ORDER
R.M. Mehta, Vice President
1. These appeals are directed against separate orders of the CIT (A) and having been heard together are decided by a common order.
2. In the appeal for asst. yr. 1996-97 the assessee has raised 7 grounds, but at the time of hearing a solitary issue covering grounds 2 to 5 (reproduced hereinafter) was argued and the other grounds were not pressed. Such grounds would; therefore, stand rejected.
“2. That while confirming the assessment, the learned joint CIT has erred in sustaining the disallowance of the claim of depreciation aggregating to Rs. 92,00,625. The learned CIT (A) has failed to appreciate that the assessee was the owner of the plant leased out by it and had been utilised by it for the purpose of its business. The finding of the learned CIT(A) that the transaction was a finance transaction, is based on complete misconception of facts
3. That further, the finding of the learned CIT (A) that M/s KPCL was in red and was badly in need of resources to run its business, by itself was not sufficient to conclude that since the alleged intention was of mobilizing resources, it could be concluded the plant was not sold by it and the assessee did not become the owner of the plant thereof.
4. That further, the learned CIT (A) has erred in concluding that, the sale transaction was not an independent of the lease transaction and assuming it was so, even then the assessee was entitled to the claim of depreciation as made as is permissible in the case of sale-cum-lease transaction.
5. The learned CIT(A) has further erred in concluding that the assets were unidentifiable and the invoices made by KPCL was vague and there was some alleged contradiction in the lease deed. The findings are all based on misconception and are otherwise too have been arrived at without appreciating the facts of the instant case. ”
3. The brief facts are that the assessee is a company in which the public are substantially interested. It was incorporated on 15th May, 1986, and is a non-banking finance company engaged in the business of hire-purchase, leasing and trading in shares. The company is also stated to be specializing in automobile financing, industrial machinery, office equipment, etc. and has an extensive retail network over semi-urban and rural north India managed by six regional offices and 21 branches. The other relevant fact is that income from the leasing activity amounts to 51.19 per cent of the total income.
4. On perusal at the assessment stage of the company’s claim for depreciation it was noticed that transactions of purchase and lease back had been entered into with two parties, namely, “TV Eighteen” and “M/s Karnataka Power Corporation Ltd.” (hereinafter referred to as KPCL) and depreciation thereon had been claimed at 100 per cent. The quantum of depreciation in respect of the former was Rs. 27,39,000 and for the latter it amounted to Rs. 92,00,625. As regards the transaction with TV Eighteen” the assessee opted for the Voluntary Disclosure Income Scheme, 1997, and it is the second transaction, which is now the subject-matter of dispute before us.
5. The value of the assets purchased from KPCL and leased back to them was worked out at a figure of Rs. 1,84,01,250 on the basis of their physical verification by one Mr. R. Arun Kumar, valuer. In the books of M/s KPCL, which was an enterprise of the Karnataka Government the WDV was Nil and their sale was shown to the assessee-company on 30th March, 1996, and the lease back to M/s KPCL was also on the same date.
6. According to the AO even if the assessee was considered to be the owner of the assets as it had paid the sale consideration to M/s KPCL the other ingredients of Section 32 remained unfulfilled vis-a-vis the usage of the assets by the assessee, the assets not having come into the physical possession of the assessee, etc. According to the AO the assets remained where they were and never changed the place of their installation, the only change being the coming into existence of certain paper formalities such as invoice, lease agreement, etc., which were nothing but part of a collusive/colourful device. The view of the AO in fact was that the intention of M/s KPCL was to get finance from the assessee and the lease agreement had been entered into only with a view to enable the assessee to get the benefit of depreciation.
