in the audit report in Form No. 3CA r/w Form No. 3CD. The AO, however, rejected the explanation given by the assessee and disallowed the claim of depreciation in respect of machinery purchased by the assessee from M/s. Patel Dying & Printing Mills (P) Ltd. for a sum of Rs. 27,85,000. The AO also directed that the receipt of Rs. 1,80,000 on account of lease rent is not to be treated as the income of the assessee, because no lease rent was in fact received by the assessee. The detailed reasonings and conclusion of the learned AO are recorded in para 6 from pages 3 to 10 of the assessment order. The objective facts on which the assessment has been framed by the AO can be summarised as under :
(a) The machinery in question was already let out on the date of purchase from M/s. Patel Dying & Printing Mills (P) Ltd. to M/s. Vimla Silk Mills (P) Ltd. and a part of that machinery was claimed to have been sold to the assessee for an amount of Rs. 27,85,000. The assessee, in fact, paid only a cash of Rs. 10 lacs on 25th July, 1988 and the balance was shown as a liability in the balance sheet of the assessee and the same was also shown as an asset in the balance-sheet of M/s. Patel Dying & Printing Mills (P) Ltd. as recoverable from the assessee.
(b) The monthly rent for all the machinery was Rs. 40,000 and that amount was bifurcated in two equal half of Rs. 20,000 each between M/s. Patel Dying & Printing Mills (P) Ltd. and the assessee – M/s. Amar Structures (P) Ltd. from the date of purchase i.e. 1st July, 1988.
(c) The books of account of M/s. Vimla Silk Mills (P) Ltd. were closed and its return filed; while the books of accounts of the assessee as well as M/s. Patel Dying & Printing Mills (P) Ltd. were not closed.
(d) As stated by the AO at page 4 of the assessment order, the following entries were made in the books of account of M/s. Vimla Silk Mills (P) Ltd :
31st July, 1988. – (a) An amount of Rs. 20,000 was shown as cash received from M/s. Patel Dying & Printing Mills (P) Ltd. on account.
(b) An amount of Rs. 20,000 was shown as cash paid to M/s. Amar Structures (P) Ltd. on account of machinery rent.
(e) Similar entries were made at the end of every month for a period of nine months upto the close of the accounting year on 31st March, 1989 and as such, the machine rent account in the books of M/s. Vimla Silk Mills (P) Ltd. remained unaffected as the total amount of rent for the year remains the same i.e. Rs. 40,000 per month. The assessee-company – M/s. Amar Structures (P) Ltd. paid the entire amount of Rs. 1,80,000 received from M/s. Vimla Silk Mills (P) Ltd. for nine months to M/s. Patel Dying & Printing Mills (P) Ltd., thereby reducing the liability of Rs. 17,85,000 on account of balance payment towards the cost of machinery to Rs. 16,05,000. Accordingly, the AO has stated at page 5 of the order as under :
“Thus, the entire cash of Rs. 1,80,000 paid by M/s. Vimla Silk Mills (P) Ltd. to the assessee-company was provided by M/s. Patel Dying & Printing Mills (P) Ltd. and the same also went back to M/s. Patel Dying & Printing Mills (P) Ltd. via the assessee-company.”
(f) The AO also noted that the ink used for the entries in the case of M/s. Vimla Silk Mills (P) Ltd. does not tally with the ink used for making the regular entries and the difference is quite apparent even with the naked eyes.
(g) The audit report of M/s. Vimla Silk Mills (P) Ltd. does not contain any mention of the payment of rent to the assessee-company.
(h) The stamp-paper for the lease of the machinery was purchased neither by the assessee nor by M/s. Patel Dying & Printing Mills (P) Ltd., but by some third party.
On these facts, the AO drew the conclusion that the purchase of machinery and the claim for depreciation was an afterthought subsequent to filing of the return by M/s. Vimla Silk Mills (P) Ltd. and it was a device to evade payment of tax in the hands of the assessee. Accordingly, the AO applying the decision of the hon’ble Supreme Court in the case of Mc Dowell & Co. vs. CTO (1985) 154 ITR 148 (SC) disallowed the claim of the assessee with regard to depreciation, and he also directed that the income shown by way of lease rent amounting to Rs. 1,80,000 may also be excluded from the total income of the assessee. The assessee appealed and the CIT(A) confirmed the order of the AO. The order passed by the CIT(A) does not contain any independent reasoning, but entirely relies on the order of the AO, which is evident from para-5 of the impugned order.
3. It was submitted by Shri P. F. Jain, the learned representative of the assessee that the assessment order passed by the AO entirely depends on the ratio of Mc Dowell’s case referred (supra) to the facts of the present case. It was submitted that the case of Mc Dowell has absolutely no application to the assessee’s case. It was emphasised that in Mc Dowell’s case the facts and the legal relationship between various parties were not in dispute. The question in Mc Dowell’s case was whether the assessee was liable to pay the sales-tax on the excise duty paid by the purchaser of the goods manufactured by the assessee. The purchaser’s of the goods manufactured by the assessee paid the excise duty directly to the State Exchequer by an arrangement with the assessee and, therefore, the assessee had excluded the excise duty element from the bills made by it and consequently, the excise duty was excluded from the turnover also. Accordingly, the assessee – Mc Dowell Co. did not pay sales-tax on the excise duty element. The hon’ble Supreme Court ultimately held that the assessee was liable to pay sales-tax on the excise duty element also although not included by the assessee in the turnover, because it formed a part of the sale price and of the turnover. In that case, the excise duty had been paid by the purchaser although the liability for payment of excise duty was that of the assessee i.e. manufacturer. Consequently, the Court held that it was paid by the purchaser on account of the assessee, as the purchaser could not obtain the goods without the excise duty having been paid. Thus, according to the ratio of the hon’ble Supreme Court decision in Mc Dowell’s case when the arrangement between the manufacturer and the purchaser was valid and effective, the turnover included the excise duty, and sales-tax had to be paid on it. It was submitted that the facts in the present case are different. The validity and existence of the ownership of the machinery has not been accepted by the AO and as such, the factual back drop is in sharp contrast/conflict with the case of Mc Dowell. It was submitted that if in the case of the assessee the validity, existence and effectiveness of the sale of the machinery is established, the case of Mc Dowell would have no application. Accordingly, it was pleaded that we should examine the facts to find out as to whether from the evidence available on record, the sale of machinery is established or not, which according to the assessee, is clearly established inspite of prejudiced and biased approach of the AO and that of the CIT(A).
4. It was submitted that it is undisputed that a substantial part of the price namely, a sum of Rs. 10 lacs has been paid by the assessee in respect of the machinery purchased. Along with part payment of Rs. 10 lacs, the liability regarding the balance sum of Rs. 17,85,000 has been kept alive and subsequently, that payment has been made by the assessee within the next one or two years. It was submitted that the AO himself has stated at page 4 of the assessment order as under :
“The assessee purchased a part of the machinery worth Rs. 27,85,000 from M/s. Patel Dying & Printing Mills (P) Ltd. on 1st July, 1988. It paid the amount of Rs. 10,00,000 to the said company on 25th July, 1988……. The balance amount of Rs. 17,85,000 remained outstanding.”
It was pleaded by Shri P. F. Jain, the learned representative of the assessee that M/s. Patel Dying & Printing Mills (P) Ltd. has submitted bills to the assessee in respect of sale of those machineries, copies of which have been furnished to us also at pages 16 to 21 of the paper-book. The details of the machinery sold by M/s. Patel Dying & Printing Mills (P) Ltd. to the assessee are as under :
Rs.
