ORDER
D. Manmohan, J.M.
These two cross-appeals are directed against the order of the Commissioner (Appeals)-XII, Calcutta.
2. As the issues are connected and relate to the same assessment year, i.e., assessment year 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.
3. In the assessee's appeal, the first ground pertains to the disallowance of depreciation on the Cops purchased by the assessee-company. An additional ground was also raised before us in this connection. Ground No. 1 in the departmental appeal is also connected, inasmuch as, the partial relief granted by the Commissioner (Appeals) is challenged by the revenue on the ground that depreciation cannot be allowed on the assets which are not used in the business of the assessee.
4. The facts relevant to the aforesaid issue are as under. During the assessment year the assessee company mainly carried on business in 5 major divisions, ie.,(a) Coal Sale Division; (b) Produce Exchange Division; (c) Distillery Division; (d) Printing Division; and (e) Construction Division. In the immediately preceding year the company was also dealing in shares but in the year under consideration, the said business was stopped and it switched over to the investment in shares. The assessee claimed to have undertaken leasing business for the first time during the accounting year relevant to the assessment year 1993-94. The assessee purchased 18,25,000 aluminium cops from JCT Ltd. for a total considerations of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them. The cops are of no use in the business of the assessee company in any of the aforementioned divisions. The assessee entered into a lease transaction with JCT Ltd. on usual terms. In the year under consideration, assessee claimed 100 per cent depreciation on the aluminium cops purchased, as the value of the each cop is below Rs. 5,000. Assessing officer did not accept the `sale and lease back transaction' on the ground that it is a colourable transaction. In his opinion the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO : [1985]154ITR148(SC) squarely applies to the facts of the case, as the real purpose of the transaction was purely to finance JCT Ltd. which has been given the colour of a leasing transaction. Assessing officer further observed that in the guise of lease transaction, assessee-company reduced its profits by claiming depreciation and JCT Ltd. continued to enjoy the assets even after the sale and the capital gains arising from high-pitched sale we set off against the losses of year thereby paying no tax on capital gains. He thus concluded that the transaction is not lease transaction but merely a lending transaction. He therefore, disallowed the claim of depreciation and in place of taxing the lease rentals, he sought to bring to tax the probable interest on the sale consideration at 21 per cent.
5. Aggrieved, assessee contended before the first appellate authority that the aluminium cops were purchased by the assessee company at a price of Rs. 55 per cop and the payment was made from its own funds. It was further submitted that the price paid by the assessee was the existing market price since JCT Ltd. made sales of cops to Comecon Overseas Pvt. Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the assessing officer is not justified to talk of Group Companies or of colourable transaction. It was further submitted that as per the Memorandum and Articles of Association of the assessee-company, it was entitled to carry on leasing business and the mere fact that it did not do such business earlier, was, therefore, not relevant as it was free to start the business at any point of time. As regards the observation of the assessing officer that there is no physical delivery it was submitted that it was not necessary and constructive delivery is an accepted in mode in this type of transaction.
6. Commissioner (Appeals) did not accept the submissions made on behalf of the assessee-company. He observed that purchase of aluminium cops was not for any business activity in which the assessee was engaged and though leasing is permitted, the item purchased was not one in which the assessee did not make purchases from a manufacturer of aluminium cops but from a company which was actually using it and hence, the only inference that is possible in this case is that the purchases were made from a sister-concern for purpose other than for commencing its leasing venture. Commissioner (Appeals) further observed that cops being second hand assets, the value of the same cannot be higher than the cost price in the hands of the seller whereas, assessee paid the price higher than the actual cost to the seller. Out of total cops of 18,25,000, 9,48,600 cops were purchased by JCT Ltd. during the accounting year relevant for the assessment year 1992-93 on which it would have claimed 100 per cent depreciation and hence the w.d.v. in the hands of the seller was zero. Commissioner (Appeals), therefore, held that the assessing officer is justified in disallowing the depreciation in respect of the aforementioned cops. However, in respect of the balance of 8,76,400 cops purchased in the assessment year 1993-94, assessing officer was directed to allow depreciation on the actual cost of the cops in the hands of JCT Ltd.
