Cit Vs. Shree Rajasthan Syntex Limited - Court Judgment

N.P. Gupta, J.

1. These four appeals arise in identical circumstances, basically involving a common question, though one question as involved in three appeals is not incorporated in Appeal No. 13, however, in view of the controversy involved in all the four matters, we think it appropriate to decide all these four appeals by this common judgment.

2. Appeals No. 70, 50 and 23 have been admitted on different dates, by framing following two substantial questions of law, which are common in all the three matters, being as under:

i) Whether, on the facts and circumstances of the case the ITAT was justified in holding that the assumption of jurisdiction under Section 147/148 of the Income Tax Act is bad in law and accordingly in quashing the reassessment proceedings?

ii) Whether on the facts and circumstances of the case the ITAT was justified in holding that the assessee is entitled to get depreciation under Section 32 on the assets claimed to be taken on lease, as owner of the assets?

3. Appeal No. 13 has been admitted on 13.03.2007, by framing following one substantial question of law, which happens to be question No. 2 in other three appeals:

Whether on the facts and circumstances of the case the ITAT was justified in holding that the assessee is entitled to get depreciation Under Section 32 on the assets claimed to be taken on lease, as owner of the assets?

4. All these four appeals relate to different assessment years.

5. Necessary facts are, that assessee Shree Rajasthan Syntex Limited had leased out certain plant and machinery to M/s. Rajasthan Texchem Limited, under different agreements, executed on different dates, for specified period of time, at a monthly rent, stipulated in the agreements. The assessee lessor has its registered office at Udaipur, while lessee M/s. Rajasthan Texchem Limited has its registered office at Mumbai, and is assessable there.

6. The Assessing Officer assessed the assessee for the assessment years 1996-97, 1997-98 and 1998-99 so also for the assessment year 2001-02, and in these assessment proceedings, the assessee claimed depreciation on the capital assets, leased out to lessee, under the provisions of Section 32, in respect of three assessment years being 1996-97, 1997-98 and 1998-99, and the assessee was allowed depreciation. It so happened, that the lessee came to be assessed at Mumbai, by the Assessing Officer there, and it appears, that the lessee claimed revenue expenditure for the lease rent paid to the lessor, but then the Assessing Officer there, instead of allowing the expenditure, allowed depreciation on the capital value of the plant and machinery. It appears that the stand of the assessee in that case was, that he did not claim depreciation, be that as it may.

7. On this fact coming to the notice of the Assessing Officer of lessor, about the Assessing Officer at Mumbai having allowed depreciation to the lessee, proceedings under Section 147 were initiated by issuing notice under Section 148, for the three assessment years.

8. So far as assessment year 2001-02 is concerned, since the assessment at Mumbai had already been made by then, the Assessing Officer, while making assessment in original, did not allow deduction for depreciation. All these orders were challenged in appeals, before the CIT (Appeals), who upheld the addition while deciding the appeals relating to the assessment years 1996-97 and 1997-98, however, on further appeals before Tribunal, the Tribunal allowed the appeals, and held the assessee entitled for depreciation on these assets, and the addition made was ordered to be deleted.

9. For the assessment years 1996-97 and 1997-98, the Tribunal passed a detailed common order on 22.12.2003, which is subject matter of appeal in Appeals No. 23 of 2005 & 50 of 2007. It so happened, that by that time, i.e. by the time of passing order of the Tribunal dated 22.12.2003, the appeals of the assessee, against the assessment orders made for the year 1998-99 and 2001- 02 remained pending before the learned Commissioner, as they have been decided vide order dated 18.10.2005, and the learned Commissioner following the judgment of the learned Tribunal dated 22.12.2003, deleted the addition, made by the Assessing Officer regarding depreciation.

10. Aggrieved of these orders of the learned Commissioner dated 18.10.2005, the revenue filed appeals before Tribunal, and the learned Tribunal by common order dated 13.07.2006, while following its earlier order, upheld the order of the learned Commissioner, in Para 6 of the order dated 13.07.2006. This is how the four appeals come before us.

