SHANKER TRADING (P) LTD Vs. CIT

JUDGEMENT

(1.) M/s Shankar Trading (P) Limited (hereinafter referred to as the assessee) is engaged in the business of Katha and Cutch and had taken on lease, with effect from 01.06.1978, a factory belonging to Mehta Charitable Prajnalay Trust (hereinafter referred to as "the Trust"), which also was engaged in the business of manufacturing of the same products. Shri Bishan Dass and Shri Raj Kumar, two of the trustees of the Trust were also the directors and shareholders of the Assessee Company. 3 out of 5 directors of the assessee company were the sons of two trustees of the Trust. It is also an admitted position that bulk of the shares of the assessee Company was held by the trustees of the Trust and their family members. Initially, the lease rent was fixed at Rs 25,000/- p.m., which was later increased first to be Rs 50,000/- p.m. and then to Rs 1,00,000/- p.m. As on 31.12.1991, the assessee was paying lease rental of Rs 1,00,000/- p.m. to the Trust, in respect of the factory taken on lease. The assessee entered into a fresh lease deed on 18.01.1992, whereby the lease rent was enhanced to Rs 6,75,000/- per month with effect from 01.01.1992.

(2.) The assessee, in its return of income for the assessment years 1992-93, claimed deductions for the lease rental which it had paid to the Trust. The Assessing Officer was of the view that the assessee Company had acquired an asset of an enduring nature and accordingly disallowed the increased amount of rent on the ground that this payment was in the nature of capital expenses. In this regard, the Assessing Officer invoked the provisions of Section 40A(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act). The Commissioner of Income Tax (Appeals) confirmed the assessment order. He was also of the view that the unusual increase in the rent was primarily for the purpose of reducing the tax incidence on the profits earned by the assessee Company and not for a business consideration and therefore was not allowable. The Income Tax Appellate Tribunal (hereinafter referred to as "the Tribunal") vide its order dated 16.2.1999 upheld the order of CIT (Appeals) and held that the enhanced lease rent amounting to Rs.17,25,000/- for the period from January to March, 1992 was a capital expenditure and therefore not allowable as a deductible expenditure. ITA No. 53/2000 has been filed by the assessee company, challenging the order of the Tribunal in respect of the Assessment Year (AY) 1992-93. The following question of law in this appeal was framed by this Court on 12.4.2001. "Whether the Tribunal was justified in holding that the payment of rentals to the extent of Rs.17,25,000/- was capital in nature?"

(3.) For the Assessment Years 1994-95, 1995-96 and 1996-97, since the disallowance made in the year 1992-93 was maintained by the Assessing Officer in the AY 1993-94 onwards, the assessee preferred appeals before CIT (A) who heard the appeals of the Assessee for the year 1994-95 and 1995-96, disagreed with the view of his predecessor and deleted the addition. It would be pertinent to note here that at the time CIT (A) allowed the appeals of the Assessee for the Assessment Years 1994-95 & 1995-96 he did not have the benefit of the order of the Tribunal dated 16.2.1999 in respect of AY 1992-93. However, for the Assessment Year 1996-97 CIT(A) did have the benefit of Tribunal?s order dated 16.2.1999 passed in respect of the AY 1992-93. He was of the view since the entire payment of lease rent was paid towards acquisition of capital assets and enduring benefit, the disallowance made by the Assessing Officer should be enhanced to Rs.81 lac, which was the total lease rent paid in that year. He accordingly disallowed the entire claim of payment of lease rent of Rs.81 lac for the year 1996-97. The appeals were filed by the Revenue for the Assessment Years 1994-95 and 1995-96 and by the assessee for the year 1996-97, against the orders passed by CIT (A). The Tribunal, while deciding the appeals of the Revenue for the Assessment Years 1994-95 and 1995-96 and the appeal of the assessee for the Assessment Year 1996- 97 vide order dated 25.2.2002, held that since the assessee did not have any enduring benefit by obtaining capital assets of the lessor against payment of monthly lease rent, the expenditure incurred by it was a revenue expenditure. The Tribunal however held that the provisions of Section 40A(2) of the Act had rightly been invoked, as there was a direct relationship between the trustees and directors of the assessee company. The Tribunal noted that 03 out of the 05 directors of the assessee company were the sons of trustee No.1 Shri Bishan Das Mehta and brother of second trustee Shri Raj Kumar Mehta. It was noted by the tribunal that the maximum share holding in the assessee company was owned by the trustees and their relatives as defined in Section 2(41) of the Act. The Tribunal however accepted the contention of the assessee that since the Assessing Officer had not recorded a specific finding that the expenditure incurred by it was excessive or unreasonable having regard to (i) the market value of goods or services, (ii) the legitimate business needs, and (iii) benefits derived by the assessee thereforom, invocation of provisions of Section 40A(2) was not proper. The Tribunal held that the reasonableness of payment of lease rent should be examined afresh by the Assessing Officer, in the light of the valuation report which the assessee had submitted before it and other evidence available on record. ITA No. 223/2002 has been filed by the Assessee, whereas ITA No. 247/2002 has been filed by the Revenue challenging the order of the Tribunal dated 25.2.2002 in respect of the Assessment Years 1994-95, 1995-96 and 1996-97. The following questions of law were framed by this Court in ITA No. 223/2002 and ITA No. 247/2002 on 11.12.2002: