Delhi High Court
Commissioner Of Income Tax Delhi vs Telecom Finance (India) Ltd. on 12 September, 2012
Author: S.Ravindra Bhat
* IN THE HIGH COURT OF DELHI AT NEW DELHI
RESERVED ON: 30.07.2012
PRONOUNCED ON: 12.09.2012
+ ITA Nos.551/2010 & 738/2010
COMMISSIONER OF INCOME TAX DELHI ..... Appellant
Through: Mr. Sanjeev Rajpal,
Sr. Standing Counsel.
versus
TELECOM FINANCE (INDIA) LTD. ..... Respondent
Through: Mr. Surinder Goel, Advocate.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
MR. JUSTICE S.RAVINDRA BHAT
% The questions of law framed in these appeals by the revenue,
impugning the order of the Income Tax Appellate Tribunal (ITAT) dated
22.8.2008 in ITA No. 4505/Del/2003, are as follows:
a. "Whether the Appellate Tribunal fell into error in allowing
deduction to the extent of Rs.26,21,049/- claimed by the
assessee towards renovation of the property and treating as
revenue expenditure in the facts and circumstances of this case?
b. Whether the Tribunal was correct in permitting depreciation at
100% on Rs.11,98,600/- capitalized by the assessee as part of
renovation claimed in these cases?"
2. The facts necessary for determining these questions are that the
assessee is engaged in the business of leasing, hire-purchase and
ITA-551 & 738/2010 Page 1
finance. In the return of income for the Assessment Year 1997-98, the
assessee declared a total income of ` 42,79,660/- on 26.11.1997.
During the assessment proceedings, the AO noticed that the assessee
had entered into a lease agreement dated 05.04.1996 with M/s Price
Water House Associates Ltd. (hereinafter PWHA) for leasing on rent
first floor of the building P-1, Aditya Vihar, M.B. Road, New Delhi
for a period of five years at a quarterly rent of ` 1,05,000/-. The AO
further noticed that immediately after two months or so, i.e. on
28.05.1996, the assessee entered into another lease agreement with
M/s Price Water House (hereinafter PWH) for giving the same
premises on sublease for 5 years from 1st July, 1996 for a quarterly
rent of ` 4,61,500/-. The AO also noticed that both the agreements
were signed by the same person though in the sublease agreement
there was no mention of the lease agreement with PWHA.
3. In the return of income, the assessee had declared sub-lease
rental of ` 13,84,500/- for nine months as income and had claimed
lease rental of ` 3,85,000/- for 11 months as deduction. The assessee
had also declared ` 41,09,585/- as expenditure on renovation of the
said premises, out of which, ` 11,98,600/- was capitalized; it claimed
depreciation @ 100% thereon. The remaining amount of
` 29,10,985/- was treated as deferred revenue expenditure and had
been amortized over the five years in the books of accounts. However,
in return of income, the assessee claimed entire amount of
` 29,10985/- as revenue expenses and thus, in effect, the entire
amount of ` 41,09,585/- was claimed as deduction.
ITA-551 & 738/2010 Page 2
4. Upon considering the facts on record, the (first) AO observed
that the arrangement of lease/sublease with PWHA and PWH
respectively were not bona fide and genuine transactions, and made
additions to the tax liability of the assessee. Against this order, the
assessee filed an appeal before the CIT (A) which set aside the
assessment order and directed the AO to conduct proceedings again
after giving an opportunity to the assessee to cross-examine witnesses,
and the assessee to confront statements of witnesses.
5. In pursuance of the said directions, the AO initiated de novo
proceedings upon which he, by order dated 19.02.2003, observed that
the lease and sublease agreements with PWHA and PWH respectively
were bogus transactions, and were in fact, finance/loan arrangements.
He, thus, disallowed deduction of depreciation @ 100% on
` 11,98,600/- capitalized by the assessee; disallowed deduction of
renovation expenses of ` 29,10,985/- claimed by the assessee as
revenue expenditure; and also disallowed lease rental of ` 3,85,000/-
payable to PWHA. He also worked out interest payable at ` 3,21,000/-
for five years and made addition of ` 4,54,140/- to the income of the
assessee attributable to the present year. The AO further observed that
the depreciation, even if held to be allowable, was available only at
10%.
6. The Assessing Officer's reasoning and conclusions are given in
para 4.1 to 4.3 of his order. Before him, the assessee argued that its
Japanese collaborator had not approved of the location of the premises
on the ground of its distance from down town, and thus the assessee
ITA-551 & 738/2010 Page 3
was left with no alternative but to sub-lease the premises. The AO
reasoned that it was incomprehensible why the original lease could not
have been cancelled, when PWHA was agreeable to have the assessee
sublease the premises to PWH (both PWH and PWHA having the
same management). Furthermore, the sub-lease agreement was entered
into even before the renovation had been completed. Moreover, in the
sub-lease agreement between the assessee and PWH, neither was there
any mention of the original lease agreement, nor any mention about
the reason why the sub-lease rental payable by PWH was as high as
` 4,61,500/- per quarter when the original lease rental was just
` 1,05,000/-. The AO inferred that the two agreements were entered
into just to reduce the tax liability of both the parties. The assessee's
tax liability was intended to be reduced by claiming cost of renovation
as deduction, and PWH's tax liability was intended to be reduced by
claiming deduction of higher sub-lease rental paid to the assessee;
such payment by PWH, in fact, resulted in advancement of the
principal loan amount to the assessee.
7. On appeal by the assessee, the CIT (A) set aside the assessment
order holding that the lease transaction was a genuine one, that there
had been no reduction in tax liability of any party was way of the
lease/sublease arrangements. He deleted all the additions except the
amount of `41,09,585 claimed by the assessee as depreciation/revenue
expenditure, and further held that out of ` 41,09,585/-, the amount of
` 14,88,536/- was to be treated as current repairs and regarding
ITA-551 & 738/2010 Page 4
balance amount of ` 26,21,049/- directed the AO to spread over the
amount for the period of lease.
8. The CIT (A), while setting aside the assessment order, observed
the AO did not rely on any material on the record to hold that the lease
and sub-lease agreements were not genuine. He further held that none
of the parties reduced their tax liabilities by entering into the lease
transactions. He believed the version of the assessee's authorized
representative and Sh. Dhadwal (Senior Manager, PWH) that at
around the same time when assessee's Japanese collaborators had
rejected the premises, one of the landlords of PWH's offices had also
given notice for vacation. Thus PWH was in search for some
premises, and the assessee, had already got renovation work (starting
with demolition) started at the premises, was looking to sublease,
subject to the lessor's (PWHA's) consent; that at this time, it was
agreed between PWHA and the assessee that the latter would get the
renovation work at its expense and sublease the premises to PWH.
Furthermore, the CIT (A)'s reasoning in holding that there had been
no difference in the tax effect borne by the assessee and PWH is
reproduced as follows:
"In case of lease transaction the amount paid by appellant to
the lessor at Rs. 21 lacs is taxable in the hands of lessor
whereas the same is deductible in the hands of the appellant.
The appellant had received Rs. 92.3 lacs as lease rentals as
against the expenditure of claimed at Rs. 41,09,585/-. Thus,
the appellant has admitted net income of Rs. 30.21 lacs (Rs.
92.39 lacs - Rs. 41.09 lacs - Rs. 21 lacs). In the case of Price
Water House, the decusion of lease rental would have been
claimed at RsS. 92.3 lacs over the period of 5 years. On the
ITA-551 & 738/2010 Page 5
other hand, if the transaction is to be treated as finance or
loan, the intt. of Rs. 30.21 lacs was chargeable to tax in the
hands of the appellant. Price Water House would have
claimed deduction of Rs. 41.09 lacs on account of repairs and
intt. of Rs. 30.21 lacs and Rs. 21 lacs rentals payable to Price
Water House Associates Pvt. Ltd. Totalling to Rs. 92.30 lacs.
From this, it is clear that both being companies, there
appears to be no difference in the incidence of taxation. Also
in subsequent assessment years, the appellant had admitted
income of sub-leasing of premises which has been accepted
by the department."
9. This order was appealed against before Income Tax Appellate
Tribunal (ITAT) by both the revenue and the assessee. While the
assessee challenged the direction given by CIT (A) for amortization of
` 26,21,049/- over the period of lease, the revenue, on the other hand,
assailed the finding that the transactions were genuine, along with
challenging all the deletions of additions that had been made by the
AO. Both appeals were clubbed by the ITAT by order dated
22.08.2008. The ITAT allowed deduction of ` 26,21,049/- claimed by
the assessee as revenue expenditure. Moreover, ITAT deleted all the
additions made by the AO holding that the lease transaction entered
into by the assessee with PWH was a genuine one. The ITAT's
reasoning on facts was as follows:
"The assessee has demonstrated that M/s. Price Water House
was in need of premises because one of the landlords of its
office premises has already given a notice for vacating the
same. Simultaneously on the other hand, the premises taken
by the assessee for its use was not approved by its
collaborator, so it was seeking permission to sub-lease the
premises. These circumstances do indicate that there was no
ulterior motive in entering into the transaction. The Assessing
ITA-551 & 738/2010 Page 6
Officer has disbelieved the transaction on the ground that
renovation work was not substantially carried out by the
assessee before entering into the sub-lease agreement with
M/s. Price Water House. In our opinion, learned Assessing
Officer has misread and misconstrued the statement of Shri
Dadwal for arriving at such a conclusion. Shri Dadwal has
specifically disclosed that major renovation work was already
undertaken by the assessee certain cabins were not of the
specifications as required by the Senior Executives of the
Price Water House. Therefore, he requested the assessee to
change the size of certain cabins. The contractor has already
been appointed. He was doing the work and, therefore, there
was no occasion to change the contractor and put the
assessee to face litigation etc. The learned CIT(Appeals) has
considered all these aspects in detail and held that the lease
transaction between the assessee and M/s. Price Water House
is a genuine lease transaction. Thus, we do not find any merit
in the appeal of revenue."
10. The main argument advanced by learned counsel for the
revenue was that the lease agreements entered into by the assessee
were bogus, and the entire arrangement instead was a loan/finance
arrangement. It was contended that the Tribunal did not appreciate that
the lease and sublease agreements was a paper arrangement to show
the cost of renovation as expenditure and to thus to charge higher
lease rental. Both the lease agreements were signed by the same
person on behalf of PWHA and PWH. The whole purpose of entering
into such an arrangement was to reduce the tax liability of both the
parties. The assessee's tax liability would stand reduced by claiming
cost of renovation as deduction, and PWH's tax liability would stand
reduced by claiming deduction of higher sub-lease rental paid to the
assessee, whereas through such payment PWH would, in fact, advance
ITA-551 & 738/2010 Page 7
the principal loan amount to the assessee. It was contended that the
Tribunal's ruling on this issue, even though on fact, is unsustainable in
law as it is perverse and not based on any material evidence.
11. Learned counsel for the assessee, on the other hand, contended
that the question of genuineness of the lease transaction is a question
of fact, and that the Tribunal's finding on that must be considered
final. Therefore, it cannot be re-agitated in appeal before the High
Court.
12. Furthermore, contended counsel for the assessee, that the
expenditure on renovation was revenue in nature, and thus ought to
have been allowed as a deduction in terms of Section 30(a) (i).
Reliance was placed on the decisions of this Court in the case of
Commissioner of Income Tax v. Escorts Finance Ltd [2006] 205 CTR
(Del) 574, Commissioner of Income Tax v. Hi Line Pens Pvt. Ltd
(2008) 306 ITR 182 and Commissioner of Income Tax v. M/s Amway
India Enterprises 4th November 2011 in ITA Nos. 1344/2009 and
1363/2009. Alternatively, it was argued that the expenditure would
fall under ambit of section 37(1) of the Act, and thus, would be
deductible.
13. On the issue of whether this expenditure was revenue or capital
in nature, counsel for the revenue contended, without prejudice to the
challenge regarding the genuineness of the lease arrangements, that
the amount of Rs. 26,21,049/- incurred on renovation of the leasehold
premises was in the nature of capital expenditure. It was argued that
Explanation 1 to section 32 was applicable, and reliance was placed
ITA-551 & 738/2010 Page 8
on the decision in Ballimal Nawal Kishore and Anr. v. Commissioner
of Income Tax [1997] 224 ITR 414 (SC). It was contended that the
expenditure incurred was not on repairs but was in fact, for a total
renovation of the leased property, and therefore expenditure was to be
capitalized.
14. On this issue, the CIT(A)'s finding and reasoning for treating
the amount of ` 26,21,049/- as revenue expenditure, which was
affirmed by the Tribunal, was as follows:
"The appellant took the premises for the purpose of its
business but due to change in circumstances it sublet the
premises. From the list of repairs carried out, it is seen that
the expenditure incurred on renovation is to replace the
existing floor, fittings etc. and also on construction of
wooden partition walls.
***
Out of total expenditure of Rs. 41,09,585/- an amount of Rs.
24,17,600/- has been incurred on construction of wooden
partition etc. and Rs. 13,46,150/- on replacement of existing
fitting & fixtures floor tiles etc. The appellant has also
incurred expenditure of Rs. 3,45,835 on designing &
supervision charges. This expenditure is to be bifurcated
proportionately. Therefore Rs. 2,03,449 [Rs. 3,45,835 x Rs.
24,17,600) divided by Rs. 41,09,585] will relate to
construction of wooden partition etc. The total expenditure
on wood work will be Rs. 26,21,049/- (Rs. 24,17,600 - Rs.
2,03,449). The amount incurred on wood work will
therefore, provide benefit to the appellant over a period of
five ears. The expenditure incurred at the Rs. 14,88,536/-
(Rs. 13,46,150/- - Rs. 3,45,835/- - Rs. 2,03,449/-) is in the
nature of current repairs.
ITA-551 & 738/2010 Page 9
.... In case of CIT Vs. Kisenchand Chellaram (India) P. LTd.
130 ITR 385 (Mad) Hon'ble Court held that improvement
carried out in leasehold premises by constructing partition
walls. Wall panelling, show windows etc. was revenue
expenditure. The expenditure incurred has resulted into
receipt of higher amount of lease rentals. Following the
decision of Hon'ble Madras High Court in the case
Kishanchand Chellaram (India) Pvt. LTd. is held that the
expenditure incurred on wood work at Rs. 26,21,049/- is in
the nature of revenue expenditure. It is also a fact that the
deduction in one year in respect of expenditure incurred on
wood work providing long term benefit to the appellant will
distort profitability in the year under appeal. Therefore the
ration of the decision of the Hon'ble apex court the case of
Madras Investment Corporation vs. CIT 225 ITR 802 is
applicable. The appellant will be entitled to deduction of Rs.
26,21,049/- during the period of lease in the ration of lease
rentals received."
15. On the second question framed, learned counsel for the revenue
argued that the Tribunal was incorrect in allowing depreciation @
100% on ` 11,98,600/- to the assessee. It was instead urged that
depreciation should have been charged at only 10% per annum.
Counsel for the assessee, on the other hand, defended the Tribunal's
decision of allowing depreciation at 100% p.a.
Analysis
16. This Court shall first deal with the question of whether the
finding of the Tribunal about genuineness or otherwise of the lease
transactions is unsustainable; and then, if need be, consider the
treatment of the amount of ` 26,1049/- and the rate of depreciation
applicable. Even though under section 260A of the Income Tax Act
ITA-551 & 738/2010 Page 10
only substantial questions of law are to be decided this case, there
exist authorities for the proposition that where the findings of fact, by
the Tribunal are perverse and contrary to materials on record and
based on surmises and conjectures, the High Court under Section
260A would be competent to interfere [Ref. Pyarelal Mittal v.
Assistant Commissioner of Income-tax [2007] 291 ITR 214 (Gauhati),
Gaurikanta Barkataky v. Commissioner of Income-tax [2009] 313 ITR
34 (Gauhati)]
17. The basis of the AO's order for treating the transactions as
bogus was that the lease and sublease transactions were, in fact, an
arrangement to give the colour of a lease to a transaction which in
substance is that of finance/loan. This, the AO reasoned, was done to
reduce the tax liability of the assessee and PWH. He also noted that
bills payable to contractor Ranjit Singh were of September 1996, and
that payment of ` 40,00,000/- was made to him from 16.7.1996 to
24.9.1996, while the last payment of ` 1,09,000/- was made in the
next financial year. Moreover, he noted that no evidence had been
submitted to show that substantial renovation was complete before the
sublease transaction was entered into. The CIT (A) found the AO's
reasoning to be erroneous, and the ITAT upheld this view. Both these
authorities held that the tax liability of the assessee (and PWH)
remained same irrespective of whether the transactions are treated as
genuine or bogus.
18. In the present case, it is clear from the record that the assessee is
engaged in the business of leasing, hire-purchase and finance. The
ITA-551 & 738/2010 Page 11
premises in question over which the expenditures were made were
leased to the assessee for a period of five years; the assessee further
subleased the premises for the same period. Since the assessee itself
was a lessee for a period of just five years, it is highly unlikely that a
new asset was created by the work done on the premises. Moreover, it
must be noted that the assessee, which is engaged in the business of
leasing and hire-purchase, would be incurring such expenses (of the
nature of work done on premises to be let/sublet) on a regular basis,
thus, depriving it of the character of capital expenditure. What is
noteworthy is that the expenditure was incurred, according to the
assessee, in anticipation of its entering into joint venture agreement;
the Japanese collaborator however did not go through the transaction,
and did not approve the location of the premises. The assessee did not
produce any materials, in the form of an MOU or letter of intent, or
draft agreement, or even copies of its correspondence, or e-mails
exchanged with the Japanese investor/collaborator, to show what the
details of such transaction were. It appears facially improbable for a
prudent businessman to undertake substantial and significant
expenditure without any modicum of commitment by a potential joint
venture partner. It is also significant, that the landlord (PWHC) let out
the premises, for a monthly rental of approximately ` 35,000/-; the
sub-lease was for ` 4,61,500/-. The assessee claimed that it incurred
an expenditure of ` 41,09,585/- (Rs. 24,17,600/- towards construction
of wooden partition etc. and ` 13,46,150/- on replacement of existing
fitting & fixtures floor tiles etc. and expenditure of ` 3,45,835 on
designing & supervision charges). There is no doubt that the
ITA-551 & 738/2010 Page 12
expenditure and the background in which it was incurred is
mysterious. The original lease (between the assessee and PWHA) was
entered into on 5.4.1996; the sub lease with PWH, was entered into on
28.5.1996.
19. The relevant findings of the AO, after remand by the CIT (A),
and after examination and cross examination of the contractor who
carried out the renovation, and after examining the books, and
corresponding evidence of payment towards the renovation, are as
follows:
"3.1 During the course of original assessment proceedings the
AO held that the said arrangement of lease/sub lease with
PWHA and PWH are not found to be bona fide genuine and that
in fact shown arrangement to give a colour of lease
arrangement to a transaction which is in substance that of
finance/loan so the tax liability in the case of both the parties
i.e. assessee would and PWH is reduced. In case of assessee tax
liability is reduced by claiming cost of renovation i.e. the
principal amount of ` 41, 09,585/- as deduction and in the case
of PW- H tax liability is reduced by claiming deduction of lease
rental which includes payment of principal amount also. This
conclusion of the AO was based on the fact that renovation was
not carried out in complete before entering into sublease
agreement would dated 28-05-1996. Also bills of contractor
Shri Ranjeet Singh in the name of assessee were of September
1996 and payment of ` 40, 00, 000/-in eight instalments of ` 5
lakhs each were made by the assessee to Shri Ranjeet Singh
from 16-07-1996 to 24-09-1996 and thus the AO held that it is
unbelievable that the renovation even if commenced before 28-
05-1996 was complete before 28-05-1996. The AO relied on the
statement of Shri BS Dhadwal senior manager of PWH who was
well acquainted with the said transactions, recorded on 24-02-
2000 wherein Shri Dhadwal confirmed that renovation was
done as per requirements of PW- H, renovation was not
ITA-551 & 738/2010 Page 13
complete before 28-05-1996 and he himself visited the premises
in connection with the work carried out by Shri Ranjeet Singh.
The AO held the transaction entered into by assessee with
PWH/ PWHA as that of finance."
20. After narrating the above sequence of events the assessment
order went on to recapitulate the directions of the Appellate
Commissioner to give sufficient opportunity to the assessee to cross-
examine the witness. This direction was complied with. The
statements recorded under oath and cross examination conducted,
were made available to the assessee; it was asked to respond to certain
queries also, issued in the form of notice by the assessing officer. The
order of the assessing officer, after noticing the sequence of events,
reasoned as follows:
"The reply of the assessee company has been carefully
considered. The Bills of the contractor Shri Ranjeet Singh in the
name of the assessee were of September 1996 and payment of `
40, 00, 000/-in eight instalments of ` five lakh each was made
by the assessee to Shri Ranjeet Singh from 16-07-1996 to 24-
09-1996 while the last payment of ` 109, 000/-was made in the
next financial year. The AR of the assessee had not submitted
any documentary evidence to show that most of the renovation
was complete before the assessee entered into the sublease
agreement.
4.1 The A R has submitted that the Japanese collaborator
did not approve of the location of the premises being far away
from downtown and as the assessee left with no alternative but
to sublease the said premises. However it is not understandable
as to why the original lease could not be cancelled when the
original owner P HWA and sublessee i.e. PWH are under the
same management And If the Management of PW- HA/PWH
could agree to take its own premises on sublease there was no
reason would cancel the original lease itself particularly when
ITA-551 & 738/2010 Page 14
the effect of even the sublease arrangement same i.e. premises
gets back in occupation of PWHA/PWH and does it is only a
paper arrangement to show the cost of renovation in the hands
of the HSE and thus to charge higher lease rental.
4.2 Even Shri BS Dhadwal has stated in his statement taken
on 24-02-2000 that the renovation was not complete before 28-
05-1996 and that he himself visited the premises in connection
with the work carried out by Shri Ranjeet Singh.
4.3 There is nothing mentioned in clear words in the said
agreement as to why lease rental to be charged from PWH is as
high as ` 461, 500/- per quarter as against ` 105, 000/-per
quarter payable by assessee to PWHA, in fact in agreement
dated 28-05-1996 even the basic facts would as to how assessee
acquired the right to lease the premises to PW- H are not
mentioned. In other words there is no reference of earlier
agreement dated 05-04-1996 in agreement dated 28-05-1996 in
spite of the fact that both agreements were signed by the same
person. The tax liability in case of both the parties i.e. SSE and
PW- H is reduced. On case of assessee tax liability is reduced
by claiming cost of renovation i.e. principal amount of ` 41,
09, 585/-as deduction and in case of PWH tax liability is
reduced by claiming deduction of lease rental which includes
payment of principal amount also.
4.4 these facts leads to the conclusion that the said
arrangement of lease and sublease of the assessee company
with PWHA and PWH is not bona fide genuine and in fact an
arrangement to give colour of lease to a transaction which in
substance is that of finance and/loan. So the transaction entered
into by the assessee with the PW- H/PWHA is taken that of a
finance. Total rental received from PWH over five years shall
be ` 92, 30, 000/-(would ` 461,500 x 20 quarters) and total
lease rental payable to PWHA over five years is ` 21,00,000/-
(105, 000 x 20 quarters) and thus assessee has would to receive
a rent amount of ` 71, 30, 000/-against principal amount of `
41, 09, 000/- paid to Shri Ranjeet Singh as finance for cost of
renovation and d and ust from these transactions the assessee
ITA-551 & 738/2010 Page 15
earns ` 30, 21, 000/-over five years as interest on principal of `
41, 09, 000/- to be recovered in quarterly instalments of
principal/ interest of Rs. 3,56,500/- (`461,500 - Rs. 1,05,000/-).
The interest income of Rs. 30,21,000/- is equally distributed
over 5 years i.e over 20 quarters and thus the interest income
from 3 quarters covered by the relevant year shall be ` 453,
150/-( ` 30, 21, 000 x 3/20)"
21. It is now settled that the nomenclature which the parties chose
to call their transaction with is not determinative of its true character,
especially in the documents which describe it, and spell out the terms
and conditions. The revenue, like the court, has to look at the real
nature of the transaction. Thus, it was held in Sundaram Finance
Limited v. State of Kerala, AIR 1966 SC 1178, that
"The true effect of a transaction may be determined from the
terms of the agreement considered in the light of the
surrounding circumstances. In each case the Court has, unless
prohibited by the statute, power to go beyond the document and
to determine the nature of transaction, whatever may be the
form of the document..."
