THE DY CIT RG 3(1), Mumbai V. M./S. DAGGER FORST TOOLS LTD., Mumbai

ITA 1243/MUM/2005

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62709 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 03-07-2012
• Assessment Year: 1997-1998
• Appeal Filed On: 14-02-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: A K NAYAK
• Keywords: Depreciation; Assessment record

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES G MUMBAI BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO. 1243/MUM/2005 ASSESSMENT YEAR : 1997-98 DCIT, RANGE 3(1), ROOM NO. 607, 6 TH FLOOR, AAYAKAR BHAVAN, MUMBAI-400 020 VS. M/S. DAGGER FORST TOOLS LTD. DALAMAL HOUSE, 1 ST FLOOR, NARIMAN POINT, MUMBAI-400 021 PAN NO: AAACD 1812 A (APPELLANT) ( RESPONDENT) APPELLANT BY : MS. AARTI VISSANJI RESPONDENT BY : SHRI A. K. NAYAK DATE OF HEARING : 03.07.2012 DATE OF PRONOUNCEMENT : 18.07.2012 O R D E R PER RAJENDRA, A.M. FOLLOWING GROUNDS OF APPEAL WERE FILED BY THE REVEN UE AGAINST THE ORDER DATED 30.11.2004 OF CIT (A)-XXVIII, MUMBAI FOR THE ASSESS MENT YEAR 1997-98 : (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE U/S.37(2) AMOUNTING TO RS.L,08,336/-. (2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A) ERRED IN ALLOWING DEPRECIATION OF RS.L,54,L7 ,031/- ON ASSETS LEASED TO PROTECH SWITCHGEARS LTD. (3) THE APPELLANT PRAYS THAT THE ORDER OF CIT( A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED. 2. THE APPELLANT, A PUBLIC LIMITED COMPANY, WAS ENGAGE D IN THE BUSINESS OF MANUFACTURE OF TOOLS AND LEASING OF EQUIPMENTS & VE HICLES. 2 I.T.A. NO.1243/MUM/2005 M/S. DAGGER FORST TOOLS LTD. 3. FIRST GROUND OF APPEAL IS ABOUT THE APPELLANTS CLAIM MADE U/S.37(2) OF THE INCOME TAX ACT,1961(ACT) IN RESPECT OF ENTERTAINMENT EXPEN SES. DURING THE ASSESSMENT PROCEEDINGS ASSESSING OFFICER (AO) FOUND THAT THE ASSESSEE HAD INCURRED CANTEEN EXPENSES AMOUNTING TO RS.2.16 LAKHS. ASSESSEE MADE A CLAIM THAT 50% OF RS.2,16,672/ BEING EXPENSES INCURRED ON MESS AND CANTEEN SHOULD BE CONSIDERED FOR STAFF.AO REJECTED THE CLAIM. BEFORE THE FIRST APPELLATE AUTHORITY(FAA) IN THE APPELLATE PROCEEDIN GS ASSESSEE SUBMITTED THAT IT HAS TO INCUR ENTERTAINMENT EXPENSES IN PROVIDING TEA, COFFEE, CO LD DRINKS TO ITS OWN EMPLOYEES IN ADDITION TO OUTSIDERS. AFTER CONSIDERING THE SUBMISSIONS OF THE ASEESSEE AND ORDER OF THE FAA FOR THE ASSESSMENT YEAR 1996-97 HE HELD THAT THE DISALLOWAN CE IN EXCESS OF 50% OF MADE BY THE AO DESERVED TO BE DELETED. HE HELD THAT THE EXPENSES I NCURRED WERE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. BEFORE US, AUTHORISED REPRESENTATIVE SUBMITTED THA T EXPENDITURE IN QUESTION WAS INCURRED FOR THE MEMBERS OF THE STAFF, THAT FOR THE AY 1996-97 FIFTY PERCENT OF SIMILAR KIND OF EXPENDITURE