THE ASSTT. CIT, Circle -4, V. GUJARAT LEASE FINANCING LTD.,

ITA 2056/AHD/2003

• Counselvise Citation: 205620514 RSA 2003
• Duration Of Justice: 12 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-05-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 10-04-2015
• Assessment Year: 1995-1996
• Appeal Filed On: 13-05-2003
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C O NO AHD
• Assessee Lawyers: ASSESSMENT YEAR S
• Keywords: Recovery proceedings; Business income; Depreciation; Earning of tax free income; Period of limitation; Initiation of penalty proceedings; Fair market value; Corroborative evidences; Valuation report; Capital receipt; Time period of passing order
• Section: 143(3); 14A; 133(6); 147; 148

Judgement Text

, A IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD (BEFORE SHRI , G.D. AGARWAL,VICEP PRESIDENT AND SHRI S.S. GODARA, JUDICIAL MEMBER) (1) I.T.A.NO.2056/AHD/2003 (BY REVENUE) & C.O. NO.112/ AHD/2004 (BY ASSESSEE) (ASSESSMENT YEARS: 1995-96) (2) I.T.A. NO.2706/AHD/2003(BY REVENUE) & C.O. NO.252/AHD/2004 (BY ASSESSEE) (ASSESSMENT YEARS: 1999-2000) ASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE-4, AHMEDABAD. VS GUJARAT LEASE FINANCING LTD., 7 TH FLOOR,HASUBHAI TOWER, OPP. TOWN HALL, ELLISBRIDGE, AHMEDABAD. / (APPELLANT) / (RESPONDENT) REVENUE BY : SHRI SUBHASH BAINS, CIT(DR) ASSESSEE(S) BY : SHRI S.N.SOPARKAR. PAN AAACG8354N ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 2 / DATE OF HEARING : 10 / 04 /2015 / DATE OF PRONOUNCEMENT: 22/05/2015 / O R D E R PER SHRI S.S. GODARA JUDICIAL MEMBER. THESE REVNEUES TWO APPEALS AND ASSESSEES CROSS OB JECTIONS FOR A.YS. 1995-96 & 1999-2000, ARISE FROM DIFFERENT ORDERS OF CIT(A) IX, AND VIII AHMEDABAD, DATED 20-2-2003 AND 13-3-2003, PASSED IN CASES NO.CIT(A)- IX/AC-4/2/2002-03 AND CIT(A)-VIII/ITO 4(4)/59/02-03 , IN PROCEEDINGS U/S. 143(3) R.W.S. 250 & 147 AND SECTION 143(3) OF THE I NCOME TAX ACT IN SHORT THE ACT; RESPECTIVELY. WE PROCEED ASSESSMENT YEAR-WISE FOR THE SAKE OF CO NVENIENCE AND BREVITY. ASSESSMENT YEAR 1995-96. REVENUES APPEAL ITA 2056/AHD/2004 AND ASSESSEES C.O. NO.112/AHD./2004. 3. THE REVENUES FIRST SUBSTANTIVE GROUNDS CHALLENG E THE CIT(A)S ORDER CANCELLING DISALLOWANCE OF DEPRECIATION OF RS.33,44 ,230/- MADE IN CASE OF ASSETS LEASED OUT TO M/S. CASTLE DUNGLASS PVT. LTD. , ENTERTAINING /REVIVING DEPRECIATION CLAIM OF RS.,23,23,747/- OUT OF DEPREC IATION ALREADY WITHDRAWN OF RS.1,58,63,090/- IN ORIGINAL ASSESSMENT, REVERSI NG DISALLOWANCE OF LEASE RENT, ADOPTING VALUE OF THE PLANT AND MACHINERY FOR THE PURPOSE OF DEPRECIATION AS PER ASSESSEES VALUERS REPORT INST EAD OF THAT COMPUTED BY THE DVO, ANNULLING DISALLOWANCE OF DEPRECIATION ON A PART OF ASSETS NOT PUT ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 3 TO USE AMOUNTING TO RS.21,35,510/- AND DELETING DIS ALLOWANCE OF DEPRECIATION IN RESPECT OF ASSETS LEASED OUT TO M/S . SALEM TEXTILES LTD. OF RS.10,95,959/-; RESPECTIVELY. 4. THE REVENUE REITERATES ITS PLEADINGS IN THE COUR SE OF HEARING AND SEEKS TO RESTORE THE ASSESSING AUTHORITIES FINDINGS INTERALIA MAKING THE IMPUGNED DISALLOWANCES/ADDITIONS. THE ASSESSEE STRO NGLY SUPPORTS THE CIT (A)S ORDER UNDER CHALLENGE. 5. WE START WITH THE REVENUES FIRST GROUND RAISING ISSUE OF DISALLOWANCE OF DEPRECIATION AMOUNTING TO RS.33,44,213/- RELATIN G TO ASSESSEES ASSETS LEASED OUT TO M/S. CASTLE DUNGLASS PVT. LTD. THE A SSESSEE COMPANY IS ENGAGED IN LEASING AND FINANCING BUSINESS. THERE IS NO DISPUTE THAT ALL THE NECESSARY DETAILS BY WAY OF BOOKS, STATEMENT OF COM PUTATION; RELEVANT PARTICULARS ARE ALREADY ON RECORD. THE ASSESSING OF FICER SOUGHT FOR FACTUAL VERIFICATION. HE ISSUED SECTION 133(6) NOTICES TO T HE ASSESSEES LESSEES. ONE OF THEM I.E. CASTLE DUNGLASS DID NOT REPLY. THE ASS ESSEE HAD LEASED A FLUID PACK BOILER AND FREE HEATER THROUGH ITS SUPPLIER M/ S.THERMAC LTD. AND CLAIMED DEPRECIATION @100%. THE ASSESSING OFFICER S OUGHT TO INVOKE THE IMPUGNED DISALLOWANCE FOR WANT OF RESPONSE. THE AS SESSEE FILED COPY OF ITS INVOICE, LEASE AGREEMENT AS WELL AS LESSEES DETAIL S UNDER THE COMPANIES ACT TO DEMONSTRATE GENUINENESS OF THE IMPUGNED LEASED T RANSACTION. THE ASSESSING OFFICER REJECTED THE SAME FOR WANT OF CRO SS VERIFICATION ON THE LESSEES PART. HE TREATED THE ASSESSEES LEASE TRAN SACTION AS A BOGUS ONE BY DRAWING SUPPORT FROM SIMILAR ASSESSMENTS FRAMED IN ASSESSMENT YEARS 1993- 94 AND 1994-95 ON IDENTICAL LINES. THIS RESULTED IN THE IMPUGNED DISALLOWANCE OF RS.33,44,413/-. ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 4 6. THE ASSESSEE CLAIMED IN THE LOWER APPELLATE PROC EEDINGS TO BE REGULARLY RECEIVING THE LEASE MONEY IN QUESTION BY WAY OF ACCOUNT PAYEE CHEQUES ONLY. IT PLACED ON RECORD ALL BILLS OF THE LEASE ENTITY ALONG WITH GATE PASSES, TRANSPORTATION DETAILS AND PROOF OF PAYMENT S. THE CIT (A) QUOTES NON EXISTENCE OF ANY MATERIAL TO HOLD THE ASSESSEES SU PPLIER AND LESSEE (SUPRA) AS BOGUS. HE REFERS TO BANKING CHANNEL OF PAYMENT I N SUPPORT. AND OBSERVES THAT THE ASSESSEE IS ALREADY LEASING BUSINESS. IT STANDS CONCLUDED THAT THERE IS NO MATERIAL ON RECORD TO HOLD THE IMPUGNED LEASE TRANSACTION TO BE BOGUS FOR DENYING THE DEPRECIATION RELIEF IN QUESTION. TH IS LEAVES THE REVENUE AGGRIEVED. 7. WE HAVE HEARD BOTH THE SIDES. RECORDS PERUSED. T HE IMPUGNED ASSESSMENT YEAR IS THE FIRST YEAR OF ASSESSEES CLA IMING DEPRECIATION QUA THE LESSEE IN QUESTION. RELEVANT FACTS STAND NARRATED HEREINABOVE. THE REVENUE SEEKS TO TREAT THE ASSESSEES LEASE TRANSACTION WIT H M/S. CASTLE DUNGLASS AS BOGUS FOR WANT OF CROSS VERIFICATION FROM THE LESSE ES SIDE. IT NOWHERE DOUBTS THAT THE ASSESSEES SUPPORTIVE MATERIAL ALREADY ON RECORD I.E. INVOICES, LEASE AGREEMENTS, LESSEE COMPANYS LISTING DETAILS AND LE ASE PAYMENT RECEIPTS BY WAY OF ACCOUNT PAYEE CHEQUES. WE OBSERVE IN THESE P ECULIAR CIRCUMSTANCES THAT EVEN IF THE ASSESSING AUTHORITY DID NOT RECEIV E CROSS CONFIRMATION FROM THE LESSEES SIDE, THERE IS AMPLE OVERWHELMING EVID ENCE SUPPORTING GENUINENESS OF THE ASSESSEES LEASE TRANSACTIONS IN QUESTION. THE REVENUE HAS ALREADY TREATED ASSESSEES LEASE RECEIPT AS ITS BUSINESS INCOME. THIS CONTRADICTS ITS STAND AS PER HONBLE JURISDICTIONAL HIGH COURTS DECISION IN CIT VS.GUJARAT GAS CO. LTD. (2009) 308 ITR 243 (GUJ). W E AFFIRM THE CIT(A)S FINDINGS IN THESE CIRCUMSTANCES. THE REVENUES FIRS T SUBSTANTIVE GROUND FAILS. ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 5 8. THE REVENUES NEXT GRIEVANCE IS AGAINST THE LOWE R APPELLATE ORDER ENTERTAINING REVIVING DEPRECIATION CLAIM OF RS. 23, 23,747/-. THE ASSESSING OFFICER REFERRED TO ASSESSEES LETTER DATED 18-2-19 98 CONDITIONALLY WITHDRAWING ITS DEPRECIATION CLAIM TO THE TUNE OF R S.1,58,63,900/- MAINLY FOR WANT OF SUPPORTING EVIDENCE. THE IMPUGNED SUM OF R S.23,23,747/- PERTAINS TO ITS LESSEE M/S. GSL (INDIA)LTD. AND VENKATESHWAR HATCHERIES LTD., AMOUNTING TO RS.16,57,500/- AND RS.6,66,247/-; RESP ECTIVELY. THE ASSESSING OFFICER IN HIS FIRST ASSESSMENT ORDER DT. 31-3-1998 HAD REJECTED THE VERY WITHDRAWAL OF DEPRECIATION. THE ASSESSEE PREFERRED APPEAL. THE CIT(A)S EARLIER ORDER DATED 13-3-2001 ACCEPTED THE RELEVANT GROUND AS UNDER:- 2.6. THE THIRD ISSUE INVOLVED I THE FIRST GROUND O F APPEAL IS THE REVIVAL OF THE CLAIM OF DEPRECIATION OF RS.23,23,747/- OUT OF THE TOTAL CLAIM OF DEPRECIATION OF RS.1,58,63,900/- WHICH WAS WITHDRAW N BY THE APPELLANT DURING THE ASSESSMENT PROCEEDINGS. WITH R EGARD THERETO, THE APPELLANT HAS CONTENDED THAT THE PROPOSAL FOR THE W ITHDRAWAL OF THE CLAIM OF DEPRECIATION WAS MADE BY IT TO THE ASSESSI NG OFFICER, SUBJECT TO CERTAIN CONDITIONS, E.G., THE NON-INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE INCOME TAX ACT, TREA TMENT OF RENTAL RECEIPTS THEREON (IN RESPECT OF THE SAID ASSETS) AS CAPITAL RECEIPTS, ETC. HOWEVER, THE ASSESSING OFFICER DID NOT AGREE TO THE AFORESAID TWO CONDITIONS. THEREFORE, THE APPELLANT CONTENDED THAT THE REVIVAL OF ITS CLAIM OF DEPRECIATION OF RS.23,23,747/- IN RESPECT OF TWO ASSETS, NAMELY, ULTRA SPIN RING FRAME AND INJECTION SYSTEM AND PARTS OF THE VALUE OF RS.1,32,60,000/- AND RS.53,29,579/- RESPEC TIVELY DURING THE APPELLATE PROCEEDINGS, WAS JUSTIFIED. THE APPELLANT STATED THAT ONE OF THE REASONS FOR THE WITHDRAWAL OF CLAIM OF DEPRECIA TION WAS THAT THE APPELLANT WAS NOT IN A POSITION TO CONTACT THE LEAS E/SUPPLIER OF THE SAID ASSETS. HOWEVER, SO FAR AS THE APPELLANT WAS CONCE RNED, THE TRANSACTIONS INVOLVED WERE ENTERED INTO BY IT ON A RMS LENGTH PRINCIPLE AND THE PAYMENTS THEREUNDER WERE MADE THROUGH ACCOU NT PAYEE CHEQUES/DEMAND DRAFTS. THE APPELLANT ALSO PLACED RE LIANCE ON A NUMBER OF JUDICIAL DECISIONS IN SUPPORT OF ITS ACTI ON IN REVIVING THE CLAIM OF DEPRECIATION ON THE AFORESAID TWO ASSETS W HICH HAD EARLIER ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 6 BEEN WITHDRAWN BY IT DURING THE COURSE OF THE ASSES SMENT PROCEEDINGS. WITH REGARD TO THE CLAIM OF DEPRECIATION OF RS.16,5 7,500/- ON THE ASSET OF ULTRA SPIN RING FRAME, THE APPELLANT HAD F URNISHED A COPY OF BILL NO. 184 DATED 23-11-1994 OF RS.1,32,60,000/- F ROM THE SUPPLIER, M/S. ARVIND INTEX LTD., WHICH GIVES THE NAME OF BOT H THE APPELLANT AS ALSO THE LESSEE I.E. M/S. G.S.L. INDIA LTD. THIS B ILL ALSO REFERS TO THE GATE PASS NUMBERS VIDE WHICH THE GOODS WERE SENT OUT OF THE FACTORY PREMISES. THE APPELLANT CONTENDED THAT SINCE THE AF ORESAID ASSET HAD BEEN DISPATCHED TO THE LESSEE BY THE SUPPLIER IN TH E MONTH OF NOVEMBER, 1994, IT WAS ENTITLED TO DEPRECIATION THE REON AS PER THE LAW. IN THE CASE OF THE ASSET, NAMELY, INJECTION SY STEM AND PARTS LEASED OUT BY THE APPELLANT TO VENKATESHWAR HATCHERIES LTD ., THE APPELLANT FURNISHED COPIES OF FOUR BILLS FROM THE SUPPLIER, N AMELY, M/S. V.J. EQUIPMENTS LTD. THE BILLS BEARING NOS. 558, 578, 59 2 AND 647 WERE DATED 31-10-1994, 30-11-1994, 26-12-1994 AND 18-3-1 995 RESPECTIVELY. THE TOTAL AMOUNT OF THE AFORESAID BIL LS WORKS OUT TO RS.47,68,586/- AS AGAINST THE COST OF THE ASSET MEN TIONED AT RS.53,29,579/- ON PAGE 15 OF THE ASSESSMENT ORDER. THE BILLS GIVE THE NAME OF THE APPELLANT AS PURCHASER AS ALSO THE NAME OF THE LESSEE NAMELY, VENKATESHWAR HATCHERIES LTD. THREE OF THE B ILLS ALSO INDICATE THE MODE OF TRANSPORT OF THE GOODS. THE APPELLANT C ONTENDED THAT SINCE THE AFORESAID ASSET HAD BEEN DISPATCHED TO TH E LESSEE BETWEEN OCTOBER, 1994 TO MARCH,1995, DEPRECIATION SHOULD BE ALLOWED TO IT THEREON AS PER LAW. 2.6.2. I HAVE CONSIDERED THE CONTENTION OF THE APPE LLANT REGARDING THE REVIVAL OF ITS CLAIM OF DEPRECIATION OF RS. 23, 23, 647/-. THE ISSUE OF ALLOWANCE OF DEPRECATION ON THE AFORESAID TWO ASSET S IS RESTORED TO THE FILE OF THE ASSESSING OFFICER. HE IS DIRECTED TO VE RIFY THE EVIDENCE FURNISHED BY THE APPELLANT DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS AND SUBSEQUENTLY DURING THE COURSE OF T HE APPELLATE PROCEEDINGS AND ALLOW THE CLAIM OF DEPRECIATION ON THE AFORESAID ASSETS IF THE SAME IS PERMISSIBLE UNDER THE LAW. 9. THESE FINDINGS HAVE ATTAINED FINALITY. THE ASSES SING OFFICER TOOK UP CONSEQUENTIAL PROCEEDINGS IN ORDER DATED 28-3-2002. AND DID NOT CONSIDER ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 7 THE SPECIFIC REMAND DIRECTIONS EXTRACTED HEREINABOV E. HE MAINLY PROCEEDED ON ASSESSEES CONDITIONAL WITHDRAWAL ONLY IN REITER ATING THE EARLIER REJECTION OF THE CLAIM. THE CIT(A) HAS AGAIN REFERRED TO HIS EARLIER FINDINGS FOR ACCEPTING THE ASSESSEES CONTENTIONS AS UNDER:- 6.2. CONCLUSION :- I HAVE PERUSED THE LD. COUNSELS SUBMISSION AND THE ORDER OF THE ASSESSING OFFICER. THE ASSESSING OFFICER HAS REPRODUCED ORIGINAL ASSESSMENT ORDER IN THIS RESPEC T ALSO. THEREFORE, THERE IS NO CHANGE IN FACTS. OUT OF THE TOTAL CLAIM OF DEPRECIATION OF RS.1,58,63,090/-, IT WAS CLAIMED BY THE ASSESSEE T HAT HE WANTS TO REVIVE ITS CLAIM IN RESPECT OF DEPRECIATION OF RS.2 3,23,747/-, I.E. ON THOSE ASSES WHICH HAVE BEEN LEASED TO M/S. GSL INDI A LTD. AND VENKATESHWAR HARCHERIES LTD., AND IN RESPECT OF OTH ERS, HE WITHDRAWS THE CLAIM OF DEPRECIATION BECAUSE OF THE INSUFFICI ENCY OF EVIDENCE. AS FAR AS THE TRANSACTION WITH M/S. GSL LTD. AND VENKA TESHWAR HATCHERIES LTD. ARE CONCERNED, THEY ARE GENUINE. PARTIES ARE W ELL KNOWN. THE GSL (INDIA) LTD. IS THE COMPANY OF GOVERNMENT OF GUJARA T AND THE SUPPLIER IS ARVIND INTEX LTD. BELONGING TO WELL KNOWN ARVIND GROUP. SIMILARLY, VENKATESHWAR HATCHERIES LTD. IS A WELL KNOWN COMPAN Y OF THE PUNE. THEREFORE, MERELY BY SAYING THAT PARTIES ARE NON GE NUINE AND SO TRANSACTION ARE ALSO NOT GENUINE, IS NOT CORRECT. T HE CONCLUSION IS NOT BASED ON THE MATERIAL EVIDENCE. I, THEREFORE, DIREC T THE A.O. TO ALLOW THE DEPRECIATION ON THE ASSETS LEASED OUT TO GSL (I NDIA) LTD. AND VENKATESHWAR HATCHERIES LTD. AS REGARDS THE CLAIM OF DEPRECIATION IN RESPECT OF OTHER ASSETS, IT IS STATED THAT IF DEPRECIATION HAS BEEN DISALLOWED OR WITHDRAWN, THEN ONLY INTEREST PORTION OF THE LEASE RENT SHOULD BE T AXED AND NOT FULL LEASE RENT. WHETHER LEASE RENT IS CALCULATED, IT IN CLUDES INTEREST AND ALSO PART OF THE PRINCIPAL AMOUNT. THE ASSESSEES C LAIM APPEARS TO BE CORRECT AND THEREFORE, THE ASSESSING OFFICER IS DIR ECTED TO TAX ONLY THE INTEREST INCOME WHICH IS INCLUDED IN THE LEASE RENT AL AND NOT FULL AMOUNT OF LEASE RENT. 10. HEARD BOTH SIDES. RECORDS PERUSED. IT IS EVIDEN T THAT THE ASSESSEE HAS ONLY MADE CONDITIONAL WITHDRAWAL OF ITS DEPRECIATIO N (SUPRA) IN THE YEAR ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 8 1998. THE CIT (A) HAS ALLOWED IT TO REVIVE THE IMP UGNED DEPRECIATION RELIEF OF RS.23,23,747/- BY HOLDING THAT ALL NECESSARY DET AILS OF TWO ENTITIES ARE AVAILABLE. THE ASSESSING OFFICERS FINDINGS IN BOTH OF HIS ORDERS NOWHERE CONTRADICT THE SAME. THE REVENUE FAILS TO POINT OUT LACK OF DETAILS IN THE INSTANT PROCEEDINGS AS WELL. NOR DOES IT PINPOINT A NY IRREGULARITY OR INFIRMITY IN THE CIT (A)S FINDINGS. IT HAS COME ON RECORD TH AT THE ASSESSEES WITHDRAWAL OF DEPRECIATION WAS A CONDITIONAL ONE ONLY. IT IS M ADE CLEAR THAT RELIEF OF DEPRECIATION IS A STATUTORY BENEFIT WHICH CANNOT BE DENIED FOR SUCH A TECHNICAL REASON IN ABSENCE OF ANY DISPUTE ON ENTIT LEMENT. THEREFORE, WE UPHOLD THE CIT (A) FINDINGS UNDER CHALLENGE. THE RE VENUES SECOND GROUND IS REJECTED. 