| SooperKanoon Citation | sooperkanoon.com/70717 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | Oct-25-1999 |
| Judge | P Parikh, D Manmohan |
| Appellant | Berlia Chemicals and Traders (P) |
| Respondent | Assistant Commissioner of Income |
2. The assessee-company is engaged in the business of trading in chemicals, It returned a loss of Rs. 6,88,375 after claiming deprecation of Rs. 28,97,697. The assessee was assessed at a positive income of Rs. 25,36,330 under Section 143(3) of the Act, the major disallowance being that of depreciation amounting to Rs. 26 lacs, the facts relating to which are narrated hereinafter. Assessee-company purchased waste heat recovery boiler, which is an energy-saving plant, from its sister concern M/s Barium Chemicals Ltd. for a consideration of Rs. 26 lacs. Payment was made by book entries. Barium Chemicals Ltd. in the fact owed some amount to the assessee-company and hence by adjusting the purchase price of the boiler, the debt due by Barium Chemicals to the assessee-company was reduced to Rs. 19,15,538. On acquiring the plant, assessee-company leased it to Barium Chemicals Ltd. on a rent of Rs. 39,000 per month. Since the plant carried a depreciation rate of 100 per cent assessee-company claimed the same on the ground that on purchase of the boiler, it had become the owner thereof and also had used it for the purpose of its business. AO was of the view that the transaction was on paper only, insofar as that there was neither the sale by Barium Chemicals, nor was there any purchase by the assessee-company. According to him, the assessee had merely taken advantage of the debit balance of Barium Chemicals in its books and had leased it back on a monthly rent. Moreover, the assessee-company had avoided payment of tax by claiming depreciation of Rs. 26 lacs. Thus, in his opinion, it was not a genuine transaction, but was merely a paper transaction and hence disallowed the claim of depreciation of Rs. 26 lacs. The CIT(A) endorsed the view of the AO by observing that the transaction was entered into between two sister concerns with the sole object of evading tax.
3. Shri V.H. Patil, the learned counsel for the assessee strongly objected to the CIT(A)'s observation terming the transaction as a tax avoiding, design. The contention was that if the transaction was not genuine, then the Department should not have taxed the lease rent earned by the assessee, nor should it have taxed the sum of Rs. 26 lacs offered for taxation by the seller of the assets as capital gains.
Thus, a part of the transaction has been accepted as genuine. If a part of the transaction is accepted as genuine, then there is no reason to treat the other part as non-genuine and hence, when a transaction is considered to be genuine, there can be no question of any tax avoidance design. To substantiate the genuineness of the transaction, we are taken to the copies of invoice issued by the selling company, the object clause in the memorandum of association of the assessee-company authorising it to give assets on lease and so on and thus urged for the allowance of the depreciation disallowed by the AO. It was also submitted that Expln 4A to Section 43(1) inserted w.e.f. 1st Oct., 1996, was not clarificatory in nature and hence did not have retrospective operation.
4. The stress of the learned Departmental Representative was on the transaction being a colourable device to avoid tax. Whether the leased asset formed part of the assessee's assets or not, and whether there was reduction from the total block in the seller's accounts or not, was not established by the records. It was pointed out by the learned Departmental Representative that the lease remained only for 14 months and was terminated thereafter w.e.f. 1st April, 1991. Thus this, according to him amply proved the collusive nature of the transaction entered into by two sister concerns. He relied on the decisions of the Supreme Court in Juggilal Kamlapat v. CIT (1969) 73 ITR 702 (SC), Union of India v. Gosalia Shipping (P) Ltd. (1978) 113 ITR 307 (SC), McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC), Sunil Siddharthbhai v. CIT (1985) 156 ITR 509 (SC) and Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. and Anr. (1986) 157 ITR 77 (SC).
Finally, it was contended that the Expln. 4A to Section 43(1) had retrospective operation for which reliance was placed on the decision of the Bombay High Court in CTT v. Banqaue Nationale De Paris (1994) 194 ITR 167 (Bom).
5. We have given our thoughtful consideration to the issue before us.
The material on record has also been duly considered. It would be appropriate if we first deal with the effect of Expln. 4A inserted in Section 43(1) of the Act w.e.f. 1st Oct., 1996. If it has a retrospective operation, as contended by Shri Raj Kumar, then perhaps, the assessee may not have any case on merits. In this respect, the learned Departmental Representative has relied on the decision of the jurisdictional High Court in the case of CIT v. Banque Nationale De Paris (supra). The Hon'ble High Court, at p. 179 of the Report observed as follows : "It is submitted that Rule 1(x) can be interpreted as referring to the net income only after the insertion of the Explanation and not prior to it. This submission, in our view, must be rejected. An Explanation may be appended to a section to explain the meaning of the words used in the section. There is no presumption that an Explanation which is inserted subsequently introduces something new which was not present in the section before. Ordinarily, an Explanation is inserted to clear up any ambiguity in the section and it should be so read as to harmonise it with the section and to clear up any ambiguity in the main section." It would be advantageous to refer to the background in brief to understand the context in which the High Court made the above observations. The case related to the computation of chargeable profits for the purpose of Companies (Profits) Surtax Act, 1964 (Surtax Act for short). As per the scheme of the Surtax Act, total income had to be computed under the IT Act, 1961. The total income so arrived at had to be adjusted in accordance with the provisions of the First Schedule to the Surtax Act. Rule 1 of the said Schedule gave a list of items to be excluded from the total income. Under Clause (x) of the said rule, one such item to be excluded was in respect of income by way of interest received from the Government or any Indian concern in the case of a non-resident company which had not made the prescribed arrangements for the declaration and payment of dividends within India. The High Court held that the exclusion, therefore, of such interest income could only be of that income which formed part of the total income computed under the IT Act. Such income, therefore, must necessarily be the net income which formed part of the total income after making permissible deductions. This was made clear, the Court held, by the Explanation added to Rule 1 by the Finance Act, 1981.
6. In this connection, it was contended on behalf of the assessee in that case that Rule (x) can be interpreted as referring to the net income only after the insertion of the Explanation and not prior to it.
While rejecting this contention of the assessee, the High Court took note of the background in which the Explanation was inserted. For this, it referred to the memorandum explaining the provisions of the Finance Bill, 1981, which, inter alia, inserted this Explanation. The relevant note [128 ITR (St) 111] is reproduced below : "In the case of Cloth Traders (P) Ltd. v. Addl. CIT (1979) 118 ITR 243 (SC), the Supreme Court held that in computing the taxable income for the purposes of the IT Act, the deduction in respect of intercorporate dividends should be allowed on the gross amount of such dividends received by the company and not with reference to net amount, i.e., after giving deduction in respect of interest paid on borrowings, etc. Since this decision ran counter to the legislative intent to grant such deduction with reference to the net income by way of dividends only, the Finance (No. 2) Act, 1980, inserted a new Section 80AA in the IT Act clarifying the intention with retrospective effect from 1st April, 1968. In several cases, High Courts have held that even for the purposes of determining chargeable profits under the Companies (Profits) Surtax Act, the gross amount of dividends should be excluded from the total income.
The legislative intent could have only been to exempt from surtax the amount of dividends which has actually been included in the total income and, accordingly, the High Court rulings have resulted in giving an unintended benefit to companies in respect of dividends received by them from domestic companies." 7. From the above discussion, it can be observed that the Explanation to Rule 1 was added as a consequence to the insertion of new Section 80AA in the IT Act with retrospective effect from 1st April, 1968.
Thus, insertion of Section 80AA with retrospective effect formed the foundation of the insertion of Explanation to Rule 1 of the First Schedule to the Surtax Act. Since the very foundation was given a retrospective effect, the Explanation to Rule 1 was also held to be clarificatory in nature and hence was held to be retroactive.
8. Vis-a-vis the above, let us consider the situation in the case before us. To enable the computation of income from business or profession as per Sections 28 to 41, Section 43 defines certain terms.
Sub-section (1) of Section 43 defines the term "actual cost". The definition is followed by eight Explanations (before the insertion of Expln. 4A. These eight Explanations are nothing but eight different situations for which the law mandates the adoption of a particular cost for an asset for the purpose of depreciation. Though it may not be the actual cost to the assessee, it is deemed to be so under Section 43(1) of the Act. In other words, apart from these eight situations, actual cost always means actual cost to the assessee and it is well-settled that actual cost has to be understood in a sense in which no commercial man would misunderstand it. However, since certain difficulties were envisaged in certain situations, these eight Explanations formed part of the statute explaining what would be the actual cost under each such situation. One such situation, as explained in Expln. 3, is where attempts can be made to claim higher depreciation by purporting to purchase assets at more than their true or real cost. It the AO is satisfied of such a situation, he has the discretion to determine the actual cost having regard to all the circumstances of the case.
9. The ever-growing complexities of trade and commerce will always throw up new situations. It is not possible to envisage all the situations while enacting the law. Hence, whenever a situation arises, which the legislature thinks it should be curbed, a new Explanation can be added. Expln 4A is one such situation which, in the opinion of the legislature needed to be discouraged and accordingly inserted the said Explanation w.e.f. 1st Oct., 1996. Earlier, we have already mentioned about the ever-growing complexities of trade and commerce. Hence, each situation has to be dealt with in a different manner. This is evident from the provisions in the eight Explanations itself. It follows, therefore, that when a new situation is dealt with by the legislature, there is nothing clarificatory about it. The situation never existed on the statute book earlier which needed clarification. It is added as an Explanation to Section 43(1) merely because what would be the actual cost in such a situation has to be specified. As a matter of fact, Expln. 3 is there to deal with the situation in Expln. 4A, but the legislature thought it appropriate to deal with that situation in a manner different than provided in Expln. 3. Thus, a different mischief was carved out with a different remedy which never existed earlier. We, therefore, repeat that there can be no clarification of a thing which never existed earlier. If the intention was to make it retrospectively effective, it would have specified so in no uncertain terms as was done when Expln. 8 was inserted by the Finance Act, 1986, with retrospective effect from 1st April, 1974. The situation in the present case is clearly distinguishable from the one which was before the Bombay High Court in the case of Banque Nationale De Paris (supra). In view of the foregoing discussion, we hold that Expln. 4A has no retrospective operation. In holding so we derive strength from the decision of the Supreme Court in the case of Keshavji Ravji & Co. v. CIT (1990) 183 ITR 1 (SC). In that case, the Supreme Court was dealing with the provisions of Section 40(b) and with Expln. 1 inserted by the Taxation Laws (Amendment) Act, 1984, in Clause (b) of Section 40. One of the arguments advanced on behalf of the assessee was that the insertion of Expln. 1, though later in point of time, constituted a legislative exposition of the correct import of the provision and, so construed, it offered a guide to the correct understanding of the provisions in Section 40(b) in its application to the earlier years as well. The "Notes on Clauses" appended to the Amending Bill, however, stated that the amendment will take effect from 1st April, 1985, and will, accordingly, apply in relation to the asst. yr. 1985-86 and subsequent years. The Court, therefore, observed that (at p. 19 of 182 ITR) : "The express prospective operation and effectuation of the Explanation might, perhaps, be a factor necessarily detracting from any evincement of the intent on the part of the legislature that the Explanation was intended more as a legislative exposition or clarification of the existing law than as a change in the law as it then obtained." In the present case also, memorandum explaining the provisions in Finance (No. 2) Bill, 1996, through which Expln. 4A was inserted to Section 43(1), makes it expressively clear that the amendment will come into effect from 1st April, 1997 and will, accordingly, apply in relation to asst. yr. 1997-98 and subsequent years. Thus, Expln. 4A has no application to the year with which we are concerned in this appeal.
Having held so, we now proceed to see whether the assessee is entitled to depreciation as claimed or not.
10. Earlier we have mentioned about the ever growing complexities of trade. It cannot be gainsaid that finance is the perennial need of any business. With the conventional means of finance either drying up, or with a view to conserve available resources for operational purposes, or to circumvent capital budget constraints and such other cash management considerations, diversification of financing sources appears to be making good business sense. This need has helped evolve various modes of financing a business and leasing is just one of them. Thus, economic reasons form the foundation for the evolution of leasing as a means of finance. Besides economic reasons, other considerations like technology, financial reporting, etc. also come into play. As is the legitimate want of any businessman, tax considerations also has a role to play. However, it need not be emphasised that in the wake of all business considerations, legitimate or otherwise, legal fundamentals cannot be given a go-by. It is with this overall perspective in mind, we proceed to examine the case before us.
11. Assessee-company purchased the equipment for Rs. 26 lacs from its associate concern Barium Chemicals Ltd. This is duly reflected as addition to its fixed assets by the assessee in its balance sheet. It is also shown as reduction in fixed assets by Barium Chemicals Ltd. The said company has also shown Rs. 26 lacs as profit on sale of fixed assets in its P&L a/c. The said amount has been offered for taxation as short-term capital gains. All these facts are on record and are not in dispute. However, Department is of the view that actually there is no sale and purchase of equipment. Following three aspects appear to have guided the Department in arriving at such a conclusion : (b) The assessee reduced its tax liability by claiming 100 per cent depreciation; (c) The transaction was collusive insofar as that it was entered into between two sister concerns.
12. First, we take up the first aspect. Yes, it is true that the equipment was already in use by Barium Chemicals. But selling it to the assessee and taking it back on lease was solely a business decision.
