ORDER
M.K. Chaturvedi, Vice-President
1. These appeals came before e as a Third Member to express my opinion on the following questions:
ITA No. 1104(Mds)/2005:
1. Whether on the facts and circumstances of the case the CIT(Appeals) is justified in confirming the action of the Assessing Officer in determining the value of the assets and recalculate the depreciation which is subject matter of lease transaction with M/s. Ganesh Benzoplast?
2. Whether on the facts and circumstances of the case the CIT(Appeals) is justified in confirming the action of the Assessing Officer in disallowing the claim of depreciation on the asset leased to M/s. Rajinder Pipes Ltd., Mumbai?
ITA Nos. 1105 & 1106(Mds)/2005:
1. Whether on the facts and circumstances of the case, the CIT(Appeals) is justified in confirming the action of the Assessing Officer in making the addition towards interest on transaction treated by the Assessing Officer as loan transaction?
2. I have heard the rival submissions. In regard to the first question the assessee leased out assets to M/s. Ganesh Benzoplast, Mumbai. It claimed depreciation on the said assets. The cost of the assets was taken at Rs. 1,99,53,440/- To determine the value of the assets the Assessing Officer referred the matter to the DVO and had taken the cost of the assets at Rs. 63,92,750/- in the original assessment. Being aggrieved with that order the assessee preferred appeal there against. It was alleged before the Commissioner (Appeals) that the prescription of Explanation 4A to Section 43(1) cannot be invoked as it was made applicable with effect from 1-10-1996 only. The prescription of Explanation 4A reads as under:
Explanation 4A.- Where before the date of acquisition by the assessee (hereinafter referred to as the first mentioned person), the assets were at any time used by any other person (hereinafter referred to as the second mentioned person) for the purposes of his business or profession and depreciation allowance has been claimed in respect of such assets in the case of the second mentioned person and such person acquires on lease, hire or otherwise assets from the first mentioned person, then, notwithstanding anything contained in Explanation 3, the actual cost of the transferred assets, in the case of first mentioned person, shall be the same as the written down value of the said assets at the time of transfer thereof by the second mentioned person.
Reliance was placed on the decision of the Hon’ble Apex Court rendered in the case of Smt. Amiya Bala Paul v. CIT 262 ITR 407. In this case the Hon’ble apex court has held that the Assessing Officer is precluded from referring to DVO the question of the cost of construction of a house property built by the assessee. The power of the Assessing Officer under Section 131(1) and 133(6) is distinct from and does not include the power to refer a matter to the DVO under Section 55A. A report of the DVO under Section 55A may be considered by the Assessing Officer as a piece of evidence if it is relevant. However, the power of enquiry granted to an Assessing Officer under Section 133(5) and 142(2) does not include the power to refer the matter to the Valuation Officer for an enquiry by the latter. If the power to refer any dispute to the DVO were already available in Section 131(1), 133(6) and 142(2), there was no need to specifically empower the Assessing Officer to do so in certain circumstances under Section 55A. Section 55A having expressly set out the circumstances under and the purposes for which a reference can be made to a DVO, there is no question of the Assessing Officer invoking the general powers of enquiry to make a reference in different circumstances and for other purposes. Such a reference cannot be supported by reference to Section 131(1) of the Income-tax Act read with Order XXVI, Rule 9, of the Code of Civil Procedure, 1908, since the consequences of a reference to Valuation Officer under Section 55A of the Income-tax Act and of a commission issued under Section 75, read with Order XXVI, Rule 9, of the Code are different.
3. The Commissioner (Appeals) did not find any force in the argument of the assessee in view of the provisions of Section 142A by which the Assessing Officer was given power to refer the matter to the DVO in certain cases. This provision was inserted by the Finance (No. 2) Act, 2004 with retrospective effect from 15-11-1972. The learned Judicial Member did not make any comment on this aspect whereas the learned Accountant Member made a passing remark by saying that the case law relied on by the assessee before the Commissioner (appeals) in the case of Amiya Bala Pal 262 ITR 407 is no more a good law in view of the amendment with retrospective effect. The assessee appears to have accepted this issue in the first round itself. The learned counsel for the assessee submitted that there was absolutely no dispute on this aspect. The core of controversy is in regard to the determination of the value of assets. It was further stated that the reference to DVO ipso facto indicates that the Assessing Officer did not doubt the genuineness of the transaction but its value. Further it was stated that the Assessing Officer did not give any finding in regard to the fact that the Transaction was effected with a view to reduce the tax liability. De hors such finding the case cannot be put within the ken of Explanation 3 to Section 43(1). The prescription of Explanation 3 to Section 43(1) reads as under:
Explanation 3.- Where before the date of acquisition by the assessee the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case.
