Commissioner Of Income Tax v. M/S.annamalai Finance Ltd. Coimbatore

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 05/10/2004 CORAM THE HONOURABLE MR.JUSTICE P.D.DINAKARANANDTHE HONOURABLE MR.JUSTICE S.R.SINGHARAVELU T.C.No.255 of 2004andT.C.Nos., 256 to 258 of 2004andT.C.M.P.Nos.175 to 177 of 2004 Commissioner of Income Tax .. Appellant -Vs- M/s.Annamalai Finance Ltd.Coimbatore. .. Respondent PRAYER: Against the order of the Income Tax Appellate Tribunal Madras'A' Bench, dated 23.1.2003 in I.T.A.Nos.99, 103, 100, and 101/M/02respectively. !For Appellant : Mr.J.NarayanasamyJunior Standing Counselfor Income Tax Cases ^For Respondent : --- :JUDGMENT(Judgment of this Court was delivered by P.D.DINAKARAN,J.) These appeals are directed against the common order dated 23.1.2003 ofthe Income Tax Appellate Tribunal, Madras 'A' Bench, made in I.T. A.Nos.99 to101 and 103/M2/02, with reference to the assessment years 1992-93, 1993-94,1994-95 and 1998-99. 2.1. In brief, the assessee-company is a non-banking financialcompany engaged mainly in the business of hire purchase and equipment leasing.After completion of the original assessments for the assessment years 1992-93,1993-94, 1994-95, notices were issued by the Assessing Officer for reopeningthe assessments of the respondent/assessee on the ground that income hasescaped assessment for the said three assessment years. 2.2. The Assessing Officer, during the course of the reassessment, by assessment order dated 23.3.2001 for the assessment year 1992-93; and by assessment order dated 26.3.2001 for the assessment years 1993-94, 1994-95 and1998-99, (i) found that the change of method of accounting of overdue charges frommercantile basis to cash system was not justified and therefore, added overdueinterest on mercantile basis; (ii)rejected the claim of the respondent/assessee with reference to 1 00% depreciation on bottles purchased in bulk and leased out to others; (iii)100% depreciation on steel rollers purchased and leased back to the samepersons by the respondent during the assessment year 1993-94 and 1994-95 wasalso rejected; (iv) the issue of cost under Section 43(1) of the Income Tax Act ( for brevity "the Act") of the assets purchased and leased back during the assessment year1994-95 was also rejected; (v) the interest was levied for the delay in filing the revised return under Section 234A of the Act; and (vi)the higher depreciation on vehicles leased out as claimed by therespondent/assessee was also rejected. 2.3. Aggrieved by the said assessment orders of the Assessing Officer, the respondent/assessee preferred an appeal before the Commissionerof Income Tax (Appeals), who by an order dated 14.12.2001 upheld theassessment order of the assessing officer with respect to the inclusion ofoverdue charges to the income for all the four assessment years. TheCommissioner also confirmed the addition of the differential depreciation madeby the assessing officer for the assessment years 1993-94 and 1994-95 inrespect of bulk leasing of steel rollers. However, he held in favour of theassessee with reference to 100% depreciation on the bottles, and also higherdepreciation rate on vehicles leased out. 2.4. While the respondent/assessee preferred appeals with referenceto the inclusion of the overdue charges on mercantile basis, the revenuepreferred independent appeals against the allowing of 100% depreciation on thebottles and steel rollers, and also higher depreciation rate on vehiclesleased out. 2.5. All the appeals were heard jointly by the Tribunal and disposed of by a common order dated 23.1.2003 allowing the appeals preferred by theassessee and dismissing the appeals preferred by the revenue. Hence, therevenue has preferred these appeals on the following substantial questions oflaw: 2.4. While the respondent/assessee preferred appeals with referenceto the inclusion of the overdue charges on mercantile basis, the revenuepreferred independent appeals against the allowing of 100% depreciation on thebottles and steel rollers, and also higher depreciation rate on vehiclesleased out. 2.5. All the appeals were heard jointly by the Tribunal and disposed of by a common order dated 23.1.2003 allowing the appeals preferred by theassessee and dismissing the appeals preferred by the revenue. Hence, therevenue has preferred these appeals on the following substantial questions oflaw: (i) Whether in the facts and circumstances of the case, the Tribunal was rightin holding that the assessing officer did not have the jurisdiction to reopenthe assessments for the assessment years 1992-93, 1993-94 and 1994-95?