[Cites 7, Cited by 0]
Madras High Court
Commissioner Of Income Tax vs M/S Vijay Shanthi Builders Ltd on 20 April, 2026
Author: G.Jayachandran
Bench: G. Jayachandran
2026:MHC:1522
T.C.A.Nos.641 and 642 of 2009
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved on :06.04.2026
Pronounced on :20.04.2026
CORAM
THE HONOURABLE DR. JUSTICE G. JAYACHANDRAN
AND
THE HONOURABLE MR.JUSTICE SHAMIM AHMED
T.C.A.Nos.641 and 642 of 2009
T.C.A.No.641 of 2009:
Commissioner of Income Tax,
Chennai. ..Appellant/Appellant
/versus/
M/s Vijay Shanthi Builders Ltd.,
No.3, Blackers Road, Anna Salai,
Chennai 600 002. ..Respondent/Respondent
Prayer:
Tax Case Appeal is filed under Section 260-A of the Income Tax Act, 1961,
against the Order of the Income Tax Appellate Tribunal, Madras ‘C’ Bench,
dated 28.11.2008 in ITA No.584/Mds/2003.
For Appellant :Dr.S.Sathiya Narayanan,
Senior Standing Counsel
For Respondent :Mr.Vishnu Mohan for
Mr.R.Parthasarathy
Page Nos.1/12
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T.C.A.Nos.641 and 642 of 2009
T.C.A.No.642 of 2009:
Commissioner of Income Tax,
Chennai. ..Appellant/Appellant
/versus/
M/s Vijay Shanthi Builders Ltd.,
No.3, Blackers Road, Anna Salai,
Chennai 600 002. ..Respondent/Respondent
Prayer:
Tax Case Appeal is filed under Section 260-A of the Income Tax Act,
1961, against the Order of the Income Tax Appellate Tribunal, Madras ‘C’
Bench, dated 28.11.2008 in ITA No.724/Mds/2003.
For Appellant :Dr.S.Sathiya Narayanan,
Senior Standing Counsel
For Respondent :Mr.Vishnu Mohan for
Mr.R.Parthasarathy
------
COMMON JUDGMENT
(Judgment was made by Dr.G.JAYACHANDRAN,J.)
The Tax Case Appeals are filed by the Revenue, being aggrieved by the
order of the Tribunal, confirming the order of the Appellate Authority held in
favour of the Assessee.
2. These two Appeals are in connection with the same issue, but for the
Assessment Year 1995-1996 to 1997-1998. The Assessee, who is in the
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T.C.A.Nos.641 and 642 of 2009
business of construction activity, had filed its return of income on 26.12.1997
disclosing income for a sum of Rs.61,070/- for the Assessment Year 1996-1997.
The return was processed under Section 143(1)(a) of the Income Tax Act,
1961(in short "IT Act") making an addition of Rs.7,43,936/- on account of
excess depreciation. After notice under Section 143(2) of the IT Act, the
Assessment Order was passed holding:-
(i)In respect of the land development account, the assessee claims
expenses of Rs.44,63,562/-. The perusal of its accounts would show that these
expenses have not been debited by assessee to the Profit and Loss Account.
Instead, they are shown under ‘Current Assets’ (Schedule G) in the Balance
Sheet under the head “Property Development Project in Progress as on
31.03.1996 (Total: Rs.10,87,33,207/-). There is no specific amount of this
magnitude debited under “Construction Expenses”(Schedule O).
(ii)Claiming depreciation at 50% of invoice value of cinematograph films
purchased on 29.03.1996 from M/s Sri Varu Creations and immediately leased
back to the same party is not a genuine transaction, therefore, the depreciation
claim is fully rejected.
(iii)The accounting method adopted in respect of construction expenses
debited and other depreciation claimed are faulty. Hence, Rs.9,72,86,043/-
levied as total tax.
(iv)Similarly, for the year 1997-1998, when the Assessee declared total
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T.C.A.Nos.641 and 642 of 2009
income of Rs.8,44,740/-. Hearing notices were issued to the Assessee
disallowed the assessee’s claim of depreciation a sum of Rs.91,23,873/- and
100% depreciation on the cinematographic films amounting to Rs.53,93,590/-,
as a result, levied tax of Rs.70,82,301/-.
3. Both the assessment orders were challenged by the Assessee before the
CIT (Appeals). After considering the grounds of appeals, the CIT(A) accepted
the plea of the assessee method of accounting as a method approved by the
Hon'ble Supreme Court of India in Calcutta Company Limited vs. CIT reported
in [(1959)37 ITR 1(SC)]. In respect of construction expenditure and claim of
depreciation on cinematographic films, the appeals were partly allowed.
