1. All the five appeals of the Revenue relate to the assessment years 1991-92 to 1995-96. We heard all the appeals together and disposing of the same by this common order.
2. Let us first take I.T.A. No. 119/Mds./99 which relates to the assessment year 1991-92. The only issue arises for consideration is regarding the valuation of the share of Tata Tea Ltd. for the purpose of capital gains.
3. We heard both the representatives of the Revenue and the assessee.
Tata Tea Ltd. offered to buy majority of the shares in Consolidated Coffee Ltd. Tata Tea Ltd. offered one share of Tata Tea Ltd. and Rs. 100 for every two shares of Consolidated Coffee Ltd. For the purpose of capital gain, the Assessing Officer took the market rate of the Tata Tea Ltd. on the date of exchange at Rs. 320. However, on appeal by the assessee, the first appellate authority found that the market value of Tata Tea Ltd. would become relevant only when the assessee sells the share of Tata Tea Ltd. In this case, since there was an exchange of Tata Tea Ltd. for Consolidated Coffee Ltd., the first appellate authority directed the Assessing Officer to levy capital gain by adopting the face value of the shares of Tata Tea Ltd. The only objection of the Revenue is that if the shares of Tata Tea Ltd. were sold by the assessee, they could have realized the market value.
Therefore, the market value should be taken as consideration for the purpose of levy of capital gains. We find that the very same issue of exchange of shares of Tata Tea Ltd. and Consolidated Coffee Ltd. came before the Madras High Court in the case of AR. Alagappa Chettiar v.ITO for the assessment year 1991-92. After considering an identical factual situation, the Madras High Court held that the capital gain shall be calculated on the basis of the value of one share of Tata Tea Ltd. at Rs. 147. In the case on our hand, the facts are identical to that of the case decided by the Madras High Court. In our opinion, the judgment of the Madras High Court in the case of AR. Alagappa Chettiar would be squarely applicable to the facts of the case. Therefore, by following the judgment of the Madras High Court in the case of AR. Alagappa Chettiar , we direct the Assessing Officer to recompute the 4. In the result, the order of the Commissioner of Income-tax (Appeals) is modified to the extent indicated above and the appeal filed by the Revenue in ITA No. 119/Mds./99 is partly allowed.
5. The next appeal in I.T.A. No. 120/Mds./99 relates to the assessment year 1992-93. The first ground of appeal relates to the expenditure incurred by the assessee on advertisement inviting deposits.
6. We heard both the representatives of the Revenue and the assessee.
This issue of expenditure on advertisement inviting deposit also arises for consideration in I.T.A. Nos. 121 and 122/Mds./99 for the assessment years 1993-94 and 1994-95. The assessee claimed the expenditure relating to advertisement inviting deposit as revenue expenditure. The Assessing Officer disallowed the claim of the assessee. However, on appeal by the assessee, the first appellate authority allowed the claim of the assessee on the ground that the assessee was required to incur the expenditure as per the directions of the Reserve Bank of India and the provisions of the Companies Act. The only objection of the Revenue before this Tribunal is that the expenditure incurred by the assessee on advertisement inviting deposit from public are to be construed as capital expenditure in view of the judgment of the Supreme Court in the case of Brooke Bond India Ltd. v. CIT .
7. We have also carefully gone through the judgment of the Supreme Court in the case of Brooke Bond India Ltd. 1997 225 ITR 798. In the case before the Supreme Court, the assessee incurred expenditure for the purpose of raising the capital base by issuing shares. In this case, the expenditure is not for issuing shares but for making advertisement inviting deposit from public. Admittedly, the assessee is a non-banking business company and the Reserve Bank of India permitted the assessee to invite deposit from the public. Inviting deposit under the provisions of the Companies Act cannot be equated to the issue of shares for the purpose of raising capital. There is a difference between deposit and shares. Therefore, in our opinion, the judgment of the Supreme Court in the case of Brooke Bond India Ltd. v. CIT is not applicable to the facts of this case. We find that the very same issue of expenditure on advertisement came before the Madras High Court in the assessee's own case for the assessment year 1984-85. The Madras High Court, after considering the provisions of Section 58A of the Income-tax Act and the circular issued by the Central Board of Direct Taxes in Circular No. 240 dated May 17, 1978 1979 117 ITR (St.) 17, held that the assessee-company is under a statutory compulsion to advertise the notice calling for deposits from the public. Therefore, the expenditure incurred on such advertisements is revenue in nature. The Madras High Court also held that this expenditure on advertisement for inviting deposit from the public does not form part of sales promotion expenses. Since the issue raised by the Revenue has already been adjudicated by the jurisdictional High Court in the assessee's own case, in our opinion, the judgment of the Madras High Court would bind on both parties and also this Tribunal.
Therefore, by respectfully following the judgment of the jurisdictional High Court in the case of CIT v. Investment Trust of India Ltd. , we hold that the expenditure incurred by the assessee on advertisements inviting deposits from public is revenue expenditure. Therefore, we do not find any infirmity in the order of the lower authority. Accordingly, we confirm the same.
9. The next ground of appeal for the assessment year 1993-94 is regarding the claim of the assessee for depreciation on bio-gas generating system. This issue also arises for consideration for the assessment year 1994-95. Mr. Shaji P. Jacob, the learned Departmental Representative (D. R.) submitted that the assessee purchased bio-gas generating system from M/s. Western Paques India Ltd. and leased back the same to the very same company. Since the asset was claimed to be purchased prior to January 1, 1993, the entire cost of bio-gas generating system was claimed as depreciation. The assessee has also claimed to have purchased another bio-gas generating system for the assessment year 1993-94 and claimed depreciation for the assessment year 1994-95. The Assessing Officer, according to the learned Departmental Representative, found that the bio-gas generating system was not installed at the premises of M/s. Sandoz India Ltd., Bharuch, Gujarat. According to the learned Departmental Representative, the bio-gas generating system said to have been installed at Vapi, was also found to be not correct. According to the learned Departmental Representative, since the machinery was not put to use for commercial production, the claim of depreciation cannot be allowed.
10. On the contrary, Mr. Rajagopalakrishnan, the learned representative for the assessee submitted that Western Paques India Ltd. is engaged in the manufacturing and sale of bio-gas generating plants for commercial use. The assessee has purchased bio-gas generating plants from Western Paques India Ltd. and leased out the same to the very same company.
According to the learned representative, the business of the assessee is leasing. Therefore, as far as the assessee is concerned, the machinery was put to use in the assessee's leasing business as soon as it was handed over to Western Paques India Ltd. The learned representative submitted that the purchase of bio-gas generating system and its lease back transaction was not denied by the Revenue. According to the learned representative, the only objection of the Revenue is that the machinery or bio-gas generating system was not installed in the premises of M/s. Sandoz India Ltd. Bharuch, Gujarat. According to the learned representative for the assessee, the transaction of leasing is between the assessee and M/s. Western Paques India Ltd. Therefore, M/s. Sandoz India Ltd., Bharuch, Gujarat has no role to play in the transaction between the assessee and M/s. Western Paques India Ltd. According to the learned representative, the first bio-gas generating system was installed by the lessee M/s. Western Paques India Ltd. at Sandoz India Ltd., Bharuch in the Gujarat State. After completion of the project, the plant was dismantled and retrieved by M/s. Western Paques India Ltd. The learned representative further submitted that the second bio-gas generating system was proposed to be installed in Rohit Pulp and Paper Mills Ltd. at Vapi in the State of Gujarat by the lessor M/s. Western Paques India Ltd. According to the learned representative, these informations were given by M/s. Western Paques India Ltd. which was passed on to the Assessing Officer. The plant which was originally planned to be installed at M/s. Rohit Pulp and Paper Mills Ltd. could not be installed due to technical reason and therefore, subsequently, it was installed at the R & D Centre of Western Paques India Ltd., Pune. According to the learned representative for the assessee, all the necessary correspondence to prove the above facts were produced before the Assessing Officer. In spite of this, according to the learned representative, the Assessing Officer has chosen to disallow the claim of the assessee on the ground that the machinery was not installed and not put to commercial production. According to the learned representative, the question of installation of the plant does not arise in the case of the assessee. According to the learned representative, the assessee leased out the bio-gas generating system to M/s. Western Paques India Ltd. in the ordinary course of its leasing business. Therefore, as soon as the machinery was handed over to M/s.
Western Paques India Ltd., the machinery was put to use in the leasing business of the assessee. Merely because M/s. Western Paques India Ltd. could not install the machinery as proposed, it does not amount to not utilizing the machinery in the leasing business of the assessee. The learned representative for the assessee invited our attention to the grounds of appeal raised by the Revenue and submitted that the only objection of the Revenue in the grounds of appeal in 2.4 of the ground is that the machinery leased out was not at all put to use. The learned representative submitted that assuming for a moment even if it is admitted for the sake of argument that the machinery was not installed and put to use by M/s. Western Paques India Ltd. to whom the machinery was leased out, that would not disentitle the assessee to make a claim of depreciation. According to the learned representative, as soon as the assessee handed over the machinery to M/s. Western Paques India Ltd., it would amount to put to use of the machinery in the leasing business of the assessee. Therefore, the assessee is entitled to depreciation at the rate of 100 per cent, as claimed. The learned representative placed his reliance on the judgment of the Orissa High Court in the case of Industrial Development Corporation of Orissa Ltd. v. CIT .
