M/s. Srinidhi Textiles, Erode V. ITO, Erode

ITA 971/CHNY/2012

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8186 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-01-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 27-12-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 02-05-2012
• Court: TRIBUNAL
• Department Lawyers: MILIND MADHUKAR BHUSARI
• Assessee Lawyers: S SRIDHAR
• Keywords: Depreciation
• Section: 263

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH: CHENNAI . . . , ! ' .. # $!% , ' () BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ! ./ ITA NO.971/MDS/2012 * +* /ASSESSMENT YEAR:2007-08 M/S.SRINIDHI TEXTILES, NO.18, THIRUNAGAR COLONY, ERODE 638 003. VS. THE INCOME TAX OFFICER, WARD I (1), ERODE. [PAN:AAO FS 9972 P] ( ,- /APPELLANT) ( ./,- /RESPONDENT) ,- 0 1 / APPELLANT BY : MR.S. SRIDHAR, ADV. ./,- 0 1 /RESPONDENT BY : MR.MILIND MADHUKAR BHUSARI, CIT(DR) # 0 2' /DATE OF HEARING : 27.12.2016 34+ 0 2' /DATE OF PRONOUNCEMENT : 13.01.2017 / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : 1.0 IN THIS CASE, THE APPEAL IS FILED BY THE ASSESS EE AGAINST THE ORDER PASSED U/S.263 OF INCOME TAX ACT BY THE CIT(A)-II, COIMBATORE, VIDE ORDER C.NO.220(12)/REV.263/CIT-II/CBE/ 2011-12 DATE D 30.03.2012. THE ASSESSEE FILED RETURN OF INCOME ADMITTING TOTAL INCOME OF RS.3,61,160/- AND THE ASSESSMENT COMPLETED U/S.143( 3) BY AN ORDER ITA NO.971/MDS/2012 :- 2 -: DATED 31.12.2009. SUBSEQUENTLY, THIS CASE WAS TAKEN FOR REVISION U/S 263 BY THE CIT AND SET-ASIDE THE ORDER PASSED U/S.143(3 ) DIRECTING THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS AO) TO DISALLOW THE DEPRECIATION ON BUILDING AND MACHINERY TRANSFERRED BY M/S.SRINIDHI FABRICS (P) LTD., FOR AN AMOUNT OF RS.3,51,95,332/-. THE F ACTS LEADING TO THE REVISION OF ASSESSMENT ORDER AND THE DIRECTIONS OF THE CIT ARE EXTRACTED FROM THE ORDER OF THE CIT U/S.263 AS UNDER: THE ABOVE FIRM WAS IN THE BUSINESS OF MANUFACTURE OF TEXTILES FABRICS BY PURCHASING YARN, CONVERT INTO FABRIC AND SELLING THEM UP-COUNT RIES. THERE WAS A PARTNERSHIP DEED EXECUTED ON 01.04.2006 BETWEEN SRI R.SUBRAMANIAM AN D HIS RELATIVE SRI S.SOCKALINGAM OF ERODE, WHO WERE CARRYING ON ALREADY A BUSINESS BY N AME M/S. SRINIDHI TEXTILES. THESE TWO PARTNERS ON 01/04/2009 HAVE ADMITTED THE COMPANY NAMELY M/S.SRINIDHI FABRI CS PVT. LTD., ERODE, AS ITS NEW PARTNER WHEREIN THESE TWO PARTNER S WERE ALSO DIRECTORS. AS PER THE DEED DATED 01.04.2006, THE CAPITAL OF THE FIRM WAS FIXED AT RS. 80,00,000/- AND THE CONTRIBUTION OF THE TWO PARTNERS R.SUBRAMANIAM