Sale and lease back transaction--Allow ability of depreciation Catch Note:

Assessee purchased assets costing less than Rs. 5,000 from J and A and leased back to them--Hundred per cent depreciation allowed by assessing officer after verifying details-- On examining assessment record, Commissioner was of the view that order of assessing officer was erroneous and prejudicial to interest of revenue--Accordingly, matter was restored to file of assessing officer to decide issue after considering directions and observations of Commissioner--Same was not justified as there was just difference of opinion--Accounts were settled and incorporated in regular books of account and the same were produced before assessing officer and after examining purchases and other agreements claim was allowed--There was no collusiveness in agreements entered by assessee with parties--Therefore, order under section 263 set aside.

Ratio:

In case of sale and lease back transaction, accounts were settled and incorporated in regular books of account and same were produced before assessing officer and after examining purchases and other agreements, depreciation claim was allowed, there was no collusiveness in agreements entered by assessee with parties therefore, order under section 263 directing assessing officer not to allow depreciation was set aside as this was case of mere difference of opinion.

Held:

Assessee had filed the details in regard to claim of depreciation before the assessing officer and the assessing officer after considering these details, then only allowed the claim of the assessee. Therefore, it cannot be stated that assessing officer has not applied his mind.

On examination of the assessment records, the Commissioner formed an opinion that the assessing officer has not applied his mind and Explanation 3 of section 43(1) is applicable on the facts of the present case. For forming an opinion there was no material, except the assessment order before the Commissioner. Therefore, the contention of the assessee seems to be correct that there was no material with the Commissioner (Admn.) for initiating proceedings under section 263. This is a case of difference of opinion only and where difference of opinion is found, then it cannot be stated that the order of the assessing officer is erroneous and, therefore, prejudicial to the interest of revenue.

Assessing officer adopted one of the courses permissible in law, that was to verify the claim of the depreciation in regard to purchase of items and then allowed the claim of the assessee. There is no error in the order of the assessing officer. It is also not the case of the department that the assessee has not filed any detail before the assessing officer. The Department has not denied in filing these documents before the assessing officer or before the Commissioner. Therefore, there was no error in the order of the assessing officer. There was just a difference of opinion and in that case proceedings under section 263 cannot be approved.

The consideration was paid to the respective seller. The bills were raised by the seller. The accounts were settled and incorporated in the regular books of account and the same were produced before the assessing officer and after examining the purchase and other agreements, then the claim was allowed. Therefore, there was no material before the Commissioner (Admn.) to attract the provisions of section 263.

Case Law Analysis:

CIT v. Gabriel India Ltd. (1993) 203 ITR 100 (Bom) and Unimed Technologies Ltd. v. Dy. ClT (2000) 17 DTC 233 (Ahd-Trib) : (2000) 73 ITD 150 (Ahd-Trib) relied on.

Application:

Also to current assessment year.

Decision:

In favour of assessee.

Income Tax Act 1961 s.263 Income Tax Act 1961 s.32 In the ITAT, Delhi 'B' Bench R.K. Gupta, J.M. & C.L. Bokolia, A.M.

sOrder R.K. Gupta, J.M.

This is an appeal by assessee against the order dated 24-3-1998, of Commissioner under section 263 of the Income Tax Act, relating to assessment year 1994-95.

2. The assessment in this case was completed on 26-3-1997, under section 143(3). The assessee had claimed hundred per cent depreciation on the assets purchased for Rs, 1.50 crores from M/s. Jai Prakash Industries Ltd and 2,23,23,329 purchased from Andhra Pradesh State Electricity Board (hereinafter referred to as the APSEB) on 29-3-1994, and 28-3-1994, respectively. Each item purchased was costing less than Rs. 5,000 and were leased back to these parties from whom they were purchased and in this way 100 per cent depreciation was claimed on these two amounts, as stated above. The assessing officer allowed the claim of the assessee. On examining the assessment record, Commissioner (Admn.) was of the view that the order of the assessing officer was erroneous and prejudicial to the interest of revenue. Accordingly, the matter was restored to the file of the assessing officer to decide the issue after considering the directions and observations of the Commissioner (Admn.).