WAS ALLOWED BY THE FAA.DR RELIED UPON T HE ORDER OF THE AO. AFTER HEARING THE RIVAL SUBMISSION WE ARE OF THE OPINION THAT ORDER O F THE FAA DOES NOT NEED ANY INTERFERENCE. HE HAS RIGHTLY HELD THAT EXPENDITURE INCURRED BY TH E APPELLANT FOR ITS STAFF IS ALLOWABLE U/S.37 OF THE ACT. GROUND NO.1 IS DECIDED AGAINST THE AO. 4. THE SECOND GROUND OF APPEAL IS ABOUT THE CLAIM OF D EPRECIATION AMOUNTING TO RS.1.54 CRORES. DURING THE ASSESSMENT PROCEEDINGS, THE AO F OUND THAT THE ASSESSEE HAD PURCHASED AUTOMATIC LOAD MONITORING SYSTEM PANELS(ALMSP)FROM PROTECH TIME TECHNOLOGY LTD. (PTTL), NOW KNOWN AS ENTIGON SYSTEMS LTD. AND SAME WERE LEASED TO PROTECH SWITCHGEARS LTD. (PSL).HE REJECTED THE CLAIM OF DEPRECIATION IN RESPECT OF EQUIPMENTS LEASED TO PSL ON THE GROUND THAT THE LEASE TRANSACTION WAS NOT GENUI NE. THE CONCLUSION OF THE AO WAS BASED ON THE DETAILS PERTAINING TO THE MOVEMENT OF FUNDS IN THE BANK ACCOUNTS OF THE ASSESSEE, PTTL AND PSL.AS PER AO, THE MAJORITY OF MONEY WAS R ECEIVED BACK TO THE ASSESSEE. THUS, AS PER AO, IT WAS NOT A GENUINE LEASING TRANSACTION IN LIGHT OF THE DECISION OF THE HONBLE SUPREME COURT DELIVERED IN THE CASE OF MCDOWELL (15 4 ITR 148). 3 I.T.A. NO.1243/MUM/2005 M/S. DAGGER FORST TOOLS LTD. 5. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA. A FTER CONSIDERING THE DETAILED REPLY FILED BY THE ASSESSEE HE HELD THAT THAT THE S AID TRANSACTION IS A SALE AND LEASEBACK (SLB)TRANSACTION, THAT DEPRECIATION WAS NOT ALLOWAB LE ON FINANCE LEASE TRANSACTIONS, THAT IN ASSESSMENT PROCEEDINGS FOR A.Y.1996-97,THE APPELLAN T CLAIMED DEPRECIATION IN RESPECT OF ALL EQUIPMENTS -25 NOS. AUTOMATIC ELECTRIC LOAD MONITO RING PANELS PURCHASED FROM PTTL AND LEASED TO PSL, THAT DEPRECIATION HAD BEEN ALLOWED B Y THE AO FOR THAT AY, THAT AO HAD MADE DETAILED ENQUIRIES ABOUT THE GENUINENESS OF THE TRA NSACTION OF PURCHASE AND LEASE OF THE SAID EQUIPMENTS, THAT RELEVANT DOCUMENTS WITH RESPECT TO THE SAME WERE PLACED ON RECORD IN THE ASSESSMENT PROCEEDINGS FOR A.Y.1996-97,THAT THE APP ELLANT HAD BEEN ALLOWED, AFTER DUE VERIFICATION, DEPRECIATION AMOUNTING TO RS.2,50,00, 018/- ON THE SAID EQUIPMENTS, THAT HE (FAA) HAD EXAMINED THE ASSESSMENT RECORDS FOR A.Y.1 996-97, THAT THERE IS A SEPARATE ENQUIRY FOLDER ALONG WITH THE MAIN RECORDS, THAT THE THEN A O HAD MADE DETAILED ENQUIRIES WITH THE PTTL AND PSL ON THIS ISSUE, COLLECTED COMPLETE DETA ILS PERTAINING THE SAID EQUIPMENTS AND HAD TAKEN CONSCIOUS DECISION TO ACCEPT SUCH TRANSAC TIONS AS GENUINE LEASE TRANSACTION. HE FURTHER HELD THAT THE APPELLANT HAD PROVED BEYON D DOUBT BY CLINCHING EVIDENCES THAT THE SAID TWO COMPANIES I.E. PTTL AND PSL WERE SEPARATE ENTITIES AND THE TRANSACTIONS WITH THEM WERE GENUINE, THAT THE REPLY OF