Commissioner Of Income Tax,Chennai v. S & S Power Switchgear Ltd

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)No.136 of 2008 Commissioner of Income Tax,Chennai...Appellant/Respondent..vs.. S & S Power Switchgear Ltd.,168, Mount Poonamallee High Road,Chennai-600 096. ..Respondent/Appellant Appeal filed under section 260A of the Income Tax Act, 1961filed against the order of the Income Tax Appellate Tribunal, Madras'C' Bench dated 02.02.2007 in I.T.A.No.1849/ Mds/2003 against theCommissioner of Income Tax (Appeals) VI, 121, Mahatma Gandhi Road,Chennai 600 034, in ITA NO.616/01-02, dated 4.8.2003 in GIR No.S-III,for the Assessment year 1996-97; against the Joint Commissioner ofIncome-Tax, Special Range VII, Chennai 34, in PAN/GIR NO.AABCS.0581J,dated 30.3.99 for the assessment year 1996-97. For Respondents : Mr.P.S.Raman, Senior Counsel for Mr.Padmanabhan This appeal is directed, at the instance of the Revenue,against the order of the Income Tax Appellate Tribunal, Chennai Bench'C', dated 02.02.2007 made in I.T.A.No. 1849/Mds/2003. 2. The appeal was admitted on the following substantialquestions of law; https://hcservices.ecourts.gov.in/hcservices/ (i) Whether, on the facts and circumstances of thecase, the Tribunal was right in holding that the expensesincurred in the foreign travel of the Chairman's wife is tobe allowed as a business expenditure ? (ii) Whether, on the facts and circumstances of thecase, the Tribunal was right in holding that the assessee isentitled to depreciation on the amount paid on the sale andlease back transaction ? 3. The assessee is a company and its business is that ofmanufacture and sale of circuit breakers, isolators, etc. Theassessee filed its return of income for the assessment year 1996-97with the relevant previous year ending 31[st] March, 1996, on26.12.1997, declaring an income of Rs.3,09,57,430/- and the same wasprocessed on 18.08.1998 and subsequently revised on 24.09.1998. Theassessee claimed deduction of a sum of Rs.1,18,219/-, whichrepresented the foreign travel expenses incurred for the Chairman'swife, who accompanied the Chairman in his foreign trip. TheAssessing Officer, while completing the assessment, disallowed theChairman wife's foreign tour expenses, holding that the expenditureon the air travel of the Chairman's wife was not incurred for thepurpose of the business of the assessee. This finding of theAssessing Officer was confirmed by the Commissioner of Income Tax(Appeals); but on appeal by the assessee, the Income Tax AppellateTribunal has allowed the claim of the assessee in this regard. Thatapart, the assessee has made a claim for depreciation on assets for asum of Rs.1,84,52,500/-. 4. With regard to the depreciation of assets, it was the case ofthe assessee that they have entered into a lease transaction and theassessee has incurred a loss of Rs.4,36,83,000/- from LeasingDivision. This is after claiming depreciation of Rs.6,11,77,555/- andthis includes a sum of Rs.1,84,52,500/- being cost of two flamelessfurnaces claimed to be supplied by M/s.Ashish Engineering Works,Durg, Madhya Pradesh and leased out to Prakash Industries, New Delhiby the assessee. But, this matter was referred to the InvestigationWing for verifying genuineness of the transactions and existence ofthe assets. The Joint Director (Investigation), Jabalpur hadconducted necessary enquiries and forwarded the report, wherein ithas been stated that the alleged supplier M/s.Ashish EngineeringWorks undertakes job works only and has no capacity to manufacturesuch assets; that they possessed only a small workshop with justthree lathe machines; that the letter furnished by the partner ofM/s.Ashish Engineering Works states that the invoice Nos.215 and 216dated 23.09.1995 produced by the assessee in support of purchase ofthe asset has not been issued by them; and that their total turnoverfor the relevant period was only Rs.10.97 lakhs. The results of theenquiry was intimated to the assessee by a letter dated 11.03.1999;for which, the assessee sent a reply dated 22.03.1999, wherein it has been contended that the payment has been effected by cheques to theaccount of M/s.Ashish Engineering Works at New Delhi. The sourcepricing and obtaining delivery of the supply of the asset wasidentified by the lessee and the assessee was not concerned in thematter. Further, a sum of Rs.23,38,377/- has been offered as leaserentals and Rs.1,67,275/- as lease management fee. It was also statedthat the transaction was brokered by Aartik Financial ConsultantsLimited. Further, the lessee subsequently had threatened to terminatethe lease citing defect in the asset and sent notice through theiradvocates. Further, the assessee had also produced a copy of part ofpolicy from New India Assurance Company Limited regarding insuranceof the asset. Thus, the assessee had produced documents to establishthe transaction of the lease with Prakash Industries as genuine. But,the Assessing Officer has disallowed the claim made by the assesseefor depreciation of Rs.1,84,52,500/- on a finding that the factsgathered from the supplier made it clear that the transaction is onlya paper transaction and asset does not exist. The said finding of theAssessing Officer was also confirmed by the Commissioner of IncomeTax (Appeals) by order dated 04.08.2003. 