| SooperKanoon Citation | sooperkanoon.com/69233 |
| Court | Income Tax Appellate Tribunal ITAT Kolkata |
| Decided On | Oct-28-1997 |
| Reported in | (1998)66ITD39Cal |
| Appellant | Karam Chand Thapar and Bros. (Coal |
| Respondent | Deputy Commissioner of Income |
Notice (8): Undefined variable: kword [APP/View/Case/amp.ctp, line 123]Code Context}//highest occurence of word in the judgementecho $this->Wand->highlight($this->Excerpt->extractRelevant($kword,strtolower(strip_tags($desc['Judgement']['judgement']))), $query) . "</div>";$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = ''include - APP/View/Case/amp.ctp, line 123 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 123]1. these two cross-appeals are directed against the order of the cit(a), calcutta.2. as the issues are connected and relate to the same assessment year i.e., asst. yr. 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 cit(a) 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.....Code Context}//highest occurence of word in the judgementecho $this->Wand->highlight($this->Excerpt->extractRelevant($kword,strtolower(strip_tags($desc['Judgement']['judgement']))), $query) . "</div>";$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = ''include - APP/View/Case/amp.ctp, line 123 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 0include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 1include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 2include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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 CIT(A) 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.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 3include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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 i.e., (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 asst. yr.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 4include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 5include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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 each cop is below Rs. 5,000.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 6include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 7include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 8include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 9include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 10include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 11include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 12include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 13include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 14include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 15include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 16include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 17include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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 reacquired 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.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 18include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 19include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 20include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 21include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 22include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 23include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 24include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 25include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 26include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 27include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 28include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 29include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 30include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 31include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 32include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
20. Ground No. 2 relates to the claim of guest house expenditure.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 33include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 34include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 35include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 36include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 37include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
We, therefore, set aside the order of the learned CIT(A) on this issue.
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 144]Code Contextecho $this->Adsense->display('responsive_rect');}echo html_entity_decode($this->Wand->highlight($content[$i], $query));$viewFile = '/home/legalcrystal/app/View/Case/amp.ctp' $dataForView = array( 'title_for_layout' => 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ', 'desc' => array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p align="justify">2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p align="justify">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 CIT(A) 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.</p><p align="justify">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 i.e., (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 asst. yr.</p><p align="justify">1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p align="justify">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 each cop is below Rs. 5,000.</p><p align="justify">The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p align="justify">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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p align="justify">6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p align="justify">depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p align="justify">Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p align="justify">The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p align="justify">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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p align="justify">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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p align="justify">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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p align="justify">10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p align="justify">10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p align="justify"> 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 reacquired 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.