11. We have considered the rival submissions on either side, and also perused the material available on record. Admittedly, the assessee is doing business in lease. M/s. Western Paques India Ltd. engaged in the business of manufacturing and sale of bio-gas generating system sold two plants to the assessee and the same was leased back to M/s. Western Paques India Ltd. The first bio-gas generating system was said to be installed in the premises of M/s. Sandoz India Ltd. in the State of Gujarat. Another equipment was proposed to be installed in the premises Rohit Pulp and Paper Mills Ltd., Vapi, Gujarat. However, due to technical reasons M/s. Western Paques India Ltd. could not install the bio-gas generating system in the business premises of M/s. Rohit Pulp and Paper Mills Ltd. Therefore, it was installed in the premises of R&D Centre of Western Paques India Ltd., Pune. It appears the assessee has also filed valuation certificate from the valuer in respect of the abovesaid two bio-gas generating systems. The claim of depreciation was disallowed only on the ground that the statement of the senior manager of M/s. Rohit Pulp and Paper Mills Ltd. was not rebutted. The Assessing Officer has not examined anybody from Western Paques India Ltd. The statement recorded by the Revenue from the senior manager of Rohit Pulp and Paper Mills Ltd. and another person from M/s. Sandoz India Ltd. may be relevant for the purpose of considering transaction between Western Paques India Ltd. and Rohit Pulp and Paper Mills Ltd. on the one hand and M/s. Western Paques India Ltd. and Sandoz India Ltd. on the other hand. The assessee is claiming depreciation only in respect of the transaction between the assessee and M/s. Western Paques India Ltd. and subsequent installation of the equipment by M/s. Western Paques India Ltd. in the premises of M/s. Sandoz India Ltd. and Rohit Pulp and Paper Mills Ltd. may not be relevant for the purpose of considering the transaction between the assessee and M/s. Western Paques India Ltd. The assessee has explained that the machinery installed in the premises of Sandoz India Ltd. was dismantled after completion of pilot project and the other equipment was installed in the premises of R&D Centre of Western Paques India Ltd., Pune. This information given by the assessee to the Revenue authorities could not be controverted by the Department.
As rightly submitted by the learned representative for the assessee, the only objection of the Revenue taken up in ground No. 2.4 is that the asset leased out was not put to use. Therefore, it is very clear that the purchase and lease back transaction between assessee and M/s.
Western Paques India Ltd. is not in dispute. The existence or non-existence of machinery with M/s. Sandoz India Ltd. and Rohit Pulp and Paper Mills Ltd. are not the relevant the consideration for the purpose of granting depreciation in respect of lease transaction between the assessee and M/s. Western Paques India Ltd. Therefore, it is very clear that as soon as the assets were handed over to M/s.
Western Paques India Ltd., the assessee put the bio-gas generating system in the business of the lessee. At no stretch of imagination it would be said that the bio-gas generating system was not put to use in the business of the assessee.
12. We have also carefully gone through the order of the first appellate authority. The first appellate authority has rightly observed that insisting evidence from M/s. Sandoz India Ltd. and Rohit Pulp and Paper Mills Ltd. is not warranted since the question that arises for consideration is in respect of transaction between the assessee and M/s. Western Paques India Ltd. Merely because M/s. Western Paques India Ltd. could not use the machinery after taking them on lease from the assessee or could not install the machinery as proposed due to the reasons best known to them, that would not deprive the assessee from claiming depreciation in respect of lease transaction between the assessee and M/s. Western Paques India Ltd. In view of the above discussion, we do not find any infirmity in the order of the lower authority granting depreciation in respect of two bio-gas generating system for the assessment years 1992-93 and 1994-95. Accordingly, we confirm the same.
13. Let us now take I T.A. No. 123/Mds./99 for the assessment year 1995-96. The first ground of appeal is regarding grant of depreciation on boiler ammonia plant, solar-power rural radio telephone system, waste heat recovery equipment, wind electric generator and rolling mills rolls. Mr. Shaji P. Jacob, the learned Departmental Representative submitted that the assessee claimed 100 per cent, depreciation in respect of the abovesaid equipment. According to the learned Departmental Representative, the boiler was purchased from M/s.
Madras Fertilizers Ltd. for Rs. 1,36,21,088 and the same was claimed to be leased back to the very same company by the assessee. According to the learned Departmental Representative, the boiler plant which is said to be purchased by the assessee and leased back to M/s. Madras Fertilizers Ltd. was in existence for the last few years. According to the learned Departmental Representative, the boiler was firmly embedded to the earth. Therefore, it is an immovable asset. Since it is an immovable asset, according to the learned Departmental Representative, the boiler could not have been sold to the assessee-company without the sale of the land in which the boiler was firmly embedded. The learned Departmental Representative further submitted that the entire sale and lease back transaction between the assessee-company and Madras Fertilizers Ltd. is nothing but financial transaction. Therefore, it cannot be treated as lease back transaction.
14. The learned Departmental Representative further submitted that the assessee-company entered into another lease back transactions with M/s.
Renewable Energy Systems Ltd., Hyderabad. According to the learned Departmental Representative, the assessee claimed that 370 Nos. solar power rural radio telephone system costing about Rs. 1,00,88,420 was purchased at the rate of Rs. 27,266 per unit from M/s. Renewable Energy Systems Ltd. and the same was leased back to the very same company. The assessee further claimed that the said equipment was sub-leased to the Department of Telecommunications by M/s. Renewable Energy Systems Ltd. According to the learned Departmental Representative, the entire arrangement between the assessee and M/s. Renewable Energy Systems Ltd. is nothing but a financial transaction and therefore, it cannot be said that the assessee leased out the asset in its leasing business.
15. The learned Departmental Representative further submitted that the assessee-company has also entered into lease transaction with M/s. Sree Rayalaseema Hi-Strength Hypo Ltd., and M/s. Prakash Industries Ltd. A similar lease transaction was also claimed to have been made with M/s.
Trident Steels Ltd. According to the learned Departmental Representative, the assessee claimed that waste heat recovery equipment was purchased from M/s. Sree Rayalaseema Hi-Strength Hypo Ltd. for Rs. 49,75,000 and the same was leased back to the very same company. The assessee has also claimed that wind electric generator was purchased from M/s. Prakash Industries Ltd. and the same was leased back to the very same company. Similarly, according to the learned Departmental Representative, a purchase was claimed to have been made in respect of rolling mills rolls from M/s. Somash Steel Manufacturing P. Ltd., Mumbai and the same was leased to M/s. Trident Steels Ltd. According to the learned Departmental Representative, the entire transaction of the assessee with respect to purchase and lease back transaction is only a financial transaction and therefore, it cannot be construed as a lease back transaction. Therefore, according to the learned Departmental Representative, the assessee is not entitled to any depreciation as claimed. The learned Departmental Representative placed his reliance on the decision of the Special Bench of this Tribunal in the case of Mid East Portfolio Management Ltd. v. Deputy CIT 2004 271 ITR (A.T.) 87 (Bom) [SB] ; 2003 87 ITD 537 (Bom). The learned Departmental Representative has also placed his reliance on the judgment of the Delhi High Court in the case of Goyal Gases P. Ltd. v. CIT 536. The learned Departmental Representative again placed his reliance on the judgment of the Kar-nataka High Court in the case of Avasarala Automation Ltd. v. Joint. CIT 2004 266 ITR 178.
16. On the contrary, Mr. K.R. Rajagopalakrishnan, the learned representative for the assessee submitted that admittedly, the assessee purchased the asset from the respective companies. The entire documents including the invoices were produced before the lower authorities to show that the entire assets were purchased by the assessee on payment of purchase price. The learned representative for the assessee submitted that after the purchase, the assessee became the owner of the asset. Therefore, in its capacity as the owner of the asset, the same was introduced in the leasing business of the assessee. According to the learned representative, the assessees leased back the machinery and boilers purchased from the various companies and collected lease rentals in the course of its business. Therefore, according to the learned representative, it is not a case of mere financial transaction but a case of lease transaction. According to the learned representative, sale and lease back transaction is not a prohibited one in the eye of law. The learned representative for the assessee invited our attention to the decision of the Special Bench of Mumbai of the Tribunal in the case of Mid East Portfolio Management Ltd. v. Deputy CIT 2004 271 ITR (A.T.) 87 : 2003 87 ITD 537 and submitted that sale and lease back transaction cannot be considered to be a dubious or colourable device for tax evasion. According to the learned representative, the intention of the parties has to be ascertained as held by the Special Bench of the Mumbai in the case of Mid East Portfolio Management Ltd. v. Deputy CIT . If the intention of the parties is really to sell the machinery and to take the same on lease, then it cannot be said that the transaction was a mere financial transaction. According to the learned representative for the assessee, in this case, the intention of the parties is very clear that the respective companies sold the assets to the assessee-company and the assessee-company purchased the same after paying the purchase price. Thereafter, the assets were leased out in the regular course of the assessee's leasing business. Therefore, according to the learned representative, it cannot be said that the arrangement between the assessee and other companies are mere financial transaction for the purpose of raising funds. According to the learned representative, the intention of the parties is not to enter into any financial arrangement. The learned representative further submitted that the intention of the assessee and other companies is to enter into a lease back transaction. Therefore, according to the learned representative, the decision of the Special Bench of the Tribunal is not applicable to the facts of this case.
