Unimed Technologies Ltd. v. Deputy Commissioner of Income-tax

Per Shri R.K. Bali (Accountant Member) - This is an appeal by the assessee against the order dated 30-10-1998 passed by the CIT(A)-I, Surat. The assessee has taken the following substantive grounds :

(1)(a)The learned CIT(A)-I, Surat has erred in confirming disallowance of Rs. 1,23,85,750 being depreciation on assets leased to Rajasthan State Electricity Board (RSEB). He ought to have directed the Assessing Officer to allow depreciation in respect of the said assets.

(b )The learned CIT(A) has erred by not directing the Assessing Officer to refrain from applying the provisions of Explanation 3 to section 43(1) to the assets leased to RSEB. Without prejudice to the foregoing, he should have directed the Assessing Officer to consider the market value of the said assets as per the Registered Valuer’s valuation report laid before him, and not an arbitrary figure of Rs. 101.

(c )The learned CIT(A) has erred in not considering strong commercial justifications for the entire arrangement and therefore lease of said assets could not be held as sham transactions.

(d )The learned CIT(A) has erred by not considering the circumstances that approvals were obtained from the Government of Rajasthan, public advertisements were issued by RSEB, mandates had been given to merchant bankers, funds were paid out and risk of default has been taken by the Appellant-company which establish the transactions were not sham transactions.

(e )The learned CIT(A) has failed to appreciate the international and domestic trade practices in sale and lease back transactions and that such practice has been given statutory recognition under the Income-tax Act, 1961. He has erred in not accepting that the Income-tax Act, 1961 also recognises the commercial existence of transactions of sale and lease back in Explanation 4A to section 43(1).

(f )The learned CIT(A) has also erred by not holding that rate of depreciation applicable to the said assets under item III(v)( c) of Appendix 1 of the Income-tax Rules, 1962 was 100% and not 25% as taken by the Assessing Officer.

(g )The learned CIT(A) has also erred in ignoring the provisions of the Sale of Goods Act, 1930.

(2)(a)The learned CIT(A) has erred in upholding the disallowance of Rs. 25,39,770 under section 43B on account of deferred sales-tax, whereas the said amount was not covered under the provisions of the said section.

(b )He has also erred by not directing the Assessing Officer to follow Circular No. 496 dated 25th September, 1987 and Circular No. 764 dated 29-12-1993 issued by the Central Board of Direct Taxes in this matter.

(3)The learned CIT(A) has erred in confirming addition of Rs. 1,09,583 being amount of lease rent under the contractual obligation. He ought to have directed the Assessing Officer to allow the said sum as a deduction.

(4)The learned CIT(A) has erred in confirming disallowance of Rs. 8,549 out of Garden Maintenance expenses on the grounds that the same were not wholly, necessarily and exclusively for the purpose of business. He ought to have appreciated that the disallowance is based on surmises and conjectures and has no basis in fact.

2. The assessee a Private Limited Company; furnished its return of income for assessment year 1995-96 on 6-11-1995 declaring total income at a loss of Rs. 49,23,400. The assessment was however completed by the Assessing Officer under section 143(3) at a total income of Rs. 80,15,101.

3. The main point of dispute as projected in the ground of appeal Nos. (1)(a) to ( g) is with regard to the disallowance of claim of depreciation which the assessee-company claimed at the rate of 100% on Water Pollution Control Equipment leased by it to Rajasthan State Electric Board (RSEB) at a figure of Rs. 1,23,85,750.

4. Briefly the facts as narrated by the Assessing Officer in the assessment order relating to the claim of depreciation and its disallowance by the Assessing Officer which disallowance was confirmed by the CIT(A) are as under :

During the year under consideration, the assessee took on hire purchase basis certain Water Pollution Control Equipment from M/s. ITC Bhadrachalam Finance Investments Ltd. (hereinafter referred to as "ITC Bhadrachalam"). The assessee has claimed depreciation on these assets which were purchased by ITC Bhadrachalam from Rajasthan State Electricity Board (hereinafter referred to as "RSEB"). The chronology of events which ultimately resulted into tripartite agreement between RSEB, ITC Bhadrachalam and the assessee on the basis of which the assessee has claimed depreciation are as under :

13-1-1995RSEB invites public offer for Sale and Lease Back of its machinery installed at Kota plant under Sale and Lease Back Finance Scheme.

19-1-1995M/s. Kotak Mahindra Finance Ltd. gives its offer on behalf of a consortium of financiers including ITC Bhadrachalam.

2-2-1995The said offer by M/s. Kotak Mahindra Finance Ltd. is accepted by RSEB.

15-2-1995M/s. Chaudhary & Associates, Registered Valuer places value of the plant and machinery comprising of Water Pollution Control Equipment installed at Kota Plant of RSEB after inspection on 11-2-1995 at Rs. 292 lacs.

18-3-1995Rajasthan Government exempts the transactions of sale of Water Pollution Control Equipment by RSEB to ITC Bhadrachalam from sales-tax.

25-3-1995Invoice raised by RSEB upon ITC Bhadrachalam for Rs. 206 lacs.

27-3-1995ITC Bhadrachalam gives the assets (Water Pollution Control Equipment) on Hire Purchase to the assessee, Unimed Technologies.

25/27-3-1995The assessee Unimed Technologies gives these very assets (Water Pollution Control Equipment) on lease to RSEB.