Before restoring the matter, the Commissioner issued a show-cause notice to the assessee and after considering the submissions and various case laws relied upon by the assessee, the Commissioner was satisfied that the order of the assessing officer was erroneous and prejudicial to the interest of revenue. In his view, as the depreciation was claimed at hundred per cent, therefore, as per Explanation 3 to section 43(1), the written down value was nil in the hands of the seller at the time of their sale to the assessee. Therefore, there was a device adopted by the assessee with the collusion of the seller. Accordingly, the assets were purchased and they leased back to the same parties. This collusive action was for the purpose of avoidance of tax. Accordingly, the order of the assessing officer was set aside. Now the assessee is in appeal here before us.

3. We have heard the rival submissions at length. We have also perused the material on which our attentions were drawn and have also considered the case laws relied upon by both the parties. After considering the rival submissions and perusing the material on record, we noted that there is no dispute in regard to facts of the present case. The only controversy arises is whether the assessee indulged in a device with the parties from whom the material was purchased and leased back to those parties or not, and whether ,the assessing officer has applied his mind or not before allowing the depreciation claimed by the assessee. Firstly, we would like to see whether the assessee has applied his mind or not, before allowing 100 per cent depreciation claimed by the assessee. These assets were purchased from M/s. Jain Prakash Industries and APSEB. The assessment in this case was completed on 26-3-1997 under section 143(3). It means that the assessment was completed after making some enquiries in regard to the return filed by the assessee. A letter dated 12-3-1997, which is placed at page 3 of the paper book, is filed on behalf of the assessee. This letter is addressed to the assessing officer which says that "Details of additions to assets in respect of leasing division is at page 162. The statement showing computation of depreciation was enclosed with the return of income. A copy of the same is enclosed at page 163. Copies of invoices on sample basis are enclosed at per page 164 to 167. Copies of lease agreements are enclosed at per page 168 to 216. " It is further mentioned in this letter that "we will be pleased to furnish any further information that may be required." Copy of another letter dated 21-3-1997, is placed at page 4 of the paper book. This letter was also written to the assessing officer in continuation of the earlier letter dated 12-3-1997. But this letter the assessee has explained the nature of depreciation which was claimed in respect of lease agreement with M/s. Jai Parkash Industries Ltd. The reply is given in para. 8 of this letter, which is reproduced here as under :

"The assessee-company, purchased shuttering plates soldiers of channel and flats and scaffolding pipes for Rs. 150 lakhs from M/s. Jaiprakash Industries Ltd. The same was leased back to the Jaiprakash Industries Ltd. on 29-3-1994, through a lease agreement, a copy of which has already been placed on your record. The assessee was asked to establish its claim on depreciation. In this connection, it is submitted that the assets were purchased from an unrelated party against payment by account payee cheque and as such, there is no question of any overvaluation of the assets and since the assessee leased the assets, it is entitled to depreciation claim. Also it is submitted that in view of the fact that the seller company would have suffered capital gain on sale of the assets on which depreciation has already been claimed by it, there is no question of reducing the taxable income resulting in a loss to the revenue. It may be submitted that even claim of depreciation at the rate of 100 per cent by the assessee does not result in reduction of its tax liability, as over the duration of the lease, the assessee would offer Rs. 174.69 lakhs as income by way of lease rental, as against the claim of depreciation at Rs. 150 lakhs only. In view of this, it is requested that no adverse inference be drawn in the matter."

