Vachanband Investment Ltd. Vs. Ito - Court Judgment

Excerpt:
in the itat, delhi f' bench r.k. gupta, j.m & keshaw prasad, a.m. income tax act, 1961, section 32, in favor of : assessed depreciation allowability counsel : anil chopra, for the appellant r.r. prasad, for the respondent - - 3. the assessed preferred appeal before the commissioner (appeals). the commissioner (appeals) also confirmed the reopening of assessment as well as withdrawal of depreciation and adding the interest income on accrual basis. , as depreciation claimed on machinery as well as lease rent shown by assessed has been held as genuine by the assessing officer himself. in this regard we would like to mention that there cannot be any entry on assets side on account of bottles, as the assessed has claimed 100 per cent depreciation and the value of the bottles were zero.orderr.k. gupta, j.m.this is an appeal by assessed against the order of commissioner (appeals) relating to assessment year 1991-92. the assessed has challenged the reopening of assessment under section 147 and also challenged the disallowance of hundred per cent depreciation claimed on bottles leased out to mansarover bottling co. itd.2. the brief facts of the case are that a search was conducted on assessed on 9-3-1999 and on the basis of material found during the course of search, notice under section 148 was issued on 22-3-2001. the block assessment was also completed on 30-4-2001, for the block period from 1-4-1989 to 9-3-1999. during the course of search the statement of shri nitin kohli was recorded, who has stated that some financial arrangements were entered into between the assessed- company and mansarover bottling co. itd. from the assessment records the assessing officer noted that return declaring an income of rs. 93,590 was filed on 31-3-1993. it was processed under section 143(1)(a). main business of the company comprised of sale and purchase of shares. apart from this, the assessed had allegedly leased empty soft drinks (limca) glass bottles and certain other plant and machinery to mansarover bottling co. itd. and claimed depreciation at 100 per cent and 33.33 per cent respectively, as per details below:plant and machinery @ 33.33% rs. 14,12,557limca glass bottles at 100% rs. 34,24,604total: rs. 48,37,1612.1 on the basis of statement recorded of shri nitin kohli, the assessing officer was of the view that no such lease transaction was entered into by the assessed. accordingly no depreciation would be allowable on such assets. thereforee, the assessing officer had read on to believe that income amounting to rs. 48,37,161 had escaped assessment. thereforee, notice under section 148 of the income tax act was served upon the assessed after recording the reasons, to file return of its income. the assessed protested the issue of notice under section 148 stating that the block assessment was completed in case of assessed for the block period. thereforee, the issue of notice under section 148 was illegal. after considering the submissions and perusing the amended provisions of block assessment and other case laws, the assessing officer held that the proceeding under section 148 was valid. on merit after considering the reply and perusing other material on record, the assessing officer disallowed the claim of the assessed on account of depreciation on bottles at rs. 34,24,604. however, the depreciation claimed on leased out machinery at rs. 14,12,557 was allowed by holding the same as genuine. the assessing officer treated the cost of bottles amounting to rs. 34,24,604 as advance made by assessed to mansarover bottling co. itd. thereforee, he calculated the interest on this amount at rs. 2,21,579 and the same was added in the income of the assessed. however, the lease rent on bottles shown at rs. 6,06,797 was reduced from the total income. for holding so, the assessing officer observed in his order that 'the assets leased out in this case were glass bottles to be used in soft drinks business. these glass bottles are used again and again after refilling the soft drink. on an average it can be presumed that the bottle is refilled once in every two weeks. this would mean that a bottle is recycled approximately 25 times in year. the bottles are required to be transported over long distances. the bottles are filled with soft drink at a high pressure. under these circumstances, it is highly improbable that a bottle could last for a period of 5 years. keeping in view the limited life of glass bottles, depreciation at 50 per cent is allowed under the it rules as compared to the rate of 25 per cent applicable to other items of plant and machinery. i have made an attempt to find out the ratio of breakage in soft drink business from other soft drink manufacturers. in each year the breakage/rejection rate is about 15 per cent. in this manner, it would not be unreasonable to draw a conclusion that by the expiry of lease period more than 50 per cent of the bottles allegedly leased out by the assessed would have broken.'2.2 it was further observed by the assessing officer that it has been provided in the lease agreement that the bottles would be transferred to mansarover bottling co. itd. at a pre-determined price. by further observing that it violates the basic condition of any lease transaction, the lease agreement was treated by the assessing officer as sham. accordingly the depreciation claimed by the assessed, as stated above, was withdrawn and in lieu of lease rent, the accrued interest was added to the income of the assessed.3. the assessed preferred appeal before the commissioner (appeals). the commissioner (appeals) also confirmed the reopening of assessment as well as withdrawal of depreciation and adding the interest income on accrual basis. now the assessed is in appeal here before the tribunal.4. lengthy arguments were put forth by the counsel of the assessed. the attention of the bench was drawn on written synopsis, list of case laws and various copies of documents, which are placed on record. it was also stated that there is no relation of the assessed directly or indirectly either with the seller from whom the bottles were purchased or with mansarover bottling co. itd., to whom the bottles were leased out. it was also stated that the assessing officer has allowed the claim of the assessed on account of leasing out of machinery, but disallowing the claim of depreciation on account of leased out bottles, were unjustified on the part of lower authorities. on the other hand, the learned departmental representative strongly placed reliance on the orders of the authorities below.5. we have heard rival submissions and considered them carefully. we have also perused the relevant material on which our attention were drawn. we have also