M/S. P.k.j. Builders Pvt. Ltd v. Commissioner Of Income Taxchandigarh

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 127 of 2005Date of decision: 29.3.2011 M/s. P.K.J. Builders Pvt. Ltd. --- Appellant Versus Commissioner of Income TaxChandigarh --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present:Mr. D.K. Goyal, Advocatefor the appellant-assessee. Ms. Urvashi Dhugga, Senior Standing Counselfor the respondent-Revenue. --- AJAY KUMAR MITTAL, J. 1. This appeal under Section 260A of the Income-Tax Act, 1961(for short “the Act”) has been filed by the assessee against the orderdated 31.12.2004, passed by the Income Tax Appellate TribunalChandigarh Bench ‘B’, Chandigarh (in short “the Tribunal”) in ITA No.237/CHANDI/2000, relating to the assessment year 1996-97. 2.The following substantial questions of law have beenclaimed for determination of this Court: (a)Whether under the facts and circumstances of the case theTribunal was justified in law on an interpretation ofagreement dated 3.2.1996 and hire purchase agreementdated 30.1.1996 that the agreement entered into betweenM/s. K.P. Earthmovers and the appellant is not bona fide andgenuine which finding is perverse?Tribunal was justified in law on an interpretation ofagreement dated 3.2.1996 and hire purchase agreementdated 30.1.1996 that the agreement entered into betweenM/s. K.P. Earthmovers and the appellant is not bona fide andgenuine which finding is perverse? (b)Whether under the facts and circumstances of the case theTribunal at the stage of the appeal could give a finding at itsown coming to a different conclusion and adopting adifferent basis which was not a ground of appeal of therespondent before the Tribunal or the first AssessingAuthority and hence, such an action is un-jurisdictional?Tribunal at the stage of the appeal could give a finding at itsown coming to a different conclusion and adopting adifferent basis which was not a ground of appeal of therespondent before the Tribunal or the first AssessingAuthority and hence, such an action is un-jurisdictional? (c)Whether under the facts and circumstances of the case theTribunal was justified in law by ignoring the evidence and thematerial on record which proves the ownership and user ofthe equipment by the appellant in terms of Section 32 of theIncome Tax Act and thereby not allowing the depreciation?Tribunal was justified in law by ignoring the evidence and thematerial on record which proves the ownership and user ofthe equipment by the appellant in terms of Section 32 of theIncome Tax Act and thereby not allowing the depreciation? (d)Whether under the facts and circumstances of the case theTribunal was justified in disallowing the interest amounting toRs. 65,894/- on the hire purchase instalment for equipmentpurchased and used by the appellant for its business.Tribunal was justified in disallowing the interest amounting toRs. 65,894/- on the hire purchase instalment for equipmentpurchased and used by the appellant for its business. 3. The facts, in brief, necessary for adjudication as narrated in the appeal, are that the appellant purchased one Tata Hitachi Hydraulicexcavator from Telco in the name of its sister concern, M/s. K.P.Earthmovers. For making purchase of the aforesaid equipment, theassessee felt need of finance and hence, applied for a loan. Therequest of the assessee for grant of the loan was, however, declined on 3. The facts, in brief, necessary for adjudication as narrated in the appeal, are that the appellant purchased one Tata Hitachi Hydraulicexcavator from Telco in the name of its sister concern, M/s. K.P.Earthmovers. For making purchase of the aforesaid equipment, theassessee felt need of finance and hence, applied for a loan. Therequest of the assessee for grant of the loan was, however, declined on the ground that it was a new concern. The Tata Finance Ltd. to whomthe assessee had applied for grant of the loan agreed to finance theequipment in the name of M/s. K.P. Earthmovers. By virtue of adecision in the meeting of the Board of the Directors of the assessee-Company, it was decided that the excavator would be purchased fromTelco in the name of M/s. K.P. Earthmovers and an agreement be wouldbe executed between assessee and M/s. K.P. Earthmovers tocompensate the latter for any loss, if any, arising from the purchase ofthe said equipment in its name. The assessee, thus, claimed that theequipment in question was owned by it and it has rightly claimeddepreciation. The assessing officer, however, after considering thematter, disallowed the deduction claimed on account of depreciation inthe sum of Rs. 3,75,080/-, by order dated 25.9.1998. 