M/s. Thambbi Modern Spinning Mills Ltd., Salem V. JCIT, Salem

ITA 1052/CHNY/2002

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 6939 (ITAT-CHENNAI)
• Duration Of Justice: 9 year(s) 5 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 23-11-2011
• Assessment Year: 1997-1998
• Appeal Filed On: 13-06-2002
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P MADHANA SEKARAN
• Assessee Lawyers: G BASKAR
• Keywords: Depreciation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER I.T.A. NO. 1052/MDS/2002 (ASSESSMENT YEAR : 1997-98) M/S THAMBBI MODERN SPINNING MILLS LTD., OMALUR MAIN ROAD, JAGIR AMMAPALAM, SALEM 636 302. PAN : AAACT7676G (APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME TAX, GANDHI ROAD, SALEM 636 007. (RESPONDENT) APPELLANT BY : SHRI G. BASKAR, ADVOCATE RESPONDENT BY : SHRI P. MADHANA SEKARAN, JCIT DATE OF HEARING : 23.11.2011 DATE OF PRONOUNCEMENT : 25.11.2011 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST L EVY OF PENALTY UNDER SECTION 271(1)(C) OF INCOME-TAX ACT, 1961 (IN SHORT THE ACT), FOR THE IMPUGNED ASSESSMENT YEAR IN RELATION TO LEA SE RENT CLAIMED BY THE ASSESSEE ON A SALE AND LEASE BACK ARRANGEMENT, WHICH WAS LATER I.T.A. NO. 1052/MDS/02 2 ON FOUND BY THE A.O. TO BE A FINANCE ARRANGEMENT AN D NOT A LEASING TRANSACTION. SUCH PENALTY WAS CONFIRMED BY THE CIT (APPEALS). 2. SHORT FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF COTTON YARN, HAD CLAIM ED LEASE RENT OF ` 1,72,18,958/- WHICH APPEARED UNDER THE HEAD COTTON PURCHASE. SUCH LEASE RENT PAID INCLUDED A SUM OF ` 16,40,250/- TO M/S CATHOLIC SYRIAN BANK LTD. ON AN INVESTIGATION CONDUCTED BY D DIT, SALEM, IT WAS FOUND THAT WHAT WAS LEASED BY THE ASSESSEE WAS ITS OWN ASSETS SOLD TO THE BANK. IT SEEMS THE BANK AUTHORITIES AD MITTED TO THIS. RELEVANT PORTION OF THE BANKS LETTER REPRODUCED AT PAGE 3 OF THE ASSESSMENT ORDER IS REPRODUCED HEREUNDER:- THE BANK WOULD LIKE TO PURCHASE PEACE AND TO AVOID LITIGATION WHICH ADVERSELY AFFECT THE BANK, CONSIDER ING THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE AGR EEING TO TREAT LEASE FINANCE AS TERM LOAN FINANCE . WE ARE SUBMITTING STATEMENT SHOWING LEASE FINANCE INCOME A ND INTEREST ON TERM LOAN. THE ASSESSMENT MAY BE COMPLETED TREATING THE LEASE ADVANCE AS TERM LOAN ADVANCE. THE BANK IS ALSO AGREEABLE TO PAY INTEREST -TAX ON SUCH ADVANCES. MANAGING DIRECTOR OF THE ASSESSEE-COMPANY ALSO ADMI TTED IT AS A MISTAKE, BUT, NEVERTHELESS PLEADED FOR ALLOWANCE OF THE INTEREST PORTION. THE A.O. BIFURCATED THE LEASE RENT CLAIM OF ` 