considered the ratio of decisions relied upon by the counsel of the assessed. after perusing all the relevant material, we find that a assessed deserves to succeed on merit. we noted that the assessed entered into an agreement for leasing out bottles and machinery with mansarover bottling co. itd. the total leased amount as per books of accounts of the assessed on account of bottles were of rs. 48,54,376 from financial year 1990-91 to 1995-96 and total amount of lease rent received by assessed on account of machinery was at rs. 86,67,649 from financial year 1990-91 to 1996-97. the lease amount of rs. 6,47,250 and rs. 1,51,843 on account of bottles and machinery respectively were shown by assessed in its return for financial year 1990-91. an amount of rs. 9,70,875 each for financial year 1991-92 to 1994-95 was offered for taxation by assessed on account of lease rent of bottles and amount of rs. 16.47 lakhs for financial year 1991-92 and rs. 17.53 lakhs each for financial years 1992-93 to 1994-95 respectively was shown by assessed. the remaining amount was shown in the two subsequent years. the chart of detail of lease rent is placed at p. 1 in the compilation. we further noted that the assessed made advance payment to arizone printers & packers itd, at rs. 34,24,604 vide cheque no. 325811 dated 4-8-1990. the purchases were made by invoices no. 582 to 671 of various dates, and each bill was of rs. 65,638 and the total of the same was at rs. 34,24,604. a copy of detail of purchases is placed at p. 2 of the compilation. the detail of payment on account of lease rent received from mansarover paper & industries itd. is placed at p. 3 and the total amount of lease rent received by assessed on account of bottles and plant and machinery from financial year 1990-91 to 1996-97 was at rs. 1,35,22,026. on examining these details it is noted that the assessed has offered for taxation much more income on account of lease rent of bottles, than the amount of depreciation in five years as the agreement of lease was for a period of 5 years. as the total lease rent received by assessed on account of leasing of bottles was at rs. 48,53,377, against which the total depreciation claimed by assessed is at rs. 34,24,604. in 6th year the assessed has received a sum of rs. 3,23,625 on account of sale of bottles from mansarover bottling co. itd. and the same was offered for taxation for financial year 1995-96. in this way, more than rs. 51 lakhs income was offered for taxation in five years. thereforee, it cannot be said that under some crevice the depreciation was claimed by assessed. we further noted that the assessing officer has himself accepted the lease rent on account of bottles at rs. 9.7 lakhs or so, in assessment years 1992-93 to 1995-96. if there were financial arrangements, then the assessing officer should have assessed the same as interest income, as against leased rent and the interest income as estimated by the assessing officer was much less than the lease rent received by assessed for respective years. the interest income estimated by the assessing officer for the year was at rs. 2,21,000, whereas the lease rent shown by assessed was rs. 9.7 lakhs. thereforee, this is not the case of the department that there was colourable device to reduce the taxability. neither the assessments for assessment year 1992-93 onwards were reopened nor any rectification orders were passed. thereforee, for this reason also, it cannot be held that lease transaction entered by assessed was sham. we further noted that neither the seller i.e., arizona printers & packers itd. was contacted, nor mansarover bottling co. itd. was contacted that whether th3y have sold the bottles to the assessed or not, or whether mansarover bottling co. itd. has taken bottles on lease or not. we further noted that the same assessing officer has accepted the leased out machinery to the same party i.e., mansarover bottling co., as depreciation claimed on machinery as well as lease rent shown by assessed has been held as genuine by the assessing officer himself. in accepting the lease agreement in part, is also not justified on the part of the assessing officer as the lease agreement in regard to machinery entered into with the same party was held as genuine, and lease agreement in regard to bottles was not held as genuine. we have also noted that on the basis of statement of one shri nitin -kohli, the assessing officer drew an adverse inference against the assessed. it is worth noting here that mr. nitin kohli neither was a director nor was authorised person of the assessed company during assessment year 1991-92. thereforee, the statement of shri nitin kohli should not have been given much credence for drawing adverse inference against assessed. except a general observation of nitin kohli that there were some financial arrangement, no other material was before the assessing officer to doubt the transaction. it is also not known that for which year the financial arrangement was made. the assessed has also advanced some loan to this party, thereforee, this is quite possible that for those transactions. mr. nitin kohli has stated that there were financial arrangements. without bringing any cogent material on record, the disallowance of claim was not justified either on the part of the assessing officer or on the part of commissioner (appeals).6. we have seen the observations of the assessing officer somewhere in his order that in books of account there was no entry of bottles. in this regard we would like to mention that there cannot be any entry on assets side on account of bottles, as the assessed has claimed 100 per cent depreciation and the value of the bottles were zero. and in the last year of the return, the assessed has shown the sale consideration of bottles as its income in p&l; a/c. thereforee, there was no occasion in showing the bottles on assets side in its books of accounts. thereforee, the observations of the assessing officer and the reason for drawing adverse inference against assessed are unfounded. the facts as stated above are undisputed facts, which neither could be controverter by the learned departmental representative nor any material was brought on record, which could controvert these facts. thereforee, we hold that both the lower authorities were not justified in disallowing the claim of the assessed. accordingly we direct the assessing officer to allow the depreciation as claimed by assessed, and tax the lease rent shown by assessed against the interest income, as assessed by the assessing officer.7. since we have allowed the appeal of the assessed on merit, thereforee, we are not inclined to adjudicate upon the legal ground of the assessed at this moment.8. in the result, the appeal of the assessed is allowed.