17. The learned representative for the assessee further submitted that the assessee has paid sales tax for purchasing the boiler and other machinery as per the provisions of the Sales Tax Act. Under the Sales Tax Act, the purchase of boiler and machinery were treated as sale of goods and the sales tax authorities assessed the transaction as one of sale and collected the sales tax at the applicable rate on the transaction. Therefore, according to the learned representative, it is not correct to say that the boiler which was purchased by the assessee from M/s. Madras Fertilizers Ltd. is not a movable property. According to the learned representative, boiler is one of the movable properties and the purchaser/assessee was made to pay sales tax at the rate of 8 per cent. According to the learned representative, in this case, the assessee has actually paid the sales tax and the transaction was also the subject-matter of assessment under the Sales Tax Act. Therefore, according to the learned representative, the transaction has to be treated as one of sale transaction. The learned representative for the assessee further submitted that the assessee has filed entire details before the Assessing Officer in respect of rolling mills rolls and waste recovery equipment and other machinery. According to the learned representative, when the assessee has produced the materials relevant to the transaction, it cannot be rejected merely because no reply was obtained by the Assessing Officer from the supplier M/s. Somash Steel Manufacturing P. Ltd. The learned representative for the assessee further submitted that the assessee has entered into a genuine lease back transaction and the lease rental received has been declared to the Department in the regular course of assessment. The learned representative for the assessee further submitted that the Orissa High Court in the case of Industrial Development Corporation of Orissa Ltd. v. CIT has upheld a similar transaction. The learned representative for the assessee submitted that a transaction which is otherwise valid in law cannot be treated as non est merely because some of the factors go to reduce the tax liability of the assessee.
According to the learned representative, since the assessee has entered into genuine transaction and the intention of the parties is very clear, it cannot be said that the entire arrangement is a device to reduce the tax liability in a manner unknown to the provisions of law.
According to the learned representative, the legal transaction which is permissible under the law cannot be given a colour to deny the statutory benefit available to the assessee under the provisions of the Income-tax Act. The learned representative for the assessee further submitted that the assessee acquired the ownership of the assets leased back to the various companies. Therefore, it has complied with the requirement of the provisions of the Income-tax Act for the purpose of grant of depreciation. The learned representative for the assessee placed his reliance on the judgment of the Gujarat High Court in the case of CIT v. Pinnacle Finance Ltd. . The learned representative for the assessee further submitted that he is placing his reliance on the judgments which are included in the paper book filed by him.
18. We have considered the rival submissions on either side, and also perused the material available on record. Admittedly, the assessee is in the business of leasing. The assessee claimed before the lower authorities that they have purchased boiler ammonia plant, waste heat recovery equipment, wind electric generator, solar power rural radio telephone systems and rolling mills rolls. After purchase, the assessee leased back the above equipment to various companies and received lease rentals. The transaction between the assessee and the abovesaid companies regarding purchase and lease back was found by the Assessing Officer as financial transaction and not a lease transaction. On appeal by the assessee, the first appellate authority found that there was a genuine lease transaction and the assessee leased out the machinery in the course of its ordinary business of leasing. Therefore, the assessee is entitled to depreciation as claimed. The main contention of the Revenue now before this Tribunal is that there was no lease back transaction and the entire arrangement is only a financial transaction and the assessee claimed as lease back transaction in order to reduce the tax liability which is a colourable device.
19. We have carefully gone through the entire material available on record in respect of the transaction which is the subject-matter of this appeal. Let us first examine the sale and lease back transaction between the assessee and Madras Fertilizers Ltd. The assessee purchased boiler ammonia plant for a sum of Rs. 1,36,21,088. M/s. Madras Fertilizers Ltd. raised proper purchase bill and the sale was also subjected to levy of sales tax at the applicable rate. The sale of boiler was a sale of goods under the Sales Tax Act. It is also not in dispute that the Assessing Officer under the Sales Tax Act assessed the transaction as one of sale. A lease deed was also executed. The first monthly rental was payable on September 23, 1994, and subsequent monthly rents are to be paid on or before 23rd of every succeeding month. The assessee has produced the invoices, challans, bills, lease agreement, valuation report, etc. The Assessing Officer, after examining the materials filed by the assessee found that the boiler was an integral part of Madras Fertilizers Ltd.'s ammonia plant and embedded to earth, therefore, it is an immovable asset. According to the Assessing Officer since the boiler was firmly embedded to earth, it becomes an immovable property. Therefore, the sale of such boiler cannot be construed as sale of goods under the Sale of Goods Act, 1930.
Therefore, the Assessing Officer concluded that the transaction is only a financial transaction and the assessee is not entitled to depreciation as claimed. On appeal by the assessee, the first appellate authority found that the sale of the boiler between the assessee and the Madras Fertilizers Ltd. was considered as sale of goods in the sales tax assessment and the value of the boiler was deducted from the block of assets in the books of Madras Fertilizers Ltd. The first appellate authority concluded that the assessee owned the boiler which is leased to M/s. Madras Fertilizers Ltd. The first appellate authority further found that the assessee is in the business of leasing.
Therefore, in view of the judgment of the Supreme Court in the case of CIT v. Shaan Finance P. Ltd. the assessee is entitled for depreciation in respect of the assets which was leased out in the course of its ordinary business. The first appellate authority also found that the boiler is a movable asset and the sale was subjected to sales tax under the provisions of the Central Sales tax Act and the Tamil Nadu General Sales tax Act. The first appellate authority further found that the second-hand boilers are available in the market and there are willing purchasers and sellers in the field of chemical and textile zone. After examining the invoices, insurance policy, valuation report, lease agreement and other materials, which were available before the Assessing Officer, the first appellate authority found that there was a genuine sale supported by evidence and there was genuine lease back transaction. Accordingly, the first appellate authority concluded that the arrangement is not a financial transaction.
Therefore, the first appellate authority directed the Assessing Officer to allow the depreciation on the boiler leased to Madras Fertilizers Ltd. 20. The main contention of the learned Departmental Representative before this Tribunal is that the boiler is an immovable asset since it was firmly attached to land. The other contention of the learned Departmental Representative is that the entire sale and lease back transaction is nothing but financial transaction. We have carefully gone through the decision of the Special Bench of the Tribunal in the case of Mid East Portfolio Management Ltd. v. Deputy CIT 2004 271 ITR (A.T.) 87 (Bom) [SB] ; 2003 87 ITD 537. After analysing the various case laws on the subject, the Special Bench of this Tribunal concluded that all the sale and lease back transactions as such cannot be considered to be dubious or colourable devices aimed at tax evasion.
According to the Special Bench, the real intention of the parties should be ascertained before concluding whether the transaction was a loan transaction or as a lease back transaction. The Special Bench further observed that the genuineness of the sale and lease back transaction should be gathered from the intention of the parties. The Special Bench has also considered whether the boiler firmly embedded on earth is a movable goods or not. After analysing various case law, the Special Bench at page 651 of the ITD para. 154 held that air pollution equipment and boilers are movable assets. In view of the Special Bench decision holding that the air pollution and boilers are movable assets, we do not find any substance in the submission of the learned Departmental Representative that the boiler is an immovable asset. In our opinion, the decision of the Special Bench does not support the case of the Revenue. The Special Bench further observed that the fact that there was only a constructive or symbolic delivery of the asset cannot by itself decide the issue. According to the Special Bench, the decisive factor is the intention of the parties. If the intention gathered from the surrounding circumstances including the contract of the parties, it would be relevant factor to find out whether the parties intended to sell the assets to the lessor. In view of the Special Bench's decision, we have to first ascertain the intention of the parties on the basis of the surrounding circumstances. In this case, the Assessing Officer brushed aside the claim of the assessee only on the ground that the boiler was firmly embedded on the earth, therefore, it was not goods. It is not in dispute that the boiler embedded on the earth could be removed and it could be sold. The first appellate authority in fact found that there are markets for second-hand boilers. The Sales tax Act treats the boiler as goods. When the sales tax laws recognize boiler as movable goods, we do not find any reason to take a different view under the Income-tax Act. In these factual circumstances, in our opinion, the first appellate authority rightly found that the boiler was a movable goods.
21. The next question arises for consideration is what was the intention of the parties. The invoices and other materials produced before the lower authorities show that the parties to the transaction intended to sell the boiler to the assessee. The assets were valued by an independent valuer. After the lease period, the goods are to be redelivered to the assessee. In those factual circumstances, the first appellate authority found that the transaction is a real lease transaction. We have also carefully gone through the Special Bench decision of the Tribunal on this aspect. The case before the Special Bench as per the terms of lease, the lessee was under an obligation to purchase the equipment after the period of lease and the lessee has no option to refuse to purchase back the asset. The assessee did not take the insurance policy in respect of the asset leased out. In the case before the Special Bench, there was no intention of the parties to hand over or transfer the goods to the other party. In those factual circumstances, the Special Bench found that the transaction was a notional one for the purpose of raising funds, therefore, it is only a financial transaction. The Special Bench further observed that the entire transactions were pre-planned. The Special Bench also found that the lessee company spread over 151 transactions for the purpose of raising funds. In those factual circumstances, it was found that there was no real intention to sell asset to the leasing companies. The Special Bench further found that there was a power of attorney authorizing the lessee company to sell the leased equipment. Therefore, the Special Bench observed that the power of attorney exposes the device adopted by the parties. In the case on our hand, the facts are entirely on different footing. The assessee purchased the boiler. The lessee company raised proper invoices and purchase bill and the sale was the subject-matter of levy of sales tax and the Assessing Officer under the Sales tax Act assessed the transaction under the Sales tax Act. There was a lease agreement to lease out the boiler to M/s. Madras Fertilizers Ltd. After expiry of lease period, the lessee shall deliver the boiler to the lessor at such place as the lessor may specify in good condition. There is no compulsion on the part of the lessee to purchase the boiler as in the case of Special Bench. There was no power of attorney authorizing anybody to sell the asset. The asset was insured and valued by an independent valuer. The Valuation Officer clearly identifies the boiler which was the subject-matter of sale and lease back transaction. Therefore, it may not be correct to say that the boiler could not be identified. After examining those factual aspects, the first appellate authority found that the intention of the party was to sell the asset and to take back the same asset on lease.
