Judgment:
1. These cross appeals, one by the assessee and another by the Revenue, are preferred against the order of the CIT(A) pertaining to the asst.
yr. 1991-92.
2. Since common issues are involved in these appeals, these were heard simultaneously and are being disposed of by this single consolidated order.
3. We have heard the rival submissions and carefully perused the orders of the authorities below and documents placed on record.
4. Ground No. 1 in assessee's appeal and sole ground of the Revenue's appeal relate to the direction of the CIT(A) for allowing depreciation on soft drink bottles given on lease to M/s Coolade Beverages (P) Ltd. (hereinafter called M/s Coolade).
5. The facts in nutshell on this issue borne out from the record are that in the year under consideration, assessee had purchased soft drink bottles from M/s Glass and Ceramics Decorators, Bombay, worth Rs. 19,54,953 by means of 30 invoices during the period w.e.f. 28th March, 1991 to 30th March, 1991. The bottles were to be directly supplied to M/s Coolade as per agreement dt. 15th Feb., 1991. The AO noted that these bottles were transported from Bombay to Sahibabad by goods train and also Transport Corporation of India. Summons under s, 131 were also issued to M/s Coolade for filing the copy of the franchise from M/s Parle (Exports). (P) Ltd., the date of receipt of the bottles along with substantiating evidence.
6. M/s Coolade filed the statement of bottles received from M/s Glass & Ceramics Decorators, copy of register of empty bottles, photocopy of franchise with Parle (Exports) India Ltd, From these details, it was noticed by the AO that out of total of 5,46,000 bottles receivable from the assessee, M/s Coolade had received only 42,000 bottles and remaining were received between 3rd April, 1991 and 18th April, 1991.
The assessee was asked to explain why claim of depreciation should not be disallowed in respect of bottles which were not brought to use in the relevant previous year. The assessee contended that for claiming depreciation under Section 32, it was not necessary for the lessor that the goods should be put to use by the lessee in its business. The requirement of law is only that the goods should be used for the assessee's business, i.e., the lessor's business and not for the lessee's business, It was further pointed out that lessor could not be at the mercy of the lessee, waiting for the latter to use the assets in its business in order to claim depreciation. It was further contended that soft drink bottles were in existence before the end of the previous year and only because part of these bottles was transported after the end of the previous year, depreciation could not be disallowed in respect of the bottles which were transported later. The AO was not satisfied with the explanation of the assessee and she accordingly restricted the depreciation in respect of 42,000 bottles which were received and put to use before 31st March, 1991, and disallowed the depreciation of Rs. 18,04,572. The assessee preferred an appeal before the CIT(A) with the submission that the assessee has entered into an agreement on 15th Feb., 1991, with M/s Coolade for lease of empty glass bottles of the aggregate value of Rs. 25,87,200 and in terms of lease agreement, assessee had purchased 5,88,000 bottles of the value of Rs. 19,54,953 from M/s Glass Ceramics Decorators of Bombay. The above manufacturer had dispatched the said bottles directly to M/s Coolade in different lots and the transportation charges were to be borne by the lessee. It was further contended that the lease agreement commenced w.e.f. 28th Feb., 1991, and monthly rental amounting to Rs. 65,708 was received in advance on 15th March, 1991. Since the bottles were put to use in the assessee's business of leasing and the assessee had received lease rental thereon, the assessee was entitled to claim depreciation in respect of the cost of the bottles under the provisions of Section 32(1)(ii) of the IT Act.
The CIT(A) reexamined the issue and he opined that in order to use the bottles for the business of the lessor, it has to become the first owner of the assets in question. The crucial question is that at what point of time the assessee in the case of assets involved, i.e., bottles which were directly dispatched by the manufacturer to the lessee, can be said to have become the owner of the assets. In this case, the assessee purchased the bottles from M/s Glass & Ceramics Decorators of Bombay and the assessee cannot be said to have become the owner of these bottles till these bottles have parted with the ownership of M/s Glass & Ceramics Decorators of Bombay, the previous owner. Therefore, the assessee can only be said to have become the owner if these bottles in the relevant year were dispatched by M/s Glass & Ceramics Decorators of Bombay before 31st March, 1991. He, accordingly, directed the AO to call for evidence and make necessary inquiry in order to ascertain how many bottles excluding 42,000 bottles which were admittedly received by the lessee before 31st March, 1993, were dispatched before 31st March, 1991, and the assessee would be entitled to depreciation in respect of those bottles which were dispatched by the previous owner upto 31st March, 1991.
