The Commissioner Of Income-Taxtamil Nadu – Iiimadras v. M/S Softlab P. Ltd.6 Smith Roadchennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HON'BLE MR.JUSTICE ELIPE DHARMA RAOANDTHE HON'BLE MR.JUSTICE M. VENUGOPAL The Commissioner of Income-TaxTamil Nadu – IIIMadras.. Appellant vs. M/s Softlab P. Ltd.6 Smith RoadChennai... Respondent Prayer: Appeal preferred under Section 260-A of the Income-tax Act,1961 against the order of the Income-Tax Appellate Tribunal, "C"Bench, Chennai dated 20.7.2007 in I.T.A. No. 99/Mds/2003 for theassessment year 1998 - 99 and the appeal against the order of theCommissioner of Income Tax (Apeals)-V, Chennai in ITA No.545/2001-2002dated 22.10.2002 and the appeal agaisnt the order of the DeputyCommissioner of Income Tax, Company Circle IV (6), Chennai in PAN/GIRNo.2222-S dated 28.3.2001 for the Assessment Year 1998-99. For Respondent : Mr. R. Venkatanarayanan for M/s Subbaraya Aiyer Padmanabhan JUDGMENT (Delivered by ELIPE DHARMA RAO, J.) This Appeal is filed by the Revenue in respect of the assessmentyear 1998 – 99 against the order dated 20.7.2007 passed by the IncomeTax Appellate Tribunal, "C" Bench, Chennai, and was admitted on thefollowing substantial question of law: "Whether on the facts and in the circumstances of thecase, the Income Tax Appellate Tribunal was right insustaining the action of the Commissioner of Income-tax(Appeals) and deleting the disallowance of leasehttps://hcservices.ecourts.gov.in/hcservices/rentals on the computers and accessories to M/s KaymoFinance Private Limited, even though there wasconstructive sale / paper transaction only and there was no physical movements of goods from the premises ofthe assessee company?" 2. The assessee, who is a Private Limited Company carrying on thebusiness of providing computer education in educational institutions,filed return of income for the Assessment Year 1998 – 99 on 31.3.1999admitting total income at Rs. 10,13,500/-. The assessee claimed anamount of Rs. 46,49,736/- as lease rental payable to M/s Kaymo FinancePvt. Ltd. After issuance of notice under Section 143(2) of the IncomeTax Act, 1961 (in short "the Act") and after going through the detailsand explanations, the Assessing Officer came to the conclusion thatthe lease transaction is nothing but a device to reduce the taxliability and that the assessee company is the owner of the assets.Accordingly, the Assessing Officer disallowed the lease rental paidand added back to total income and arrived at a sum of Rs. 47,92,411/-as taxable total income. However, the Assessing Officer allowed thedepreciation on said asset @ 25%. As against that order, the matterwas carried on appeal to the Commissioner of Income-tax, who, inparagraphs 1.9 and 1.10 held as follows:- "1.9. On a careful consideration of the othercontentions of the appellant, I agree with itscontention that it is in the realm of thebusiness decision of the appellant to take adecision as to whether it has to go for purchaseof assets or leasing of assets. Regarding theobservation made by the Assessing Officer thatthe appellant has paid 138% of cost of the assetin a span of 13 months, the appellant'ssubmission that it enjoyed benefits of liquidityin the process cannot be ignored. AssessingOfficer has also not highlighted any facts orarguments to show that there is any connectionamongst the parties involved in the transactionwhich would make the transaction suspect orthere was padding up of costs. 1.10. On a perusal of the assessment order, it is seenthat the Assessing Officer has merely relied upontwo factors to hold that the lease transaction isnot genuine;(i) that there was no physical movement of goods;(ii)how KFPL has leased out the asset till31.3.2002 to the appellant company for atotal sum of Rs. 64.49 lakhs when theythemselves are paying M/s IFCL a sum of Rs.1.04 Crores." 1.10. On a perusal of the assessment order, it is seenthat the Assessing Officer has merely relied upontwo factors to hold that the lease transaction isnot genuine;(i) that there was no physical movement of goods;(ii)how KFPL has leased out the asset till31.3.2002 to the appellant company for atotal sum of Rs. 64.49 lakhs when theythemselves are paying M/s IFCL a sum of Rs.1.04 Crores." Accordingly, the Commissioner allowed the appeal thereby deleting thedisallowance of lease rental made by the Assessing Officer. Thathttps://hcservices.ecourts.gov.in/hcservices/order was carried on appeal at the instance of the Revenue to theIncome Tax Appellate Tribunal. 3.The Appellate Tribunal in paragraph 8 of the order held thatthe Commissioner of Income Tax (Appeals) has dealt with the issue inthe proper perspective and that the lessor confirmed the lease and hasshown the impugned assets as its own and claimed depreciation as welland dismissed the appeal thereby confirming the order of theCommissioner of Income Tax. The correctness of the same is now put inissue in this appeal at the instance of the Revenue. 