Commissioner Of Income Tax,Chennai v. M/S.sundaram Finance Limited

In the High Court of Judicature at Madras Dated: 08.12.2011 Coram: The Honourable Mr.Justice ELIPE DHARMA RAOandThe Honourable Mr.Justice R.SUBBIAH Tax Case (Appeal)Nos.156 and 157 of 2008 Commissioner of Income Tax,Chennai...Appellant in both Appeals..vs.. M/s.Sundaram Finance Limited,21, Pattullos Road,Chennai-600 002. ..Respondent in both Appeals Appeals filed under section 260A of the Income Tax Act, filedagainst the common order of the Income Tax Appellate Tribunal, Madras'B' Bench dated 23.08.2006 in I.T.A. Nos.1974/Mds/2000 and887/Mds/2001 respectively against the orders of the Commissioner ofIncome Tax (Appeals)-IX, Chennai-600 034 (i) dated 26.9.2000 and madein ITA.No.40/99-2000; and (ii) dated 20.2.2001 and made in ITANO.115/2000-2001 respectively against the orders of the JointCommissioner of Income -Tax, Special Range-II, Chennai 600 034 (i)dated 30.3.1999 and made in PA.No.GIR No.9-S; and (ii) dated31.3.2000 and made in PANO./GIR No.AAA CS 4944A/-9-S Respectively. For Appellant : Mr.K.Subramanian For Respondent : Mr.P.S.Raman, Senior Counsel for M/s.Subbaraya Aiyar, Padmanabhan and Ramamani COMMON JUDGMENT R.SUBBIAH, J., These Tax Case Appeals are directed, at the instance of theRevenue, in respect of the assessment years 1996-97 and 1997-98,against the common order passed by the Income Tax Appellate Tribunal,Chennai Bench 'B', dated 23.08.2006, made in I.T.A.Nos.1974/Mds/2000and 887/Mds/2001. https://hcservices.ecourts.gov.in/hcservices/ 2. Both the appeals were admitted on the following substantialquestions of law: (1) Whether, on the facts and circumstances of thecase, the Tribunal was right in holding that collection ofcontingency deposit against payment of sales tax would notform part of the income ? (2) Whether, on the facts and circumstances of thecase, the Tribunal was right in holding that thedepreciation on leased assets can be allowed in a year whenthe assets had not yet been put to use by the lessee ? Substantial question of law No:1 3. The first question, namely, whether the collection of'contingency deposit' by the assessee against the payment of salestax, would form part of the income or not, is no more res integra, asit has already been answered against the assessee, by the decisionrendered by a Division Bench of this Court reported in COMMISSIONEROF INCOME-TAX .vs. SOUTHERN EXPLOSIVES CO., ((2000) 242 ITR 107(Mad), wherein it has been held that 'the receipt of the amount forpayment of sales tax and keeping it in deposit would amount to a"revenue receipt" and it would form part of the assessee's income'.Hence, in view of the dictum laid down in the said judgment, we areof the view that the finding rendered by the Appellate Tribunal isliable to be set aside. Accordingly, the same is hereby set aside inboth the appeals and the said question is answered in favour of therevenue. Substantial question of law No:2 4. The brief facts, which are necessary to decide the secondsubstantial question of law, are as follows: During the assessment year 1997-98, the assessee claimeddepreciation at 100% on 70 MTPH boiler, amounting toRs.3,85,38,500/-, stating that the boiler was given on lease toM/s.Thiru.Arooran Sugars Limited(TASL) as per the lease agreementdated 29.03.1997. The boiler is located at Kollumangudi Village,Nannilam Taluk in the premises of TASL. Since the said asset was putinto use on 26.03.1997, the assessee claimed depreciation for thesecond half of the assessment year. The enquiry made by thedepartment revealed that the said 70 MTPH boiler is part of a co-generation power plant, commissioned by TASL and hence, a show causenotice dated 16.03.2000 was issued to the assessee as to why thedepreciation should not be withdrawn. The relevant portion from thesaid notice reads as follows: "This Office Inspectors have visited the factory premises ofM/s.Thiru Arooran Sugars Ltd., at Kollumangudi Village on11.03.2000, to make on the spot enquiries with regard to theboiler. The enquiries revealed that the said boiler is partof the 110KV/18/MW Co-generation Power Plant. As per letterNo.16/BC/96-97 dated 26.03.1997 issued by the Deputy ChiefInspector of Boilers, permission was granted to put to usethe boiler for a period of 6 months from 26.03.1997. As already stated, the said boiler is part of the co-generation power plant and the Co-generation Plant wasactually commissioned and