7. This direction of the CIT(A) was not accepted by the assessee as well as by the Revenue. Both of them preferred an appeal before the Tribunal. The learned counsel for the assessee has emphatically argued that lease agreement was executed between the assessee and M/s Coolade on 15th Feb., 1991, to lease out the empty glass bottles against a fixed monthly tent. The lease value was stipulated to be Rs. 25,87,200 but as per Schedule 1B, the empty glass bottles worth Rs. 19,54,953 were to be supplied, The assessee, accordingly, placed an order to the manufacturer M/s Glass & Ceramics Decorators of Bombay to supply the empty bottles directly to the lessee, i.e. M/s Coolade. Accordingly, the bottles were dispatched before 31st March, 1991, through Transport Corporation of India. In support of his contention, he invited our attention to the photocopy of the invoices, railway receipts (RRs) and transporter's challans. The learned counsel for the assessee further submitted that since the assessee has purchased the bottles from the manufacturer and put it into transportation for its delivery to the lessee for its use, the equipment were used for the assessee's leasing business and, as. such, the assessee is entitled for depreciation on these equipments irrespective of the fact whether/when they were put to use by the lessee. In support of this proposition, the learned counsel for the assessee has relied upon the following judgments:Indian Management Advisors & Leasing (P) Ltd, v. Dy. CIT (1994) 51 ITD 566 (Del) 8. In oppugnation, the learned Departmental Representative emphatically argued that for claiming depreciation, the equipments, plants or machinery must be used for the business purpose, before the end of the financial year. In the instant case, the impugned bottles were not even delivered upon the lessee for its use before the end of financial year.
As such, the assessee, the lessor, is not entitled for the depreciation. The learned Departmental Representative has also invited our attention to the lease agreement and its Schedules 1 and 1B according to which bottles costing Rs. 19,54,953 were leased out for 3 years at a monthly rent of Rs. 65,708.15 resulting into a total payment of rent in 3 years at Rs. 23,65,493.10. It means that the bottles were leased out at a monthly rent which is more than the interest @ 36 per cent per annum on the total investment of Rs. 19,54,953 made in the purchase of bottles which was returned back by a sum of Rs. 23,65,493 within a period of three years. It was also contended on behalf of the learned Departmental Representative that at the end of the lease period, the lease of the bottles was neither renewed nor bottles were returned back to the lessor. It means the bottles were, in fact, not leased out to the lessee but it was rather a case of making finance by the aforesaid lessor to the lessee in purchase of bottles. In a case of lease, the lessor always retained the ownership right on the equipment and the equipment is either returned back to the lessor or the lease agreement is renewed at the end of the lease period. But, in the instant case, lease of the bottles was neither renewed nor bottles were returned to the lessor although a specific clause in this lease agreement is stipulated. It means that the assessee has simply made the finance available to the lessee in purchasing the bottles under the garb of this lease agreement and received back its entire capital along with interest. Once it is established that the assessee was not the owner of the equipment/bottles, it is not entitled for depreciation at all. The learned Departmental Representative further contended that though this aspect was not examined by the lower authorities but it is a very material point which requires a proper consideration.
