TaxTMI 
TaxTMI 
2006 (2) TMI 510
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....ourt in the case of Mc. Dowell and Co. v. CIT [1985] 154 ITR 146. It is also stated that the appellate order relied upon by the ld. CIT(A) has not been accepted by the department and an appeal has been filed before the ld. ITAT. 2. The ld. CIT(A) has erred in law and on facts in deleting the above addition of Rs. 62,42,055 towards lease rentals paid to various companies including DSM Ltd. which have substantial interest in the assessee-company and there was no actual physical transfer of machinery." 2. The assessee in the present case is a limited company which is engaged in the business of manufacturing and sale of sugar. The assessment in its case for the year under consideration was originally completed by the Assessing Officer under section 143(3) assessing a net loss at Rs. 1,88,11,098. In the assessment so completed, the deduction claimed by the assessee on account of lease rent paid to the following parties totalling to Rs. 62,42,055 was allowed by the Assessing Officer :-- (Rs.) To SRF Ltd. @ 82,455 p.m. from Oct. 92 to March, 93 4,94,730 To India Security Ltd. @ 3,36,750 p.m. from 27-3-1993 to 31-3-1993 54,315 To D.S.M. Ltd. @ Rs. 1.40 lac p.m. from Oct. 92 to Mar.....
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....sugar plant from DSM were furnished before him and even no evidence for the purchase of three numbers of roller shafts was filed before him. He, therefore, held that the sale of the equipments in question by the assessee to India Securities Ltd. thus was not established by the assessee on evidence and in the absence of any evidence to show that the said equipments were actually delivered by the assessee to India Securities Ltd. or that any sales tax or excise duty was paid on such sale, the sale and lease back transactions between the assessee and the said party were not genuine. For almost similar reasons, he also held such transactions between the assessee-company and the other parties as unproved and disallowed the lease rent of Rs. 62,42,055 claimed by the assessee in the assessment completed under section 143(3) read with section 263. 4. Aggrieved by the order of the Assessing Officer, the assessee-company preferred an appeal before the learned CIT(A). It was submitted on behalf of the assessee-company before the learned CIT(A) that the leasing arrangements with the DSM were not of sale-cum-lease back transaction and this fact brought to the notice of the Assessing Officer wa....
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....as also contended that the assessee-company not taken on lease the assets and borrowed the money for the purchase of the said assets, it would have been entitled to claim deduction on account of depreciation as well as interest on the borrowed funds which would have been much more than the lease charges paid. 5. The aforesaid submissions made on behalf of the assessee-company found favour with the learned CIT(A) and he allowed the claim of the assessee for deduction on account of lease rent amounting to Rs. 62,42,055 for the following reasons given in paragraph Nos. 9 to 13 of his impugned order :-- "9. I have carefully considered the submissions and documents placed before me by the A/R. Before dealing with the real issue, I would like to mention here that sale and lease back transaction is a well known method of raising finance and our tax laws recognize it. It is a convenient method for the borrower to raise moneys by going through the process of sale of assets at market value and getting it back on lease terms so that the borrower is able to raise fund for its business purposes at convenient terms of repayment. In the process they loose depreciation on the assets sold because....
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....ts, segregated by the appellant as per valuer certificate for accounting purposes, cannot be questioned. Moreover, the roller shafts and semi kestner are essential equipments for sugar factory and without these the sugar cannot be produced. The appellant has produced the photographs of the semi kestner and roller shafts installed in the sugar factory. The appellant has also produced bills and vouchers for purchase of three shafts. Mere non-submission of audited balance sheet and details of each and every item of equipment installed at the factory at the time of its take over, cannot lead to the conclusion that the assets in question did not exist at the relevant point of time. The appellant has sold the equipments in question to ISL at market value and received payment for the same. The appellant has reduced the sale consideration from the block of the assets and depreciation on the reduced amount has been allowed to the appellant. The lease agreement duly signed by the representative of the ISL along with the supplementary schedule mentioning the number of equipment has been produced both before Assessing Officer and the undersigned. The appellant has also produced the letter of A....
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....e learned DR at the outset pointed out that the order passed by the learned CIT, Meerut under section 263 setting aside the assessment originally completed by the Assessing Officer in the present case was never challenged by the assessee by filing an appeal before the Tribunal and, therefore, the findings recorded in the said order by the learned CIT(A) as well as directions given by him to the Assessing Officer while setting aside the original order have become final on this issue. She submitted that in the set aside assessment proceedings, a detailed questionnaire was issued by the Assessing Officer calling for the relevant information and documents from the assessee as per the directions of the learned CIT given under section 263 but there was a failure on the part of the assessee to comply fully with the said requirements. She pointed out that all the items of equipments/machinery involved in the transactions of sale and lease back in question were eligible for 100 per cent depreciation and this aspect itself was sufficient to create a doubt about the genuineness of the said transactions as well as the bona fide purpose to enter into such transactions. She took us through the s....
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....essing Officer to doubt the existence of the machinery in question as well as sale thereof to India Securities Ltd. He contended that all the transactions of lease entered into by the assessee thus were genuine and the disallowance of lease rent paid in respect of the said transactions made by the Assessing Officer being based on irrelevant and hypothetical considerations, the learned CIT(A) was fully justified in deleting the same. He, therefore, strongly supported the impugned order of the learned CIT(A) on this issue and urged that the same may be upheld. 8. We have considered the rival submissions and also perused the relevant material on record. It is observed that the running sugar mill was acquired by the assessee-company from DSM Ltd. on 1-10-1992 and there is no dispute about this factual position. The said acquisition was in three forms. Firstly, some of the machinery/equipments of the sugar mill were out rightly purchased by the assessee from DSM Ltd. for an agreed lump sum consideration and the machinery so purchased was duly entered in the regular books of account of the assessee at the said value. Out of the remaining machinery, some of the machinery was owned by DSM....
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....lish that the lease agreements between the assessee and DSM Ltd. as well as SRF Ltd. were genuine and the assessee was duly entitled for deduction on account of lease rent paid in pursuance of the said agreements. 9. As regards the sale and lease back transaction between the assessee-company and India Securities Ltd., it is observed that out of the total machinery purchased by the assessee-company from DSM Ltd., some of the machinery was sold by it to India Securities Ltd. for a consideration of Rs. 1.5 crores which was fixed on the basis of valuation report prepared and furnished by a Chartered Engineer. As stated on behalf of the assessee-company before the authorities below as well as before us, the said valuation report was prepared by the Chartered Engineer after physical verification of the concerned machinery and the existence thereof thus was proved on the basis of the said valuation report. Moreover, the said machinery i.e., semi kestner and roller shafts were forming essential ingredients of the sugar mill within sugar production was not possible and this fact again was sufficient to fortify that the said items of machinery were actually in existence at the sugar plant o....