5. On the basis of the above factual position, the assessee claimed depreciation at 50% on the ground that it has satisfied the conditions under section 32 of the Income-tax Act, 1961. The Assessing Officer however denied the claim for the reasons given in paras-2 to 8 at pages 1 to 9 of the assessment order. The reasons of the Assessing Officer for denying the claim for depreciation can be summarised as under :

In the computation of income the assessee claimed that it has purchased on Hire Purchase basis the assets worth Rs. 2,47,71,500 which were eligible for 100% depreciation. The break-up of the amount was as under :

(i)Management Fees at 2.25% on

Rs. 2.06 croresRs. 41,71,500

(ii)I.T.C. Bhadrachalam Finance

& Investment Ltd.Rs. 2,06,00,000

On an enquiry by the Assessing Officer from ITC Bhadrachalam relating to the above transactions, ITC Bhadrachalam explained that they are in the business of leasing and hire purchase finance and they finance their clients each equipment required by and to be installed at the clients premises. The terms of an agreement between ITC Bhadrachalam and RSEB were as under :

Assets:100% depreciable assets being leased to RSEB

Value:Rs. 206 lacs

Tenure:3 years

Rentals:8.55% payable quarterly in advance

Upfront Hire:20.25%

Purchase

Management Fees

We had given the equipment to M/s. Unimed Technologies (P.) Ltd. (the assessee) under a hire purchase agreement and constructive delivery was given to the party.

The instalments were decided and mutually agreed on commercial terms.

The value of equipment:Rs. 2,06,00,000

(Amount receivable from M/s. Unimed:Rs. 45,67,270

Technologies Pvt. Ltd. against Hire Purchase Management Fees etc.)

This amount was paid vide Demand Draft dated 30-3-1995 to RSEB.

On a query by the Assessing Officer from RSEB, the factual information given by ITC Bhadrachalam was confirmed along with the following additional information :

"(i)Description of the asset sold and taken back on lease is water pollution control equipment, mechanical flocculators & mechani- cal reactors.

(ii)These assets were relating to the year 1988-89.

(iii)The assets have been sold at the value of Rs. 2.06 crores and then taken back on lease as per terms and conditions of lease agreement.

(iv)The equipment was installed at Kota Thermal Power Station, Kota and still it is located at the same place.

(v)Being sale & lease back transaction there was no physical movement of the assets."

6. On the basis of the above facts, the Assessing Officer concluded that the sole and primary motive behind these transactions entered into by the assessee is to avail benefit of depreciation at the rate of 100% of cost of assets and in order to avail such benefits, the assessee created the make believe transactions with RSEB on one hand and with that of ITC Bhadrachalam on the other hand.

According to the Assessing Officer, RSEB was in need of funds from the market; ITC Bhadrachalam was looking for new financing avenues and the assessee Unimed Technologies required 100% depreciation to reduce its tax burden to NIL. According to the Assessing Officer, one Shri Dilip S. Sanghvi, Financial Consultant acted as an intermediary among the three companies and decided on the modalities of mutually beneficial terms of contract which according to the Assessing Officer were as under :

A.ITC Bhadrachalam Finance & Investment Ltd.

(i)It payed Rs. 1,60,32,730 to RSEB by a Demand Draft dated 30-3-1995

(ii)It received Rs. 41,71,500 on the same date from Unimed Technologies Pvt. Ltd.

(iii)It received Rs. 2,11,35,000 over a period of three years from Unimed Technologies (P.) Ltd. in instalments under hire purchase agreement.

(iv)It earned simple interest at 26.06% per annum, on a net financing of Rs. 1,18,61,230.

B.Rajasthan State Electricity Board (RSEB)

(i)It got a fund of Rs. 1,60,32,730 on payment of lease rental which works out to a nominal amount of 8.64% per annum by selling to ITC Bhadrachalam certain very old assets like Water Pollution Control Equipment, Mechanical Flocculators and Mechanical Reactors which were acquired by it and were in use since 1988-89 and these assets were eligible for 100% depreciation.

C.Unimed Technologies Pvt. Ltd.

(i)ITC Bhadrachalam entered into hire purchase agreement with Unimed Technologies dated 27-3-1995 and as per the said agreement it paid Rs. 2,11,35,600 over a period of three years to ITC Bhadrachalam.

(ii)It claimed 100% depreciation at Rs. 2,47,71,500 in two years i.e. assessment years 1995-96 and 1996-97.

(iii)It is scheduled to receive back Rs. 2,01,71,520 in six years and the balance amount of Rs. 1,08,768 in four years from RSEB.

(iv)It received Rs. 41,20,000 from RSEB and paid Rs. 41,71,500 to ITC Bhadrachalam on 28-3-1995.

According to the Assessing Officer when the modalities of transactions were discussed and mutually agreed between the three, an elaborate documentation procedure followed which included hire purchase agreement, lease agreement, sale deed invoice, Board’s Resolution, delivery documents, no lien certificate, user certificate etc. and an apparent colour of genuineness was given to the entire transactions to hoodwink the Income-tax Department by claiming bogus depreciation. According to the Assessing Officer the assessee is not entitled to the claim of depreciation inter alia for the following reasons :

(i)There was no genuine purchase of the assets as no delivery of the assets was taken by the assessee and the provisions of the Sale of Goods Act were openly flouted.

(ii)RSEB got only Rs. 1,60,32,730 though the price was agreed to be Rs. 2,06,00,000.

(iii)RSEB sold the assets only on paper to ITC Bhadrachalam vide a sale deed dated 27-3-1995 and received the consideration amounting to Rs. 1,60,32,730 vide Demand Draft No. 17584 dated 30-3-1995.

(iv)ITC Bhadrachalam Finance & Investments Ltd. entered into a hire purchase agreement with the assessee and the assessee entered into a lease agreement with RSEB though it was not the owner of such assets.

(v)The whole transactions were collusive with the sole intention to defraud the Revenue by climbing 100% depreciation.

(vi)The purchase bills were not produced by the assessee although specifically asked.

(vii)Copies of transportation documents in support of movement of assets from the supplier upto the place where the assets were installed are not available with the assessee.

(viii)Insurance particulars of leased assets were not available with the assessee.

(ix)No lease taxes were paid in respect of the lease transactions.

(x)The assessee did not prove the ownership of the assets over which the depreciation is claimed.

(xi)It never made any physical inspection of leased assets.

(xii)No installation certificates were furnished.

(xiii)The goods did not move at all nor the deeds were registered anywhere in India.

Thus, the Assessing Officer held that the assessee is not eligible for 100% depreciation OR part depreciation on such assets and as such the depreciation claimed at Rs. 1,23,85,750 was disallowed.