It was vehemently argued that to invoke the prescription of the aforesaid Explanation it is sine qua non that the Assessing Officer must be satisfied that the main purpose of transfer of such assets was reduction of liability to income-tax. There is absolutely no such finding in the facts of the present case.
4. Now it emerges out of the aforesaid discussion that for making valuation of the assets the Assessing Officer has with him the valuation as declared by the assessee based on the apparent consideration. The other value was based on the DVO’s report dated 27-1-1998 amounting to Rs. 63,92,750/- This value was disputed in appeal. The matter was set aside. It was pleaded on behalf of the assessee vide letter dated 10-3-1998 that a number of items forming integral parts of the machinery were considered while arriving at the value of the machinery. These items were stated to be of the nature of shell plates, angular plates, etc. During the course of the proceedings carried out in connection with the set aside assessment the assessee company furnished a copy of the letter addressed to the assessee company by M/s. Ganesh Benzoplast, wherein it was mentioned that the valuation cell had not considered a number of items while arriving at the valuation.
5. The Assessing Officer made a query with the Valuation Cell to state clearly the components taken into account while arriving at the valuation of the machinery. The Assessing Officer did not receive any reply from the Valuation Cell. The Assessing Officer made it clear in the order that the report available with the department was bereft of miniscule description of the components taken into account for arriving at the valuation. In these circumstances the Assessing Officer found it convenient not to change the valuation adopted in the assessment order dated 31-3-1990
6. In my opinion, the requirement of justice cannot be sacrificed at the altar of administrative convenience or celerity, for convenience and justice, as Lord Atkin felicitously put it, are often not on speaking terms. The learned Judicial Member while deciding the issue placed reliance on the judgment of the Hon’ble jurisdictional High Court rendered in the case of CIT v. Annamalai Finance Ltd. 275 ITR 451. In this case there was sale and lease back of assets. Depreciation was claimed on the actual cost The Hon’ble High Court has held that apparent consideration can be taken as the cost of assets. The learned Accountant Member declined to apply the ratio of this decision on the ground that there was a strong reason to suspect that the consideration passed between the parties was not real consideration. In arriving at this conclusion the learned Accountant Member adumbrated on the report of the DVO. There is no other material in the record to suggest that the consideration passed between the parties was not real consideration. A number of items forming integral parts of the machinery were not considered while arriving at the value of the machinery, therefore, on the basis of the valuation report, no inference can be drawn in regard to the genuineness of the transaction. The value determined by the DVO cannot be construed to be the correct value. The learned Judicial Member took the apparent consideration as the true value of the assets. I agree with the decision of the learned Judicial Member on this point.
7. Adverting now to the second question apropos the disallowance of depreciation of Rs. 12,87,500/- on assets leased to M/s. Rajinder Pipes Ltd., I find that in the original assessment the assessee had claimed depreciation on suction blower with 10HP squired cage indicator motor and ducting systems bought from M/s. R.M. Machines P. Ltd., Kanpur for Rs. 51.50 lakhs and leased out to M/s.Rajinder Pipes Ltd., Mumbai. The Assessing Officer disallowed the assessee’s claim on the ground that as per his enquiry no machinery was actually manufactured by M/s. R.M. Machines P. Ltd. Besides, M/s. Rajinder Pipes Ltd. did not reflect in its accounts any plant and machinery acquired either through purchase or by lease during the previous year 1994-95 onwards. The Commissioner (Appeals) confirmed the disallowance. Before the Tribunal the assessee did produce evidence in the form of installation certificate from the lessee, payment vouchers for the leased assets, etc. According to the learned Judicial Member the factum as to the existence of the machinery was proved beyond the shadow of doubt and no effort was taken by the Revenue to examine the leased assets. No basic enquiry was made in this regard and the claim for depreciation was disallowed on the basis of surmises and suspicion. As such he allowed the relief on this count, whereas the learned Accountant Member followed the order of the Tribunal rendered for the assessment year 1995-96 in ITA No. 1213(Mds)/2000 dated 28-2-2006 in the assessee’s own case, wherein the matter was set aside to the Assessing Officer for fresh adjudication. Having regard to the facts, in my opinion the issue was rightly set aside to the file of the Assessing Officer for fresh adjudication. I, therefore, concur with the decision of the learned Accountant Member on this count.