The dynamics which guided Barium Chemicals to sell the equipment was to raise finance, or, as is the case here, to reduce its indebtedness towards the assessee-company. The dynamics which guided the assessee to purchase and lease back the equipment was to earn additional income by way of lease rentals. The essential characteristic of a sale is that the property in the goods passes to the buyer. It is not necessary that the asset should physically move to the buyer in order to constitute a valid sale. It is essential that when property in the goods passes to the buyer, the risks and rewards attached to the goods also pass to the buyer. The buyer in this case, i.e., the assessee has reaped the rewards in the form of lease rentals by leasing it back to the seller.
The income in the form of lease rentals has been recognised by the Department by levying tax on it. The Department has also recognised capital gains arising to the seller on sale of the asset. We fail to understand what is illegal in the entire transaction or what is sham or non- genuine about it, Is it not unfair to recognise only that part of the transaction which is beneficial to the State and show disrespect to that part which is beneficial to the subject and which is also permissible under the law? Yes, we do agree that had the parties agreed to abysmally low rentals not ensuring adequate returns to the assessee on its investment, perhaps there was a case for the Department to reject the transaction as a colourable device. But in the instant case, there is no such allegation. The learned Departmental Representative has, no doubt, drawn our attention to the fact that the lease agreement was terminated within 14 months. However, neither the AO nor the CIT (A) has either brought out this fact or investigated into the causes of termination and also into the fallout of the termination. Hence, we see nothing wrong in the purchase of the asset and its lease back to the seller. The assessee did become the owner of the asset on buying it from Barium Chemicals.
13. We come to the second aspect that assessee reduced its tax liability by claiming 100 per cent depreciation. In other words, this has been described as a colourable device to avoid tax. In the earlier paras we have held that the decision to purchase the asset and lease it back to the seller was purely a business decision to earn income by way of lease rental. In the process, if assessee gets tax sops to which it is entitled under the law, it cannot be described as a colourable device. When the seller of the asset has offered Rs. 26 lacs for taxation as short-term capital gain and when the lease rentals earned by the assessee have suffered tax, it is difficult to conclude that the transaction was entered into with the sole motive of getting tax benefit by claiming 100 per cent depreciation. It needs to be appreciated that while striking a business deal, tax aspect will always be considered, because it directly affects the fund flow and cash flow situation of the business. Thus, the tax aspect is very much an integral part of the business decision which should not be looked down as a taboo. If tax aspect is not taken into consideration, it is quite unbusiness like for the businessman to do. This is not to suggest that assessees do not ever adopt colourable devices to dodge the Revenue.
But wherever benefit is derived by the assessee, it cannot automatically attract the label of a colourable device. In any case, if such a doubt was there, the AO should have carried out an exercise, considering the incomes of both, the Seller as well as purchaser, with and without the transaction and should have been the net effect on the exchequer. Be that as it may, we do not see anything illegitimate about the transaction to treat it as a colourable device and hence, in our opinion, the second aspect also holds no water.
14. The last aspect springs from the kinship between the two entities involved in the transaction. It is on record that assessee has leased its assets not only to Barium Chemicals, but to other unrelated parties also and has continued to do so in the subsequent years as well. In the face of these facts, therefore, the allegation is wild enough to be left as allegation only with no substance.
15. In view of the foregoing discussion, we are of the confirmed view that the transaction was genuine, that it was not merely a paper transaction and hence the assessee be allowed depreciation as claimed.
16. Next ground pertains to the disallowance of interest amounting to Rs. 6,24,709. The AO disallowed the impugned amount on the ground that the assessee had made interest-free advances out of interest-bearing loans. The CIT(A) confirmed the disallowance.
17. Shii V.H. Patil submitted that in the earlier year there was no disallowance and in fact, the debits this year had reduced from Rs. 101 lacs to Rs. 66.72 lacs. Moreover, out of total interest of Rs. 6,22,811 a sum of Rs. 6,07,000 was paid to Vijaya Bank alone as interest- This year there were no additional loans and, therefore, it could not be said that bank borrowings were used for making interest-free advances.
Secondly, it was also contended that no correlation was established between interest-free advances and interest-bearing borrowings.
Reliance was placed on the decision of the Karnataka High Court in CIT v. Sridev Enterprises (1991) 192 ITR 165 (Kar).
18. The learned Departmental Representative by and large relied on the orders of the lower authorities. However, it was pointed out that in three cases there were additional loans. He relied on the decisions in Phalton Sugar Works Ltd. v. CWT (1994) 208 ITR 989 (Bom) and CIT v.Doctor & Co. (1989) 180 ITR 627 (Bom).
19. It is a fact that the advances have actually reduced this year and no disallowance was made in the earlier year. Therefore, this year also no disallowance is called for. Even otherwise, it is difficult to establish any nexus between funds which flowed in and funds which flowed out. Thus, entire interest paid has to be treated as incurred for business purposes. Accordingly, we delete the disallowance.