ORDER
Mahavir Singh, J.M.
1. This appeal of the assessee is emanating out of the order of the CIT(A)-II, Chennai, dt. 28th June, 2000, for the asst. yr. 1995-96. The assessee has raised eight grounds of appeal and four additional grounds of appeal. In all these grounds, the assessee has raised issues in the nature of disallowance of depreciation in respect of assets given on sale and lease back, disallowance of depreciation in respect of assets given on lease and disallowance of depreciation on assets mortgaged. In this way, the assessee has raised the issues three in nature and the issues are as under :
I. Sale and lease back transactions :
(1) M/s Khoday India Ltd.
(2) M/s Mohan Breweries & Distilleries Ltd.
II Straight lease transactions :
(1) M/s Kedia Distilleries Ltd.
(2) M/s Mahalakshmi Sugar Mills Company Ltd.
(3) M/s Prakash Industries
(4) M/s Carews Pharmaceuticals Ltd.
(5) M/s Seethapur Plywoods Industries
(6) M/s Patheja Forgings & Auto Parts Ltd.
III. Mortgage transactions:
(1) M/s Marvel Sales & Services Ltd.
2. The learned counsel for the assessee has relied on the following case laws, commentaries and Acts :
1. The extracts of Law of Practice of Income-tax, Vol.-I, Ninth Edn. of Kanga, Palkhivala and Vyas.
2. The extracts of Indian Contract & Specific Relief Acts of Pollock & Mulla, Twelfth Edn., Vol. II.
3. Rukmanand Bairsoliya v. State of Bihar AIR 1971 SC 746
4. Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC)
5. CIT v. Salkia Transport Association (1983) 143 ITR 39 (Cal)
6. Jeypore Timber & Veneer Mills (P) Ltd. v. CIT (2982; 137 ITR 415 (Gau)
7. Kishanchand Chellaram v. CIT (1980) 125 ITR 713 (SC)
8. National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC)
9. CIT v. Orissa Corpn. (P) Ltd. (1986) 159 ITR 78 (SC)
10. Mid East Portfolio Management Ltd. v. Dy. CIT (2003) 81 TTJ (Mumbai)(SB) 37: (2003) 87 ITD 537 (Mumbai)(SB).
On the other hand, the learned Departmental Representative relied on the following case laws :
1. Mid East Portfolio Management Ltd. v. Dy. CIT (supra).
2. Abdul Razak v. CIT (1935) 3 ITR 361 (Pat)
3. Gopinath Naik v. CIT (1936) 4 ITR 1 (All)
4. Shakuntala Devi v. CIT (1971) 82 ITR 416 (Cal)
5. Avasarala Automation Ltd. v. Jt. CIT (2004) 266 ITR 178 (Kar)
6. G. Gopi v. G. Thiyagarajan (2004) 266 ITR 378 (Mad).
2(a) We have considered the above case laws relied on by the learned counsel for the assesses and the learned Departmental Representative. Now, we will deal with the issues with regard to sale and lease back transactions, straight lease transactions and mortgage transaction.
3. The assessee has raised ground Nos. 1 and 2 and additional ground No. 1 in regard to sale and lease back transactions in the case of M/s Khoday India Ltd. and M/s Mohan Breweries & Distilleries Ltd. which read as under :
“1(a) The CIT(A) erred in confirming the disallowance of depreciation in respect of assets given on sale and lease back to M/s Khoday India Ltd.
(b) The appellant submits that the seller/lessee has confirmed the transaction as a lease transaction.
(c) In any event it is submitted that since a portion of the purchase price has been treated as a financial transaction and interest brought to tax, the corresponding lease rentals should be excluded from the total income.
2(a) The CIT(A) erred in confirming the disallowance of depreciation in respect of assets given on sale and lease back to Mohan Breweries & Distilleries Ltd.
(b) He should have found that the transaction was supported by invoice and valuation report from a chartered engineer.”
Additional ground No. 1 is as follows :
“1. The lower authorities erred in not affording the opportunity of cross-examination of the valuers, namely, Mr. P.S. Manohar, in connection with valuation report submitted in the case of Khoday SLB transaction and Mr. A.D. Anandaram, in the case of Mohan Breweries, as same has been specifically prayed for before the CIT(A) vide our letter dt. 15th Feb., 2000.”
4. The briefly stated facts are that the appellant-assessee is engaged in the business of leasing of assets and claiming depreciation on these leased out assets. The AO while framing the assessment under Section 143(3) of the IT Act, after making enquiries disallowed the claim of depreciation and the CIT(A) confirmed the disallowance in respect of these transactions.
5. First, we will deal with the issue with regard to sale and lease back transaction in the case of M/s Khoday India Ltd. The AO while framing the assessment found that the assessee has entered into a lease agreement with M/s Khoday India Ltd. for leasing of 4167 oak wood barrels which were purchased from M/s Khoday India Ltd. and were leased back to the same party. In this transaction the cost of each oak wood barrel was Rs. 4,800. During the assessment proceedings, the AO found that for asst. yrs. 1982-83 to 1988-89, the lessee purchased empty oak wood barrels at various rates and sold the same barrels during the period 1992-93 to 1994-95 at a higher price. The lessee purchased the oak wood barrels in 1988-89 @ 720 per barrel and these were put to use up to the period of 1994-95. The AO found that the value of each barrel could not in any case be more than the cost of acquisition and moreover, the lessee has claimed 100 per cent depreciation in its books of account. The AO could not identify the barrels purchased and leased out by the assessee by referring the invoices; he took the average cost price of each barrel at Rs. 559 and moreover, these barrels were used for more than 5 years and the AO reduced it to 50 per cent, and the value adopted by the AO for each barrel was at Rs. 279. Accordingly, he computed the claim of the assessee for depreciation.
6. Now, we will deal with the sale and lease back transaction in respect of M/s Mohan Breweries & Distilleries Ltd. It was found by the AO that the lessee acquired the assets as per the scheme of amalgamation as approved by BIFR vide order dt. 20th May, 1994, from erstwhile Vorion Chemicals & Distilleries Ltd. and these assets were installed 10 years back. The assessee claimed that the market value as on the date of sale was based on the value as determined by chartered engineer who was appointed in consultation with the assessee-company. The AO while framing the assessment, found no original invoices/bills except the invoices in regard to two numbers of diesel generators which were produced before him. The valuation was done by the chartered engineer after verifying the assets available with the owner, viz., the total life, depreciated physical working period, etc. and on the basis of details and records submitted by the owners. The AO further found that there was nothing mentioned about the anticipated life, purchase value of the machines, etc. But, the year of manufacturing was mentioned in the valuation report. Before the AO, nothing was produced which was produced before the valuer. Subsequently, the AO referred the matter to the Departmental valuer who after investigation of the assets, valued it at Rs. 1,60,11,290 against the cost of Rs. 5,50,05,000 in the lease agreement. The AO also found that the lessee has also claimed depreciation @ 25 per cent for many years. In these circumstances, he accepted the value as determined by the Departmental valuer for the purpose of claiming depreciation by the assessee, He gave a finding, that higher cost was mentioned in the agreement only to claim higher depreciation with reference to the enhanced cost. Aggrieved by the order of the AO on ‘these two transactions, the assessee preferred an appeal before the CIT(A). The CIT(A) vide its order dt. 17th Dec., 1998, remanded the matter back to the AO. The CIT(A) found from the observation of the AO the following facts which read as under:
(i) in most of the cases old plant and machinery and other fixed assets were purchased at an exorbitantly higher value than the actual cost of the asset,
(ii) the wdv of most of these assets in the books of account of the alleged lessee prior to the date of the sale was very low and information was not furnished by the lessee’s for obvious reasons,
(iii) whereas the funds were provided by the lessor to the lessee’s for purchase of the machinery, the assets covered by alleged transactions continued to remain in the possession and use of the lessee’s prior to and after the date of the alleged sales,
(iv) the lessee required the funds for its working capital requirement and not for the purchase of acquiring of any new assets.
In view of this, the CIT(A) has restored the matter to the AO for calling remand report with the following directions :
“I had restored the issue to the AO with the direction that he should find out the cumulative effect of all the circumstances and see whether transactions were genuine or not and whether the depreciation was at all admissible, and if the transactions were found to be genuine, it should be ascertained what was the actual cost of the assets in question. In that case, the AO was also required to make a reference to the Departmental valuer and enquire into the value of assets and examine the basis of determining the alleged lease rents in respect of these transactions, method of accounting the same for income-tax purpose and whether the system followed in the case of appellant was in accordance with the established practice of trade and commerce. I had also directed the AO to examine the valuers on the valuation certificates and also to make enquiries from the insurance companies regarding the basis on which the value of the old and used assets was allegedly accepted at a very high figure and find out what was the insured value of such old and used assets before the alleged purchases by the appellant.”
The CIT(A) found that the assessee vide its letter dt. 15th Feb., 2000, replied to the remand report of the Department which was dt. 10th Jan., 2000, wherein it was stated that the Departmental valuation reports have not been furnished to the assessee and moreover the method of valuation was challenged as the inspection of the assets could have been made only in 1999 by the Departmental valuer and arriving at their value on the date of acquisition in earlier years can never be a matter of guess, as one cannot assess the assets at the time of acquisition, and valuation will, therefore, suffer from infirmity, unless the valuer establishes that the purchase price of a new assets on the date of acquisition of the assets under sale and lease back is much less than the value adopted by the company’s valuer. Copies of the Department valuation reports by the Departmental valuer or the report of the investigation or the statements made to the IT Department by certain of the lessee’s during investigation have not been furnished to the assessee. The CIT(A) confirmed the disallowance of depreciation claimed by the assessee on higher value by giving the finding that the AO has rightly invoked the provisions of Expln. 3 to Section 43(1) to the Act and determined the value of each barrel in the case of M/s Khoday India Ltd. at Rs. 279 and accordingly, the disallowance of depreciation was confirmed. With regard to the other transaction in the case of M/s Mohan Breweries & Distilleries Ltd., the CIT(A) examined the two sets of valuation as made by the assessee as well as the Department and found that the purchase cost by the assessee has been heavily inflated and finally held that the action of the AO in restricting the depreciation allowance to the value as opined by the Departmental Valuation Officer has to be upheld, particularly as the assessee has not been able to justify the valuation given by the chartered engineer of the assessee-company. In view of this, he confirmed the disallowance of depreciation and held that these transactions are financial transactions representing money lent on interest. He further directed the AO to bring to tax the interest to be assessed on the amount charged by the assessee and exclude the component of principal in the lease rent received by the assessee on pro rata basis. Aggrieved, the assessee is in second appeal before the Tribunal on these issues.
7. Before us, the learned senior counsel, Shri Aravind Dattar, along with Shri V.S. Jayakumar, appeared for the assessee. They filed paper book I consisting of pp. 1 to 235 and paper book II consisting of pp. 1 to 29 and response to the Department’s written submissions. First of all, the learned counsel for the assessee argued that the directions given by the CIT(A) in his remand order dt. 17th Dec., 1998, have not been carried out by the AO. The learned counsel for the assessee has drawn our attention to the additional grounds raised that the AO has not afforded an opportunity of cross-examination of the valuer, Shri P.S. Manohar, in the case of Khoday India Ltd, and other valuer, Shri A.S. Anandaram, in the case of Mohan Breweries as the assessee has specifically prayed before the CIT(A) vide letter dt. 15th Feb., 2000. The learned counsel for the assessee has also drawn our attention to the remand order of the CIT(A), dt. 17th Dec., 1998, wherein he has directed the AO vide paras 9 and 10 at p. 9 which read as under :
“9. Therefore, considering the totality of facts and circumstances of the case and in view of foregoing discussion, I remand the matter back to the AO for examining the transactions of lease and buy back in view of my order for asst. yr. 1994-95 (supra). The AO is also required to give proper opportunity to the appellant as per provisions of law as also provide facilities to cross-examine the parties whose statements have been used by him in finalising the assessment as per impugned order. The AO is also directed to consider the various replies and written submissions filed by the appellant during the appellate proceedings.
10. The remand report should be submitted on or before 22nd Feb., 1999.”
The learned counsel for the assessee argued that for proper disposal of this appeal, the additional ground as regards to these issues, should be first adjudicated upon. The learned counsel for the assessee further submitted that the AO has not given the copies of the valuation reports and the materials collected and relied upon by him for passing the assessment order against the assessee. The assessee has requested the AO to furnish the copies of the valuation reports time and again and he only provided the valuation reports on 27th May, 2004, which were made part of paper book by the assessee in assessee’s paper book I at p. 39. The learned counsel for the assessee also argued that other materials relied on by the AO and the CIT(A) in his order dt. 28th June, 2000, was furnished only at the stage of the Tribunal by the CIT, Departmental Representative in Departmental paper books 1 and II and the Department has made out totally a new case based on these new materials in respect of these transactions. The learned counsel for the assessee further narrated the fact that the aspect relating to the date of lease, existence of assets on the date of lease and transaction of assets, etc., in respect of transactions of M/s Khoday India Ltd. and M/s Mohan Breweries & Distilleries Ltd. were never raised by the Department at the earlier stage and it was undisputed or unquestioned by the lower authorities at any time that is the reason why lease deeds relating to these transactions were not made part of the assessee’s paper book and no adverse inference can be drawn against the assessee. The learned counsel for the assessee further argued that the Department can confine itself only to the difference in valuation of the assets in question and it cannot travel beyond the scope of the said objection and in this matter, the Department has made out totally a new case and the argument, if accepted, it would amount to enhancement by the Tribunal which is beyond the scope and powers of the Tribunal. He further stated that the learned Departmental Representative very clearly considered that he is only bringing to the attention of the Bench that the AO had not gone on that footing. The learned counsel for the assessee further argued that the Department is relying only on the assessment orders in the case of M/s Five Brothers Trading & Investment Co. (P) Ltd., Kanakapura Trading & Investment (P) Ltd. and in those cases, there is no Departmental valuation as per the counsel of the assessee, He further argued that in the case of M/s Mohan Breweries & Distilleries Ltd., the asset was purchased by the suppliers under a scheme of amalgamation. He further argued that the Department has accepted that the asset is in existence as they have not doubted the existence of asset but the objection was only that the original invoice was not produced by the assessee at the time of assessment. The asset was proved by the assessee by the certificate issued by the valuer and the same should have been accepted as such, and in the alternative, the Department could have summoned the valuer and examined him and offered cross-examination to the assessee. The learned counsel for the assessee further argued that the valuation was prepared by a qualified valuer and his valuation should be accepted as that was substantiated on reasoning. M/s Khoday India Ltd. has replied in response to the letter written by the Asstt. CIT, Bangalore, that the Department has seized the books of account in pursuance of a search on that party and they are not in a position to furnish the details. The learned counsel for the assessee has further drawn our attention to the assessee’s paper book I and stated that in the cases of M/s Khoday India Ltd. and M/s Mohan Breweries & Distilleries Ltd., the invoice, valuation certificate, assessment and appellate orders in the cases of M/s Five Brothers Trading & Investment Co. (P) Ltd. and Kanakapura Trading & Investment (P) Ltd., Departmental valuation certificate, lessee’s valuation certificates have been submitted at pp. 1 to 43. He also relied on the decision of the Hon’ble Supreme Court in the case of Rukmanand Baisolia v. State of Bihar AIR 1971 SC 746.
8. On the other hand, the learned representative, Shri Sushil Kumar, argued for the Department in respect of M/s Khoday India Ltd. that the lessee has purchased oak wood barrels during the period from the asst. yrs. 1984-85 to 1989-90 which were sold to various lessors including the assessee during the asst. yrs. 1993-94 to 1995-96. He narrated that the cost of purchase in the hands of lessee varied from Rs. 380 to 720. The AO took the average value at Rs. 559 in the absence of any specific detailed information or identification of barrels vis-a-vis invoices as the barrels have been admittedly used for more than 5 years and the lessee has availed the depreciation on these assets. Accordingly, the value was determined at Rs. 500 and also the AO has given set off of 50 per cent on account of wear and tear and usage, and accordingly, determined the market value by invoking the Expln. 3 to Section 43(1) at Rs. 279 per oak wood barrel. He further argued that the value determined by the AO is on scientific reasoning and this is not on the basis of conjectures or surmises but on the actual cost of the assets, the period of use, and fully depreciated asset was sold to the assessee by the lessee. He has drawn our attention to the valuation report submitted from one Shri P.S. Manohar, chartered engineer of Bangalore, which found place at p. 2 of the assessee’s paper book I which is being reproduced as it is :
“P.S. Manohar
Chartered Engineer
Bangalore.
Valuation Certificate
This is to certify that the value of empty oak wood barrels which is under consideration of sale per proforma invoice dt. 7th Oct., 1994, of Khoday India Ltd. to M/s First Leasing Co. of India Ltd., Madras, is Rs. 4,800 each.
Sd/- P.S. Manohar, BE, MIE, C. Engg.
Certified Chartered Engineer
Place :
Bangalore
Dt. 7th Oct., 1994″
He further argued that the assessee has not furnished the original invoices evidencing the cost of purchase in the lands of the lessee. Even, the lessee did not furnish the invoices called upon by the AO vide letter dt. 14th March, 1998, which is annexed as Annexs. 4 and 5 to the Departmental written submissions dt. 23rd June, 2004. Actually and factually, he further argued that the cost of purchase of barrels in the hands of the lessee ranged from Rs. 380 to 720 during the relevant period mentioned above. He further argued that the chartered engineer is not an authorised person or registered with the IT Department as provided under the IT Act to give valuation report. The said valuer has merely relied on the proforma invoice of the lessee dt. 7th Oct., 1994, and not on any credible information as it can be seen from the valuation report reproduced above, Even, he pointed out the deficiency that the proforma invoice is of a date after the invoice of sale dt. 26th Sept., 1994, issued by the lessee to the assessee. Even, the assessee could not explain as to how the proforma invoice can be raised by the lessee to the assessee after the invoice of sale. In view of this, he further argued that the valuation report is an afterthought just to claim the bogus depreciation. The valuation certificate does not even show the postal or complete address of the engineer. Moreover, the assessee by way of the additional ground has sought to cross-examine its own valuer. He further argued that it is very difficult for the AO to verify the existence of valuer, genuineness of his certificate and asking him to appear for cross-examination. In view of this, it is clearly established that no such person by the name of valuer exists, the valuation certificate is bogus and there is no ground for the assessee to attach any credibility of the so-called valuation report. He further argued that any addition to the above, even the assessee has not furnished a copy of the lease agreement in its paper books. However, the Department has provided the same in the Departmental paper book II at p. 96, wherein the lease value has been shown at Rs. 2 crores. He further argued that doubting the agreement by narrating the fact that the agreement was entered into on 6th Oct., 1993, in the asst. yr. 1994-95 and the assessment year under appeal is 1995-96, However, the invoice is of dt. 7th Oct., 1994, and after such agreement entered into between the lessee and the assessee, even the installation of the equipment shown as on 6th Oct., 1994, which is also prior to the date of invoice. In view of this, he doubted the genuineness of the lease agreement and the claim of depreciation. He further argued that as to how the assessee chose to buy a fully depreciated assets at such inflated price, as the intention is very clear that the assessee only wanted to fund the lessee and opted for an old asset so that it can claim bogus depreciation on inflated prices to avoid the incidence of income-tax in its hands and then transaction is in the guise of a lease transaction which is nothing but purely a financial transaction. The learned Departmental Representative further objected to the admission of additional grounds as Shri P.S. Manohar, the valuer of the assessee, is not the Departmental valuer in the case of M/s Khoday India Ltd. and Shri A.S. Anandram in the case of M/s Mohan Breweries & Distilleries Ltd. is the Departmental valuer. He argued that there are several other compelling and surrounding circumstances in respect of these transactions which go to prove that they are not genuine transactions. Therefore, there is no reason to allow cross-examination of valuers which will be of no consequence in deciding the issue in hand. The learned Departmental Representative further argued in respect of M/s Mohan Breweries & Distilleries Ltd. that the assessee has not furnished the copies of lease agreements in its paper books and there are two lease agreements which are finding place in the paper book at pp. 71 and 83 of the Departmental paper book II and the lease value of the asset is at Rs. 3 crores each. He argued that it may be seen from the Annex. B to the agreement at p. 82 of the Departmental paper book II that the schedule description of equipment and the location of the equipment is blank and not filled up. In view of this, he argued that there was no equipment which was leased by the assessee though it has furnished invoices at pp. 29 to 31 of the assessee’s paper book I. These invoices are dt. 20th Sept., 1994, i.e., 6 1/2 month after the date of lease of the equipment at pp. 71 and 83. In regard to the second lease agreement, the invoice dt. 26th Sept., 1994, is reflected at p. 35 of the assessee’s paper book I and that also after the date of leasing the equipment. He further argued that the equipments leased are machineries of the lessee’s distilleries factory including the fermentation tank, storage tanks, 250 KVA generator set and 100 tonne capacity airconditioner plant. Further, he argued that these are permanently fastened to the distillery equipments which are attached to the earth. To this transaction, the provisions of Sale of Goods Act and the Registration Act apply and the sale made to the assessee by the lessee under the sale and lease back transaction is not a valid sale under the above-mentioned enactments. The learned Departmental Representative further argued that the value adopted by the AO based on the value determined by the Departmental Valuation Officer which is the lower figure than the cost of equipment adopted by the assessee as the assessee has contested the valuation made by the Departmental valuer and has relied on its valuation done through a chartered engineer whose valuation report is placed at pp. 33 and 34 of the assessee’s paper book I. The learned Departmental Representative argued that the assessee’s chartered engineer is not a valuation officer and registered valuer for the purpose of IT Department and further, the valuation of the chartered engineer is not based on any evidence or details whereas the Departmental valuation is based on the reasons and the report is a detailed one. The learned Departmental Representative further argued that in the case of sale and lease back transaction, the assessee has purchased old equipment owned by the lessee and leased out by the lessee and all the equipments are depreciated to the maximum extent, and the assessee has not given any evidence as regards to the cost of equipment purchased by the assessee originally. The AO time and again asked for original invoices from the assessee relating to the purchase of assets but those have not produced by the assessee. He further argued that the AO has rightly asked for the original invoice as he has doubted the value of the assets which has been fixed at very higher rate without any basis. Since the AO himself being not competent to value the equipments, referred the matter to the Departmental Valuation Officer who is an expert, qualified and competent to value the assets as per the authority under the IT Act and accordingly, he determined the fair market value of the assets. In view of this, he finally concluded that value adopted by the AO for allowing depreciation on both the transactions is the correct value and accordingly depreciation has rightly been disallowed.