the Power Plant was synchronisedwith the Tamil Nadu Electricity Board Grid at 10.35 hours on06.05.1997. Thus, the production of the Co-generation Plantcommenced only on 06.05.1997. This is supported by the letterfrom the Chief Engineer (Distribution), Tamil NaduElectricity Board, Trichirappalli. From the above, it may beseen that the boiler could be put to use only on 06.05.1997,on which date, the power plant actually started producing theenergy. The boiler could not have been put to use otherwisealso before 06.05.1997 as the sugar plant started productionof sugar only from 19.01.1998. The boiler is part of the co-generation power plant and thus, in the circumstances of theassessee's case, it is very clear that the boiler was put touse only on 06.05.1997. So, the claim of 100% depreciationby you on the said boiler is not in accordance with theprovisions of the Income Tax Act, as it had not been put touse before 31.03.1997. The depreciation claim at best can beconsidered only in the subsequent year...". 5. It is the contention of the revenue that the boiler was putto use only on 06.05.1997 on which date, the power plant actuallystarted producing energy and it could not have been put to useotherwise also before 06.05.1997 as the sugar plant startedproduction of sugar only from 19.01.1998; that the boiler is part ofthe co-generation power plant and in such circumstances, it is clearthat the boiler was put to use only on 06.05.1997. So, the claim of100% depreciation made by the assessee for the year 1996-97 is not inaccordance with the provisions of the Income Tax Act as the boilerhad not been put to use before 31.03.1997. The depreciation claim, atbest, can be considered only in the subsequent year and not for theyear 1996-97. 6. It is the further case of the revenue that the lease rentalaccrued on the boiler was not accounted as on 31.03.1997. As per theprovisions of section 145 of the Income Tax Act, the assessee issupposed to recognise the income on accrual basis. The Board has alsoissued a Notification No.S.O.69(E) dated 25.01.1996 under section 145(2) of the Income Tax Act. As per these Accounting Standards, accrualrefers to the assumption that revenues and costs are accrued, i.e.recognised as they are earned or incurred and recorded (not asmoney received or paid) and recorded in the financial statements ofthe periods to which they relate. When the lease transaction isrecognised and the depreciation is claimed, then, the income shouldhave been recognised and admitted in the return of income. But, nosuch lease rental is recognised as earned as on 31.03.1997. As perthe Audit Report in Form-3 CD filed along with the return, it isstated that "income is accounted on accrual basis in accordance withthe Prudential Norms prescribed by the Reserve Bank of India and theAccounting Standards notified by the Central Government videNotification No.S.O.69(E) dated 25.01.1996 issued under section 145(2) of the Income Tax Act". i.e.recognised as they are earned or incurred and recorded (not asmoney received or paid) and recorded in the financial statements ofthe periods to which they relate. When the lease transaction isrecognised and the depreciation is claimed, then, the income shouldhave been recognised and admitted in the return of income. But, nosuch lease rental is recognised as earned as on 31.03.1997. As perthe Audit Report in Form-3 CD filed along with the return, it isstated that "income is accounted on accrual basis in accordance withthe Prudential Norms prescribed by the Reserve Bank of India and theAccounting Standards notified by the Central Government videNotification No.S.O.69(E) dated 25.01.1996 issued under section 145(2) of the Income Tax Act". 7. The sum and substance of the contention of the revenue isthat as per the agreement entered into between the assessee and TASLon 29.03.1997, the boiler was given on lease i.e.just two days priorto the end of assessment year 1996-97. Therefore, the lessee TASLcould not have put the asset in use before 31.03.1997. When thatbeing so, the depreciation claimed by the assessee is liable to bewithdrawn, at the best, the depreciation can be considered only inthe subsequent year, whereas it is the case of the assessee that theboiler has been installed in the factory of TASL, Kollumangudi,Nannilam by the supplier of M/s.Bharat Heavy Electricals Limited(BHEL). The boiler has been capitalised net of Modvat credit