Mahashakthi Construction Co. V. The Joint Commissioner of Income Tax (Assessment), Special Range, Hubli

ITA/5024/2011

AI Insights

The case revolves around the dispute concerning the deduction of lease rentals paid by M/s. Mahashakthi Construction Co. for the use of Compressors and Excavators in their business during the assessment year 1997-98. The Income Tax Department disallowed the deduction on the grounds that the lease agreement effectively transferred ownership of the machinery to the lessee, categorizing it as a hire purchase rather than a lease. The appellant contested this decision through various levels of the tax authority, ultimately reaching the High Court. The court examined whether the Assessing Officer was justified in disallowing the lease expenditure when similar deductions were allowed in other years.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 794326 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 14-09-2012
• Assessment Year: misc
• Other Referred Cases: S A BUILDERS LTD. Vs. COMMISSIONER OF INCOME-TAX (APPEALS) AND ANOTHER
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: Y V RAVIRAJ
• Assessee Lawyers: A S KULARNI; GANESH R GHALE
• Keywords: Assessment Year 1997-98; Disallowance of Expenditure; Income tax deduction; Lease agreement; Plant and machinery
• Section: 260A

Judgement Text

"IN THE HIGH COURT OF KARNATAKA CIRCUIT BENCH AT DHARWAD DATED THIS THE 14TH DAY OF SEPTEMBER 2012 PRESENT THE HON’BLE DR. JUSTICE K. BHAKTHAVATSALA AND THE HON’BLE MR.JUSTICE B.SREENIVASE GOWDA ITA NO.5024/2011 ITA NO.5024/2011 ITA NO.5024/2011 ITA NO.5024/2011 BETWEEN BETWEEN BETWEEN BETWEEN M/s. Mahashakthi Construction Co., Murudeshwar Bhavan, 604/B, Gokul Road, Hubli. Appellant (By Sri A S Kularni & Ganesh R Ghale, Adv., for appellant) AND AND AND AND The Joint Commissioner of Income Tax (Assessment), Special Range, Hubli. Respondent (By Y V Raviraj, Adv., for respondent) - - - This Appeal is filed under Section 260A of the Income Tax Act, 1961, against order passed in ITA 2 No.702(BANG)/2010 dated 5.8.2011 on the file of Income Tax Appellate Tribunal, Bangalore Bench, Bangalore, dismissing the Appeal filed by an assessee. This Appeal coming on for hearing, the same having been heard and reserved for pronouncement of Judgment, Dr. Bhakthavatsala, J., delivered the following: JUDGMENT This is an Appeal filed under Section 260A of the Income Tax Act, 1961 by the assessee challenging the order dated 16.3.2010 made in ITA No.87/CIT(A)HBL/06-07 on the file of Commissioner of Income Tax (Appeals) (Annexure-C) and the order dated 5.8.2011 made in ITA No.702(Bang)/2010 on the file of Income Tax Appellate Tribunal at Annexure-D. 2. Brief facts of the case leading to the filing of the Appeal may be stated as under: The appellant/assessee had taken Plant and Machinery viz., Compressors and Excavators on lease for the purpose of contract business and paid lease rentals of `11,74,800/- to 3 the lessor-M/s. Murudeshwar Finance & Leasing Ltd., as per the lease agreement and filed its Income Tax Returns for the assessment year 1997-98 claiming deduction of the above- said amount, but it was dis-allowed by the Assessing Officer on the ground that machinery would become the property of the Lessee even though there is no agreement to that effect and ownership remains with the Lessor. The order of the Assessing Officer for the assessment year 1997-98 was challenged before the Commissioner of Income Tax (Appeals) unsuccessfully. The matter was carried before the Income Tax Appellate Tribunal, but the Tribunal dismissed the Appeal confirming the order of dismissal. Therefore, the Assessee is before this Court. 3. In this Appeal, the following substantial question of law arises: Whether the Assessing Officer is justified in disallowing the expenditure incurred towards lease of Plant and Machinery by the Assessee for the assessment year 1997-98 4 and when the Assessing Officer has allowed such deduction for the previous and subsequent assessment years ? 4. Learned Counsel for the appellant submitted that the Assessee took Compressors and Excavators by entering a lease agreement with M/s. Murudeshwar Finance & Leasing Ltd. and the machinaries were utilised for the purpose of its business and paid a sum of `11,74,800/- towards lease rentals to the Lessor and also claimed deduction for the assessment year 1997-98, but the deduction was disallowed on the ground that the machinery would become the property of the Lessee at the end of the lease period though there is no contract to that effect and ownership of the machinery remains with the Lessor. He further submitted that after the expiry of the lease, the machineries were delivered back to the Lessor, but the Assessing Officer has erroneously come to the conclusion that it was an hire purchase agreement and not a lease. It is also contended that the Assessing Officer disallowed the lease rentals paid to the Lessor towards the machinery-Compressors as well as Excavators. It is also 5 contended that the Assessing Officer did not take into account the factum of lease rentals paid by the Lessee to the Lessor was taxed in the hands of the Lessor and there was no suspicious circumstances to doubt the genuiness of the lease. He cited a decision reported in (2007) 288 ITR 1 (SC) (S A BUILDERS LTD. Vs. COMMISSIONER OFINCOME-TAX (APPEALS) AND ANOTHER) on the point that once it is established that there was nexus between the expenditure and the purpose of business, the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case and no businessman can be compelled to maximise his profits. Therefore, he submits that the substantial question of law formulated may be answered in favour of the appellant/assessee and set aside the impugned orders. 5. Learned Counsel appearing for the respondent/ Revenue submits that there is no illegality or infirmity in the impugned orders. 6 6. Admittedly, the amount paid by the appellant/assessee to M/s. Murudeshwar Finance & Leasing Ltd. was reflected in the books of Lessor and taken into account as income of the Lessor and paid tax thereon. There is no material placed on record to show that the transaction is that of hire purchase and not lease agreement. It is the case of the Assessee that the Compressors and Excavators were utilised for the purpose of business of the appellant and there is not a scintilla of material placed on record to suspect genuiness of the transaction. The Revenue has not denied that it did not allow such deduction for the previous years and subsequent year of assessment year in question. The Assessing officer has disallowed the deduction only for the assessment year 1997-98. The decision reported in (2007) 288 ITR 1 (SC) cited by the learned Counsel for the appellant/assessee is applicable on all the fours to the case on hand and also supports the case of the appellant. In our view, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal erred in confirming the order of the Assessing Officer, in so far as the deduction sought for. For the reasons stated, supra, we answer the substantial question 7 of law in the negative in favour of the appellant/assessee and against the Revenue. 7. In the result, we pass the following order: Appeal is allowed and the impugned orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal dated 16.3.2010 and 5.8.2011 at Annexures-C and D, respectively, are set aside. Sd/- JUDGE Sd/- JUDGE Bjs "