AND S.SOCKALINGAM WE RE RS.40,000/- EACH AND THE COMPANY M/S.SRINIDHI FABRICS PVT. LTD., CONTRIBUTED RS. 79,20,000/-. ACCORDINGLY, THE COMPANY HAD CONTRIBUTED A SUM OF RS. 79,20,000/- ON 01/04/2006. THE COMPANY WHICH IS HAVING ITS FACTORY AT SIPCOT I NDUSTRIAL ESTATE AT PERUNDURAI HAD DURING THIS FINANCIAL YEAR AVAILED LOAN FROM TI IC FOR PUTTING UP OF A PROCESSING UNIT AT SIPCOT INDUSTRIAL GROWTH CENTRE. THE LOAN WAS SANCT IONED ON 07.10.2005. THE LOAN WAS FOR THE PURPOSE OF PUTTING UP A PROCESSING UNIT CONSIST ING OF PLANT AND MACHINERY AND AN EFFLUENT TREATMENT PLANT. THE TOTAL TERM LOAN SANCT IONED WAS RS.19,00,00,000. PROCESSING UNIT WAS COMPLETED IN SEPTEMBER,2006 AND STARTED FU NCTIONING. THE ENTIRE LAND AND BUILDING INCLUDING TREATMENT PLANT AND MACHINERIES WERE MORTGAGED TO TIIC WHICH HAD ADVANCED THE TERM LOANS FOR PUTTING UP OF PROCESSIN G UNIT BY M/S. SRINIDHI FABRICS(P) LTD. BY A BOOK ENTRY DATED 15.03.2007 THE COMPANY HAD T RANSFERRED A SUM OF RS.3,51,95,332/- BEING THE VALUE OF ETP CONSISTING OF BUILDING OF RS.89,00,000/-, PLAN & MACHINERY OF RS.2,62,95,332/- TOWARDS ADDITI ONAL CAPITAL CONTRIBUTED TO THE ABOVE ASSESSEE FIRM. THE ASSESSEE FIRM HAD CLAI MED DEPRECIATION ON THIS ETP TRANSFERRED BY BOOK ENTRY AT RS.1,75,97,666/- BEING 50% OF THE ELIGIBLE 100% DEPRECIATION ON ETP. THE ASSESSMENT WAS TAKEN UP FOR SCRUTINY A ND THE ASSESSMENT WAS COMPLETED ON 31.12.2009 ALLOWING THE DEPRECIATION CLAIMED BY THE ASSESSEE IN THE RETURN FILED. THE AO, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, OBTAIN ED COPY OF THE TIIC LOAN SANCTION ORDER, COPY OF THE BALANCE SHEET, ANNUAL REPORT AND AUDIT REPORT OF THE COMPANY SRINIDHI FABRICS (P) LTD. AND ALSO COPY OF THE PARTNERSHIP D EED DATED 01.04.2006. SINCE TIIC LTD HAD SANCTIONED THE TERM LOAN WITH T HE CONDITION THAT NO SALE OF TRANSFER OF THE ASSET SHOULD BE MADE WITHOUT PRIOR APPROVAL OF THE LENDER (TIIC OF THE LTD) THE ACTION OF THE COMPANY THAT THE TRANSFER OF THE ASSETS AND THE CLAIM OF DEPRECATION BY THEM ON THE ASSETS GOT IT UNDER TRANSFER FROM THE C OMPANY WAS NOT PROPER AND THE DEPRECIATION CLAIMED SHOULD HAVE BEEN DISALLOWED. T HE ENTIRE TRANSACTION WAS SHAM TRANSACTION SINCE THE COMPANY CANNOT TRANSFER THE A SSET CONSISTING OF IMMOVABLE PROPERTY AND MACHINERY WITHOUT A REGISTERED SALE DEED AND AL SO AS THE ASSET WAS UNDER MORTGAGED TO THE FINANCIER TIIC PVT. LTD., THE FIRM AFTER THE ALLEGED RECEIPT OF ETP FROM THE COMPANY IN TURN EXECUTED A LEASE DEED BACK TO THE COMPANY O N 15/03/2007 WHEREIN THE TEASE RENT WAS FIXED AT RS.60,000/- PER