forRs.7,70,77,000/- in the books on 29.03.1997, the date of theagreement of lease with TASL. As the boiler (Lignite-cum-Bagasee) isspecialised in nature having thermal efficiency above 75%, it iseligible for 100% depreciation as per item III(3)(iii)A(d) ofAppendix-1 to the Income-Tax Rules, 1962. The conditions for claimingdepreciation under section 32 of the Act has been satisfied inrespect of the boiler, as mentioned below: "Ownership: As a lessor and as evidenced from the invoice raisedby the BHEL, the assessee is the absolute owner of the asset.User: The boiler has been put to use in the business of leasingvide lease agreement dated 29.3.1997. The lessee, TASL, issued an installation certificate certifyingthat the boiler was installed and put to use on 28.3.97. TheDeputy Chief Inspector of Boilers, Tiruchirapalli has certifiedthat the boiler was erected on or before 26.3.97 andhydraulically tested to a pressure of 102 kg/cm2 and foundsatisfactory vide his order No.B/Rc 19320/95 dt.3.4.97". 8. It is the case of the assessee that the asset was put intouse for the purpose of leasing business even before 31.03.1997. Butthe case of the assessee was negated by the assessing officer,holding that the assessee has not proved that they are eligible for100% depreciation as a specialised category and they have also notproved that the asset was put into use before 31.03.1997. But, on appeal, the Commissioner of Income Tax (Appeals) upheld the order ofthe Joint Commissioner of Income Tax. Aggrieved over the same, therevenue has filed this appeal. 9. We have heard the learned counsel for both sides and perusedthe materials available on record. 8. It is the case of the assessee that the asset was put intouse for the purpose of leasing business even before 31.03.1997. Butthe case of the assessee was negated by the assessing officer,holding that the assessee has not proved that they are eligible for100% depreciation as a specialised category and they have also notproved that the asset was put into use before 31.03.1997. But, on appeal, the Commissioner of Income Tax (Appeals) upheld the order ofthe Joint Commissioner of Income Tax. Aggrieved over the same, therevenue has filed this appeal. 9. We have heard the learned counsel for both sides and perusedthe materials available on record. 10. It is the case of the revenue that the asset was actuallyput to use only on 06.05.1997 and in support of their contention,they have relied upon a letter from the Chief Engineer, Tamil NaduElectricity Board, Tiruchirapalli to show that the permission wasgranted to the lessee to put to use the boiler on 06.05.1997, onwhich date the power plant of the lessee actually started producingenergy. Since the asset was put to use on 06.05.1997 i.e. much laterfrom the end of the assessment year 31.03.1997, the appellant canclaim depreciation only for the subsequent year. But it is thecontention of the assessee that the boiler has been installed in thefactory of lessee in the month of February, 1997 itself and insupport of the same, they relied upon a letter dated 01.07.1997issued by BHEL, the supplier of boilers. Therefore, since the boilerwas installed prior to 31.05.1997, they are eligible for depreciationfor the assessment year 1996-97. 11. Whether the assessee is entitled for the depreciation on theassets for the assessment year 1996-97 or for the subsequent year isthe question that has to be decided in this appeal. In fact, thejudgments relied upon by the learned counsel for therespondent/assessee would give a fitting answer to this issue andthe relevant paragraphs in the decisions are extracted hereunder: In COMMISSIONER OF INCOME TAX .vs. KOTAK MAHINDRA FINANCE LTD.,((2009) 317 ITR 236 (Bom), a Division Bench dismissed the appealfiled by the Revenue, holding that, "The assessee, admittedly had supplied the machinerybefore the end of the financial year and the assessee hadreceived the lease rentals for the same. Whether the lesseehad put to use the leased equipment would be irrelevant aslong as the machinery in fact had been given on lease beforethe end of the financial year, as then it could be said thatthe assessee for the purpose of business had "used" the leasedequipment. The assessee was entitled to depreciation". 