7. Both the assessee-company as well as the revenue were aggrieved against the order of the Commissioner (Appeals). Learned counsel for the assessee submitted that for the purpose of allowing depreciation, the actual price paid by the assessee for purchase of aluminium cops should be taken as the actual cost and in his regard he has relied upon the following two decisions:
CIT v. Buckingham & Carnatic Co. Ltd. : [1935]3ITR384(Mad)
Challapalli Sugars Ltd. v. CIT : [1975]98ITR167(SC)
Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons:
(a) Payment was made by account payee cheque;
(b) Sale and lease back is an accepted method in the market;
(c) Financing the companies by this method is a commercially convenient procedure; and
(d) In the hands of the vendor-company, the sale price was already subjected to capital gains tax.
Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in McDowell & Company Ltd.'s case (supra) does not applyno tax evasion is proved in the instant case nor is there any basis to consider the transaction as colourable transaction. He further submitted that in the case of sale and lease back transaction, it is not necessary to take physical delivery of aluminium cops and, in fact, the constructive delivery is accepted as a valid mode by the Commissioner (Appeals) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance within JCT Ltd., which is a sister concern, it cannot be attributed that the transaction is colourable inasmuch as JCT Ltd. has entered into similar transaction with outsiders also at around the same price. Thus, the assessee-company cannot be said to have done a favour by purchasing the cops at such price. In other words ,it is the case of the learned counsel the price paid by the assessee- company was the market price during the relevant point of time and the fact that the transaction was between the assessee-company and its sister- concern, would not change the bona fide transaction into a colourable transaction, so as to apply the decision of McDowell & Co. Ltd.'s case (supra). Adverting our attention to the material papers furnished before us, learned counsel submitted that the original cost of 18,25,000 cops in the hands of JCT Ltd., was Rs. 8,55,18,922 whereas after the depreciation, the w.d.v. as per the books was Rs. 8,20,69,529.94 and the average cost as per the w.d.v. worked out to about Rs. 44 per cop. The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central Excise, Sales-tax and other duties (vide page 23 of the paper book). Learned counsel further submitted that the assessing officer as well as the first appellate authority have not properly appreciated the facts and circumstances of the case and disallowed the claim by merely holding that the transactions are colourable. Learned counsel submitted that the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd.'s (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions:
(a) M.V.Valliappan v. ITO : [1988]170ITR238(Mad)
(b) CWT v. Arvind Narottam : [1988]173ITR479(SC)
Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell & Co. Ltd.'s case (supra) requires reconsideration and in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.
8. On the other hand, learned Departmental Representative submitted that both the parties belonged to Thapar Group and the very first transaction of lease was by purchase of second hand cops, that too from the sister concern, and the facts and circumstances would, unequivocally prove that the transaction is not with a bona fide intention to carry on leasing business. He further submitted that aluminium cops are used in textile manufacturing and the assessee-company was never in the business of textile and the fact that two days before the closure of the financial year assets were purchased and leased back would also show that the main intention of entering into this transaction is to claim tax advantage both by the assessee-company as well as by JCT Ltd., and the tax avoidance being the prime consideration, McDowell & Co. Ltd.'s case (supra) applies to the facts of the case. Learned departmental representative further submitted that he purchase price was higher than the price for which JCT Ltd. purchased the cops and this highlights that the transaction is not bona fide. He further submitted that the transaction is only a financial arrangement and also to claim depreciation and for such colourable transaction, judicial sanction should not be given. Drawing our attention to Explanation 3 to section 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell & Co. Ltd.'s case (supra), the order of the assessing officer can be supported by the power vested in him vide Explanation3. He also invited our attention to Explanation 4A introduced w.e.f. 1-10-1996 and submitted that Explanation3 and Explanation 4A should be read together which brings out the legislative intention that Explanation 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Explanation 8 to section 43 (1) is also applicable in this regard. In support of his contention that subsequent legislation should be taken as legislative exposition of the existing law, learned Departmental Representative relied upon the following two decisions:
(a) CIT v. Deepchand Kishanlal : [1990]183ITR299(KAR) .
(b) CIT v. P. Doraiswamy Chetty : [1990]183ITR559(SC) .
For the proposition that an Explanation inserted would normally be retrospective in operation learned Departmental Representative relied upon the decision of the Hon'ble Calcutta High Court in the case of CIT v. India Steamship Co. Ltd. : [1992]196ITR917(Cal) . Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explanations to section 43(1) of the Act, learned Departmental Representative submitted that the Commissioner (Appeals) is not justified in directing the assessing officer to allow depreciation on the w.d.v. in respect of 8,76,400 cops purchased. In the alternative, learned Departmental Representative submitted that assets i.e., aluminium cops, were purchased in the months of March and during the accounting year, relevant to the assessment year under consideration, the assessee-company enjoyed ownership for less than 180 days and hence, only 50 per cent depreciation is allowable in the year.
9. Joining the issue, learned Senior Counsel, appearing on behalf of the assessee-company, submitted that for the purpose of financing some protection in the form of mortgage or otherwise is required and since there is legal hastle in mortgage, the present mode, i.e., sale and lease back, is found to be safer in the commercial circles and hence it cannot be attributed to any colourable device for having adopted a safe financing mode. Learned counsel further submitted that these two companies cannot be considered as `Group companies' as held by the Hon'ble Calcutta High Court in the case of CIT v. Produce Exchange Corpn Ltd. : [1963]50ITR308(Cal) . He further submitted that no further appeal was preferred against the said judgment and thus it has become final. As regards the application of Explanation 4A to section 43(1) of the Income tax Act, 1961, learned counsel submitted that a newly inserted Explanation would be considered as clarificatory in nature only when it starts with the words 'for the removal of doubts' but, he contended, in Explanation 4A it was intended to cover transactions entered into after 1-10-1996 and hence it is prospective in operation and in this regard he adverted our attention to the Notes on Clauses of Finance (No.2) Bill, 1996. Learned counsel further submitted that Explanation 3 is limited in operation Explanation 4A was intended to cover only leasing/financing transaction irrespective of whether there is any reduction of liability to tax, whereas, for the purpose of invoking Explanation 3 it has to be proved that the transaction was entered into with the main purpose of reducing the tax liability by claiming depreciation on the enhanced cost. He further submitted that in order to claim depreciation it is not necessary that the items purchased are useful in the assessee's business and when aluminium cops are leased out to others, depreciation is allowable in the hands of the owner ie., the assessee-company and in this regard he relied upon the decision of the Delhi Bench of the Tribunal in the case of Indian Management Advisers & Leasing (P.) Ltd. v. Dy. CIT . With regard to the question of reduction in tax liability, learned counsel submitted that in the normal financing business, interest suffers tax whereas in the sale and lease back transaction, lease rentals are collected instead of interest and hence, there is no reduction in tax liability.
10. We have heard the rival submissions and perused the records. The words `actual cost' have been defined in section 43(1) of the Act. It is well settled that `actual cost to the assessee is the cost paid by the assessee in purchasing assets. There is no legal prohibition for purchasing the assets at a particular value and legitimate transaction cannot be viewed as a colourable transaction so as to apply McDowell & Co. Ltd.'s case (supra) unless there is sufficient evidence on record to prove that the price paid by the assessee is abnormal or higher than the market price. In the instant case, assessee submitted before the tax authorities that cops were not only purchased by the assessee but also were purchased by the other companies (not connected with JCT Ltd.) from JCT Ltd. at the same price and hence it cannot be said that the price paid by the assessee is not the market price. Even otherwise, to safeguard the interests of the revenue, the Legislature provided for subsituting `actual cost' [vide Explanation 3 to section 43(1)] if the assessing officer is satisfied that the main purpose of the transaction was reduction of liability to income tax by claiming depreciation with reference to enhanced cost. Explanation 3 by implication, says that merely because the price paid by the assessee is higher than the market value, McDowell & Co. Ltd.'s case (supra) should not be pressed into service. But nevertheless, the assessing officer was authorised under the Explanation to fix reasonable price as the actual cost to the assessee in the facts and circumstances of the case. In our opinion, assessing officer as well as first appellate authority have not considered the issue from this angle. In the case of sale and lease back transaction, physical delivery is not relevant and it is not necessary that the items purchased are capable of being used in the lessor company, inasmuch as, in a leasing business, assessee is concerned with earning income by leasing the assets but not in utilising the same for his own business.
10.1 As regards the claim of learned Departmental Representative, vis-a-vis 4A, we are of the opinion that it was never intended to be retrospective in operation. Memorandum explaining provisions in Finance (No.2) Bill, 1996 may be usefully extracted hereinbelow:
'Under the existing provisions, the terms 'actual cost'means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. The sub-section contains a proviso and eight Explanations, which explain this term in various situations. A number of cases have come to notice where the instrument of sale and lease back (SLB) transactions has been used as a tax planning device to reduce tax liabilities. There have been cases where assets, having nil or nearly nil written down value, have been sold at higher prices, especially where 100 per cent depreciation allowance is admissible, and the buyer again claimed depreciation on these assets at the sale value. There have also been cases where such SLB transactions have been effected at a value much higher than the fair market value of the assets. In order to curb such transactions, i.e., where an asset has been sold and re- acquired by an assessee by way of lease hire or otherwise it is proposed that the 'actual cost' for the purpose of deduction of depreciation allowance shall be written down value at the time of transfer in the hands of the seller.