4. In sofar as the next assessment year 1997-1998, the appeal filed by the
Assessee was allowed in respect of depreciation claimed on cinematographic
films purchased. The Revenue had preferred appeal against this order before
the ITAT raising various grounds including deletion of the disallowance of
construction expenses and deleting the disallowance of depreciation on
cinematographic films.
5. With regard to the issue relating to construction expenses and adoption
of hybrid system of accounting (i.e.) receipt based on sale and on accrual basis
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T.C.A.Nos.641 and 642 of 2009
for expenses, the Tribunal confirmed the view of the Appellate Authority by
holding that such hybrid method of accounting is permissible in view of the
judgment of the Hon'ble Supreme Court in Calcutta Company Limited case
(cited supra).
6. The Tribunal approving matching concept of accounting as below:
“15.After considering the rival contentions and material
on record, we note that the Assessee credited the full sale
consideration in the profit and loss account at the time of
booking of the flat though the amount received as advance was
very less. At the same time, the Assessee has also debited the
estimated expenditure to be incurred in construction of the flat.
The estimates so made by the Assessee regarding cost of
construction is a conservative estimate and the Assessee has
claimed the difference between the actual expenditure and the
estimated expenditure at the time of filing of return. The
Assessing Officer has disallowed this expenditure on the ground
that the Assessee has adopted hybrid system of accounting
whereas we note that this is not so as apparent from records
because when the Assessee has credited the entire sale
consideration at the time of booking of flat without receiving the
same then the Assessee is adopting the mercantile system of
account in respect of sale whereas the Assessing Officer has
observed that this is on receipt basis for the sale and accrual
basis for the expenditure. We further note that the Assessing
Officer is not correct in saying that the claim is made only in
computation of income and not in the books of accounts
whereas the learned counsel for the Assessee pointed out and
referred to pages 7 & 12 of the paper book which shows that the
construction expenses were booked in the profit and loss
accounts for so many years and this was accepted by the
Department in the previous years. The Assessing Officer though
rejected the estimation made but did not specifically point out
the defect in the estimation of the Assessee.”
7. As far as the depreciation on purchase of cinematographic films, the
ITAT has approved as below:
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T.C.A.Nos.641 and 642 of 2009
“34.After considering the rival submissions and the
material on record, we note that the Assessing Officer has
disallowed the depreciation claim of the Assessee on the
ground that the transaction itself is not genuine transaction
but in the nature of sale and lease back transaction the
Assessee was claiming 100% depreciation while the seller
was claiming as lease rent on the same asset without
movement of the asset itself. We note that the disallowance
of depreciation is only for questioning the transaction and not
otherwise. It is not the case of the department that if the
transaction is found to be genuine, the depreciation is not
allowed. We note that the lease transaction is entered into the
parties by executing lease deed which contains all the terms
and condition of the transaction and also referring to sale as
well as the lease back transaction. As per lease agreement
dated 28.03.96, the lessee requested the lessor to purchase the
equipment described in schedule I to the lease agreement at a
price finalised by the parties and had offered to take on lease
the said equipment thereafter purchase. Therefore, when the
lease agreement itself contains all the terms and conditions
and subsequent lease back transaction, then subsequent
issuing of invoice/bills by M/s Sri Veeru Creations on 29.3.96
is in pursuance to the lease agreement which is also
containing the terms and conditions of the purchase as well as
lease back does not suffer from any illegality. Thus, we find
no defect in the subsequent issue of bills against the
consideration through two cheques on 28.3.96. We further
note that even otherwise if a particular transaction is done
with a motive to save the tax then the same cannot be treated
as colourable devise if the transaction is otherwise
permissible in law. Therefore, on the facts and in the
circumstances of the case when the transaction itself is
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permissible under law, then merely because the same is
suspected by the Department, as a devise to evade tax, the
said transaction cannot be held as lawful or colourable. In
view of the above discussion, we find no error or illegality in
the order of the CIT(appeals) on this issue. The issue is
decided against the Revenue and in favour of the Assessee.”
8. Revenue has filed these appeals on the ground that the Tribunal failed
to take note of the fact that the Assessee has prepared its accounts in such a
manner that a rosy picture has been given to the public and the share holders by
showing a net profit of Rs.2.04 crores in the Profit and Loss account, however,
while computing the taxable income for the purpose of paying tax had shown
only Rs.61,070/-. By improper accounting procedure for income, the assessee
has shown the actual receipt as income. Whereas the expenditure has been
claimed on accrual basis. Therefore, the principal of matching concept will not
arise. The claim of depreciation on purchase of cinematographic films ought to
have been rejected since the date of lease of the film to the same person
proceeds the date of purchase by the Assessee. When there is no right over the
cinematographic films on the date of lease, the Assessee has leased it out.
