The assessee, a limited company carrying on the business of leasing and finance has instituted this appeal against the order of the Commissioner (Appeals)-II, Chennai dated 25-11-1999 passed with reference to the income of the assessee under the provisions of the Income Tax Act, 1961 (hereinafter referred to as the Act). The appellant- company has raised only one issue of claim of depreciation at hundred per cent on the continuous pusher type hardening furnace that was leased to M/s. Jonas Woodhead & Sons (India) Ltd. (JWSIL hereinafter referred to as). The appellant- company was represented by Mr. Vijayaraghavan and the department was represented by Mr. Venkatesa Gopinath.
The brief facts related to the claim of depreciation are that vide invoice dt. 10-8-1995 the assessee claimed that he had purchased the said furnace from JWSIL for a consideration of Rs. 1.05 crores. The consideration for the purchase was made over to the said party. The said furnace is shown as leased to the same party the next day and a receipt of Rs. 30 lakhs as lease advance has been shown. The Income Tax Rules, 1962 has prescribed that the furnace is entitled to hundred per cent depreciation and this was claimed by the assessee in its return of income.
The assessing officer (assessing officer hereinafter referred to AO) observed in his order that the said furnace was initially fabricated and purchased by JWSIL in the year 1976 for Rs. 1,78,400 and the said party had been using the said furnace from that time in its business.
The assessee had obtained a valuation certificate from Mr. P.S.Subramanian, a Civil, Ocean and Structural Engineer dated 24-4-1995 which certificate showed that the valuer had inspected the furnace on 21-4-1995. The valuation certificate had detailed description of the furnace and the value has been made with reference to each of the components that make the complete furnace. The certificate also stated that the said furnace is in operating condition. In the value of the furnace was shown at Rs. 1.36 crores. The assessee placing reliance on this certificate claimed that it agreed to purchase the furnace from the party for a total consideration of Rs. 1.05 crores and claimed depreciation of the like amount in its return of income.
Assessing officer observed that the furnace was needed by the said lessee for carrying out its various activities and that the act of sale and lease back to it was a made-up affair. He also observed that the furnace that was built in 1976 could never appreciate in value and that the invoice and the lease agreement was a make believe affair. He further noted that every purchase is always associated with delivery which was absent in the instant case. The absence of delivery which he believed as a condition that must be satisfied, he concluded that the transaction in fact was one of advance of loan to the lessee. He also noted that the payment of Rs. 30 lakhs as lease advance by the lessee is only to give the transaction the colour of genuine one. He noted that the certificate of the valuer could not be relied upon as acceptable evidence and a true indicator of the price of the furnace.
He rejected the claim of depreciation. In appeal to the Commissioner (Appeals), the appellant had placed the arguments along with the invoice, valuer's certificate, lease agreement, receipt of lease advance of Rs. 30 lakhs. Commissioner (Appeals) was of the opinion that Rs. 30 lakhs was in the nature of security offered by the lessee and the true nature of the transaction is what was found by assessing officer. He did not allow any relief to the appellant- company.
The appellant- company felt that its claim was not appreciated properly and sought the intervention of the Tribunal by filing the present appeal. The appellant- company had filed a paper book containing 78 pages and on the index to the paper book had certified that it contains true copies. The paper book contains the invoice dated 10-8-1995, the valuer's certificate dated 24-9- 1995, the lease agreement and the copy of the submission dated 15-9- 1999 made before assessing officer. The appellant- company had filed an application for admission of additional evidence and enclosed along with the assessment order' of JWSIL for the assessment year 1996-97, the acknowledgement of the return income with statement of computation of income of the said party, a statement of fixed assets for the year ended 31-3-1996 and a certificate of the lessee dated 31-1-2001. These are added to the paper book and numbered from pages 67 to 83.
The counsel for the appellant- company referred to the certificate from the lessee dated 31-1-2001 and contended that the said party had confirmed as having shown the sale as a deduction from the written down value of the block of assets. He also referred to the statement of income which showed the aspect of capital gain on sale of machinery and the income from business so computed which income has been accepted by the assessing officer of the lessee. He contended that the transaction has been established as genaine, with its value also as the price paid by the assessee and its business of leasing as given on lease and the furnace is found in the premises of the lessee. He insisted that the claim of the appellant should be accepted in the light of these facts.