9. Having considered the rival submissions and from a careful perusal of record, we find that the assessee has entered into an equipment lease agreement with M/s Coolade and M/s Parle (Exports) (P) Ltd., for supply of bottles which would be delivered by the supplier directly at the place of the lessee. It was also agreed that although M/s Coolade and M/s Parle (Export) (P) Ltd. are for the purpose of this agreement joint hirer, all the liabilities and obligations at the first instance are of M/s Coolade who would be deemed to be the principal hirer and in case of default or non-performance, all terms and conditions would mutatis mutandis be applied to M/s Parle (Export) (P) Ltd. According to its Schedule 1 and Schedule 1B, the bottles costing at Rs. 19,54,953 were to be leased out w.e.f. 1st March, 1991, at a monthly rent of Rs. 65,708.15 which is more than the interest @ 40 per cent per year on the investment made in the purchase of bottles, i.e., Rs. 19,54,953. It is also evident from Schedule 1B that the assessee has agreed to receive a sum of Rs. 23,65,493.10 within a period of three years against an investment made in purchase of bottles, i.e., Rs. 19,54,953. From a careful perusal' of these data, we find force in the contention of the Departmental Representative that it is not a simple case of leasing of equipment, i.e., the bottles, to the lessee but it is rather a case of finance made available by the lessor to the lessee for purchasing these bottles. During the course of hearing, a specific query was raised from the learned counsel for the assessee that according to this specific clause Nos. 16 and 27 of this lease agreement, the lessee was required either to surrender the equipment to the lesser at such place as the lessor may specify, in good repair, condition and working order or get the lease renewed for another period agreed between the parties, what happened with the equipments/bottles after the end of the lease period? Whether the lease was renewed or bottles were returned back to the lessor? Learned counsel for the assessee candidly accepted that after the lease period, the bottles were neither returned to the lessor nor the lease was renewed. These bottles were retained by the lessee, as per the practice prevailing in the market. With this reply, it has become amply clear that after the end of the lease period, the lessee became the absolute owner of the bottles and whatever alleged rent on account of hiring of bottles was paid, it was not in fact, a rent but was an instalment towards the advance/finance made available in purchase of the bottles, paid to the lessor. This proposition also gets support from the fact that the assessee has made the investment in purchase of bottles at Rs. 19,54,953 and received a total sum of Rs. 23,65,493.10 within a period of three years from the so-called lessee.
All these facts suggest that it is not a case of simple leasing of bottles by the assessee to the lessee but it is rather a case of finance made available by the assessee to the lessee for purchasing the bottles against certain rate of interest and thereafter in equal monthly instalments, it was repaid by the lessee to the lessor and after the end of the stipulated period, the lessee becomes an absolute owner of the equipment as it was not required to return back the equipment or to get the lease renewed although a specific clause to this effect was envisaged in the lease agreement to entitle the assessee to claim 100 per cent depreciation on the bottles besides earning interest on its investment in bottles.
10. On a careful perusal of record, we find that this aspect was neither examined by the AO nor the CIT(A) but this aspect goes to the very root of the case to decide whether the assessee has, in fact, leased out these bottles and is entitled for depreciation on it. We, therefore, examined the facts of the case in the light of surrounding circumstances, keeping in mind the above aspect and find that although specific clauses were stipulated/mentioned in the lease deed for return of equipment/bottles at the end of the lease period or further renewal of lease but it was never done by the so-called lessee nor was it intended to do so as it has been candidly accepted by the learned counsel for the assessee that equipment were retained by the lessee permanently without getting the lease renewed and nothing further was paid to the lessor. From these facts, it becomes amply clear that on the final payment of the instalment, the lessee became the absolute owner of the bottles. It means that the assessee never intended to lease out the bottles to lessee on a lease rent inasmuch as it did not claim its ownership over the equipments at the end of the lease period nor did it enforce the recovery of the bottles. The assessee, in fact, made the finance available to the lessee or purchased the bottles and collected monthly instalment of the advance amount incurred in purchasing of bottles with interest in three years. It is also not a case of hire-purchase agreement because in the hire-purchase agreement, at the end of the agreement, the lessee may purchase the equipment against certain payments. In the instant case, nothing was admittedly paid to the lessor for retaining these equipment/bottles by the lessee.
This view also finds support from the details of cost of bottles and the monthly instalment according to which cost of bottles was Rs. 19,54,953 and the assessee has received a total amount of Rs. 23,65,483 in 36 equal monthly instalments which means the assessee has received the entire advance amount with interest.
11. On careful perusal of these established facts, we are of the considered opinion that the assessee, in fact, has made finance available to the so-called lessee in purchasing the bottles but it tried to give a shape to this transaction as a lease transaction to claim 100 per cent depreciation on bottles besides earning a considerable rate of interest. We, therefore, do not have any hesitation in holding that the assessee was not the absolute owner of the bottles which were allegedly put to use before the end of the financial year to claim depreciation thereon. The issue is accordingly decided against the assessee and the order of the CIT(A) on this count is set aside and the disallowance made by the AO is hereby confirmed.