7. As regards the valuation of the assets, the AO observed that the WDV in the books of M/s KPCL had been reduced to Nil and the valuation of 1.84 crores could not be taken simply on the basis of the report of the valuer. A reference was made to Expln. 3 to Sub-section (1) of Section 43 whereby the actual cost shown by the assessee could be substituted by the actual cost as estimated by the AO. According to the AO the assets in question were affixed to the ground and were not capable of being transferred, shifted and delivered from place to place. It was also noted that the leased machineries were not independent items, but these were part of the power plant system of Raichur Thermal Power Station being managed and run by M/s KPCL. It was noted by the AO that the said project was spread over an area of 3,600 acres and the assets purchased and leased back by the assessee formed part of the total plant and machinery of Unit No. Ill, which was commissioned on 30th March, 1991. The AO found the basis adopted by the valuer for arriving at the market value as irrelevant.
8. The assessee submitted before the AO that the sale by M/s KPCL to it was a genuine one, more so, when a notification was issued by the Government of Karnataka exempting the transaction from sales-tax. The AO noted that the exemption was allowed subject to the condition that the machinery and equipment sold was to be leased to M/s KPCL. The AO observed that it was clear from the notification that the sales-tax exemption had been allowed, because there was no real sale and the goods were not to move from the seller to the purchaser. The view of the AO in fact was that the transaction was not a lease transaction, but a loan/financing transaction since M/s KPCL was in a tight financial position and required substantial amounts.
9. The further facts noted by the AO were that the lease agreement was entered into only on 30th March, 1996, so that the assessee could claim depreciation at 50 per cent of the normal rates of hundred per cent there being a mere lease rental of Rs. 1,78,492.
10. On the basis of the aforesaid facts and discussion, the AO proceeded to disallow the claim of depreciation amounting to Rs. 92,00,625 and proceeded to tax the interest component embedded in the leased rental of Rs 1,78,492, i.e., a sum of Rs. 39,694 and the balance of Rs. 1,38,798 representing recovery of the principal/capital cost of the assets was allowed out of the leased rentals received. The net disallowance worked out to Rs. 90,61,827 (Rs.92,00,625 minus Rs. 1,38,798). A perusal of the order of the AO shows that he applied the judgment of the Hon’ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC).
11. Before the CIT (A) the matter was argued at length, the main submissions being as follows :
(i) The AO had failed to appreciate that at the time of sale by M/s KPCL the entire value of the assets which had been sold became the income of the seller;
(ii) There was no basis or justification to treat the transaction to be collusive in nature since M/s. KPCL was a Government enterprise and there could be no collusion between a Government enterprise and a private company;
(iii) The WDV in the hands of M/s KPCL was irrelevant since law permitted the assessee-company to claim depreciation on the value of assets acquired by it. It was undisputed that the assets had been acquired for a sum of Rs. l.84 crores and the same represented the fair market value thereof;
(iv) The AO had not brought any material on record which would show that the value of the asset was not correctly stated as he had not made any attempt to prove the actual cost of the asset;
(v) The physical delivery of the asset was not relevant since there had been a constructive delivery. That in a sale-cum-lease transaction there was no physical movement of the equipment and the title passed to the lesser from the supplier on signing of the lease agreement and receiving the lease rent;
(vi) Even in the past the assessee-company had entered into similar transactions of sale-cum-lease back. Further, the transaction could not be doubted unless there was valid and sufficient material available to support such a conclusion. As there was a sale invoice, delivery note and lease agreement, these constituted sufficient documentary evidence which could not be rejected;
(vii) In the case of CWT v. Arvind Narottam (1988) 173 ITR 479 (SC) the Hon’ble Supreme Court had held that the real character of a transaction based upon documentary evidence could not be disregarded on scientific considerations;
(viii) That the Hon’ble Supreme Court in the case of CIT v. First Leasing Company Ltd. (1998) 231 ITR 308 (SC) had held that investment allowance was admissible to those assessees, who were engaged in the business of leasing;
(ix) The tax exemption obtained by M/s KPCL vide Notification dt. 1st March, 1996, clearly demonstrated that permission to sell was obtained prior to the date of the transaction;
(x) The assessee had been regularly receiving lease rental till date and the asset purchased by it and leased back was physically verifiable; and
(xi) Under the law there was no bar on a manufacturer or a seller in taking back on lease the equipment sold to the purchaser on payment of rent and such transactions were not uncommon in the commercial world.