11 THE REVENUES THIRD SUBSTANTIVE GROUND SEEKS TO RESTORE DISALLOWANCE ON LEASE RENTALS. THIS ISSUE IS MORE AN ACADEMIC ON E. THE CIT (A) IN ALLOWING ASSESSEES SECOND GROUND ADJUDICATED HEREINABOVE QU A CONDITIONAL WITHDRAWAL OF DEPRECIATION HAS OBSERVED THAT ONLY I NTEREST PORTION OF THE LEASE RENT IS TO BE TAXED AND NOT THE GROSS AMOUNT. WE HAVE ALREADY EXTRACTED THE RELEVANT PORTION IN PRECEDING PARAGRA PH. THIS LEASE RENT CALCULATION INCLUDES BOTH PRINCIPAL AS WELL AS INTE REST SUMS. THE CIT (A) HAS ACCEPTED ASSESSEES ALTERNATIVE PLEA THAT IN CASE I TS WITHDRAWAL OF DEPRECIATION IS ACCEPTED, THE LEASE TRANSACTIONS WO ULD STAND TREATED AS A FINANCE TRANSACTIONS. THE REVENUE FAILS TO PROVE T HAT SUCH A TRANSACTION HAS TO BE TAXED ON GROSS SUM INSTEAD OF INTEREST AMOUNT ONLY. IT FAILS IN ITS THIRD GROUND AS WELL. 12. THE REVENUES FOURTH GROUND ASSAILS CORRECTNESS OF THE CIT(A)S ORDER ADOPTING THE VALUE OF ASSESSEES PLANT AND MACHINER Y AS PER GOVT. APPROVED ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 9 VALUERS REPORT INSTEAD OF THE DOVS ESTIMATION. TH E CIT (A)S FINDINGS ELABORATELY DISCUSS ASSESSING OFFICERS OBSERVATION S, CONTENTS OF EARLIER LOWER APPELLATE REMAND ORDER AND ASSESSEES SUBMISSIONS A S UNDER:- SUBMISSION :- THIS ADDITION HAS BEEN DISCUSSED IN PAGE 7 TO 10 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER HAS STATED THAT ON VERIFICATION OF THE VARIOUS INVOICES AND DOCUMENTS IT WAS NOT9CE D THAT SALE AND LEASE BACK TRANSACTIONS WERE CARRIED OUT WITH VARIO US CONCERNS. HE HAS STATED THAT IN RESPECT OF CERTAIN CONCERN THE TRANS ACTIONS WERE FOR NEW ASSETS AND WERE AT THE SAME COST AT WHICH THE PURCH ASES WERE MADE BY LESSEES. THEREAFTER, THE SAID ASSETS WERE SOLD T O THE APPELLANT AND TAKEN BACK ON LEASE. IN THOSE CASES NO DEPRECIATION WAS CLAIMED BY THE LESSEES, THEY CLAIMED LEASE RENTALS. HE HAS STATED THAT IN FOLLOWING CASES, THE ASSETS LEASED OUT WERE OLD ON WHICH DEPR ECIATION WAS CLAIMED BY THE ORIGINAL SUPPLIER I.E. LESSEE AND TH E SAME WERE TRANSFERRED TO THE APPELLANT ON MARKET PRICE AND IT WAS TAKEN BACK ON LEASE. 1. GSFC LTD. RS. 30,78,48,630/- 2. VIDHI INDUSTRIES LTD. RS. 6,33,125/- _______________ RS.30,84,81,755/- ON THIS ISSUE THE ASSESSMENT WAS SET ASIDE BY THE C IT(A)-VI, AHMEDABAD WITH THE FOLLOWING DIRECTIONS. I HAVE CONSIDERED THE OBSERVATIONS OF THE ASSESSI NG OFFICER WHO MADE THE ASSESSMENT, REPORTS OF THE PRESENT AS SESSING OFFICER AS ALSO THE CONTENTIONS OF THE APPELLANT. O N THE SAID BASIS OF THE FACTS ON RECORD, IT IS EVIDENT THAT T HE TRANSACTION FOR THE PURCHASE OF THE BOILER UNIT WAS MADE BETWEEN TW O INDEPENDENT CONCERNS, THE AMOUNT OF PURCHASE CONSID ERATION WAS PAID BY THE APPELLANT TO GSFC AND THE TRANSACTI ON WAS BASED ON A VALID DOCUMENT. THE LAW ALLOWS GRANT OF DEPRECIATION ON ASSETS ACQUIRED UNDER A SALE AND LE ASE BACK TRANSACTION. THEREFORE, DEPRECIATION IS ALLOWABLE O N THE AFORESAID ASSET ON THE BASIS OF THE ACTUAL COST THE REOF AS ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 10 DEFINED IN SUB-SECTION (1) OF SECTION 43 OF THE INC OME TAX ACT. THE ISSUE FOR CONSIDERATION IS AS TO WHAT WAS THE ACTUAL COST OF THE SAID ASSET ON THE DATE OF ITS TRANSFER FROM GSF C TO THE APPELLANT. THE BOILER UNIT HAD BEEN PURCHASED BY GS FC FROM BHARAT HEAVY PLATE AND VESSELS LTD., VISHAKHAPATNAM , AND WAS COMMISSIONED AT THE PREMISES OF THE FORMER IN MARCH , 1989. ITS ORIGINAL VALUE WAS STATED TO BE RS.1442.84 LAKHS. T HUS, WHEN THE AFORESAID ASSET WAS SOLD BY GSFC TO THE APPELLANT O N 27-09- 1994, IT HAD BEEN USED BY THE FORMER FOR A PERIOD O F MORE THAN 5 YEARS. AS THE STATED TRANSFER CONSIDERATION OF THE BOILER UNIT OF RS.28,77,09,000/- ( EXCLUDING THE SALE TAX OF RS .2,01,39,630/-) APPEARED TO BE EXCESSIVE, I GOT CONDUCTED CERTAIN E NQUIRIES, THROUGH THE PRESENT ASSESSING OFFICER, REGARDING TH E FAIR MARKET VALUE OF THE BOILER UNIT AT THE TIME OF ITS TRANSFE R FROM GSFC TO THE APPELLANT. BHARAT HEAVY PLATE AND VESSELS LTD., VISHAKHAPATNAM, IN THEIR LETTER DATED 13-11-2000, H AVE INFORMED THAT THE APPROXIMATE SALE PRICE OF A NEW B OILER OF BHPV MAKE OF 130TPH CAPACITY (IDENTICAL TO THE ONE SUPPLIED BY THEM TO GSFC) WAS RS.2,500/- LAKHS AS OF 1994. THE AFORESAID SALE PRICE ALSO INCLUDED THE COST OF ENGINEERING, S UPPLY TRANSPORTATION TO SITE, TAXES AND DUTIES, ERECTION AND TESTING AND COMMISSIONING OF THE AFORESAID UNIT GSFC, IN THEIR COMMUNICATION DATED 15-11-2000, STATED THAT THE A FORESAID BOILER UNIT HAD BEEN INSURED AT A VALUE OF RS.1997 LAKHS BEFORE THE SAME WAS SOLD TO THE APPELLANT. AFTER ITS SALE, THE BOILER UNIT WAS INSURED AT A VALUE OF RS.3079 LAKHS. THE AFORESAID SHOWS THAT WHEN THE SALE PRICE OF THE NEW BOILER UN IT, IDENTICAL TO THE ONE PURCHASED BY GSFC IN MARCH, 1989, WAS RS 2500 LAKHS IN 1994, WHICH PRICE INCLUDED COST OF ALL THE ALLIE D EXPENSES, THE STATED TRANSFER CONSIDERATION OF THE OLD BOILER UNI T OF RS.28,77,09,000/-, (USED BY GSFC FOR MORE THAN 5 YE ARS) AS, ON 2709-1994 WAS INFLATED. THE ASSESSING OFFICER OBSER VED THAT BOTH THE PARTIES HAD AGREED TO THE INFLATED TRANSFE R CONSIDERATION OF THE ASSET AS MUCH AS ARRANGEMENT W AS BENEFICIAL TO THEM THE APPELLANT BENEFITED BY HIGH CLAIM OF DEPRECIATION AND GSFC BENEFITED BY OBTAINING FUNDS ON SOFT TERMS. THE AFORESAID OBSERVATION MADE BY THE ASSESSING OFFICER FOR THE INFLATED PURCHASE CONSIDERATION OF THE A SSET ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 11 APPEARS TO BE IN ORDER. THE TERM ACTUAL COST HAS BEEN DEFINED IN SUB-SECTION (1) OF SECTION 43 OF THE INCOME TAX ACT. THIS TERM HAS BEEN DEFINED IN THE MAIN BODY OF THE SUB-SECTIO N TO MEAN THE ACTUAL COST OF THE ASSET TO THE ASSESSEE. HOWEV ER, EXCEPTION TO THE AFORESAID GENERAL RULE HAVE BEEN PROVIDED IN EXPLANATION 4A AND EXPLANATION 3 TO SECTION 43(1) OF THE INCOME TAX ACT. EXPLANATION 4A PROVIDES THAT THE ACTUAL COST OF A N ASSET TO AN ASSESSEE, IN A SALE AND LEASE BACK TRANSACTION, WIL L BE ITS WDV AT THE TIME OF ITS TRANSFER IN THE BOOKS OF THE TRANSF EROR. HOWEVER, THE AFORESAID EXPLANATION WOULD NOT APPLY TO THE CA SE OF THE APPELLANT AS IT WAS INSERTED IN THE STATUTE PROSPEC TIVELY WITH EFFECT FROM 1-10-1996. EXPLANATION 3 TO SECTION 43 (1) OF IT READS AS UNDER:- WHERE, BEFORE THE DATE OF ACQUISITION BY THE ASSE SSEE, THE ASSETS WERE AT ANY TIME USED BY ANY OTHER PERSO N FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION AND THE ASSESSING OFFICER IS SATISFIED THAT THE MAIN PURPOS E OF THE TRANSFER OF SUCH ASSETS, DIRECTLY OR INDIRECTLY TO THE ASSESSEE, WAS THE REDUCTION OF A LIABILITY TO INCOM E TAX ACT (BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST), THE ACTUAL ASSET TO THE ASSESSEE SH ALL BE SUCH AN AMOUNT AS THE ASSESSING OFFICER MAY, WITH T HE ......................THE CASE. THE ASSET OF THE BOILER UNIT HAD BEEN USED BY GSFC FOR THE PURPOSES OF ITS BUSINESS BEFORE ITS ACQUISITION BY THE APPELLANT. THE ASSESSING OFFICER HAD ALSO OBSERVED IN THE ORDE R OF ASSESSMENT THAT THE MAIN PURPOSE OF THE TRANSFER OF THE AFORESAID ASSET WAS REDUCTION OF ITS LIABILITY OF T HE APPELLANT BY CLAIMING 100% DEPRECIATION ON ITS ENHANCED COST. T HE INFORMATION