Judgment:
ORDER

R.K. GUPTA, J.M.

This is an appeal by assessed against the order of Commissioner (Appeals) relating to assessment year 1991-92. The assessed has challenged the reopening of assessment under section 147 and also challenged the disallowance of hundred per cent depreciation claimed on bottles leased out to Mansarover Bottling Co. ITD.

2. The brief facts of the case are that a search was conducted on assessed on 9-3-1999 and on the basis of material found during the course of search, notice under section 148 was issued on 22-3-2001. The block assessment was also completed on 30-4-2001, for the block period from 1-4-1989 to 9-3-1999. During the course of search the statement of Shri Nitin Kohli was recorded, who has stated that some financial arrangements were entered into between the assessed- company and Mansarover Bottling Co. ITD. From the assessment records the assessing officer noted that return declaring an income of Rs. 93,590 was filed on 31-3-1993. It was processed under section 143(1)(a). Main business of the company comprised of sale and purchase of shares. Apart from this, the assessed had allegedly leased empty soft drinks (Limca) glass bottles and certain other plant and machinery to Mansarover Bottling Co. ITD. and claimed depreciation at 100 per cent and 33.33 per cent respectively, as per details below:

Plant and Machinery @ 33.33%

Rs. 14,12,557

Limca Glass bottles at 100%

Rs. 34,24,604

Total:

Rs. 48,37,161

2.1 On the basis of statement recorded of Shri Nitin Kohli, the assessing officer was of the view that no such lease transaction was entered into by the assessed. Accordingly no depreciation would be allowable on such assets. thereforee, the assessing officer had read on to believe that income amounting to Rs. 48,37,161 had escaped assessment. thereforee, notice under section 148 of the Income Tax Act was served upon the assessed after recording the reasons, to file return of its income. The assessed protested the issue of notice under section 148 stating that the block assessment was completed in case of assessed for the block period. thereforee, the issue of notice under section 148 was illegal. After considering the submissions and perusing the amended provisions of block assessment and other case laws, the assessing officer held that the proceeding under section 148 was valid. On merit after considering the reply and perusing other material on record, the assessing officer disallowed the claim of the assessed on account of depreciation on bottles at Rs. 34,24,604. However, the depreciation claimed on leased out machinery at Rs. 14,12,557 was allowed by holding the same as genuine. The assessing officer treated the cost of bottles amounting to Rs. 34,24,604 as advance made by assessed to Mansarover Bottling Co. ITD. thereforee, he calculated the interest on this amount at Rs. 2,21,579 and the same was added in the income of the assessed. However, the lease rent on bottles shown at Rs. 6,06,797 was reduced from the total income. For holding so, the assessing officer observed in his order that 'The assets leased out in this case were glass bottles to be used in soft drinks business. These glass bottles are used again and again after refilling the soft drink. On an average it can be presumed that the bottle is refilled once in every two weeks. This would mean that a bottle is recycled approximately 25 times in year. The bottles are required to be transported over long distances. The bottles are filled with soft drink at a high pressure. Under these circumstances, it is highly improbable that a bottle could last for a period of 5 years. Keeping in view the limited life of glass bottles, depreciation at 50 per cent is allowed under the IT Rules as compared to the rate of 25 per cent applicable to other items of plant and machinery. I have made an attempt to find out the ratio of breakage in soft drink business from other soft drink manufacturers. In each year the breakage/rejection rate is about 15 per cent. In this manner, it would not be unreasonable to draw a conclusion that by the expiry of lease period more than 50 per cent of the bottles allegedly leased out by the assessed would have broken.'

2.2 It was further observed by the assessing officer that it has been provided in the lease agreement that the bottles would be transferred to Mansarover Bottling Co. ITD. at a pre-determined price. By further observing that it violates the basic condition of any lease transaction, the lease agreement was treated by the assessing officer as sham. Accordingly the depreciation claimed by the assessed, as stated above, was withdrawn and in lieu of lease rent, the accrued interest Was added to the income of the assessed.

3. The assessed preferred appeal before the Commissioner (Appeals). The Commissioner (Appeals) also confirmed the reopening of assessment as well as withdrawal of depreciation and adding the interest income on accrual basis. Now the assessed is in appeal here before the Tribunal.

4. Lengthy arguments were put forth by the counsel of the assessed. The attention of the Bench was drawn on written synopsis, list of case laws and various copies of documents, which are placed on record. It was also stated that there is no relation of the assessed directly or indirectly either with the seller from whom the bottles were purchased or with Mansarover Bottling Co. ITD., to whom the bottles were leased out. It was also stated that the assessing officer has allowed the claim of the assessed on account of leasing out of machinery, but disallowing the claim of depreciation on account of leased out bottles, were unjustified on the part of lower authorities. On the other hand, the learned departmental Representative strongly placed reliance on the orders of the authorities below.