4.The assessee preferred appeal before the Commissioner ofIncome-tax (Appeals) {in short “the CIT(A)”}. The appellate authorityvide order dated 1.12.1999 allowed the appeal by holding that theequipment had been purchased by the assessee-company and it hadonly been got financed through its sister concern and thus, theassessee was the owner of the said equipment and was entitled toclaim the benefit of depreciation and interest. 5.The Revenue took the matter in further appeal before theTribunal. The Tribunal by the order under appeal here accepted theplea of the Revenue, reversed the order of the CIT(A) and upheld that ofthe assessing officer, necessitating the assessee to file the presentappeal. 6. We have heard learned counsel for the parties and haveperused the record. 7.The primary point in issue in this case is, whether theagreement which was entered into by the assessee with its sisterconcern, M/s. K.P. Earthmovers, was a genuine transaction or not.Learned counsel for the assessee relied upon Tarun Bhargava vs.State of Haryana and another, 2003(2) ARBLR 645 (Pb. & Hr.),Commissioner of Income Tax vs. Abrol Engineering Company (Pvt.)Ltd. (2001) 251 ITR 830 (Pb. & Hr.) and Commissioner of Income TaxVs. Fazilka Dabwali Transport Company Pvt. (Ltd.), (2004) 270 ITR398 (Pb. & Hr.) to contend that the Tribunal had erred in adjudicating theissue against the assessee. The hire-purchase agreement dated30.1.1996 and agreement dated 3.2.1996 between the assessee and itssister concern, M/s. K.P. Earthmovers had resulted in conferringownership rights on the assessee and, therefore, depreciation andinterest on hire-purchase installments was admissible as expenditure.Learned counsel for the Revenue supported the order of the Tribunal. 8. We have given our thoughtful consideration to the issue.The Tribunal on appreciation of evidence had come to the conclusionthat the sister concern, M/s. K.P. Earthmovers, was owner of theequipment and the alleged agreement of the said concern with theassessee was not a bona fide transaction. The Tribunal furtherconcluded that the agreement between the assessee and its sisterconcern, M/s. K.P. Earthmovers was invalid and void ab initio. 9. The Tribunal while holding the same to be not a genuine transaction had in para No. 7 of its order held as under: “A single question, which first comes to our mind, is as towhy the assessee did not purchase this asset in its ownname and entered into a hire-purchase agreement with Tata 8. We have given our thoughtful consideration to the issue.The Tribunal on appreciation of evidence had come to the conclusionthat the sister concern, M/s. K.P. Earthmovers, was owner of theequipment and the alleged agreement of the said concern with theassessee was not a bona fide transaction. The Tribunal furtherconcluded that the agreement between the assessee and its sisterconcern, M/s. K.P. Earthmovers was invalid and void ab initio. 9. The Tribunal while holding the same to be not a genuine transaction had in para No. 7 of its order held as under: “A single question, which first comes to our mind, is as towhy the assessee did not purchase this asset in its ownname and entered into a hire-purchase agreement with Tata Finance Ltd., in its own name when in fact this equipmentwas to be owned and used by the assessee itself? The pleaof the assessee before us as well as before the taxauthorities below is that in the instant case, assessee hadapplied for loan to Tata Finance who declined to finance forthe purchase of the equipment in the name of the assesseecompany on the ground that it was a new concern butexpressed the willingness to finance for the equipment in thename of M/s. K.P. Earthmovers, a sister concern of theassessee, so the assessee entered into a sale agreementwith its sister concern M/s. K.P. Earthmovers and purchasedthe equipment and got the same financed in the name ofM/s. K.P. Earthmovers, its sister concern, from Tata FinanceLtd. Now, in the light of this explanation of the assessee, wewould be examining the bona fide and genuineness of thistransaction. In the instant case, the assessee has notfurnished any evidence to indicate that it ever entered intosuch type of correspondence with Tata Finance Ltd., forobtaining loan from them in its own name or that TataFinance ever refused to advance loan to the assesseebecause it was a new concern and that they agreed tofinance for the purchase of the equipment in the name ofM/s. K.P. Earthmovers, a