RECEIVED FROM BHARAT HEAVY PLATE VESSEL S LTD., VISHAKHAPATNAM, BY ITS LETTER DATED 13-11-2000,HAS ESTABLISHED THAT THE TRANSFER CONSIDERATION OF THE BOILER UNIT STATED AT RS.28,77,09,000/- (EXCLUDING SALES-TAX OF RS.2,01,3 9,630/-) IN THE INVOICE OF GSFC DATED 27-9-1994, WAS ARTIFICIALLY I NFLATED TO BENEFIT THE PARTIES TO THE TRANSACTION. THEREFORE, THE ASSESSING OFFICER IS DIRECTED TO DETERMINE THE ACTUAL COST OF THE BOILER UNIT OF THE CO-GENERATION SYSTEM, ON THE DATE OF IT S TRANSFER ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 12 FROM GSFC TO THE APPELLANT, I.E. 27-09-1994, HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE, IN ACCORDANCE WITH THE PROVISIONS OF EXPLANATION 3 TO SECTION 43(1) OF THE INCOME TAX ACT. THE ASSESSING OFFICER SHOULD MAKE A REFERENCE TO THE DEPARTMENTAL VALUATION OFFICER FOR OBTAINING HIS EX PERT ADVICE ON THE FAIR MARKET VALUE OF THE ASSET AS ON 27-9-19 94 BY TAKING RECOURSE TO THE RELEVANT PROVISIONS OF THE INCOME T AX ACT IN THIS REGARD. THE AMOUNT OF DEPRECIATION ALLOWABLE SHOULD BE WORKED OUT ON THE ACTUAL COST OF THE BOILER UNIT DETERMI NED AS ABOVE. IN RESPECT OF THE ASSETS LEASED OUT TO VIDHI INDUST RIES LTD. ALSO THE CIT(A) HAD VIDE PARA 2.5.2 OF THE APPELLATE ORDER G IVEN SIMILAR DIRECTIONS. THE ASSESSING OFFICER HAS HOWEVER, REPEATED THE ARG UMENTS WHICH WERE RAISED IN THE ORIGINAL ASSESSMENT ORDER AND HE HAS NOT REFERRED TO THE DIRECTIONS OF THE CIT (A). I THE COURSE OF A PPEAL PROCEEDINGS BEFORE HIM THE APPELLANT HAD GIVEN DETAILED SUBMISS ION AND ALSO SUBMITTED THAT THE ASSESSING OFFICER HAD NOT FOLLOW ED THE DIRECTIONS OF THE CIT (A) GIVEN HEREINABOVE. IT WAS ALSO SUBMITT ED THAT THE VALUE SHOWN BY THE APPELLANT WAS SUPPORTED BY THE REPORTS OF THE GOVERNMENT APPROVED VALUER IN RESPECT OF BOTH THE A SSETS. COPIES OF SUCH REPORTS ARE ALREADY ON THE RECORD AND ARE ALSO SUBMITTED OF PAPER BOOK BEING NOS. 272 TO 279, 286-399 & 400-405 . IT IS SUBMITTED THAT THE ASSESSING OFFICER IN THE ABSENCE OF THE VA LUATION REPORT OUGHT TO HAVE ACCEPTED THE VALUE WHICH HAS BEEN SUPPORTED BY THE DETAILED REPORT OF THE APPROVED VALUER. THE ASSESSING OFFICE R HAD IN HIS REMAND REPORT; WITH REFERENCE TO THE ABOVE SUBMITTED THAT THE CIT (A) HAD GIVEN ABOVE DIRECTIONS. THE MATTER WAS REFERRED TO THE VALUATION OFFICER. THE VALUATION REPORT WAS NOT RECEIVED TILL THE TIME BARRING DATE. THE A.R. OF THE ASSESSEE WAS REQUESTED TO EXP EDITE THE MATTER OF VALUATION. HOWEVER, HE HAS STATED THAT AS THE VALU ATION REPORT PROVED ILLUSIVE THE ORDER WAS PASSED BY HIM KEEPING THE TI ME BARRING DATE IN MIND. THE A.R. HAD SUBMITTED COPY OF VALUATION REPO RT IN RESPECT OF ASSETS GIVEN TO GLFL WHICH WAS RECEIVED FROM THE VA LUATION OFFICER. IT IS SUBMITTED THAT THE VALUE AS SHOWN BY THE VALUATI ON OFFICER IS OF RS.26,54,15,400/- AS ON THE DATE OF TRANSACTIONS. I T IS SUBMITTED THAT THE VALUE SO DETERMINED REQUIRES TO BE RECONSIDERED N THE LIGHT OF THE FACT THAT THE DIFFERENCE IS MARGINAL AND LESS THAN 15%. APART FROM THIS, ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 13 THE VALUE AS PER APPROVED VALUER IS REASONABLE. THE REFORE, I ANY CASE, THE ASSESSING OFFICER SHOULD HAVE BEEN DIRECTED TO ADOPT THE VALUE ON THE BASIS OF THE SAID REPORT. AS REGARDS THE ASSETS LEASED OUT TO VIDHI INDUSTRIES LTD. THE A.R. SUBMITTED THAT EVEN AFTER SPECIFIC DIRECTIONS FROM THE CIT (A) NO REFERENCE WAS MADE TO VALUATION OFFICER FOR VALUATION OF SUCH ASSETS. THEREFORE, THE ASSESSING OFFICER SHOULD HAVE ADOPTED VALUE AS PER THE REPORT OF THE GOVT. APPROV ED VALUER WHICH IS ON THE RECORD. 7.1. CONCLUSION :- I HAVE PERUSED THE ASSESSEES SUBMISSION. AS PER THE DIRECTION OF THE CIT (A) THE PLANT AND MACHINER Y WHICH WAS LEASED TO GSFC WAS REFERRED TO VALUATION OFFICER BY THE AS SESSING OFFICER. REPORT OF THE VALUATION OFFICER WAS NOT RECEIVED TI LL DATE OF PASSING OF THE ASSESSMENT ORDER AND DUE TO THIS REASON THE ASS ESSING OFFICER HAS TO PASS THE ORDER WITHOUT CONSIDERING THE VALUATION REPORT. THUS, THERE IS NO SUBSTANCE IN THE LD. COUNSELS CONTENTION THA T THE ASSESSMENT ORDER HAS BEEN PASSED IGNORING THE VALUATION REPORT . IF THERE WAS NO VALUATION REPORT, HOW THE A.O. CAN FOLLOW THAT REPO RT. THERE IS NO PROVISION IN THE ACT WHICH EMPOWER THE ASSESSING OF FICER TO DIFFER THE LIMITATION PERIOD. THUS, THE ASSESSING OFFICERS AC TION IS PERFECTLY JUSTIFIED. THE VALUATION REPORT HAS BEEN FORWARDED BY THE VALUATION REPORT (PLANT AND MACHINERY) VIDE HIS LETTER D. 28- 11-2002. COPY OF WHICH WAS GIVEN TO THE ASSESSING OFFICER. THE VALUA TION OFFICER HAS VALUED THE PLANT AND MACHINERY AT RS.26,54,15,468/- AS ON THE DATE OF TRANSACTION. WHEREAS THE ASSESSEE HAS VALUED THE PL ANT AND MACHINERY AT RS.28,77,09,000/-. IT IS STATED THAT S INCE THE DIFFERENCE IS MARGINAL AND LESS THAN 15%, THEREFORE THE ASSESSING OFFICER SHOULD BE DIRECTED TO ADOPT THE VALUE ON THE BASIS OF THE APP ROVED VALUERS REPORT AS THE ASSESSEES VALUATION REPORT IS ALSO B ASED ON THE APPROVED VALUER. SINCE THE DIFFERENCE IN VALUATION IS NOT MU CH COUPLED WITH THE FACT THAT IT IS ESTIMATED VALUE, THEREFORE, DUE REG ARD HAS TO BE GIVEN TO THE ASSESSEES CONTENTION. 7.2. VALUATION IS SUBJECTIVE. NO AMOUNT OF ARGUMENT S, LOGIC, REASONS CAN ACHIEVE MATHEMATICAL PRECISION. THEREFORE, SMAL L MARGIN BY LESS THAN 15% HAS TO BE IGNORED. SECONDLY, IF FOR ANY RE ASON VALUE IS DISTURBED, THEN IN SUCH CASE TO THAT EXTENT LEASE R ENT HAS TO BE ALSO REDUCED IN THE YEAR UNDER QUESTION AND ALSO IN SUBS EQUENT YEAR. THEREFORE, BY CHANGING THE VALUE NO USEFUL PURPOSE MAY BE SERVED ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 14 WHEN TRANSACTION IS GENUINE. I, THEREFORE DIRECT TH E A.O. TO ALLOW DEPRECIATION ON THE VALUE TAKEN BY THE APPROVED VAL UER. AS REGARDS THE ASSETS LEASED TO VIDHI INDS. LTD., IT IS SUBMIT TED THAT EVEN AFTER SPECIFIC DIRECTION FROM THE CIT (A), NO REFERENCE H AS BEEN MADE TO THE VALUATION OFFICER FOR THE VALUATION OF THE ASSETS. IN THE CIRCUMSTANCES, THE A.O. SHOULD HAVE ADOPTED THE VALUE OF THE APPRO VED GOVERNMENT VALUER WHICH IS ON THE RECORD. THE PLANT AND MACHIN ERY WHICH HAS BEEN LEASED TO VIDHI INDUSTRIES LTD. ONLY COST RS.6 ,33,125/-. THE ASSESSMENT PERTAINS TO A.Y. 1995-96. NOW AT THIS ST AGE NO USEFUL PURPOSE WOULD BE SERVED BY REFERRING THIS PROPERTY TO VALUATION. NOBODY KNOWS AFTER 8-9 YEARS WHAT HAPPENED TO THE L EASED ASSETS. THEREFORE, THERE IS NO POINT TO ALLOW THE A.O. TO R EFER THE PROPERTY FOR VALUATION. SINCE THE VALUATION OF THE PLANT AND MA CHINERY IS SUPPORTED BY GOVERNMENT APPROVED VALUER, THEREFORE, THE A.O. IS DIRECTED TO ALLOW DEPRECIATION ON THE VALUE OF THE APPROVED GOV ERNMENT VALUER. 