In those factual circumstances, we do not find any infirmity in the order of the lower authority. In our opinion, the intention of the parties were to enter into genuine sale and lease back transaction.
22. We have also carefully gone through the judgment of the Orissa High Court in the case of Industrial Development Corporation of Orissa Ltd. 2004 268 ITR 130. The assessee before the Orissa High Court is a public limited company wholly owned by the Government of Orissa. The object of the company is to establish industries which are likely to advance the industrial development in the State of Orissa. The assessee entered into a purchase-cum-lease agreement with the Orissa State Electricity Board on September 29, 1995, to purchase electrical machinery of some sub-stations of the Orissa State Electricity Board for a price of Rs. 25 crores and leased out the machinery back to the Orissa State Electricity Board for a lease rent of Rs. 34,38,00,000 for a period of 60 months. The assessee claimed depreciation at the rate of 100 per cent. The Assessing Officer allowed the claim of the assessee in the assessment order made under Section 143(3) of the Income-tax Act, 1961.
However, the Commissioner of Income-tax by exercising his power under Section 263 of the Income-tax Act, set aside the order of the assessment on the ground that it is erroneous and prejudicial to the interests of the Revenue. The order of the Commissioner was confirmed by the Income-tax Appellate Tribunal. On appeal by the assessee before the High Court, one of the substantial questions raised before the High Court was whether the sale and lease back agreement is a colourable device. The High Court, after considering various case law including the judgment of the Supreme Court in the case of McDowell and Co. Ltd. v. CTO , held that the Commissioner cannot discord the sale and lease back agreement on the ground that the underlying motive of the assessee to enter into the said transaction was to reduce the income-tax liability. The Orissa High Court found that the agreement between the assessee and the Orissa State Electricity Board is a genuine sale and lease back transaction. Accordingly, the Orissa High Court upheld the transaction between the assessee and the Orissa State Electricity Board and confirmed the order of the Assessing Officer granting depreciation in respect of the asset which was leased out to the Orissa State Electricity Board. In our opinion, this judgment of the Orissa High Court is squarely applicable to the facts of this case.
As we have already observed, the intention of the assessee before this Tribunal and M/s. Madras Fertilizers Ltd. was to sell the boiler and to take the same on lease. Even though the boiler was utilised by the Madras Fertilizers Ltd. few years back, in view of the judgment of the Orissa High Court and the surrounding circumstances and the terms and conditions of the agreement clearly show that there was real sale and lease back transaction. Therefore, in our opinion, the first appellate authority rightly directed the Assessing Officer to grant depreciation in respect of boiler.
23. We have also carefully gone through the judgment of the Karnataka High Court in the case of Avasarala Automation Ltd. v. Joint. CIT . In the case before the Karnataka High Court, the assessee purchased machinery from Andhra Pradesh State Electricity Board for a total consideration of Rs. 1,60,18,854 and leased back the same to the Andhra Pradesh State Electricity Board for a monthly rent of Rs. 2,19,498.35 for a period of 72 months. The assessee claimed 100 per cent, depreciation in respect of machinery leased out to the Andhra Pradesh State Electricity Board. The Assessing Officer held that the transaction was not genuine, therefore, he rejected the claim of the assessee. On appeal by the assessee, the Tribunal found that the sale transaction was not registered and the machinery were not identified.
On further appeal by the assessee before the Karnataka High Court, on the facts of the case, it was found that the Andhra Pradesh State Electricity Board was interested in securing financial assistance by way of loan and for that purpose the machinery was offered as security.
This judgment of the Karnataka High Court may not be helpful to the Revenue. In the case on our hand, the surrounding circumstances, which was gathered from the material available on record, clearly shows that the transaction of sale and lease back transaction is genuine and there is no intention on the part of the assessee to reduce its tax liability. Therefore, in our opinion, there was a real sale and lease back transaction in respect of boiler and the first appellate authority has rightly directed the Assessing Officer to allow depreciation. In view of the judgment of the Orissa High Court in the case of Industrial Development Corporation of Orissa Ltd. 2004 268 ITR 130, in our opinion, the judgment of the Karnataka High Court may not be applicable to the facts of the present case.
24. The next transaction is with regard to leasing of solar power rural radio telephone system to M/s. Renewable Energy Systems Ltd. The assessee purchased 370 Nos. solar power rural radio telephone system for Rs. 1,00,88,420 at the rate of Rs. 27,266 per unit and the same was given back on lease. M/s. Renewable Energy Systems Ltd. in turn sub-leased the solar power rural radio telephone system to the Department of Telecommunications. It appears from the order of the Assessing Officer that the invoices and other material relating to transaction were produced before him. The Assessing Officer disallowed the claim of the assessee only on the ground that the machinery was not put to use on or before March 31, 1995. The Assessing Officer observed that the solar power rural radio telephone system could have been used only on or after the date on which the lease deed was signed by M/s.
Renewable Energy Systems Ltd. with Department of Telecommunications. On appeal by the assessee, the first appellate authority found that solar power rural radio telephone system was put to use in the business of the assessee before March 31, 1995. It is not in dispute that the assessee-company is doing the business of leasing. When the solar power rural radio telephone system was purchased from M/s. Renewable Energy Systems Ltd. and the same was handed over to them in pursuance of agreement of lease, in our opinion, the assessee has put the machinery in use in the business of leasing. The Assessing Officer disallowed the claim of the assessee on the ground that M/s. Renewable Energy Systems Ltd. could not have handed over the equipment to the Department of Telecommunications before March 31,1995. The subject-matter of appeal is between the assessee and M/s. Renewable Energy Systems Ltd. We are not concerned about the transaction between M/s. Renewable Energy Systems Ltd. and the Department of Telecommunications. When the assessee handed over the asset to M/s. Renewable Energy Systems Ltd. in pursuance of the lease agreement, it has to be construed that the assessee has put the equipment on use in the business of leasing.
Therefore, we find no justification in the order of the Assessing Officer rejecting the claim of the assessee. In our opinion, the first appellate authority has rightly found that the solar power rural radio telephone system was put in use and therefore, we do not find any infirmity in the order of the lower authority.
25. The next transaction is with regard to waste heat recovery equipment. The assessee leased out waste heat recovery equipment to Sree Rayala-seema Hi-Strength Hypo Ltd. The Assessing Officer disallowed the claim of the assessee for the reasons recorded in respect of sale of boiler in the case of Madras Fertilizers Ltd. However, on appeal by the assessee, the first appellate authority found that waste heat recovery equipment is a movable goods and could be repossessed conveyed and shifted independently. According to the first appellate authority, the waste heat recovery equipment could be sold as movable property. The first appellate authority also found that the sale of waste heat recovery equipment was subjected to levy of sales tax in the sales tax assessment as movable goods. The only objection of the Revenue is that the land in which the equipment was affixed was not transferred to the assessee. Therefore, the Assessing Officer disallowed the claim of the assessee. A similar issue came in the case of Madras Fertilizers Ltd. We have elaborately discussed the nature and transaction of boiler in the case of Madras Fertilizers Ltd. The agreement entered into between the assessee and M/s. Sree Rayalassema Hi-Strength Hypo Ltd. are almost identical. The structural nature of the waste heat recovery equipment is also similar to one of the ammonia plant. The valuation report filed by the assessee clearly identifies the equipment which was leased out. In those factual circumstances and the reasons elaborately discussed in the case of Madras Fertilizers Ltd., we find the assessee is entitled to depreciation as claimed.
Therefore, we uphold the order of the lower authority.
26. The next transaction arises for consideration is in respect of wind electric generator with M/s. Prakash Industries Ltd. The Assessing Officer found that the land on which the wind electric generator stands was not registered and no sale of electricity was commenced. The first appellate authority, however, found that the assessee was in the business of leasing. Therefore, the commencement of commercial production of electricity could not decide the factum of eligibility for grant of depreciation. The fact remains that the assessee has purchased wind electric generator from M/s. Prakash Industries Ltd. The agreement between the parties clearly says that there was a lease transaction. The invoices, lease agreement and other materials which were relevant to show the intention of the parties were produced before the Assessing Officer. Mere non-registration of the land cannot be a ground to reject the depreciation. The transit insurance and inspection report may not be relevant material, since invoice, lease agreement, the agreement between the lessee and the Tamil Nadu Electricity Board and other materials available on record show the transaction. The agreement entered into between the assessee and M/s. Prakash Industries Ltd. is similar to the one entered into between the assessee and M/s.