8. The last issue concerning ITA Nos. 1105 and 1106(Mds)/2005 relates to the addition made by the Assessing Officer towards interest on transaction treated by the Assessing Officer as loan transaction. It was contended on behalf of the assessee that the Revenue authorities were not correct in treating the lease transaction as finance transaction, ex consequent adding the notional interest on deemed loan transaction. Both the parties agreed that this issue is consequential. Since in the context of M/s. Ganesh Benzoplast the majority decision is now in favour of the assesee, no addition on this count is possible. However, in the case of M/s. Rajinder Pipes Ltd. I have already agreed with the learned Accountant Member that the issue is to be examined afresh by the Assessing Officer. This issue is consequential and as such it should be decided accordingly. Therefore in regard to question No. 3 in the context of M/s. Ganesh Benzoplast I agree with the learned Judicial Member and in the context of M/s. Rajinder Pipes Ltd. I agree with the learned Accountant Member.
9. The matter will now go before the Regular Bench for deciding the appeals in accordance with the opinion of majority.
N. Vijayakumaran, Judicial Member
ITA No. 1104/Mds/2005:
1. Whether on the facts and circumstances of the case the CIT(Appeals) is justified in confirming the action of the Assessing Officer in determining the value of the assets and recalculate the depreciation which is a subject matter of lease transaction with M/s. Ganez Benzoplast?
2. Whether on the facts and circumstances of the case, the CIT(Appeals) is justified in confirming the action of the Assessing Officer in disallowing the claim of depreciation on the asset leased to M/s. Rajinder Pipes Ltd., Mumbai ?
ITA No. 1105 & 1106/Mds/05:
1. Whether on the facts and circumstances of the case, the CIT(Appeals) is justified in confirming the action of the Assessing Officer in making the addition towards interest on transaction treated by Assessing Officer as loan transaction ?
1. These cross appeals by the Revenue and the assessee were heard together and are being disposed of by a consolidated order for the sake of convenience, since the issues involved are common.
2. We shall first deal with the appeals by the Revenue. The first ground raised by the Revenue common for all these three assessment years relate to method of accounting of finance charges, whether it should be EMI (Equated Monthly Instalment) method as adopted by the assessee or CRM (Capital Recovery Method) as urged by the Revenue. It is contended by the Id. DR that the Id. CIT(A) failed to appreciate that for the purpose of Income-Tax alone assessee is deviating from the computation of income made by it in its books and as per the decision of the Hon’ble Supreme Court in the case of British Paints India Ltd. 188 ITR 44, the AO is under obligation to ensure that correct income is brought to tax. The Id. Counsel for the assessee, on the other hand, supported the orders of the Id. CIT(A) on this issue.
3. Having carefully considered the arguments of the parties and perusing the materials on record, we find that for the assessment years 1995-96, 1996-97, 1997-98, etc. the Tribunal in the assessee’s own case has decided this issue in favour of the assessee by dismissing the Revenue’s appeal on this account for the elaborate reasons stated in paras 3 to 32 of its order dated 28.02.2006 in ITA Nos. 1008, 1712/Mds/99, 1217, 300/Mds/2000 & 860/Mds/01. Since, admittedly there is no change in the facts and circumstances of the case, in our considered opinion, no interference is called for on our part in the orders of the Id. CIT(A). The contention of the Id. DR was that earlier order of the Tribunal relied upon by the Id. CIT(A) has not become final. But, as long as the said finding of the Tribunal is not disturbed by any process authorized by law, the rights of the assessee will continue to be governed by the Tribunal’s order. In this view of the matter, this ground of Revenue stands dismissed.
4. The second ground common for assessment years 2000-01 and 2001-02 is to the effect that the CIT(A) erred in directing allowance of enhanced depreciation on leased assets. We have considered the matter in the light of the orders of the authorities of below and also the aforesaid earlier order of the Tribunal in the assessee’s own case. In view of the decision of the Hon’ble Jurisdictional High Court in the case of CIT v. Annamalai Finance Ltd. 275 ITR 451, we have no hesitation to uphold the findings of the Id. CIT(A) that leased out commercial vehicles are eligible for higher rate of depreciation. This ground is also decided against the Revenue.
5. For the assessment years 2000-01 and 2001-02, there is yet another common issue raised by the Revenue which relates to estimated expenditure disallowed by the Revenue in earning the income exempted under Section 10(33). We have carefully considered the matter and in view of the categorical findings of the CIT(A) which is in consonance with the ITAT decision in the case of ACIT v. Teeaye Investment Ltd. ITA No. 1816/Mds/1989, wherein under similar facts and circumstances of the case it was held that an amount of 2% of the total exempt income should be treated as reasonable expenditure to earn the dividend income. In this view of the matter, we find no infirmity in the direction of the Id. CIT(A) and for both these years an amount Rs. 57,500/- each may be treated as reasonable expenditure. The ground raised by the Revenue is accordingly dismissed.