7. Alternatively and without prejudice to the above findings, the Assessing Officer held that even if it is accepted that the assessee did purchase these assets, then the actual cost of such assets had to be determined in the hands of the assessee. According to the Assessing Officer, such assets were eligible for 100% depreciation and these were acquired by RSEB in the Financial Year 1988-89 and therefore the written down value of such assets must be NIL in the Financial Year 1994-95. Accordingly, by applying the provisions of Explanation 3 to section 43(1), the Assessing Officer determined the actual cost of such assets in the hands of the assessee at Rs. 101 only and held that the assessee could be entitled to depreciation of Rs. 13 only during the Financial Year 1994-95 relevant to assessment year 1995-96.

8. On appeal by the assessee, the CIT(A) upheld the action of the Assessing Officer for the reasons given by the Assessing Officer as well as his own conclusion recorded in the impugned appellate order and also on the ground that because the assessee was purported to be the owner under the hire purchase agreement of the part assets of RSEB in view of the decision of the Supreme Court in the case of Seth Banarsi Dass Gupta v. CIT [1987] 166 ITR 783 /32 Taxman 112A. Aggrieved with the order of the CIT(A), the assessee has come in second appeal before us.

9. Shri S.N. Soparkar, the learned representative of the assessee submitted that the Departmental Authorities have erred in denying the claim of depreciation which is admissible to the assessee, as it has satisfied the conditions laid down under section 32 of the Act. To substantiate its claim, the learned representative of the assessee raised the following issues :

(i)Whether in the facts and circumstances of the case it could be held that the transactions entered into by the assessee were sham transactions ?

(ii)Whether the assessee is entitled to depreciation on assets with it has acquired under hire purchase agreement ?

(iii)Whether the equipment was put to use in order to claim depreciation ?

(iv)What is the actual cost to the assessee for the purpose of claiming depreciation ?

After formulating the issues, the learned counsel for the assessee made his submissions in respect of issue No. (i) first and submitted that a reference to the chronology of events (which have been reproduced in para 4 above) clearly indicates that the equipment has been sold by RSEB to ITC Bhadrachalam. Equally ITC Bhadrachalam has given it on hire purchase to the assessee, Unimed Technologies. The assessee has given the equipment on lease to RSEB. Thus it was submitted that it is a case of sale and lease back. It was pleaded that according to the Departmental Authorities this transaction is not a bona fide one OR is a sham transaction because of the reasons given by the Assessing Officer in para 6 of the assessment order, which has been summarised by us in para 6. It was pleaded that some of the reasons given are factually incorrect and some are legally impermissible. In respect of its reasons given, the learned counsel for the assessee made the following submissions :

(1)As regards the delivery of the assets being not actually taken by the assessee, it was submitted that symbolic/constructive delivery was taken which is quite permissible under the Sale of Goods Act.

(2)As regards the second allegation of the Assessing Officer, it was pleaded that it is factually wrong because RSEB got full price as noted by the Assessing Officer himself at page 3 para 3(viii) of the assessment order.

(3)As regards the third item, it was submitted that the actual sale took place and in any case every sale is accompanied by a document executed on paper, so in that sense it can be said to be paper sale because the invoice was executed by RSEB in favour of ITC Bhadrachalam and the copy of the invoice is given to us at page 44 of the paper book.

(4)Regarding items 4 and 5, it was submitted that the assessee did enter into a hire purchase agreement with ITC Bhadrachalam for the disputed assets and then into a lease agreement with RSEB although the assessee was not the owner but for giving equipment on lease the assessee need not be a full owner.

(5)As regards item No. 6 relating to collusive arrangement to defraud the Revenue it was submitted that the allegation and inference drawn by the Assessing Officer are not correct.

(6)As regards item No. 7 that the purchase bills were not produced, it was submitted that the assessee is only a hire purchaser and not full owner and as such can not have invoice. However invoice raised by RSEB on ITC Bhadrachalam was produced before the Assessing Officer which has been given to us at page 44 of the paper book.

(7)As regards the transportation documents being not available, it was submitted that it was a case of sale and lease back and as such the assets have not physically moved from their place of installation and as such question of transport documents does not arise.

(8)As regards insurance particulars not available, the same is irrelevant as the assessee is not the owner; rather RSEB was required to get assets insured under the lease agreement.

(9)As regards item No. 10 with regard to the lease taxes not paid, it was submitted that the Government of Rajasthan had exempted the transaction from sales tax as per a Notification dated 18-3-1995 copy of which has been given to us at page 55 of the paper book.

(10)As regards the question of assessee’s proving the ownership of the assets, it was submitted that the assessee is not the full owner but is only a hire purchaser and as such it is entitled to depreciation in accordance with the CBDT Circular No. 9 dated 23-3-1943 as noted by the Supreme Court in CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308 / 97 Taxman 435 at page 306/317.

(11)As regards the assessee having not physically inspected the assets, the same was submitted to be irrelevant consideration and in any case it was pleaded that the existence of assets has not been doubted by the Department.

(12)As regards no installation certificate, it was submitted that it is a case of sale and lease back and the user certificate was given by RSEB copy of which is given to us at page 56 of the paper book and in any case it was pleaded that it is not the case of the Department that the assets were not installed and operating.

(13)As regards item No. 14 relating to movement of goods and the documents being not registered, it was submitted that the physical movement was neither possible nor necessary in case of sale and lease back and in such a case documents are not required to be registered under any law.

Accordingly, it was submitted that all the reasons given by the Assessing Officer for denying the claim are not cogent reasons and the assessee is entitled to depreciation. It was further submitted that a perusal of the entire order of the Assessing Officer indicates that he is influenced by the fact that the three transactions viz. sale, hire purchase and lease back have taken place almost simultaneously and that the delivery of the assets has not been taken by any party. It was submitted that these factors are totally irrelevant and in fact in all the transactions of sale and lease back this must necessarily follow. It was pleaded that in transaction involving sale and lease back, purchaser and lessor shall immediately enter into transactions in favour of seller-lessee because the physical possession is with the seller-lessee in sale and lease back. Such type of sale and lease back has been held to be valid and permissible in law as per the following decisions :

(1)Peacock Chemical (P.) Ltd. v. Dy. CIT [1995] 51 TTJ (Delhi) 264

(2)Oriental Leasing Co. v. Dy. CIT [1996] 55 TTJ (Delhi) 294

(3)Karam Chand Thaper & Bros. v. Dy. CIT [1998] 66 ITD 39 (Cal.)

(4)Amar Structures (P.) Ltd. v. Asstt. CIT [1996] 57 TTJ (Ahd.) 508

It was submitted that if the reasoning of the Assessing Officer is taken to be correct then all sales and lease back transactions should be recorded as sham or bogus because physical delivery of the assets never takes place in case of sale and lease back. The Income-tax Act, 1961 has given recognition to sale and lease back by insertion of Explanation 4A to section 43, which allows depreciation allowance in case of sale, and lease back. The only fiction created by the said Explanation is to restrict the depreciation in the hands of the owner-purchaser. However the said Explanation is inserted with effect from 1st October, 1996, and the same can not be applied in the present case because it is prospective in effect as has been held by the Calcutta Bench of the Tribunal in the case of Karam Chand Thaper & Bros. (supra). It was submitted that the lessee in this is RSEB and this fact proves the genuineness of the sale transaction because the other party RSEB is a Govt. of Rajasthan Corporation and to accept that Govt. of Rajasthan will be a party to a sham transaction is untenable. It was submitted that if anything, it establishes that the sale and lease back is in public interest as per the perception of the Govt. of Rajasthan because it exempted the whole transaction from sales-tax. It was pleaded that what the Income-tax Department finds to be sham, the Govt. of Rajasthan deems necessary in public interest. The assets are acquired by the assessee from ITC Bhadrachalam, which is unrelated to the assessee. The whole transaction is finalised after public offer and after it was found that the offer was the best in response to advertisement published by a Govt. Corporation in the newspaper and entitling public at large to scrutinise and know of the transactions and Govt. of Rajasthan grants exemption to the transaction in public interest. It was submitted that where the documents are clear in their intention which is undisputed fact in the present case, they have to be given full effect as per the ratio of the decision of the Supreme Court in the case of CWT v. Arvind Narottam [1988] 173 ITR 479/ 39 Taxman 368 . Accordingly it was pleaded that the action of the Departmental Authorities to treat the entire transaction as sham was not sustainable in law.

10. Coming to issue No. 2 it was submitted that the assessee acquired the assets under a hire purchase agreement in which clauses 3 and 4 are material. Copy of the hire purchase agreement has been given to us at pages 32 to 43 of the paper book. The relevant pages are 33 and 37. In terms of these clauses if the assessee has fully paid the hire charge, it is entitled, as a matter of right to get the property transferred to him at a price of Rs. 1 at the option of the assessee. Accordingly it was submitted that the assessee is entitled to claim the depreciation as the person who takes property under hire purchase agreement in view of circular No. 9 of 1943 dated 23rd March, 1943 issued by Central Board of Revenue. The above Circular was reconfirmed by the Central Board of Revenue in its letter F. No. 17(20)-IT/59 dated 26th June, 1959 and the same has been reiterated in instruction No. 1097 dated 19-9-1977 where on a pointed query raised before CBDT it is clarified that the instructions contained in Circular No. 9 of 1943 and letter dated 26-6-1959 have not been withdrawn before and are still in force and as such are to be followed. Accordingly it was pleaded that on the basis of instructions issued by C.B.D.T. and the following decisions the assessee being hire purchaser is entitled to depreciation :

(1)S.P. B.P. Srirangacharyulu v. CIT [1965] 58 ITR 95 (AP),

(2)Addl. CIT v. General Industries Corpn. [1985] 155 ITR 430/ 23 Taxman 347 (Delhi)

(3)Commissioner Of Income-Tax v. Nagpur Golden Transport Co. [1998] 233 ITR 389 (Delhi)

(4)Vinod Kumar Malhotra v. ITO [1983] 15 TTJ (Jab.) 170

(5)Tumus Electric Corpn. Ltd. v. ITO [1984] 18 TTJ (Jab.) 318,

(6)Sirhind Co-operative Marketing-Cum-Processing Society Ltd. v. ITO [1983] 16 TTJ (Chd.) 481.

Reliance was also placed on the decision of the Supreme Court in the case of CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308/ 97 Taxman 435 (SC).

11. As regards issue No. 3 it was submitted that the user of equipment by RSEB has not even been doubted by the Assessing Officer. On the other hand, the certificate has been given by RSEB with regard to the user, copy of which has been given to us at page 57 of the paper book. In any case it was submitted that in case of sale and lease back transaction when the assets continue to be owned and possessed by the seller-lessee, they are bound to be used by him even after taking them on lease. It was submitted that only because the seller-lessee requires the assets in business when sale and lease back transaction appears necessary. In any case it was submitted that since the assessee has leased its assets to RSEB, as far as the assessee is concerned, it put the assets to use and whether the asset is used by the lessee or not is irrelevant. Reliance was placed on the following decisions :

(1)Mulraj Dwarkadas Goculdas v. Dy. CIT [1994] 48 TTJ 531

(2)K & Co. v. Dy. CIT [1996] 56 ITD 448 (Delhi)

(3)ITA No. 853/Ahd./1992 decided by the ITAT.

12. As regards issue No. 4, it was submitted that the assessee is entitled to depreciation on the capital cost of assets viz. the cash value in the hire purchase agreement as per para 3 of Circular No. 9 of 1943 referred to above. It was submitted that the assessee has placed on record of the Assessing Officer, the valuation report of a registered valuer copies of which have been to us at pages 45 to 52 of the paper book. The Assessing Officer has not disputed the said valuation report and the following facts are undisputed :

(a)The Assessing Officer did not appoint his own valuer;

(b)The Assessing Officer did not dispute the valuation report; and

(c)The Assessing Officer did not think it necessary to examine the said valuer.

That being so, in absence of any other valuation report prepared by any agency and there being no other evidence to show that the report is not reliable, the valuation report submitted by the assessee can not be ignored. Accordingly it was pleaded that the assessee is entitled to depreciation on the basis of purchase value fixed in the hire purchase agreement which is less than the valuation report given by the assessee to the Assessing Officer.

13. The learned D.R. submitted that as far as the factual position is concerned, there is no dispute to the extent that certain Water Pollution Control Equipment owned by RSEB was sold to ITC Bhadrachalam on sale-cum-lease arrangement. These assets were in turn given to the assessee M/s. Unimed Technologies on "hire purchase agreement". The assessee in turn leased the assets back to ITC Bhadrachalam. The assessee is claiming depreciation on the equipments received from ITC Bhadrachalam.

It was submitted that the first contention of the Revenue is that the agreement entered into by RSEB was only an agreement to obtain finance at a lower rate and the whole transaction in which the assets have been shown as sold to ITC Bhadrachalam and then reverted to RSEB through the agency of one M/s. Unimed Technologies, is a sham transaction with the only motive of passing of 100% depreciation to the assessee M/s. Unimed Technologies which is otherwise available to RSEB. In this connection, the learned Senior DR referred to the observations of the House of Lords in the case of Snook v. London & West Riding Investments Ltd. [1967] 2 QB 786 :

"I think it is necessary to consider whether any legal concept is involved in the use of this popular and pejorative word. I apprehend that if it has any meaning in law, it means acts done or documents executed by the parties to be Sham which are intended by them to give to third parties or to the fourth the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing I think is clear in legal principle, morality and authorities that for acts or documents to be Sham with whatever legal consequences which follow from this, all the parties thereto must have common intention that the acts or documents are not to create the legal rights and obligation which they give the appearance of creating. No unexpressed intention of a "shammer" affect the rights of a party whom he deceived."

It was submitted that the legal rights and obligations created as a result of various agreements signed by the different parties viz. sale agreement between RSEB and ITC Bhadrachalam and hire purchase agreement between ITC Bhadrachalam and the assessee M/s. Unimed Technologies and the lease agreement between the assessee M/s. Unimed Technologies and RSEB were quite different from the actual intention of those parties. To prove this, the learned Senior DR has filed a representative copy of the Resolution approved by the Board of Directors of the RSEB on 2-8-1995 approving the agenda noted for availing of lease finance under "Sale and Lease Back" of existing assets. It was submitted that that such decision must also have been taken for the impugned sale. It was submitted that a perusal of the resolution clearly indicates that the depreciation available on the assets were linked with the amount of security deposit and the rate of finance charges to be paid against the agreement of "sale and lease back". It was further submitted that had it been a normal sale transaction, then the purchaser and the seller would have drawn up a detailed inventory of the equipment intended to be sold and there would have been normal handing over and taking over of the assets even if the assets were not to be moved from their place of location. It was submitted that no inventory list was prepared and or filed before the Assessing Officer during the course of assessment proceedings. It was further submitted that the assets have not moved from the place of location and it has been contended by the A.R. of the assessee that this is not necessary but it was pleaded that the fact remains that RSEB continued to have the possession and control over the same assets and there have been no transfer of ownership. It was submitted that a perusal of the dates of the agreement would show that the whole arrangements were pre-planned and pre-ordained because if the benefits of depreciation had to be availed of by any concern other than RSEB then all the legal formalities including handing over of assets had to be completed by 30th March, 1995 i.e. the sale of assets to M/s. ITC Bhadrachalam, the handing over of the assets by ITC Bhadrachalam to Unimed Technologies and the leasing of the assets by Unimed Technologies to RSEB was all accomplished within two days prior to the close of the financial year 1994-95. The learned Senior DR also referred to copy of lease agreement furnished to us at pages 2 to 31 of the paper book wherein the date of the agreement initially mentioned is 25-3-1995. The same date is indicated at pages 9, 27 and 29 also. These dates have been cut and changed to 27-3-1995 on all these pages. From the above the learned Senior DR pleaded that the agreement of lease between the assessee M/s. Unimed Technologies and RSEB had already been prepared even before the assets were received by the assessee from ITC Bhadrachalam because the assessee received the assets from ITC Bhadrachalam only on 27-3-1995. Reference was also made to clauses 2(g) and 2(o) of the hire purchase agreement of 27-3-1995 wherein it is stipulated that the hirer will not sell, assign, transfer, mortgage etc. any of the equipments of the hiree while in clause 2(o) an exception has been carved out and it has been stated that notwithstanding clause 2(g) the assessee can lease the equipment to RSEB. Thus it was submitted that the exception has been carved out in advance to enable such equipment to be given back to RSEB only. It was further submitted that the installation certificate dated 27-3-1995 given by RSEB to Unimed Technologies indicates that the date of lease agreement was originally mentioned as 25-3-1995 which has been cut and changed to 27-3-1995. It was submitted that such a certificate is not valid as it is undated. For all the aforesaid reasons it was submitted that all the steps taken by the three parties in the series of transactions were preplanned and preordained steps and the Tribunal should not accord approval to such transactions in view of the ratio of the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTD [1985] 154 ITR 148 /22 Taxman 11. Reliance was also placed on the decision of the Supreme Court in the case of CIT v. Sakarlal Balabhai [1972] 86 ITR 2. Accordingly it was pleaded that the claim of depreciation made by the assessee was rightly rejected by the Assessing Officer and upheld by the CIT(A).

14. Without prejudice to the above stand and in the alternative, the learned Senior DR submitted that the depreciation to the assessee cannot be allowed because—

(i)Hire purchase agreement clearly indicates that till the last instalment is paid the hiree is the owner of the assets. The hirer has only the option to purchase or not to purchase the assets after all the payments have been made. Accordingly it was pleaded that if the assessee is not the full owner of the assets, how can he claim depreciation.

The learned Senior DR referred to clauses (1) to (4) of the hire purchase agreement between ITC Bhadrachalam and the assessee to emphasize that M/s. ITC Bhadrachalam remained the owner of the assets till the last payment was made by the assessee. Accordingly it was submitted that in view of the various clauses of the agreement it is clear that the assessee is a hirer and a bailee till the ownership rights, title and interest are passed on to the assessee by ITC Bhadrachalam the owner. As such the assessee is not entitled to depreciation. It was submitted that the learned representative of the assessee has relied on the Circular No. 9 of 1943 of the Central Board of Revenue for the proposition that depreciation can be claimed by hirer in a hire purchase agreement and the learned AR of the assessee has also relied on the decision of the Supreme Court in the case of Shaan Finance (P.) Ltd. (supra). In this connection, it was pleaded by the learned Senior DR that the question for consideration before the Supreme Court in the case of Shaan Finance (P.) Ltd. (supra) was not of hire purchase but the question referred for judgment and reproduced at page 310 reads as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in respect of machinery owned by the assessee, but leased to 3rd parties and used by them for the manufacture of article of thing, investment allowance was allowable under section 32A ?"

Accordingly it was submitted that the question adjudicated by the Supreme Court was clearly different and in particular the Supreme Court at page 316 has observed as under :

"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 has not acquired any new assets. The transaction of hire is, therefore, of bailment of the machinery. There is no extinguishment in right of the owner in the machinery."

Accordingly it was submitted that for the purpose of claiming deprecia- tion the first pre-condition is that the person claiming depreciation should be the owner of the assets and that the hirer is not the owner of the equipment but only the bailee. And as such the assessee is not entitled to depreciation. Reliance was placed on the decision of the Madhya Pradesh High Court in the case of Sardar Tara Singh v. Commissioner Of Income-Tax, M.P [1963] 47 ITR 756 which dealt with the Board Circular No. 9 of 1943 and submitted that the Circular issued by the department for the guidance of the officials can not control or affect the meaning or construction of the provisions of the Act. Accordingly it was submitted that till the ownership rights, title and interest are passed to the hirer in express terms, he does not become the owner of the assets and so is not entitled to depreciation. Reliance was also placed on the decision of the Supreme Court in the case of Kerala Financial Corpn. v. CIT [1994] 210 ITR 129/ 75 Taxman 573 and the decision of the Himachal Pradesh High Court in the case of Himachal Pradesh State Forest Corpn. v. Dy. CIT [1998] 231 ITR 556 for the proposition that the Circulars are not binding on the authorities below if they are against the statutory provisions. Reliance was also placed on the decision of the Special Bench of the Tribunal in the case of Bhilai Engg. Corpn. Ltd. v. Dy. CIT [1997] 63 ITD 223 (Nag.). It was further submitted that the user certificate given by RSEB is undated and as such it is not proved that the assets in question being Water Pollution Control Equipment were actually used in the Financial Year 1995-96. Reliance was placed on the decision of the Supreme Court in the case of Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265 and that of the Gujarat High Court in the case of CIT v. Suhrid Geigy Ltd. [1982] 133 ITR 884/[1981] 7 Taxman 183.

It was further submitted that taking into consideration the judicial decisions cited supra it appears that ITC Bhadrachalam has a better case of claim of depreciation on the assets in question because it is both legal owner of the assets as well as it is utilising these assets for the purpose of its business. As far as the assessee is concerned, it is not the legal owner but is only a bailee and is paying hire purchase instalments in respect of these assets. Accordingly it was submitted that the assessee has no case for claiming depreciation.

Alternatively it was further submitted that in terms of Explanation 3 to section 43(1) if the Assessing Officer is of the view that the fair market value of the assets has been inflated to claim excess depreciation then he can replace the fair market value with the cost estimated with the approval of the Jt. Commissioner of Income-tax. It was submitted that in the case before the Tribunal the assets in question had been purchased by RSEB in 1989 and therefore by the year under appeal i.e. Financial Year 1994-95 they had been using them for at least six years. Accordingly it was submitted that whatever be the rate of depreciation, the written down value must have been reduced to almost zero. Accordingly it was submitted that the fair market value of these assets could not be substantial amount and the report given by one Dr. M. Chowdhury on which reliance has been placed by the AR of the assessee indicates that it is most perfunctory report because four pages have been devoted to general factors on which valuation has been done but no specific details are given in the said valuation report which ends on the 5th page with the total amount mentioned at Rs. 2,92,00,000. It was submitted that normally a valuation report would contain atleast the original cost of the goods and quotation of such second hand equipment prevailing in the market as in the period of sale. There would also be details of the items which constitute the assets and the conditions in which they are but the valuation report given by Dr. M. Chowdhury contains nothing specific and therefore the value fixed for sale consideration is arbitrary and was rightly rejected by the Assessing Officer who has taken the value of these assets at Rs. 101. It was submitted that if the valuation adopted by the Assessing Officer appears to be very low, then the Tribunal may take any fair and reasonable valuation based on facts and record.

15. We have considered the rival submissions and have also gone through the orders passed by the Assessing Officer as well as the CIT(A). The first issue on which there is dispute between the assessee and the Department is as to whether in the facts and circumstances of the case it can be held that the transactions entered into by the assessee with ITC Bhadrachalam and RSEB are sham transactions? The Hon’ble Supreme Court in the case of Shree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 have occasion to consider the nature of benami transactions which also include sham transactions and Justice Venkatarama Ayyar as he then was, has brought out the difference between the two classes of transactions viz. real benami transaction and sham transaction in the following words :

"The word benami is used to denote two classes of transactions which differ from each other in their legal character and incidents. In one sense, it signifies a transaction which is real, as for example, when A sells properties to B but the sale deed mentions X as the purchaser. Here the sale itself is genuine, but the real purchaser is B, X being his benamidar. This is the class of transactions which is usually termed as benami. But the word "benami" is also occasionally used, perhaps not quite accurately, to refer to a sham transaction, as for example, when A purports to sell his property to B without intending that his title should cease or pass to B. The fundamental difference between these two classes of transactions is that, whereas in the former there is an operative transfer resulting in the vesting of title in the transferee, in the later there is none such, the transferor continuing to retain the title notwithstanding the execution of the transfer deed. It is only in the former class of cases that it would be necessary, when a dispute arises as to whether the person named in the deed is the real transferee or B, to enquire into the question as to who paid the consideration for the transfer. But in the latter class of cases, when the question is whether the transfer is genuine or sham, the point for decision would be, not who paid the consideration but whether any consideration was paid." [Emphasis supplied]

From the above clarification of the Supreme Court it is clear that a sham transaction is one in which A purports to sell his property to B without intending that his title is ceased or passed to B and for the transaction no consideration is paid at all. However in the present case it is undisputed that the consideration has been paid by ITC Bhadrachalam to RSEB on the execution of the agreement of sale. The assessee also paid a substantial sum viz. Rs. 45,67,270 to ITC Bhadrachalam against the hire purchase management fees and the instalment of hire purchase were fixed for which post dated cheques spanning over a period of three years were given by the assessee to ITC Bhadrachalam. In this view of the matter although the transactions were preplanned and preordained these can not be called sham transactions as consideration were paid by the assessee to ITC Bhadrachalam and from ITC Bhadrachalam to RSEB. Reliance of the learned Senior DR on the case of McDowell & Co. ( supra) is misplaced because even in that decision the Supreme Court has held at page 148 that tax planning may be legitimate provided it is within the framework of the law. Every assessee has legal rights to so arrange his affairs as to reduce the brunt of taxation to a minimum amount. Avoidance of tax is not tax evasion and it carries no ignominy with it, for it is sound law and, certainly, not bad morality, for anybody to so arrange his affairs to pay minimum possible tax. The above legal position has not altered even after the decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra). The argument of the learned Senior DR that the decision of the McDowell & Co. Ltd.’s case (supra) have changed and altered the legitimacy of the tax avoidance is not completely correct.

To illustrate the point, let us take the case of a man who is carrying on business which is very profitable. He takes his three major sons into partnership and he tells the Income-tax Department "if you had no income-tax, I would not have formed the partnership but because of your income-tax and wealth-tax and the wealth-tax depends on my share as a partner, I would like my sons to be genuinely my partners so that they may proportionately share the burden of income-tax and wealth-tax and in such a case can the Assessing Officer refuse registration to the partnership firm on the ground that admitted object of forming the partnership was reduction in tax liability/avoidance of tax? The answer is "NO". In any case, if the Assessing Officer refuses the registration solely on this ground, although the other formalities required under the Act are complied with like execution of a proper partnership deed, filing of proper application of registration, the Tribunal will have to decide in favour of the assessee. In this connection, it will be relevant to refer to the decision of the Court of Appeal and the House of Lords in Newstead v. Frost [1980] 53 TC 525 wherein the House of Lords unanimously upheld the assessee’s right to form partnership with a foreign company, expressly ruling that the fact that the course adopted by the assessee could reasonably be described as a device to avoid tax was irrelevant.

Similarly, the Hon’ble Supreme Court in the case of Arvind Narottam (supra); Per Justice S. Mukharji, (as he then was) has held that where the true effect on the construction of the deeds is clear, the appeal to discourage tax avoidance is not a relevant consideration. Similarly, Ahmedabad Bench "A" of the Tribunal in the case of Amar Structures (P.) Ltd. (supra) took the view that where the documents are clear in their intention (which is undisputed fact in the present case) they have to be given full effect relying on the observations of Justice S. Mukharji in the case of Arvind Narottam (supra ). It is also pertinent to note that the lessee in this case is RSEB which is a Govt. of Rajasthan Corporation and to accept that Govt. of Rajasthan will be a party to sham transaction is untenable. If anything it establishes 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 dated 13-1-1995 and the Rajasthan Government, finally deems it necessary in public interest to exempt the transaction from sales-tax. For all the aforesaid reasons we are of the opinion that the Departmental Authorities were not justified in holding that the transactions were sham transactions.

16. Now we take up the second issue, i.e., whether the assessee is entitled to depreciation on assets when the same have been acquired under hire purchase agreement. In this connection, it is imperative to hold that the assessee is entitled to depreciation in view of Circular No. 9 of 1943 dated 23-3-1943 issued by the Central Board of Revenue which has been reconfirmed by Central Board of Revenue in its letter F. No. 17(20) IT/59, dated 26-6-1959 (in the context of development rate) at page 1714 of Chaturvedi & Pithisaria’s Law on Income-tax. The same view has been reiterated in Instruction No. 1097 dated 19-9-1997 where on a pointed query raised before the C.B.D.T. it is clarified that the instructions contained in Circular No. 9 of 1943 and letter dated 26-6-1959 have not been withdrawn and are still in force and as such are to be followed. The Supreme Court in the case of Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 has held that benevolent circulars issued by the CBDT must be followed by Income-tax authorities. The Supreme Court in the case of Shaan Finance (P.) Ltd. (supra) has taken note of the Board’s Circular No. 9 of 1943 at pages 316 and 317 and it has accepted that in a case of hire purchase agreement there is an element of sale. The Hon’ble Delhi High Court in the case of Nagpur Golden Transport Co. (supra) has held that in a case where machineries are purchased by the assessee on hire purchase basis the assessee is the owner of machinery and is entitled to depreciation. Similar is the view of the Delhi High Court in the case of General Industries Corpn. (supra) and that of the Hon’ble Andhra Pradesh High Court in the case of S.P.B.P. Srirangacharyulu (supra). As regards the reliance of the Senior DR on the decision of the Supreme Court in the case of Kerala Finance Corpn. (supra) and that of Himachal Pradesh State Forest Corpn. (supra) is concerned, they did not deal with the issue of depreciation. In those cases, the question was of the Circular being contrary to a statutory provision, whereas in the present case the Circulars are not contrary to statutory provisions. They only explain as to under what circumstances hire purchaser can be treated as owner of the property for the purpose of allowing depreciation.

17. As regards the so called discrepancy in the dates like cutting of the date and changing it from 25-3-1995 to 27-3-1995 is concerned, these are not very material and they will not change the nature of transactions. In any case even assuming the discrepancy or unclearness of the date, it is undisputed that the transactions have taken place after the public offer and it is entered into with a public Govt. Corporation like RSEB after open tender and in public scrutiny. Reliance of the Senior DR on the decision of the Special Bench of the Tribunal in the case of Bhilai Engg. Corpn. Ltd. (supra) is misplaced because in that case the contract dealt in was not the hire purchase agreement at all and it was a case of agreement of sale in exchange of property, whereas in the present case we are concerned with the hire purchase agreement. Similarly the reliance of the DR on the decision of the Supreme Court in the case of Liquidators of Pursa ( supra) and the decision of the Gujarat High Court in the case of Suhrid Geigy Ltd. (supra) is also misplaced because of difference in facts as in those cases hire purchase was not an issue. Thus in view of the Board’s Circulars referred to above in para 16 and in view of the decision of the Supreme Court in the case of Navnit Lal C. Javeri ( supra) holding that benevolent circulars issued by CBDT are binding on the Income-tax authorities, we will hold that the assessee being a hire purchaser is entitled to depreciation.

18. As regards the third issue as to whether the equipments were put to use, it is pertinent to point out that the Assessing Officer has not disputed the use of the assets at all although the learned Senior DR has raised this issue. Nonetheless it is pertinent to note that in the case of sale and lease back transactions when the assets continue to be owned and possessed by the seller-lessee, they are bound to be used by him even after taking them on lease. In fact, it is because the seller-lessee required the assets in business that the sale and lease back transactions are entered into. So we will hold that the assets were in fact used by RSEB.

19. Coming to the fourth issue as to what is the actual cost to the assessee for the purpose of claiming depreciation, it is pertinent to note that the Explanation 3 to section 43(1) can be applied if the Assessing Officer is of the view that the fair market value of the assets has been inflated to claim excess depreciation. Only then, he can replace the fair market value with the estimated cost. In the case before us the fair market value of the assets has been certified to be Rs. 2,92,00,000 by a registered valuer who has inspected the property on 11-2-1995; prepared report on 15-2-1995 which was finally sent to RSEB on 27-3-1995. It is pertinent to note that the Assessing Officer has not appointed his own valuer for the valuation of the disputed assets and he has not thought it necessary to examine the said valuer before adopting the valuation of the assets at Rs. 101. In the absence of any other valuation report prepared by any agency and there being no other evidence to show that the report is not reliable, the valuation report filed by the assessee can not be ignored. In any case the sale consideration was fixed at Rs. 2,06,00,000 as against the valuation report which has put the value of the assets at Rs. 2,92,00,000. The argument of the Senior DR that since the sale invoice is of date 25-3-1995, which is earlier than 27-3-1995 the date of hire purchase agreement, the consideration in the valuation report was fixed arbitrarily, is of no consequence because the documents on record established that the valuation was available much earlier as the inspection was taken on 11-2-1995 and the report was prepared on 15-2-1995. In any case what is relevant is that the market value of the assets was available earlier and not on the date written by the valuer in his valuation report. In this view of the matter we are of the opinion that no material has been brought on record to indicate that the valuation adopted in the invoice issued by RSEB favouring ITC Bhadrachalam is more than the fair market value. In this view of the matter, the cost to the assessee has to be held to be Rs. 2,47,71,500 (Rs. 2,06,00,000 + Rs. 41,71,500 being the management fees paid at 20.25% of Rs. 2,06,00,000). Accordingly, we direct the Assessing Officer to allow depreciation to the assessee at Rs. 1,23,85,750. Accordingly ground of appeal No. 1 is allowed.

20. Coming to ground of appeal No. 2 it was submitted by the learned counsel for the assessee that the issue in dispute is squarely covered by the decision of the Tribunal in the case of Morvi Horological Industries v. ITO [1991] 36 ITD 115 (Ahd.) and the decision of the Hon’ble Madhya Pradesh High Court in the case of CIT v. K.N. Oil Industries [1997] 226 ITR 547 / 95 Taxman 557 . The learned DR relied on the order of the CIT(A). Since the issue is covered by the aforesaid decisions, relying on the reasoning given therein, we hold that the Departmental Authorities were not justified in disallowing the sum of Rs. 25,39,770 on account of deferred sales-tax liability.

21. Coming to ground of appeal No. 3, after hearing the parties to the dispute, we will uphold the order of the CIT(A) in this regard as the learned AR of the assessee has not been able to bring any material on record to substantiate its claim. Therefore, for the reasons given by the Assessing Officer in para 10 at page 11 of the assessment order, we will uphold the disallowance.

22. Coming to ground of appeal No. 4, the dispute is with regard to the disallowance of Rs. 8539 out of Garden Maintenance expenses on the ground that the same was not wholly, necessarily and exclusively for the purpose of business. It is seen that the Assessing Officer in para 11 of the assessment order has observed that the assessee has claimed Garden Maintenance expenses at Rs. 34,157 in addition to factory maintenance expenses of Rs. 77,258, one fourth of this was disallowed by the Assessing Officer on the ground that this may relate to garden of Director’s bungalow and the disallowance was upheld by the CIT(A). The learned counsel for the assessee submitted that the Directors are not residing in the premises of the factory and as such the disallowance is based on surmises and conjectures and should be deleted. The learned DR supported the order of the Assessing Officer and CIT(A). After hearing the parties to the dispute, we are of the opinion that the Departmental Authorities are not justified in making this disallowance of Rs. 8539 which is directed to be deleted.

23. In the result, the appeal is partly allowed.

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