9. We have heard the rival submissions. We have perused the assessment order as well as the order of the CIT(A) and also perused the assessee’s paper books I, II and written submissions including the case law cited by the assessee’s counsel. We have also gone through the Departmental paper books I, II, III and written submissions. As regards to the disallowance of depreciation in respect of assets given on sale and lease back to M/s Khoday India Ltd., we have gone through the copy of invoice dt. 26th Sept., 1994, filed by the assessee and perused the valuation certificate issued by Sri P.S. Manohar which is dt. 7th Oct., 1994. The AO has disallowed the depreciation by invoking the provisions of Expln. 3 to Section 43(1) of the Act. The assessee has shown the price as per invoice at Rs. 4,800 for each oak wood barrel and AO has determined the cost of each oak wood barrel at Rs. 279 by considering the reasons that the lessee has purchased the oak wood barrels during the years 1982-83 to 1988-89 and the same have been sold by the lessee to various lessors from the asst. yrs. 1993-94 to 1995-96 ranging the price from Rs. 380 to Rs. 720. The AO finally took the average value at Rs. 559 as no information was submitted before him and finally, he determined the fair market value at Rs. 279 per barrel by invoking the provisions of Expln. 3 to Section 43(1) of the Act as these oak wood barrels were more than five years old and the lessee has fully depreciated the value. The existence of asset is not doubted neither by the AO nor by the CIT(A). The assessee has not filed the lease agreement in his paper book but it is not denied by the AO as well as by the CIT(A) that there is no lease agreement, rather the learned Departmental Representative has filed the lease agreement in Departmental paper book. These facts are undisputed by both the parties. The assessee by way of additional ground, contended that the assessee was not allowed to cross-examine Shri P.S. Manohar. Here, we do not agree with the assessee that no cross-examination is required, as Sri P.S. Manohar is the valuer who is witnessed the assessee. Since the Department has not relied on the valuation report of Shri P.S. Manohar, as to why the Department should provide the cross-examination of such a person to the assessee. In view of this, there is no substance in the contention of the assessee as regards to the cross-examination of Sri P.S. Manohar, valuer of the assessee. 10.1 Now, the point at issue is regarding the valuation of assets. We have gone through the valuation certificate of Shri P.S. Manohar and seen that this is repetition of sale proforma invoice dt. 7th Oct., 1994, and the copy of valuation certificate has already been reproduced above in para 7, In view of this, the assessee’s valuation has no basis except the sale proforma invoice. The AO as well as the CIT(A) have treated the transaction as a collusive transaction. The AO suspected the bona fide of the lease transaction and held this to be a device adopted by the assessee to claim depreciation in their guise and accordingly held to be financial and lease transaction. We have seen that the AO while valuing the lease asset has invoked the provisions of Section 43(1), Expln. 3 of the Act and accordingly determined the value at Rs. 279 per barrel. Now, we go through the provisions of Section 43(1), Expln. 3 of the Act which reads as under :
“43………
(1) ‘actual cost’ means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority :
Explanation 3.–Where, before the date of acquisition by the assesses, the assets were at any time used by any other person for the purposes of his business or profession and the AO 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 AO may, with the previous approval of the Jt. CIT, determine having regard to all the circumstances of the case.”
In view of this provision, it is clear that the Expln. 3 to Section 43(1) of the Act would be attracted in the case 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 and the AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was for the reduction of the liability to income-tax. In view of this, if the AO in such cases invokes the Expln. 3 to Section 43(1) of the Act and fixes the cost, then he has not acted unreasonably or arbitrarily. The mere production of documents which show 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 AO is of the opinion that in the deal the assessee has taken resort to a subterfuge or device in order to avoid tax which is liable to pay or otherwise has entered into the transaction which is illusory or colourable. In such cases, the AO can go behind the contract and ascertain the actual cost for the purposes of correct ascertainment of income-tax liability of the assessee. We do not agree with the argument of the assessee that the valuation certificate cannot be rejected unless clinching evidence is produced to the contrary. Here, the valuation certificate of the assessee is without any basis, i.e., just on sale invoice of the assets without any reference to size, dimension, age of barrel, type of wood, etc. In this regard, it is submitted that this claim should have been made by the assessee at the assessment stage but no claim whatsoever was made by the assessee. The AO while determining the value given the reasons for invoking the Expln. 3 to Section 43(1) of the Act which were that the lessee has purchased the oak wood barrel during the period from 1984-85 to 1988-90 which was sold to various lessors including the assessee. During the assessment years from 1993-94 to 1995-96, the cost of purchase ranged from Rs. 380 to 720 by the assessee during the abovementioned period. In view of this, the AO has taken an estimated value at Rs. 559 in the absence of any information submitted by the assessee regarding the quality, size, dimension, age, type of wood and machinery of original. Since the assets were already used by the lessee and the value was depreciated, the AO valued the assets by giving set off of 50 per cent and accordingly determined the value by invoking the provisions of Section 43(1), Expln. 3 of the Act at Rs. 279 per each oak wood barrel. In view of this, we uphold the AO in valuing the assets and accordingly disallow the depreciation in the respect of the assets given on sale and lease back in the case of M/s Khoday India Ltd. which was confirmed by the CIT(A). In view of this, this issue is decided against the assessee. The assessee’s counsel has not pressed ground No. 1(c) as the lease rental has already been allowed by the AO. Therefore, this ground is dismissed as not pressed.
11. As regards to disallowance of depreciation in respect of assets given on sale and lease back to M/s Mohan Breweries & Distilleries Ltd., the AO while framing the assessment found that the lessee has acquired these assets as per the scheme of amalgamation approved by the BIFR vide order dt. 20th May, 1994, from M/s Vorion Chemicals & Distilleries Ltd. and these assets were put to use for more than 10 years by the lessee. Subsequently, these assets were sold to the assessee-company and the assessee-company leased out the same to M/s Mohan Breweries & Distilleries Ltd. The assessee valued the property for sale as on the date of sale on the basis of valuation done by the chartered engineer. Before the AO, no invoices were produced by the assessee except the two invoices of diesel generators. As per the valuation report the machineries were valued based on verification of details of assets as available with the assessee, like the total life, depreciated physical working period, etc. and on the basis of details and records furnished by the assessee. The AO gave a finding that nothing was mentioned in the valuation report as regards to the anticipated life, purchase value of machines, etc. However, in the valuation report, the date of manufacturing was mentioned as on 20th May, 1993. Before the AO, the assessee has produced nothing which was produced before the valuer and it is not clear that before the valuer which documents were produced. In these circumstances, the AO referred the matter to the Departmental valuer for valuing the assets. The Departmental valuer after inspection of the assets valued the assets at Rs. 1,60,11,290 as against the value shown in the lease agreement at Rs. 5,50,05,000. The AO further gave the reasoning that the lessee would have claimed depreciation @ 25 per cent for the last many years and accordingly, he adopted the actual cost of purchase for restricting the claim of depreciation of the assessee at Rs. 1,60,11,290.
11.1 We have seen that the Department has not disputed the existence of the assets and the existence of lease agreement. The only dispute is regarding the value of the leased assets. The AO has adopted the lower rate as valued by the Departmental valuer on the ground that nothing was produced either before the AO or before the CIT(A) to show that the value of the assets was Rs. 5,50,05,000. The assessee has submitted the invoices of machineries, lessee’s valuation certificate and Departmental valuation certificate in its paper book I at pp. 29 to 43. The assessee’s valuer has valued the assets vide reports dt. 20th May, 1993, and 15th Sept., 1994. The valuation done by the assessee’s valuer is being reproduced from its paper book which reads as under:
“The valuation of the machinery is made on the basis of the details and records furnished by the owners and brief comments on the machineries inspected are as under :
Qty. Each Present
(in Nos.) @ Rs. Market Value
1. Storage Tank
Made up of Mild Steel Fabricated by Century
Engineering, Madras, year of Mfg. 1982
Capacity :
80,000 litres 2 11,00,000 22,00,000
62,000 litres 2 9,00,000 18,00,000
52,000 litres 2 7,00,000 14,00,000
25,000 litres 3 3,50,000 10,50,000
2. Receiver Tanks
Made up of Mild Steel Fabricated by Century
Engineering, Madras, year of Mfg. 1982
Capacity
45,000 litres 9 6,00,000 54,00,000
3,500 litres 3 50,000 1,50,000
3. Fermentation Tank
Made up of Mild Steel Fabricated by Virgo
Engineers, year of Mfg. 1983
Capacity
2,00,000 litres 8 10,00,000 80,00,000
4. Molasses Storage Tank
Fabricated by G. Arunachalam, Madras, year
of Mfg. 1983
Capacity : 4,000 tons
2 21,00,000 42,00,000
5. Diesel Generator
Year Cap.
Parry Make 1988 250 KVA 1 7,00,000
Greeves 14,50,000
Cotton 1922 250 KVA 7,50,000
6. Air-conditioning Plant 1
Made by M/s Blue Star India Ltd., Madras
Capacity : 100 tons -- 62,00,000
Total 8,50,000
Taking into consideration the total anticipated life, utilised life, purchase value of the machines, the present market value of the plant and machinery as detailed above, in our opinion, is about Rs. 3,18,50,000.
The above machines are in sound working condition.
The specifications of the machineries were verified from the details available with the owners, their total lift, depreciated, physical and working period were also studied.
The valuation of the machinery is made on the basis of the details and records furnished by the owners and brief comments on the machineries inspected are as under :
Qty. Each @ Present
(in Nos.) Rs. market value
Rs.
1. Tapoica Spirit Column Plant M.S. 1 set -- 3,00,04,000.00
1.5 mtrs. x. 30' ht. Fully insulated
consisting of hammer mill, cyclone,
slurry tank, pump, hold-up tanks,
conveyors, elevators and heat
exchangers.
Taking into consideration of the total anticipated lift, utilised life, purchase value of the machines, the present market value of the plant and machinery as detailed above, in our opinion, is about Rs. 3,00,04,000.00
The above machines are in sound working condition."
11.2 Taking example from the above, we have seen that the asset of Tapoica Spirit Column Plant M.S. 1.5 mtrs. x 30′ ht. fully insulated consisting of hammer mill, cyclone, slurry tank, pump, hold-up tanks, conveyors, elevators and heat exchangers has been valued at Rs. 3,00,04,000 and for this no basis is given by the chartered engineer. It is to be noted that the value is to be determined by taking into consideration total anticipated life, utilised life, purchase value of the machines, the present market value of the plant and machinery, but the chartered engineer has not given any basis as to how he has valued the assets, what was the purchase value and present market value of the plant and machinery, etc. Even before us, it was not challenged as to how the value determined by the Departmental valuer was wrong and no bills/invoices were produced before the AO and it was valued on the basis of physical inspection of the assets. It was stated that “the company from where it was purchased was M/s Vorion Chemicals & Distilleries Ltd, which was merged with M/s Mohan Breweries & Distilleries Ltd. w.e.f. 1st April, 1993, by amalgamation scheme as approved by the BIFR vide order dt. 20th May, 1994. As far as the assessee’s additional ground regarding cross-examination of Shri A.S. Anandaram, the Departmental valuer, and non-production of Departmental valuer’s report are concerned, we feel that we have given enough opportunity to controvert his valuation report. In view of these facts, it is to be seen that which valuation is correct. Considering the vast variation, it is seen that both the valuation reports are made on presumptions and particularly in the absence of original purchase vouchers of plant and machinery, we come to the conclusion that the assessee has inflated the value of the machineries to claim depreciation. The assessee is unable to prove the value certified by valuer by any other cogent evidence except the lease agreement and valuation certificate of private valuer which are self-serving documents. In view of this, we uphold the order of the CIT(A) who has confirmed the AO’s action. Accordingly, the assessee fails on this issue.