6. In the result, the Revenue’s appeals in ITA Nos. 1218 to 1220/Msds/2005 are dismissed.
7. Coming to the appeals filed by the assessee, in ITA No. 1104/Mds/05 for the A.Y 1995-96 the first ground raised is with regard to disallowance of depreciation of Rs. 33,90,172/- on assets leased to M/s Ganesh Benzoplast, Mumbai. The contention of the Id. Counsel is that the Id. CIT(A) totally ignored the details furnished by the assessee in support of the cost of leased assets before him. The facts of the case are that in respect of assets leased to the above company the assessee claimed depreciation showing the cost of assets at Rs. 1,99,53,440/-. The AO after referring the matter to the Valuation Officer and considering his report, had taken the cost of the assets at Rs. 63,92,750/- in the original assessment and he again retained the said cost of asset in the assessment framed under Section 143(3) r.w. Section 250 of the Act. It was the contention of the assessee before the Id. CIT(A) that the AO should not have applied the Explanation 4-A to Section 43(1) of the Act because it was made applicable w.e.f. 1-10-1996 only. Referring to the decision of the Hon’ble Supreme Court in the case of Smt. Amiyabala Paul v. CIT 262 ITR 407 it was contended before the Id. CIT(A) that power of enquiry granted to the AO under Section 133(6) and 142(2) does not include the power to refer the matter to the Valuation Officer. The Id. CIT(A) did not find any force in the argument of the assessee and observing that the provisions of Section 142A are applicable in the present case and the AO’s reliance on the Valuation Officer’s report is not misplaced, he held that the AO was justified in restricting the depreciation on the assets leased to M/s Ganesh Benzoplast, Mumbai on the basis of the report of the Valuation Officer. Aggrieved by the finding of the Id. CIT(A) the assessee is in appeal before the Tribunal.
8. We have heard both the parties and carefully considered the material on record. Since admittedly in this case the lesser has discharged its obligation of making the equipment available to the lessee in the financial year, respectfully following the decision of the Hon’ble jurisdictional High Court in It he case of Annamalai Finance Ltd. (supra), we allow depreciation as claimed by the assessee on assets leased to M/s Ganesh Benzoplast, Mumbai. This ground of appeal raised by the assessee is accordingly allowed.
9. The other ground raised by the assessee in this appeal is in respect of the disallowance of depreciation of Rs. 12,87,500/- on assets leased to M/s Rajinder Pipes Ltd. It was the contention of the Id. Counsel for the assessee that the Id. CIT(A) failed to appreciate that the assessee had furnished concrete evidence in the form of installation certificates and insurance cover for the leased assets. In the original assessment the assessee had claimed depreciation on suction blower with 10HP squirred Cage Indicator Motor and Ducting Systems stated to have been bought from M/s R.M. Machines P. Ltd., Kanpur for Rs. 51.50 lakhs and leased out to M/s Rajinder Pipes Ltd., Mumbai. The AO disallowed the assessee’s claim for depreciation as according to him the enquiries made by him revealed that no such machinery was actually manufactured by M/s R.M. Machines P. Ltd. Further M/s Rajinder Pipes Ltd. did not show any plant and machinery having acquired by them either through purchase or by lease dur9ing the previous year 1994-95 onwards. In the circumstances, the AO disallowed the claim in respect of alleged assets leased to M/s Rajinder Pipes Ltd. In appeal, the Id. CIT(A) held that the assessee failed to discharge the onus to substantiate its claim for depreciation and accordingly upheld the action of the AO in disallowing depreciation on the assets stated to have been leased to M/s Rajinder Pipes Ltd. The assessee is in further appeal before the Tribunal.
10. We have carefully considered the matter. In our considered opinion the claim of depreciation on the transaction cannot be rejected in view of the fact that the existence of the asset is not disputed. As held by us in the Revenue’s appeal in the earlier part of this order, this issue is covered in favour of the assessee by the decision of the Hon’ble jurisdictional High Court in Annamalai Finance Ltd. (275 ITR 451). It could be seen that the AO had disallowed the claim of depreciation as according to him the enquiries made; by him revealed that no such machinery was actually manufactured by M/s R.M. Machines P. Ltd., Kanpur. In so doing he totally ignored the evidence produced by the assessee in the form of installation certificates from the lessee, payment vouchers for the leased assets etc. It was the contention of the Id. Counsel before us that in fact the existence of the machinery has been proved by the assessee and no effort was taken by the authorities to examine the leased assets and no basic enquiry was made in this regard and simply on surmises and suspicion the claim for depreciation was found not to be admissible. In the circumstances, we have no hesitation to uphold the claim of the assessee. This ground of appeal is therefore, allowed.