12. Ground No. 2 in assessee's appeal relates to the confirmation of disallowance of depreciation in respect of soft drink bottles of Rs. 30,17,122 given on lease to M/s Aravali Leasing Ltd., who later on sub-leased it to Unikol Bottlers Ltd. 13. The facts borne out from the record on this issue are that the assessee has shown purchase of soft drink bottles from M/s Arizona Printers & Packers Ltd. worth Rs. 30,17,122 which were leased out to M/s Aravali Leasing Ltd. who, in turn, sub-leased these bottles to M/s Unikol Bottlers Ltd. It was noted by the AO that the assessee has entered into a lease agreement with Aravali Leasing Ltd. on 15th March, 1991, for the purpose of leasing of soft drink bottles. M/s Aravali Leasing Ltd. had, in turn, entered into an agreement with M/s Unikol Bottlers Ltd. on 8th March, 1991, for a sub-lease of the same bottles.
The AO issued summons under Section 131 to M/s Arizona Printers & Packers to produce the use of the bottles because of lock out in the factory. On this evidence, the AO observed that none of the parties is ready to own the liability of making payment of transport charges of the bottles although as per the lease agreement, the lessee was required to pay the transportation charges. The AO further issued summons to M/s Khanna Goods Transport who were stated to be the transporters of the bottles but the representative of the Khanna Goods Transport could not place any evidence as to who has transported the bottles from manufacturer to the sub-lessee, M/s Unikol Bottlers Ltd., and who has paid the transportation charges. The AO examined the facts of the case in the light of this evidence and observed that the assessee entered into an agreement for supply of soft drink bottles with M/s Arizona Printers & Packers which vide agreement dt. 15th March, 1991, were leased out to M/s Aravali Leasing Ltd. It was not clear that how M/s Aravali Leasing Ltd. entered into a sub-lease agreement in respect of these bottles with M/s Unikol on 8th March, 1991, before acquiring any right in the leased bottles. The assessee could not even explain how the transportation of bottles was effected and who has paid the transportation charges. On the basis of these facts, the AO opined that the bottles were not physically transported to Sahibabad and the entire circuit of transaction from the assessee to M/s Unikol Bottlers Ltd. was, in fact, sham transaction. He, accordingly, disallowed the claim of depreciation raised by the assessee.
14. The assessee has preferred an appeal before the CIT(A) with the submission that after verbal negotiation, a letter of offer dt. 27th Nov., 1990, was sent to M/s Aravali Leasing Ltd, which was accepted by the latter vide letter dt. 27th Nov., 1990, although the formal lease agreement was signed on 15th March, 1991. It was further contended that although the assessee wanted to lease the bottles to M/s Unikol, but it wanted an involvement of another party since it had no prior dealing with M/s Unikol. M/s Aravali had agreed to step in as the lessee in order to sub-lease bottles to M/s Unikol. M/s Arizona Printers & Packers Ltd., the manufacturer of bottles, had sent written offer through a proforma invoice which was accepted by the assessee and the supplier commenced the supply of bottles on behalf of assessee to M/s Unikol, the sublessee, from 10th Dec., 1990. Since the parties had already reached understanding and delivery of bottles had commenced, M/s Aravali had executed a lease deed with M/s Unikol Bottlers Ltd. on 8th March, 1991, for sub-leasing the bottles which were taken on lease by it from the assessee under the formal lease agreement executed on 15th March, 1991, Before the CIT(A), it was again contended that transportation charges were borne by M/s Unikol but no evidence to this effect was filed. The CIT(A) reexamined the issue but did not find any force in the contention of the assessee and confirmed the disallowance.
15. Aggrieved, the assessee has preferred an appeal before the Tribunal and contended before us that on account of lock out in the Unikol Ltd., no evidence could be filed with regard to the payment of transportation charges. He, however, reiterated his contentions earlier raised before the lower authorities. The learned Departmental Representative, on the other hand, has placed heavy reliance upon the order of the lower authorities.
16. Having considered the rival submissions and from a careful perusal of record, we find that this equipment lease agreement was executed between the assessee and Aravali Leasing Ltd. with an understanding that the lessor, the assessee would lease out the bottles costing Rs. 30,17,122.15 at a monthly rent of Rs. 3,04,226.50 for a period of three years starting from 25th March, 1991. From Schedule 1A annexed with the lease agreement, it is noticed that the lessor would receive a sum of Rs. 36,50,718 during the period of 3 years against the total investment in these bottles at Rs. 30,17,122. From a careful perusal of this agreement, we do not find any inkling whereby one can draw an inference that the lessor has, in fact, intended to lease out the bottles to Unikol Bottlers Ltd., through Aravali Leasing Ltd. Moreover, a specific clause with regard to non-assignable interest is included in this lease agreement whereby this agreement is called to be a personal one between the lessor and the lessee as no interest is assignable in equity or at law in this agreement or in the equipment and will not during the lease agreements attempt, offer or purport to sell, assign, pledge, mortgage, lend or let on lease, or otherwise part with or attempt to part with, the possession of the equipment or his interest therein or in this agreement except sub-lease of the equipment as permitted by the lessor.