</p><p align="justify"> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p align="justify">As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p align="justify">43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p align="justify">11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p align="justify">11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p align="justify">12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p align="justify">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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p align="justify">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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p align="justify">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.</p><p align="justify">15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p align="justify">Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p align="justify">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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p align="justify">17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p align="justify">19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p align="justify">20. Ground No. 2 relates to the claim of guest house expenditure.</p><p align="justify">Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p align="justify">Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p align="justify">21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p align="justify">22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p align="justify">We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p align="justify">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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ), 'casename_url' => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner', 'args' => array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) ) $title_for_layout = 'Karam Chand Thapar and Bros Coal Vs Deputy Commissioner of Income - Citation 69233 - Court Judgment | ' $desc = array( 'Judgement' => array( 'id' => '69233', 'acts' => null, 'appealno' => null, 'appellant' => 'Karam Chand Thapar and Bros. (Coal', 'authreffered' => null, 'casename' => 'Karam Chand Thapar and Bros. (Coal Vs. Deputy Commissioner of Income', 'casenote' => '', 'caseanalysis' => '', 'casesref' => null, 'citingcases' => null, 'counselplain' => null, 'counseldef' => null, 'court' => 'Income Tax Appellate Tribunal ITAT Kolkata', 'court_type' => 'TRI', 'decidedon' => '1997-10-28', 'deposition' => null, 'favorof' => '', 'findings' => '', 'judge' => '', 'judgement' => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.</p><p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.</p><p>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 CIT(A) 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.</p><p>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 i.e., (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 asst. yr.</p><p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.</p><p>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 each cop is below Rs. 5,000.</p><p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.</p><p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.</p><p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.</p><p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.</p><p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.</p><p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.</p><p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.</p><p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.</p><p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.</p><p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.</p><p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.</p><p> 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 reacquired 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.</p><p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".</p><p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.</p><p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).</p><p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).</p><p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.</p><p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.</p><p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.</p><p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.</p><p>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.</p><p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).</p><p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.</p><p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.</p><p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).</p><p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.</p><p>20. Ground No. 2 relates to the claim of guest house expenditure.</p><p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).</p><p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).</p><p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.</p><p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.</p><p>We, therefore, set aside the order of the learned CIT(A) on this issue.</p><p>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 submissions 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.', 'observations' => '', 'overruledby' => null, 'prhistory' => null, 'pubs' => '(1998)66ITD39Cal', 'ratiodecidendi' => null, 'respondent' => 'Deputy Commissioner of Income', 'sub' => null, 'link' => null, 'circuit' => null ) ) $casename_url = 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' $args = array( (int) 0 => '69233', (int) 1 => 'karam-chand-thapar-bros-coal-vs-deputy-commissioner' ) $url = 'https://sooperkanoon.com/case/amp/69233/karam-chand-thapar-bros-coal-vs-deputy-commissioner' $ctype = '' $content = array( (int) 0 => ' 1. These two cross-appeals are directed against the order of the CIT(A), Calcutta.', (int) 1 => '<p>2. As the issues are connected and relate to the same assessment year i.e., asst. yr. 1993-94, we take up for disposal of both the cases by a common order for the sake of convenience.', (int) 2 => '<p>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 CIT(A) 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.', (int) 3 => '<p>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 i.e., (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 asst. yr.', (int) 4 => '<p>1993-94. The assessee purchased 18,25,000 aluminium cops from J.C.T.Ltd. for a total consideration of Rs. 10,03,75,000. The said aluminium cops are used in textile mills to roll nylon filament yarns on them.', (int) 5 => '<p>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 each cop is below Rs. 5,000.', (int) 6 => '<p>The AO 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. vs. CTO (1985) 154 ITR 148 (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. The AO 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 was set off against the losses of the 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.', (int) 7 => '<p>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 (P) Ltd. and Ceat Financial Services Ltd. also at the same rate of Rs. 55 per cop. It was, therefore, contended that the AO 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 AO that there is no physical delivery, it was submitted that it was not necessary and constructive delivery is an accepted mode in this type of transaction.', (int) 8 => '<p>6. The CIT(A) 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 had any previous experience. He further observed that 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 purposes other than for commencing its leasing venture. The CIT(A) 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 asst. yr. 1992-93 on which it would have claimed 100 per cent.', (int) 9 => '<p>depreciation and hence the WDV in the hands of the seller was zero. The CIT(A), therefore, held that the AO 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 asst. yr. 1993-94, AO 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 CIT(A). 