(ii) Whether in the facts and circumstances of the case, the Tribunal wasright in entertaining the assessee's objection to the jurisdiction of theassessing officer, which had not been raised at any earlier stage? (iii) Whether in the facts and circumstances of the case, the Tribunal was right in upholding the action of the assessee in changing the method ofaccounting of overdue interest alone on a cash basis, when the system ofaccounting of the assessee was mercantile? (iv) Whether in the facts and circumstances of the case, the Tribunal was right in allowing 100% depreciation on bottles purchased in bulk by theassessee and leased out to others? (v) Whether in the facts and circumstances of the case, the Tribunal was rightin allowing 100% depreciation on steel rollers which were purchased from andleased back to the same party? (vi) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the apparent consideration should be accepted by theassessing officer as the cost in a sale and lease back transaction, althoughthe amounts specified as lease amounts were not received by the assessee?(vii) Whether in the facts and circumstances of the case, the Tribunal wasright in holding that no interest under Section 234A can be charged for delayin filing the return in response to notice under Section 148, as the originalreturn was on file all the time? (viii) Whether in the facts and circumstances of the case, the Tribunal wasright in holding that leased out commercial vehicles are eligible for higherrate of depreciation? 3. After hearing the learned counsel for the appellant/ revenue and perusing the orders of the authorities below, we are inclined to pass thefollowing order on the above substantial questions of law. 4.1. Questions (i) to (iii): Question (i): - Whether in the facts and circumstances of the case,the Tribunal was right in holding that the assessing officer did not have thejurisdiction to reopen the assessments for the assessment years 1992-93,1993-94 and 1994-95? Question (ii): - Whether in the facts and circumstances of the case,the Tribunal was right in entertaining the assessee's objection to thejurisdiction of the assessing officer, which had not been raised at anyearlier stage? Question (iii): - Whether in the facts and circumstances of the case,the Tribunal was right in upholding the action of the assessee in changing themethod of accounting of overdue interest alone on a cash basis, when thesystem of accounting of the assessee was mercantile? 4.2. A reference to the following admitted facts are relevant to deal with questions (i) to (iii), referred to above. 4.3. It is not in dispute that the respondent/assessee has fully and truly disclosed all material facts necessary for completing the assessmentsfor the impugned assessment years 1992-93, 1993-94 and 1994-9 5 under Section143(3) of the Act. 4.4. The period of limitation applicable to the reopening the Question (iii): - Whether in the facts and circumstances of the case,the Tribunal was right in upholding the action of the assessee in changing themethod of accounting of overdue interest alone on a cash basis, when thesystem of accounting of the assessee was mercantile? 4.2. A reference to the following admitted facts are relevant to deal with questions (i) to (iii), referred to above. 4.3. It is not in dispute that the respondent/assessee has fully and truly disclosed all material facts necessary for completing the assessmentsfor the impugned assessment years 1992-93, 1993-94 and 1994-9 5 under Section143(3) of the Act. 4.4. The period of limitation applicable to the reopening the assessments concluded under Section 143(3) of the Act for the assessment years1992-93 and 1993-94 would be the period of four years prescribed in theproviso to Section 147 of the Act. In these two cases, the notices underSection 148 of the Act have been issued after the expiry of the four yearsfrom the end of the assessment years 1992-93 and 19 93-94. For the purpose ofclarity, in respect of assessment year 199 2-93, if at all necessary, shouldhave been issued on or before 31.3.1997, whereas, in fact, the notice wasissued only on 5.3.1999. Similarly, in the case of assessment year 1993-94,notice under Section 1 48 of the Act should have been issued on or before31.3.1998, whereas it was issued only on 5.3.1999. Therefore, apparent on theface of the record, it could be seen that the notice for the two assessmentyears 1992-93 and 1993-94 was issued after the expiry of the period of fouryears from the end of respective assessment years, violating proviso toSection 147 of the Act. 4.5. With reference to the jurisdiction to reopen the assessment for the year 1994-95, the assessing officer proposed to reopen the assessment forthe year 1994-95 purely based on the change of opinion, namely the change inthe method of accounting of overdue interest on cash or actual receipt basis,when the assessee was following mercantile system of accounting. 4.6. In COMMISSIONER OF INCOME TAX v. MATCHWELL ELECTRICALS (I) LTD, [2003] 263 ITR 227, a Division Bench of the Bombay High Court held that thechange of method of accounting is permissible in law. In the said case, theassessee was engaged in the business of manufacturing electrical appliances.It followed the accounting year ending September, 20. The assessee was alsoengaged in exporting its products. The assessee received cash assistance andduty drawbacks from the Government of India. Prior to the assessment years1977-78 and 1978-79, the assessee was accounting for receipts of cashassistance and duty drawbacks on the mercantile basis as its accounts weremaintained on the mercantile basis. In revised returns for these years cashassistance and duty drawbacks were accounted on the cash basis. The AssessingOfficer held that the assessee could not maintain a mixed system of accountingfor different types of income. The Commissioner, however, held that thechange in the method of accounting was bona fide and no loss was sustained bythe Revenue. This was upheld by the Tribunal. The matter was taken onreference to the High Court. The Division Bench of the Bombay High Court heldthat the view of the Tribunal was justified in law holding that the export ofduty drawback and cash assistance from the Government was assessable in thehands of the assessee on receipt basis and not on accrual basis. 4.7. It is a settled proposition vide the decision a Division Bench 4.7. It is a settled proposition vide the decision a Division Bench of the Calcutta High Court in HELA HOLDINGS PVT. LTD v. COMMISSIONER OFINCOME TAX, [2003] 263 ITR 129 that the assessee is entitled to change hisregular method of accounting by another regular method. It would be open tothe assessee to produce records and show that it had followed such changedaccounting method in the subsequent years. In the said decision, the CalcuttaHigh Court also laid the following general principles regarding tax avoidanceand tax evasion, while dealing with the validity of the change in method ofvaluation, change in accordance with accounting practice and change followed in subsequent years. The general principles are: (i) the distinction between tax evasion and tax avoidance is still prevalent. (ii) generally speaking, tax evasion is the result of such things as illegality, suppression, misrepresentation and fraud. (iii) tax avoidance is the result of actions taken by the assessee, none ofwhich is illegal or forbidden by the law in itself and no combination of whichis similarly forbidden or prohibited. (iv) the permissibility of a tax avoidance, will fall to be decided, when andonly when, on the basis of the facts and transactions truly and correctlydisclosed by the assessee, a point of law arises, whether on a certainreasonable construction of one part of the taxing statute, as applied to theassessee's case, tax which would otherwise be payable by the assessee, becomesnot payable in the case in hand. (v) When the court is faced with a task of construction in the above manner,the court is not bound to make the construction in favour of the assesseemerely on proof by the assessee, that it has entered into no illegality andmade no prohibited transaction. (vi) the court would have to assess, in the facts and circumstances of each case, upon general principles of conscience and justice, whether thearrangement of affairs by the assessee, so as to cause the possibility of areduction of tax incidence, can fairly be permitted to the assessee, as agenuine and legal means of tax reduction, employed by it in a commercial fairsense, or whether allowing the assessee to earn the reduction, in the factsand circumstances of the particular case, is opposed to the public policy ofnot encouraging citizens to engage themselves in dealings and transactionsdesigned primarily for the purpose of non-payment of tax only.(emphasis supplied) 4.8. In the instant case, the learned counsel for the revenue is not in a position to demonstrate or satisfy us that due to the change ofaccounting method adopted by the respondent/assessee, which is permissible inlaw as per the ratio laid down in (i) COMMISSIONER OF INCOME TAX v. MATCHWELLELECTRICALS (I) LTD, [2003] 263 ITR 227; and (ii) HELA HOLDINGS PVT. LTD v.COMMISSIONER OF INCOME TAX, [2003] 263 ITR 129 , the revenue suffered any lossor such a change of methodology attracts tax evasion. Concededly, there is nofinding to that effect in the assessment order or in the order of theCommissioner of Income Tax (Appeals). 4.9. The change of method of accounting of overdue charges from 4.8. In the instant case, the learned counsel for the revenue is not in a position to demonstrate or satisfy us that due to the change ofaccounting method adopted by the respondent/assessee, which is permissible inlaw as per the ratio laid down in (i) COMMISSIONER OF INCOME TAX v. MATCHWELLELECTRICALS (I) LTD, [2003] 263 ITR 227; and (ii) HELA HOLDINGS PVT. LTD v.COMMISSIONER OF INCOME TAX, [2003] 263 ITR 129 , the revenue suffered any lossor such a change of methodology attracts tax evasion. Concededly, there is nofinding to that effect in the assessment order or in the order of theCommissioner of Income Tax (Appeals). 4.9. The change of method of accounting of overdue charges from mercantile basis to cash system, method of accounting, as followed by anassessee, does not create any income; but the method of accounting onlyrecognizes income. Therefore, either to apply accrual system or cash system,recognition of income is a paramount factor. In the present case, thedisputed amount is the overdue charges receivable by the assessee from variousparties on the basis of hire purchase and lease agreements. As per the termsof agreements, overdue charges are payable by the parties concerned to theassessee when they make defaults in paying the instalments as per the scheduleof payments. When the instalment itself is overdue, is not collected, thereis no basis for making out a case that the additional overdue charges payableby the parties would be collectible with certainty. The terms of theagreements which enable the assessee company to demand overdue charges is onlyan enabling provision and that enabling provision does not guarantee the collection of overdue charges. It only gives a cause of action to theassessee. In such cases it is very difficult to recognize income againstoverdue charges. 4.10. We are, therefore, of the considered opinion that the Tribunalhas rightly deleted the additions made towards overdue charges, acknowledgingthe change of method of accounting of overdue interest alone on cash basis. 4.11. In the course of reassessment, as held by the Division Bench ofthe Kerala High Court in COMMISSIONER OF INCOME-TAX v. SIVA TRADERS, [2002]255 ITR 77, the Income Tax Officer is obliged to satisfy himself as to whether the materials produced by the assessee and available on record, had anyrational connection or live link for the formation of the requisite beliefthat the income chargeable to tax has escaped assessment. 4.12. A Full Bench of the Delhi High Court in C.I.T. v. KELVINATOR OF INDIA LTD., [2002] 256 ITR 1, interpreting the powers of the Income TaxOfficer with respect to reassessment, held that a mere change of opinioncannot form a basis for reopening the completed assessment and further heldthat when a regular order of assessment is passed under Section 143(3) of theAct, a presumption can be made that such an order has been passed onapplication of mind. It is well known that a presumption can be raised to theeffect that in terms of Section 11 4(e) of the Indian Evidence Act, judicialand official acts have been regularly performed. If it be held that an orderwhich has been passed purportedly without application of mind would itselfconfer jurisdiction upon the Assessing Officer to reopen the proceedingwithout anything further, the same would amount to giving a premium to anauthority exercising quasi judicial function to take benefit of its own wrong.Hence, it is clear that section 147 of the Act does not postulate confermentof power upon the Assessing Officer to initiate reassessment proceedings upona mere change of opinion. 4.13. Accordingly, the questions (i) to (iii) are answered inaffirmative, against the revenue and in favour of the assessee. 5.1. Question (iv): Whether in the facts and circumstances of the case, the Tribunal was right in allowing 100% depreciation on bottlespurchased in bulk by the assessee and leased out to others? 5.2. This question is settled by a decision of this Court in FIRST 4.13. Accordingly, the questions (i) to (iii) are answered inaffirmative, against the revenue and in favour of the assessee. 5.1. Question (iv): Whether in the facts and circumstances of the case, the Tribunal was right in allowing 100% depreciation on bottlespurchased in bulk by the assessee and leased out to others? 5.2. This question is settled by a decision of this Court in FIRST LEASING CO. OF INDIA LTD. v. COMMISSIONER OF INCOME TAX, [2000] 244 ITR238, wherein this Court held that each bottle was an independent unit and wasnot dependent for its user on the availability of other bottles whether emptyor filled. The use of one bottle was not interconnected with the use of otherbottles. Since each bottle was an individual unit and all bottles togetherdid not constitute a single integrated unit depreciation under the proviso toSection 32(1)(ii) of the Act was allowable. Even in the instant case, theissue is relating to the allowance of 100% depreciation on each bottle and thesaid decision squarely applies. That apart, the case of the assessee is also supported with another decision in COMMISSIONER OF INCOME TAX v. ALAGENDRANFINANCE LTD., [2003] 264 ITR 269. 