11.3 Coming to the second issue in respect of straight lease transactions, the assessee has entered into straight lease transactions with six parties mentioned above in para 2. The first straight lease transaction entered into by the assessee and the AO disallowed the depreciation was in respect of new plant and machinery leased to M/s Kedia Distilleries Ltd. (hereinafter called as the KDL). The machineries were allegedly purchased from M/s T.S. Engineering Works and Sigma Industrial Works, both based at Bhilai. The IT Department conducted a search at the premises of Kedia group of companies. The AO found from the search material that the statements of company’s officials were recorded who have categorically stated that these suppliers, viz., M/s T.S. Engineering Works and M/s Sigma Industrial Works were sham companies and bogus bills were obtained to get funds from various financial institutions including the leasing companies, and these funds were again rotated back allegedly to M/s KDL which has utilised the funds for various purposes. During the course of assessment proceedings, the AO confronted the assessee with, the statements of various employees. However, the assessee asked for cross-examination of various employees who have stated that these were sham companies vide letter dt. 9th March, 1998. When the AO asked for confirmation of lease transaction, the assessee’s representative vide letter dt. 25th March, 1998, furnished a photocopy of confirmation letter stating that there were lease transactions between the assessee and KDL. The AO by going through the facts disallowed the claim of the assessee in respect of depreciation on leased transactions by holding that these transactions are financial transactions. The CIT(A) confirmed the action of the AO. Aggrieved, the assessee is in second appeal on this issue before us.
12. Before us, the learned counsel for the assessee argued that the statements were recorded from the employees but no cross-examination was permitted despite of directions of the CIT(A) and the request for cross-examination was made even before the AO which can be verified from the assessment order. He further argued that the entire theory that machineries have not been supplied is absurd. For this, he has taken us through the suit filed before the Hon’ble Madras High Court in CS No. 692 of 2003 and where the Hon’ble High Court vide order dt. 30th March, 2004, in Application No. 457 of 2003, an advocate-commissioner was appointed to proceed to Bhilai to seize the machineries with police protection. The advocate-commissioner has initially taken inventory of the machinery at Bhilai which is set out in the schedule and the Hon’ble High Court has directed the commissioner to seize the machinery. The inventory shows that the assessee has sold the machinery and the same is in existence as the machinery has been subjected to inventory and seizure orders have now been issued and the plea of the Department that the assets are not in existence, cannot be believed. Further, the learned counsel for the assessee argued that the statement of Shri K.N. Ramamurthy is not to be viewed in the matter suggested by the Department since the legal proceedings filed by the assessee against the KDL will prove the case of the assessee that KDL was in possession of the assets belonging to the assessee-company. He further argued that the statement of Shri K.N. Ramamurthy is contradictory and he is signed the statement himself along with other bankers documents. He further argued that the circumstances under which the statements taken from Shri K.N, Ramamurthy were not amply clear as no opportunity of cross-examination was given by the Department and whether the statements were given by Shri K.N. Ramamurthy under coercion was also not known. This can be cleared when the opportunity to cross-examine him is allowed. In view of this, the learned counsel for the assessee urged the Bench to allow the depreciation as these transactions are genuine lease transactions.
13. On the other hand, the learned Departmental Representative argued that as far as the contention of the assessee regarding the denial of cross-examination of the KDL employees as well as Shri K.N. Ramamurthy is concerned, the same is not correct as this is evident from the copy of the letter dt. 4th Feb., 1993, which the AO has addressed to the assessee following the remand report dt. 17th Dec., 1998, of the CIT(A). This forms part of the Departmental paper book I at p. 27. He further argued that the assessee did not respond to it and he did not raise the issue of denial of cross-examination even in its letter dt. 15th Feb., 2000, which was addressed to the CIT(A) giving his comments on the remand report of the AO which is dt. 10th Jan., 2000. Here, the assessee has ignored the opportunity of cross-examination provided to him. On merits, the learned Departmental Representative argued that there are two lease agreements and he has specifically drawn our attention to one agreement which is dt. 1st March, 1995, valuing Rs. 3,00,00,000 and invoices of supply of machines which is dt. 25th March, 1995. In view of this, he argued that it shows that no machinery was in existence when the lease agreement was entered into on 1st March, 1995. Even, the assessee has not furnished any proof as regards to movement of machineries. The learned Departmental Representative argued that (if) the payments were made on 31st March, 1995, then how the machines can be purchased and delivered before 31st March, 1995, and how the assets can be put to use in the absence of lease agreement entered into on 1st March, 1995. As far as the other lease agreement dt. 8th Sept., 1994, for the lease value of Rs. 1,66,32,000 is concerned, the invoice is dt. 5th Sept., 1994, prior to the lease agreement. However, the assessee has not furnished any proof of delivery of machines either to itself or to the lessee. Even, in the invoices for both the transactions, there is no address of any factory where the equipments were manufactured and there was no registration with the Central Excise Department of those parties and no such registration number is evidenced from the invoices except for the Madhya Pradesh Sales-tax and Central Sales-tax registrations. Even, the assessee could not prove the existence of equipment which is required to be identified with insignia and nameplates and the assessee was not prevented to produce a photograph of the equipment evidencing that they do exist and belonged to the assessee. The learned Departmental Representative objected the argument of the assessee that Sri K.N. Ramamurthy is not competent person to give statement which can be relied upon. The learned Departmental Representative has drawn our attention to the lease agreement which has been signed by the authorised signatory who is Sri K.N. Ramamurthy and he is very much competent to give the statement for that transaction. In view of this, the learned Departmental Representative argued that the AO has rightly disallowed the depreciation as this is merely a loan transaction and not a lease transaction as the assets did not exist at all.
14. We have seen that the assessee entered into lease transactions with M/s T.S. Engineering Works and Sigma Industrial Works and the machineries were supplied by M/s T.S. Engineering Works and Sigma Industrial Works at Bhilai. During the search in the premises of KDL, the high officials of Kedia group who entered into lease transactions categorically stated that M/s T.S. Engineering Works and Sigma Industrial Works are only sham companies for utilisation of bogus bills for obtaining funds from various financial institutions including the leasing companies. The assessee was asked during the course of assessment proceedings to support its claim as regards to depreciation in view of the statements given by employees of high officials of KDL. The assessee asked for the statement which was supplied by the employees and further asked for cross-examination of the various persons who has given the statement as regards to said companies of KDL. The IT Department, during the course of spot verification at different locations of the suppliers and lessee’s recorded the statements of the employees who have admitted that T.S. Engineering Works and Sigma Industrial Works are only affront companies. During the hearing, the assessee argued that no opportunity to cross-examine the various officials of KDL group was denied. The learned Departmental Representative has specifically drawn our attention to the letter dt. 4th Feb., 1999, which is part of DPB I at p. 27, addressed to the assessee, for giving opportunity to cross-examine but the assessee has not availed this opportunity. The AO has specifically required the assessee to let him know the persons to whom he wanted to cross-examine but it chose not to avail this opportunity. In view of these facts, we do not say that the AO has denied the opportunity to cross-examine various persons, even otherwise, all the officials of KDL are within the approach of the assessee. But, the assessee has not made any efforts on this account. In view of these facts, we feel that the Departmental has not denied the opportunity to cross-examine various persons of KDL to the assessee. The next argument of the assessee is in respect of the Hon’ble Madras High Court’s order appointing advocate-commissioner for verification of assets and the advocate-commissioner in his report has submitted the details of assets in its schedule of equipment annexed to Application No. 457 of 2003 in CS No. 692 of 2003. After going through the Hon’ble High Court’s order which was relied on by the assessee’s counsel, it is seen that the Hon’ble High Court has passed an order for seizure of assets as per schedule of equipment and in the event of resistance, the advocate-commissioner can execute this work by taking help from the police station. No doubt, the Hon’ble High Court has authorised advocate-commissioner but what has happened after that is not known, The result of that is not produced before the Tribunal as to whether the assets were actually seized and taken over by the advocate-commissioner. Further, there is no proof whether the Hon’ble High Court’s order is on lease agreement entered into between the lessee and the assessee as no copy of suit has been furnished to verify the claim of the assessee; whether it was shown as a lessor or financier and whether the client was shown as a lessee or borrower and further whether the machinery is inventorised to be claimed as leased equipment or any equipment taken as security on mortgage. In view of these facts the assessee is unable to prove whether the assets have really been seized by the advocate-commissioner and what happened after that. Even, there are deficiencies in the lease agreement as regards to the date of lease agreement and invoices, the suppliers of machineries, etc. The assessee also admitted that for these machineries, payments were made only on 31st March, 1995, and in view of this, no delivery could have taken place before 31st March, 1995, and how the asset was put to use in the absence of lease before 31st March, 1995. The lease agreement was dt. 1st March, 1995, even the invoices of suppliers in both the lease transactions do not show any address of the factory where these equipments were manufactured and if these equipments were manufactured, as to whether these equipments were excisable items and there is no excise registration nuimber of these suppliers which can be verified from invoices. When the high official, Sri K.N. Ramamurthy, who is part of this lease transaction has denied and only stated that these two companies are sham companies and the transaction is a loan transaction, the contention of the assessee that Sri K.N. Ramamurthy is not a competent person on behalf of the company, is wrong as the lessee employed Sri K.N. Ramamurthy, who acted on behalf of the company bankers documents as well as the lease agreement. In view of these facts it can easily be held that the these transactions are nothing but only financial transactions and to claim the depreciation to reduce the incidence of tax. In view of this, we hold that these are pure financial transactions and accordingly, confirm the order of the CIT(A) who has confirmed the action of the AO in disallowing the depreciation. Accordingly, this issue is decided against the assessee.
15, The next issue in the assessee’s appeal is against the disallowance of the claim of depreciation in respect of boilers leased out to the Mahalakshmi Sugar Mills Company Ltd. (hereinafter referred to as M/s MSMCL) which was raised by way of ground No. 4, reads as under:
“4(a). The CIT(A) erred in confirming the disallowance of the claim for depreciation in respect of boilers leased out to the Mahalakshmi Sugar Mills Company Ltd.
(b) The appellant submits that the CIT(A) was not justified in not considering the certificate filed by the lessee of the machinery.”
The AO while framing the assessment, found the fact that the assessee has claimed the depreciation on the machineries stated to be leased to M/s MSMCL. The assessee in support of its claim filed the copies of invoices/leased agreement. The AO after going through the invoices, found that the machineries were purchased from Rachana (P) Ltd. and the address given by the assessee was ultimately found to be wrong. Actually, Rachana (P) Ltd. was started by one of the employees of M/s MSMCL. These plant and machineries were purchased by Rachana (P) Ltd. from M/s MSMCL originally and the original purchase was made by M/s MSMCL. In this way, Rachana (P) Ltd. after purchasing the assets sold it to the assessee who has leased it out to M/s MSMCL. The AO further found that the machineries were never moved out and they were remained with the lessee, M/s MSMCL. The AO further held that this elaborate arrangement of transaction in purchase and sale was given colour of authenticity to the transaction of the lease to claim the depreciation. The AO further found the fact that after receipt of money from Rachana (P) Ltd., the assessee has passed on the money to the subsidiary of M/s MSMCL who in turn passed the money to M/s MSMCL. The assessee has done this only as a finance transaction as the lessee was in need of funds and the intention is not to buy any machinery. The AO further found that the assessee could not produce any evidence to prove that this is a sale and lease transaction and in this way, in reality, there does not exist any plant and machinery. Accordingly, the AO disallowed the depreciation. The CIT(A) confirmed the action of the AO and he found that the factory of Rachana (P) Ltd. is at Lucknow and not at Saharanpur as submitted by the assessee, and that the equipment was purchased and transferred from Saharanpur to Iqbalpur. In view of this, he has given a finding that the evidence given by the assessee is of no use. He confirmed the finding of the AO that plant and machinery has not been proved to be in existence. Hence, the transaction is liable to be treated as financial one. Aggrieved, the assessee is in second appeal, before us.