5. Aggrieved over the same, the assessee filed an appeal beforethe Income Tax Appellate Tribunal and the Revenue filed an appealchallenging the confirmation of disallowance of expenditure incurredon the foreign travel of the Chairman's wife and by a common orderdated 02.02.2007, the Appellate Tribunal has dismissed the claim ofthe Revenue and allowed the claim of the assessee by assigning thefollowing reasons; 5. Aggrieved over the same, the assessee filed an appeal beforethe Income Tax Appellate Tribunal and the Revenue filed an appealchallenging the confirmation of disallowance of expenditure incurredon the foreign travel of the Chairman's wife and by a common orderdated 02.02.2007, the Appellate Tribunal has dismissed the claim ofthe Revenue and allowed the claim of the assessee by assigning thefollowing reasons; "10. In view of these facts, we find that neither theC.I.T.(Appeals) nor the Assessing Officer has appreciated thefacts regarding the existence of the assets. Even the AssessingOfficer has not brought out that who has denied the invoices onaccount of M/s.Ashish Engineering works. It seems that theassessee has produced complete details before the AssessingOfficer at the time of assessment and the same was notconfronted neither to the Ashish Engineering Works nor to thePrakash Industries. The Assessing Officer without examiningthese details has decided the issue against the Assessee andthe same was confirmed by the C.I.T.(Appeals). We find that thelease transaction was entered into by the assessee withM/s.Prakash Industries Limited in January and hence, thetransaction of lease and the existence of assets cannot bedoubted on conjectures or surmises. In view of this, we findthat the leased assets existed and there is no reason todisallow the claim of the Assessee in respect of depreciation.Accordingly, we allow the same and the orders of the lowerauthorities are reversed and the Assesee succeeds on thisissue". Challenging the said finding, this appeal has been filed by theassessee. 6. Heard the learned counsel for the parties and perused thematerials available on record. Substantial question of law No.1: 7. With regard to the first question of law, it is thesubmission of the learned counsel for the Revenue that theexpenditure of a sum of Rs.1,18,219/- incurred on foreign travelexpenses of Chairman's wife was not deductible since the expenditureincurred by the Chairman's wife was not for the purpose of businessof the assessee. Per contra, it is the submission of the learnedSenior counsel appearing on behalf of the respondent that theexpenditure incurred in the foreign travel by the wife of theChairman accompanying him has to be allowed as business expenditureand hence, no infirmity could be found in the order passed by theIncome Tax Appellate Tribunal. 8. But we are unable to appreciate the submission made by thelearned Senior Counsel for the respondent because the facts on thecase on hand would show that the wife of the Chairman has nothing todo with the business of the company. At least if she is one of theDirectors of the Company, then the arguments put forth by therespondent could have some force. In this regard, it would be usefulto refer the judgments relied on by the learned counsel for theappellant/revenue. In COMMISSIONER OF INCOME TAX .vs. T.S.HAJEE MOOSAAND CO., ((1986) 51 CTR (MAD) 200, it has been held as follows: "The attention given by the wife of the partner of theassessee while on tour would enure to his benefit and advantage,not only when he was engaged in his business activities, buteven, otherwise as a human being, so that at least in part theexpenditure incurred had been laid out for the advantage andbenefit of the partner. The expenditure incurred thus served notonly purposes of business but also a personal or a privatepurpose and if the expenditure does not exclusively serve thepurposes of business, then, it does not qualify for allowanceunder S.37(1). Viewed thus, the expenditure in this case had atwin purpose and did not qualify for allowance". 9. In D.B.MADAN .vs. COMMISSIONER OF INCOME TAX ((2003) 179 CTR(MAD) 487, a Division Bench of this Court has held as follows: 9. In D.B.MADAN .vs. COMMISSIONER OF INCOME TAX ((2003) 179 CTR(MAD) 487, a Division Bench of this Court has held as follows: "8. We have carefully considered the submissions of thelearned counsel for the assessee and the learned counsel for theRevenue. This Court in T.S.Hajee Moosa's case (153 ITR 422) hasupheld the disallowance of expenditure on two grounds; (i) it waspurely a personal expenditure; and (ii) there was a dual object in incurring the expenditure on the foreign tour of theassessee's wife. In so far as the disallowance of expenditure onthe ground that it was the personal expenditure of the assesseeis concerned, the following observation of the Court isrelevant:- "....The state of health of a person is not in any wayrelated to the business activities carried on by him. Agood businessman may be bad in health and a good andhealthy person may be no good at all in business.Therefore, the state of health has no relevance or bearingat all to the business activities carried on by a person.If a businessman, not in good health, desires to securethe help and assistance of an attendant, then, it ispurely to satisfy his personal need. Such a need is notvery different from say, his need for food and clothing,except that this need is directed towards the maintenanceof his health. The expenses incurred for availing of theservices of an attendant would, in our view, be only tosatisfy or meet the personal need and in that context, itis really immaterial whether the person concerned availshimself of the services of his wife or that of a stranger.In this case, if the partner of the assessee had not beenaccompanied by his wife on the tour, having regard to hisstate of health, he would have been obliged to engage theservices of probably a professionally trained nurse and,even in such a case, the expenses would have been purelypersonal. While we agree that a businessman in indifferenthealth ought not to be discouraged from undertaking aforeign tour accompanied either by his wife or nurse orother attendant, we cannot at the same time hold thatexpenses incurred either for availing himself of thecompany of his wife or the services of a nurse orattendant are any the less personal, however much theexpenses are either necessary or even otherwise productiveof good health or other enjoyable results from the pointof view of the personal need and requirement of such abusinessman". 9. This Court also examined the question whether theexpenditure would be allowable under section 37 of the Income-tax Act and held that the expenditure was not laid out whollyand exclusively for business purposes. It was held that theexpenditure was laid out for a dual purpose, viz., (i) tosatisfy the personal needs of the assessee and (ii) for thepurpose of business, and therefore the expenditure was notincurred wholly and exclusively for the purpose of business andit would not qualify for allowance. In other words, the Courtheld that the expenditure was for a dual purpose and it wouldnot qualify for allowance. This Court after noticing some ofearlier cases on this aspect held as under:- " ... the object of the partner of the assessee at the timewhen he took his wife along with him on his foreign tourwas only to serve or assist him and not for any businesspurposes, albeit there was also another object, namely, thefurtherance or the promotion of the business of theassessee by the partner taking his wife along with him.Even in such a case, it would only be a dual purpose inrespect of which the expenditure had been incurred. On aconsideration of the principles laid down in the aforesaiddecisions, it is difficult to support the conclusion thatthe expenditure in question was wholly and exclusively laidout for business purposes". In our view, the decision of this Court in T.S.Hajee Moosa's case(153 ITR 422) would squarely apply to the facts of the case. " ... the object of the partner of the assessee at the timewhen he took his wife along with him on his foreign tourwas only to serve or assist him and not for any businesspurposes, albeit there was also another object, namely, thefurtherance or the promotion of the business of theassessee by the partner taking his wife along with him.Even in such a case, it would only be a dual purpose inrespect of which the expenditure had been incurred. On aconsideration of the principles laid down in the aforesaiddecisions, it is difficult to support the conclusion thatthe expenditure in question was wholly and exclusively laidout for business purposes". In our view, the decision of this Court in T.S.Hajee Moosa's case(153 ITR 422) would squarely apply to the facts of the case. 10. A reading of the aforesaid judgments would show that if theexpenditure incurred for the foreign travel of the Chairman's wife isnot only for the purpose of business but also the private purpose,then the expenditure does not exclusively serve the purpose of thebusiness, it does not qualify for allowance under S.37(1) of theIncome Tax Act. Therefore, unless it is established by the assesseethat the travelling of the Chairman's wife was only for the businesspurpose by producing tangible evidence, the assessee is not entitledfor the allowance towards the expenditure incurred for foreign travelby the wife of the Chairman, particularly in the circumstances whenthe wife is not occupying any official position in the company. Whenthat being the position, the order passed by the Appellate Tribunalin allowing the claim of the respondent towards the expenditureincurred on the foreign travel of Chairman's wife is liable to be setaside and accordingly, the order passed by the Tribunal allowing theexpenditure of Rs.1,18,219/- in this regard is hereby set aside. Thequestion is answered in favour of the revenue. Substantial question of law No:2 11. With regard to the next question, it is the submission ofthe learned counsel for the appellant Revenue that the enquiryconducted by the Joint Director (Investigation) Jabalpur would showthat the alleged supplier M/s.Ashish Engineering Works of assets,namely, flameless furnaces, has no capacity to manufacture suchassets and they are having only a small workshop with three lathemachines. During investigation, the letter furnished by a partner ofM/s.Ashish Engineering Works would state that the invoice Nos.215 and216 dated 23.09.1995 produced by the assessee in support of purchaseof the asset have not been issued by the alleged manufacturer.Therefore, the claim of the assessee for a sum of Rs.4,36,83,000/-on the ground of depreciation by leasing the machinery to M/s.PrakashIndustries, New Delhi, is not genuine. But the Appellate Tribunal, byrelying upon the lease agreement entered into between the assesseeand Prakash Industries has allowed the claim. In this regard, the https://hcservices.ecourts.gov.in/hcservices/ appellant has further submitted when there is ample evidence to showthat the alleged manufacturer has not supplied the asset toM/s.Prakash Industries, by placing reliance on the lease agreemententered into between the assessee and the lessee, the AppellateTribunal ought not to have allowed the claim on the ground ofdepreciation. At this stage, it would be appropriate to refer thejudgments relied on by the learned counsel for the appellant. InLACHMINARAYAN MADAN LAL .vs. COMMISSIONER OF INCOME TAX ((1972) 086ITR 0439, the Hon'ble Supreme Court has held as follows: https://hcservices.ecourts.gov.in/hcservices/ appellant has further submitted when there is ample evidence to showthat the alleged manufacturer has not supplied the asset toM/s.Prakash Industries, by placing reliance on the lease agreemententered into between the assessee and the lessee, the AppellateTribunal ought not to have allowed the claim on the ground ofdepreciation. At this stage, it would be appropriate to refer thejudgments relied on by the learned counsel for the appellant. InLACHMINARAYAN MADAN LAL .vs. COMMISSIONER OF INCOME TAX ((1972) 086ITR 0439, the Hon'ble Supreme Court has held as follows: "... The mere existence of an agreement between the assesseeand its selling agents or payment of certain amounts ascommission, assuming there was such payment, does not bind theIncome-tax Officer to hold that the payment was madeexclusively and wholly for the purpose of the assessee'sbusiness. Although there might be such an agreement inexistence and the payments might have been made, it is stillopen to the Income-tax Officer to consider the relevant factsand determine for himself whether the commission said to havebeen paid to the selling agents or any part thereof is properlydeductible under section 37 of the Act". 12. The learned counsel for the appellant further relied on thedecision of the Hon'ble Apex Court in COMMISSIONER OF INCOME TAX .vs.JAIN (S.P.) ((1973) 087 ITR 0370 in support of his contention thatthe Tribunal has failed to take into account relevant material andacting on inadmissible material and basing conclusion on conjecturesand surmises, it has arrived at a finding, which is bad. Counteringthe said submission, the learned senior counsel for the respondentsubmitted that the assessee has effected payments by way of chequesto the account of the manufacturer M/s.Ashish Engineering Works, NewDelhi for the supply of assets, namely, flameless furnaces to thelessee. The source pricing and obtaining delivery of the supply ofthe asset was identified by the lessee. Under such circumstances, theassessee was not concerned in the matter, It is the furthersubmission of the learned senior counsel for the respondent that sofar as the factum about the payment effected by the assessee to thesupplier was not denied by the revenue and even if the assessee isnot entitled for the claim under the head 'depreciation' they areentitled to 'business loss' under section 28 of the Income Tax Actsince it is the contention of the revenue that the manufacturer hasnot supplied the assets to the lessee; for which, it is the reply ofthe learned counsel appearing for the revenue that once the assesseehas made a claim of depreciation on assets, which claim was disputedby the revenue, the assessee cannot alternatively make a claim underthe head of 'business loss'. 13. In the above circumstances, we are of the opinion that itwould be appropriate to set aside the finding of the AppellateTribunal that the assessee is entitled to depreciation ofRs.1,84,52,500/-. When the fact finding authorities, viz., AssessingOfficer and the Commissioner of Income Tax (Appeals) haveconsistently held, after ordering an investigation, that the claim ofthe assessee in this regard is shown, the contra view taken by theTribunal, placing reliance on legally unsustainable grounds isuntenable. Hence, the order of the Tribunal in this regard is setaside and the question is answered in favour of the revenue. The Appeal is, thus, allowed in favour of the Revenue. No costs.Sd/Asst. Registrar/true copy/Sub Asst.Registrargl1. The Assistant Registrar, I.T. Appellate Tribunal, 'C' Bench, Madras.2. The Commissioner of I.T. (Appeals)VI, 121, Mahatma Gandhi Road, Chennai-34.3. The Joint Commissioner of I.T.Special Range VII, Chennai 34.4. The Section Officer, VR Section, High Court, Madras. Tax Case (Appeal)No.136 of 2008 VSV(CO)Eu 2.01.2012 https://hcservices.ecourts.gov.in/hcservices/