16,40,500/- TO I.T.A. NO. 1052/MDS/02 3 PRINCIPAL ` 10,83,356/- AND INTEREST ` 5,57,144/-. HE ALLOWED THE CLAIM TO THE EXTENT OF ` 5,57,144/- AND BALANCE ` 10,83,356/- WAS DISALLOWED CONSIDERING IT TO BE PRINCIPAL PAYMENT O N A TERM LOAN. THEREAFTER PROCEEDINGS FOR LEVY OF PENALTY WAS INIT IATED. AS PER THE A.O., ASSESSEE HAD WITH MALAFIDE INTENTION, OBTAINE D FINANCE ON ITS OWN ASSETS BY PRODUCING VOUCHERS FROM ONE MRS. JAYA LAKSHMI, AMMAPET, SALEM, FOR PURCHASE OF MACHINERY AND BASED ON SUCH VOUCHERS, LEASE FINANCE WAS OBTAINED FROM M/S CATHO LIC SYRIAN BANK LTD., ERNAKULAM. THE SAID BANK HAD ALSO CLAIMED DE PRECIATION ON THE ASSETS CLAIMED TO HAVE BEEN LEASED TO THE ASSESSEE. IT WAS ONLY ON AN INVESTIGATION CONDUCTED BY THE REVENUE DEPARTMEN T, THE SAID BANK SURRENDERED THE TRANSACTION AS TERM LOAN TO AS SESSEE AND AS PER THE A.O., BUT, FOR THE ADMISSION BY THE BANK, A SSESSEE WOULD NOT HAVE COME FORWARD FOR A SETTLEMENT AND ADMIT THE CO NCEALMENT. FURTHER, AS PER THE A.O., ASSESSEE WAS NOT MAINTAIN ING ITS BOOKS OF ACCOUNTS IN A MANNER THAT WOULD CLEARLY SHOW THE PA YMENT OF LEASE RENT. HE, THEREFORE, LEVIED PENALTY CONSIDERING TH E TRANSACTION TO BE BOGUS, AT 150% OF THE TAX SOUGHT TO BE EVADED. 3. ASSESSEE IN ITS APPEAL BEFORE LD. CIT(APPEALS), PLEADED THAT BANK AS WELL AS ASSESSEE WERE PARTIES TO THE LEASE AGREEMENT AND I.T.A. NO. 1052/MDS/02 4 ONCE BANK ITSELF ADMITTED THE LEASE TO BE A FINANCI AL TRANSACTION, ASSESSEE HAD TO FALL IN LINE, THOUGH THERE WAS A LE ASE AGREEMENT WHICH WOULD GO TO SHOW THAT IT WAS NOT A FINANCIAL TRANSACTION. AS PER THE ASSESSEE, IT HAD FILED DETAILS OF LEASE RENT PA YMENTS DURING THE COURSE OF REGULAR ASSESSMENT AND EXCEPT FOR THE LET TER CITED FROM THE BANK, THERE WAS NOTHING WITH THE ASSESSING OFFICER TO COME TO A CONCLUSION THAT THE CLAIM OF LEASE RENT WAS A BOGUS AND WAS ONLY A REPAYMENT OF PRINCIPAL AND INTEREST ON TERM LOAN TO M/S CATHOLIC SYRIAN BANK LTD. HOWEVER, LD. CIT(APPEALS) WAS NOT IMPRESSED. ACCORDING TO HIM, ASSESSEE HAD ACCEPTED THE TRANSAC TION AS A FINANCIAL LEASE ONLY WHEN CONFRONTED WITH THE ADMIS SION OF THE LESSOR. HE, THEREFORE, CONFIRMED THE LEVY OF PENALTY ALBEIT REDUCED IT TO 100% OF THE TAX SOUGHT TO BE EVADED, AGAINST 150% CONSID ERED BY THE A.O. 4. NOW BEFORE US, LEARNED A.R., STRONGLY ASSAILING THE ORDERS OF THE AUTHORITIES BELOW, SUBMITTED THAT NOTHING WAS F OUND FROM THE RECORDS OF THE ASSESSEE WHICH WOULD SHOW THAT ANY B OGUS CLAIM HAD BEEN PUT UP WITH REGARD TO THE LEASE RENT. ACCORDI NG TO LEARNED A.R., THE LEVY OF PENALTY