TaxTMI 
TaxTMI 
2001 (4) TMI 926
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.... under s. 69C of the IT Act, 1961. 3(ii) Without prejudice to the above, the learned CIT(A) further erred in holding that addition of alleged payment of ₹ 25 lakhs in cash to M/s National Plastic Industries Ltd. for procuring large order should be made under s. 69C of the IT Act and no deduction of the said amount which is paid on account of interest against excess advance and cash discount should be allowed under s. 37(1) of the IT Act. 4(i) The learned CIT(A) further erred in confirming the action of the AO in computing undisclosed income on account of lease transactions with Punjab State Electricity Board (PSEB) and Rajasthan State Electricity Board (RSEB) at ₹ 11,64,89,975. 4(ii) The learned CIT(A) further erred in holding that the lease transactions with Punjab State Electricity Board (PSEB) and Rajasthan State Electricity Board (RSEB) were of the nature of loan transactions with the assets purchased and leased back are mere security and the appellant was never the real owner of assets. 4(iii) The learned CIT(A) further erred in heavily relying on the power of attorney issued in favour of PSEB and RSEB which authorises them to sell the leased asset to any i....
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..... 158BFA(1) of the IT Act. 6. The learned CIT(A) further erred in holding that surcharge is chargeable on the tax rate of 60 per cent on the undisclosed income computed for the block period. 7. The appellant-company craves leave to add to, alter or amend the above grounds which are without prejudice to each other, at the time of hearing." 2. The assessee is engaged in the business of injection mounding machinery. A survey was conducted under s. 133A(1) of the IT Act, 1961, on 26th Sept., 1997 at the corporate headquarters and the factory of the assessee-company at Thane. It is the case of the Revenue that simultaneously a search was also conducted under s. 132 of the Act at the address of the chairman of the assessee, viz. 88C, Old Prabhadevi Raod, Mumbai. During the course of the search at 88C, Old Prabhadevi Road, certain documents were seized showing the assessee's transactions with M/s National Plastic Industries Ltd. and other state of affairs of the assessee-company. On enquiry, it was submitted before the AO that the transactions are duly recorded in its books of account. During the course of survey under s. 133A(1) at the corporate headquarters and factory of ....
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....rox of ₹ 8 lacs as interest and ₹ 17 lacs as further discount (2.25 per cent). We will have to recover approx. ₹ 10 lacs (as discount adjustment)." 3. The AO concluded that the payment of ₹ 25 lacs was made to M/s National Plastic Industries Ltd., which included ₹ 8 lakhs as interest and ₹ 17 lacs as further discount at the rate of 2.25 per cent. The AO further noted that a recovery of ₹ 10 lacs would have to be made as discount adjustment because of cancellation of order for three machines. It is pointed out by the AO that p 2 reveals similar noting dt. 1st Oct., 1996 on the same subject as is mentioned in page No. 1, though containing additional information. This contains information about the details of six machines proposed to be supplied to M/s National Plastic Industries Ltd., an additional column of cash discount at the rate of 2.25 per cent is also mentioned. The total discount shown in respect of the six machines is mentioned as ₹ 17 lacs. On the lower portion of the page, the fresh status as on 28th Sept., 1996 is noted in addition to the notings which were on page No. 1 as under : "Status : (28th Sept., 1996) ....
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....nues to be so. As the entire industry was also aping a liquidity crunch, the company was facing problems. National Plastics offered to give us ₹ 2 crores as advance. For this high advance, company offered then a cash discount. However, owing to poor market conditions, National Plastics did not honour their commitment and did not lift all the machines. In fact they lifted only 2 machines finally. The cost of these machines was adjusted against the advance and the balance, the amount is lying as credit balance in our account. As they did not honour their commitment, our company also did not offer the cash discount to them." 5. During the course of assessment proceedings, the assessee-company was again questioned in respect of these documents and it was submitted by the assessee that there are no entries of either the cash discount or any other payment made or received in its books of account, apart from the advance of ₹ 2 crores received and the sale of only two machines, which had been delivered as per the notes on these papers. It was put to the assessee that in view of the noting showing that the sum of ₹ 25 lakhs had already been received and because of th....