(1) Harish 3 Chambers Pin-clip Type Hot
Air Stenter Machine with two deep
pnenumatic padding mangle equipped
with two chambers high speed
heat-setting device with other
accessories & fittings. 12,91,000.00
(2) ‘Sanjay’ High Pressure Steam-agers
No. 2 75,000.00
(3) ‘Tex Print’ flat bed & colours Semi
-auto Screen Printing Machine 50
table length with Dryer 5,26,000.00
(4) ‘Nipurna’ 8 colour semi-automatic
flat bed Screen Printing Machine 4,31,000.00
(5) ‘Sanjay’ perforated Beam Batching
Machine No. 1 51,000.00
(6) Thermosat Model H-1000 coal-cum-oil
fire device with furnace 4,11,000.00
It was submitted that the fact of presentation of bills by M/s. Patel Dying & Printing Mills (P) Ltd. to the assessee has not been disputed by the AO. Thus, it was pleaded that property in the goods i.e. machinery passed from the seller i.e. M/s. Patel Dying & Printing Mills (P) Ltd. to the assessee legally and validly. This is fully reflected in the balance-sheet of the purchaser as well as the seller. It was pleaded that in the face of this documentary evidence to say that machinery has not been sold by M/s. Patel Dying & Printing Mills (P) Ltd. to the assessee would be to go clearly against the established fact. The conclusion of sale rests on the presentation of the bill, a fact undisputed by the AO and the substantial payment of Rs. 10,00,000 by the assessee to M/s. Patel Dying & Printing Mills (P) Ltd. followed by the balance payment in the succeeding years. As such, it was submitted that the Departmental Authorities were not justified in coming to the conclusion that there has been no sale by M/s. Patel Dying & Printing Mills (P) Ltd. of machinery to the assessee-company.
5. It was submitted by Shri K. R. Dixit, the learned representative of the assessee that the AO at page 5 of the assessment order has observed that the entire cash of Rs. 1,80,000 paid by M/s. Vimla Silk Mills (P) Ltd. to the assessee-company was provided by M/s. Patel Dying & Printing Mills (P) Ltd. and the same also went back to M/s. Patel Dying & Printing Mills (P) Ltd. via the assessee-company. It was pleaded by Shri K. R. Dixit that the observations made by the AO indicates his ignorance of legal principles, because the payments are made in discharge of legal liabilities and obligations. M/s. Vimla Silk Mills (P) Ltd. paid to M/s. Patel Dying & Printing Mills (P) Ltd., because M/s. Vimla Silk Mills (P) Ltd. had taken the machinery on rent and half of the amount of rent was due from M/s. Vimla Silk Mills (P) Ltd. to M/s. Patel Dying & Printing Mills (P) Ltd. Similarly, M/s. Vimla Silk Mills (P) Ltd. paid to the assessee-company, because the assessee was half owner of the machinery and the assessee paid that amount of Rs. 1,80,000 to M/s. Patel Dying & Printing Mills (P) Ltd. in respect of the balance sale price of the machinery amounting to Rs. 17,85,000. Accordingly, it was submitted that it was incorrect on the part of the AO to give an impression as if there has been some dubious passing and exchange of money. It was submitted that all these payments and receipts are in discharge of legal obligations and just because the amount of money is the same i.e. Rs. 1,80,000, there is no reason and no basis for treating the transaction as not genuine.
6. It was further submitted that another reason for which the learned AO excluded the amount of Rs. 1,80,000 on account of lease rent from the total income and disallowed the claim of depreciation is based on supposed non-receipt of rent by the assessee in respect of the machinery, because the payment of rent by M/s. Vimla Silk Mills (P) Ltd. to the assessee was transferred to M/s. Patel Dying & Printing Mills (P) Ltd. on the same day for adjustment against the balance sale price payable by the assessee to M/s. Patel Dying & Printing Mills (P) Ltd. towards the cost of machinery. It was submitted that assuming but not admitting that the AO is right on this count, this cannot displace the concrete evidence regarding the sale of machinery from M/s. Patel Dying & Printing Mills (P) Ltd. to the assessee-company. The receipt or non-receipt of rent is merely a consequence of the ownership of machinery and that cannot decide the question of ownership which rests on the raising of bills and consequent payment in respect of the machinery. It was submitted that the whole approach of the AO is full of prejudice against the assessee as the AO has stated at page 4 of the assessment order that the assessee had thought of the scheme after the close of the relevant accounting period. It was submitted that there is no evidence of this thought process of the assessee except the imagination of the AO as according to the AO, it was not possible to make payment by cheque or cash, so the aforesaid entries were passed. It was submitted that payment by means of entries in the books of account is a perfectly legitimate way of making the payment.