5.3. This question is also answered in affirmative against therevenue. 6.1. Question (v): Whether in the facts and circumstances of the case, the Tribunal was right in allowing 100% depreciation on steel rollerswhich were purchased from and leased back to the same party? 6.2. With regard to 100% depreciation in the case of steel rollers, an attempt was made by the learned counsel for the appellant that 100 %depreciation cannot be allowed in the case of steel rollers, because the ratioin the case of FIRST LEASING CO. OF INDIA LTD. v. COMMISSIONER OF INCOMETAX, referred supra, dealt with only leasing out of bottles which are valuedbelow Rs.750/-. He further contended that the ratio in COMMISSIONER OF INCOMETAX v. ALAGENDRAN FINANCE LTD., [2003] 264 ITR 269, which deals withdepreciation on centering sheets is also not applicable to the facts of thecase, as Steel Rollers cost more than Rs.5000/-. 6.3. The Apex Court in COMMISSIONER OF INCOME TAX v. SHAAN FINANCE P. TD., [1998] 231 ITR 308 held that where the business of the assesseeconsists of hiring out of machinery and where the income derived by theassessee from such hiring is business income the assessee must be consideredas having used the machinery for the purpose of its business. This positionwas reiterated by the Supreme Court in COMMISSIONER OF INCOME TAX v. MAHARASHTRA APEX CORPORATION LTD, [2002] 254 ITR 98, and also the decision ofthis Court in COMMISSIONER OF INCOME TAX v. MADAN AND CO., [2002] 254 ITR445. 6.4. We are, therefore, of the firm opinion that the Tribunal was right in granting 100% depreciation on steel rollers, and accordingly, weanswer this question in affirmative in favour of the assessee and against therevenue. 7.1. Question (vi): Whether in the facts and circumstances of the case, the Tribunal was right in holding that the apparent consideration shouldbe accepted by the assessing officer as the cost in a sale and lease backtransaction, although the amounts specified as lease amounts were not receivedby the assessee? 7.2. Strictly speaking, "apparent consideration", as held by the Bombay High Court in POLYCON PAPER LTD. v. UNION OF INDIA, [2002] 253 ITR182, would mean the whole or part of the consideration for such transfer,which is payable on any date or dates falling after the date of such agreementfor transfer, and the value of such consideration payable after such date shall be deemed to be discounted value of such consideration as on the date ofsuch agreement or transfer, determined by adopting such rate of interest as 7.3. Therefore, unless and until there are reasons to believe that the cost in a sale or an amount in a lease back transaction, as specified, wasreceived, but not disclosed, we do not see any error, on the part of theTribunal, in accepting the apparent consideration. 7.2. Strictly speaking, "apparent consideration", as held by the Bombay High Court in POLYCON PAPER LTD. v. UNION OF INDIA, [2002] 253 ITR182, would mean the whole or part of the consideration for such transfer,which is payable on any date or dates falling after the date of such agreementfor transfer, and the value of such consideration payable after such date shall be deemed to be discounted value of such consideration as on the date ofsuch agreement or transfer, determined by adopting such rate of interest as 7.3. Therefore, unless and until there are reasons to believe that the cost in a sale or an amount in a lease back transaction, as specified, wasreceived, but not disclosed, we do not see any error, on the part of theTribunal, in accepting the apparent consideration. 7.4. This question is, therefore, answered in affirmative and againstthe revenue. 8.1. Question (vii) - Whether in the facts and circumstances of the case, the Tribunal was right in holding that no interest under Section 234Acan be charged for delay in filing the return in response to notice underSection 148, as the original return was on file all the time? 8.3. Since, when the very reopening of the case for the assessmentyears is based on change of opinion and on irrelevant, illogical andunsustainable reasons, without any jurisdiction, the question of demandinginterest under Section 234A of the Act does not arise. 8.4. This question is also answered in affirmative, against therevenue. 9.1. Question (viii): Whether in the facts and circumstances of thecase, the Tribunal was right in holding that leased out commercial vehiclesare eligible for higher rate of depreciation? 