WAS BASED ON THE STATEMENT TAKE N BY THE REVENUE FROM M/S CATHOLIC SYRIAN BANK LTD. AND SUCH STATEME NT WAS GIVEN BY THE SAID BANK ONLY TO PURCHASE PEACE WITH THE DEPAR TMENT. I.T.A. NO. 1052/MDS/02 5 ASSESSEE HAD FOLLOWED SUIT SO AS TO AVOID FURTHER L ITIGATION AND NOT BECAUSE THE CLAIM WAS A BOGUS ONE. AS PER LEARNED A.R., SALE AND LEASE BACK OF ASSETS WAS AN ACCEPTED METHOD OF TAX PLANNING AND THIS COULD NOT BE CONSIDERED AS A MALAFIDE METHOD F OR EVADING TAX. ACCORDING TO HIM, THERE WAS NEITHER CONCEALMENT NOR FILING OF ANY INACCURATE PARTICULARS. HE, THEREFORE, PLEADED THA T LEVY OF PENALTY WAS NOT WARRANTED UNDER THE CIRCUMSTANCES OF THE CA SE. 5. PER CONTRA, LEARNED D.R. SUBMITTED THAT BUT FOR THE INVESTIGATION CONDUCTED BY THE INVESTIGATION DEPARTMENT OF THE RE VENUE WITH M/S CATHOLIC SYRIAN BANK LTD., ASSESSEE WOULD NOT HAVE COME OUT ON ITS OWN WITH AN ADMISSION THAT LEASE RENTALS WERE NOTHI NG BUT REPAYMENTS TOWARDS PRINCIPAL OF THE TERM LOAN TAKEN FROM M/S CATHOLIC SYRIAN BANK LTD. HENCE, CLAIM OF THE ASSE SSEE THAT IT HAD COME OUT ON ITS OWN WAS UNFOUND. ASSESSEE HAD CONC EALED THE PARTICULARS OF INCOME BY CAMOUFLAGING LEASE RENTAL AS COTTON PURCHASE AND BUT FOR THE PRUDENT INVESTIGATION CON DUCTED BY THE A.O., THESE FACTS WOULD NOT HAVE COME OUT. ACCORDI NG TO HIM, LD. CIT(APPEALS) HAD GIVEN SUBSTANTIAL JUSTICE TO THE A SSESSEE BY SCALING DOWN THE PENALTY TO 100% OF THE TAX TO BE EVADED AG AINST 150% ADOPTED BY THE A.O. I.T.A. NO. 1052/MDS/02 6 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS. WITHOUT DOUBT, ASSESSEE HAD SHOWN PAYMENTS MADE TO M/S CATHOLIC SYRIAN BANK LTD. AS LEASE RENTALS. DURING THE COUR SE OF ASSESSMENT, ASSESSEE HAD NOT CONCEALED ANYTHING IN THIS REGARD, BUT HAD FURNISHED BEFORE THE ASSESSING OFFICER THE DETAILS OF SUCH PAYMENT OF LEASE RENTAL. MAY BE, THE ASSESSEE CLASSIFIED THE LEASE RENTALS UNDER THE HEAD COTTON PURCHASE. BUT, THIS BY ITSELF WO ULD NOT MEAN THAT THERE WAS ANY CONCEALMENT. IF WE LOOK AT THE TOTAL LEASE RENT CLAIM OF ` 1,72,18,958/- MADE BY THE ASSESSEE, ONLY A SUM OF ` 16,40,250/- WAS FOUND TO BE NOT ACCEPTABLE TO THE REVENUE. THI S CLEARLY COMES OUT FROM THE BREAK-UP OF LEASE RENT ` 1,72,18,958/- GIVEN AT PAGE 2 OF THE ASSESSMENT ORDER. HENCE, WE CANNOT SAY THAT BY AGGREGATING SUCH PAYMENTS WITHIN THE HEAD MADE FOR COTTON PURC HASE, ASSESSEE WAS TRYING TO MISLEAD THE REVENUE. IT IS AN ACCEPT ED POSITION THAT M/S CATHOLIC SYRIAN BANK LTD. CLAIMED DEPRECIATION ON THE ASSETS WHICH WERE SOLD BY THE ASSESSEE TO IT AND LEASED BA CK