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RELEVANT FINDINGS. THE DISPUTE BETWEEN THE PARTIES IS THAT OF VALUATION OF THE LEASED ASSETS FOR THE PURPOSE OF COMPUTING DEPRECIATION. THE DVOS ESTIMA TES VALUE THEREOF AS RS.26,54,15,468/-. THE ASSESSEE DRAWS SUPPORT FROM A GOVERNMENT VALUERS REPORT QUOTING ITS PRICE AS RS.28,77,09,000/-. THIS DIFFERENCE COMES WITHIN 10-15% RANGE. UNDOUBTEDLY, SUCH A VALUATION IS A HI GHLY FACTUAL ISSUE TO BE ADJUDICATED AS PER PECULIAR FACTS AND CIRCUMSTANCES OF EACH CASE. FACTS RELEVANT TO THE ISSUE DO NOT INDICATE ANY TIME GAP BETWEEN PURCHASE AND LEASE BACK OF THE IMPUGNED ASSETS. THIS ASSESSEE PU RCHASED THE BOILER IN QUESTION FROM M/S. GSFC ON 27-9-1994. AND LEASED IT BACK ON THE VERY NEXT DAY. THUS THERE IS NO TIME GAP OR VALUE DEPRECIATIO N. THE ASSESSEE HAS INCURRED SALES TAX EXPENDITURE OF RS.2,01,39,630/- @ 7% ON THE COST PRICE OF RS.28,77,09,000/-. THE REVENUE FAILS TO REBUT ALL THESE FACTS. IT TRANSPIRES THAT COST PRICE AND VALUATION ARE THE SAME. ONE OF THE VALUER IS DVO AND THE ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 15 OTHER ONE IS GOVERNMENT APPROVED. WE OBSERVE IN ALL THESE CIRCUMSTANCES THAT THIS DIFFERENCE OF LESS THAN 15% DOES NOT DESE RVE TO BE INTERFERED. THE CIT (A)S FINDINGS ARE AFFIRMED ACCORDINGLY. 14. THE REVENUES FIFTH SUBSTANTIVE GROUND CHALLENG ES THE CIT (A)S ORDER DELETING DEPRECIATION DISALLOWANCE OF RS.21,35,510/ - ON PART OF ASSETS NOT PUT TO USE. THE ASSESSING OFFICER HAD INVOKED THIS DISALLOWANCE BY HOLDING THAT THE ASSETS IN QUESTION HAD NOT BEEN PUT TO USE FOR BUSINESS BEFORE END OF THE RELEVANT PREVIOUS YEAR. THE CIT (A) HAS DELE TED THE IMPUGNED DISALLOWANCE AS FOLLOWS: I HAVE PERUSED THE ASSESSEES SUBMISSION AND THE R EASONS GIVEN BY THE ASSESSING OFFICER IT IS SUBMITTED THAT DISALLOWANCE WAS MADE ON THE GROUND THAT ASSET WAS NOT PUT TO USE BY THE LESSEE FOR ITS BUSINESS. THE ASSESSING OFFICER HAS NOT DOUBTED GENUINENESS OF TH E TRANSACTION, HE DISALLOWED MERELY ON THE GROUND THAT THE ASSET WAS NOT PUT TO USE BY THE LESSEE BEFORE THE END OF THE PREVIOUS YEAR. IN THIS CONNECTION IT IS TO BE STATED THAT AS FAR AS THE ASSESSEE IS CONCERNED, HE HAS LEASED OUT THESE ASSETS BEFORE THE END OF THE PREVIOUS YEAR. D ELIVERY OF THE ASSET WAS GIVEN IN MARCH, 1995. THEREFORE, THE APPELLANT HAS USED THESE ASSETS FOR ITS BUSINESS. LEASE RENT AS BEEN ALSO AC COUNTED FOR DURING THE YEAR UNDER CONSIDERATION. THE IMPORTANT ISSUE IN TH E APPELLANTS CASE RELEVANT TO ITS CLAIM FOR DEPRECIATION IS THAT AS T O AT WHAT POINT OF TIME, ITS CLAIM FOR DEPRECIATION ARISES. THIS ISSUE HAS B EEN EXAMINED AT LENGTH IN THE CASE OF THE APPELLANT BY CIT (APPEALS )-VII, AHMDABAD IN HIS ORDER DATED 3-7-1997 FOR THE A.Y. 1992-93. HE H ELD THAT ONCE THE ASSET HAS BEEN DELIVERED BY WAY OF LEASING TO A LES SEE AND LEASE RENT HAS STARTED, THE SAID ASSET SHOULD BE DEEMED TO HAV E BEEN USED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. I AGREE WI TH THE CONCLUSION OF CIT (A)VII. THE VIEW TAKEN BY HIM HAS BEEN FOLLOWED SUBSEQUENTLY BY OTHER CSIT(A) IN ASSESSEES OWN CASE. THE ABOVE VIE W IS ALSO SUPPORTED BY CIT VS. SHAAN FINANCE (P) LTD. 231 ITR 308 (SC) AND CIT VS. BANSAL CREDITS LTD. 254 ITR 69 (DELHI). IN VIEW OF THE ABO VE, THE ASSESSEE IS ENTITLED TO DEPRECIATION ON THE ASSETS LEASED TO NE HA PROTEINS. ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 16 15. WE HAVE GIVEN OUT THOUGHTFUL CONSIDERATION TO T HE RIVAL CONTENTIONS. THE CASE FILES REVEAL THAT THIS IS A RECURRING ISSU E. THE TRIBUNAL IN ASSESSMENT YEARS 1992-93 & 1994-95 IN ASSESSEES OWN CASES HAS UPHELD CIT (A)S ORDERS HOLDING THAT WHEN A LEASING COMPANY DELIVERS ASSETS BY WAY OF LEASE TRANSACTION AND LEASE RENT COMMENCES, THE CONCERNED ASSET IS DEEMED TO HAVE BEEN PUT TO USE. A CO-ORDINATE AT PAGE 120 PAR A 14 OF THE PAPER BOOK IN DECIDING ITAS 1677 & 1742/AHD/1999 ON 28-2-2014 DEC IDES THE VERY ISSUE IN ASSESSEES FAVOUR BY QUOTING CASE LAW OF HON. JURIS DICTIONAL HIGH COURT IN CIT VS. PINACLE FINANCE LTD. 268 ITR 395 (GUJ.). THE RE VENUE FAILS TO POINT OUT ANY DISTINCTION ON FACTS OR LAW. WE UPHOLD THE CIT (A) S FINDINGS ACCORDINGLY. 16. THE REVENUES LAST GROUND SEEKS TO RESTORE DISA LLOWANCE OF DEPRECIATION AMOUNTING TO RS.10,95,959/- IN RESPECT OF ASSETS LEASED OUT TO M/S. SALEM TEXTILES. A PERUSAL OF THE PAPER BOOK PA GE 103 PARA-15 CONTAINING THE TRIBUNALS ORDER IN ASSESSEES OWN C ASE FOR A.Y. 1994-95 UPHOLDS ITS DEPRECIATION CLAIM QUA THE VERY ENTITY. IT OBSERVES THAT WHEN ALL INGREDIENTS OF PURCHASE AND LEASE BACK/SALE TRANSAC TION ARE FOUND TO BE GENUINE, DEPRECIATION RELIEF HAS TO BE GRANTED. THE REVENUE FAILS TO POINT OUT ANY CHANGE IN THE CIRCUMSTANCES. WE ADOPT CONSISTEN CY IN THESE FACTS AND UPHOLD THE CIT(A)S FINDINGS UNDER CHALLENGE. THE REVENUES APPEAL ITA NO.2056/AHD/2003 IS DISMI SSED 17. NOW WE COME TO ASSESSEES CROSS OBJECTION NO.11 2/AHD/2004 CHALLENGING VALIDITY OF SECTION 148 NOTICE FOR WANT OF JURISDICTION SINCE NO NOTICE U/S. 143 (2) HAD BEEN ISSUED UNDER THE PROVI SO. IT DOES NOT PRESS FOR ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 17 THE SAME IN THE COURSE OF HEARING. THEREFORE, THE A SSESSEES CROSS OBJECTIONS ARE DISMISSED AS NOT PRESSED. ASSESSMENT YEAR 1999-2000. REVENUES APPEAL ITA.NO.2706/AHD/2003 AND ASSESSEE S C.O.252/AHD/2004. 18. THE REVENUES GROUNDS CHALLENGE THE CIT(A) ORDE R DELETING DEPRECIATION DISALLOWANCE/ADDITION OF RS.11,97,187/ - AND ANOTHER ADDITION OF INTEREST ON DEBENTURES AMOUNTING TO RS.39.60 LA KHS. 19. THE ASSESSEES CROSS OBJECTION ON THE OTHER HAN D ASSAILS THE LOWER APPELLATE ORDER UPHOLDING SEC.14A INTEREST DISALLOW ANCE OF RS.11,61,35,000/- HOLDING IT TO BE RELATABLE TO ITS EXEMPT INCOME. BOTH PARTIES STRONGLY ARGUED IN FAVOUR OF THEIR RE SPECTIVE PLEADINGS. THEY ALSO SUPPORT THE CIT (A)S ORDER TO THE EXTENT IT IS IN THEIR FAVOUR. WE TAKE UP REVENUES APPEAL. 20. THE REVENUES FIRST GROUND SEEKS TO RESTORE DEP RECIATION DISALLOWANCE OF RS.11,97,187/-.THE ASSESSEE HAD CLAIMED DEPRECIA TION RELIEF OF RS.35,01,48,105/- ARISING IN CASE OF ASSETS GIVEN O N LEASE AND ALSO ON ITS BUSINESS ASSETS. IT FILED DEPRECIATION CHART IN SUP PORT. THE ASSESSING OFFICER REFERRED TO HIS PREDECESSORS FINDINGS IN A.Y. 1996 -97 DISALLOWING THE VERY CLAIM ON ASSETS LEASED OUT TO SALEM TEXTILES LTD., BY TREATING IT AS A MERE LOAN TRANSACTION DISALLOWED THE ENTIRE CLAIM ACCORDINGLY . 21. THE CIT (A) ACCEPTS THE ASSESSEES CONTENTION A S UNDER:- ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 18 3. REGARDING THE DISALLOWANCE OF DEPRECIATION AS M ENTIONED IN PARA-4 OF THE ASSESSMENT ORDER, THE A.R. INFORMED T HAT THE ASSESSMENT ORDER FOR A.Y. 1996-97 HAS BEEN SET ASIDE WHICH INC LUDES THE ISSUE RELATED TO DEPRECIATION ON ASSETS TO KEDIA DISTALLA RIES AND DATAREX. 3.1. THE A.R. HAS GIVEN THE REASONS IN DETAIL AS TO WHY THE DEPRECIATION HAVE BEEN ALLOWED BUT ALSO INFORMED T HAT THE ISSUE WHICH WAS SET ASIDE BY THE CIT (A) FOR A.Y. 1996-97 , HAS NOW BEEN DECIDED BY THE ASSESSING OFFICER AND THAT THE APPEA L IS PENDING BEFORE THE CIT (A). THE APPELLANT ALSO REPRODUCED THE SUBM ISSIONS MADE BEFORE THE CIT (A) ON ASSETS LEASED TO DATAREX AND SUBMITTED THAT THE TRANSACTION WAS NOT SHAM HOWEVER, IF THE DEPRECIATI ON IS NOT ALLOWED, THE LEASE RENT SHOULD ALSO NOT BE BROUGHT TO TAX. 3.2. THE DEPRECIATION IS REQUIRED TO BE GIVEN ON TH E WDV BROUGHT FORWARD AS PER RECORDS, AS THE ASSETS TO THESE TWO PARTIES WERE LEASED OUT IN THE PREVIOUS ASSESSMENT YEARS. AND AS GENUIN ENESS OF THE TRANSACTION AND ALLOWABILITY OF THE DEPRECIATION OR NON TAXABILITY OF LEASE RENTAL IN CASE TRANSACTION IS TREATED AS SHAM , IS PENDING BEFORE CIT (A) FOR ADJUDICATION FOR A.Y. 1996-97, THE GROU ND IS CONSEQUENTIAL TO THE FINDING THAT MAY BE GIVEN BY THE LD.CIT (A). NO FINDING ON MERIT NEED BE GIVEN. THE ASSESSING OFFICER IS DIRECTED TO GIVE THE CONSEQUENTIAL EFFECT ON THE ASSETS LEASED TO KEDIA DISTALLARIES AND DATAREX, ON RECEIPT OF THE DECISION OF CIT (A) ON T HIS ISSUE. 