16. Before us, the learned counsel for the assessee argued that only objection of the AO was that Rachana (P) Ltd. was subsidiary of M/s MSMCL and the address of Rachana (P) Ltd. is not the correct one, But this is wrong. He has drawn our attention to the APB I at pp. 61 to 101. The learned counsel for the assessee argued that the address of Rachana (P) Ltd. is at Lucknow as well as Delhi and to which address the letter was sent by the AO, was not informed to the assessee. The learned counsel for the assessee has drawn our attention to the APB I at pp. 61 to 101 where the documents regarding the transfer of assets and payments made and installation certificate of the asset are filed. The documents regarding the payment receipt, installation certificate and the confirmation letter by the lessee were filed at pp. 99, 100 and 101, respectively. In view of this, he argued that there is no doubt about the existence of assets and address of Rachana (P) Ltd. He further argued that no doubt, Rachana (P) Ltd. is started by one of the employees of M/s MSMCL but this does not give rise to any finance transaction. This is purely on suspicion, conjecture and surmises, and held that there cannot be any assets or this is collusive transaction. The AO has disallowed the depreciation just on the basis of surmises and not on the definite finding. Accordingly, the depreciation should have been allowed to the assessee.
17. On the other hand, the learned Departmental Representative argued that by going through the paper book of the assessee, Vols. I to III, it can be noticed that the assessee has not furnished the copy of lease agreement. However, there are two lease agreements between the assessee and the lessee. The first lease agreement is dt. 6th Sept., 1994, which is valuing Rs. 75 lakhs and this is placed in DPB II at p. 57. The other lease agreement is dt. 13th Sept., 1994, which is placed in DPB II at p. 52 where the value has enhanced from 75 lakhs to 1.10 crores of the leased equipment and this is captioned as supplementary lease agreement in continuation to earlier lease agreement dt. 6th Sept., 1994, The learned Departmental Representative further argued that Annex. B to the first lease agreement, shown the description and location of the equipment leased, i.e., skoda make high pressure baggasse fired boiler is located at the lessee’s factory at Iqbalpur as on 6th Sept., 1994, and the invoice of purchase shows that this was purchased on 8th Oct., 1994, from Rachana (P) Ltd. and accordingly, the boiler was purchased by the assessee only on 8th Oct., 1994, and it was shown to be leased vide lease agreement dt. 6th Sept., 1994. In view of this, he argued that if the asset is available that can be leased and not anticipated asset, particularly when the assessee was not in possession or was not the owner of the assets, how he can lease the assets to the lessee. As per the supplementary agreement, the learned Departmental Representative argued that enhancement of value is a big question that what was the basis for enhancement. Once the equipment has been purchased and leased to the lessee it has to be purchased at a particular price and it is not possible to increase its value in the leased agreement at one’s choice. In view of this, he argued that the intention of the assessee is very clear that the assessee (who) wants to finance as the lessee was in need of funds and accordingly claim of depreciation was made to reduce the tax incidence. The learned Departmental Representative also referred to the definition of ‘Goods’ as per the Sale of Goods Act and also placed reliance on the Registration Act. In view of the above, he argued that the so-called leased transaction between the assessee and the lessee is only a loan transaction and no depreciation is admissible in loan transaction of an asset which was not owned by the assessee. Accordingly, he urged the Bench to confirm the order of the CIT(A).
18. We have heard the rival submissions and gone through the case records including the paper books filed by both the sides. We have seen from the assessee’s paper books I to III that there is no lease agreement furnished by the assessee as regards to the leased assets. However, the Department has filed the lease agreements entered into between the assessee and the lessee. The first agreement is dt. 6th Sept., 1994, for an amount of Rs. 75 lakhs and this finds place in DPB II at p. 57. Subsequently, the assessee entered into second lease agreement which is dt. 13th Sept., 1994, which finds place in DPB II at p. 52 wherein the assets are valued at Rs. 1.10 crores. For this, the learned counsel for the assessee argued that supplementary agreement is normal trade practice and if the credit committee has approved the credit limit which operates at different level He further argued that credit committee has approved Rs. 75 lakhs as limit first and enhanced the limit. He further argued that the lease agreement, an exposer agreement, which operates as master agreement and at the time of agreement lessee might not even choose the asset or brand over the supplier or negotiate the price. Here, we do not agree with the learned counsel for the assessee’s argument that this is trade practice but there should be some basis for enhancement of value from Rs. 75 lakhs to Rs. 1.10 crores. Hence, we reject this argument. The learned Departmental Representative has pointed out several other inconsistencies in transaction like movement of goods, difference between the date and actual purchase date and the invoices issued by the supplier show the place at Lucknow and the sales office at New Delhi and this only shows UP Sales-tax and Central-tax registration number and not Central Excise registration numbers. These small inconsistencies lead to suspicion and surmises. These are not decisive factors but this cast suspicion on the transaction. Another fact is that M/s Paramjit Sugar Factory Ltd. which is a 100 per cent subsidiary of the lessee company, has admitted before the AO that Rachana (P) Ltd. has given a loan of Rs. 2,27,86,000 during the asst. yr. 1995-96. Out of this, the assessee has paid partly Rs. 96,25,000 as sale proceeds of one Skoda make high pressure coal and bagasse fired boiler which was acquired from M/s MSMCL for Rs. 9,10,31,250 vide invoice dt. 20th Sept., 1994, and then it was sold to the assessee for a sum of Rs. 1,06,25,000. When this was confronted with the assessee by the AO in respect of M/s Paramjit Sugar Factory Ltd., the assessee objected to this fact. In view of the above facts, out of this transaction, it is clear that plant and machinery was originally owned by the assessee and then it was sold to Rachana (P) Ltd. and Rachana (P) Ltd. again sold the machinery to the assessee which again leased out the assets to the lessee, M/s MSMCL. Even, the AO has given the finding that after the receipt of money from M/s MSMCL, Rachana (P) Ltd. has passed the money to the subsidiary of M/s MSMCL which in turn has passed the money to the lessee which was in need of funds. Here, in this transaction, it is seen that the lessee was in need of funds and the assessee wanted to finance it and it is only a financial transaction and all these lease transactions are just made out arrangements. From the above it is established that the intention of the lessor from the very beginning was never to buy any equipment but enter into finance transaction with the lessee for purchase and sale of boilers. The manner in which the transaction is entered into and finance has circulated, clearly shows that this is a loan/financial transaction. In view of this, we confirm the order of the CIT(A) who has confirmed the disallowance of depreciation made on leased assets to M/s MSMCL by the AO. This issue is also decided against the assessee.
18.1 The next issue is against the disallowance of depreciation in respect of leased assets to M/s Prakash Industries, Carews Pharmaceuticals Ltd. and Sitapur Plywoods Industries. This issue is raised by way of ground No. 5 which reads as under :
“5. (a) The CIT(A) erred in confirming the disallowance of depreciation in respect of assets leased to Prakash Industries, Carews Pharmaceuticals Ltd. and Sitapur Plywoods Industries.
(b) The appellant submits that the failure of the suppliers to reply to the AO cannot be a ground for inferring that the assets were non-existent.”
The AO while framing the assessment found that the assessee has claimed depreciation @ 100 per cent on plant and machinery leased to M/s Prakash Industries. The supply of machinery to M/s Pioneer Engg. Company has categorically denied having any transaction with the First Leasing Company of India Ltd. and also denied supply of any pollution control equipment. The lessee’s claim was that the equipment was purchased by the assessee from M/s Pioneer Engg. Co. The depreciation claimed by the assessee was amounting to Rs. 2,38,09,500 on the plant and machinery claimed to have been supplied by M/s Sahib Engineering Works, Ludhiana. The AO issued an enquiry letter to M/s Sahib Engineering Works which was returned unserved. Before the AO, nothing was produced to prove the lease transaction, neither the supplier nor the denial was rebutted and as per the lease agreement furnished before the AO the amount mentioned in the schedule was Rs. 2,50,00,000 and the description of equipment and location of equipment in this lease agreement was blank. The CIT{A) confirmed the action of the AO and held that since M/s Pioneer Engineering Works has denied the transaction with the First Leasing Company of India Ltd., the assessee, there is no question of existence of plant and machinery and accordingly the depreciation cannot be allowed. He further held that the evidence available in the record showed that there was no plant and machinery that could have been brought by the assessee for lease. Even, the Investigation Wing of the IT Department has proved that there was no such supplier as M/s Sahib Engineering Works, Ludhiana, and no such proprietor by name Narender Giridhar, who was claimed to be the proprietor of M/s Sahib Engineering Works. In view of this, the CIT(A) held that M/s Sahib Engineering Works has been established to be a bogus concern and, therefore, plant and machinery supplied by it would never have been in existence. Aggrieved, the assessee is in second appeal before the Tribunal. The assessee has raised additional ground No. 2 in connection with the above issue which reads as under :
“2. The lower authorities erred in not permitting the cross-examination of Mr. Baldev Singh, employer of Prakash Industries Ltd.”
19. The learned counsel for the assessee argued that M/s Pioneer Engg. has given the statutory excise invoices containing PLA number, invoice issued under Rule 52A/173G of the Central Excise Rules, classification of product with tariff number, date and time of removal as required by the Rules given and payment of basic excise duty and CST indicated in the invoice. He further argued that delivery challan and transport documents of Onkar Transport Co. with packing list were also given and even the installation and commissioning at Bilaspur was confirmed by M/s Prakash Industries, the lessee. In view of all these facts, the learned counsel for the assessee argued that the supplier cannot deny the supply of machinery and his denial cannot be accepted as contrary to statutory documents and the machinery is available for verification in the lessee’s premises. He further argued that the particulars in respect of M/s Sahib Engineering Works are also taken into consideration. The learned counsel for the assessee further argued that the authorities below have not allowed to cross-examine Shri Baldev, the employee of M/s Prakash Industries, before disallowing the depreciation. He has drawn our attention to the assessee’s paper book I at pp. 102 to 123 wherein lease agreement, invoices, delivery challans, lorry receipts, assets confirmation, etc. in favour of supplier, M/s Pioneer Engg., have been filed. He has also drawn our attention to the assessee’s paper book II where the documents as regards to M/s Sahib Engineering Works at pp. 26 and 27 have been filed. In view of these statutory documents and evidences, the learned counsel for the assessee argued that the depreciation should have been allowed.