12. The AO was also asked to offer his comments by the CIT(A) and his
submissions were as under :
(i) He was well within his jurisdiction in determining the cost of the assets at
Rs. Nil;
(ii) The assets had been installed at various places, which were not even known
to the assessee;
(iii) The cost of the assets should be taken after adjusting the security deposit
of Rs. 82.80 lakhs for the purposes of allowing depreciation;
(iv) The contention of the assessee that M/s KPCL had offered for tax the sale proceeds of the assets was incorrect since M/s KPCL had huge amount of brought forward losses of earlier years, which would otherwise lapse due to the limitation of 8 years; and
(v) The arrangement between the assessee and M/s KPCL was for their mutual benefit.
13. In counter-comments the assessee stated that the sum of Rs. 82.80 lakhs had been received as security deposit and the assessee was a debtor in respect of the aforesaid amount to M/s KPCL.
14. The aforesaid submissions of the assessee did not find favour with the CIT (A), who proceeded to reject the arguments on the following grounds :
(i) M/s KPCL was the owner of the assets defined in the lease deed and the purpose for entering into the agreement with the assessee was not the enjoyment of the assets inasmuch as M/s KPCL was in the red and badly in need of resources to run its business. That it entered into an agreement with the assessee-company with the sole intention of mobilising resources;
(ii) The assessee wanted a lease agreement rather than a financing agreement to enable it to claim depreciation on the assets after purchasing the same from M/s KPCL;
(iii) The assets were “sold” to the assessee for a sum of Rs. 1.84 crores on 30th March, 1996, and on the same date these were leased back over a 10 year lease to M/s KPCL on payment of non-interest bearing security deposit at 45 per cent of the cost of the assets. In other words, M/s KPCL received a net amount of Rs. 1 crore approximately, after adjustment of the security deposit and the first rental;
(iv) As per Clause II of Schedule I to the lease agreement, M/s KPCL was to give postdated cheques for the entire lease rental, which was @ Rs. 1,78,492 per month for the first 72 months and Rs. 184 per month for the remaining 48 months. In other words, the assessee was to receive a sum of Rs. 1.28 crores and odd over a period of 6 years and for the remaining 4 years the total lease rental was Rs. 8,832 only;
(v) The assessee had heavily relied on the fact that M/s KPCL was a Government undertaking and the order of the Karnataka Government exempting the sale of the asset from sales-tax to show the genuineness of the transaction could not be denied to the extent that the asset existed and that a certain amount was paid to M/s KPCL, but the sales-tax exemption was not absolute and it was subject to the assets sold being leased back to M/s KPCL;
(vi) A Government corporation was required to follow a set procedure when it decided, to dispose of an asset i.e., advertisement of the sale or auction, calling for tenders, fixing the minimum price, etc. and this procedure had been completely bye-passed as the transaction was not mentioned to be a sale;
(vii) The asset continued to remain with M/s KPCL even after the sale and the assessee-company did not have the option to take back the asset from M/s KPCL and lease it to” a third party or put it to any other use ; and
(viii) The assessee was only a paper owner of the asset and did not have the right to enjoy or dispose it of as per its will.
14.1 The CIT{A) also commented upon certain clauses of the lease deed and further observed that the assets were not identifiable and the invoice made by M/s KPCL was vague and lacking in relevant details.
15. The CIT (A) also referred to the change in law w.e.f. 1st Oct., 1996, by insertion of Expln. 4A to Section 43(1) whereby sale-cum-lease back transactions had been referred to and it was observed that vis-a-vis the amendment no depreciation would be admissible under the law to transactions of the type which were presently under consideration, but the observations of the CIT(A) were that the amendment no doubt would not be applicable to the period under consideration, but the further observation was that the same had been introduced to prevent parties from bye-passing the provisions of law in order to reduce their tax liability. In the final analysis, the CIT(A) agreed with the AO to hold that the transaction between the assessee-company and M/s KPCL was actually a financial transaction which had been given the garb of a lease transaction by paper formalities. The disallowance on account of depreciation made by the AO was, therefore, upheld.