7. It was submitted that the AO has called for the minute book of the assessee-company and on finding that it was in order and there has been duly recorded the resolution regarding the purchase lease and sale of the machinery. The AO observed that it is not reliable and that it appears to have been prepared recently by re-writing the entries. It was submitted that no basis for this conclusion is indicated in his order except that it appears to be unreliable and recently re-written according to the AO. It was submitted that in this way, any minute book could be rejected. It was pleaded that the AO has also stated that the relevant entries in the books of M/s. Vimla Silk Mills (P) Ltd. are in different ink than those for regular entries. It was pleaded that the assessee has accepted this position that the entries in the cash book and journal ledger were written after the close of accounts of M/s. Vimla Silk Mills (P) Ltd. and after those being audited by the CA, because during the assessment proceedings of M/s. Vimla Silk Mills (P) Ltd. when copies of account of sister concern was called, it was noticed that the accounts were not tallying because of omission on the part of M/s. Vimla Silk Mills (P) Ltd. to record the payment of lease rent made by them to the assessee and due to compensating error of omitting entries of lease rent on one side and the entries of cash receipt from M/s. Patel Dying & Printing Mills (P) Ltd. on the other hand and further since the lease rent was debited at Rs. 4,80,000 in the name of M/s. Patel Dying & Printing Mills (P) Ltd. instead of debiting Rs. 2,40,000 each in the name of M/s. Patel Dying & Printing Mills (P) Ltd. and the assessee-company, rectification entries were passed in the cash book and journal ledger in 1991. It was submitted that in a letter dt. 27th March, 1992 the assessee has requested to the AO that the alleged discrepancy if any pertained to M/s. Vimla Silk Mills (P) Ltd. and not to the assessee-company and if the explanation was to be called for, the AO should have called it from M/s. Vimla Silk Mills (P) Ltd. and not the assessee. It was submitted that instead of doing this, the AO has relied on the audit report of M/s. Vimla Silk Mills (P) Ltd. wherein the payment of rent had not been recorded and on that basis, he has come to the conclusion that absence of this in the audit report of M/s. Vimla Silk Mills (P) Ltd. conclusively proved that at the time of audit of the books of account of M/s. Vimla Silk Mills (P) Ltd., entries regarding payment of machine rent amounting to Rs. 1,80,000 were not appearing, and that they have been inserted at a later date. It was submitted that the assessee had accepted this finding that the entries in the books of M/s. Vimla Silk Mills (P) Ltd. were, in fact, recorded at a later date and for that, it has given a reasonable explanation. But the AO has rejected that explanation and has denied the claim of depreciation on machinery wrongly making several flimsy observations in points (2) to (16) on pages 7 to 9 of the assessment order and also regarding the re-writing of journal ledger and unreliability of minute book of the assessee-company. It was submitted that the fact of purchase and lease of machinery was not disclosed at the time of search and the agreement of lease was not found in the search action cannot go against the assessee and the assessee had in fact stated that it has entrusted the job of executing the lease agreement to his CA, who in turn has asked an Advocate to purchase the requisite stamp-paper for writing the lease agreement and at the time of search, the lease agreement was lying with the CA. It was submitted that there was no reason to doubt the statement of the assessee, and in any case, if the AO has any doubt, he ought to have examined the CA. Advocate who has, in fact, purchased the stamp-paper for executing the lease agreement, which was admittedly not done by the AO. Accordingly, it was submitted that the case of Mc Dowell (supra) has no application.
On the other hand, the facts of the case are more akin to the facts of the case in CWT vs. Arvind Narottam (1988) 173 ITR 479 (SC) wherein it was held that when the legal relationship established by the trust-deed was clear, the appeal to discourage tax avoidance is not a relevant consideration. It was submitted that in the present case, the legal relationship of purchaser and seller of machinery is clear by the submission of the bills and consequent payment, resolution of the Board of Directors of the assessee-company for the purchase of machinery from the seller, i.e. M/s. Patel Dying & Printing Mills (P) Ltd. is clear and the assessee is entitled to depreciation.