The proposed amendment will come into effect from 1-4-1997, and will accordingly, apply in relation to assessment year 1997-98 and subsequent years.'
As rightly submitted by the learned Senior counsel, Explanation 4A is not clarificatory Explanation, which usually begins with the words 'for removal of doubts'. Explanation 4A was inserted to discourage the sale and lease back transactions (entered into on or after 1-10-1996) wherein assessee pays higher value than the w.d.v. in the hands of the vendor, in respect of the cops purchased by the assessee, was Rs. 8,20,69,530 and the average cost power cop was around Rs. 44 (vide page 27 of paper book) whereas, the assessee purchased at Rs. 40 per cop and the actual cost in the hands of the assessee worked out to Rs. 56 on account of payment of Central Excise duty and Sales-tax and this price is very competitive price as compared to the other purchasers (vide page 23 of paper book). The Legislature never intended to disregard the sale and lease back transactions and the intention is made further clear by inserting Explanation 4A to section 43(1) of the Act where in it was stated that the w.d.v. in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Explanation 4A in the instant case, inasmuch as, it has no application to the assessment year 1993-94. In order to apply Explanation 3 to section 43(1) of the Act, the assessing officer has to prove that main purpose of the purchase of the assets is with a view to reduce the tax liability by claiming depreciation on the enhanced cost. It is no doubt true that the assessing officer observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crore (claimed as depreciation) but there is no indication that the assessing officer has considered the issue with reference to Explanation 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the assessing officer indicates that the disallowance was made mainly on the ground that the transaction is a subterfuge and entered into with an intention to avoid tax though, however the Legislature never intended to disallow the claim of a depreciation under such circumstances as could be seen from the definition of `actual cost' provided in section 43(1) and Explanations 3 and 4A thereto. The Commissioner (Appeals) has decided the issue on the presumption that JCT Ltd. claimed 100 per cent depreciation in respect of aluminium cops purchased by it during the accounting year relevant to the assessment year 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide page 27 of the paper book). [Emphasis, here italicizied in print, supplied]
11. As regards cops numbering 8,76,400, learned Commissioner (Appeals) accepted in the principle, the claim of the assessee- company that the purchase value in the hands of JCT Ltd., should be taken as the actual cost in the hands of the assessee-company for the purpose allowing depreciation. The revenue contested the same on the ground that depreciation cannot be allowed on the assets which are not useful in the business of the assessee- company. In our opinion, the claim of the revenue has no substance, inasmuch as, in the case of a leasing company assets which were leased out need not be useful in the business of the assessee. In this regard he draws support from the decision of the Delhi Bench of the Tribunal in the case of Indian Management Advisers & Leasing (P.) Ltd. (supra).
11.1 However, since the assessing officer has not appreciated the case from proper perspective, in the interests of justice, we set aside this issue (as regards claim of depreciation of Rs. 10.03 crore) to the file of the assessing officer with the following directions. It may be mentioned here that, infact, the evidence, in the form of 'statement to show w.d.v. of the assets in the hands of the JCT Ltd., as on 31-3-1993', vide page 27 of the paper book, was not furnished before the tax authorities. However, as the facts contained in the aforesaid material paper touch the root of the matter, in the interests of substantial justice, we have admitted the additional evidence:
(a) Assessing officer should examine as to whether reduction of tax liability by claiming depreciation on the enhanced cost is the main purpose behind the impugned sale and lease back transaction. It is needless to observe that if the assessing officer is satisfied that the main purpose of the assessee company is other wise, then Explanation 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee- company irrespective of the w.d.v. or market value of the aluminium cops;
(b) if the assessing officer is satisfied, in terms of Explanation 3 he may examine the facts and circumstances of the case to fix the substituted `actual cost'. In this regard he may find out the market value of the aluminium cops at the relevant point of time; and
(c) The contention the learned departmental representative that the assessee-company owns the aluminium cops for less than 180 days during the previous year and hence depreciation is not allowable in full may also be considered in accordance with law.