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....ven to the party as the party has ultimately purchased only two machines and returned back the third machine delivered to them and cancelled the order for the three remaining machines. The regular discount allowed to the party is of 20 per cent from the list price which is the general practice followed by the assessee-company to grant the discount ranging between 15 to 20 per cent depending on the business relation which party, quantity and value of the order as well as the amount of advance received from the party. The assessee-company does not have any details in respect of remarks and status as on 28th Sept., 1996, given on page No. 2 of the paper. The two concerned persons namely Shri R. Venkatachalam and Shri Alok Tibrewala have already left the services of the assessee-company long back and, therefore, the assessee-company is unable to explain these remarks. We would, therefore, submit that whatever transactions taken place with National Plastic Industries Ltd. are duly recorded in the books of the accounts of the assessee-company and they are duly confirmed by National Plastic Industries Ltd." The AO considered the contentions of the assessee vis-a-vis the documents ....
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....plicable on expenses incurred which are not accounted for by the assessee-company in its books of account. It is strange to digest that a businessman will pay a sum of ₹ 25 lakhs as discount for getting large order during the course of business; but will not record the same in his books of account as if the same is recorded in the books of account, it will be allowed as business expenditure. 8. Without prejudice to the above, it is submitted that if at all the appellant-company had made the alleged payment of ₹ 25 lakhs in cash to National Plastics, which is not recorded in its books of account, the same should be considered as commission paid for getting large order of machines as held by the AO and, therefore, the same should be allowed as deduction on account of commission paid during the course of the business. Since the payment of the commission is not made from books of account, the deduction of the same shall set off against the addition made as undisclosed income. 9. We rely on the decision of the Supreme Court in the case of Kishinchand Chellaram vs. CIT (1980) 19 CTR (SC) 360: (1980) 125 ITR 713(SC). In this case, the assessee had an office in Bombay and....
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....e of S.F. Wadia vs. ITO (1987) 27 TTJ (Ahd) 437: (1986) 19 ITD 306(Ahd); (ii) In the case of M.K. Mathivathanan vs. ITO (1989) 31 ITD 114(Mad); (iii) In the case of Nissan Housing Development (P) Ltd. vs. Asstt. CIT (1995) 52 ITD 103(Pat); and (iv) In the case of Sharma Associates vs. Asstt. CIT (1996) 54 TTJ (Pune) (TM) 207: (1995) 55 ITD 171(Pune) (TM). After considering the arguments of the learned counsel for the assessee and the case laws relied in this behalf, as mentioned above, the CIT(A) concurred with the view taken by the AO for the detailed reasons given at pp. 13 to 17 of his order. He has further mentioned that the assessee is not entitled to any deduction under s. 37(1) of the Act also. 7. The learned counsel for the assessee, in brief submitted that during the course of survey action it was clearly stated in the statement recorded of Shri Ganesh Melatur, Dy. General Manager (Finance) and Shri Shantanu Aditya, executive director, that these papers pertained to the earlier period when the executive director was one Shri R. Venkatachalam and the Dy. General Manager (Sales) was one Shri Ashok Tibrewala and since both of them are no longer in the service of the asse....
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....rmed as deemed income of the assessee under s. 69C of the Act, since it is an expenditure deduction of the same should be allowed to the assessee under s. 37(1) of the Act. It is pointed out that it is clear from these two papers that the alleged payment was made to M/s National Plastic Industries Ltd. on account of cash discount and interest on the advances received on large order. Reliance was also placed on the Tribunal decision in the case of S.F. Wadia (supra); M.K. Mathivathanan (supra); Nishan Housing Development (P) Ltd. (supra) and Sharma Associates (supra). It is also submitted that the proviso to s. 69C of the Act was inserted by the Finance Act, 1998, which is not applicable to the facts of the present case because the said proviso was brought on the statute book w.e.f. 1st April, 1999. The Circular No. 772, dt. 23rd Dec., 1998 [published at (1999) 151 CTR (St) 9] clearly states that unexplained expenditure is treated as income under s. 69C. But there is no corresponding provision for disallowance of such expenditure as the taxpayers are claiming deduction of such expenses under s. 37(1) of the Act and in order to curb this practice the amendment is brought on the statu....
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....terest and ₹ 17 lakhs as discount at the rate of 2.25 per cent. This discount was for the purchase of six machines and as per the papers found, part of the money, given on account of discount (approximately ₹ 10 lakhs) was to be recovered as discount adjustment, since M/s National Plastic Industries Ltd. had cancelled order for three machines and had not lifted the third machine manufactured by the assessee. As per the documents found, the special payment/discount given to M/s National Plastic Industries Ltd. for the 6 machines had to be recovered in respect of 4 machines, which were either cancelled or not lifted by M/s National Industries Ltd. The basic argument of the learned counsel for the assessee that Shri R. Venkatachalam, the then executive director, and Shri Alok Tibrewala, the then Dy. General Manager (Sales), were not examined, since they have left the service of the assessee and the statements recorded of Shri Ganesh Malatur and Shri Shantanu Aditya clearly state that these papers pertained to earlier period when they were not in the service of the assessee-company. Under these circumstances it was argued that no opportunity was given to the assessee to con....
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.... and could be held to be the owner of the wrist watches and their value could be deemed to be his income by virtue of s. 69A. Applying the said principle laid down by the Hon'ble Supreme Court, we are of the opinion that the transactions noted in the loose papers clearly stipulate that the assessee had made the payment of ₹ 25 lakhs to M/s National Plastic Industries Ltd. in cash out of the books against the expected orders for six machines to be placed on the assessee and the receipt of ₹ 2 crores as advance by the assessee, ₹ 8 lakhs as interest and ₹ 17 lakhs as cash discount. 10. The next question that arises is that if the addition is construed as deemed income of the assessee under s. 69C of the Act, whether the deduction of the same should be allowed on the basis of the same papers, under s. 37(1) of the Act as the expenditure had been found to have been incurred by the assessee in the form of cash discount and interest. Here the argument of the learned Departmental Representative was that the proviso to s. 69C of the Act was brought on the statute book, which could be considered to be retrospective in nature. So far as this contention of the Dep....
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....e computation of undisclosed income on account of sale and lease-back transactions with Punjab State Electricity Board (PSEB) and Rajasthan State Electricity Board (RSEB) amounting to ₹ 11,64,89,975. During the course of survey, lease agreements entered into by the assessee with PSEB and RSEB were found and inventorised as Annexure 'A' to the survey report. Copies of these documents were also mentioned at serial Nos. 6 to 9 of Annexure 'B' to the survey report. The AO examined these lease agreements closely vis-a-vis the terms and status of the agreements entered into between the assessee and the PSEB and RSEB. The AO conducted enquiries by the Investigation Wing of the Department with both these Electricity Boards. The AO collected information and after regularising the terms and the surrounding circumstances, it was put to the assessee that the lease transactions entered into by it with these Electricity Boards were, in fact, in the nature of financial arrangements/loan transactions; that the assets alleged to have been purchased and leased back, acting merely as a security and that the assessee never owned these assets. It was also brought to the notice of ....
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....the leased equipment having the right to claim depreciation on the assets leased. Therefore, the depreciation claimed by the assessee on these assets was disallowed. 12. This was challenged before the CIT(A). The CIT(A), in fact, incorporated the order of the AO as well as the submissions of the assessee. A tabular chart was also furnished before the CIT(A). For the sake of convenience, the same is reproduced below : Sr. No. Observation of AO Contention of appellant company 1 2 3 Ownership of the Assets 1. There was no genuine sale of equipments and several terms of the lease agreements are contrary to the claim of absolute ownership. Sale and lease-back is one of the recognised and legally accepted modes of raising finance. By purchasing the assets from Electricity Boards and paying the agreed consideration, the assessee became the legal owner of the assets. The transactions were subjected to sales-tax assessment. All the legally recognised attributes of ownership vested with the assessee. The terms of the lease agreement, found by the AO to be contrary to the claim of absolute ownership were intended to protect the assets which in fact go to prove the absolute o....
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....lessee and in the event of total loss/damage, the lessees would have to replace the equipment at its own cost and the lease will continue. Sec. 152 of the Indian Contract Act provides that 'the bailee' in the absence of any special contract is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of its described in s. 151.' It will be appreciated that the lease agreement in this case is a special contract between the bailor and the bailee and accordingly, the provisions contained in the lease agreement with regard to rent, maintenance, risk on account of use, etc. would prevail. True lease agreement or not 1. If any option to buy the equipment is given in the lease agreements, the agreements would not be 'true lease' agreement. In this case no option to buy the leased equipments is given to the lessee in the lease agreement. It is only a power of attorney given in favour of the Secretary, PSEB, authorising to negotiate and sell these equipments to any intending purchaser at a price not less than minimum mentioned in the power of attorney on the expiry of the lease period. 2. The AO has stated....
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....lessor gets the right to repossess the equipment at the end of the lease period or in a case of breach of terms, is entitled to recover damages as per lease agreement and also repossess the equipment. Hence, a provision to recover all the amounts due under the lease agreement goes to ensure that the lessee does not commit any breach of the terms of the agreement. This right is a specific right, over and above the normal right of repossession given under the Contract Act. Whether the transactions were loans 1. The substance of the arrangement is one of lending against security of fixed assets : A sale and lease-back transaction contemplates sale of assets by a person using the asset and in need of finance to a person who is willing to finance by purchase of the asset and the corresponding lease of same asset to the seller. Thus this transaction has several advantages : 2. SEBs were looking for availing of finance at cheap rates and since 100 per cent depreciable assets offer cheap finance, the same had been identified for use in sale and lease-back arrangement. (b) The person willing to provide the finance becomes the owner the equipment and thus is fully secured; 3. The S....