THE PTTL THAT THEY WERE UNABLE TO REPLY TO THE QUERIES RAISED BY THE AO DUE TO CLOSURE OF THEIR FA CTORY AND THE STAFF HAVING LEFT DUE TO SEVERE FINANCIAL CRISIS BY ITSELF COULD NOT BE CONSIDERED TO BE THE REASON FOR THE NON-EXISTENCE OF TWO SEPARATE ENTITIES IN THE ASSESSMENT YEAR UNDER APPE AL WHEN THE SAID COMPANIES WERE HELD TO BE TWO SEPARATE ENTITIES AND INDEPENDENT IN EVERY R ESPECT IN THE A.Y.1996-97,THAT THE APPELLANT HAD RECEIVED LEASE RENT, LEASE MANAGEMENT FEE AND DEPOSIT TOWARDS THE SAID LEASING TRANSACTION, THAT THE APPELLANT HAD OFFERED FOR TAX ATION THE NECESSARY LEASE RENT AS WELL AS LEASE MANAGEMENT FEE DURING THE YEAR UNDER APPEAL A ND FOR SUBSEQUENT 4 YEARS, THAT THE APPELLANT HAD NOT ONLY PROVED THE GENUINENESS OF TH E EXISTENCE OF THE SAID TWO INDEPENDENT COMPANIES BUT HAD ALSO PROVED ABOUT THE GENUINENESS OF THE PURCHASE OF EQUIPMENT FROM PTTL, RECEIPT OF PAYMENT, DELIVERY OF THE EQUIPMENT TO PSL, RECEIPT OF EQUIPMENT BY PSL, INSTALLATION OF THE SAME BY PSL, USER OF THE SAME B Y PSL ON THE BASIS OF THE PERSONAL VERIFICATION BY AN INDEPENDENT CHARTERED ENGINEER, INSURANCE OF SAID EQUIPMENT BY THE UNITED INDIA INSURANCE CO LTD, RECEIPT OF LEASE REN TALS AND SECURITY DEPOSIT FOR THE YEAR AND 4 I.T.A. NO.1243/MUM/2005 M/S. DAGGER FORST TOOLS LTD. FOR THE SUBSEQUENT YEARS, THE IMPUGNED LEASE TRANSA CTIONS WERE ENTERED INTO BY THE APPELLANT IN THE REGULAR COURSE OF ITS LEASING ACTIVITY, THAT TRANSACTION OF PURCHASE FROM PTTL AND LEASE TO PSL COULD NOT BE REGARDED A SALE AND LEASE BACK TRANSACTION, THAT THE DECISION OF THE SPECIAL BENCH, ITAT, MUMBAI IN THE CASE OF MID EAST PORTFOLIO MANAGEMENT LTD. WAS NOT APPLICABLE TO THE APPELLANTS CASE. HE HELD THAT CA SE OF MCDOWELL WAS ALSO NOT APPLICABLE IN THE MATTER UNDER CONSIDERATION . HE FINALLY HELD, MERELY BECAUSE THE SELLER OF THE EQUIPMENT AND THE LESSEE OF THE EQUIPMENT ARE SISTER CONCERNS , THE TRANSACTION ENTERED INTO WITH THEM CANNOT BE REGARDED AS SHAM TRANSACTION. 5.1. FAA HAS GIVEN A FEW FACTUAL FINDINGS: I) IN THE PRECEDING FY SAME EQUIPMENTS WERE PURCHAS ED FROM PTTL AND LEASED OUT TO PSL. II) IN A.Y. 1996-97 AO HAS HELD THAT PTTL AND PSL WERE DIFFERENT ENTITIES. III) AO HAD ALLOWED DEPRECIATION ON THE SAID ASSETS . IV) ASSESSEE HAD OFFERED INCOME FROM LEASE AND LEAS E MANAGEMENT FEE FOR TAXATION FOR THE YEAR UNDER CONSIDERATION. V) OVER THE LEASE PERIOD OF 5 YEARS, THE APPELLANT HAD OFFERED INCOME FROM THE IMPUGNED LEASE TRANSACTIONS AGGREGATING RS.1,60,33,600/- FOR TAX INCLUSIVE OF RENTALS, LEASE MANAGEMENT FEES AND CAPITAL GAINS. BEFORE US DR SUBMITTED THAT THE TRANSACTION IN QUES TION WAS SHAM, THAT BANK INQUIRIES MADE BY THE AO PROVED THAT MONEY WAS RECEIVED BY TH E ASSESSEE,THAT BANK ACCOUNTS OF PTTL AND PSL WERE CLOSED AFTER THE TRANSACTION TOOK PLAC E.AR SUBMITTED THAT TRANSACTION WAS GENUINE THAT INQUIRIES MADE WITH BANK DID NOT PROVE THAT ASSETS WERE NOT PURCHASED OR NOT LEASED, THAT ASSESSEE HAD OFFERED TAXES ON INCOME F OR LEASE, THAT IN SUBSEQUENT YEAR CAPITAL GAINS WAS ALSO PAID WHEN ASSETS WERE SOLD.AR REFERR ED TO PG.NOS. 54,31,32,33,40,41TO 45,72- 77,108,110,115 OF THE PAPER BOOK. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. FROM THE RECORDS AVAILABLE IT TRANSPIRES THAT THE ASSESSEE, WAS TO RECEIVE LEASE MANAGEMENT FEE AND 5 I.T.A. NO.1243/MUM/2005 M/S. DAGGER FORST TOOLS LTD. SECURITY DEPOSIT OF RS.21.75 LAKHS AND RS.24.5 LAKH S RESPECTIVELY FROM FIRST AND SECOND LEASE TRANSACTIONS OF ALMSP. BESIDES APPELLANT WAS ALSO ENTITLED TO ANNUAL LEASE RENT OF RS.10.44 AND RS.11.75 LAKHS RESPECTIVELY FOR THE SA IS TRANSACTIONS. FOR THE PERIOD OF SEPT., 1996 TO AUGUST 1997, THE ASSESSEE RECEIVED RS.22.2 LAKHS AS LEASE RENT, RS.3.08 LAKHS AS LEASE MANAGEMENT FEES AND RS.46.25 LAKHS AND SECURITY DEP OSIT. IN THE ACCOUNTING YEAR 2002-03, HE ASSESSEE SOLD THE EQUIPMENTS TO PSL AND SALE PRI CE WAS RECOVERED THROUGH ADJUSTMENTS OF SECURITY DEPOSIT AMOUNTING TO RS.216.25 LAKHS. THE SAID AMOUNT OF RS.46.25 LAKHS WAS ALSO OFFERED FOR TAXATION BY THE APPELLANT AS SHORT TERM CAPITAL GAINS STCG. IF ANNUAL LEASE RENT, LEASE MANAGEMENT FEE, SECURITY DEPOSIT OFFERED FOR TAXATION TILL THE SALE OF EQUIPMENTS FROM THE DATE OF PURCHASE OF EQUIPMENT IS CONSIDERED ALO NG WITH THE FACT THAT ON SALE OF EQUIPMENT ASSESSEE OFFERED STCG ALSO FOR TAXATION, THEN, IN OUR OPINION, TRANSACTION UNDER CONSIDERATION CANNOT BE TERMED SHAM OR NON GENUINE. IN THE PRECEDING YEAR, THE AO HAD MADE DETAILED INQUIRIES IN THIS REGARD AND AFTER IN VESTIGATION HE ARRIVED AT A DEFINITE CONCLUSION THAT TRANSACTION WITH PTTL AND PSL WERE GENUINE. AS NO NEW FACTS WERE THERE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, SO, TO HOLD THE SAID TRANSACTION AS NON GENUINE WAS NOT PROPER. IF THE TOTAL TAX OFFERED OVER THE YEARS BY THE ASSESSEE FOR THE SAID TRANSACTION IS CONSIDERED, THEN ALSO IT CAN SAFELY BE SAID THAT IT WAS NOT DEVICE FOR TAX AVOIDANCE. UPHOLDING THE ORDER OF THE FAA, WE DISMISS GROUND N O. 2. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE S TANDS REJECTED. PRONOUNCED IN THE OPEN COURT ON 18 TH JULY , 2012 SD/- (VIJAY PAL RAO) JUDICIAL MEMBER SD/- (RAJENDRA) ACCOUNTANT MEMBER MUMBAI, DATED : 18 TH JULY, 2012 ROSHANI 6 I.T.A. NO.1243/MUM/2005 M/S. DAGGER FORST TOOLS LTD. COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),XIV, MUMBA I 4. COMMISSIONER OF INCOME TAX, 14 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH J MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI