SAI INDUSTRIES LTD Vs. CIT

JUDGEMENT

(1.) This appeal has been filed by the assessee and it relates to the assessment year 1995-96. The assessee is a company engaged in the business of leasing. While completing its assessment under Section 143(3) of the Income Tax Act, 1961 (Act, for short), the Assessing Officer noted that the assessee had claimed depreciation on assets worth Rs.38,50,000/- which were claimed to have been purchased during the year. The rate of depreciation claimed was 100%. The assessee assessed relevant details relating to the depreciation and it was submitted that the assets purchased represented effluent treatment plant, aerate lagoon system, scrubber venturi & packed bed and burner, which were all entitled to depreciation at the rate of 100%. These assets were purchased from a company by the name M/s U B Pharmaceuticals Ltd. of Bangalore (hereinafter referred to as UBPL) under hire-purchase agreement entered into between the assessee and another company by name First Leasing Company of India Ltd. (FLCIL, for short). The assessee also submitted that the assets were leased back to UBPL.

(2.) In order to verify the claim for depreciation, the Assessing Officer called upon the assessee to furnish a copy of the lease agreement. The assessee filed the same. It was found to have been executed on 15.9.1994. The lease agreement was stated to have commenced on the date of delivery of equipment or payment to the supplier of the equipment, whichever is earlier. It was also stipulated in the lease agreement that the lease rentals will be payable by UBPL to the assessee in advance. The assets were to be installed and put to use before 30 th September, 1994. On these facts, the Assessing Officer was of the view that the assets were already in the possession of and were being used by UBPL even before the date on which the assessee claimed to have purchased them from UBPL and this fact had also been admitted by the assessee in its letter dated 10.2.1998. He also noted that as per order sheet entry dated 24.3.1998, it was admitted by the assessee that there was no movement of the assets from the premises of UBPL to that of the assessee pursuant to the purchase by the assessee. They remained stationary in the place where they were before the assessee purchased them. After noticing these facts, the Assessing Officer proceeded to examine the question regarding the user of the assets. Though the assessee had claimed that it had put the assets to use in the business of leasing, which it was carrying on. According to the Assessing Officer it was UBPL, which was using the assets both before the date of sale and after the date of sale. He was of the view that the transaction between UBPL and the assessee under which the assessee claimed to have purchased the assets from UBPL was a paper transaction and that in fact it was UBPL which was the owner and in possession of the assets. The Assessing Officer thereafter observed that the assessee had deliberately adopted the colourable device in collusion with UBPL to avoid its tax liability and proceeded to demonstrate the same. He noted that the net profit of the assessee as per its profit and loss account was Rs.25,10,284/-, which was converted into a loss of Rs.14,00,380/- mainly on account of the claim of depreciation on the assets at the rate of 100% of the cost of assets. Thus, according to the Assessing Officer, what would have taxable income was converted into a loss resulting in no tax liability. The Assessing Officer also noticed certain other contradictions in the case. The assets were purchased on 26.9.1994, but there was no physical movement of the assets from UBPL to the assessee. On the very same day assets were claimed to have been delivered to the lessee i.e. UBPL. However, the details of lease rentals received by the assessee showed that first installment was received by the assessee only on 21.1.1995 from UBPL. This chain of events, according to the Assessing Officer amounted to a colourable device to avoid the legitimate tax dues of the assessee, attracting the rule laid down by the Supreme Court in the case of McDowell & Co. Limited vs. CTO, 1985 154 ITR 148. The Assessing Officer thus held that the transactions entered into by the assessee vis- -vis the assets on which the depreciation was claimed was not genuine. He therefore disallowed and had added back the depreciation of Rs.38,50,000/- to the loss declared by the assessee.

(3.) The assessee appealed to the CIT(Appeals) and contended that the conditions of Section 32 of the Act were satisfied and that the assessee owned the assets on which depreciation was claimed and also used them for the purpose of its business. Several authorities were cited in support of the assessee s contention that it was entitled to the depreciation. It was pointed out that the assessee was in the leasing business and there was no condition that in order to be eligible for depreciation the assets should have been "used" by the assessee itself. The assessee also contested the finding of the Assessing Officer that the entire transaction was a colourable and non-genuine transaction entered into merely to reduce its tax liability.