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....rior to the amendment the lessors were entitled to depreciation on leased assets. The only difference that was brought in this amendment was that the cost of acquisition in the hands of the lessor was restricted w.e.f. 1st Oct., 1996, to the WDV in the hands of the previous owner, that is the lessee. The learned counsel for the assessee also invited our attention to Instruction No. 1978, dt. 31st Dec., 1999 [F.No. 225/190/98/IR(A-II)], according to which the Board has given guidelines for investigation in the finance lease agreements. He submitted that in the said circular it is maintained that instances have come to the notice of the Board that in some of the finance lease agreements leased assets had never existed or purchase price for the lease assets came back to the lessor by discounting the lease rental either directly from the lessee or through circuitous route from intermediaries and that the line of investigation is mentioned in that circular. It was also directed that field inquiries are to be made to identify and verify about the existence of the lease assets, the compliance of various provisions of the law relating to transfer of assets, such as payment of sales-tax, go....
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....he Institute of Chartered Accountants of India makes distinction between operating lease and finance lease and also requires capitalisation of assets by the lessee in financial lease transaction, but directed that the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the IT Act. In view of this circular, it is submitted that none of the conditions mentioned in Instruction No. 1978, dt. 31st Dec., 1999, are found in the lease transaction entered into by the assessee-company. It is also submitted that the applicability of the decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra) is already examined by the Tribunal in a number of decisions. Further, it is very clear from the circular that the IT Act does not differentiate between operating lease and finance lease. 16. The learned counsel for the assessee next submitted that the issue of granting depreciation on sale and lease-back transactions has been considered by the Tribunal in a number of cases. It was pointed out that in the case of Unimed Technologies Ltd. vs. Dy. CIT (2000) 69 TTJ (Ahd) 25: (2000) 73 ITD 150(Ahd), the issue was position with rega....
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....1999, has pointed out that it has come to its notice that in some of the finance lease agreements, lease assets had never existed or purchase price for the lease assets came back to the lessor by discounting the lease rental either directly from the lessee or through circuitous route from intermediaries. Under these circumstances, this circular was issued with a view to making inquiries to identify and verify about the existence of lease assets so that the fake transfer of assets on paper should be discouraged and depreciation should not be allowed to the unreal owner. But that instruction is not applicable to the facts of the present case because the transactions have been entered into between the assessee and the two State Government undertakings and there is no finding of any authority that no such agreements were ever entered into between the parties and consequently the machinery was never purchased and leased back by such agreements. It will be pertinent to mention here that the PSEB and RSEB have removed these assets from their balance sheets and are now appearing in the balance sheet of the assessee. So the unreal transaction, which is mentioned in the circular, does not at....
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....ot be disallowed. Similar view was expressed by the Mumbai Bench of the Tribunal in the case of Coronet Investments (P) Ltd. in ITA No. 2103/Mum/1999 decided on 7th March, 2001, wherein the Tribunal, following its order in the case of Berlia Chemicals & Traders (P) Ltd. in ITA No. 7510/Bom/1993, dt. 25th Oct., 1999, had allowed the claim of the assessee. The facts of these cases are identical to the facts of the present case. Similar view was also taken in the cases of : (i) Karam Chand Thaper & Bros. vs. Dy. CIT (1998) 61 TTJ (Cal) 576: (1998) 66 ITD 39(Cal); (ii) New Deal Finance & Investment Ltd. vs. Dy. CIT (2000) 69 TTJ (Mad) 410: (2000) 74 ITD 469(Mad); (iii) Oriental Leasing Company vs. Dy. CIT (1996) 55 TTJ (Del)294; (iv) Amar Structures (P) Ltd. vs. Asstt. CIT (1997) 51 TTJ (Ahd)508; (v) Peacock Chemicals (P) Ltd. vs. Dy. CIT (1995) 51 TTJ (Del)264; and (vi) Accu Dress vs. Asstt. CIT (1998) 62 TTJ (Ahd)755. We find that the AO has relied on the two decisions of the Supreme Court in the case of Sundaram Finance Ltd. (supra) and in the case of Damodar Valley Corporation (supra). But these decisions were considered by the Bombay High Court in the case of Prakash Indust....