8. It was submitted that looking from another angle, one must be very cautious in applying McDowell’s case, because in that case the assessee get advantage by way of tax avoidance on payment of sales-tax on the excise component of the turnover without his suffering any disadvantage. In the case of the assessee, it has paid a sum of Rs. 10 lacs and has accepted liability of Rs. 17,85,000, which was also discharged in the next year or two and in return, got claim of depreciation of Rs. 11,60,300 which resulted in reduction of tax by only a part of the amount of depreciation. As such this fact alone will distinguish the assessee’s case from that of McDowell (supra). Accordingly, it was submitted that the Departmental Authorities were not justified in denying depreciation to the assessee and also excluding a sum of Rs. 1,80,000 from the total income of the assessee which the assessee has declared on account of lease rent from M/s. Vimla Silk Mills (P) Ltd. Reliance was also placed on the decision of the Hon’ble Gujarat High Court in the case of Banyan & Berry vs. CIT and the decision of Ahmedabad Bench of the Tribunal in the case of ITO vs. Glacier Investment Co. & Ors.
9. Shri M. K. Meerani, the learned Departmental Representative, supported the order of the AO. He extensively read from the order of the AO from para 6 onwards from page 3 to 10 of the assessment order. It was submitted that M/s. Patel Dying & Printing Mills (P) Ltd. – a sister concern of the assessee had huge claim of brought forward business losses, unabsorbed depreciation and investment allowance. Therefore, some addition to its income by way of profit under the capital gain did not matter to it as no tax liability was created there. On the other hand by simply showing the sale of machinery by M/s. Patel Dying & Printing Mills (P) Ltd. to the assessee a fictitious claim of depreciation was made in the hands of the assessee to nullify the entire tax which was legitimately payable by the assessee on the disclosure of Rs. 10 lacs made by one of the Directors in a statement recorded under s. 132(4) in the case of the assessee-company for the assessment year under consideration. On a query from the Bench as to whether any search warrant was issued in the case of the assessee, the learned Departmental Representative replied that there was no search warrant and there is nothing on record to indicate the compulsions which prompted the assessee to make a disclosure of Rs. 10 lacs in the case of the assessee-company. It was submitted that the AO has recorded the statement of Shri Ashvin K. Parikh, CA who audited the accounts of M/s. Vimla Silk Mills (P) Ltd. wherein the CA has stated that the entries with regard to the payment of lease rent to the assessee were incorporated in the books after these were audited by the CA. From the above, the learned Departmental Representative submitted that it clearly indicates that the assessee has created a device by which the depreciation which was allowable in the hands of M/s. Patel Dying & Printing Mills (P) Ltd. was intended to be transferred to the assessee to neutralise the tax liability on the disclosed income of Rs. 10 lacs and such a device should not be given judicial sanction. Accordingly, it was submitted that the AO as well as the CIT(A) were perfectly justified in lifting the veil and looking at the reality of the situation to uncover the colourable device resorted to by the assessee to reduce its tax liability. It was further submitted that initially M/s. Patel Dying & Printing Mills (P) Ltd. has let out the entire machinery to M/s. Vimla Silk Mills (P) Ltd. on 1st Nov., 1985 for a period of 10 years and it was only subsequently on 1st July, 1987 when M/s. Vimla Silk Mills (P) Ltd. executed an agreement of lease with the assessee – M/s. Amar Structures (P) Ltd. for lease of a part of the machinery which was purchased by the assessee from M/s. Patel Dying & Printing Mills (P) Ltd. It was submitted that there was no mention of the agreement, dt. 1st Nov., 1985 in the subsequent agreement executed on 1st July, 1987. It was submitted that the case of the assessee is squarely covered by the decision of the Hon’ble Supreme Court in the case of McDowell & Co. (supra).