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 this regard he has relied upon the following two decisions : (a) CIT vs. The Buckingham & Carnatic Co. Ltd. (1935) 3 ITR 384 (PC) and Learned counsel further submitted that there is no room for doubting the transaction as the transaction is bona fide for the following reasons : (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.', (int) 10 => '<p>Learned counsel further submitted that the transaction is plain and bona fide commercial transaction and hence the decision in the McDowell's case (supra) does not apply-no 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 CIT(A) vide para 2.8 of his order. It is also submitted that merely because the sale and lease back transaction was by chance with 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 that 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'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 WDV as per the books was Rs. 8,20,69,529.94 and the average cost as per the WDV worked out to about Rs. 44 per cop.', (int) 11 => '<p>The assessee purchased the aluminium cops at Rs. 40 per cop excluding Central excise, sales-tax and other duties (vide p. 23 of the paper-book). Learned counsel further submitted that the AO 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 (supra) is not applicable to the facts and circumstances of the case and in this regard he relied upon the following decisions : Learned counsel also submitted that even otherwise, the decision of the Hon'ble Supreme Court in McDowell's case (supra) requires reconsideration and, in fact, the issue is referred to a larger Bench by the Hon'ble Supreme Court.', (int) 12 => '<p>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's case (supra) applies to the facts of the case. Learned Departmental Representative further submitted that the 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 Expln. 3 to s. 43(1) of the Act, learned Departmental Representative submitted that apart from applying the McDowell's case (supra), the order of the AO can be supported by the power vested in him vide Expln. 3. He also invited our attention to Expln. 4A introduced w.e.f. 1st October, 1996 and submitted that Expln. 3 and Expln. 4A should be read together which brings out the legislative intention that Expln. 4A is clarificatory in nature and hence it is retrospective in operation. In the opinion of the learned Departmental Representative Expln. 8 to s. 43(1) is also applicable in this regard.', (int) 13 => '<p>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 : 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 vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal). Drawing support from the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and also various Explns. to s. 43(1) of the Act, learned Departmental Representative submitted that the disallowance of depreciation by the AO is in order and further submitted that the CIT(A) is not justified in directing the AO to allow depreciation on the WDV 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 month 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.', (int) 14 => '<p>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 vs. Produce Exchange Corporation Ltd. (1963) 50 ITR 308 (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 Expln. 4A to s. 43(1) of the IT Act, 1961, learned counsel submitted that a newly inserted Expln. 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 1st October, 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, reported in 220 ITR 224 at 271 (Statutes). Learned counsel further submitted that Expln. 3 is limited in operation - Expln. 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 Expln. 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 i.e. 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. vs. Dy. CIT (1994) 51 ITD 566 (Del). 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.', (int) 15 => '<p>10. We have heard the rival submissions and perused the records. The words 'actual cost' have been defined in s. 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'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 were also purchased by 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 substituting 'actual cost' [vide Expln. 3 to s. 43(1)] if the AO 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's case (supra) should not be pressed into service. But nevertheless, the AO 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, AO 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.', (int) 16 => '<p>10.1 As regards the claim of learned Departmental Representative, vis-a-vis Expln. 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 (200 ITR 270 (Statutes) may be usefully extracted hereinbelow : "Under the existing provisions, the term "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) transaction 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.', (int) 17 => '<p> 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 reacquired 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.', (int) 18 => '<p> The proposed amendment will come into effect from 1st April, 1997, and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years".', (int) 19 => '<p>As rightly submitted by the learned senior counsel, Expln. 4A is not clarificatory in nature as unlike the clarificatory Explanation, which usually begins with the words "for removal of doubts". Explanation 4A was inserted to discourage the sale and leaseback transactions (entered into on or after 1st October, 1996) wherein assessee pays higher value than the WDV in the hands of the vendor. In the instant case, the WDV 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 per cop was around Rs. 44 (vide p. 