11. In the result, assessee’s appeal in ITA No. 1104/Mds/05 for the A.Y 1995-96 is allowed.
12. Now coming to the appeals by the assessee in ITA Nos. 1105 and 1106/Mds/05 for the Asst. years 2001-02 and 2000-01, the first common ground raised is against disallowance made with regard to provision for Non-Performing Assets created in books by the assessee on the basis of statutory guidelines issued by the Reserve Bank of India. The Id. CIT(A) held that the AO was justified in disallowing the provisions for Non-Performing Assets for both the asst. years.
13. We have considered the issue involved in these appeals in the light of arguments of representatives of both the parties and material on record. As held by the Hon’ble jurisdictional High Court in the case of T.N. Power Finance & Infrastructure Development Corporation Ltd. v. JCIT 280 ITR 491, “merely because the Reserve Bank of India had directed the assessee to provide the non-performing assets, that direction could not override the mandatory provisions of the I.T. Act contained in Section 36(1)(viia) which stipulate a deduction not exceeding 5 per cent, of the total income only in respect of the provision for bad and doubtful debts which are predominately revenue in nature or trade related and not for provision for non-performing assets, which are of predominately capital nature. The assessee was not entitled to deduction, in view of the Explanation to Section 36(1)(vii) which says that the provision for bad and doubtful debts made in the accounts of the assessee is not an allowable deduction.” Respectfully following the aforesaid decision of the Hon’ble Madras High Court we uphold the finding of the authorities below and dismiss the ground raised by the assessee for both these Asst. years.
14. Another common ground is against the disallowance of lease equalisation charges of Rs. 6,08,72,000/- and Rs. 5,28,05,000/- respectively for the Asst. years 2000-01 and 2001-02. The Id. CIT(A) decided this issue by following his order in the assessee’s own case for the Asst. year 1996-97. After hearing both the parties we find that this point was decided against the assessee by the Tribunal in its order dated 28-2-2006 inn ITA Nos. 834, 1642/Mds/99 and 1213/Mds/00 for the Asst. years 1995-96 to 1997-98/ At the time of hearing before us also the Id. DR placed reliance on the said order of the Tribunal. In this view of the matter we affirm the order of the Id. CIT(A) and decide this issue against the assessee. This ground raised by the assessee for both these years are accordingly dismissed.
15. In the next ground the assessee pleaded that the Id. CIT(A) ought to have held that the lease transactions with M/S Rajinder Pipes Ltrd. Mumbai and Ganesh Benzo Plast, Mumbai were genuine lease transactions and accordingly he ought to have deleted the addition of Rs. 63,62,553/- (Asst. year 2001-02) and Rs. 1,19,52,914/- (Asst. year 2001-01). It was the contention of the assessee before the Id. CIT(A) that the first appellate authority in his order dated 30-3-1999 for the earlier asst. years 1995-96 to 1997-98 had allowed depreciation on certain assets but the AO has treated those lease transactions as finance transactions. Since according to the assessee the facts and circumstances of the case are the same, it was pleaded by the assessee’s counsel that the AO was not justified in disallowing the claim by making an addition by way of notional interest on deemed loan transactions. It was the contention of the assessee’s counsel before us that the Id. CIT(A) ought to have appreciated that even the debt due from M/s Rajinder Pipes Ltd., Mumbai and M/s Ganesh Benzoplast, Mumbai have subsequently become bad and irrecoverable and the entire amount was written-off in the books as bad debt.
16. As a consequence of our decision in the assessee’s appeal in ITA No. 1104/Mds/05 for the A.Y 1996-96 in para-10 of this order, we are inclined to accept the claim of the assessee that since the transactions in question are genuine lease transactions the additions in question in their entirety without excluding such lease transactions should have been deleted. Ordered accordingly.
17. The last ground raised in these appeals is that the Id. CIT(A) ought to have held that no part of administrative expenditure and interest on borrowed funds disallowed by the AO could be attributed to the investment activity for earning income exempt under Section 10(33) of the Act. It was the contention of the assessee’s counsel before us that the Id. CIT(A) ought to have appreciated that the assessee had sufficient owned-funds (in the form of share capital and ploughed-back profits) which were utilised for investment fetching income exempt under Section 10(33) of the I.T. Act, 1961. The Id. Counsel further pointed out that the Tribunal’s decision in the case of Teeaye Investments Ltd. (ITA No. 1816/Mds/89) relied upon by the Id. CIT(A) is distinguishable and not applicable to the facts of the assessee’s case. The Id. DR strongly supported the orders of the authorities below on this issue.