16. Before us the learned counsel for the appellant reiterated the arguments advanced before the tax authorities highlighting, at the outset, that the genuineness of the sale was not in dispute and that the sale and lease back transaction had been exempted by the State Government of Karnataka by a statutory notification. According to the learned counsel whatever had been accepted by the State Government could not be objected to by another department and in the present case of the Central Government A reference was made to Art. 12 of the Constitution of India for the aforesaid submission.
17. The learned counsel further took exception to the observations of the CIT(A) about, the “manner” in which the transaction had been conducted. It was his plea that no third party had raised any objection and the transaction / contract between the assessee and the State Government of Karnataka was a valid one. It was emphasized by the learned counsel that the IT Department could not ignore the terms of an agreement between two parties and in the process overlook the legal rights that flowed therefrom. It was also the submission of the learned counsel that the agreement of lease pursuant to the sale was not a sham one.
18. A reference was also made by the learned counsel to para 10 of the order of the CIT(A) wherein there was a discussion on Expln. 4A to Section 43(1) inserted w.e.f. 1st Oct., 1996. He also referred to the CBDT circular explaining the said provision appearing at p. 2571 of Chaturvedi & Pithisaria, Vol. 2, 5th Edn. A reference was also made by the learned counsel to provisions of Sections .91 and 92 of the Evidence Act and our attention was also invited to relevant pages of the paper book filed during the course of the hearing, moreso, p. 33, which was a copy of the Notification, dt. 1st March, 1996, issued by the Government of Karnataka exempting from sales-tax all transactions of sale of its machinery and electricity equipment to leasing companies or financial institutions, but subject to the condition that these are leased back to the Karnataka Power Corporation Ltd. In the same connection, a reference was made to p. 34 which contained the copy of another notification. The plea of the learned counsel was that these notifications were dt. 1st March, 1996, i.e., a month prior to the actual transaction having taken place. It was emphasized by the learned counsel that the aforesaid documents demonstrated the genuineness of the sale and lease back transaction. A reference was also made to p. 27 of the paper book which was the copy of the valuation report of an approved valuer pertaining to the plant and machinery sold to the assessee and leased back.
19. In conclusion the learned counsel urged that the sale-cum-lease back transaction being above board and between the assessee and a State Government the same be accepted as genuine and the depreciation claim of the assessee be allowed. In support of the various arguments, reliance was placed on the case of CGT v. IP. Soni (1982) 136 TTR 838 (Del).
20. The learned Departmental Representative, on the other hand, vehemently supported the order passed by the CIT(A) contending that it was a financial transaction and not a leasing transaction as sought to be made out on behalf of the assessee. In relying wholly on the order of the first appellate authority, highlighting the reasons recorded therein as also the factual aspects, the learned Departmental Representative contended that no actual delivery of the plant and machinery had taken place and it had not been proved that the assets had been used by the assessee in any manner and which was a necessary prerequisite for depreciation to be considered/allowed. Reliance was placed on the judgment of the Hon’ble Delhi High Court in the case of Goyal Gases (P) Ltd. v. CIT (1997) 227 ITR 536 (Del).
21. In reply, the learned counsel for the appellant stated that the judgment of the Hon’ble Delhi High Court relied upon by the Department was not applicable the same being a matter taken up in reference under Section 256(2) and the same, therefore, not constituting a decision on merits. It was the further plea that every sale and lease back transaction had to consider quite identical facts, but in the case of the assessee the clinching factor would be that one of the parties was a State Government. The learned counsel further sought to buttress his arguments by relying on the judgment of the House of Lords in the case of Mac Niven (Inspector of Taxes) v. Westmorland Investments Ltd. (2001) 1 All ER 6 (HL).
22. We have examined the rival submissions and have also perused the material on record to which our attention was invited during the course of the hearing. The decisions cited at the Bar have also been taken into account.