MONTH PAYABLE BY THE C OMPANY TO THE FIRM. THE FIRM CLAIMED DEPRECIATION AGAINST THE TEASE INCOME SHOWN IN THE RETURN. ITA NO.971/MDS/2012 :- 3 -: THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE WAS HEARD AND WRITTEN SUBMISSION WAS PERUSED IN THE COURSE OF HEARING. THE AUTHORIZE D REPRE5ENTATIVE SUBMITTED THAT BOTH THE FIRM AND THE COMPANY FOLLOWED THE PROVISIONS OF STATUE IN SO FAR AS SECTION 43(1) - EXPLANATION 4A IS CONCERNED AND ACCORDINGLY IT IS S UBMITTED THAT THERE IS NO VIOLATION OF THE PROVISIONS OF LAW BY EXPLAINING VARIOUS REASONS AND FACTS IN THE LETTER. THE REPLY OF THE ASSESSEES REPRESENTATIVE DATED 2 7/03/2012 HAS BEEN CONSIDERED. THE ASSESSEE COMPANY HAD PURCHASED THE LAND AND CON STRUCTED THE1 FACTORY AND INSTALLED THE MACHINERY FOR THE PURPOSE OF ITS OWN BUSINESS. IT HAD BECOME A PARTNER WITH 99% OF SHARE WITH THE FIRM SRINIDHI TEXTILES AS PER PARTNE RSHIP DEED 01/04/2006 AND HAD AGREED TO CONTRIBUTE CAPITAL BY WAY OF 79.2 LAKHS AS FUNDS AN D THE OTHER 2 DIRECTORS OF THE COMPANY WHO ARE EXISTING PARTNERS OF THE FIRM CONTRIBUTED R S.40,000/- EACH. PRACTICALLY, THE COMPANY HAD COMPLETE CONTROL AND RIGHT TO THE PROPE RTIES OF THE FIRM. HENCE, THE COMPANY SRINIDHI FABRIC PVT. LTD., WHICH WAS ALREADY INTO T HE BUSINESS OF MANUFACTURE OF FABRIC AND ALSO PROCESSING OF FABRICS NEED NOT HAVE TRANSFERRE D THE PROCESSING UNIT TO THE FIRM (THE PRESENT ASSESSEE) BY WAY OF BOOK ENTRY ONLY TO GAIN TAKE IT ON LEASE AND CONTINUE ITS BUSINESS. THE ENTIRE TRANSACTION IS SQUARELY COVERE D BY THE DECISION OF THE SUPREME COURT IN THE CASE OF MC. DOWELL & CO. LTD., IN ITR 154 IT R 148(SC). IT IS ALSO STRANGE THAT THE BUILDING AND MACHINERY ATONE ARE TRANSFERRED BY BOO K ENTRY LEAVING THE LAND WITH THE COMPANY WHICH IS NOT PHYSICALLY POSSIBLE. THE ENTIR E TRANSACTION APPEARS TO BE SHAM AND JUST BY BOOK ENTRIES THE FIRM HAS TRIED TO MAKE IT CLAIM FOR DEPRECIATION ON THE BUILDING AND MACHINERY PURPORTED TO THE HAVE TRANSFERRED BY THE COMPANY TO THE FIRM. CONSIDERING THE ENTIRE FACT OF THE CASE, THE ASSES SMENT MADE IS SET ASIDE TO THE AO FOR COMPLETING THE ASSESSMENT TO DISALLOW THE DEPRE CIATION ON BUILDING AND MACHINERY AND WHITE DOING SO THE LEASE INCOME SUPPOSED TO HAVE BE EN RECEIVED FROM THE LEASING OF THE PROCESSING UNIT AGAIN BACK TO THE COMPANY MAY BE RE DUCED. 