11. In the order dated 22.12.2003, the learned Tribunal has discussed both the aspects, i.e. about sustainability of the action of the Assessing Officer in reopening the assessment, for examining the question as to whether the circumstances existed, authorizing the assessing officer to re-open the assessment, and after discussing various case laws of different High Courts, and Hon'ble Supreme Court, so also this Court, came to the conclusion, that the learned Assessing Officer did not have any jurisdiction to review its own order, and that, the opinion framed by the Assessing Officer, on the opinion of another Assessing Officer, could not be made basis to initiate the re-assessment proceedings, as it was described to be a 'borrowed satisfaction'. Then, notwithstanding, the learned Tribunal proceeded to consider the matter on merit also, and it was found, that the lease agreements in question cannot be said to be finance leases, but are operating leases, the lessor continues to be the owner, and the lessee does not acquire any right in the property, and that, on overall reading of the lease agreements, there was nothing inconsistent therein, which could show the intention of the parties to be otherwise. Thus it was held, that the assessee company is the owner of the leased assets, which assets were leased out to the lessee company, for a rent, and thereby the assessee company is also in user of the assets, and as such the lessee is entitled to depreciation under Section 32 of the Act.

12. In view of the two questions framed in the three appeals, we are required to examine, as to whether, in the facts and circumstances the ITAT was justified in holding, that assumption of jurisdiction under 147 and 148 is bad in law, and secondly, as to whether on the facts and circumstances the learned Tribunal was justified in holding that the assessee is entitled to depreciation under Section 32, on the assets claimed to be given, (sic. accidentally written in the admission order as 'taken') on lease, as owner of the assets.

13. Arguing the appeals, it was contended by the learned Counsel for the revenue, that the learned Tribunal was in error in concluding, that reopening proceedings had been undertaken, only on the ground of change of opinion, rather it was on account of material fact, that subsequently came to the notice of the Assessing Officer, that with respect to the same assets, the purported lessor, as well as lessee, both had been allowed the benefit of depreciation, and therefore it did constitute sufficient ground, for the Assessing Officer to initiate proceedings for reassessment, on the ground of income having escaped assessment. Then, on the second question, it was contended, that the circumstances of the case are writ large, viz., that the lessor and lessee, though they are two companies, but they are sister concerns, inasmuch as the son of the key person of the lessor, is the key person in the lessee company, and in substance, the lessee company had only availed financial assistance from the lessor company, and the activity has been given a cover by articulate drafting of the lease agreements, to show, as if the assets were acquired by the lessor, and were leased out to lessee. The veil was rightly required to be pierced, and has rightly been pierced by the Assessing Officer, and was rightly confirmed by the learned Commissioner in appeals, relating to assessment years 1996-97 and 1997-98, by coming to the conclusion, that the purported lease agreements are only financial leases, and therefore the assessee is not entitled to any depreciation under Section 32. It was contended, that the learned Tribunal has not properly construed the terms and conditions of the lease agreements, rather the learned Commissioner had properly appreciated various clauses of the lease agreements.

14. On the other hand, learned Counsel for the assessee supported the impugned judgment of the learned Tribunal, on all counts.

15. We have heard learned Counsel, have gone through the judgments, and have considered the legal provisions, and the case laws as well.

16. Coming to the first question, about validity of assumption of jurisdiction under Section 147 and 148 by the Assessing Officer, we may gainfully quote provision of Section 147(1), which reads as under:

147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or re- compute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned....

17. A look at this provision shows, that pre- requisite condition, which can be said to be sine-qua-non is, that the Assessing Officer 'has reason to believe' that income chargeable to tax has escaped assessment. The learned Tribunal has considered this aspect of the matter in detail, and has found, that in the present case, the Assessing Officer had taken the decision after considering all the facts, and reopening proceedings had been initiated, on account of opinion of another Assessing Officer (at Mumbai), and came to the conclusion, that opinion of one Assessing Officer cannot replace the opinion of another Assessing Officer. In such a case, law does not permit re-assessment, on change of opinion. For this purpose, the learned Tribunal has relied upon a series of judgments, being as under:

1. Jt. CIT (Assessment) and Ors. v. George Williamson (Assam) Ltd. (2002) 258 ITR

2. Mercury Travels Ltd. v. Dy. CIT : [2002]258ITR533(Cal)

3. Garden Silk Mills Ltd. v. Dy. CIT : [1996]222ITR68(Guj)

4. Jindal Photo Films Ltd. v. Dy. CIT and Anr. : [1998]234ITR170(Delhi)

5. CIT v. Hickson & Dadajee Ltd. : [1980]121ITR368(Bom)

6. Garden Silk Mills Pvt. Ltd. v. Dy. CIT : [1999]237ITR668(Guj)

7. CIT v. Corporation Bank Ltd. : [2002]254ITR791(SC)

8. Sheth Brothers v. Joint CIT (2001) ITR 270

9. CIT v. Sambhar Salt Ltd.

10. CIT v. Kelvinator of India Ltd. (2002) 256 ITR 1

18. In the case of Garden Silk Mills Ltd., wherein original assessment was done after considering the explanation of the assessee, and no new information had come to the effect, that the income had escaped assessment, it was held, that the re-assessment, initiated merely on change of opinion could not sustain. Likewise, in the case of Jindal Photo Films Ltd., Income-tax Officer attempted to reopen an assessment, because the opinion formed earlier by him, in his opinion was found to be incorrect. It was held that reopening could not be done. In that case, it was also held, that if an expenditure or deduction was wrongly allowed, while computing the taxable income of the assessee, the same could not be brought to tax by reopening the assessment, merely on account of the Assessing Officer subsequently forming an opinion, that earlier he had erred in allowing the expenditure or the deduction. Then, in other cases, view has been taken, that 'reason to believe' is a sine- qua-non, and such reason must be based on material, while change of opinion does not satisfy the requirement of such material.

19. In our view, of course, it has been very intelligibly projected, that the factum of Assessing Officer at Mumbai having allowed depreciation allowance to the lessee, did constitute a fact, which came to the notice of the Assessing Officer here, and that furnished reason to believe, that the income of the assessee, chargeable to tax, had escaped assessment, but then if properly appreciated, all that it comes to is, that a set of lease deeds, had been appreciated by the Assessing Officer of lessee at Mumbai, who after appreciating them allowed depreciation, and the Assessing Officer here came to the conclusion, that the assessee continues to be the owner of the assets, and is entitled to depreciation allowance, while the Assessing Officer at Mumbai formed an opinion from the same set of lease deeds, that the lessee should be taken to be the owner, and has right to depreciation. Thus net result, which comes to is, that simply because, after the Assessing Officer here had formed a particular opinion, on a particular set of documents, simply because, the Assessing Officer at Mumbai had formed a different opinion, on the same set of documents, the action was sought to be initiated here for re-assessment, which in our view, has rightly been found by the learned Tribunal, that it was a 'borrowed satisfaction' under the opinion of the Assessing Officer at Mumbai, and has rightly been found to be not sufficient, to confer power on the Assessing Officer, to initiate re-assessment proceedings.

20. Likewise, we may just take another hypothesis, that if the Assessing Officer at Mumbai had not allowed depreciation allowance to the lessee, and would have come to the conclusion, on the basis of these very lease deeds, about the lessor being continuing as owner, it is not in dispute, that the re-assessment proceedings would not have been initiated here. This obviously makes it clear, that re-assessment proceedings had been initiated, only on account of the opinion arrived at by the Assessing Officer at Mumbai.

21. Thus, question No. 1, as framed in three appeals is answered in affirmative, i.e. against the revenue, and in favour of assessee.

22. Then, we take up question No. 2, regarding entitlement of the assessee to claim depreciation allowance on the leased plant and machinery. The learned Commissioner, though has purportedly recapitulated various clauses of the agreements, like Clause 8, 12, 13, 16, 17, 27 and 29, and pressed them into service, but then in Para 18, the learned Commissioner has also considered the assessment order, passed by the Assessing Officer at Mumbai, and the conclusions drawn by him in this regard, to the effect, that lessor never intended to be the real owner of the assets in question, and had never intended to possess and exploit them for the purpose of profit, so also the loan transactions were put in the form of lease transaction, only to avail tax benefits. Then, the learned Commissioner purportedly proceeded to consider various clauses of the lease deeds, and described the above clauses to be general clauses, utilized normally in preparing a lease agreement, not giving clear indication about the substance of the transactions. Then, the learned Commissioner proceeded to take into account Clauses 4, 8, 9, 10, 14, 15, 18 & 30, and on that basis concluded, that it is clear, that in real substance the alleged lease agreement is only a finance lease, and not an operating lease, and also concluded, that the risks of accidents to the ownership of the assets stand substantially transferred to the lessee, although apparently the title to the assets has not been so transferred, and held the lease agreement being in the nature of a finance lease, not a normal operating lease.

