Madras High Court
M/S.India Equipment Leasing Ltd vs The Acit on 1 February, 2021
T.C.A.No.1394 of 2008
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATE: 01.02.2021
CORAM:
THE HON'BLE MR. JUSTICE M.DURAISWAMY
AND
THE HON'BLE MRS.JUSTICE T.V.THAMILSELVI
T.C.A.No.1394 of 2008
M/s.India Equipment Leasing Ltd.,
(merged with Sundaram Finance Limited)
21, Patullos Road,
Chennai – 600 002. ... Appellant
Vs.
The ACIT,
Co.Cir.VI(4),
Chennai. ... Respondent
Appeal preferred under Section 260A of the Income Tax Act,
1961, against the order of the Income Tax Appellate Tribunal, Madras,
“A” Bench, dated 28.09.2007 in I.T.A.No.864/Mds/2004, Assessment
Year 1996-97.
For Appellant : Mr.Venkatanarayanan
for M/s.Subbaraya Aiyar
For Respondent : Mr.T.Ravi Kumar,
Senior Standing Counsel
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T.C.A.No.1394 of 2008
JUDGMENT
(Judgment was delivered by M.DURAISWAMY, J.)
Challenging the order passed in I.T.A.No.864/Mds/2004 for the
assessment year 1996-97 on the file of the Income Tax Appellate
Tribunal, Madras, “A” Bench, the assessee has filed the above appeal.
2.The assessee – Company, a Public Limited Company and in the
business of hire purchase financing, equipment leasing and allied
activities, got merged with M/s.Sundaram Finance Limited (SFL). The
Assessing Officer, while framing the assessment, asked the assessee to
furnish the details in respect of the claim for depreciation on the
flameless furnace and steel rolls. It is the case of the assessee – Company
that the transaction was entered into with bonafide and in the normal
course of the business with M/s.Prakash Industries Limited and that the
payment was made directly to the supplier (i.e.) Sahib Engineering
Works, that had obtained invoices evidencing supply of goods. However,
the Assessing Officer raised a specific question whether the assessee –
Company ascertained that the supplier himself is the manufacturer or
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T.C.A.No.1394 of 2008
who is the actual manufacturer of the machinery and whether the
assessee received quotation for approval of purchase of the machinery.
The Assessing Officer denied the depreciation as it is a financial
transaction. The Commissioner of Income Tax (Appeals) upheld the
action of the Assessing Officer.
3.With regard to the second part of the depreciation claim in
respect of the rolls given on lease to Bellary Steels and Alloys Limited
(BSAL), the Assessing Officer, on the basis of the investigation
undertaken by the Department, found that the transaction in steel rolls
allegedly supplied by M/s. ORV Castings Private Limited, Bellary and
leased to BSAL was not genuine lease transaction, but was only an
arrangement to arrange finance and to claim the benefits under the
Income Tax Act. Finally, the Assessing Officer concluded that by
rejecting the explanation of the assessee that it is a bonafide transaction
entered into in the normal course of business activities of the assessee –
Company. In these circumstances, the Assessing Officer denied the claim
of the assessee for depreciation. For the assessment year 1996-97 also the
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T.C.A.No.1394 of 2008
claim of depreciation in respect of asset leased to BSAL was negatived
by the Assessing Officer and upheld by the Commissioner of Income Tax
(Appeals) on the ground that it is not a genuine transaction and entered
into only to get the benefits under the Income Tax Act. Aggrieved over
the same, the assessee filed an appeal before the Income Tax Appellate
Tribunal. The Income Tax Appellate Tribunal, by its order dated
28.09.2007 allowed the appeal in I.T.A.No.864/Mds/2004 filed by the
Department. Aggrieved over the order passed by the Income Tax
Appellate Tribunal in I.T.A.No.864/ Mds/2004 for the assessment year
1996-97 , the assessee has filed the above appeal. The above appeal is
admitted on the following substantial questions of law:
“1)Whether on the facts and in the circumstances of
the case, the Tribunal was right in law in holding that lease
transactions entered into by the appellant with M/s.Bellary
Steels and Alloys Ltd., is not genuine and hence not entitled
to depreciation?
2)Whether on the facts and in the circumstances of the
case, the Tribunal was justified in ignoring the evidences
produced by the appellant that would establish the lease
transactions entered into by the appellant are genuine and
hence entitled to depreciation?
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T.C.A.No.1394 of 2008
3)Whether on the facts and in the circumstances of the
case, the Tribunal was right in law in holding that the cost of
software purchased by the appellant and given it on lease is
capital in nature and hence not allowable as deduction?”
4.The learned counsel appearing for the appellant – assessee
submitted that in similar circumstances, the Hon'ble Division Bench of
this Court in the appeals in T.C.A.Nos.2097 to 2099 of 2008
[Commissioner of Income Tax, Chennai Vs. M/s.Indbank Merchant
Banking Services Ltd., Krest Bldg (III Floor), 26/27, Jehangir Street,
Second Line Beach, Chennai] dated 30.07.2019, following the ratio laid
down by the Hon'ble Supreme Court in (2018) 90 taxmann.com 365
(SC) [Commissioner of Income Tax vs. Vasisth Chay Vyapar Ltd.],
decided the questions of law in favour of the assessee and against the
Department. Further, the learned counsel submitted that the ratio laid
down by the Hon'ble Division Bench squarely applies to the facts and
circumstances of the present case.
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T.C.A.No.1394 of 2008
5.In view of the submission made by the learned counsel for the
appellant – assessee, it would be appropriate to extract the relevant
portion of the order dated 30.07.2019 made in T.C.A.Nos.2097 to 2099
of 2008, which reads as follows:
“...
7.At this juncture, it would be worthwhile to take note
of the following paragraphs of the decision of the High Court
of Delhi in the case of Vasisth Chay Vyapar Ltd.:
“18. ......................However, when we examine the
issue involved therein minutely and deeply in the context
in which that had arisen and certain observations of the
Apex Court contained in that very judgment, we find that
the proposition advanced by Mr. Sabharwal may not be
entirely correct. In the case before the Supreme Court,
the assessee a NBFC debited ` 81,68,516 as provision
against NPA in the profit and loss account, which was
claimed as deduction in terms ofSection 36 (1) (vii) of
the Act. The assessing officer did not allow the deduction
claimed as aforesaid on the ground that the provision of
NPA was not in the nature of expenditure or loss but
more in the nature of a reserve, and thus not deductible
under section 36(i) (vii) ITA 139/2008,ITA 466/2008,
ITA 537/2008,ITA 408/2003 of the Act. The assessing
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T.C.A.No.1394 of 2008
officer, however, did not bring to tax ` 20,34,605 as
income (being income accrued under the mercantile
system of accounting). The dispute before the Apex court
centered around deductibility of provision for NPA.
After analyzing the provisions of the RBI Act, their
Lordships of the Apex Court observed that in so far as
the permissible deductions or exclusions under the Act
are concerned, the same are admissible only if such
deductions/exclusions satisfy the relevant conditions
stipulated therefor under the Act. To that extent, it was
observed that the Prudential Norms do not override the
provisions of the Act. However, the Apex Court made a
distinction with regard to "Income Recognition" and held
that income had to be recognized in terms of the
Prudential Norms, even though the same deviated from
mercantile system of accounting and/or section 45 of the
Income Tax Act. It can be said, therefore, that the Apex
Court approved the „real income" theory which is
engrained in the Prudential Norms for recognition of
revenue by NBFC.
............. Therefore, subject to the requirements of
the IT Act, profits to be assessed under the IT Act have
got to be Real Profits which have to be computed on
ordinary principles of commercial accounting. In other
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T.C.A.No.1394 of 2008
words, profits have got to be computed after deducting
Losses/ Expenses incurred for business, even though
such losses/ expenses may not be admissible under
Sections 30 to 43D of the IT Act, unless such Losses/
Expenses are expressly or by necessary implication
disallowed by the Act. Therefore, even applying the
theory of Real Income, a debit which is expressly
disallowed by Explanation to Section 36(1)(vii), if
claimed, has got to be added back to the total income of
the assessee because the said Act seeks to tax the "real
income" which is income computed according to
ordinary commercial principles but subject to the
provisions of the IT Act. Under Section 36(1)(vii) read
with the Explanation, a "write off" is a ITA
139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003
condition for allowance. If "real profit" is to be computed
one needs to take into account the concept of "write off"
in contradistinction to the "provision for doubtful debt".
.........However, these Directions 1998 and the IT
Actoperate in different areas. These Directions 1998
have nothing to do with computation of taxable income.
These Directions cannot overrule the "permissible
deductions" or "their exclusion" under the IT Act. The
inconsistency between these Directions and Companies
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T.C.A.No.1394 of 2008
Act is only in the matter of Income Recognition and
presentation of Financial Statements. The Accounting
Policies adopted by an NBFC cannot determine the
taxable income. It is well settled that the Accounting
Policies followed by a company can be changed unless
the AO comes to the conclusion that such change would
result in understatement of profits. However, here is the
case where the AO has to follow the RBI Directions
1998 in view of Section 45Q of the RBI Act. Hence, as
far as Income Recognition is concerned, Section 145 of
the IT Act has no role to play in the present dispute."
19. We have also noticed the other line of cases wherein
the Supreme Court itself has held that when there is a
provision in other enactment which contains a non-
obstante clause, that would override the provisions of
Income Tax Act. TRO Vs. Custodian, Special Court Act
(supra) is one such case apart from other cases of
different High Courts. When the judgment of the
Supreme Court in Southern Technology (supra) is read in
manner we have read, ITA 139/2008,ITA 466/2008, ITA
537/2008,ITA 408/2003 it becomes easy to reconcile the
ratio of Southern Technology with TRO Vs. Custodian,
Special Court Act.
20. Thus viewed from any angle, the decision of
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T.C.A.No.1394 of 2008
the Tribunal appears to be correct in law. The question of
law is thus decided against the Revenue and in favour of
the assessee. As a result, all these appeals are dismissed.”
8.The above decision was affirmed by the Hon'ble
Supreme Court holding that the consideration of the question
by the High Court of Delhi has been given a meaningful
reasoning and affirmed the finding. Thus, by applying the
above mentioned decision, the Substantial Questions of law
are answered against the revenue and in favour of the
assessee.
9.In the result, the tax case appeals are dismissed. No
costs.”
6.Mr.T.Ravi Kumar, learned Senior Standing Counsel appearing
for the respondent – Department has not produced any contra judgement.
7.In these circumstances, we are of the considered view that the
ratio laid down by the Hon'ble Division Bench of this Court in
T.C.A.Nos.2097 to 2099 of 2008 squarely applies to the facts and
circumstances of the present case. Following the ratio laid down by the
Hon'ble Supreme Court in (2018) 90 taxmann.com 365 (SC)
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T.C.A.No.1394 of 2008
[Commissioner of Income Tax vs. Vasisth Chay Vyapar Ltd.] (cited
supra) and the ratio laid down by the Hon'ble Division Bench in
T.C.A.Nos.2097 to 2099 of 2008, the order passed by the Income Tax
Appellate Tribunal in I.T.A.No.864/Mds/2004 for the assessment year
1996-97 is liable to be set aside. Accordingly, the same is set aside. The
substantial questions of law are decided in favour of the appellant –
assessee. The Tax Case Appeal stands allowed.
[M.D., J.] [T.V.T.S., J.]
Index : Yes/No 01.02.2021
Internet : Yes
va
To
The Income Tax Appellate Tribunal, Chennai, “A” Bench
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T.C.A.No.1394 of 2008
M.DURAISWAMY, J.
and
T.V.THAMILSELVI, J.
va
T.C.A.No.1394 of 2008
01.02.2021
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