9.2. This issue is settled by a decision of the Delhi High Court in COMMISSIONER OF INCOME TAX v. BANSAL CREDITS LTD., [2003] 259 ITR 69. On aplain reading of Section 32 of the Act and entry III(2)(ii) in Appendix I tothe Rules, it is clear that it is the end user of the specified asset which isrelevant for determining the percentage of depreciation. Section 32 of theAct requires that the asset should be used for the purpose of the assessee'sbusiness and the entry in the Appendix refers to the user it should be put to.Once it is accepted that the leasing out of the vehicles is one of the modesof doing business by the assessee and in fact the income from such leasing istreated as business income of the assessee, it would be clearly contradictoryin terms to hold that the vehicles in question were not used wholly for thepurpose of the assessee's business. The Delhi High Court held that theassessees, which were engaged in the business of leasing out commercialvehicles, were entitled to depreciation at the higher rate of 40 per cent asprovided in item III(2)(ii) of Part A of Appendix I to the Income Tax Rules,1962. 9.3. This Court in COMMISSIONER OF INCOME TAX v. MADAN & CO., [2002] 254 ITR 445, explaining reason for eligibility for higher rate of depreciationin the case of leased out vehicles, while interpreting Entry III(2)(ii) ofAppendix I, namely "Motor buses, motor lorries and motor taxis used in abusiness of running them on hire", held as follows: "Owners of vehicles who used it for their own purposes are allowed to claimdepreciation at the normal rates. Owners of vehicles mentioned in the entry when they allow it to be used for a price are allowed to obtain a higher rateof depreciation. The distinction is based upon the fact that a person whoobtains the temporary right to use of the vehicle on payment of a charge priceis likely to, by the nature of his user, such user being for the purpose ofthe hirer and not the owner, depreciate the value of the vehicle faster. All such vehicles, which are so used, are likely to undergo a little morerough use than vehicles owned by and used for the personal purposes of theowner. It is in recognition of that fact of the depreciation occurring at afaster rate for such vehicles that the law provides for the higher rate ofdepreciation. when they allow it to be used for a price are allowed to obtain a higher rateof depreciation. The distinction is based upon the fact that a person whoobtains the temporary right to use of the vehicle on payment of a charge priceis likely to, by the nature of his user, such user being for the purpose ofthe hirer and not the owner, depreciate the value of the vehicle faster. All such vehicles, which are so used, are likely to undergo a little morerough use than vehicles owned by and used for the personal purposes of theowner. It is in recognition of that fact of the depreciation occurring at afaster rate for such vehicles that the law provides for the higher rate ofdepreciation. The fact that the assessee here chose to lease out the vehicle does not onthat score disentitle the assessee to claim the benefit of the higherdepreciation. The lease of the vehicle enables the lessee to have possessionof the vehicle, and have the right to use the vehicle as the lessee wishes,subject to the terms of any contract between the parties. The lessee duringthe period of user is also likely to have to maintain the vehicle subject tothe terms of the contract between the parties. For having the benefit of theuser of the vehicle, the lessee is required to pay a price which is the leaseamount, whether called rent or hire charges. The terminology used fordescribing the payment makes no difference in substance. What is paid is anamount in consideration of the right obtained from the owner to have the useof the vehicle for the benefit of the lessee for the stated period, and, orthe stated purpose, whether or not by employing his own drivers, and whetheror not also undertaking to maintain the vehicle during the period of the leaseor hire. The word "hire" used in this entry is only meant to denote that the use of thevehicle is not by the owner himself for his own purposes, but it is given toanother for use for a limited period of that other for a consideration. Forthe purpose of this entry there is no qualitative difference between lease ofthe vehicle for a specified period for consideration and letting the vehicleon hire for short duration on payment of hire charges." 9.3. Applying the ratio laid down in the above decisions, viz., (i)COMMISSIONER OF INCOME TAX v. BANSAL CREDITS LTD., [2003] 259 ITR 69; and(ii) COMMISSIONER OF INCOME TAX v. MADAN & CO., [2002] 254 ITR 4 45, thisquestion is answered in affirmative, in favour of the assessee and against therevenue. These appeals are disposed of accordingly. Consequently, connectedmiscellaneous petitions are closed. Index : YesInternet :Yes