Renewable Energy Systems Ltd. for lease. The facts are also identical as in the case of Renewable Energy Systems Ltd. and Madras Fertilizers Ltd. Therefore, for the reason we have clearly discussed in the case of transaction of boiler in the case of Madras Fertilizers Ltd. and Renewable Energy Systems Ltd., in our opinion, there was genuine lease transaction. Since the assessee is in the business of leasing, handing over the possession would be more than sufficient for putting the equipment on use in the business of leasing. Merely because commercial production was not started that cannot be a ground to say that the machinery was not put in use. Admittedly, the assessee is not in the business of producing electricity. Therefore, mere non-production of electricity for sale is not a ground to deny the depreciation to the assessee since there was a genuine lease transaction between the assessee and M/s. Prakash Industries Ltd. For the reasons elaborately discussed by us in the case of Madras Fertilizers Ltd., and M/s.
Renewable Energy Systems Ltd. and for the reason stated in the judgment of the Orissa High Court in the case of Industrial Development Corporation of Orissa Ltd. 2004 268 ITR 130, we uphold the order of the lower authorities.
27. The next transaction is with regard to rolling mills rolls with M/s. Trident Steels Ltd. The Assessing Officer disallowed the claim of the assessee on the ground that the supplier of rolling mills rolls M/s. Somash Steel Manufacturing P. Ltd. and the lessee M/s. Trident Steels Ltd. have not responded to the queries raised by the Assessing Officer. The Assessing Officer has not disputed the fact that the assessee purchased the rolling mills rolls and leased back the same to M/s. Trident Steels Ltd. Merely because the supplier M/s. Somash Steel Manufacturing P. Ltd. and the lessee M/s. Trident Steels Ltd. have not responded to the Assessing Officer that alone cannot be a ground to reject the claim of the assessee when the assessee has produced materials to show the purchase and lease transaction. Transit insurance may not be relevant in view of invoice, lease agreement, delivery challan are the material available on record to show the transaction.
Unless and until the Assessing Officer found that the lease transaction was bogus, in our opinion, it cannot be disallowed merely on the ground that the supplier and the lessee have not responded. The assessee has produced invoices, lease agreement and other relevant material before the lower authorities to prove the ownership, existence of the equipment and the lease transaction. In those factual circumstances, the first appellate authority, in our opinion, has rightly directed the Assessing Officer to grant depreciation. In view of the above discussion and for the reason discussed in the earlier part of this order in the case of M/s. Renewable Energy Systems Ltd., we do not find any infirmity in the order of the lower authority. We find that the facts are identical to that of M/s. Renewable Energy Systems Ltd. Therefore, we uphold the order of the Commissioner of Income-tax (Appeals).
28. The next ground of appeal is regarding the disallowance of guest house expenses. We heard both the representatives of the assessee and the Revenue. The guest house expenses cannot be allowed since it is not a business expenditure. The first appellate authority, in our opinion, committed an error in allowing the guest house expenses. After going through the material available on record, we find that the guest house expense is not an allowable expenditure under Section 37(4) of the Income-tax Act. Therefore, we set aside the order of the lower authority and restore that of the Assessing Officer.
29. The next ground of appeal is regarding research fee expenses. It appears the assessee has not filed any details before the Assessing Officer with regard to the expenses. However, on going through the details of the material filed before the first appellate authority, the Commissioner of Income-tax (Appeals) allowed the claim of the assessee.
The only objection of the Revenue is that the first appellate authority admitted the additional evidence in violation of Rule 46A of the Income-tax Rules, 1962, we find that the first appellate authority, after verifying the details filed by the assessee, allowed the claim of the assessee with regard to research fee expenses. Since it is a fresh material, in our opinion, there is a violation of Rule 46A. Therefore, we set aside the order of the lower authority and remand back the issue to the file of the Assessing Officer. The Assessing Officer shall reconsider the claim of the assessee regarding research fee expenses in the light of the material filed by the assessee before the Commissioner of Income-tax (Appeals) afresh after giving sufficient opportunity to the assessee and decide the issue in accordance with law.
30. In the result, I. T. A. Nos. 120, 121 and 122/Mds./99 are dismissed and I. T. A. Nos. 119 and 123/Mds./99 are partly allowed.
31. After going through the proposed order of the learned Brother, the hon'ble Judicial Member, I find it difficult to agree with the conclusions as recorded by him, in so far as depreciation on assets which is the subject-matter of sale and lease back transaction is concerned. However, I have the benefit to go through the proposed order of the learned Brother, but I am recording my reasons hereunder for differing with the view taken by the learned Brother.
32. I entirely agree with the findings of the learned Judicial Member with regard to issue relating to valuation of shares of Tata Tea Ltd. in I. T. A. No. 119/99 wherein the Commissioner of Income-tax (Appeals) order is modified to value the shares at Rs. 147 instead of Rs. 320 per share and on another issue of treatment of advertisement expenditure on inviting deposits which is a common issue in I.T.A. Nos. 120, 121 and 122/99 wherein the order of the Commissioner of Income-tax (Appeals) is confirmed.
33. However, I am not able to agree with the findings of the learned Judicial Member on the issue relating to allowability of depreciation on bio-gas generating system for the assessment year 1994-95 in I. T.A. No. 122/99 in ground No. 2.3. Further, the assessee has raised the same ground in I.T.A. No. 120/99 for the assessment year 1993-94.
34. The assessee has purchased two bio-gas generating system from M/s.
Western Paques India Ltd. for consideration of Rs. 50 lakhs each and the same was leased back to M/s. WPIL. In the first instance, the assessee claimed that M/s. WPIL has installed the first plant at the premises of M/s. Sandoz, Bharuch, Gujarat, and other one was installed at the premises of M/s. Rohit Pulp and Papers Ltd. Vapi, Gujarat. The Assessing Officer verified the authenticity of the statements of the assessee regarding the existing of the plants at the said places through the Additional Director of Income-tax, Investigation, Unit-I, Pune, who submitted the report that no such plants existed at those places. This information was based on the sworn statement recorded by the Assistant Director of Income-tax (Inv.), Surat from one senior manager, administration viz., Shri Jatin Vakil of Rohit Pulp and Paper Ltd. and sworn statement recorded by the Assistant Director Income-tax (Inv.), Baroda, from one Mr. Vijay Narayan, works accountant of M/s.
Sandoz, Bharuch where both of them denied the installation of plants in their respective premise.
35. The Assessing Officer promptly put these reports to the assessee to rebut the same and the Assessing Officer also obtained the valuation report from M/s. Techno Economic Consultants, Pune, who has valued the plant at Rs. 2,53,000 each.
36. The assessee vide its letter dated March 27,1997, replied that M/s.
WPIL has stated that it has leased the plant to M/s. Sandoz India Ltd., Bharuch, for their project and after completion of its project, the plant was dismantled and retrieved by M/s. WPIL. However, the assessee has not furnished any materials to show that the plant was installed at the premises of M/s. Sandoz India and it is the burden of the assessee to prove the existence of the asset and not the Department.
37. Regarding the second plant said to be installed at the site of M/s.
Rohit Pulp and Papers Ltd., Vapi, the assessee stated that the project was not materialized and the same plant was operated at the R&D centre of M/s. WPIL.
38. In both the cases, the assessee has not rebutted the facts collected by the Department from the persons of M/s. Sandoz and M/s.
Rohit Pulp and Papers Ltd. In addition to this, the assessee failed to establish that the plant at R&D was the same plant what was leased to M/s. Rohit Pulp and Papers Ltd. Hence, there was serious doubt regarding the existence of plants. Depreciation can be granted only when the assets are existing and it cannot be granted on assets existing at vacuum. Though the assessee is in leasing business, it is mandatory on the part of the assessee to identify the assets when the Assessing Officer specifically required the assessee to prove the very existence of the assets as he doubted the existence. The assessee instead of proving the existence of the assets changed the facts and switched over to new story which is very unfortunate. The assets cannot be installed and put to use without its existence. In the present case the existence of the asset itself is at vacuum. The Assessing Officer has given ample opportunity to the assessee to prove the existence of the assets.
39. The assessee has failed miserably to prove the existence of assets instead the assessee is changing the story often in support of its claim. All the evidence collected by the Department through the investigation wing was properly placed before the assessee and comments sought for, but the assessee has failed to make use of the opportunity.
The mere production of documents which shows that a contract was made for purchase of the assets at a certain price does not conclusively establish the correctness of the claim made by the assessee specially where the Assessing Officer is of the opinion that in the deal the assessee has taken resort to a subterfuge or device in order to avoid tax liability which is liable to pay or otherwise has entered into the transaction which is illusory or colourable device. In such case the Assessing Officer can go behind the contract and ascertain the actual position for correct ascertainment of income-tax liability of the assessee. The valuation report is nothing but tissue paper as the entire transaction is not genuine and entire arrangements are sham in nature and consideration of valuation report in isolation does not arise. I am of the view that this issue is squarely covered by the order of the Special Bench Mumbai (Mid East Portfolio Management Ltd. v. Deputy CIT ). Hence, I have no hesitation in reversing the order of the Commissioner of Income-tax (Appeals) and restoring that of the Assessing Officer on this issue.