23. Clause 4 of the lease agreement stipulates, about payment of rental, notwithstanding the fact, that machinery, or any of them remain out of commission, or out of order, due to whatever circumstances. Then, Clause 8 provides for the lease being not cancelable. Clause 9 comprises the acknowledgements on the part of the lessee with the lessor, about there being no warranty for fitness of the machinery or it being in merchantable condition, that the machinery is accepted by the lessee with all faults and defects, and that delivery by lessor shall be conclusive evidence about the machinery being in good working condition and order, and that, the lessor has not made, and does not make, any representation of warranty with respect to merchantability, quality, condition, durability or suitability of said machinery, in any respect. Then, Sub-clause (h) of Clause 9 is regarding obligation of the lessee to pay rent in time during the contract period, regardless of fact, as to whether the machinery is under repair, or is otherwise not working. Then Clause 10 is about obligation of the lessee to keep the machinery insured, and to take insurance in joint names of lessee and lessor, and that, if the machinery is damaged during the term of the lease, the insurance moneys payable under the said policy, shall be paid to the lessor, to compensate the lessor, for the loss, and surplus if any, will be paid to the lessee. Then, this clause further provides, that any loss or destruction caused to the machinery, shall not effect continuing of the lease, or the lessee's liability for payment of rent. Then, Clause 14 provides that the lessee shall pay all tax, rates and out goings of every description. Clause 15 stipulates about expenses to be born by lessee for major or minor repairs and up-keeping and maintenance of machinery. Then, Clause 18 is about the lessee being responsible to bear entire risk of loss or damage to the machinery, and to pay continuously the lease rental, without any disturbance. Then, Clause 30 provides obligation of the lessee to assume all the liabilities and risk for the use, operation and storage of the machinery.

24. We have recapitulated these clauses only for the purpose of seeing, as to how, from these clauses, the learned Commissioner could possibly arrive at a conclusion, about the agreement being only a finance lease, and not operating lease. The learned Tribunal has considered these stipulations of the lease in detail, and again threadbare, and also considered the other attending circumstances, including as found in Para 42 of the judgment, that under the Memorandum of Association, it is carrying on the business of leasing and hire purchase, and that, the assessee company, during the relevant year, carried out the business of leasing to more than one person. It was also found, as a fact available on record, that the public financial institutions like ICICI and IDBI provided financial assistance of Rs. 1500 lacs to the assessee, against security of assets, for carrying the lease business. It was further found, that the two companies are independent limited companies, which are listed in recognized Stock Exchange, and are independent legal entities, incorporated under the companies law. It has also been found, that the supplier of the equipments have supplied, and delivered the assets, and payment of taxes etc. have also been made by the assessee company, and insurance cover also mentions the assessee company as the owner of equipments. Then, in the financial statements of the assessee company, the leased assets have been separately shown, and the accounts are audited by the statutory auditors, and same have been approved by the Board of Directors. With this, the learned Tribunal again reproduced/recapitulated various clauses of the lease deed, as considered by the learned Commissioner, and it was considered, that in this particular case, machines were received at the premises of the lessor company, the same is recorded in the Central Excise record, duly received, and the assessee has claimed the Central Excise Modvat on these machines, and then they were given on lease to the lessee company, by issuance of Central Excise Gate-pass, and following Central Excise Rules, prevalent at that time, and considering the assessee to be the owner, consequent benefits have been given. The assets were delivered to the lessee by truck transport, and freight charges were paid by the assessee company, and were added in the amount of value of the assets. The assets were covered by transit insurance, and insurance premium was paid by the assessee company, and same were declared as the assets of leasing company to the insurance company. Then, complete details of machines, given on lease, in respect of assessment years, showing respective amount, break-up, dates of lease, have been given. The custom duty, bank charges, freight charges were also paid by the assessee, which also proved the assessee to be the owner. Then, the learned Tribunal considered various case laws on this aspect, being as under:

1. CIT v. Maharashtra Apex Corporation Ltd. : [2002]254ITR98(SC)

2. CIT v. Shaan Finance (P) Ltd/First Leasing Co. Of India Ltd. : [1998]231ITR308(SC)

3. CIT v. Essan Investments Ltd. : [2002]254ITR83(Mad)

4. CIT v. Madan & Co. : [2002]254ITR445(Mad)

5. Joint Commissioner of Income-tax v. Anatronics General Co. (P) Ltd. : [2001]247ITR25(Delhi)

6. CIT v. Rensult Investment & Finance P. Ltd. : [1998]233ITR172(Bom)

7. Mulraj Dvarkadas Goculdas v. Dy. CIT (1994) 48 TTJ (Bom) 531

8. Peacock Chemicals Pvt. Ltd. v. Dy. CIT (1995) 51 TTJ Delhi 264.

25. We need not multiply all the cases, as the best, and nearest case we find is, that of Hon'ble Supreme Court, in the CIT v. Shaan Finance's case, in Para 17 whereof it has been held by the Hon'ble Supreme Court as under:

17. Neither of these cases deals with an agreement of hire of machinery in contradistinction to an agreement of hire purchase. When the machinery is given on hire by the owner to the hirer on payment of hire charges, the income derived by the owner is business income. The owner is also entitled to depreciation on the machinery so hired out. The hirer, on the other hand, who pays hire charges, is entitled to claim these as revenue expenditure. The hirer has not acquired any new asset. A transaction of hire is, therefore, of bailment of the machinery. There is no extinguishment of any right of the owner in the machinery. There is merely a license given to the hirer to use, for a temporary period, the machinery so hired. In the case of Damodar Valley Corporation v. The State of Bihar : [1977]1SCR118 , this Court examined the contract under which the machinery and equipment was supplied by the Corporation to the contractors. The question was whether it was a mere contract of hiring or a sale or a hire purchase. The Court said (p.445):

It is well-settled that a mere contract of hiring, without more, is a species of the contract of hiring, without more, it a species of the contract of bailment, which does not create a title in the bailee, but the law of hire purchase has undergone considerable development during the last half a century or more and has introduced a number of variations, thus leading to categories, and it becomes a question of some nicety as to which category a particular contract between the parties comes under.We need not dwell on the niceties of a hire purchase contract between the parties of a hire purchase contract since we are concerned only with contracts of hire simpliciter.

26. With this, it is required to be considered, that the basic distinguishing feature between the lease being finance lease or operating lease would be, that in case of finance lease, at some point of time, the ownership transfers to the lessee, or the lessee has the option to purchase, the hired assets, in consideration of a token price. Obviously, in that event, the lease rent, or hire charges, called by whatever name, with passage of time, partake the character of the price of the asset in possession of the lessee, or hirer, under the finance lease agreement, as distinct from the lease in question, where there is a very specific stipulation in Clause 8 that on termination of the lease, the leased plant and machinery are to be returned to the lessor, in the condition, as they were taken, except normal wear and tear. Clause 8 of the lease deed reads as under:

The said machinery shall at all times remain sole and exclusive property of the lessor and lessee shall have no right, title or interest thereon.

The lessee irrevocably undertakes that at no time during currency of lease agreement, which shall be non- cancelable, not to capitalize lease assets in lessee's Balance Sheet. It has been agreed that the ownership of said assets during tenure of lease, and inclusive of any renewal that lessor may concur, indisputably rest with the lessor.

Lessee shall not claim any relief by way of any deduction, allowance, or grant available to the lessor as owner of the equipment under Income Tax Act, 1961 or any other statute, rule of regulation issued by the govt. Or any statutory authority.

The lessee shall keep machinery at all times for the full term of lease in lessee's possession and control and have right to use said machinery at plant of lessee.

On expiry of the lease period, the lessee shall deliver back the said machinery to lessor in as good condition as at commencement of this agreement, reasonable wear and tear excepted and shall pay all arrears of rent that may be outstanding. Such delivery is to be made to lessor at destination indicated by lessor at the lessee's cost unless otherwise decided by the lessor. Lessee is a trustee of the machinery leased to it, and, without prejudice to other obligation for the agreement will render himself liable for breach of trust in case of misapplication or misappropriation of the machinery leased.

27. The controversy, thus, can very well be said to be standing concluded by the judgment of Hon'ble Supreme Court, in Shaan Finance's case.

28. In view of above discussion, Question No. 2 is also answered in affirmative, i.e. in favour of the assessee, and against the revenue.

29. All the 4 appeals are consequently dismissed.