18. We have dealt with an identical issue in the Revenue’s appeals for the very same assessment years in para 5 of this order wherein in view of the categorical finding of the Id. CIT(A) which is in consonance with the Tribunal’s decision in Teeaye Investment Ltd. it was held that an amount of 2% of the total exempt income should be treated as reasonable expenditure to earn the dividend income. Since the facts and circumstances of the case in respect of the Asst. years under consideration are also similar, we uphold the finding of the Id. CIT(A) that for both these years an amount of Rs. 57,000/- each may be treated as reasonable expenditure. In this view of the matter, respectfully following the earlier order of the Tribunal in ACIT v. Teeaye Investments Ltd. (supra) we dismiss the grounds raised by the assessee on this issue.
19. In the result, assessee’s appeals in ITA Nos. 1105 & 1106/Mds/05 are partly allowed.
Chandra Poojari. A.M.
I have gone through the order of the Id. Judicial Member. But I am unable to agree with him fully with his proposed order.
1. In ITA Nos. 1104,1105 & 1106,1 disagree with the issues discussed hereunder. In ITA No. 1104/Mds/2005 filed by the assessee for the Asst. Year 1995-96, the assessee is aggrieved against the disallowance of depreciation of Rs. 33,90,172/- on the assets leased to M/s. Ganesh Benzoplast, Mumbai.
2. The Id. Judicial Member allowed the above appeal of the assessee placing reliance on the judgment of the Hon’ble Jurisdictional High Court in the case of CIT v. Annamalai Finance Ltd. 275 ITR 451.
3. In this case, the question that was before the High Court for consideration is:
Whether on the facts and circumstances of the case, the Tribunal was right in holding that the apparent consideration should be accepted by the Assessing Officer as the cost in a sale and lease back transaction although the amounts specified as lease amounts were not received by the assessee?
The High Court has held as follows:
Strictly speaking “apparent consideration” as held by the Bombay High Court in Po/ycon Paper Ltd. v. Union of India 253 ITR 182 would mean the whole or part of the consideration for such transfer which is payable on any date or dates falling after the date of such agreement for transfer and the value of such consideration shall be deemed to be the discounted value of such consideration as on the date of such agreement or transfer determined by adopting such rate of interest as may be prescribed in this behalf. Therefore, unless and until there are reasons to believe that the cost in a sale or an amount in a lease back transaction, as specified, was received but not disclosed, we do not see any error on the part of the Tribunal in accepting the apparent consideration.
As seen from the above judgment, the High Court has held that unless and until there are reasons to believe that the cost or the amount in a lease back transaction as specified was received, but not disclosed, there was no error on the part of the Tribunal in accepting the apparent consideration as actual consideration.
4. In the present case, there is a strong reason to suspect that the consideration has passed between the parties is not real consideration. The actual consideration is not that which is apparent on record. Hence Explanation to Section 43(1) of the Act provides that if assets are acquired second hand and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of liability to income-tax by claiming depreciation with reference to the enhanced cost, the actual cost to the assessee shall be the amount that may be determined by the Assessing Officer with the previous approval of the Deputy Commissioner. The mere production of documentary evidence showing that a contract was made for purchase of the assets at a certain price does not conclusively establish the correctness of the claim made by the assessee specially where the Assessing Officer is of the opinion that in the deal the assessee has taken resort to a subterfuge or device in order to avoid tax which he is liable to pay or otherwise has acted fraudulently or the transaction is illusory or colourable. In such cases, the Assessing Officer can go behind the contract and ascertain the actual cost for the purposes of correct ascertainment of Income-tax liability of the assessee. Kungundi Industrial Works (Pr.) Ltd. v. CIT 57 ITR 540 (AP); Jogta Coal Co. Ltd. v. CIT 55 ITR 89 (Cal); Pindi Kashmit Transport Co. Ltd. v. CIT 26 ITR 595 (Lah.); Guzdar Kajora Coal Mines Ltd. v. CIT 85 ITR 599 (SC); G. Vijayaranga Mudaliar v. CIT 47 ITR 853 (Mad.) Craddicj v. Zevo Finance Co. Ltd. 27 Tax Cas. 267 (HL); Motiram Roshal Lal Coal Co. v. CIT 1 ITR 329 (Pat.); R.B. Bansilal Abirchand Spg. & Wvg. Mills v. CIT 75 ITR 260 (Bom). This Explanation 3 no where speaks of the market value being determined by the Assessing Officer but it speaks of the “actual cost” being determined by the Assessing Officer with the approval of the Dy. Commissioner having regard to all the circumstances of a case [Ginners & Pressers P. Ltd. v. CIT 113 ITR 616 (Bom.) For this purpose I also rely on the judgment of the Hon’ble Supreme Court in the case of CIT v. Durga Prasad More 82 ITR 540 wherein it was held that:
that though an apparent statement must be considered real until it was shown that there were reasons to believe that the apparent was not the real, in a case where a party relied on self-serving recitals in documents, it was for that party to establish the truth of those recitals : the taxing authorities were entitled to look into the surrounding circumstances to find out the reality of such recitals.:
5. Therefore, in my opinion, the A.O., is within his jurisdiction to refer the matter to the D.V.O., to ascertain the correct value. Accordingly, I do not find any infirmity in the order of the CIT(Appeals) confirming the disallowance made by the Assessing Officer and I sustain his order on this issue. Incidentally, the case law relied on by the assessee before the CIT(Apeals) in the case of Smt. Amiyabala Paul v. GT 262 ITR 407 (SC) is no more a good law in view of the amendment with retrospective effect.
