M/s Mahashakthi Construction Co, Hubli V. JCIT, Hubli

ITA 702/BANG/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51238 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 30-06-2011
• Assessment Year: 1997-1998
• Appeal Filed On: 20-05-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JACINTA ZIMIK VASHAI
• Assessee Lawyers: S NITYA
• Keywords: Depreciation; Cost of acquisition; Revenue expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL BANGALORE BENCH A, BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER I.T.A. NO.702(BANG.)/2010 ( ASSESSMENT YEAR : 1997-98) M/S MAHASHAKTHI CONSTRUCTION CO., MURDESH BAHAWAN, 604/B GOKUL ROAD, HUBLI APPELLANT VS THE JOINT COMMISSIONER OF INCOME-TAX, SPECIAL RANGE, HUBLI. RESPONDENT APPELLANT BY : SMT S.NITYA, ADVOCATE RESPONDENT BY : SMT. JACINTA ZIMIK VASHAI, ADDL.CIT O R D E R PER SMT P. MADHAVI DEVI, JM; THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-HUBLI, DATED 16-03-2010 FOR THE ASSESSME NT YEAR 1997-98. 2. THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE CI T(A) IN HOLDING THAT THE LEASE RENTAL INCOME CLAIMED TO BE PAID BY THE ASSESSEE IS NOT ALLOWABLE AND THAT THE TRANSACTIONS OF LOANS WAS A COLOURABLE DEVICE. 2.1 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS PARTNERSHIP FIRM. IT FILED ITS RETURN OF INCOME FO R THE RELEVANT ASSESSMENT YEAR ON 21-10-1997 SHOWING A TOTAL INCOM E OF ITA.NO.702(B)/10 2 RS.1,50,630/-. DURING THE ASSESSMENT PROCEEDINGS U /S 143(3), THE AO OBSERVED THAT THE ASSESSEE HAS PAID LEASE RE NTALS TO THE EXTENT OF RS.11,74,800/- TO ITS SISTER CONCERN TOWA RDS LEASED MACHINERIES. AND THE ASSESSEE WAS ASKED TO FILE THE LEASE AGREEMENT AND ALSO THE REASONS FOR THE PAYMENT OF L EASE RENTALS. THE ASSESSEE HAS STATED IN ITS REPLY THAT ALL THE L EASED MACHINERIES WERE USED IN EXECUTING THE CONTRACT WORK AT SITES A ND THEREFORE, THE PAYMENTS OF LEASE RENTALS ARE TO BE ALLOWED IN FULL. COPIES OF LEASE AGREEMENTS WERE ALSO FILED. FROM THE SAID LE ASE AGREEMENTS, THE AO OBSERVED THAT THE ASSESSEE HAD TAKEN ON HIRE ONE TATA HITACHI EXCAVATOR AND THREE INGERSOLL RAND COMPRESS ORS AND THE MONTHLY LEASE RENTALS WAS RS.62,300/- FOR HITACHI E XCAVATOR AND RS.34,200/- FOR THREE COMPRESSORS AND THE TOTAL LEA SE RENTAL AMOUNTING TO RS.11,58,000/- AND SERVICE CHARGES OF RS.16,800/- HAS BEEN CLAIMED AS DEDUCTION FROM THE INCOME OF TH E RELEVANT ASSESSMENT YEAR. 3. AFTER GOING THROUGH THE LEASE AGREEMENTS MINUTE LY, THE AO CAME TO THE CONCLUSION THAT LEASE AGREEMENTS ARE NOTHING BUT HIRE PURCHASE AGREEMENTS OF MACHINERIES, BECAUSE TH E LEASE RENTALS EXCEEDED THE COST OF THE ACQUISITION OF MAC HINERIES AND ALSO INTEREST THEREON. THEREFORE, HE CAME TO THE C ONCLUSION THAT IN THE NAME OF LEASE AGREEMENT, IT IS IN FACT A HIRE P URCHASE AGREEMENT AND THEREFORE, THE PAYMENT FOR THE PURCHA SE OF THE MACHINERY IS NOT ALLOWABLE AS EXPENDITURE. HE PLA CED RELIANCE ITA.NO.702(B)/10 3 UPON THE JUDGMENT OF MCDOWELL & CO. VS CTO AS REPO RTED IN 154 ITR 148( SC) TO COME TO THE CONCLUSION THAT THE COL OURABLE VEIL HAS TO BE LIFTED TO FIND THE REALITY. HE ACCORDINGLY, DISALLOWED THE DEDUCTION FROM THE YEAR PROFIT AND MADE THE ADDITIO N OF RS.11,74,800/- AS TOTAL INCOME OF THE ASSESSEE. 