22. Similarly, in Commissioner of Income-Tax, West Bengal II v.
Durga Prasad More, (1971) 82 ITR 540 the Supreme Court observed
as under: -
"Now we shall proceed to examine the validity of those grounds
that appealed to the learned judges. It is true that the apparent
must be considered real until it is shown that there are reasons
to believe that the apparent is not the real. In a case of the
present kind a party who relies on a recital in a deed has to
establish the truth of those recitals, otherwise it will b e very
easy to make self-serving statements in documents either
executed or taken by a party and rely on those recitals. If all
that an assessee who wants to evade tax is to have some recitals
ITA-551 & 738/2010 Page 16
made in a document either executed by him or executed in his
favour then the door will be left wide open to evade tax. A little
probing was sufficient in the present case to show that the
apparent was not the real. The taxing authorities were not
required to put on blinkers while looking at the documents
produced before them. They were entitled to look into the
surrounding circumstances to find out the reality of the recitals
made in those documents."
23. The approach of the CIT (A) was to brush aside the inferences
drawn by the AO; in doing so, the order of the Commissioner merely
stated that Mr. Dhadwal, in his statement had mentioned that some
cabins were being put up, and their dimensions were changed to suit
the specifications of PWH. No other reason was given why the AO's
reasoning was faulty or unsound. The other reason was that the tax
liability on both PWHA and the assessee remained the same, even if
the transaction was not genuine. The CIT (A) however disallowed
depreciation of the entire amount, and instead allowed it to be
amortized over a period of five years.
24. This court is of opinion that the inferences drawn by the AO
were not unfounded. They were based on certain facts:
(1) The extremely short duration between the lease and sub-
lease agreement;
(2) Renovation being carried on even before the sub-lease
agreement was entered into;
(3) Payment for the renovation being made in eight
instalments the last of which was actually paid the next financial year;
ITA-551 & 738/2010 Page 17
(4) A valid inference that if PWHA wished to, it could have
cancelled the lease, and made the premises to its related concern, or
sister concern, PWH. Instead, the continuation of the lease, and
creation of sub lease in favour of PWH by the assessee for an amount
which was over 300% (as sub lease rental) in comparison with the
lease rent paid by it, appeared far-fetched.
25. In addition, this Court notices that the assessee's claims that the
Japanese collaborator was not satisfied by the location of the premises,
seems ex facie contradictory. As stated earlier, it defies logic that a
reasonable and prudent businessman would invest or commit to invest
so heavily in such extensive renovations, without any corresponding
assurance from his business partner. There is no evidence that in fact
such a prior arrangement had been worked out, or even mooted by the
Japanese collaborator; there is no evidence to show what impelled the
collaborator to call off the idea, or how the assessee was compensated.
The timing of PWHA's lease and the need of PWH for new premises
is too close. In April, 1996, PWHA leased out the premises; the very
next month, the same premises were sub-leased to PWH.
26. The CIT (A) and the Tribunal blandly, and perhaps uncritically
accepted the argument that the tax implications either way were the
same, for the assesse as well as PWHA. There is no discussion in this
regard; no details about assessment of PWH, or PWHA, or its returns
appear in either order. Therefore, the wholesale acceptance by the said
authorities that the tax implications were the same cannot be
sustained. Equally, these authorities did not furnish any reason why
ITA-551 & 738/2010 Page 18
the deductions and findings, based on an elaborate and painstaking
examination of the materials on record, by the AO, were unjustified.
The findings of the CIT (A) and the Tribunal, therefore, were contrary
to the evidence; their reasoning cannot be sustained.
27. In the light of the above discussion, both the questions framed
are answered against the assessee, and in favour of the revenue. The
appeals are, accordingly allowed.
S. RAVINDRA BHAT
(JUDGE)
R.V. EASWAR
(JUDGE)
SEPTEMBER 12, 2012
ITA-551 & 738/2010 Page 19