40. I also differ with the findings of the Judicial Member with regard to issue relating to grant of depreciation on plant and equipment raised by the Revenue in Ground No. 2.1 in I. T. A. No. 123 of 1999.
41. The first issue relates to depreciation on boiler ammonia plant which is sale and lease back transaction between the assessee and M/s.
Madras Fertilizers Ltd. The assessee has produced sales invoice, for having purchased the plant from M/s. Madras Fertilizers Ltd. The assessee also produced before the Assessing Officer on March 17, 1998, documents like lease agreement, valuation report and other details as per the assessee's letter dated March 12, 1998. However, other information sought by the Assessing Officer vide his letter dated March 9, 1998, was not satisfactorily furnished. The Assessing Officer denied the depreciation on this plant on the reason that boiler is an integral part of whole manufacturing process and cannot be hived off without shutting down the plant for a considerable period and at a huge cost to the production processes and this was working round the clock and was embedded to the earth and it is an immovable asset and not severed from the earth before sale. Further, he observed that no commissioning report was furnished by the assessee and also depreciated value of the boiler not disclosed by the assessee and as such the Assessing Officer treated the sale and lease back transaction as financial transaction and denied the depreciation. The first appellate authority allowed the appeal of the assessee on the reason that the sale was subject to sales tax and the assessee has produced the commissioned report and depreciated value of the boiler was furnished to her and she was satisfied about the genuineness of transactions.
42. The Assessing Officer has denied the depreciation not only for the reason that it was not subject to sales tax but he was also of the opinion that the boiler is an integral part of whole manufacturing process and cannot be hived off without shutting down the plant for a considerable period and at a huge cost to the production processes and this was working round the clock and was embedded to the earth and it is an immovable asset and not severed from the earth before sale and the particular boiler sold to the assessee-company is not clearly identifiable out of all the boilers in the ammonia plant and sale invoice and lease deed do not clearly identify any particular boiler sold to the assessee out of all the existing boilers and all these reasons given by the Assessing Officer were in cumulative in nature and are operative simultaneously. The Commissioner of Income-tax (Appeals) has only considered the particular piece of findings of the Assessing Officer and concluded the case. It is just like a blind person narrating the elephant. The boiler plant in a fertilizer company is just like a heart in a human body. If a person produces a sale invoice for sale of his heart and claims that he has sold his heart, nobody can believe it as it cannot be removed from a person when he is alive.
Similarly, by merely producing a sales invoice by the assessee for sale of boiler, it cannot be believed as the surrounding circumstances say something otherwise. The witness may tell a lie, documents may spell lie but not circumstances. In order to ensure the smooth and continuous functioning of M/s. Madras Fertilizers Ltd., it is very difficult to think that it has decided to sell its boiler plant which is a important plant and without it that industry cannot function. The boiler will come back as lease to M/s. Madras Fertilizers only when there was actual and genuine sale. It is an admitted fact that the boiler was never severed from the earth as it was never identified and it was embedded to earth and without severing there cannot be sale. The sale said to have taken place is only imaginary in nature and not intended to be acted upon by the parties and the property in the boiler has not passed from one person to another, as there was no actual physical or symbolic delivery of the boiler. It was not severed from the earth and the removal of the boiler from embedded position really causes interruption to the manufacturing activity of M/s. Madras Fertilizers Ltd., as I have already narrated above. Further, there is no evidence to show at least symbolic delivery as the boiler itself is not specifically identified and without identification there cannot be constructive or symbolic delivery. The documents called for by the Assessing Officer were not satisfactorily made available to him and he was put in the dark. The Special Bench in the case cited supra upheld the contention of the assessee that the boiler is a movable asset in the context that in that case all proceedings before the Assessing Officer as well as the Commissioner of Income-tax (Appeals) went on with the footing that the boiler is a movable asset and for the first time, the issue relating to movable or immovable asset raised before the Tribunal by the Revenue and, therefore, the Tribunal held that movable or immovable is the subject-matter of evidence and investigation, it is for the person contending that the asset is immovable to show first that it is attached to or forms part of the land. In the present case in hand, the facts and circumstances is not similar, on this aspect, instead, the Assessing Officer in the assessment order itself specifically mentioned that the boiler is embedded to the earth and it does not fit into the definition of "goods" in the Sale of Goods Act. Being so, the assessee has not produced any material to show that the boiler is not attached to the earth. From this point of view also, I have to hold that the boiler is only an immovable asset as being attached to land and there is no materials to show that the seller intended to detach from the land before sale. Being an immovable asset, it does not fit into the definition of "goods" as in the Sale of Goods Act. The intention of parties is only to arrange financial transaction and not that of effecting actual sale of the boiler. The verification of the intentions of the parties at the touch-stone of the human probabilities shows a different picture. No document has been produced by the assessee to show that M/s. Madras Fertilizers Ltd. was intent to deliver the boiler after the expiry of the lease period. The Assessing Officer has clearly mentioned in page 4 of the assessment order that the particular boiler which is said to be sold to the assessee is not clearly identifiable out of all the boilers in the ammonia plant at the premises of M/s.
Madras Fertilizers Ltd. and without identification of the boiler the sale cannot be made and thereby no lease also. Without prejudice to the above, the assessee has never produced the depreciated value of the assets and commissioned report before the Assessing Officer. The first appellate authority mentioned in her order that she has seen these documents. The new documents were admitted by the Commissioner of Income-tax (Appeals) without calling remand report from the Assessing Officer which is clear violation of Rule 46A of Income-tax Rules. The Commissioner of Income-tax (Appeals) also mentioned in her order that the sale of boiler is subject to sales tax. The basis for such conclusion is not mentioned in her order and such documents, if any, was not produced before the Assessing Officer. These documents cannot override the real intention of the parties as well as Explanation 3 of Section 43(1). The Assessing Officer has required the assessee to produce various documents mentioned in his letter dated March 9, 1998, and the assessee has not produced satisfactory information before the Assessing Officer but produced for the first time before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) mentioned that the boiler value has been deducted from the block assets of M/s. Madras Fertilizers Ltd. Even if it is deducted from the block asset it cannot change the result as at all times the boiler continued to remain with M/s. Madras Fertilizers Ltd. There is no iota of evidence to show that the boiler was severed from embedded position or it was identified. The assessee is a very smart business entity and has chosen unfair practice to create make believe documents with a motive to claim depreciation and thereby reduce tax the liability and this action of the assessee has no legal sanction and the assessee has just tried to get over its claim. The principles laid down by the hon'ble Supreme Court in the case of McDowell and Co. Ltd. 1985 154 ITR 148 are squarely applicable to the present facts of the case and other case law relied on by the Revenue supports the view of the Assessing Officer. Besides, case of the assessee fails to fulfil the major relevant factors prescribed by the Special Bench (Mid East Portfolio Management Ltd. v. Deputy CIT ). Further, judicial discipline requires consistency in its proceedings. Otherwise, propriety of the judgment will be jeopardized as held by the hon'ble Gujarat High Court in the case of Sayaji Iron and Engg. Co. v. CIT and also by the hon'ble jurisdictional High Court in the case of CIT v. L.G. Ramamurthi . In view of the above discussion, I am of the opinion that the transactions is nothing but financial transaction on which the assessee is not entitle to claim depreciation on boiler and accordingly the order of the Commissioner of Income-tax (Appeals) is reversed on this issue and the order of the Assessing Officer is restored.
43. Regarding allowability of depreciation on solar power rural radio telephone system sale and leased back to M/s. Renewable Energy System Ltd., I am agreeing with the findings of the learned Judicial Member.
44. Next issue relates to claim of depreciation on waste heat recovery equipment which is sale and lease back transaction with M/s. Sree Rayalaseema Hi-Strength. The Assessing Officer disallowed the depreciation on this equipment on the same reason as in the case of the boiler, as the sale and lease back transaction with M/s. Madras Fertilizers Ltd. In this case, the waste heat recovery equipment was embedded to the earth and land was not sold to the assessee and as such the system is immovable asset not fit into the definition of "goods" as defined in the Sale of Goods Act. In this case, on identical facts and circumstances, my finding is similar to the one that I have held in the case of boiler sale and lease back transaction with M/s. Madras Fertilizers Ltd. and, hence, the assessee is not entitled for depreciation on this equipment.
45. The next issue is with regard to the claim of depreciation on wind electric generator which is a sale and lease back transaction with M/s.
Prakash Industries Ltd. The Assessing Officer disallowed the depreciation on this asset on the reason that M/s. Prakash Industries Ltd. has not furnished the details called for and land on which wind electric generator stands has not been registered. No sale of electricity and commissioning report and transit insurance for transport for the equipment and inspection report were not submitted.
In this case also, my findings is similar to that as held in the case of boiler sale and lease back transaction with M/s. Madras Fertilizers Ltd., and I hold that the assessee is not entitled for depreciation.
46. The next issue is with regard to the claim of depreciation on rolling mill rolls wind which is a sale and lease back transaction with M/s. Trident Steel Ltd. The Assessing Officer disallowed the depreciation due to non-furnishing of required details by the assessee as well as the lessee and the supplier of equipment M/s. Somash Steel Manufacturing P. Ltd., Mumbai. The assessee has failed to prove before the Assessing Officer the existence, ownership and lease transaction and it is the basic requirement to prove these things before the Assessing Officer. If any evidence was produced before the Commissioner of Income-tax (Appeals) for the first time, the Income-tax Rules require the remand report from the Assessing Officer before admitting it as evidence and without calling the remand report from the Assessing Officer, the Commissioner of Income-tax (Appeals) cannot admit the same. In view of this, I am inclined to set aside the issue to the file of the Assessing Officer with the direction to verify the genuineness of the documents produced before the Commissioner of Income-tax (Appeals) and decide the issue in accordance with law.
47. The next issue relates to the claim of guest house expenses and research fee expenses. I agree with the findings of the learned Judicial Member and these grounds are allowed.
48. In the result, I. T. A. No. 121/99 dismissed and I. T. A. Nos. 119, 120, 122 and 123/99 are partly allowed.
49. Since there is a difference of opinion, the following questions are framed and referred to the hon'ble President for nominating Third Member.
50. I.T.A. Nos. 120 and 122 (Mds.)/99 (Assessment years 1993-94 and 1994-95) (1) In the facts and circumstances of the case, when the transaction of sale and lease back of bio-gas generating system between the assessee (a leasing company) and M/s. Western Paques India Ltd. is proved by the documentary evidence produced before the lower authorities, whether the claim of depreciation could be rejected on the ground that the machinery was not put to use by the lessee (2) Whether on the facts and circumstances of the case, when the assessee furnished the details of installation, bio-gas generating systems to the Assessing Officer as per the information furnished by M/s. Western Paques India Ltd., can the statement recorded from the personnel of M/s. Sandoz India Ltd. and M/s. Rohit Pulp and Papers Ltd. be relied upon without examining anybody from M/s. Western Paques India Ltd. for doubting the existence of the machinery especially when the explanation of the assessee to the show-cause notice was not controverted or found to be false (3) Whether in the facts and circumstances of the case, for grant of depreciation to the assessee in respect of transaction of lease between the assessee and M/s. Western Paques India Ltd., the proof of transaction between M/s. Western Paques India Ltd. and Sandoz India Ltd. or M/s. Rohit Pulp and Paper Mills Ltd. are relevant especially when both the members agreed that the Tribunal was not concerned with the subsequent transaction in the very same order while dealing with solar power radio telephone system, the lease transaction between the assessee and M/s. Renewable Energy Systems Ltd. (4) Whether the Assessing Officer is justified in disallowing the claim of depreciation for the assessment year 1993-94 in a proceeding under Section 154 in view of the debatable nature of issue (1) Whether on the facts and circumstances of the case, there was genuine sale and lease back transaction of boiler between the assessee and M/s. Madras Fertilizers Ltd. (2) When the sale of the boiler was subjected to sales tax and it was treated as sale of goods under the Sales Tax Act, can the sale of the said boiler be doubted in the income-tax proceeding especially when the juris-dictional High Court in the case of CIT v. Anandha Metal Corporation accepted by the Commercial Tax Department is binding on the income-tax authorities (3) When admittedly, the boiler attached to ammonia plant could be removed and sold as second-hand and such boilers are available for sale in the open market, can it be said that the boiler is an immovable property (4) In the facts and circumstances of the case, when M/s. Madras Fertilizers Ltd. is under an obligation to deliver the boiler to the assessee after the expiry of the lease period, can it be said that there was no intention to sell the boiler (5) Whether on the facts and circumstances of the case, and in view of the specific agreement between the parties wherein Madras Fertilizers Ltd. specifically agreed to redeliver the boiler and there was no obligation on the part of the assessee to resell the boiler to Madras Fertilizers Ltd. after the expiry of lease period, can it be said that there was no intention to sell the boiler (6) Merely because the boiler was in use when the sale and lease back transaction was entered into, can it be said that there was no intention to sell the boiler especially when the Orissa High Court in the case of Industrial Development Corporation of Orissa Ltd. v. CIT held that a similar sale and lease back (7) When there is a judgment of the High Court (constitutional authority) available on the subject, whether judicial discipline requires to follow the judgment of the High Court in preference to the decision of the Special Bench of this Tribunal (statutory authority) (8) Whether in the facts and circumstances of the case, the decision of the Special Bench of the Tribunal in the case of Mid East Portfolio Management Ltd. v. Deputy CIT is (9) Whether on the facts and circumstances of the case, there was a genuine lease transaction between the assessee and M/s. Sree Rayalaseema Hi-Strength Hypo Ltd. in respect of waste heat recovery equipment (10) Whether on the facts and circumstances of the case, the registration of land is a condition precedent for grant of depreciation in respect of lease transaction between the assessee and M/s. Sree Rayalaseema Hi-Strength Hypo Ltd. (11) Whether on the facts and circumstances of the case, in view of the specific agreement between the parties to redeliver waste heat recovery equipment to the assessee after the expiry of lease period and there was no obligation on the part of the assessee to resell the same to the lessee, can it be said that there was no intention to sell waste heat recovery equipment (12) Whether on the facts and circumstances of the case, there was a genuine sale and lease back of wind electric generator between the asses-see and M/s. Prakash Industries Limited (13) In the facts and circumstances of the case, when the assessee, a leasing company introduced the wind electric generator in the leasing business, whether the commercial production of electricity by the lessee is a pre-condition for grant of depreciation to the assessee in respect of leasing transaction (14) In the facts and circumstances of the case, whether there was a genuine lease transaction between the assessee and M/s. Trident Steels Ltd. with regard to rolling mills rolls (15) When the assessee has produced sufficient material to prove the purchase and lease back of rolling mills rolls to M/s. Trident Steels Ltd., can the claim of the assessee be rejected merely because the supplier M/s. Somash Steel Manufacturing P. Ltd. and the lessee M/s. Trident Steels Ltd. have not responded to the Assessing Officer We direct the registry to place the appeal files before the hon'ble President for nominating a Third Member.
52. These appeals came before me as a Third Member to express my opinion on the following questions: (1) In the facts and circumstances of the case, when the transaction of sale and lease back of bio-gas generating system between the assessee (a leasing company) and M/s. Western Paques India Ltd. is proved by documentary evidence produced before the lower authorities, whether the claim of depreciation could be rejected on the ground that the machinery was not put to use by the lessee (2) Whether on the facts and circumstances of the case, when the assessee furnished the details of installation, bio-gas generating systems to the Assessing Officer as per the information furnished by M/s. Western Paques India Ltd., can the statement recorded from the personnel of M/s. Sandoz India Ltd. and M/s. Rohit Pulp and Papers Ltd. be relied upon without examining anybody from M/s. Western Paques India Ltd. for doubting the existence of the machinery especially when the explanation of the assessee to the show-cause notice was not controverted or found to be false (3) Whether on the facts and circumstances of the case for grant of depreciation to the assessee in respect of transaction of lease between the assessee and M/s. Western Paques India Ltd., the proof of transaction between M/s. Western Paques India Ltd. and Sandoz India Ltd. or M/s. Rohit Pulp and Paper Mills Ltd. are relevant especially when both the members agreed that the Tribunal was not concerned with the subsequent transaction in the very same order while dealing with solar power radio telephone system, the lease transaction between the assessee and M/s. Renewable Energy Systems Ltd. (4) Whether the Assessing Officer is justified in disallowing the claim of depreciation for the assessment year 1993-94 in a proceeding under Section 154 in view of the debatable nature of the issue (1) Whether on the facts and circumstances of the case, there was genuine sale and lease back transaction of boiler between the assessee and M/s. Madras Fertilizers Ltd. (2) When the sale of boiler was subjected to sales tax and it was treated as sale of goods under the Sales Tax Act, can the sale of the said boiler be doubted in the income-tax proceeding especially when the jurisdictional High Court in the case of CIT v. Anandha Metal Corporation by Commercial Tax Department is binding on the income-tax authorities (3) When admittedly the boiler attached to ammonia plant could be removed and sold as second-hand and such boilers are available for sale in the open market, can it be said that the boiler is an immovable property (4) In the facts and circumstances of the case, when M/s. Madras Fertilizers Ltd. is under an obligation to deliver the boiler to the assessee after the expiry of the lease period, can it be said that there was no intention to sell the boiler (5) Whether on the facts and circumstances of the case, and in view of the specific agreement between the parties wherein Madras Fertilizers Ltd. specifically agreed to redeliver the boiler and there was no obligation on the part of the assessee to resell the boiler to Madras Fertilizers Ltd. after the expiry of lease period, can it be said that there was no intention to sell the boiler (6) Merely because the boiler was in use when the sale and lease back transaction was entered into, can it be said that there was no intention to sell the boiler especially when the Orissa High Court in the case of Industrial Development Corporation of Orissa Ltd. v. CIT held that a similar sale and lease back (7) When there is a judgment of the High Court (constitutional authority) available on the subject, whether judicial discipline requires to follow the judgment of the High Court in preference to the decision of the Special Bench of this Tribunal (statutory authority) (8) Whether on the facts and circumstances of the case, the decision of the Special Bench of the Tribunal in the case of Mid East Portfolio Management Ltd. v. Deputy CIT is (9) Whether on the facts and circumstances of the case, there was a genuine lease transaction between the assessee and M/s. Sree Rayalaseema Hi-Strength Hypo Ltd. in respect of waste heat recovery equipment? (10) Whether on the facts and circumstances of the case, the registration of land is a condition precedent for grant of depreciation in respect of lease transaction between the assessee and M/s. Sree Rayalaseema Hi-Strength Hypo Ltd. (11) Whether on the facts and circumstances of the case, in view of the specific agreement between the parties to redeliver waste heat recovery equipment to the assessee after the expiry of lease period and there was no obligation on the part of the assessee to resell the same to the lessee, can it be said that there was no intention to sell waste heat recovery equipment (12) Whether on the facts and circumstances of the case, there was a genuine sale and lease back of wind electric generator between the assessee and M/s. Prakash Industries Ltd. (13) In the facts and circumstances of the case, when the assessee, a leasing company introduced the wind electric generator in the leasing business, whether the commercial production of electricity by the lessee is a pre-condition for grant of depreciation to the assessee in respect of leasing transaction (14) In the facts and circumstances of the case whether there was a genuine lease transaction between the assessee and M/s. Trident Steels Ltd. with regard to rolling mills rolls (15) When the assessee has produced sufficient material to prove the purchase and lease back of rolling mills rolls to M/s. Trident Steels Ltd., can the claim of the assessee be rejected merely because the supplier M/s. Somash Steel Manufacturing P. Ltd. and the lessee M/s. Trident Steels Ltd. have not responded to the Assessing Officer? 53. In regard to I. T. A. Nos. 119 and 122/(Mds.)/1999 there is no disagreement between the learned Members. Hence reference in respect of these appeals appears to have been made inadvertently.