3.1 AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEF ORE THE CIT(A) WHO CONFIRMED THE ORDER OF THE AO. AGAINST T HE SAME THE ASSESSEE PREFERRED FURTHER APPEAL BEFORE THE TRIBUN AL VIDE ITS ORDER DATED 26-04-2006, WHEREIN THE TRIBUNAL AFTER TAKING INTO CONSIDERATION THE ASSESSEE S GROUNDS OF APPEAL THA T THE COMMISSIONER HAS NOT CONSIDERED THE ASSESSEES GROU NDS OF APPEAL NOS.5,6 & 7 BEFORE HIM AND ALSO HAVING OBSER VED THAT IF IT IS A FACT THAT THE AMOUNT PAID TOWARDS RENT HAS BEE N SHOWN IN THE HANDS OF THE SISTER CONCERN IN INCOME-TAX PROCEEDIN GS, THEN THE SAME HAS TO BE ALLOWED TO THE ASSESSEE, AND SINCE T HE GROUNDS 5,6 & 7 HAVE NOT BEEN CONSIDERED BY THE LEARNED CIT(A), THE ENTIRE ISSUE RAISED IN THE APPEAL WAS REMANDED TO THE LEAR NED CIT(A) WITH A DIRECTION TO RECONSIDER THE SAME AFRESH AFTER GIV ING REASONABLE OPPORTUNITY TO THE ASSESSEE. IN COMPLIANCE TO THE O RDER OF THE TRIBUNAL, THE CIT(A) PASSED A FRESH ORDER CONFIRMIN G THE ORDER OF THE ASSESSING OFFICER. 3.2 AGGRIEVED, THE ASSESSEE IS IN APPEAL AGAIN BEFO RE US. 4. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THIS BEING A SECOND ROUND OF LITIGATION, THE CIT(A) OUGH T TO HAVE ITA.NO.702(B)/10 4 FOLLOWED THE DIRECTIONS OF THE TRIBUNAL AND VERIFIE D IF THE AMOUNT PAID TOWARDS RENT IS SHOWN AS INCOME ON THE HANDS O F THE SISTER CONCERN IN THE INCOME TAX PROCEEDINGS AND THEN THE SAME OUGHT TO HAVE BEEN ALLOWED. SHE SUBMITTED THAT THE CIT(A) H AS TRAVELED BEYOND THE DIRECTIONS GIVEN BY THE TRIBUNAL IN GOIN G INTO THE MERITS OF THE CASE AND IN DECIDING THE ISSUE AGAINS T THE ASSESSEE. 4.1 REGARDING THE POWERS OF THE CIT(A) IN GIVING EF FECT TO THE ORDER OF THE TRIBUNAL, THE ASSESSEE PLACED RELIANCE UPON THE DECISION IN THE CASE OF CIT VS KAMLA TOWN TRUST REPORTED IN 198 ITR 191(1992) AND SMT.MUKUNDKUMARI VS KVSD NAMOOND ARI 17 TH ITO, D-I WARD, BOMBAY REPORTED I 118 ITR 433 (1979 ). SHE ALSO PLACED RELIANCE UPON THE DECISIONS OF THE HON BLE APEX COURT IN THE CASE OF M/S MODI INDUSTRIES LTD & ANOTHER VS CIT & ANOTHER 216 ITR 759 TO THE EFFECT THAT ANY MODIFIED OR REVISED ASSESSMENT AFTER COMPLETION OF THE ORDER U/S 1243 O R SEC.144 WILL BE FRESH ORDER PASSED TO IMPLEMENT THE DIRECTION OF A HIGHER AUTHORITY AND IF THE DIRECTION OF THE HIGHER AUTHOR ITY IS NOT FAITHFULLY CARRIED OUT, THE ORDER WILL BE ERRONEOUS AND IT WILL BE LIABLE TO BE SET ASIDE. 4.2 WITHOUT PREJUDICE TO THE ABOVE ARGUMENT, LEARN ED COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT THE MA CHINERY INVOLVED ARE THREE INGERSOLL RAND COMPRESSORS AND O NE TATA HITACHI EXCAVATOR WHICH ARE UNDISPUTEDLY USED FOR T HE CONTRACT BUSINESS OF THE ASSESSEE. SHE SUBMITTED THAT THE MA CHINERY DOES ITA.NO.702(B)/10 5 NOT BECOME THE PROPERTY OF THE LESSEE AT ANY TIME, BUT REMAINS THE PROPERTY OF THE LESSOR AND THEREFORE, IT CANNOT BE DEEMED AS HIRE PURCHASE DEAL. SHE SUBMITTED THAT MANY TIMES BUSIN ESSMEN MAY NOT BE ABLE TO MAKE DOWN PAYMENT TOWARDS PURCHASE O F THE MACHINERY AND THEREFORE, THEY ARE TAKEN ON LEASE FO R WHICH LEASE RENTALS OVER A PERIOD OF TIME MAY EXCEED THE COST O F MACHINERY, BUT THAT IS NOT A GROUND FOR DOUBTING THE GENUINENE SS OF THE TRANSACTION. 5. AS REGARDS THE RELIANCE OF THE AO ON THE RULING OF APEX COURT IN THE CASE OF M/S MCDOWELL & CO., CITED SUPR A, SHE PLACED RELIANCE ON THE DECISIONS OF THE APEX COURT IN THE CASE OF UNION OF INDIA & ANOTHER VS AZADI BACHAO ANDOLAN & ANOTHER R EPORTED IN 263 ITR 706 (2003) TO THE EFFECT THAT THE CITIZEN I S FREE TO CARRY ON ITS BUSINESS WITHIN THE FOUR CORNERS OF THE LAW. S HE ACCORDINGLY, PRAYED THAT THE LEASE RENTALS MAY BE ALLOWED AS EXP ENSE INCURRED FOR THE PURPOSE OF BUSINESS. PARTICULARLY BECAUSE , THEY WERE ALLOWED IN THE IMMEDIATELY PRIOR AND SUBSEQUENT ASS ESSMENT YEARS. SHE FILED COPIES OF THE ASSESSMENT ORDERS U/ S 143(3) FOR THE RELEVANT ASSESSMENT YEARS. 6. THE LEARNED DR HOWEVER, REBUTTED THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE AND SUBMITTED THAT THE PRINCIPLES OF RESJUDICATA IS NOT APPLICABLE TO THE INCOME TAX PROCEEDINGS AND THEREFORE, MERELY BECAUSE, THE EXPENDITURE HAS BEEN ALLOWED IN THE PEVIOUS AS WELL AS IN THE SUBSEQUENT ASSESSMENT YEA RS, IT CANNOT ITA.NO.702(B)/10 6 BE SAID THAT IT CANNOT BE SCRUTINIZED IN THE PARTIC ULAR ASSESSMENT YEAR. SHE ALSO SUBMITTED THAT AFTER SCRUTINY OF L EASE AGREEMENT ONLY, THE AO HAS COME TO THE CONCLUSION THAT THE LE ASE AGREEMENTS ARE NOTHING BUT HIRE PURCHASE AGREEMENTS AS NO PRUD ENT BUSINESSMEN WOULD PAY LEASE RENTALS WHICH WOULD EXC EED THE COST OF ACQUISITION ITSELF. 6. 1 AS REGARDS THE ASSESSEES CONTENTION THAT THE CIT(A) HAS EXCEEDED THE JURISDICTION IN FOLLOWING THE DIRECTIO NS OF THE TRIBUNAL, SHE SUBMITTED THAT THE TRIBUNAL HAD ONLY OBSERVED THAT THE GROUND NOS.5,6 & 7 RAISED BY THE ASSESSEE HAVE NOT BEEN CONSIDERED BY HE CIT(A) AND THERE IS NO FINDING BY THE TRIBUNAL WITH REGARDS TO THE MERITS OF THE CASE. SHE DREW OU R ATTENTION TO THE ORDER OF THE TRIBUNAL, WHERE IT IS MENTIONED TH AT THE APPEAL IS REMANDED TO THE FILE OF THE CIT(A) TO BE DECIDED IN ACCORDANCE WITH LAW. THUS, ACCORDING TO HER, THE TRIBUNAL HAS DIRE CTED THE CIT(A) TO GO INTO THE MERITS OF THE CASE AND DECIDE THE IS SUE IN ACCORDANCE WITH LAW. 7.1 HAVING GONE THROUGH THE ORDER OF THE TRIBUNAL, WE FIND THAT IN THE FIRST ROUND OF LITIGATION, THE ASSESSEE HAD TAKEN CERTAIN GROUNDS OF APPEAL BEFORE THE CIT(A) WHICH HAD NOT B EEN CONSIDERED BY HIM. THE TRIBUNAL IN ITS ORDER HAS REPRODUCED T HE GROUND NOS.5,6 & 7 OUT OF WHICH THE GROUND NO.7 READS AS U NDER; 7. IT SHOULD HAVE BEEN APPRECIATED THAT THE LEASE RENTALS HAVE BEEN BROUGHT TO TAX ITA.NO.702(B)/10 7 IN THE HANDS OF THE LESSOR AS RENT AND IT IS IMPERMISSIBLE TO TAX A CONTRARY VIEW IN THE HANDS OF THE ASSESSEE LESSEE. IT IS AFTER GOING THROUGH THIS GROUND OF APPEAL THA T THE TRIBUNAL CAME TO THE CONCLUSION THAT THESE GROUNDS WERE NOT CONSIDERED BY THE CIT(A) AND THAT IT IF IS A FACT T HAT THE AMOUNT PAID TOWARDS RENT IS SHOWN IN THE HANDS OF THE SIS TER CONCERN IN THE INCOME-TAX PROCEEDINGS THEN THE SAME HAS TO BE ALLOWED TO THE ASSESSEE. THEREAFTER, THE TRIBUNAL REMANDED THE EN TIRE ISSUE TO THE FILE OF THE CIT(A) TO RECONSIDER THE SAME AFRES H GIVING A REASONABLE OPPORTUNITY TO THE ASSESSEE. 8. FROM THE ABOVE, IT IS CLEAR THAT THE TRIBUNAL H AS ONLY MADE AN OBSERVATION, BUT HAS NOT GONE IN TO THE MER ITS OF THE CASE AND THE OBSERVATION CANNOT BE HELD TO BE A FINDING OF THE TRIBUNAL. SINCE THE ISSUE WAS REMANDED TO THE FILE OF THE CIT (A) TO RECONSIDER AFRESH, THE CIT(A) WAS RIGHT IN CONSIDERING THE ENT IRE ISSUE AFRESH IN ACCORDANCE WITH LAW. 8.1 COMING TO THE MERITS OF THE ISSUE, WE FIND THAT THE LEASE RENTALS HAVE NOT BEEN ALLOWED ON THE GROUND THAT TH EY EXCEEDED THE COST OF ACQUISITION OF THE MACHINERY. THE AO A ND THE CIT(A) HAVE COME TO A CONCLUSION THAT IT IS HIRE PURCHASE AGREEMENT AND A COLOURABLE DEVICE SHOWING IT AS A LEASE AGREEMENT , BECAUSE THE TRANSACTION IS BETWEEN SISTER CONCERNS. 8.3 AS RIGHTLY POINTED OUT BY THE LEARNED DR THE PR INCIPLES OF RESJUDICATA IS NOT APPLICABLE TO THE INCOME-TAX PROCEEDINGS AND ITA.NO.702(B)/10 8 EACH YEAR IS INDEPENDENT. THUS, DURING THE RELEVAN T ASSESSMENT YEAR, THE LEASE AGREEMENT HAS BEEN CONSIDERED IN DE TAIL AND MINUTELY AND THE AO MADE THE DISALLOWANCE, BECAUSE THE MACHINERY HAS BEEN PURCHASED BY THE SISTER CONCERN OF THE ASSESSEE ONLY FOR LEASING IT OUT TO THE ASSESSEE AN D THE LEASE RENTALS EXCEEDED THE COST OF ACQUISITION OF THE MAC HINERY. THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO SHOW THAT IT WAS NOT IN A POSITION TO MAKE THE DOWN PAYMENT NECESSARY FOR A CQUIRING THE MACHINERY. IN VIEW OF THE SAME, WE AGREE WITH THE FINDING OF THE AUTHORITIES BELOW THAT THE LEASE RENTALS CANNOT BE ALLOWED DURING THE RELEVANT ASSESSMENT YEAR AS REVENUE EXPENDITURE . HOWEVER, IF THESE AGREEMENTS ARE CONSIDERED AS A HIRE PURCHASE AGREEMENTS, THEN WHEN THE ASSESSEE MAKES THE PAYMENT OF ALL THE INSTALMENTS, THEN IT SHALL BE DEEMED TO BECOME THE OWNER OF THE MACHINERY AND IT SHALL BE ENTITLED TO DEPRECIATION THEREON. THE FACT THAT THE SISTER CONCERN HAS OFFERED THE LEASE RENTAL AS INCO ME CANNOT BE THE ONLY FACTOR TO ALLOW THE LEASE RENTALS IN THE HANDS OF THE ASSESSEE. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 5 TH OF AUGUST, 2011. SD/- SD/- (A. MOHAN ALANKAMONY (SMT. P. MADHAVI DE VI) ACCOUNTANT MEMBER JUDICIA L MEMBER PLACE: BANGALORE DATED: 05-08-2011. AM* ITA.NO.702(B)/10 9 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. CIT(A) 4. CIT 5. DR 6. GF(BLORE) BY ORDER AR, ITAT, BANGALORE