10. We have considered the rival submissions and have gone through the order passed by the AO as well as the learned CIT(A). The learned first appellate authority has not given any independent reasoning, but has mainly relied on the AO’s order. The factual back drop of the case has already been discussed in paras 3 to 8. There was a search & seizure operation on the residential premises as well as the business premises of the Directors of the assessee-company along with the premises of M/s. Vimla Silk Mills (P) Ltd. and M/s. Patel Dying & Printing Mills (P) Ltd. on 12th/16th July, 1988. It now appears that there was no specific search warrant under s. 132 in the case of the assessee – M/s. Amar Structures (P) Ltd. However, Shri Amar N. Shah, who is a Director of M/s. Patel Dying & Printing Mills (P) Ltd. as well as M/s. Amar Structures (P) Ltd. during the course of statement recorded under s. 132(4) on 16th July, 1988 by the Asstt. Director of IT, Investigation 3(1), Ahmedabad offered to make a disclosure of Rs. 30 lacs in the case of M/s. Patel Dying & Printing Mills (P) Ltd. and Rs. 10 lacs in the case of M/s. Amar Structures (P) Ltd. There were also disclosure by Shri Atul N. Shah, Managing Director of M/s. Vimal Silk Mills (P) Ltd. of a sum of Rs. 45 lacs as income. Besides the above major three disclosures, there were other disclosures of Rs. 3 lacs in the case of M/s. Acon Builders, Rs. 2 lacs in the case of M/s. Vishal Builders, Rs. 2 lacs in the case of M/s. Bhairav Textiles, Rs. 2 lacs in the case of M/s. Vardhaman Silk Mills and Rs. 6 lacs in the case of M/s. V. G. Twisting Industries. Thus, a total sum of Rs. 1 crore was disclosed by the various persons under different names over which ordinarily tax of about Rs. 56 to Rs. 57 lacs ought to have been payable. However, immediately after the disclosure the declarants wrote to the CIT, Surat that in view of the brought forward losses and unabsorbed depreciation, no tax was payable, keeping in view the advance-tax paid and the assets seized during the course of search. This provoked the AO to make huge additions in the various cases belonging to the assessee group. In the case of M/s. Amar Structures (P) Ltd. – the present assessee, there was no search warrant issued under s. 132. However, the assessee made an offer of disclosing Rs. 10 lacs as income in terms of Expln. 5 to s. 271(1)(c) as per the statement of Shri Amar N. Shah, Director of the assessee-company recorded by ADI on 16th July, 1988 under s. 132(4). Subsequently, the assessee explained vide letter, dt 5th March, 1992 that the assessee-company was engaged in organizing activity of commercial complex namely, Mahavir Textile Market at Ring Road, Surat and as a head of apex organising entity it was vested with powers, duty and obligations of purchase of materials, payment of labour charges and other expenses. The company has dealt with number of persons in connection with the activity of construction of complex and had received Rs. 10 lacs during the period from 1st Jan., 1988 to 11th July, 1988 by way of commission from the persons concerned in construction activity of the company in the course of construction of commercial complex. The particulars as to the name of the persons, agreements, accounts and other informations regarding commission from construction business were not maintained since no terms were pre-determined, but commission was received during 1st Jan., 1988 to 11th July, 1988 from the persons who had completed most of the work of construction entrusted to them.
11. On the date of search, the amount generated from the above transaction amounting to Rs. 10 lacs was circulating in unidentified advances and unidentified sundry debtors for money in circulation and the amount was thereafter realised and credited in the books of account, and this amount of Rs. 10 lacs was paid by the assessee as a part payment towards the cost of machinery amounting to Rs. 27,85,000, which was purchased by the assessee from M/s. Patel Dying & Printing Mills (P) Ltd. The factum of sale is evidenced by the issue of bills in respect of different items of machinery enumerated in para 4 above by M/s. Patel Dying & Printing Mills (P) Ltd. in favour of the assessee-company. The part payment of Rs. 10 lacs by the assessee to M/s. Patel Dying & Printing Mills (P) Ltd. has not even been doubted by the AO on 25th July, 1988 and the assessee has accepted the liability of Rs. 17,85,000 which was payable by the assessee to M/s. Patel Dying & Printing Mills (P) Ltd. The above liability is duly shown in the balance-sheet of the assessee-company. Similarly, the amount of Rs. 17,85,000 has been shown as an asset in the balance-sheet of M/s. Patel Dying & Printing Mills (P) Ltd. The accounts of the assessee as well as M/s. Patel Dying & Printing Mills (P) Ltd. are duly audited. It is no doubt true that the entries in the books of account of M/s. Vimla Silk Mills (P) Ltd. were made subsequently to the filing of the return by M/s. Vimla Silk Mills (P) Ltd. and after its accounts was audited by the CA and the assessee has accepted this, but the assessee has a reasonable explanation to offer for non-inclusion of the name of the assessee in the list of persons to whom payment exceeding Rs. 10,000 were made in cash as required under s. 