4. From the correspondence made by the assessee with the assessing officer, it clearly emerges that assessee was required to file details in regard to the claim of depreciation and the assessee, has complied with the information as required. Of course there is no whisper in regard to another purchase and leasing back, which was made from APSEB. This may not be, for the reason that the details of purchases were filed and the items were purchased from a government agency. Therefore, the assessing officer did not enquire further because the purchases were made from State Government Department. The copy of details filed before the assessing officer are also placed in the paper book here before us. Copy of agreement of conveyance entered between the assessee and APSEB is placed at per page 28 and 29; description of equipments is placed from per page 30 to 33; agreement for lease of equipments : with APSEB is placed at per page 34 to 58. Against invoices raised by M/s. Jaiprakash Industries Ltd. are placed at per page 61 to 63 and copy of lease agreement is placed a per page 64 to 72 of the paper book. All these details show that assessee had filed the details in regard to claim of depreciation before the assessing officer and the assessing officer after considering these details, then only allowed the claim of the assessee. Therefore, it cannot be stated that assessing officer has not applied his mind.

5. We further, noted that on examination of the assessment records, the Commissioner (Admn.) formed an opinion that the assessing officer has not applied his mind and Explanation 3 of section 43(1) is applicable on the facts of the present case. For forming an opinion there was no material, except the assessment order before the Commissioner. Therefore, the contention of the learned counsel seems to be correct that there was no material with the Commissioner (Admn.) for initiating proceedings under section 263. This is a case of difference of opinion only and where difference of opinion is found, then it cannot be stated that the order of the assessing officer is erroneous and, therefore, prejudicial to the interest of revenue. We have also considered the decisions on this aspect in CIT v. T. Narayana Pai (1975) 98 ITR 422 (Karn), CIT v. Gabriel India (1993) 203 ITR 108 (Bom), Jhulelal Land Dev. Corpn. v. Dy. CIT (1996) 56 ITD 345 (Bom-Trib) and Dilshad Tdg. Co. (P) Ltd. v. ITO (1994) 49 ITD 348 (Bom-Trib) and the latest decision of the Apex Court in Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) at page 88.

6. In the case of Malabar Industrial Co. Ltd. v. CIT (supra), the Apex Court has laid down the principle that "The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the assessing officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent, if the order of the Income Tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue, recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the assessing officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous." It is further observed that "in the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase "prejudicial to the interests of the revenue" is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the Income Tax Officer the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase "prejudicial to the interests of the revenue" has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of an order of the assessing officer, cannot be treated as prejudicial to the interests of the revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Income Tax Officer is unsustainable in law." By observing this principle then the Apex Court decided the issue before it.

7. Here before us the facts are very clear. The assessing officer required from assessee to file details in regard to claim of depreciation and after examining the details, then the claim of the assessee was allowed. It means that the assessing officer adopted one of the courses permissible in law, that was to verify the claim of the depreciation in regard to purchase of items and then allowed the claim of the assessee. In our considered view, there is no error in the order of the assessing officer. It is also not the case of the department that the assessee has not filed any detail before the assessing officer. Queries were raised, replies were filed and the copy of those replies are placed in the paper book filed by assessee. The Departmental Representative has not denied in filing these documents before the assessing officer or before the Commissioner (Admn.). Therefore, we are of the view that there was no error in the order of the assessing officer. There was just a difference of opinion and in that case proceedings under section 263 cannot be approved.

8. In the case of CIT v. T. Narayana Pai, (supra) the Hon'ble High Court has held that the Commissioner has not recorded any finding to the effect that the consideration for the transfer of shares declared by the assessee was less than the fair market of the shares. There was no material to come to the conclusion that section 52(2) was attracted in the facts of the case and the Commissioner had no jurisdiction to revise the order of the Income Tax Officer.

9. Here in the present case, the facts are very clear. The consideration was paid to the respective seller. The bills were raised by the seller. The accounts were settled and incorporated in the regular books of account and the same were produced before the assessing officer and after examining the purchase and other agreements, then the claim was allowed. Therefore, in our considered view, there was no material before the Commissioner (Admn.) to attract the provisions of section 263.

10. In the case of CIT v. Gabriel India Ltd. (1993) 203 ITR 108 (Bom), the Hon'ble Bombay High Court has held "that the Income Tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given a detailed explanation in that regard by a letter in writing. All these were part of the record of the case. Evidently, the claim was allowed by the Income Tax Officer on being satisfied with the explanation of the assessee. This decision of the Income Tax Officer could not be held to be "erroneous" simply because in his order, he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income Tax Officer to re-examine the matter. That was not permissible. The Tribunal was justified in setting aside the order passed by the Commissioner under section 263."