20. On the other hand, the learned Departmental Representative argued that the lease agreement dt. 5th Sept., 1994, which is placed in assessee’s paper book at p. 102 is valued at Rs. 2.50 crores and the leased equipment is air pollution control system which is installed at Bilaspur. The assessee has submitted the invoices from M/s Pioneer Engg. Company in support of the leased equipment which is dt. 19th Sept., 1994, placed in assessee’s paper book I at pp. 115 to 117. This lease is made before the date of purchase and before the existence of the leased equipment. Even, the AO has informed the assessee that the supplier has denied that no machinery was supplied to the assessee during the relevant asst. yr. 1995-96 which is part of the Departmental paper book I at p. 54. The assessee replied in lieu of the letter of AO vide letter dt. 17th March, 1998, wherein the lease agreement and invoices of the supplier to support the claim of depreciation were enclosed and accordingly asked for cross-examination of the partner of the supplier firm, M/s Pioneer Engg. Company. The learned Departmental Representative further argued that opportunity to cross-examine was given by the AO vide letter dt. 4th Feb., 1999 which is placed at p. 27 of the DPBI. Even otherwise, the learned Departmental Representative argued that once the supplier denied the supply of equipment to the assessee, the burden is on the assessee to prove the existence of assets with cogent evidence. When there is no question of denial of opportunity of cross-examination of the partner of the supplier, the assessee is duty-bound to prove the transaction and if it proves with evidence only then the cross-examination would have been fruitful and even though the AO provided the opportunity but the same was not availed by the assessee. He further argued that the circumstances in this transaction clearly show that there are enough evidence available to disregard the plea of cross-examination and decide the issue based upon these facts. The assessee can seek cross-examination only if it proves that the assets in dispute exist and at least make out a prima facie case. In this case, the supplier denied the supply of equipments and on the same set of facts, the assessee was asking for cross-examination. He further argued that the assessee at one point of time admitted that it is not its duty to investigate whether the supplier is in exists or not at the same time seeking cross-examination of the supplier and in this way, he cannot blow hot and cold at the same time. The learned Departmental Representative argued that the assessee banks only on the brokers, financiers and does not even bother to find out whether any asset is purchased by any supplier. As far as the second lease agreement dt. 26th April, 1994, is concerned, the value is Rs. 2 crores in respect of equipments like flameless furnace purchased from M/s Sahib Engg. Works on 8th Sept., 1994, and the lease agreement was dt. 26th April, 1994. The lease was entered into much before the existence of the asset, The learned Departmental Representative further brought to our notice that there is packing list of delivery challan-cum invoice and the supplier showing goods sent by truck and that list does not include the furnace. He further argued that even there is no proof of movement, delivery of furnace which is a very massive structure and cannot possibly be transported in one truck which carried other items also. He further argued that the CIT(A) has referred the matter to the Investigation Wing of the Department at Ludhiana for making enquiries and on the basis of enquiries conducted by the Investigation Wing, he came to the conclusion that M/s Sahib Engg. Works does not exist. This information was not available with the AO at the time of assessment and he brought into the notice of the CIT(A) vide letter dt. 18th Nov., 1998, which is part of DPB I at p. 33. Even, the IT Department conducted search in the case of other supplier, M/s Pioneer Engg, Company (which) revealed that fake invoices were issued in the names of supplier company and the transport company which claimed to have been engaged in the delivery of goods, did not exist at all. He further argued that the enquiries as aforesaid have been discussed in detail in the letter dt. 24th/26th March, 1999, of the DGIT (Inv.), New Delhi, to the DGIT (Inv.), Chennai, which finds placed at p. 1 of DPB II and the full enquiry reported enclosed with this letter is placed in DPB III. The report of DIT, Ludhiana, vide letter dt. 16th April, 1999, addressed to DIT, Chennai accompanies report of the DDIT, Ludhiana which mentions that the supplier M/s Sahib Engineering Works, is non-existence and the PLA number mentioned in its invoice was in fact of nother concern M/s A.S. Forgings. Therefore, he argued that it proves that the invoice of M/s Sahib Engineering Works on which considerable reliance has been placed upon by the assessee is the forged invoice. Similarly, the report mentions that though M/s Pioneer Engineering Company exists at the address given in the invoice but has denied sale of alleged equipment to either lessee or the lessor. He argued that it is also evident from the report that both the suppliers had given the different address in the VDIS declarations filed before CIT, Ludhiana, and the names of the owners also differ. Still further, the bank accounts opened in their names at Delhi and Faridabad again show entirely different names as owners. This makes it very clear that both the lease transactions are very suspicious and dubious in nature. The transactions have been given the colour of lease so that the lessor avoids incidence of tax in its hand. In view of this, he contended that the two transactions are, therefore, merely financial transactions and the CIT(A) has rightly confirmed the disallowance of depreciation in their respect.
21. We have heard the rival submissions and gone through the case records. The AO while framing the assessment disallowed the depreciation on account of two transactions of lease as claimed by the assessee. The machineries in both the lease transactions were leased out to M/s Prakash Industries Ltd. The first machinery leased out was plant and machinery claimed to have been supplied by M/s Pioneer Engg. Company Ltd. which denied the transaction and admitted the supply of air pollution control equipment during the financial year 1994-95. The leased value of this equipment was Rs. 2.50 crores which was installed at the assessee’s place at Bilaspur. The supplier of the equipment was M/s Pioneer Engg. Company Ltd., Jamshedpur, Bihar, and the invoice was dt. 19th Sept., 1994, whereas the lease agreement was dt. 5th Sept., 1994. Due to denial of the supplier, the AO has written a letter to the assessee that the supplier has denied the supply of machinery/equipment but the assessee has filed in support of his claim, lease agreement and invoice on the basis of which the AO made enquiries and the same was denied. The assessee could not substantiate its claim with cogent evidence to ask for examination of the other party which has denied the supply of machinery. Even before us, the assessee could not adduce any evidence in support of its claim except the invoice and lease agreement which were produced before the AO. In these circumstances, the AO has rightly denied the opportunity of cross-examination as the assessee could not substantiate its claim with evidence. As regards to second lease agreement of Rs, 2 crores, the equipment was flameless furnace which was supplied by M/s Sahib Engg. Works, dt. 8th Sept., 1994, and the lease agreement was dt. 26th April, 1994. The assessee in its paper book II at pp. 29 and 28 has submitted packing list of delivery challan-cum-invoice dt. 8th Sept., 1994, of the supplier, M/s Sahib Engg. Works, sent by truck. However, the list does not include the furnace as such and even there is no proof which supports the claim of the assessee regarding the delivery or movement of delivery of furnace. Even, the Investigation Wing of the IT Department at Ludhiana has conducted the enquiries, the result of which shows that M/s Sahib Engg. Works does not exist. This information was not available with the AO at the time of assessment and this was brought to the notice of the CIT(A) by the AO vide letter dt, 18th Nov., 1999, and before the remand order of the CIT(A) dt. 17th Dec., 1998. The report of Dy. DIT, Ludhiana, vide letter dt. 16th April, 1994, addressed to DIT, Chennai, mentioned that the supplier, M/s Sahib Engg. Works, is non-existence and the PLA number mentioned in is invoice was of another concern, M/s A.S. Forgings. The assessee has not controverted this finding of the Dy. DIT, Ludhiana, and even at this stage it could not make out any case. It clearly shows that the assessee has nothing to produce as evidence except the material placed before the AO, Similarly, in the case of other supplier, M/s Pioneer Engg. Company, it is seen that fake invoices were issued in the name of the supplier company and the transport company which claimed to have delivered the equipment, did not exist at all. Even, the party, M/s Pioneer Engg. Company, exists at the address given in the invoice but it denied the sale of alleged equipment to either of the parties, lessor or lessee. These parties have given different addresses while declaring the income under VDIS filed before the CIT, Ludhiana, and the names of the owners are also differ. Even, the Department has verified the bank accounts opened at Delhi and Faridabad which showed different names of the owners. In view of the above facts, we have no hesitation in holding that these are merely financial transactions and these transactions have been arranged by the assessee as lease transactions to avoid the incidence of tax. Therefore, we confirm the order of the CIT(A) on this issue and accordingly, the assessee fails on this issue.
22. Now, we will deal with the transaction with Carews Pharmaceuticals. The AO while framing the assessment found that the suppliers, M/s Goutam Enterprises, S.K, Enterprises and Universal Engg. Co., supplied plant and machinery to the assessee and the assessee has leased it out to M/s Carews Pharmaceuticals and claimed depreciation on these plant and machineries. The AO sent letters to find out the genuineness of the parties but they were returned by the postal authorities with the comment “not known”. In view of this, the AO wrote a letter to the lessee, M/s Carews Pharmaceuticals, for confirmation but the lessee, vide letter dt. 15th Jan., 1998, replied that the documents required are not readily available, hence one month’s time was sought. In view of no feed back, the AO disallowed the depreciation as the assessee has not been able to establish the existence of suppliers and the lessee has also not furnished any details which would help the verification. Therefore, the AO inferred that the assets were not in existence and the CIT(A), in view of the above facts, confirmed the disallowance.
23. Before us, the learned counsel for the assessee argued that the lessee, M/s Carews Pharmaceuticals, was earlier known at UB Pharmaceuticals. There is a lease agreement which describes of the assets which are located at Thumkur, Karnataka. He has drawn our attention to the assessee’s paper book I at pp. 124 to 154 where lease agreement, invoices and letter from the Department are placed. He has also drawn our attention at pp. 127 to 136 of the assessee’s paper book and submitted that the lease agreement on equipment between the assessee and the lessee is placed at p. 136 wherein the complete details of machinery and location of equipment are given as UB Ltd. (Pharma Division, Thumkur, Karnataka). The learned counsel for the assessee argued that the lessee is a well known company and the inspection at the site could easily be carried out by the Department: Even, the supplier, M/s S.K. Enterprises, has given the invoices which mention LR number and the relevant transport company. He further stated that the documents furnished include the bills and delivery challans from all the suppliers, viz., S.K. Enterprises, Goutam Enterprises, Universal Engineering Company. He further argued that the delivery challans show that the goods have been properly delivered. In view of this, the assessee’s counsel argued that the lease transaction is genuine and the existence of machinery is not to be doubted which have not been verified by the Department. Accordingly, he urged the Bench to set aside the addition or remit the matter back to the file of the AO to decide the issue after affording due opportunity to the assessee.
24. On the other hand, the learned Departmental Representative stated that the details of equipment leased are given in Annex. ‘B’ at p. 136 of the assessee’s paper book and it contains 14 different items. He argued that he has compared these items with invoices and found that the items at sl. Nos. 6, 7, 9 to 12 and 14 did not find place in the invoices at pp. 139 to 152 of the assessee’s paper book I. In view of this, he argued that ‘there is no proof whether all the items are subject-matter of lease which were purchased and delivered to the lessee. The learned Departmental Representative further stated that as per the lease agreement at p. 124 of the assessee’s paper book I, the lessee as well as M/s UB Pharmaceuticals Ltd. are joined lessee’s and it is not explained by the assessee as to how two lessee’s can be the party to the same lease agreement and the same equipments, and the same equipments can be leased to different parties one at Calcutta and the other at Bangalore. He further argued that the transaction is nothing but a loan transaction and putting the name of UB Pharmaceuticals Ltd. is nothing but only to take UB Pharmaceuticals as a guarantor for the amount of Rs. 1.5 crores advanced in the shape of lease agreement and the transaction as per the lease agreement is not a lease transaction but this is a financial/loan transaction.
25. We have heard the rival submissions and gone through the case records, It is seen from the lease agreement that the assets described are located at Thumkur, Karnataka. These documents have not been verified by the AO at the assessment stage. The documents including bills and delivery challans of supplier, S.K. Enterprises, Goutam Enterprise and Universal Engg. Company, have been furnished and these have not been verified by the Department. The learned Departmental Representatives, contention was that no proof has been furnished in support of the delivery of the equipment in any shape or in any mode. Even, when he compared the invoices, he found some discrepancies which have not been verified by the AO. Even, there is doubt in the transactions with the lessee’s, M/s Carews Pharmaceuticals, and UB Pharmaceuticals, which is the real lessee and for this, the learned counsel for the assessee’s argument was that the lessee is formerly known as UB Pharmaceuticals but this has not been verified by the AO at the stage of assessment. In view of these facts, we find that this issue has not been deliberated by the AO and the facts are not brought on record. Accordingly, we have no hesitation in setting aside this issue to the file of the AO for verification and decide the issue as per law after affording reasonable opportunity of being heard to the assessee to prove the transaction.