3.3. AS REGARD OTHER ASSETS, THE APPELLANT SUBMITTE D THAT THE ASSESSING OFFICER DID NOT TREAT THE LEASING TRANSAC TION AS NON-GENUINE. THE ISSUE BEFORE THE A.O. WAS WHETHER THE APPELLANT WAS ENTITLED TO DEDUCTION OF 50% OF THE DEPRECIATION AS ASSETS WERE USED FOR LESS THAN 6 MONTHS. HE DREW ATTENTION TO THE RELEVANT PARAGRA PH OF THE ASSESSMENT ORDER. IT IS SEEN FROM PARAGRAPH 7.1.1 AND 7.1.2 OF THE AS SESSMENT ORDER OF A.Y. 1996-97 THAT THE ASSESSING OFFICER HAS ALLOWED HALF DEPRECIATION AND THE LEASE WAS HELD GENUINE WITH RESPECT TO ASSE TS LEASED TO CORE HEALTH CARE AND BANASWARA SYNTEX. THE ASSESSING OFF ICER IS DIRECTED TO GRANT THE DEPRECIATION ON THESE 2 ASSETS ON WDV BRO UGHT FORWARD ON 1.4.1997 AT THE APPLICABLE RATES. ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 19 3.4 AS FAR AS THE ASSETS LEASED TO VEKATESHWARA HAT CHERIES ARE CONCERNED, THE ASSESSING OFFICER ALLOWED DEPRECIATI ON ON ASSETS WORTH RS.5,06,440/-. THE A.O. IS DIRECTED TO ALLOW THE DE PRECIATION AS PER WDV BROUGHT FORWARD. 3.4.1. HOWEVER, FOR THE BALANCE ASSET OF THE VALUE OF RS.10,12,880/-, THE ASSESSING OFFICER OBSERVED AS UNDER:- OUT OF THE TOTAL LEASE TRANSACTION FOR RS.15,19,52 0/-, THE ASSESSEE HAD SUBMITTED ONE INVOICE FOR RS.5,06,443/ - AND HAD SUBMITTED PROFORMA INVOICES DT. 17-5-95 FOR RS.5,0 6,440/- AND DATED 20-7-95 FOR RS.5,06,440/-. FURTHER, THE PROFO RMA INVOICES SUBMITTED BY THE ASSESSEE DID NOT ESTABLISH THAT TH E ASSESSEE IS THE OWNER OF THE ASSETS, AND ACCORDINGLY, THE ASSES SEES CLAIM FOR DEPRECIATION FOR THE SAID TWO PROFORMA INVOICES FOR RS.5,06,440/- EACH IS DISALLOWED. WITHOUT PREJUDIC E TO THE ABOVE, BASED ON THE REPLY OF THE SUPPLIER, THE ASSE TS HAVE BEEN DELIVERED IN FEBRUARY, 1996; THE ASSESSEES CLAIM F OR DEPRECIATION MAY BE ADMISSIBLE ON ESTABLISHING THE FACT THAT THE ASSESSEE IS THE OWNER OF THE ASSETS. HOWEVER, THE A SSESSEE CANNOT ESTABLISH THE SAME, AND ACCORDINGLY, THE ASS ESSEES CLAIM FOR DEPRECIATION ON RS.10,12,880/- @ 25% IS DISALLO WED. 3.4.2 THUS, DURING THE ASSESSMENT YEAR 1996-97 THE A.O. DID NOT ALLOW THE DEPRECIATION ON RS.10,12,880/-. AS THE ALLOWABI LITY IS CONSEQUENTIAL TO THE DECISION OF CIT (A) FOR A.Y. 1 996-97,HE IS DIRECTED TO GIVE CONSEQUENTIAL EFFECT FOLLOWING ORDER OF CIT (A) FOR A.Y. 1996-97 AS AND WHEN RECEIVED AND IN CASE HE HAS TAKEN A VI EW ON THE ISSUE IN THE ASSESSMENT ORDER FOR A.Y. 1997-98, THE SAME MAY BE FOLLOWED. 3.5. AS THE DEPRECIATION OF ASSETS LEASED TO SALEM TEXTILE IS CONCERNED THE SAME HAS BEEN DECIDED IN FAVOUR OF THE APPELLAN T BY APPELLATE ORDER NO.CIT(A) VIII/AC.4/57/02-03 DATED 30-01-2003 FOR ASSESSMENT YEAR 1994-95. 22. WE HAVE HEARD RIVAL CONTENTIONS. THE CIT (A) HA S MAINLY REFERRED TO HIS FINDINGS IN A.Y. 1996-97 ON THE VERY ISSUE OF DEPRE CIATION ON LEASE ASSETS IN ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 20 CASE OF THE SAME ENTITIES. HE HAS MERELY DIRECTED T HE ASSESSING OFFICER TO PASS CONSEQUENTIAL ORDER IN CONFORMITY WITH THE PRE VIOUS ASSESSMENT YEARS FINDINGS. THE TRIBUNAL IN A.Y, 1994-95 (SUPRA) ALSO HOLDS THAT ONCE THE ASSESSEES LEASE TRANSACTIONS ARE HELD AS GENUINE, THE NATURAL COROLLARY FLOWS IS THAT OF DEPRECIATION CLAIM. THE REVENUE FAILS TO POINT OUT ANY DISTINCTION ON FACTS OR LAW. WE ADOPT CONSISTENCY IN THESE FACT S AND AFFIRM THE CIT (A)S FINDINGS. 23. THE REVENUES SECOND SUBSTANTIVE GROUND SEEKS T O RESTORE ADDITION ON ACCOUNT OF INCOME FROM INTEREST ON DEBENTURES AMOUN TING TO RS.39.60 LAKHS. THE ASSESSEE HOLDS 18% OF NON CONVERTIBLE DEBENTURE S OF M/S.AKAI IMPEX LTD. WORTH RS.220 LAKHS. IT DID NOT OFFER ANY INCOM E THEREFROM. IT FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING. THE ASSESSING OFFI CER MADE THE IMPUGNED ADDITION OF RS.39.60 LAKHS KEEPING IN MIND ALL THES E FACTS AND THIS METHOD OF ACCOUNTING. 24. THE CIT (A) HAS ACCEPTED THE ASSESSEES CONTENT ION AS UNDER:- 4. REGARDING SECOND GROUND OF APPEAL, THE AUTHORIS ED REPRESENTATIVE, SUBMITTED AS UNDER:- THE ASSESSING OFFICER HAS MADE ADDITION OF RS.39,6 0,000/- BEING INTEREST ON DEBENTURES OF AKAI IMPEX LTD., W ORTH RS.220/- LAKHS AT THE RATE OF 18%. HE HAS STATED THAT THE APPELLAN T COMPANY FOLLOWS MERCANTILE METHOD OF ACCOUNTING AND THE INTEREST RE LATING TO THE YEAR UNDER CONSIDERATION IS REQUIRED TO BE TAXED IN THIS YEAR ITSELF. IN THIS CONNECTION THE APPELLANT MAY REFER TO THE FOLLOWING SUBMISSIONS MADE TO THE ASSESSING OFFICER VIDE LETTER DATED 18-3-200 2. 2. IN YOUR ABOVE REFERRED LETTER YOUR GOODSELVES H AVE PROPOSED TO MAKE THE ADDITION OF RS.39,60,000/- ON ACCOUNT OF INTEREST ON 18% NON-CONVERTIBLE DEBENTURES OF 220 LAKHS ISSUED BY A KAI IMPEX LTD., WHICH THE ASSESSEE HAS NEITHER RECEIVED NOR ACCRUED . WE HAVE TO BRING ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 21 TO YOUR NOTICE THAT W.E.F. 1-4-1989 INTEREST ON SEC URITIES IS TAXABLE U/S. 56(2)(ID) UNDER THE HEAD INCOME FROM OTHER SOURCE S. ORIGINALLY, SUCH INTEREST ON SECURITY WAS TAXABLE U/S.18 ON THE BASIS OF ACCRUAL OF INCOME BUT AS NOW THE SAID INTEREST ON SECURITY IS TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES, YOUR PROPOSAL TO TAX THE SAID INTEREST WHICH IS NEITHER RECEIVED NOR ACCRUED TO T HE ASSESSEE IS INVALID IN LAW. THE APPELLANT MAY SUBMIT THAT IT HAD GIVEN LEASE OF GAS TURBINE FOR THE CAPTIVE POWER PLANT OF AKAI IMPEX LTD., FOR RS.485. 89 LAKHS. THE TOTAL VALUE OF THE PLANT WAS RS.16 CRORES. THE OTHER PART IES GIVING SUCH LEASE WERE ITC BHADRACHALAM FINANCE AND INVESTMENTS LTD., ICICI LTD., TATA FINANCE LTD., L & T FINANCE LTD., ETC. THE APPELLAN T RECEIVED ONLY RS.35.38 LAKH BY WAY OF PAYMENT OF LEASE RENTALS AN D AKAI IMPEX LTD., WAS TOTALLY IRREGULAR IN PAYMENT OF LEASE RENT. IN THE ABOVE CIRCUMSTANCES, AS PER THE OFFER OF AKAI IMPEX LTD., FOR RESTRUCTURING PROPOSAL, THE LEASE RENTALS OF RS.220 LAKHS UPTO DE CEMBER, 1997 WERE AGREED TO BE CONVERTED INTO NON-CONVERTIBLE DEBENTU RES FOR 18 MONTHS. THEY HAD ISSUED DEBENTURES ON 16 TH MARCH, 1998. THE APPELLANT HAD ALSO FILED CRIMINAL CASES FOR THE REC OVERY OF THE AMOUNTS IN THE METROPOLITAN COURT OF AHMEDABAD. HOWEVER, AK AI IMPEX LTD., FAILED TO MAKE THE PAYMENTS. TATA FINANCE LTD., HA D FILED A WINDING UP PETITION AGAINST THE SAID COMPANY AND OBTAINED WIND ING UP ORDERS. AKAI IMPEX LTD., HAD OBTAINED STAY AGAINST THE APPO INTMENT OF LIQUIDATOR. AKAI IMPEX LTD., HAD ALSO NOT MADE ANY PAYMENT OF INTEREST TO THE APPELLANT ON DEBENTURES. IT MAY BE APPRECIAT ED THAT IN VIEW OF THE HISTORY OF ACCOUNT OF AKAI IMPEX LTD., STATED A BOVE AND THE FACT THAT THE DEBENTURES WERE ISSUED ON CONVERSION OF OU TSTANDING LEASE RENTALS WHICH WERE NOT BEING PAID BY THEM, THE APPE LLANT JUSTIFIABLY DID NOT CONSIDER THE INTEREST ON SUCH DEBENTURES AS ITS INCOME UNLESS AND UNTIL IT WAS RECEIVED BY IT. IT IS SUBMITTED TH AT I THE CIRCUMSTANCES THE INTEREST ON DEBENTURES CANNOT BE CONSIDERED AS INCOME TILL IT IS RECEIVED. IT IS NOT THE REAL INCOME OF THE APPELLAN T. CONSIDERING THIS ASPECT THERE BEING NO REAL INCOME, WHICH IS NEVER R ECEIVED BY THE ASSESSEE, THE SAME SHOULD NOT BE TAXED. THIS VIEW I S SUPPORTED BY THE DECISION OF THE SUPREME COURT IN THE CASE OF GODHRA ELECTRICITY CO. LTD., REPORTED AT 225 ITR-61. ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 22 4.1 ON GOING THROUGH THE DETAILS PRODUCED, IT IS N OTICED THAT THE TOTAL AMOUNT OF LEASE RENTAL RECEIVABLE WAS RS.485. 89 LAKHS AND THAT THE APPELLANT HAD RECEIVED A VERY SMALL PORTION OF THE LEASE RENTAL DUE AND THAT THE OTHER PARTIES WHO HAVE PROVIDED LE ASE FINANCE ALSO DID NOT RECEIVE THE LEASE RENTAL ON GASTURBINE. AS THE RESTRUCTURE PROPOSAL OF THE OUTSTANDING AMOUNT, PART OF THE LEA SED RENTAL CONVERTED INTO NON-CONVERTIBLE DEBENTURES FOR 18MON THS YET, THE APPELLANT DID NOT RECEIVE ANY AMOUNT OF LEASE RENT OR THE INTEREST ON THE DEBENTURES. EVEN OTHER PARTIES VIZ. ITC BHADRAC HALAM & ICICI LTD., COULD NOT RECEIVE LEASE RENTAL AND HAD FILED WINDIN G UP PETITION AGAINST THE SAID COMPANY. THEREFORE, THE HISTORY OF THE LEASE CLEARLY SHOWS THAT IT WAS NOT IN A POSITION TO PAY THE MONE Y AND THEREFORE, TO DRAW THE CONCLUSION THAT THE INTEREST ON THE DEBENT URES WOULD MATERIALISE OR NOT SUBJECTIVE DECISION OF THE MANAG EMENT CONSIDERING THE TRACK RECORD OF THE COMPANY. IN MY OPINION, IN VIEW OF THE FACTS PRESENTED THE DECISION OF THE MANAGEMENT NOT TO OFF ER INTEREST FOR TAXATION ON ACCRUAL BASIS IS NOT UNREASONABLE. EVE N THOUGH, APPELLANT HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, IN VIEW OF THE DECISION OF S.C. CITED BY THE APPELLANT, WHAT CAN B E BROUGHT TO TAX IS ONLY THE REAL INCOME. AS THE APPELLANT WAS OF THE OPINION THAT THE INCOME WAS NOT LIKELY TO BE RECEIVED AT ALL, ITS DE CISION NOT TO ACCOUNT FOR SUCH INCOME ON ACCRUAL BASIS APPEARS TO BE IN O RDER. HENCE, THE ADDITION MADE ON THIS ACCOUNT IS DELETED. 25. HEARD BOTH THE PARTIES. RELEVANT FINDINGS PERUS ED. THE REVENUE REITERATES THE ASSESSING OFFICERS LINE OF ACTION. THE ASSESSEE HAS EXPLAINED CORROBORATING CIRCUMSTANCES REGARDING NON RECEIPT O F THE IMPUGNED INTEREST SUM. AND ALSO THAT THE PAYER ENTITY M/S. AKAI IMPEX IS FACING WINDING UP AS WELL AS RECOVERY PROCEEDINGS (SUPRA). THE REVENUE S EEKS TO TREAT THIS HYPOTHETICAL INTEREST AS ASSESSEES INCOME. IT DOES NOT DISPUTE THE AFORESAID CIRCUMSTANCES. WE OBSERVE THAT WHEN THERE IS NOT EV EN A PROBABILITY OF THE OTHER PARTY IN PAYING INTEREST ON DEBENTURES AS OF NOW, THE VERY SUM CANNOT BE HELD TO HAVE BEEN ACCRUED OR ARISEN FOR BEING RE COGNIZED AS INCOME IN ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 23 VIEW OF THE HONBLE APEX COURT DECISION IN (2013) 35 8 ITR 295 (SC) CIT VS. EXCEL INDUSTRIES LTD. THE CIT (A)S FINDINGS STAND AFFIRMED. THE REVENUES GROUND IS REJECTED. REVENUES APPEAL ITA 2706/AHD/2003 IS DISMISSED. 26. NOW WE COME TO ASSESSEES CROSS OBJECTION CHALL ENGING SECTION 14A INTEREST DISALLOWANCE OF RS.11,61,35,000/- RELATIN G TO ITS DIVIDEND INCOME OF RS. 55.68 LAKHS EXEMPT U/S. 10(33) OF THE ACT ARISI NG FROM SHARES INVESTMENT OF RS.7,213.38 LAKHS. THE ASSESSING OFFICER VIEWED THE SAID INVESTMENT AS MADE PARTLY FROM BORROWED FUNDS. THE ASSESSEE WAS H AVING INTEREST FREE FUND OF RS.63,901.68 LAKHS. ITS INTEREST PAYMENTS R EAD RS. 10,292,42 LAKHS. THE ASSESSING OFFICER COMPUTED PROPORTIONATE INTERE ST EXPENSES RELATING TO THE IMPUGNED INVESTMENT VIS--VIS FUNDS AVAILABLE A S RS.1161.35 LAKHS. HE SOUGHT TO DISALLOW THE SAME U/S. 14A OF THE ACT. 27. THE ASSESSEE INTERALIA PLEADED THAT IN ABSENCE OF NEXUS BETWEEN PROPORTIONATE EXPENDITURE AND ITS EXEMPT INCOME, MA JOR PORTION OF ITS INVESTMENTS TO HAVE BEEN WAY BACK IN A.Y. 1994-95 S HOWING AVAILABILITY OF INTEREST FREE FUNDS OF RS.16036.11 LAKHS, INTEREST FREE FUNDS OF RS.12325.44 LAKHS IN THE CAPITAL ACCOUNT ETC. IT CHALLENGED AP PLICABILITY OF SEC.14A SINCE ITS DIVIDEND ALREADY STOOD TAXED UNDER THE DISTRIBU TION TAX. AND ALSO THAT IT IS A NON BANKING FINANCE COMPANY SHOWING THE IMPUGNED DIVIDENDS AS BUSINESS INCOME LIABLE TO BE TAXED. THE ASSESSING OFFICER RE JECTED ALL THESE CONTENTIONS. HE OBSERVED THAT SEC.14A STOOD ATTRAC TED SINCE THE IMPUGNED DIVIDENDS HAD BEEN TREATED AS EXEMPT INCOME U/S. 10 (33) AND ITS NATURE WAS ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 24 THAT OF INVESTMENT THAN STOCK IN TRADE. THIS RESULT ED IN THE IMPUGNED DISALLOWANCE OF RS.1161.35 LAKHS. 28. THE CIT (A) HAS UPHELD THE ASSESSING OFFICERS ACTION AS FOLLOWS:- 5. REGARDING THE DISALLOWANCE OF INTEREST OF THE D IVIDEND INCOME, THE APPELLANT RELIED UPON THE SUBMISSIONS MADE BEFO RE THE ASSESSING AND STATED THAT NO DISALLOWANCE SHOULD HAVE BEEN MA DE. WITHOUT PREJUDICE IT IS SUBMITTED THAT THE MAJOR PORTION OF THE INVESTMENTS WERE MADE IN F.Y. 1994-95, YET THE ASSESSING OFFICE R APPLIED THE PROPORTION OF INVESTMENT TO LOANS PERTAINING TO THE F.Y. 1998-99. IT IS CONTENDED THAT THAT HE SHOULD HAVE ADOPTED THE RATI O RELEVANT TO F.Y. 1994-95 WHICH WOULD COME TO 6.5% AS AGAINST 11.5% T AKEN BY THE ASSESSING OFFICER. THE APPELLANT ALSO SUBMITTED THE CHART OF INVESTMENTS ALONG WITH THE EQUITY CAPITAL AND RESER VE AND STATED THAT THE DISALLOWANCE WOULD COME TO RS.670.54 LAKHS IF T HE RATIO OF F.Y. 1994-95 WAS APPLIED. 5.1. IN ITS SUBMISSION, THE A.R. DREW ATTENTION TO THE AMENDMENT BROUGHT BY FINANCE ACT, 1997, WHEREBY THE DIVIDEND DISTRIBUTED BY THE CORPORATE WAS BROUGHT TO TAX AND HE ALSO DREW ATTEN TION TO THE PROVISIONS OF SECTION 115-0 TO MAKE CONTENTION THAT THERE IS NO REASON FOR OBSERVING THAT THE BORROWED FUNDS WERE USED FOR EARNING INCOME EXEMPT FROM TAX. 5.2. I DO NOT AGREE WITH THE REASONING OF THE APPEL LANT GIVEN IN THIS PARAGRAPH THOUGH THE APPELLANT MAY BE LIABLE TO PAY TAXES ON DIVIDEND DISTRIBUTED, YET THE INCOME EARNED BY WAY OF DIVIDE ND IN ITS OWN CASE IS AN EXEMPTED INCOME AND TO WHICH SECTION 14A HAS CORRECTLY BEEN APPLIED BY THE ASSESSING OFFICER. 5.3. THE AUTHORISED REPRESENTATIVE CONTENDED THAT A T THE TIME WHEN THE ASSESSEE HAD MADE THE BORROWING, IT WAS FO R THE PURPOSE OF BUSINESS OF INVESTMENT AND THAT EVEN IF, IT IS NOT FOR THE PURPOSE OF BUSINESS, IT WAS FOR THE PURPOSE OF ACQUIRING INCOM E EARNING ASSET WHICH INCOME WAS LIABLE TO TAX. THE AUTHORISED REPR ESENTATIVE EXTENSIVELY QUOTED THE DECISION OF THE HONBLE GUJA RAT HIGH COURT IN THE CASE OF LAXMI AGENTS LTD. (125 ITR-227). ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 25 HE RELIED ON THE FINDING THAT THE GENERAL PRINCIPL E THAT EXPENDITURE INCURRED FOR EARNING INCOME FALLING UND ER A PARTICULAR HEAD SHOULD BE DEDUCTED ONLY UNDER THAT HEAD BUT TH E SAME HAS TO BE READ SUBJECT TO THE SPECIAL PROVISION CONTAINED IN CLAUSE (III) SEC. 36(1) AS REGARDS ALLOWABILITY OF INTEREST. IT RELIED ON T HE FOLLOWING OBSERVATIONS MADE THEREIN. IF ONCE IT IS ESTABLISHED THAT CAPITAL WAS BORROWE D FOR THE PURPOSE OF BUSINESS, IT IS IMMATERIAL HOW THAT BORR OWED CAPITAL WAS APPLIED BECAUSE ALL THAT CL. (III) OF SEC. 36(1) RE QUIRES IS THAT BORROWINGS, ON WHICH INTEREST IS PAID, SHOULD BE FO R THE PURPOSE OF BUSINESS... THE BUSINESS INCOME, AS OBSERVED BY TH E COURT, WAS BROKEN UP UNDER DIFFERENT HEADS ONLY FOR THE PURPOSE OF TH E COMPUTATION OF THE TOTAL INCOME AND THEREFORE, BY THAT BREAKING UP , THE INCOME DID NOT CEASE TO BE THE INCOME OF THE BUSINESS, THE DIF FERENT HEADS OF INCOME BEING ONLY THE CLASSIFICATION PRESCRIBED BY THE ACT FOR COMPUTATION. THUS, THE SUPREME COURT HAS IN THIS C ASE DEFINITELY HELD THAT THE BREAKING UP WHICH IS CONTEMPLATED BY THE D IFFERENT HEADS OF INCOME IS ONLY FOR THE PURPOSE OF COMPUTATION OF TH E TOTAL INCOME AND THAT BEING SO, IF A QUESTION ARISES FOR ANY PURPOSE OTHER THAN COMPUTATION OF TOTAL INCOME, THE COURT CAN LOOK INT O THE INTRINSIC NATURE OF THE INCOME WHICH IS EARNED AND CAN CONSID ER FROM THE COMMERCIAL POINT OF VIEW WHETHER THIS INCOME WAS EA RNED FOR THE BUSINESS PURPOSE OR NOT. THOUGH FOR THE PURPOSE OF COMPUTATION OF THE INCOME INTEREST ON SECURITIES WAS SEPARATELY CLASSIFIED, INCOME BY WAY OF INTEREST FROM BUSINESS IF SECURITIES WERE PART OF THE INCOME FROM BUSINESS IF SECURITIES WERE PART OF THE TRADING ASSETS. THE C OURT ALSO OBSERVED THAT WHETHER A PARTICULAR INCOME WAS PART OF THE IN COME FROM BUSINESS FELL TO BE DECIDED NOT ON THE BASIS OF THE PROVISIONS OF SEC.6 BUT ON COMMERCIAL PRINCIPLES. AS ALREADY OBSERVED B Y US ABOVE, THIS COURT HAS ALSO TAKEN THE SAME VIEW WITH REFERENCE T O THE WORKING OUT OF THE PROVISIONS OF SEC. 23A OF THE ACT OF 1922 IN DISTRIBUTORS (BARODA) PVT.LTD., VS. C.I.T. (1968) 69 ITR-614 (GUJ.) AS AF FIRMED BY THE SUPREME COURT IN CIT VS. DISTRIBUTORS (BARODA) P. LTD., ( 1972) 83 ITR -377. 5.4. THE APPELLANT ITSELF ADMITS THAT IT WAS ENGAGE D IN THE BUSINESS OF HOLDING OF INVESTMENTS. AN ASSESSEE ENGAGED IN T HIS BUSINESS WOULD ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 26 TAKE INTO CONSIDERATION THE PROFIT ACCRUING BY WAY OF DIVIDEND ON SHARES, INTEREST ON DEBENTURES, RECEIPT OF SHARES O N CONVERSION OF DEBENTURES AND PROFIT/LOSS ON SALE OF THE INSTRUMEN TS. ALL SUCH RECEIPTS WOULD NECESSARILY BE BUSINESS RECEIPTS. AS IS CLEAR FROM EXTRACTS QUOTED IN PARA 5.3, THOUGH DIVIDEND MAY BE TAXABLE UNDER ANY OTHER HEAD, THE ESSENTIAL CHARACTERISTICS OF RECEIPT IS B USINESS RECEIPT WHICH IS EXEMPT FROM TAX. THE APPELLANT ITSELF ADMITS THA T INTEREST BEARING FUNDS HAVE BEEN UTILISED FOR BUSINESS OF INVESTMENT AND THEREFORE, ENTIRE INTEREST IS ALLOWABLE U/S.36(1)(III). THIS B EING SO, HOW CAN IT DENY THAT A PART OF INTEREST IS SPENT ON ACQUIRING INVES TMENTS, WHICH IS ATTRIBUTABLE TO INCOME BY WAY OF DIVIDEND, BUSINESS INCOME. I DO NOT FIND ANY MERIT THAT SUCH ALLOCABLE INTEREST IS NOT COVERED BY PROVISIONS OF SECTION 14A. IT IS THE ONUS OF THE APPELLANT TO ESTABLISH BY WAY OF FUND-FLOW AT THE TIME OF INVESTMENTS, THAT BORROWED FUNDS WERE NOT USED FOR MAKING INVESTMENTS. IN FACT FREE FUNDS AND BORROWED FUNDS HAVE BEEN USED FOR BUSINESS OF LEASE, FINANCING AND INVESTMENTS AND THERE HAS BEEN NO DISTINCTION KEPT WHILE UTILISING FUNDS FOR EITHER OF THE BUSINESS. IN ABSENCE OF SAME, THE RATIO TO ALLO CATE THE INTEREST TO EXEMPTED INCOME IS LOGICAL AND REASONABLE. FURTHER, THE CONTENTION THAT THE RATIO OF F.Y. 1994-95 BE APPLIED AS MAJOR INVESTMENTS WERE MADE IN THAT YEAR IS ALSO NOT ACCEPTABLE. THE ARGUM ENT COULD BE CONSIDERED HAD HE SHOWN WITH REGARD TO FUND FLOW TH AT THE BORROWED FUNDS WERE UTILISED IN THE RATIO OF 6.5 FROM INVEST MENT IS UP BY 48 CRORES, FREE FUNDS ARE UP BY 32 CRORES THAT TOO BY WAY OF PROFIT OF THE YEAR AS AGAINST RISE IN BORROWED FUNDS BY 594 CRORE S. IF THE FUND FLOW IS EXAMINED IN DETAIL IT MAY COME ON THAT DAY ONLY BORROWED FUNDS OF THE YEAR WERE USED TO MAKE INVESTMENTS. THERE APPE ARS TO BE NO BASIS TO APPLY THE RATIO OF THE YEAR 1994-95. 5.5. THEREFORE, THE CONTENTIONS OF THE APPELLANT AR E REJECTED AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS SUSTA INED. 29. WE HAVE HEARD BOTH THE PARTIES. CASE RECORDS ST ANDS PERUSED. THERE IS NO DISPUTE ABOUT FACTS AND FIGURES STATED HEREIN ABOVE. THE ASSESSEE HAS ITSELF TREATED THE IMPUGNED DIVIDEND OUTSIDE ITS BU SINESS HEAD. IT REITERATES THE STAND ADOPTED BEFORE THE LOWER AUTHORITIES. ITS MAIN CONTENTION IS THAT MAJOR PORTION OF THE IMPUGNED INVESTMENTS WAS MADE IN THE YEAR 1994-95. ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 27 AND THAT INTEREST FREE FUNDS OF RS.16306.11 LAKHS C OMPRISING OF SHARE CAPITAL OF RS.2170.19 LAKHS ALONG WITH RESERVES AND SURPLUS ES OF RS.14135.92 LAKHS WERE ALREADY AVAILABLE IN THE SAID ASSESSMENT YEAR. A SIMILAR POSITION APPEARS IS STATED TO HAVE CONTINUED IN THE IMPUGNED ASSESSMENT YEAR AS WELL WHEREIN ITS BALANCE SHEET WOULD SHOW SHARE CAPITAL OF RS.2716.05 LAKHS WITH RESERVES OF RS.9609.31 LAKHS. AN ALTERNATIVE PLEA I S ALSO RAISED THAT THE DISALLOWANCE IN QUESTION CANNOT EXCEED THE EXEMPT I NCOME ITSELF. HOWEVER, IT FAILS TO DISCHARGE ITS ONUS OF NOT HAVING INCURR ED ANY SUM RELATED TO EXEMPT INCOME IN QUESTION IN EARLIER ASSESSMENT YEA RS OR IN THE IMPUGNED ASSESSMENT YEAR. THERE IS NO ISSUE THAT PRESENT CAS E INVOLVES HUGE VOLUMES OF INTERESTS AND EXEMPT INCOME. THE ASSESSEE ALSO F AILS TO TABULATE DETAILS OF ITS INTEREST FREE FUNDS BY PLACING ON RECORD ALL TH E CORROBORATIVE EVIDENCE. WE REJECT ITS ARGUMENT ON THIS SCORE ALONE. HOWEVER , THE FACT ALSO REMAINS THAT THE LOWER AUTHORITIES HAVE ALSO NOT EXAMINED A NY FLOW CHART OF THE ASSESSEES INVESTMENTS. WE DEEM IT APPROPRIATE TO Q UOTE DECISION OF THE TRIBUNAL CHANDIGARH BENCH IN ACIT V/S PUNJAB STATE CO-OP. MARKETING FEDERATION ITA NO.548/CHD/2011 HOLDING THAT SECTION 14A DISALLOWANCE CANNOT EXCEED EXEMPT INCOME ITSELF AND ACCEPT ASSES SEES ALTERNATIVE PLEA (SUPRA). THE IMPUGNED SECTION 14A DISALLOWANCE OF R S.11,61,35,000/- IS RESTRICTED TO RS.55.68 LAKH ACCORDINGLY. THE ASSESS EES C.O.NO.252/AHD/2004 IS PARTLY ALLOWED. 30. THE REVENUES APPEAL ITA NO.2056/AHD/2003 IS DI SMISSED AND ASSESSEES C.O. NO.112/AHD/2004 IS DISMISSED AS NOT PRESSED. REVENUES APPEAL NO.2706/AHD/2003 IS DISMISSED AND ASSESSEES C.O.NO.252/AHD/2004 IS PARTLY ALLOWED. ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 28 ORDER PRONOUNCED IN THE COURT ON - 05 - 2015 AT AHMEDABAD. SD/- SD/- (G. D. AGARWAL) (S.S. GODARA) VICE PRESIDENT JUDICIAL MEMBER. PATKI AHMEDABAD; DATED 22 /05/2015 ! ' / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A)-III 5. !' ## , / DR, ITAT, 6. '$% & / GUARD FILE. # / $ %& ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION- : 18-5-2015 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE ITA NO2056 & 2706/AHD/2003 C.O.NO.112 & 252/2004 A.Y.1995-96 AND 1999-2000 29 DICTATING MEMBER 20-5-2015 & 21-5-15 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S. 22-5-15 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT .. 5. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 6. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 7. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 8. DATE OF DESPATCH OF THE ORDER