11. The facts here before us are exactly similar with the facts in the case of Gabriel India Ltd. (supra). Here in the present case, the assessee was required to file details. The assessee filed the same and they were examined. However, there was no elaborate discussion by the assessing officer in his order. The Commissioner (Admn.) invoked the provisions of section 263 and asked the assessing officer to make enquiry further. In our considered view, this is not permissible under the law. Respectfully following the above decisions, we are of the view that there was no error in the order of the assessing officer and the proceedings under section 263 were not correct.

12. We have also considered the other case laws relied upon by the learned counsel, i.e., in the case of New Deal Finance & Investment Ltd. v. Dy. CIT (2000) 69 TTJ (Chennai-Trib) 410 : (2000) 74 ITD 469 (Chennai-Trib). In this case the facts were that the assessee-company had purchased electric meters used by various customers of State Electricity Board. These meters were fixed in the residences as well in industrial places and were owned by the State Electricity Board. These were formally sold to the assessee and the assessee in turn leased out those items back to the State Electricity Board. Each item of these meters being less than Rs. 5,000 in value, the assessee had claimed 100 per cent value as depreciation. The assessing officer while framing the assessment under section 143(3), observed that this agreement to sell these meters to the assessee was ab initio void and there was no intention to sell the meters to the assessee. Thus, according to the assessing officer, the assessee did not get the title over the meters involved. According to him, the essential condition of allowing depreciation was that the assessee shall own the property and shall utilise the same for its business; in this case, no assets were acquired from anybody and no delivery of the same was done and the assessee had not in anyway utilised the same for its business. Accordingly, the depreciation was disallowed. The Commissioner (Appeals) upheld the order of the assessing officer. The Tribunal allowed the appeal of assessee by holding that the assessee was the owner of the assets and, therefore, he was eligible for the depreciation. While discussing the details and other provisions of law, the Bench has also discussed Explanation 4a to section 43(1) and then arrived at a conclusion, the observations and findings of the Tribunal are given here as under :

"In view of the insertion of Explanation 4a to section 43(1), which deals with the actual cost of the transferred assets in respect of leased assets, it is crystal clear that the concept of sale and lease back transactions are recognised one and not unknown to the Act. In such situations, it was wrong to consider the agreement between the State Electricity Board and the assessee as the one entered into only to give the financing transaction a colour of purchase and sale, by which the assessee would get additional benefit in the form of full depreciation. From the perusal of the orders of the first appellate authority, it transpired that he confirmed the disallowance made by the assessing officer mainly because the transactions between the assessee and the State Electricity Board involved no physical delivery or possession and that the invoice-cum-delivery challan was only a formality. All of, the Commissioner (Appeals) was much worried about the fact that the assessee entered into the transaction without insisting on the exact specification of the items, though the assessee relied on the valuation report of an independent valuer. He also had observed that the assessee could not be held to be the owner of the assets. More surprising was that the lower authorities considered this transaction as a colourable device for availing under benefits under the Act, although the transactions were with a State Government undertaking, particularly in response to a public advertisement, which appeared in the leading newspapers. One is now living in 'Internet World' and many transactions including the bank transactions, shares and securities transactions, etc., are all done through internet even without the usage of the basic documents such as cheques, drafts and share scripts. When the world has been so advanced, it was a wonder that the Commissioner (Appeals) was insisting for physical delivery of the goods to confirm a purchase in sales-and-lease-bank transactions. It is only for the assessee and not for the income-tax authorities to decide whether to enter into any transaction without insisting on the exact specification of the items or not. In fact, by avoiding the physical delivery of meters, which had already been installed in various residences and industrial places, to the assessee by the State Electricity Board, the assessee had not only avoided unnecessary expenditure for removing and refixing of the meters but also had helped the consumers by providing uninterrupted supply of power, because the consumers could not use the power without there being a meter of the Electricity Board. The assessee by not insisting for physical delivery of the goods and by accepting the valuer's report had in fact acted more sensibly to avoid hardships to the consumers and to avert wasteful national expenditure. By this act of the assessee, the State Government had also been saved from loss of revenue by way of power charges for the intervening period of removing and refixing the meters at respective locations. Hence, authorities below were not justified in holding that the transaction was not genuine due to the absence of physical movement of the assets.