Mr. Venkatesa Gopinath on the other hand, insisted that the authorities had come to the correct conclusion on the facts as a made-up affair and placed heavy reliance on the observation about the furnace could not appreciated in value from under Rs. 2 lakhs in 1976. He referred to the lease agreement that indicated that the advance lease of Rs. 30 lakhs would not be adjusted against future lease rentals which indicated that the amount is not an advance but repayment of part of the amount given over by the appellant- company. He insisted that the assessee got the certificate from a valuer which certificate is not reliable for the reason that a furnace built in 1976 could not have appreciated in value because the appreciation of the value is known only on land.
The fact is that JWSIL was the owner of the furnace and this furnace is claimed as sold to the appellant and then it was leased back to JWSIL.
The claim of the appellant- company is that the furnace was purchased at a cost of Rs. 1.05 crores because it is the consideration paid by it and on this amount it claimed depreciation at hundred per cent.
Section 43(1) defines the term 'actual cost' for purposes of allowing depreciation. It defines the cost as acquired and what would be taken as cost in certain circumstances. These circumstances are provided in Explanation 3, 4 and 4A to the section 43(1) of the Act. These have direct bearing to the instance case and therefore, being relevant to the issue, are reproduced hereunder.
.Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the assessing officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the assessing officer may, with the previous approval of the Deputy Commissioner determine having regard to all the circumstances of the case.
Where any asset which had once belonged to the assessee and had been used by him for the purposes of his business or profession and thereafter ceased to be his property by reason of transfer or otherwise, is reacquired by him, the actual cost to the assessee shall be : (i) the actual cost to him when he first acquired the asset as reduced by : (a) the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income Tax Act, 1922 (11 of 1922), in respect of any previous year relevant to the assessment year commencing before the 1-4-1988; and (b) the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1-4-1988, as if the asset was the only asset in the relevant block of assets; or (ii) the actual price for which the asset is re-acquired by him, whichever is less.
.Where before the date of acquisition by the assessee (hereinafter referred to as the first mentioned person), the assets were at any time used by any other person (hereinafter referred to as the second mentioned person) for the purposes of his business or profession and depreciation allowance has been claimed in respect of such assets in the case of the second mentioned person and such person acquires on lease, hire or otherwise assets from the first mentioned person, then, notwithstanding anything contained in Explanation 3, the actual cost of the transferred assets, in the case of first mentioned person, shall be the same as the written down value of the said assets at the time of transfer thereof by the second mentioned person." The reading of the Explanation 3 goes to show that once an asset was used in business by a person and is transferred to another person and assessing officer is of the opinion that the real intention behind the transfer was to claim a higher depreciation resulting in reduction of tax liability, he may value the asset after obtaining the prior approval of the Deputy commissioner. Explanation 4 is applicable to a situation of an asset used in business but sold by him only to be reacquired, the cost of the said asset would be taken to be its written down value only. Explanation 4A is applicable to a situation of a person (first owner) owning an asset, used by him in business and depreciation claimed on that asset and the person (first owner) transferring to another person (second owner) the said asset followed by the person (first owner) acquiring it on lease, hirepurchase or otherwise from the second owner, and in that situation the cost to the person (second person) would be taken at the written value as in the hands of the first owner.
The above appreciation of the provisions about the cost of an asset goes to show that the Explanation 4A of section 43(1) of the Act is attracted because, in the instant case the lessee was the first owner and the appellant -company is the second owner followed by the first owner taking it on lease and therefore, the cost to the appellant (second owner) would have to be limited to the written value as in the hands of the lessee before its transfer to the assessee. We accordingly uphold the orders of the authorities below but direct that the appellant- company may be given an opportunity to substantiate its claim of depreciation with reference to the written down value as found in the hands of the lessee-company before its sale to the appellant.
In view of the foregoing, the appeal of the assessee is allowed in part.