12. It is common knowledge that the w.d.v. of assets may not in all circumstances reflect the correct value of the assets. For example, a new car purchased in the year 1950 may cost Rs.5,000 but if the same is sold today, even the junk value would be 3 or 4 times higher that the purchase price. Assessing officer should, therefore bear in mind that the w.d.v. may not reflect the correct value unless otherwise the circumstances so warrant.
13. Ground No. 2 in the assessee's appeal pertains to the justification of the disallowance of legal expenses of Rs. 28,200 incurred in connection with amalgamation. Assessing officer as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned Commissioner (Appeals) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. v. CIT : [1987]165ITR678(Cal) . The claim of the assessee that there was no change in the share capital and hence the expenditure is revenue in nature is rejected by the tax authorities.
14. Further aggrieved, assessee is in appeal before us. Learned counsel submitted that the sum of Rs. 28,200 is the legal expenditure incurred in connection with the amalgamation and the issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT v. Bombay Dyeing & Mfg. Co. Ltd. : [1996]219ITR521(SC) . It was further submitted that there was no change/increase in share capital. On the other hand, learned Departmental Representative submitted that the decision of the Hon'ble Calcutta High Court applies to the facts of the case and the decision of the Hon'ble Supreme Court is distinguishable.
15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the Apex Court cited (supra). Legal expenses incurred in connection with amalgamation was held by the Apex Court as revenue expenditure. By respectfully following the same, we direct the assessing officer to allow deduction of the sum of Rs. 28,200 from the taxable income.
16. Ground No. 3 pertains to the claim of deduction of Rs. 44,995 incurred and shown under the head `Sales promotion. It is the case of the assessee that the expenditure incurred was in connection with the coffee, tea and refreshments served to the persons who come for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under section 37 of the Act. On the other hand, learned departmental representative submitted that the expenditure incurred in connection with the entertainment in hotels falls within the ambit of section 37(2A) of the Act.
17. In the light of the amended provisions of section 37 of the Act,and the decision of the Honble Supreme Court in the case of CIT v. Patel Bros. & Co. Ltd. : [1995]215ITR165(SC) the claim of the assessee-company is not tenable. We, therefore, uphold the order of the Commissioner (Appeals).
18. In the result, the appeal filed by the assesee is partly allowed.
19. In the revenue's appeal, Ground No. 1 pertains to the direction of the Commissioner (Appeals) with regard to the depreciation on leased aluminium cops. In the light of the discussion in the assessee's appeal, the issue is hereby set aside to the file of the assessing officer for re-examinantion as per our observations in paragraphs 10 and 11 above.
20. Ground No. 2 relates to the claim of guest house expenditure. Learned departmental representative submitted that in view of the specific provisions of section 37(4) of the Income Tax Act, 1961, rates, taxes and repairs of the guest house are not allowable as deduction. First appellate authority decided the issue in favour of the assessee-company by following the decision of the Hon'ble Calcutta High Court in the case of CIT v. Tungabhadra Industries Ltd. (1994) 207 ITR 533 . Learned departmental representative submitted that the aforesaid decision has wrongly been applied by the learned Commissioner (Appeals) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT v. Upper Ganges Sugar Mills Ltd. : [1994]206ITR215(Cal) (Cal), he submitted that the disallowance made by the assessing officer is in order. On the other hand, learned counsel for the assessee relied upon the order of the Commissioner (Appeals).
21. We have carefully considered the rival submissions. In the view of the direct decision of the Hon'ble Calcutta High Court under section 37(4) of the Act in the case of Upper Ganges Sugar Mills. Ltd. (supra), we are of the opinion that expenditure on maintenance of guest house, such as, rates, taxes and repairs, are not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under section 37(3A) of the Act and hence, it has no application in the present case.
22. Vide Ground No. 3, revenue contends that the learned Commissioner (Appeals) erred in deleting the addition on account of under changes received by the assessee but not disclosed in the taxable income. Learned departmental representative submitted that the issue is covered against the assessee and further submitted that the Commissioner (Appeals) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground. We, therefore, set aside the order of the learned Commissioner (Appeals) on this issue.
23. The revenue's appeal is filed by a delay of 13 days. Condonation petition was filed explaining the reasons for the delay in filing the appeal. On hearing the rival submission and upon careful perusal of the reasons for the delay in filing the appeal, we are satisfied that the delay in filing the appeal is due to reasonable cause. We, therefore, condone the delay.
24. In the result, the appeal filed by the revenue is partly allowed.