23. At the outset we would like to observe that every businessman-assessee would endeavour to get the best for himself in every transaction that he enters into and the Revenue should not grudge him this right. The McDowell judgment has been substantially watered down by the subsequent decision of the Hon’ble Supreme Court in the case of CWT v. Arvind Narottam (supra) and tax planning within the four-corners of law is, therefore, not to be seen with suspicion and doubt.
24. Further, a transaction in which one of the parties is the Central Government, a State Government or an undertaking of the said Government then connivance of the nature alleged by the Department has to be ruled out.
25. Sale-cum-lease back transactions have been a part of business dealings although we must say that these are viewed with a suspicious mind by the Revenue, but it must be emphasized that every transaction has to be considered on its own facts and it is not the case of the Revenue before us that Expln. 4A to Section 43(1) inserted by the Finance (No. 2) Act, 1996, is to apply to transactions prior to 1st Oct., 1996.
26. Coming to the valuation aspect, no doubt the WDV in the books of KPCL was Rs. Nil, but this does not reflect the market value as on the date of the transaction and the valuation report filed by the assessee remains uncontroverted on the part of the Revenue.
27. Further, the transaction between the assessee and the KPCL is duly supported by a lease agreement, invoice, and in the case of a lease-cum-sale back transaction physical delivery is not a must as constructive delivery also satisfies the legal aspect.
28. Coming to the sales-tax exemption the notification of the Karnataka Government is dt. 1st March, 1996, i.e., a month prior to the actual transaction and it speaks of all transactions and not the one under consideration. Can it be expected of a State Government to do something, which is not above board and to be part of a tax avoidance scheme engineered between the assessee and one of the State Government undertakings as is the allegation of the Department.
29. It must be emphasized that KPCL has given a substantial amount of security to the assessee in respect of the transaction. In para 6 of the order of the CIT (A) the figure mentioned is Rs. 82.80 lakhs and the sale transaction would involve tax implications in the hands of KPCL and it is not entirely relevant that it has substantial losses, a fact noted by the tax authorities.
30. In para 9 the CIT(A) makes a very odd observation and which is “To this extent the transaction is genuine”. It does not need any deliberation to say that the transaction is either genuine or it is not. There can be no transaction, which is part genuine and part sham.
31. The CIT(A) has also spoken about the manner in which the KPCL has entered into the transaction i.e., public notice, tenders, auction, etc. The learned counsel has rightly contended that it is an affected party who should object and it is not for the CIT(A) to tell the State Government how to go about it.
32. Another point made by the tax authorities was that KPCL was in the red requiring finance which the assessee provided, but in return it entered into a sale-cum-lease back transaction so that it could claim substantial amount of depreciation, We would like to say that a State Government undertaking when financially pressed can fall back on the State Government itself rather than to enter into an arrangement with an assessee with allegations by the Revenue that it is part of a tax avoidance scheme and in case the assessee wants to enter into a transaction for its financial benefit, then we really see no reason as to why it should be viewed suspiciously.
33. In the final analysis, we opine that the sale-cum-lease back transaction between the assessee and KPCL was genuine and the claim on account of depreciation made by the assessee was required to be allowed. The quantum is not disputed and we, therefore, direct the AO to allow necessary relief to the assessee. The AO is also directed to make suitable adjustment in respect of lease rentals, interest, etc. consequent to the aforesaid direction.
34. As regards the appeal for asst. yr. 1997-98 the first ground pertains to the claim for depreciation in respect of the assets leased out to KPCL in asst. yr. 1996-97 and in the light of the view expressed by us in the preceding assessment year the assessee must succeed in its claim, which would be consequential. In other words, directions given in the preceding assessment year would apply in respect of ground No. 1 for asst. yr. 1997-98.