26. Now, we will deal with the transaction of M/s Sitapur Plywood Industries. The AO while framing the assessment found that the assessee has claimed to have purchased plant and machinery from M/s Perfect Engineering Company for a sum of Rs. 1.5 crores. The plant and machinery described as solid waste recycling and resource recovery system which is complete system of fabrication to drying. This machinery was leased out by the assessee to M/s Sitapur Plywood Industries on 17th Jan., 1995. The assessee, before the AO in support of its claim filed invoices issued by M/s Perfect Engg. Company, and lease agreement with Sitapur Plywood Industries. The AO made enquiries under Section 133(6) of the Act on the supplier, M/s Perfect Engg, Company and it was found that no such concern ever existed at the address given and even the sales-tax number quoted on the invoices and billings were that of some other concerns. An opportunity was given to substantiate the claim of the assessee but it could not support its claim by any evidence and the assessee even could not establish that it had only purchased the said plant and machinery and leased out the same to M/s Sitapur Plywood Industries. In view of this, the AO disallowed the claim of depreciation as the assets were not in existence and the CIT(A) confirmed the action of the AO.
27. The learned counsel for the assessee submitted that the invoices filed before the AO show that the sales-tax payments, have been made which is reflected from the invoice submitted in assessee’s paper book I at p. 167. He argued that the installation certificate has already been submitted before the AO which has been certified by the lessee that the assets have been installed properly and this installation certificate has been placed at p. 168 of the assessee’s paper book I. According to the assessee, in the installation certificate, the assets are described as under:
"Sl. No. Description of asset Quantity
1. Dust Collecting System 1 No.
2. Thermic Fluid Heater 2.5 millions Koal/hr. Coal, 1 No.
fired, including all Fittings
3. Solid Waste recycling and Resource Recovery 1 No."
System (based on Waste Bagasse) complete
system From Filtration fabrication to dyring.
Even, the performance certificate has also been submitted before the AO which is placed at p. 169 of the assessee’s paper book I which was at. 2nd Feb., 1995. In view of this, the learned counsel for the assessee argued that there is no dispute about the existence of assets and even the AO as well as the CIT(A) have not disputed this fact. He further argued that the allegation of the. Department that sales-tax number does belong to somebody also is not substantiated by any evidence. Further, he argued that it is not the fault of the assessee that the letter addressed to the supplier could not be served and, therefore, inference cannot be drawn as no such concern exists at the address given. The learned counsel for the assessee also argued that the AO could not have assume that the plant was not located at Hazrat Ganj, Lucknow, and the entire amount should have been disallowed which is not the assessee’s case.
28. On the other hand, the learned Departmental Representative argued that there is discrepancy in the transaction regarding the lease dt. 10th Nov., 1994, which shows the value of Rs. 1.5 crores and finds place at p. 155 of the assessee’s paper book I and the invoice of purchase of equipment from M/s Perfect Engineering (P) Ltd. is dt. 17th Jan., 1995, which finds place at p. 167 of the assessee’s paper book I. Therefore, he argued that there is much gap between the sale agreement and the purchase of the equipment and at the time of making of lease agreement, the asset was not in existence with the assessee. The another discrepancy pointed out by the learned Departmental Representative is that as per the lease agreement the equipment is located at Lucknow whereas the lessee says that it is located at Sitapur which is a place far away from Lucknow. In view of these two discrepancies, he argued that it casts serious doubt about the genuineness of lease agreement, transaction and existence of equipment. According to the learned Departmental Representative as per the installation document which is at p, 168 of the APB I, only three equipments are installed and other equipments do not find place in the invoice or in the lease agreement which appear to have been supplied by M/s Assam Solvex (P) Ltd. He further argued that the installation certificate indicates that the equipments supplied vide invoice of Perfect Engg. (P) Ltd. have been installed and put to use on 7th Oct., 1998, whereas the lessee’s letter dt. 2nd Feb., 1995, which is three years earlier was already working at the lessee’s place. This also casts serious doubt as regards to genuineness of the lease transaction. The learned Departmental Representative further argued that while opening the L/C account with Standard Chartered Bank for purchase of solid waste recycling and resource recovery equipment favouring M/s Perfect Engg. (P) Ltd., a letter was addressed to the assessee by the bank. The invoice issued by the supplier to the assessee was thus proforma invoice and not an invoice of purchase of equipment. In view of this, he concluded that the assessee possibly sought to import this equipment to the said supplier for some purpose but it also entered into lease agreement with the lessee as if the said equipment was sold to the assessee by the supplier and then leased it out to the lessee. He further argued that the lessee is required to pay lease rentals @ Rs. 18,13,500 for initial six months and after that for 60 months the lease rentals will be @ Rs. 3,02,250 as per the lease agreement. He further argued that the total value of the equipment was Rs. 1.5 crores and in the very first six months the value would have been recovered at Rs. 84,81,000 before the installation. In view of this, he argued that this is nothing but a security against the lease value which is, according to him, commonly known as a loan transaction. To conclude, he argued that the transaction is only a finance transaction and this is to avoid tax incidence and, therefore, the CIT(A) has rightly confirmed the disallowance of depreciation.
29. We have heard the rival submissions and gone through the case records. We have seen from the facts of the case that before the AO nothing was produced as regards to the supplier, M/s Perfect Engg. (P) Ltd., in support of the assessee’s claim. The AO issued enquiry letter under Section 133(6) to M/s Perfect Engg. (P) Ltd., but the enquiries revealed that no such concern existed at the address given. Even, the sales-tax numbers quoted were also that of another concern. The assessee could not adduce any evidence in regard to this claim before the AO and even before the CIT(A), the assessee could not produce anything to substantiate its claim in respect of this lease transaction. Before us, the learned counsel for the assessee produced the lease agreement, invoices and installation certificate, and performance certificate which are placed in APB I at pp. 155 to 169. Nobody has disputed these documents but the very existence of the party, the supplier, M/s Perfect Engineering (P) Ltd., was not found by the AO when enquiries were made under Section 133(6) of the Act. However, the assessee stated that the equipment is located at its factory at Sitapur whereas the APB I in Annex. B at p. 166 shows that the location of equipment is at Hazrat Ganj, Lucknow, which is solid waste recycling and resource recovery plant. There are discrepancies in the lease transaction dt. 10th Nov., 1994, and the invoice for purchase of equipment from M/s Perfect Engg. (P) Ltd., dt. 17th Jan., 1995. The other discrepancy in the transaction is as regards to installation of three equipments including the equipment as per lease deed and the other equipments do not find place either in the invoice or in the lease agreement which appears to have been supplied by M/s Assam Solvex (P) Ltd. Even, the installation certificate states that the equipment supplied vide invoice of M/s Perfect Engg. Ltd. has been installed and put to use on 7th Oct., 1998, whereas as per the assessee’s letter these equipments are already working at the lessee’s place. These things also created doubt but the very existence of the supplier, M/s Perfect Engg. (P) Ltd., from where the assessee has purchased the machinery is doubtful and it has not been established by the assessee. In view of these facts, we feel that the CIT(A) has rightly confirmed the disallowance of depreciation made by the AO. It seems that this is a loan transaction in the guise of lease transaction to claim the depreciation. In view of this, we confirm the order of the AO and accordingly, the assessee fails on this issue.
30. The next issue raised by way of ground No. 7 is against the disallowance of depreciation in respect of asset given on lease to M/s Patheja Forgings & Auto Parts Ltd. (hereinafter called as M/s PFAPL) which reads as under :
7 (a) The CIT(A) erred in confirming the disallowance of depreciation in respect of asset given on lease to Patheja Forgings & Auto Parts Ltd.
(b) The appellant submits that the failure of the suppliers to respond to the letters of the AO cannot be a ground for disallowing the claim for depreciation.
(c) The appellant submits that it has furnished the confirmation letters from the lessee which has not been refuted by the AO.
(d) The appellant submits that the disallowance of the claim for depreciation was unwarranted.
The AO while framing the assessment under Section 143(3) found that the assessee has claimed the depreciation on the assets leased out to the lessee, M/s PFAPL. These assets were stated to be supplied by M/s Orion Finances and M/s Kalpataru Engineers. The AO during the course of assessment proceedings sent enquiry letters at the addresses of the suppliers but there was no response and it was found that the addresses given in the invoices were the residential premises of the employees of Patheja group of companies and these concerns were being used for supply of various plant and machinery to Patheja group of companies through various finance companies. On further enquiry, the AO found that the lessee, M/s PFAPL, claimed that due to a fire at their office on 18th Dec., 1994, all the records pertaining to the lease transactions have been destroyed. The assessee was asked to give the correct address and name of the suppliers and the evidence regarding the transportation of the machineries, etc., but, neither the lessee nor the assessee could produce anything to substantiate its claim. The enquiries conducted were communicated to the assessee and an opportunity was given to substantiate the claim of depreciation. The assessee before the AO contended that lease rent was received from the party and it submitted the copies of invoices and lease agreement but no confirmation letter/correspondence regarding the installation certificate, evidence for transportation of equipments were supplied to the Department. The AO in view of these facts, held that the onus is on the assessee to prove that the assets really existed and also the parties who have supplied the assets. Therefore, he rejected the claim of depreciation treating the transaction as finance transactions and depreciation was claimed just to avoid the tax incidence. Accordingly, the depreciation was disallowed and interest on these finance transactions was brought to tax; The CIT(A) confirmed the action of the AO. The CIT(A) found that the investigation made by the Dy. DIT (Inv.), Pune/has brought on record that M/s Kalpataru Engineers and M/s Orion Finances from whom the assessee has allegedly purchased the plant and machinery which was the subject-matter of lease were bogus concerns set up by M/s PFAPL. These were set up for the sole purpose of preparing bills for supply of machinery to various finance companies. The CIT(A) further held that the nature of evidence gathered in this case proved that the assessee is not the owner of the equipment and it cannot take shelter that a breach of contract by a third party should not be allowed to affect its claim of depreciation. In view of these facts and circumstances of the case, he upheld the disallowance of depreciation.
31. Before us, the learned counsel for the assessee argued that the assessee does not know the suppliers of the machineries but as long as the machinery (is) in existence can be verified and the depreciation cannot be disallowed. He further argued that it is impossible to verify the antecedents of individual suppliers as the assessee entered into more than 1000 transactions per year. Further, he argued that no leasing companies can conduct investigation on the genuineness of the machinery suppliers since the transactions are often handled by finance brokers/independent marketing agents on commission basis. He has drawn our attention to the letter of Asstt. DIT (Inv.)-2, Pune, dt. 18th March, 1998 which is placed at APB I at p. 224, wherein the Asstt. DIT has admitted that the assets are in existence and are located at Waluj at Aurangabad as mentioned in the delivery challan. He further argued that physical count of machineries tallied with leased out furnaces supplied by M/s PFAPL. In view of this, no adverse inference can be drawn out of the Asstt. DIT’s letter. He further argued that merely because the premises of the suppliers belonging to the employees/relatives of employees, the depreciation cannot be allowed, even the assets appear to be revalued and re-routed through the said companies to the finance companies. This observation of the AO is a mere surmise and conjecture and cannot be the ground for disallowance of depreciation. The learned counsel for the assessee has drawn our attention to the assessee’s paper book I where the assessee has filed the lease agreement, invoices and Departmental letter at pp. 189 to 226. In view of this, he urged the Bench to allow the claim of depreciation.