40A(3), which was not noted by the auditors at the time of audit. The explanation of the assessee for this omission in the books of M/s. Vimla Silk Mills (P) Ltd. is that there was an omission by the accountant of M/s. Vimla Silk Mills (P) Ltd. to record the payment of lease rent made by them to the assessee and this omission took place because of a compensating error of omitting the entry of cash received from M/s Patel Dying & Printing Mills (P) Ltd. According to the assessee, this fact came to the notice only during the course of assessment proceedings of M/s. Vimla Silk Mills (P) Ltd. when the AO called for the copies of accounts of M/s. Patel Dying & Printing Mills (P) Ltd. and the assessee in the books of M/s. Vimla Silk Mills (P) Ltd. and as such, rectification entries were passed in the cash book of M/s. Vimla Silk Mills (P) Ltd. and journal ledger of M/s. Vimla Silk Mills (P) Ltd. in 1991. The disputed machinery, in fact, was purchased by the assessee on 1st July, 1988 as per the sale bills issued by M/s. Patel Dying & Printing Mills (P) Ltd. on which date the claim of depreciation became due as per law; whereas the income of Rs. 10 lacs was disclosed by the Director of the assessee only on 16th July, 1988 under s. 132(4). The AO has accepted the books of accounts of the assessee, but has denied the claim of depreciation to the assessee on the basis of defects in the audit report of lessee company i.e. M/s. Vimla Silk Mills (P) Ltd. The contention of the AO that instead of new machinery old machinery was purchased is not tenable in law, because it is the Board of Directors of the assessee-company which has to decide the commercial prudence of buying old or new machinery and the AO cannot step into shoes of the assessee-company. The old machinery appears to have been purchased due to less cost as compared to the new machinery and also the fact that the assessee had to pay initial payment of 35 per cent of the cost only and the rest of the payment was to be paid within the next seven years; whereas the lease rent of Rs. 20,000 per month was to start from the date of leasing the machinery. Thus, as a commercial proposition, the decision of the Board of Directors of the assessee-company was quite sound as the lease rent would be utilised for the payment of cost of machinery and in fact, the assessee will become the owner of the machinery at 35 per cent of the effective cost. The assessee had not filed the return of income due to the fact that the returned income was a loss and no tax was payable. The claim of the assessee with regard to depreciation on the purchase of machinery is governed under s. 32(1) of the Act, because as per s. 32(1) it is the owner of asset who is entitled to depreciation on assets purchased and put to use. In the present case, the assessee-company has purchased the machinery and the payment of Rs. 10 lacs against the machinery is not doubted by the AO. The machinery was actually used by the lessee in its premises, which is also not doubted. As such, the assessee becomes entitle to depreciation under s. 32(1). The error of compensatory nature which was committed by the lessee company due to omission of recording entries during the course of business though payment of lease rent was made, cannot be the ground for disallowance of depreciation in the case of the assessee, because it is an error in the books of the lessee company and not in the books of the assessee-company. The contention of the AO that the stamp-paper was not purchased either by the assessee or by M/s. Vimla Silk Mills (P) Ltd. cannot be the basis for treating the agreement of lease as non-genuine, because the lessee had entrusted the preparation of lease agreement etc. to a CA, who had entrusted the same to an Advocate with all expenses and, accordingly, the Advocate purchased the stamp-paper in his own name by sending his clerk for the purchase. The stamp-paper is dt. 16th June, 1988 and the search took place on 12th July, 1988. The contention of the AO that books of the assessee do not contain lease rent entry on 12th July, 1988 is not tenable in law, because the books of the assessee were incomplete on 12th July, 1988 and as such, there bound to be no such entries in the books of 12th July, 1988. The learned AO has also rejected the income of Rs. 1,80,000 shown by the assessee on the ground that it is a bogus paper entry only. However, assuming for arguments sake if the AO’s contention regarding non-receipt of rent is accepted, this will not be sufficient ground to deny the claim of depreciation to the assessee, because rent is only a consequence of the ownership, which is established differently. The ownership of machinery changed hand from M/s. Patel Dying & Printing Mills (P) Ltd. to the assessee on the basis of raising of bills by the seller and the payment of a substantial part of the cost namely, Rs. 10 lacs by the assessee to the seller of the machinery. The factum of purchase of machinery by the assessee from M/s. Patel Dying & Printing Mills (P) Ltd. is mentioned in the resolution of the Board of Directors of the assessee-company recorded in the minute book, which was called for by the AO, but was rejected on the spacious presumption that it was written afterwards. In that way, any minute book could be rejected.