The next ground relates to non-allowance of depreciation on assets leased to M/s. Rajinder Pipes Ltd. This issue is decided by of the order of the Tribunal for the Asst. Year 1995-96 in ITA No. 1213/Mds/2000 in the Assessee’s own case dated 28.2.2006 wherein the Tribunal has confirmed the order of the CIT(Appeals) who has set aside this issue to the file of the Assessing Officer for fresh adjudication. Accordingly we set aside this issue to the file of the Assessing Officer for fresh adjudication as the findings of the Assessing Officer consequent upon the direction of the Tribunal on earlier occasion (supra) will have bearing on this issue for this Asst. Year also Accordingly, this appeal is allowed partly for statistical purpose.
6. In ITA No. 1105 & 1106/Mds/2005, the assessee has taken the ground that the CIT(Appeals) erred in confirming the addition made by the Assessing Officer towards interest on transactions treated by the Assessing Officer as loan transaction. Similar issue was dealt with by the CIT(Appeals) for the Asst. Year 1995-96 and the CIT(Appeals) while passing the order for the Asst. Years 2000-01 and 2001-02 has held as follows:
Since I have given certain directions in respect of depreciation relating to the assets leased out to M/s. Ganesh BenzoPlast and M/s. Rajinder Pipes Ltd., Mumbai in ITA TR No. 87/2004-2005 for the Asst. Year 1995-96 vide my order dated 28.2.2005, the AO is directed to take into account these lease transactions which are set aside by the CIT(Appeals) for the Asst Year 1995-96. Subject to this the appellant is treated as having succeeded on this ground for both these years.
It is to be noted that the same issue was a subject matter of appeal before the I.T.A.T., for the Asst. Year 1995-96 in ITA No. 1213/Mds/2000 wherein the Tribunal vide order dated 28.2.2006 has held that:
107. Depreciation claimed on assets leased to M/s Rajinder Pipes Ltd.:
In this case, the assessee company claimed depreciation of Suction Blower with allied systems bought from M/s R.M. Machinery Pvt. Ltd., Kan pur for a value of Rs. 51.50 lakhs and leased to M/s Rajinder Pipes Ltd. The Assessing Officer on the basis of his enquiry held that there was no such machinery manufactured and supplied and the supplier M/s R.M. Machinery Pvt. Ltd. did not have the infrastructure and technical personnel to manufacture such machinery.
108. Upon assessee’s appeal, the learned Commissioner of Income Tax (Appeals) held as under:
I find that the Assessing Officer had not categorically proved that the asset was non existent The fact of purchase of machinery is to be verified vis-a-vis the letters of the supplier and the result of the enquiry is to be put to the assessee for rebuttal. Further enquiry is to be carried on to verify the mode of payment of the lease consideration and the mode of repayments. Hence I set aside this issue to the files of the Assessing Officer to come to proper conclusion after necessary enquiry as suggested above.
109. Depreciation on S.S. Liquid Chemical Storage Tank and MS Liquid Chemical Storage Tank:
The assessee claimed that it had leased out the above asset to M/s Ganesh BenzoPlast, Mumbai. The cost of the asset was stated to be Rs. 1,99,53,440/-. The Assessing Officer referred the matter to the Valuation Officer of the Department who in his report dated 27.01.98 valued the assets at Rs. 63,92,750/-. The Assessing Officer issued a show cause notice dated 9.02.98 to the assessee to explain as to why the cost of the machinery should not be taken as per the Department Valuation Officer.