FROM IT. SO, BOTH ASSESSEE AND BANK HAD TREATED IT ONLY AS A LEA SE TRANSACTION. OF COURSE, THE BANK LATER IN THE COURSE OF INVESTIG ATION ADMITTED THAT THE LEASE FINANCE WAS TO BE TREATED AS TERM LOAN FI NANCE. HOWEVER, IT HAS BEEN SPECIFICALLY MENTIONED BY THE BANK THAT TH EY WERE AGREEING I.T.A. NO. 1052/MDS/02 7 FOR SUCH TREATMENT IN ORDER TO PURCHASE PEACE AND A VOID LITIGATION WHICH COULD ADVERSELY AFFECT THE BANK. M/S CATHOLI C SYRIAN BANK LTD. IS A SCHEDULED BANK AND IT WOULD BE NAVE TO PRESUM E THAT A SCHEDULED BANK WOULD COLLUDE WITH AN ASSESSEE FOR C AMOUFLAGING A TERM LOAN AS A LEASE FINANCE. MAY BE, UNDER COMPUL SION, THE SAID BANK AGREED THAT THE LEASE FINANCE WAS ONLY TERM LO AN FINANCE. NEVERTHELESS, ASSESSEE HAD EVERY RIGHT TO CLAIM THE PAYMENTS MADE, BASED ON THE AGREEMENT WITH THE BANK TO BE LEASE RE NTAL. LATER ON, IT MIGHT HAVE TOWED THE LINE TAKEN BY THE BANK AND ACC EPTED THE TRANSACTION AS TERM LOAN FINANCE, BEFORE THE ASSESS ING OFFICER WHEN FACED WITH ADMISSION OF THE BANK. BUT, THIS CANNOT BE A REASON TO COME TO CONCLUSION THAT THERE WAS ANY CONCEALMENT D ONE BY THE ASSESSEE OR THERE WAS ANY INACCURATE PARTICULARS FU RNISHED BY IT. THE METHOD OF SELLING MACHINERY AND LEASING IT BACK, IN ORDER TO REDUCE TAX LIABILITY WAS CONSIDERED AS AN ACCEPTABLE MODE OF TAX PLANNING AND THE DIFFERENTIATION BETWEEN SUCH A LEASE ARRANG EMENT AND PURE FINANCE ARRANGEMENT HAS OFTEN BEEN FOUND TO BE BLUR . IF THE ASSESSEE HAD CONSIDERED IT TO BE LEASE A TRANSACTION BASED O N THE AGREEMENT WITH THE BANK, ITS CLAIM CANNOT BE TAKEN AS A BOGUS ONE. JUST BECAUSE IT HAD AGREED AT A LATER POINT OF TIME TO T REAT THE PAYMENTS OF I.T.A. NO. 1052/MDS/02 8 LEASE RENTALS, AS REPAYMENT OF PRINCIPAL, WE CANNOT SAY, THAT THE CLAIM ITSELF WAS NOT A BONAFIDE ONE. MAKING A CLAIM THAT THE ASSESSEE BELIEVED TO BE LEGITIMATE, WHICH LATER ON WAS ACCEP TED AS A CAPITAL OUTGO WOULD NOT BE A REASON TO LEVY PENALTY UNDER S ECTION 271(1)(C) OF THE ACT, UNLESS IT IS SHOWN THAT THERE WAS CONCE ALMENT MADE BY THE ASSESSEE OR IT IS SHOWN THAT IT HAD FILED INACC URATE PARTICULARS. IN OUR OPINION, THE CIRCUMSTANCES OF THE CASE DID NOT WARRANT LEVY OF PENALTY. THE PENALTY, THEREFORE, STANDS CANCELLED. 7. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . THE ORDER WAS PRONOUNCED IN THE COURT ON 25 TH NOVEMBER, 2011. SD/- SD/- (GEORGE MATHAN) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 25 TH NOVEMBER, 2011. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A), SALEM (4) CIT, SALEM (5) D.R. (6) GUARD FILE