12. Thus, keeping in view the totality of the facts and circumstances of the case, we are of the opinion that the assessee became owner of machinery purchased from M/s. Patel Dying & Printing Mills (P) Ltd. and that machinery was used by the lessee company namely M/s. Vimla Silk Mills (P) Ltd. and as such, the assessee is entitled to depreciation. We may point out that the decision of the hon’ble Supreme Court in the case of McDowell & Co. referred supra is not applicable, because of distinction in facts as contended by the learned representative of the assessee and recorded by us in para 3 of this order. On the other hand, the ratio of decision of the hon’ble Supreme Court in the case of CWT vs. Arvind Narottam (supra) is applicable. In that case, certain deeds of trust were to be considered on the question whether certain rights of the assessee under those deeds alone were to be capitalised for inclusion in the assessee’s wealth or some other elements for a future potential benefit had also to be taken into account. The hon’ble Supreme Court held that only rights of the assessee which were existing on the relevant date could be capitalised and so included and that the possibilities of future benefit which were in the discretion of the trustees could not be included in the calculation of net wealth of the assessee. All pleas raised on behalf of the Revenue that this was a scheme to avoid tax were rejected on the ground that the trust deed was unambiguous and clear. The hon’ble Supreme Court stated, “in any event, however, where the true effect on construction of the deeds is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration.” Referring to McDowell’s case, their lordships stated, “that decision cannot advance the case of the Revenue, because the language of the deed of the settlement is plain and admits of no ambiguity.” Similarly, in the instant case, the legal relationship of purchaser and seller of the machinery is clear and proved by the submission of the bills of sale by the seller M/s. Patel Dying & Printing Mills (P) Ltd. to the assessee and consequent substantial part payment and acceptance of liability relating to the balance cost by the assessee, which is duly recorded in the books of account of both the purchaser and seller and is reflected in their respective balance-sheet. The transactions are on the basis of resolution of the Board of Directors of the assessee-company and as such, the decision of McDowell (supra) has no application.
13. The matter can be looked up from another angle also, because whenever Mc Dowell’s case is to be applied, one has to see as to whether the assessee is trying to get some advantage by way of tax avoidance without his suffering any disadvantage i.e. is he trying to get something for nothing. In the present case, the assessee had paid a sum of Rs. 10 lacs as a substantial part payment and the balance liability which was taken over by the assessee was discharged within one or two years. In McDowell’s case, the assessee attempted to avoid sales-tax by merely making arrangement with the purchaser to pay the excise duty which arrangement did not cost him anything. In the case before us, the assessee had paid Rs. 10 lacs and had paid the balance Rs. 17,85,000 within a year or two and got the claim of depreciation amounting to Rs. 11,60,300 which resulted in reduction of his tax liability by only a part of that sum of depreciation. Accordingly, we will hold that the assessee is entitled to depreciation and we adjudicate this issue in favour of the assessee. We also direct that the AO should include the amount of Rs. 1,80,000 on account of lease rent in the income of the assessee as declared.
14. Grounds of appeal Nos. 9 to 11 relates to action of the CIT(A) in disallowing Rs. 11,000 from the professional fees of Rs. 21,000 claimed to have been paid by the assessee. It is seen that the assessee has claimed a sum of Rs. 21,000 for professional fees; out of which the AO has disallowed an amount of Rs. 20,000. On appeal, the learned CIT(A) has held that the disallowance made by the AO was excessive and unreasonable. He, accordingly, upheld the disallowance to the extent of Rs. 10,000 only.
15. At the time of hearing, no specific arguments were advanced on behalf of the assessee in support of the ground raised. Accordingly, we will uphold the order of the CIT(A) in this regard and adjudicate this issue against the assessee and in favour of the Revenue.
16. In the result, the appeal filed by the assessee is partly allowed.