5. We have heard rival submissions and considered them carefully. We have also perused the relevant material on which our attention were drawn. We have also considered the ratio of decisions relied upon by the counsel of the assessed. After perusing all the relevant material, we find that a assessed deserves to succeed on merit. We noted that the assessed entered into an agreement for leasing out bottles and machinery with Mansarover Bottling Co. ITD. The total leased amount as per books of accounts of the assessed on account of bottles were of Rs. 48,54,376 from financial year 1990-91 to 1995-96 and total amount of lease rent received by assessed on account of machinery was at Rs. 86,67,649 from financial year 1990-91 to 1996-97. The lease amount of Rs. 6,47,250 and Rs. 1,51,843 on account of bottles and machinery respectively were shown by assessed in its return for financial year 1990-91. An amount of Rs. 9,70,875 each for financial year 1991-92 to 1994-95 was offered for taxation by assessed on account of lease rent of bottles and amount of Rs. 16.47 lakhs for financial year 1991-92 and Rs. 17.53 lakhs each for financial years 1992-93 to 1994-95 respectively was shown by assessed. The remaining amount was shown in the two subsequent years. The chart of detail of lease rent is placed at p. 1 in the compilation. We further noted that the assessed made advance payment to Arizone Printers & Packers ITD, at Rs. 34,24,604 vide cheque No. 325811 dated 4-8-1990. The purchases were made by invoices No. 582 to 671 of various dates, and each bill was of Rs. 65,638 and the total of the same was at Rs. 34,24,604. A copy of detail of purchases is placed at p. 2 of the compilation. The detail of payment on account of lease rent received from Mansarover Paper & Industries ITD. is placed at p. 3 and the total amount of lease rent received by assessed on account of bottles and plant and machinery from financial year 1990-91 to 1996-97 was at Rs. 1,35,22,026. On examining these details it is noted that the assessed has offered for taxation much more income on account of lease rent of bottles, than the amount of depreciation in five years as the agreement of lease was for a period of 5 years. As the total lease rent received by assessed on account of leasing of bottles was at Rs. 48,53,377, against which the total depreciation claimed by assessed is at Rs. 34,24,604. In 6th year the assessed has received a sum of Rs. 3,23,625 on account of sale of bottles from Mansarover Bottling Co. ITD. and the same was offered for taxation for financial year 1995-96. In this way, more than Rs. 51 lakhs income was offered for taxation in five years. thereforee, it cannot be said that under some crevice the depreciation was claimed by assessed. We further noted that the assessing officer has himself accepted the lease rent on account of bottles at Rs. 9.7 lakhs or so, in assessment years 1992-93 to 1995-96. If there were financial arrangements, then the assessing officer should have assessed the same as interest income, as against leased rent and the interest income as estimated by the assessing officer was much less than the lease rent received by assessed for respective years. The interest income estimated by the assessing officer for the year was at Rs. 2,21,000, whereas the lease rent shown by assessed was Rs. 9.7 lakhs. thereforee, this is not the case of the department that there was colourable device to reduce the taxability. Neither the assessments for assessment year 1992-93 onwards were reopened nor any rectification orders were passed. thereforee, for this reason also, it cannot be held that lease transaction entered by assessed was sham. We further noted that neither the seller i.e., Arizona Printers & Packers ITD. was contacted, nor Mansarover Bottling Co. ITD. was contacted that whether th3y have sold the bottles to the assessed or not, or whether Mansarover Bottling Co. ITD. has taken bottles on lease or not. We further noted that the same assessing officer has accepted the leased out machinery to the same party i.e., Mansarover Bottling Co., as depreciation claimed on machinery as well as lease rent shown by assessed has been held as genuine by the assessing officer himself. In accepting the lease agreement in part, is also not justified on the part of the assessing officer as the lease agreement in regard to machinery entered into with the same party was held as genuine, and lease agreement in regard to bottles was not held as genuine. We have also noted that on the basis of statement of one Shri Nitin -Kohli, the assessing officer drew an adverse inference against the assessed. It is worth noting here that Mr. Nitin Kohli neither was a director nor was authorised person of the assessed company during assessment year 1991-92. thereforee, the statement of Shri Nitin Kohli should not have been given much credence for drawing adverse inference against assessed. Except a general observation of Nitin Kohli that there were some financial arrangement, no other material was before the assessing officer to doubt the transaction. It is also not known that for which year the financial arrangement was made. The assessed has also advanced some loan to this party, thereforee, this is quite possible that for those transactions. Mr. Nitin Kohli has stated that there were financial arrangements. Without bringing any cogent material on record, the disallowance of claim was not justified either on the part of the assessing officer or on the part of Commissioner (Appeals).

6. We have seen the observations of the assessing officer somewhere in his order that in books of account there was no entry of bottles. In this regard we would like to mention that there cannot be any entry on assets side on account of bottles, as the assessed has claimed 100 per cent depreciation and the value of the bottles were zero. And in the last year of the return, the assessed has shown the sale consideration of bottles as its income in P&L; A/c. thereforee, there was no occasion in showing the bottles on assets side in its books of accounts. thereforee, the observations of the assessing officer and the reason for drawing adverse inference against assessed are unfounded. The facts as stated above are undisputed facts, which neither could be controverter by the learned departmental Representative nor any material was brought on record, which could controvert these facts. thereforee, we hold that both the lower authorities were not justified in disallowing the claim of the assessed. Accordingly we direct the assessing officer to allow the depreciation as claimed by assessed, and tax the lease rent shown by assessed against the interest income, as assessed by the assessing officer.

7. Since we have allowed the appeal of the assessed on merit, thereforee, we are not inclined to adjudicate upon the legal ground of the assessed at this moment.

8. In the result, the appeal of the assessed is allowed.