32. On the other hand, the learned Departmental Representative argued that even the assessee admits that it does not know the suppliers of the machineries and how it is possible, particularly when the assessee is the owner of the machinery and it has purchased the same. He further argued that the assessee has made huge payments to both the parties, M/s Orion Finance and M/s Kalpataru Engineers, and the assessee stated that it does not know both the parties. In view of this, he has drawn the inference that the lessee itself is the supplier of the machinery but for lease transaction, it has made papers in such a fashion. He has shown these two parties as the suppliers of the machineries. He contended that this is only a finance transaction and there is no lease transaction as such. The assessee itself admitted in one particular transaction relying on the letter of the Asstt. DIT, Pune, that PFAPL themselves supplied their own machineries to the assessee which was the subject-matter of lease and this shows that there is no purchase from the alleged suppliers and the assessee has merely finance the fund to the PFAPL to carry on security of the latter’s owned furnaces. The assessee’s contention that it is enough for claiming depreciation that the concerned assets exist, but the learned Departmental Representative argued that no doubt the assets exist but who is the owner, as to whether the assessee or the lessee. In such a situation the claim of depreciation cannot be allowed. The learned Departmental Representative further argued that there are two lease agreements. First lease agreement is dt. 10th Sept., 1994, which is valued at Rs. 2.60 crores which finds place at p. 189 of APB I. As per Annex. B, first lease agreement at p. 201 APB I shows the location of equipment at Waluj, Aurangabad. The AO has obtained the copy of the lease agreement which finds place at p, 129 of the DPB II. In Annex. B to this agreement; the schedule of asset and location of asset has not been filled but left blank and this costs doubt on the lease transaction. Even, the invoice evidencing the purchase of equipment is dt. 27th Sept., 1994, which is about 7 days after the lease agreement and that means the asset was not in existence at the time of lease agreement. Even, the assessee has not furnished any evidence in regard to the movement and delivery of equipment to the lessee. As regards to second lease agreement, he argued that this agreement is dt. 1st March, 1995, valued at Rs. 1.96 crores. As per the lease agreement which finds place at p. 220 of APB I, in Annex. B, describing the equipment located at Waluj, Aurangabad, and the copy of the lease agreement obtained by the AO shows the description about the equipment and location of assets leased left blank. The portion of leased agreement was left blank only to be filled up later at the convenient of the lessor or lessee. The learned Departmental Representative has also drawn our attention to the statement of Ajit Singh, GM (Finance), M/s Patheja group of companies, which is placed at p. 109 DPB II where he has deposed that the two suppliers which are claimed to have sold the equipment to the lessee, were only paper concerns of lessee and engaged in trading operation and also filed declaration under VDIS in respect of the equipments allegedly sold. In view of these facts, he argued that these transactions are nothing but loan transactions and the assessee has acted as a financier. In view of this, he supported the order of the CIT(A) who has rightly confirmed the disallowance of depreciation on equipments leased out by way of two lessee’s.
33. We have heard the rival submissions and gone through the case records. We have seen that when the Department has made enquiries with regard to the suppliers, M/s Orion Furnaces and M/s Kalpataru Engineers, it was found that the addresses given in the invoices were residential premises of Patheja group of companies’ employees and these concerns were used for supply of plant to Patheja group to various finance companies. Even, it was found that these transaction’s of lease were entered into before the purchase of equipments which creates serious doubts. The assessee has not filed any evidence to substantiate its claim with regard to supply of equipments through M/s Orion Furnaces and M/s Kalpataru Engineers and even, in the suppliers addresses only, the Patheja group of companies’ employees were residing and no such company existed there. From the report of the Asstt. DIT, it was found that no such mark of identification was available to verify the assets. Therefore, it was very difficult to find out the exact ownership. Even, the General Manager (Finance), Ajit Singh, gave the statement that these are only paper concerns and engaged in trading operation and these two concerns filed declaration under VDIS in respect of the equipments allegedly sold. Even, these companies are not maintaining any books of account. Further, in both the lease agreements, the AO found that the location of equipment and type of equipment kept blank whereas in assessee’s paper book, the location and type of equipment were properly mentioned. Here, we do not agree with the assessee’s contention that the assets are in existence. No doubt, the assets are in existence but the ownership is not proved. Finances are routed through but it is not proved that as to whether it is a loan transaction or finance transaction or lease transaction. Since the assessee is duty-bound to prove that these are lease transactions which was not done by the assessee, in the absence of evidence, it can only be held that these are loans/finance transactions. In view of these facts, we hold that these lease transactions are nothing but finance transactions. Therefore, we uphold the order of the CIT(A) who has confirmed the order of the AO.
34. The next issue in the assessee’s appeal is with regard to lease transaction with M/s Marvel Sales & Services Ltd. which was claimed by the assessee as an agreement for mortgage and lease. The assessee has raised this issue by way of ground No. 6 which reads as under :
“6.(a) The CIT(A) erred in holding that the lease transaction with Marvel Sales & Services Ltd. was an agreement for mortgage and not lease.
(b). He should have found that the various documents supported the lease transaction.
(c) The appellant submits that the mere fact that the supplier received the payment through the lessee would not reduce the lease transaction to a finance transaction.”
The AO during the assessment proceedings found that the assessee has claimed depreciation on plant and machinery leased out to M/s Marvel Sales & Services Ltd. The lease agreement was valued at Rs. 2 crores. The supplier, M/s Indian Standard Metal Company Ltd., has supplied the pollution control equipment directly to M/s Marvel Sales & Services Ltd. and it has sold the plant and machinery to the lessee at the first instance. The letter addressed to the supplier returned unserved. The assessee was asked to substantiate its claim of depreciation as the existence of supplier has not been proved. Nothing was adduced before the AO and he disallowed the depreciation. The CIT(A) after examining the documents filed before him found that the supplier, M/s Indian Standard Metal Company Ltd., sold and supplied the pollution control equipment to the lessee, M/s Marvel Sales & Service Ltd. directly. Subsequently, the assessee reimbursed the amount to the lessee. After the expiry of the lease in 1999, the plant and machinery was retransferred to the lessee at a residual value of Rs. 1,78,571 vide invoice No. 099/WB/090 dt. 16th Sept., 1999. Even, the capital gains accruing to the assessee on this transaction is stated to have been disclosed as income in the P&L a/c. In the first purchase, the lessee, M/s Marvel Sales & Service Ltd. directly paid the full amount to M/s Indian Standard Metal Co. Ltd. and after the payment was made, the asset was preferred as the subject for lease by the assessee. The lease agreement and the final invoice were for an amount of Rs. 2 crores in favour of the assessee which was only a proforma invoice. In view of these facts, the CIT(A) treated the agreement as one of mortgage, rather than straight lease transaction. In view of this, he confirmed the disallowance of depreciation.
35. Before us, the learned counsel for the assessee argued that the assessee has furnished equipment lease agreement with details of schedule and the location of the assets. He also argued that the invoice of M/s Indian Standard Metal Co. Ltd. was given and the address as well as sales-tax numbers were also available on the invoice. Even, a letter of confirmed receipt of consideration was also enclosed which finds place in APB I at p. 187. Even, the invoice raised by the assessee with the payment of sales-tax was enclosed at p. 188 of the APB I. He argued that the supplier of the asset is in very much existence. He further argued that the telephone number and telex number were available and he could easily be contacted. Therefore, he contended that complete details like sales agreement, invoice, letter of reimbursement, final payment letter and termination invoice were already enclosed in assessee’s paper book at pp. 172 to 188. He further argued that the assets are in existence and this is not a mortgage transaction but this is a lease transaction. In view of this, he urged the Bench to allow the depreciation to the assessee.
36. The learned Departmental Representative argued that as per the lease agreement which is placed at p. 70 of the APB I which is dt. 20th Sept., 1994, shows lease value of Rs. 2 crores and there are two co-lessee’s. One is the assessee and the co-lessee is M/s Magma Leasing Ltd. Even, from the letter dt. 6th Oct., 1994, which is placed at APB I at p. 186, which is addressed to the assessee by the supplier, says that the supplier has received this sum of Rs. 2 crores which is the lease value from the lessee vide its invoice dt. 15th Sept., 1994. He further argued that the supplier gave no objection to the assessee to reimburse the sum to the lessee. In view of this, he argued that the lessee itself has paid the full value of the equipment to the supplier and accordingly, the assessee is not the owner of the assets. He has drawn our attention to APB I at p. 171 which gives the lease rental structure and argued that it shows the first month rental at Rs. 60 lakhs as compared to the lease rental for the 7th month to 60th month at uniform rate of Rs. 3,16,000. There is no reason given by the assessee as to why such a huge amount of Rs. 60 lakhs would be recovered in the first month itself. In view of this, he argued that it shows the intention of the lessor to obtain this amount by way of security of the funds of Rs. 2 crores released by way of lease. He further argued that there is no proof of movement of equipment from the supplier’s place to assessee’s own place or lessee’s place. He has further drawn our attention to the APB I at p. 187 and invoice dt. 16th Sept., 1999, which is raised by the assessee on the lessee on account of selling the equipment under lease to the lessee at its residual value of Rs. 2 lakhs and the sale as per the invoice is effected before the initial period lease period of 5 years has come to an end. He further argued that the enquiry letter issued by the AO to the supplier has returned unserved. Even, the invoice issued by the supplier does not show any excise registration number, challan number and date and lorry number, and even the relevant columns as prescribed in the invoice were kept blank. In view of the above, he argued that all the above makes the whole transaction as colourable and proves that the lease agreement was only a device adopted by the assessee to avoid the payment of tax claiming depreciation and he urged the Bench to uphold the order of the CIT(A).
37. We have heard both the sides and perused the case records. We have seen that the assessee has produced only the lease agreement, invoice of supplier and letter of supplier confirmed receipt on consideration which is placed at p. 187 of the APB I. The learned counsel for the assessee has argued that the supplier is in very much existence but when the AO made enquiries, the supplier was not found. It is the duty of the assessee to get the transaction from the supplier and the supplier could have been produced before the AO. The IT Department has fairly conducted the enquiries to find out the supplier. Even, otherwise, the alleged supplier has received the full sum of Rs. 2 crores which is lease value vide its invoice dt. 15th Sept., 1995, and the same supplier gives no objection to the assessee to reimburse this sum to the lessee. The whole transaction reveals that the assessee itself paid the value of the equipment to the supplier and acquired it, (by) its own invoice dt. 15th Sept., 1995. In this case, the lessee has paid the cost of equipment to the lessee and not to the supplier and the reason for the same is that there was no equipment and the assessee has merely financed the transaction. The lease rental structure also shows that out of Rs. 2 crores, Rs. 60 lakhs have been paid in the very first month and remaining lease rental of Rs. 3,16,000 from 7th month to 60th month was paid. This shows that the transaction is merely a finance transaction and not a lease transaction. Therefore, we are of the view that the CIT(A) has rightly held this transaction to be the case of mortgage and not lease. This lease transaction was made just to claim depreciation to reduce the tax incidence. Accordingly, we uphold the order of the CIT(A) on this issue and dismiss this ground of appeal.
38. The issue as regards to straight lease transaction with M/s Carews Pharmaceuticals is remitted to the file of the AO and all other issues of the assessee’s appeal are dismissed.
39. In the result, the assessee’s appeal is partly allowed for statistical purposes.