sister concern of the assessee.Secondly, even if the contention of the assessee is to beaccepted for the sake of presumption then before executingthe hire purchase agreement with Tata Finance in the nameof M/s. K.P. Earthmovers, the sister concern of the assessee, a tripartite agreement of sale between TataFinance, M/s. K.P. Earthmovers and the assessee shouldhave first been executed. In the instant case, there is nosuch tripartite agreement executed, on the contrary, eventhe sale agreement between the assessee and M/s. K.P.Earthmovers was executed on 3.2.96 after the execution ofhire purchase agreement between Tata Finance Ltd., andM/s. K.P. Earthmovers on 30.1.1996 and even the first twoinstalments were paid to Tata Finance by M/s. K.P.Earthmovers. Since the hire-purchase agreement betweenTata Finance and M/s. K.P. Earthmovers was executed on30.1.96 then, on the basis of subsequent agreement to selldated 3.2.96 entered between M/s. K.P. Earthmovers andthe assessee, M/s. K.P. Earthmovers could not have anyright to further transfer the ownership rights in favour of theassessee because as per the hire purchase agreement,M/s. K.P. Earthmovers are the hirers of the machinery andnot the owners. We would also like to mention here that ona careful perusal of the nature of the hire purchaseagreement dated 30.1.96, it is clear that though it is wordedas a hiring agreement, it matures into a sale, so it can alsobe said to be a sale on instalments, which further meansthat the property / assets passes in such agreement on thebasis of payment of last instalment, but till that time theownership of the asset/ property vests in the financier andhence any subsequent agreement entered into by the hirerwith a third party, ownership rights cannot be transferred in favour of that third party without making the financiers as aparty to that agreement and therefore, the sale agreement,subsequently entered into by the assessee with its sisterconcern, M/s. K.P. Earthmovers is not a valid agreement inthe eyes of law and so M/s. K.P. Earthmovers could not havetransferred any ownership rights in favour of the assessee,irrespective of any terms and conditions enunciated in thatagreement. The CIT(A) erred here in coming to aconclusion that the assessee and M/s. K.P. Earthmoversentered into an arrangement of taking the asset in the nameof M/s. K.P. Earthmovers though the equipment waspurchased and owned by the assessee, because this aspectof the matter regarding the sale agreement and the hirepurchase agreement as discussed by us herein above in thisorder was not taken into consideration by the CIT(A) whileaccepting the contention of the assessee regarding thegenuineness of this transaction. Hence, we are of theopinion that the assessee failed in justifiably explaining as towhy the hire purchase agreement in respect of the purchaseof the asset was not entered into with Tata Finance in thename of the assessee, and, therefore, the subsequentarrangement made by the assessee with a third party, i.e.M/s. K.P. Earthmovers for transferring the ownership rightsin favour of the assessee in respect of the assets in questioncannot be held to be bona fide and genuine. Consequently,the subsequent entries recorded in the books of theassessee with regard to purchase of the asset, amount financed and two instalments debited are only an after-thought and cannot be treated as genuine and bona fide.Hence, for the reasons stated above, it is held that theassessee is not the owner of the asset. So, we are of theopinion that the CIT(A) erred in allowing the impugneddepreciation u/s 32 claimed by the assessee and on theexcavator and so the impugned order of the CIT(A) in thisregard is reversed and that of the A.O. denying thedepreciation to the assessee is upheld. Accordingly, groundNo.1 of the appeal of the revenue is allowed.” 10. Once that is so, the judgments relied upon by the learned counsel for the assessee do not advance its case. Further, in theabsence of a genuine and bona fide agreement between the assesseeand its sister concern, M/s. K.P. Earthmovers, the assessee was notentitled to claim depreciation and interest on instalments alleged to havebeen paid there-under as an expense. The finding of fact recorded bythe Tribunal has not been shown to be perverse. The Tribunal has takena plausible view. The substantial questions of law as claimed, thus, donot arise in this case. 11.In view of the above, there is no merit in the appeal and thesame is dismissed. (AJAY KUMAR MITTAL) JUDGE March 29, 2011*rkmalik* (ADARSH KUMAR GOEL) JUDGE