4.Heard the learned Standing Counsel for the Revenue and thelearned counsel for the assessee and perused the records. 5.Learned Standing Counsel for the Revenue submitted that thelease agreement entered into by the assessee company is nothing but anarrangement to show the purchase of computers and accessories as leaseand, by doing so, the assessee is claiming deduction of the entirecost of the asset on the other hand, it was eligible for depreciationat 25% on the said assets. He further submitted that in all thetransactions there was constructive sale / paper transaction only andthere was no physical movement of goods from the premises of theassessee company i.e., the assets were even shown as sold though theywere in possession of the assessee company only. Therefore, accordingto the learned Standing Counsel, the aforesaid method adopted by theassessee is nothing but a colourable device to hoodwink the Revenue. 6.From the materials produced, it is seen that the assesseecompany had purchased computers and accessories worth Rs.59,85,037/-from M/s. Hitech Informatics, M/s. Colt Computers and M/s. AlacrityElectronics and the invoices were raised in the name of the assesseecompany and entire payments were also made by it. It is also seenthat after purchase, the assessee company subsequently on 12.3.1997,i.e., on the same assessment year, sold the said computers andaccessories to M/s. Integrated Finance Company Ltd., for the samepurchase money of Rs.59,85,037/-. In other words, the assesseepurchased the computers and sold the same for the same purchase moneyin the same year without any profit. In this connection, it has to beseen that the sale was a constructive sale i.e., paper sale and therewas no physical movement of the goods from the assessee to M/s.Integrated Finance Company Ltd. After effecting sale on 12.3.1997,the assessee entered into a lease agreement after two days i.e., on14.3.1997 with one M/s.Kaymo Finance Pvt. Ltd., and claimed an amountof Rs.46,49,736/- as lease rental payable to the aforesaid company.From the aforesaid transactions, it is apparent that the assesseewhich has purchased the computers for the purchase money ofRs.59,85,037/- sold the same to another company for the very samepurchase money and entered into a lease agreement after two days ofsale of those computers with another company and claims lease rental,which is more than 75% of the purchase amount of the accessories.These transactions entered into by the assessee would clearlyestablish, as rightly pointed out by the learned Standing Counsel forthe Revenue, that only with a view to avoid the taxability, theassessee had entered into a lease agreement and claimed the leasehttps://hcservices.ecourts.gov.in/hcservices/rental, by which the assessee claims deduction of the entire cost ofthe assets. 7.More over, it is also to be seen that when the assesseecompany has the capacity to purchase the assets of its own, why it haschosen to sell the same to another company without any profit i.e.,for the purchase money and chose to enter lease agreement. Learnedcounsel appearing for the assessee though states that he is eligiblefor deduction of entire cost of the assets as per the provisions ofthe Act, he is not able to point out or give reason for entering intothe lease agreement and why the assessee has chosen to sell the assetsfor the purchase money. Since no satisfactory explanation wasforthcoming from the assessee, we are not in a position to accept theconclusion arrived at by the appellate authority as well as theTribunal. 8.This aspect of the case can also be viewed from anotherangle. As per Section 54 of the Transfer of Property Act, "Sale" is atransfer of ownership in exchange for a price paid or promised orpart-paid and part-promised. 9.Admittedly, in the present case, the ingredients spelled outin the aforesaid Section are not found. Nowhere it is brought to ournotice that the computers were transferred from the assessee to thepurchaser, but, on the other hand, the assessee brought the computersto his premises by virtue of the lease entered into between theassessee and the purchaser. The computers are intact in the premisesof the assessee, who is a seller. Therefore, the sale is notcomplete as defined under Section 54 of the Transfer of Property Act. Therefore, in addition to the reasons given by the AssessingOfficer, for the above stated reason, which we have stated in theearlier paragraph, the order of the Commissioner of Income Tax,confirmed by the Tribunal, is set aside and the order of the AssessingOfficer is confirmed. Accordingly, the substantial question of law isanswered in favour of the Revenue. No costs. Sd/ Asst.Registrar /true copy/ Sub Asst.Registrar gri To 1.The Assistant RegistrarIncome Tax Appellate TribunalBench C, Chennai 2.The Commissioner of Income-Tax(Appeals) V Chennai 3.The Deputy Commissioner of Income-TaxCompany Circle IV (6) Chennai +1cc to Mr.T.Ravikumar, Advocate Sr 29791+1cc to Mr.R.Venkat Narayanan, Advocate Sr 29800 SR(CO)km/26.5. T.C. (A) No. 95 of 2008