110. Upon assessee’s appeal, the learned Commissioner of Income Tax (Appeals) held as under:
I find it fit to set aside the issue to the files of the Assessing Officer for giving necessary opportunity to the assessee to establish that all the machineries in possession of the lessee were taken into consideration by the Valuation Officer and also to establish that there was no inflation with regard to the cost of the assets.
111. On these issues, the learned Departmental Representative submitted that there is no infirmity in the Commissioner of Income Tax (‘Appeals) s findings and the consequent remission of the issue to the Assessing Officers files. We have carefully considered this issue. We do not find any need to interfere with the order of the learned Commissioner of Income Tax (Appeals) in this regard.
Since the Tribunal, for the Asst. Year 1995-96 has set aside as cited above and the consequent findings of the Assessing Officer has bearing on this issue for these Asst. Years, I set aside this issue relating to the interest on transactions with Rajendra Pipes Ltd., as loan transaction to the file of the Assessing Officer with a direction to decide this issue in accordance with the findings derived by the Assessing Officer in response to the directions of the Tribunal earlier as above, for these Asst. Years also. The Assessing Officer is also directed to consider the interest only on the balance value of the asset which is not entitled for depreciation. However, we direct the Assessing Officer to treat the interest on transaction as loan transaction in the case of transaction with M/s. Ganesh BenzoPlast over and above the value of the DVO’s report as discussed in ITA No. 1104/Mds/05 as above.
12. In the result, ITA Nos. 1l04/Mds/05, ITA Nos. 1105 & 1106/Mds/05 are partly allowed for statistical purpose. The Revenue’s appeals in ITA Nos. 1218 to 1220/Mds/2005 are dismissed.
N. Vijayakumaran, Judicial Member
13. The above cross-appeals by the Revenue and the assessee for the Asst. years 1995-96, 2000-01 & 2001-02 were originally heard on 6-3-2007. On a careful consideration of the matter, we came to the conclusion that the Departmental appeals in ITA Nos. 1218 to 1220/Mds/05 are to be dismissed. However, with regard to assessee’s appeals in ITA Nos. 1104 to 1105/Mds/05 for the very same assessment years there was difference of opinion amongst the Members and accordingly the following questions were referred for the esteemed opinion of the Third Member:
ITA No. 1104/Mds/2005:
1. Whether on the facts and circumstances of the case, the CIT(A) is justified in confirming the action of the AO in determining the value of the assets and recalculate the depreciation which is subject matter of lease transaction with M/s Ganesh Benzoplast?
2. Whether on the facts and circumstances of the case the CIT(A) is justified in confirming the action of the AO in disallow8ing the claim of depreciation on the asset leased to M/s Rajinder Pipes Ltd., Mumbai?
ITA No. 1105 & 1106/Mds/05:
Whether on the facts and circumstances of the case, the CIT(A) is justified in confirming the action of the AO in making the addition towards interest on transaction treated by the AO as loan transaction?
14. With regard to the first question in ITA No. 1104/Mds/2005 the Id. Third Member agreed with the Judicial Member, whereas he concurred with the decision of the Accountant Member in respect of the second question.
15. For the Asst. years 2000-01 & 2001-02 there was yet another common issue raised by the Revenue relating to estimated expenditure disallowed in earning the income exempted under Section 10(33) of the Act. On this issue both the Members agreed that the common ground raised by the Revenue is to be dismissed.
16. In the result, assessee’s appeal in ITA No. 1104/Mds/05 for the Asst. year 1995-96 stands partly allowed.
17. In the assessee’s appeals in ITA Nos. 1105 and 1106/Mds/05 the issue before the Id. Third Member relates to the addition made by the AO towards interest on transaction treated by the AO as loan transaction. The contention of the assessee was that the Revenue authorities were not correct in treating the lease transaction as finance transaction, ex consequenti adding the notional interest on deemed loan transaction. Both the parties agreed before the Id. Third Member that this issue is consequential. The Id. Third Member came to the conclusion that since in the context of M/s Ganesh Benzoplast the majority decision is now in favour of the assessee, no addition on this count is possible and he accordingly concurred with the view taken by the Judicial Member. However, in the case of M/s Rajinder Pipes Ltd. the Id. Third Member agreed with the Accountant Member and accordingly expressed his opinion that the issue is to be examined afresh by the AO. These two appeals by the assessee are accordingly partly allowed.
18. In the result, Revenue’s appeals in ITA Nos. 1218 to 1220/Mds/05 are dismissed and assessee’s appeals in ITA Nos. 1104 to1106/ds/05 are partly allowed.