12. In COMMISSIONER OF INCOME-TAX .vs. REETU FINLEASE P.LTD.,((2006) 286 ITR 652 (Delhi), it has been held as follows: "In the absence of any evidence to the contrary once themachines were installed at the place of the lessee it could bepresumed that they had been utilised, even assuming that suchactual user was a condition precedent for https://hcservices.ecourts.gov.in/hcservices/ the lessee to claim depreciation. The assessee was entitled tothe depreciation". 13. This Court, in COMMISSIONER OF INCOME-TAX .vs. FIRST LEASINGCO.OF INDIA LTD., ((1995) VOL.216 ITR 455 (Mad), has held as follows:"In other words, while the relevant provisions in section 33provide that machinery or plant should be installed by theassessee in the premises used by it, or it is an asset or thesaid machinery or plant is an asset relating to the businesscarried on by the assessee, as the case may be, section 32A(2B)does not have any such stipulation. That is why the saidKarnataka decision CIT v. Shaan Finance (P.) Ltd. [1993] 199ITR 409, concludes by saying thus (at page 416) : https://hcservices.ecourts.gov.in/hcservices/ the lessee to claim depreciation. The assessee was entitled tothe depreciation". 13. This Court, in COMMISSIONER OF INCOME-TAX .vs. FIRST LEASINGCO.OF INDIA LTD., ((1995) VOL.216 ITR 455 (Mad), has held as follows:"In other words, while the relevant provisions in section 33provide that machinery or plant should be installed by theassessee in the premises used by it, or it is an asset or thesaid machinery or plant is an asset relating to the businesscarried on by the assessee, as the case may be, section 32A(2B)does not have any such stipulation. That is why the saidKarnataka decision CIT v. Shaan Finance (P.) Ltd. [1993] 199ITR 409, concludes by saying thus (at page 416) : "The benefit is given with reference to the actual userof the machinery, though the benefit may go to a personwho does not exploit the machinery himself formanufacturing or producing any article. Such a situationis not entirely unknown in the field of taxation. If theobject behind section 32A is understood as to encourageindustrial activities and investment in capital goods tofacilitate industrial developments, the provision wouldcertainly bear the meaning we have attributed to it." Learned counsel for the Revenue also relies on section 32A,sub-section (5) (a), and contends that since the plant ormachinery in the present cases has been leased out by theassessee, it is hit by the abovesaid provision in view of thefact that the terms "otherwise transferred" found therein wouldinclude such lease. So, according to him, the said allowance"shall be deemed to have been wrongly made". But, we are unableto accept this contention also. First of all, even on thefooting that the term "otherwise transferred" would includesuch "leases" as given in the present cases, the said provisionwill not disentitle the assessees herein from securinginvestment allowance, since the said provision only speaks of"machinery or plant transferred by the assessees" at any timebefore the expiry of eight years from the end of the previousyear in which it was acquired or installed". In all the presentcases, admittedly, the leases were only during the previousyear in which the plant or machinery was acquired and not inthe abovereferred to eight year period beginning from the endof the previous year". The dictum laid down in the above judgments would show that as andwhen the assets are installed at the place of the lessee, it could bepresumed that they had been used and that such actual use was acondition precedent for the lessee to claim depreciation. 14. In view of the legal position, we are unable to appreciatethe contentions made by the Revenue that actual date on which theasset was put to use alone has to be taken into consideration. We donot find any infirmity in the common order passed by the AppellateTribunal, allowing the claim of depreciation on leased assets.Therefore, the second substantial question of law is answered in thenegative i.e. against the revenue. Accordingly, both the appeals are allowed in part by answeringthe first question in favour of the Revenue and answering the secondquestion as against the Revenue. No costs. Sd/Asst. Registrar/true copy/Sub Asst.RegistrarglTo1. The Assistant Registrar,Income Tax Appellate Tribunal Rajaji Bhavan III Floor,Besant Nagar, Chennai-90.2. The Commissioner of Income Tax, Chennai.3. The Commissioner of Income-Tax (Appeals)-IX Chennai 600 034.4. The Joint Comissioner of Income -Tax Special Range-II, Chennai 600 034. Tax Case (Appeal)Nos.156 and 157of 2008NG(CO)Eu 5.1.12