Therefore, it being a sham and nominal transaction and colourable device with a
motive to evade the tax, the Tribunal ought not to have accepted the plea of the
Assessee.
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T.C.A.Nos.641 and 642 of 2009
9. This Court, while admitting these two appeals, has formulated the
following Substantial Questions of Law for consideration:-
1.Whether on the facts and circumstances of the case, the Tribunal
was right in holding that the assessee is entitled to deduction of
construction expenses and incremental expenses accounted for on accrual
basis, while accounting for the equivalent income only on receipt basis?
2.Whether on the facts and in the circumstances of the case, the
Tribunal was right in holding that the assessee is entitled to deprecation on
cinematograph films in a sale and lease back transaction, when the date of
purchase of the films is subsequent to the date of leasing them out, and no
evidence was produced regarding the original sale of the same?
3.Whether on the facts and in the circumstances of the case, the
Tribunal was right in holding that the sale and lease back transaction of
cinematograph film is only with a motive to save tax and so cannot be
treated as a colourable device?
10. Heard the learned Senior Standing Counsel appearing for the
Revenue/appellant and the learned counsel appearing for the respondent/the
assessee.
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T.C.A.Nos.641 and 642 of 2009
11. In so far as the question of adopting hybrid system of account in
respect of receipt on sale of flats and expenditure of the construction, the said
issue has been considered by the Hon’ble Supreme Court in Calcutta Company
Ltd., case (cited supra), in the following lines.
28. Turning now to the facts of the present case, we find
that the sum of Rs 24,809 represented the estimated expenditure
which had to be incurred by the appellant in discharging a
liability which it had already undertaken under the terms of the
deeds of sale of the lands in question and was an accrued liability
which according to the mercantile system of accounting the
appellant was entitled to debit in its books of account for the
accounting year as against the receipts of Rs 43,692-11-9 which
represented the sale proceeds of the said lands. Even under
Section 10(2) of the Income Tax Act, it might possibly be urged
that the word “expended” was capable of being interpreted as
“expendable” or “to be expended” at least in a case where a
liability to incur the said expenses had been actually incurred by
the assessee who adopted the mercantile system of accounting
and the debit of Rs 24,809 was thus a proper debit in the present
case. We need not however base our decision on any such
consideration. We are definitely of opinion that the sum of Rs
24,809 represented the estimated amount which would have to be
expended by the appellant in the course of carrying on its
business and was incidental to the same and having regard to the
accepted commercial practice and trading principles was a
deduction which, if there was no specific provision for it under
Section 10(2) of the Act was certainly allowable deduction, in
arriving at the profits and gains of the business of the appellant
under Section 10(1) of the Act, there being no prohibition against
it, express or implied in the Act.
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T.C.A.Nos.641 and 642 of 2009
12. Therefore, in view of the affirmative judgment of the Hon’ble
Supreme Court, which has been duly followed by the Appellate Authority and
the Tribunal, we find no reason to interfere with the concurrent finding of the
Appellate Authority and the Tribunal, based on the above said Judgment of the
Hon’ble Supreme Court.
13. In case of depreciation claimed on purchase of cinematograph film,
no doubt, the Assessee, who has purchased the cinematograph film from one
M/s Sri Veeru Creations production, had immediately leased it back to the very
same party. However, the fact remains the status of the vendor as the holder of
the cinematograph right has become the lessee. The title has been transferred in
favour of the assessee. While so, the depreciation sought by the assessee cannot
be disallowed, merely on suspicion without any material to substantiate the said
suspicion.
14. As rightly contended by the learned Senior Standing Counsel for the
appellant/Revenue, the Assessing Officer had disallowed the depreciation purely
on the basis of surmises and conjunctions. Sale and leaseback is a recognised
business transaction. The records show that the entire amount of sale
consideration was paid by cheque and encashed by the vendor. What is paid by
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T.C.A.Nos.641 and 642 of 2009
the vendor to the assessee is the lease amount and not the sale consideration.
For the said reason, we find that the Appellate Authority as well as the Tribunal
have rightly applied the law to the facts of the case and have arrived at a correct
decision.
15. As a result, the Substantial Questions of Law framed above are held
against the appellant/revenue.
16. In fine, both the Tax Case Appeals stand dismissed. No order as to
costs.
(G.JAYACHANDRAN, J.) (SHAMIM AHMED, J.)
20.04.2026
Neutral Citation:yes
Index:yes/no
ari
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T.C.A.Nos.641 and 642 of 2009
Dr.G.JAYACHANDRAN, J.
and
SHAMIM AHMED,J.
ari
delivery Common Judgment made in
T.C.A.Nos.641 and 642 of 2009
20.04.2026
https://www.mhc.tn.gov.in/judis