35. the second ground in the appeal pertains to claim for depreciation of Rs. 50 lakhs in respect of assets leased out to the Haryana State Electricity Board. The CIT (A) has rejected the claim on the ground that the point at issue is the same as considered in respect of the assets leased out to KPCL. Before us, both the parties stated that the view taken in respect of the earlier appeal as also the earlier ground in the current appeal would apply. In our opinion, this would not be so since the sale to the assessee was by means of an invoice dt. 29th March, 1997, and the lease back transaction was also of the same date. Expln. 4A to Section 43(1) was inserted w.e.f. 1st Oct., 1996, and this has been discussed by us while disposing of the earlier years appeal. Being of the view that the matter has been examined without taking into account the said Explanation and the orders of the tax authorities being based entirely on the view taken in respect of the assets leased to KPCL, the matter is required to be reconsidered. In this view of the matter, we set aside the orders passed by the tax authorities and restore the matter back to the file of the AO for a decision de novo on merits, after giving reasonable opportunity to both the parties.
36. Ground Nos. 3 and 4 in the appeal for asst. yr. 1997-98 are as under :
(3) That on the facts and in the circumstances of the case, the learned CIT(A)-V, New Delhi, was wrong in confirming the action of the AO in making the disallowance of Rs. 78,095 being claim of depreciation on two-wheelers by restricting the claim of depreciation @ 20 per cent of the WDV as against the claim made by the appellant at 25 per cent on the WDV.”
(4) That on the facts and in the circumstance of the case, the learned GIT (A)-V, New Delhi, was wrong in confirming the action of the AO in making the disallowance of Rs. 4,56,830 being claim of depreciation in respect of the trucks leased out by the appellant to person who used them in the business of running them on hire by restricting the rate of depreciation @ 25 per cent of the WDV as against the claim of 40 per cent of the WDV made by the appellant.”
37. As regards ground No. (3) both the tax authorities took the view that depreciation @ 20 per cent was available, but the learned counsel during the course of the hearing referred to entry No. 1 in Part III of Appendix I pointing out that the rate was 25 per cent in respect of all items of machinery and plant, which were not covered by the other heads, namely, sub-items (1A), (2) and (3). The learned Departmental Representative did not advance any argument to the aforesaid submission of the learned counsel and we, therefore, direct depreciation to be allowed at 25 per cent since there is no specific mention of two-wheelers under any of the sub-items.
38. As regards ground No. (4) the stand of the Department is that the assessee has merely leased out the trucks and there is no evidence to show that the lessees have used such trucks in the business of running them on hire and, therefore, claim for depreciation at 40 per cent was not tenable. This was- also the case of the Revenue before us whereas the learned counsel for the assessee reiterated the arguments advanced before the tax authorities placing reliance on unreported judgment of the Delhi Benches of the Tribunal in the case of Goodwill India Ltd. v. Jt. CIT and Ors. in ITA No. 4916 (Del) of 1999 (order dt. 27th April, 2000). It was the submission of the learned counsel that on quite identical facts the Tribunal had been pleased to direct depreciation at the higher rate. Reliance was also placed on another judgment of the Delhi Benches of the Tribunal in the case of Oriental Leasing Company v. Dy. CIT (1996) 55 TTJ (Del) 294.
39. After examining the rival submissions, we are of the view that there is merit in the arguments advanced by the learned counsel for the appellant, but subject to necessary verification being carried out by the AO. The assessee would be obliged to file relevant evidence before the AO showing that the trucks leased out have been used by the respective lessees in the business of hiring them out. We have resorted to such a set aside observing from the order of the CIT(A) that certain facts are not available, although we do not agree with the observation of the first appellate authority that for purposes of getting the higher rate of depreciation it should be the assessee, who should be running the vehicles in the business of hiring. It would be sufficient compliance with the provisions of law in case it was the lessee, who was performing the. said activity.
40. The last ground in the appeal i.e, No. (5) pertaining to disallowance of a sum of Rs. 10,39,000 under the head “Preliminary and issue expenses” was not argued at the time of hearing of these appeals and this would, therefore, be treated as not pressed.
41. In the result, both the appeals of the assessee are partly allowed.