According to the decision of the Apex Court in CIT v. First Leasing Co. of India Ltd. (1998) 231 ITR 308 (SC), the assessee, the leasing company, was to be considered as the owner of the leased assets and once the assessee was the owner of the assets, it was eligible for depreciation. In this case each of the meters was costing less than Rs. 5,000 and hence, the assessee had claimed 100 per cent depreciation on each of the meters as provided in the depreciation schedule to the Income Tax Rules, 1962. There was no illegality in this claim of the assessee, because once the assessee was to be considered as the owner of the assets, the assessee was eligible for the allowances under the Act, namely, depreciation according to the depreciation schedule incorporated in the Rules. Once the assessee had claimed depreciation, so long as the same was according to the depreciation schedule under the Rules, the same was to be allowed as the assessee was the owner of the assets and was eligible for depreciation on the basis of the decision of the Apex Court. In the light of the above discussion, the claim of the assessee was to be allowed."

13. Similar issue was decided by Ahmedabad Bench of the Tribunal in the case of Unimed Technologies Ltd. v. Dy. CIT (2000) 69 TTJ (Ahd) 25 : (2000) 73 ITD 150 (Ahd). In this case also the department was of the view that the assessee entered into an agreement with Rajasthan State Electricity Board (hereinafter referred to as the RSEB) with a collusive motive to reduce the taxability. The issue was discussed in great detail and then it was held that the assessee has not entered into a sham transaction and the agreement was valid. It was observed by the Tribunal in this case that the RSEB, which is a Government of Rajasthan Corporation and to accept the Government of Rajasthan would be a party to sham transaction was untenable. If anything is established that the sale and lease back transaction was a genuine transaction, as it was entered into by public offer in various newspapers including Economic Times and the Rajasthan Government finally deemed it necessary in public interest to exempt the transaction from sales-tax. For all the aforesaid reasons, the departmental authorities were not justified in holding that the transactions were sham transactions. The Departmental Circular No. 9 of 1943, dated 23-3-1943, issued by the Central Board of Direct Taxes was also considered, whereby the assessee was entitled to depreciation on the assets, which had been acquired under the hire-purchase agreement. Explanation 3 to section 43(1) was also considered by the Tribunal and then the issue was decided in favour of the assessee.

14. Similar facts are involved in the present case. The assessee entered into an agreement with APSEB and after purchasing the assets from the APSEB, then they were leased back to it and the depreciation was claimed accordingly. Each of the items purchased were of the value of less than Rs. 5,000. Accordingly, depreciation at 100 per cent was eligible and the same was claimed by the assessee. In another case, the items were purchased from M/s. Jai Parkash Industries, which is also a limited company and the material which was purchased from Jai Parkash Industries, was duly invoiced and duly accounted for in the books of account. They were examined by the assessing officer and then the claim was allowed. Therefore, the case of the assessee, is not hit by the Explanation 3 to section 43(1) : Explanation 4A, which came on the statute with effect from 1-10-1996, is not applicable, as the case of the assessee is for assessment year 1994-95.

15. In view of the discussion as made above, we are of the view that there was no collusiveness in the agreements entered by the assessee with the parties, i.e., APSEB and Jai Parkash Industries and we hold that the transactions were genuine and they were examined by the assessing officer. Therefore, there was no necessity for initiating the proceedings by the Commissioner under section 263. Accordingly, we set aside the order of the Commissioner passed under section 263 and restore the original order passed by the assessing officer.

16. In the result, the appeal of the assessee is allowed.