2.0 APPEARING FOR THE ASSESSEE, LD.COUNSEL ARGUED T HAT THE COMPANY M/S.SRINIDHI FABRICS (P) LTD., HAS BEEN ADMITTED AS A PARTNER IN THE PARTNERSHIP FIRM OF THE ASSESSEE AND TRANSFERRED TH E ASSETS HELD BY THE COMPANY TO THE FIRM BY BOOK ENTRY. THERE IS NO LEG AL BAR TO TRANSFER THE ASSETS BY THE BOOK ENTRY BY THE COMPANY TO THE ASSE SSEE. THE COMPANY HAS ADMITTED IN TO PARTNERSHIP FIRM AND THE ASSETS WHICH WERE HELD BY THE COMPANY LEGALLY HAVE BEEN TRANSFERRED TO THE PARTNE RSHIP FIRM AS SHARE CAPITAL. THE ASSETS ARE OWNED AND USED BY THE FIRM FOR THE PURPOSE OF BUSINESS AND SATISFIED BOTH THE CONDITIONS OF OWNIN G AND USING THE ASSETS FOR THE PURPOSE OF BUSINESS. THEREFORE, THE ASSESS EE IS ENTITLED FOR DEPRECIATION. ACCORDING TO THE LD.AR, THE FIRM AND COMPANY FOLLOWED THE PROVISIONS OF STATUTES OF INCOME TAX ACT EXPLANATIO N-4A OF SECTION 43(1) ITA NO.971/MDS/2012 :- 4 -: AND THERE IS NO VIOLATION OF LAW. THE LD.AR OF THE ASSESSEE RELIED ON THE FOLLOWING DECISIONS: 1) 212 ITR 592 (SC) 2) 261 ITR-1 (SC) 3) 239 ITR 775 (SC) 4) 348 ITR 574 3.0 ON THE OTHER HAND, THE LD.DR RELIED ON THE CIT S ORDER. 4.0 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PLACED ON RECORD. THE ASSESSEE COMPANY ADMITTED AS A PARTNER IN THE PARTNERSHIP FIRM AND IT BROUGHT THE FIXED ASSETS HELD BY THE COMPANY AS SHARE CAPITAL BY BOOK ENTRY. THE ASSESSEE RELIED ON THE DECISIONS C ITED ABOVE AND ARGUED THAT THE TRANSFER OF ASSETS BY BOOK ENTRY IS A SUFF ICIENT COMPLIANCE FOR CONTRIBUTION OF SHARE CAPITAL IN THE CASE OF PARTNE R. THE LD.AR ALSO OBJECTED FOR THE DIRECTIONS GIVEN BY THE LD.CIT TO COMPLETE THE ASSESSMENT TO DISALLOW THE DEPRECIATION ON BUILDING AND MACHINERY. NO DOCUMENTS WERE PLACED BEFORE US REGARDING THE AGREE MENT FOR TRANSFER OF ASSETS AND AS WELL AS THE AGREEMENT OF LEASE, THERE FORE WE ARE OF THE CONSIDERED OPINION THAT THE ISSUE OF TRANSFER OF AS SETS BY THE COMPANY IN THE ASSESSEES FIRM REQUIRED TO BE EXAMINED WITH PA RTICULAR REFERENCE TO THE BOOK ENTRIES MADE BY THE ASSESSEE AND THE TRANS FER DOCUMENTS AND THE LEASE AGREEMENT. THEREFORE, WE MODIFY THE DIRE CTION OF THE CIT AND DIRECT THE AO TO RE-EXAMINE THE ISSUE INDEPENDENTLY WITHOUT LINKING THE CONDITION OF MORTGAGE DEED WHETHER THE TRANSFER OF ASSETS IS GENUINE AND ITA NO.971/MDS/2012 :- 5 -: PUT TO USE BY THE ASSESSEE AND ALLOW THE DEPRECIATI ON ON MERITS. ACCORDINGLY, THE DIRECTIONS OF CIT U/S.263 ARE MODI FIED AND THE FILE IS REMITTED BACK TO THE AO. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH JANUARY, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( ' . . # $!% ) (D.S.SUNDER SINGH) ' /ACCOUNTANT MEMBER /CHENNAI, 5! /DATED: 13 TH JANUARY, 2017. TLN 0 .2$6 76+2 /COPY TO: 1. ,- /APPELLANT 4. # 82 /CIT 2. ./,- /RESPONDENT 5. 6 9 .2 /DR 3. # 82 ( ) /CIT(A) 6. * < /GF