According to this lease agreement, the bottles are to be delivered at the place of lessor, i.e., Aravali Leasing Ltd., or at it instance.
Through this agreement, the Aravali Leasing Ltd. was not authorised to sub-lease these bottles to some third party. We have also carefully perused the lease agreement executed between the Aravali Leasing Ltd, and the Unikol Ltd., whereby the Aravali Leasing Ltd. has agreed to lease out the said bottles to Unikol Ltd. but in this entire agreement, nothing has been mentioned in this regard that these bottles were obtained on lease from the assessee against certain payment of rent.
Besides this agreement, nothing has been filed to establish how much monthly rent on these lease bottles was agreed between Aravali Leasing Ltd. and Unikol Bottlers Ltd. From these documents, we do not find any assistance in support of the contention of the assessee that the assessee, in fact, intended to lease out these bottles to Unikol Bottlers Ltd. but being a stranger to the assessee, it had involved Aravali Leasing Ltd. in the transaction of leasing the bottles to Unikol Bottlers Ltd. instead of leasing the bottles directly to Unikol.
It is also evident from these documents that Aravali Leasing Ltd. has entered into a lease agreement with Unikol Bottlers Ltd. on 8th March, 1991, and agreed to lease out. the bottles to Unikol before acquiring any right in these bottles by virtue of a lease agreement with the assessee inasmuch as the lease agreement was executed between the assessee and the Aravali Leasing Ltd. on 15th day of March, 1991. A specific query was raised during the course of assessment proceedings and the appellate proceedings before the CIT(A) how it happens that no documentary evidence was placed in support of the contention that Aravali Leasing Ltd. was involved in the transaction of leasing between the assessee and Unikol Bottlers. Ltd. It was simply stated that before the execution of this lease agreement, everything was settled orally between the parties. Had it been a fact, there would have been some mention on these tri party negotiations in any of the lease agreement but we do not find anything therein. Nothing has been placed before us to substantiate how much monthly rent was settled between the Aravali Leasing Ltd. and the Unikol Ltd. except the cost of the bottles given in Schedule A, annexed to the lease agreement between M/s Unikol Ltd. and M/s Aravali. As per this agreement executed between the assessee and M/s Aravali Leasing, the lessee was required to pay the charges of transportation in respect of delivery of bottles from a supplier but during the course of assessment proceedings, Aravali Ltd. has denied any payment of transportation charges. It rather contended that it was the responsibility of Unikol Ltd. But, the Unikol Ltd. did not produce any evidence with regard to the payment of transportation charges. It also disowned the liability of transportation charges and took a stand that it was borne by the supplier. On the basis of these facts, the AO has concluded that this entire transaction is sham and the assessee is not entitled for depreciation at all as it was not owner of the bottles. From a careful perusal of this lease agreement, we find that this lease agreement was drafted in a casual manner as some of its clauses like clause No......... cannot be applied in case of leasing of bottles. As such, we do not find any support from these documents in favour of the assessee that it has, in fact, leased out bottles to Unikol Bottlers Ltd. through Aravali Leasing Ltd. because this document tells a story otherwise. The learned counsel for the assessee invited our attention to certain correspondence exchanged between the assessee and Aravali Leasing Ltd. but with these documents, it cannot be proved that the assessee has, in fact, leased out bottles to Unikol Ltd. in order to claim depreciation thereon. Even if the transaction is proved, the next question comes that whether it was a leased transaction or the finance made available to the consumer of the bottles because the amount of so-called rent payable suggests a story otherwise. In these circumstances, we are constrained to hold that the CIT(A) is justified in concluding that this transaction is sham and the assessee is not entitled for depreciation as claimed.
17. In the result, the appeal of the assessee stands dismissed and of the Revenue is allowed.