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 purchaser (vide p. 23 of paper-book). The legislature never intended to disregard the sale and leaseback transactions and the intention is made further clear by inserting Expln. 4A to s. 43(1) of the Act wherein it was stated that the WDV in the hands of the vendor should be taken as the actual cost of the assessee. However, we are not concerned with Expln. 4A in the instant case, inasmuch as, it has no application to the asst. yr. 1993-94. In order to apply Expln. 3 to s.', (int) 20 => '<p>43(1) of the Act, the AO 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 AO observed that by entering into the impugned transaction, the assessee-company has reduced its profits for the previous year by Rs. 10.03 crores (claimed as depreciation) but there is no indication that the AO has considered the issue with reference to Expln. 3 and satisfied that the transaction was with an intention to reduce the tax liability. In fact, the order of the AO 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 depreciation under such circumstances as could be seen from the definition of 'actual cost' provided in s. 43(1) and Explns. 3 and 4A thereto. The CIT(A) 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 asst. yr. 1992-93. Learned counsel for the assessee submitted before us that the same is factually incorrect (vide p. 27 of the paper-book).', (int) 21 => '<p>11. As regards cops numbering 8,76,400, learned CIT(A) accepted, in 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 of 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 reported at (1994) 51 ITD 566 (supra).', (int) 22 => '<p>11.1 However, since the AO 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 crores) to the file of the AO with the following directions. It may be mentioned here that, in fact, the evidence, in the form of "statement to show the WDV of the assets in the hands of JCT Ltd. as on 31st March, 1993", vide p. 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) The AO 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 AO is satisfied that the main purpose of the assessee-company is otherwise, then Expln. 3 will have no application and depreciation is allowable on the actual cost as shown by the assessee-company irrespective of the WDV or market value of the maximum cops; (b) If the AO is satisfied, in terms of Expln. 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 of 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.', (int) 23 => '<p>12. It is common knowledge that the WDV of the assets may not, in all circumstances, reflect the correct market 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. The AO should, therefore, bear in mind that the WDV may not reflect the correct value unless otherwise the circumstances so warrant.', (int) 24 => '<p>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. The AO as well as the first appellate authority held that the expenditure is capital in nature and thus disallowed the claim. In this connection, learned CIT(A) relied upon the decision of the Hon'ble Calcutta High Court in the case of Union Carbide India Ltd. vs. CIT (1987) 165 ITR 678 (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.', (int) 25 => '<p>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 now squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521 (SC). It was further submitted that there was no change/increase in share capital.', (int) 26 => '<p>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.', (int) 27 => '<p>15. We have carefully considered the rival submissions. In our opinion, the issue is covered by the decision of the apex Court cited (supra).', (int) 28 => '<p>Legal expenses incurred in connection with the amalgamation was held by the apex Court as revenue expenditure. By respectfully following the same, we direct the AO to allow deduction of the sum of Rs. 28,200 from the taxable income.', (int) 29 => '<p>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 came for discussion regarding amalgamation and it was, therefore, claimed that it is not entertainment expenditure and hence allowable under s. 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 s. 37(2A) of the Act.', (int) 30 => '<p>17. In the light of the amended provisions of s. 37 of the Act, and the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), the claim of the assessee-company is not tenable. We, therefore, uphold the order of the CIT(A).', (int) 31 => '<p>19. In the Revenue's appeal, ground No. 1 pertains to the direction of the CIT(A) 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 AO for re-examination as per our observation in paras 10 and 11 above.', (int) 32 => '<p>20. Ground No. 2 relates to the claim of guest house expenditure.', (int) 33 => '<p>Learned Departmental Representative submitted that in view of the specific provisions of s. 37(4) of the IT 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 vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal).', (int) 34 => '<p>Learned Departmental Representative submitted that the aforesaid decision has wrongly been applied by the learned CIT(A) and by relying upon the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Upper Ganges Sugar Mills Ltd (1994) 206 ITR 215 (Cal) he submitted that the disallowance made by the AO is in order. On the other hand, learned counsel for the assessee relied upon the order of the CIT(A).', (int) 35 => '<p>21. We have carefully considered the rival submissions. In view of the direct decision of the Hon'ble Calcutta High Court under s. 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, is not allowable. The decision in the case of Tungabhadra Industries Ltd. (supra) is under s. 37(3A) of the Act and hence, it has no application in the present case.', (int) 36 => '<p>22. Vide ground No. 3, Revenue contends that the learned CIT(A) erred in deleting the addition on account of undercharges 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 CIT(A) is not justified in deleting the addition. Learned senior counsel has not seriously opposed the ground.', (int) 37 => '<p>We, therefore, set aside the order of the learned CIT(A) on this issue.', (int) 38 => '<p>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 submissions 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.' ) $paragraphAfter = (int) 1 $cnt = (int) 39 $i = (int) 38include - APP/View/Case/amp.ctp, line 144 View::_evaluate() - CORE/Cake/View/View.php, line 971 View::_render() - CORE/Cake/View/View.php, line 933 View::render() - CORE/Cake/View/View.php, line 473 Controller::render() - CORE/Cake/Controller/Controller.php, line 963 Dispatcher::_invoke() - CORE/Cake/Routing/Dispatcher.php, line 200 Dispatcher::dispatch() - CORE/Cake/Routing/Dispatcher.php, line 167 [main] - APP/webroot/index.php, line 109
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 submissions 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.