54. I. T. A. Nos. 120 and 122(Mds.)/1999 (Assessment years : 1993-94 and 1994-95) :-I have considered the rival submissions in the light of the material placed before me and the precedents relied upon. The assessee is a leasing company. The solitary common issue raised in these appeals relates to the question whether depreciation could be denied on the bio-gas generating system on the ground that the transaction in question was a sale and lease back transaction and the machinery was not put to use by the lessee. The next issue relevant to the assessment year 1993-94 only relates to the question whether the claim of depreciation could be denied by resorting to Section 154 of the Act.
55. In regard to the first issue I find that the matter is no longer res integra. The law is trite on the subject. Once a leasing or finance company, which owns machinery and leases it out to third party, is found to have satisfied the other requirements of the provision, it would be entitled to the deduction of depreciation in respect of such machinery or plant. Where the business of the assessee consists of hiring out machinery and/or where the income derived by the assessee from the hiring of such machinery is business income, the assessee must be considered as having used the machinery for the purpose of its business. In the case of CIT v. Pinnacle Finance Ltd. 2004 268 ITR 395 (Guj) the hon'ble High Court has held that the assessee, a company carrying on the business of financing, investment, leasing, etc., which leased out a boiler, was entitled to depreciation under Section 32 of the Income-tax Act, 1961, in relation thereto. In deciding this issue the ratio laid down by the hon'ble Supreme Court in the case of CIT v.Shaan Finance P. Ltd. Madras High Court in the case of CIT v. Annamalai Finance Ltd. has held that where the business of the assessee consists of hiring out of machinery and where the income derived by the assessee from such hiring is treated as business income of the assessee it must be considered that the assessee has used the machinery for the purpose of its business as such the Tribunal was right in granting 100 per cent, depreciation on steel rollers.
56. In view of the aforesaid decisions I concur with the decision of the learned Judicial Member on this issue.
57 The next issue relating to disallowance by resorting to the provisions of Section 154 also stands covered by the decision of the apex court rendered in the case of T.S. Balaram, ITO v. Volkart Bros.
. In this case the hon'ble Supreme Court has held that a mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record. The issue involved in the present appeal is a debatable issue.
As such it cannot be rectified by resorting to Section 154. I concur with the decision of the learned Judicial Member in this regard.
58 I. T. A. No. 123(Mds.)/1999 (Assessment year : 1995-96) :-The first issue relates to the allowability of depreciation on boiler-ammonia plant in respect of the sale and lease back transaction with M/s.
Madras Fertilizers Ltd. 59. I have considered the rival submissions in the light of the material placed before me and the precedents relied upon. The learned Accountant Member was of the opinion that the transaction was in the nature of a financial transaction and as such the assessee was not entitled to depreciation. The learned Judicial Member held that the intention of the parties and the surrounding circumstances clearly show that there was real sale and lease back transaction. As such the Commissioner (Appeals) was correct in allowing depreciation benefit to the assessee. It transpires from the perusal of the records that the Assessing Officer has visited the plant and verified the asset. The assessee did make payment of sales tax at 8 per cent, of the value of the boiler on the basis of invoice raised by M/s. Madras Fertilizers Ltd. The amount of sales tax was duly paid on the transaction and sales tax assessment was completed accordingly. On that basis it was argued that the transaction was in respect of sale of goods under the Sales tax Act. Reliance was placed on the decision of the jurisdictional High Court rendered in the case of CIT v. Anandha Metal Corporation , wherein it was held that the valuation accepted by the sales tax authorities is binding on the income-tax authorities.
60. The main plank of the learned Departmental Representative's argument was that since the boiler is embedded to the earth, it is not a movable asset and as such a valid transfer is not effected. I find that this issue stands covered by the decision of the Special Bench of the Tribunal (Mumbai Bench-C) rendered in the case of Mid East Portfolio Management Ltd. v. Deputy CIT , the Special Bench of the Tribunal held as under (page 198 of 2004 271 ITR (AT)): 154. On this aspect also, there were considerable arguments. Several authorities were also relied upon by both the sides on the question.
We find that the cases have proceeded all along on the footing that the assets/equipment are only movable items. That is the reason why the Sale of Goods Act and the provisions in the Contract Act relating to bailment of goods, 'opinion of Benjamin' on sale etc.
were referred to. It was only for the first time before us that an argument was raised by Mr. Dave, the learned Commissioner of Income-tax (Departmental Representative) that the boilers (in the case of ICICI Ltd.) were immovable assets. Mr. Dasrur has rightly objected to this point being raised for the first time before the Special Bench. He is also right in contending that the question whether an asset is a movable or immovable asset is a matter of evidence and it is for the person contending that the asset is immovable to show first that it is attached to or forms part of the land. These objections are valid and must be upheld. We therefore hold that the assets (air pollution equipment in the case of Mid East Portfolio Management Ltd. and boilers in the case of ICICI Ltd.) are movable assets and that is how the cases have proceeded so far. In this view of the matter it is not necessary to discuss the authorities cited by both sides on the point.
61. The boiler was held to be movable asset. No other decision of binding nature was brought before me in this regard. Respectfully following the precedent I agree with the view taken by the learned Judicial Member in this respect. Questions Nos. 1 to 8 in I. T. A. No.123/Mds./1999 stand decided accordingly.
62. The next issue contained in questions Nos. 9 to 11 relates to the genuineness of the sale and lease back transaction between the assessee and M/s. Sree Rayalaseema Hi-Strength Hypo Ltd. in respect of waste heat recovery equipment. The only objection raised by the Revenue in this regard was that the land on which the equipment was fixed was not transferred to the assessee. The learned Accountant Member held that as it does not fit into the definition of goods as defined in the Sale of Goods Act, depreciation was rightly denied by the Assessing Officer.
63. It was submitted before me that recuperator is the equipment. It is a movable asset and the sale was subjected to levy of sales tax. It could be repossessed, conveyed and shifted independently. Repossession rights were given to the assessee in the eventuality of default by the lessee. There was no obligation attached in the lease to sell the asset back to the lessee. Reliance was also placed on the decision of the jurisdictional High Court rendered in the case of CIT v. Anandha Metal Corporation . Identification of the equipment was made with reference to the valuation report. It was further stated that the seller has removed the asset from the net block.
64. In view of the above, I am inclined to agree with the learned Judicial Member.
65. The next issue contained in questions Nos. 12 and 13 relates to the question whether there was a genuine sale and lease back transaction between the assessee and M/s. Prakash Industries Ltd. in respect of wind electric generator. The learned Accountant Member held that the transaction is similar to the boiler in the case of M/s. Madras Fertilizers Ltd. and as such no depreciation is to be allowed. The learned Judicial Member held that since the assessee is in the business of leasing, handing over possession would be more than sufficient for putting the equipment on use in the business of leasing. There was a genuine lease transaction between the assessee and the lessee. In the case of Industrial Development Corporation of Orissa Ltd. v. CIT it was held that where the sale and lease back transaction is genuine, depreciation is to be allowed on the asset.
Besides, I find that the issue is covered by the decision of the apex court rendered in the case of CIT v. Shaan Finance P. Ltd. , the decision of the Gujarat High Court rendered in the case of CIT v. Pinnacle Finance Ltd. and also the decision of the jurisdictional High Court rendered in the case of CIT v. Annamalai Finance Ltd. , as discussed in para. 3 (page 108 supra) above. Respectfully following the precedents I concur with the decision of the learned Judicial Member on this issue.
66. The last issue relates to the question whether there was a genuine lease transaction between the assessee and M/s. Trident Steels Ltd. with regard to rolling mills rolls. I have heard the rival submissions.
Before the Assessing Officer the details were not furnished by the supplier and the lessee in response to the letters issued. The details of transit insurance were not given. The learned Accountant Member set aside the matter to the Assessing Officer for verification. Both the parties agreed that the issue may be examined with reference to the direction of the learned Accountant Member. Ex consequenti I agree with the decision of the learned Accountant Member in this regard.
67. The matter will now go before the regular Bench for deciding the appeals in accordance with majority.