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2004 DIGILAW 651 (PNJ)

Industrial Cables (India) Ltd. v. Cit

2004-07-02

N.K.SUD, S.S.GREWAL

body2004
Judgment N.K.Sud, J. 1. This order shall dispose of two appeals, viz., I.T.A. Nos. 121 and 122 of 2004, involving common questions of law and facts. 2. The assessee has filed these appeals under section 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), against the orders of the Income Tax Appellate Tribunal, Chandigarh Bench "A", Chandigarh (hereinafter referred to as "the Tribunal"), dated 26-10-2003 whereby disallowances of Rs. 10,95,000 and Rs. 15,00,000 on account of lease rent paid to M/s. I.C.S. L. (Haryana) Limited, a sister concern of the appellant, made by the assessing officer in two assessment years 1993-94 and 1994-95, respectively, have been sustained. The lease rent has been paid at the rate of Rs. 1,25,000 per month for land and building and at the rate of Rs. 25,000 per month for plant and machinery. 3. During the course of assessment proceedings, the assessing officer found that the assets, on which lease rent had been paid, earlier belonged to the assessee. The same were sold by it to its sister concern on 10-10-1991 for a consideration of Rs. 45,35,491 and, thereafter, on the same date these assets were taken on lease from the sister concern. It was further noticed that in November, 1991, a few days after receiving the sale consideration, the assessee had advanced an interest-free loan of Rs. 50 lakhs to the said sister concern. The assessing officer was of the view that the assessee had entered into all these transactions merely to divert its income to its sister concern as the assessee had not received any benefit from the sale of these assets. Even the sale consideration had been returned to the purchaser as interest-free loan within a few days of its receipt. 4. The assessee was asked to explain as to why the lease rent claimed as deduction be not disallowed. The assessee explained that it was running two units : one at Kila Zaffaragarh (District Jind) and the other at Rajpura (District Patiala). The unit in jind was incurring huge losses and, therefore, the management had taken a decision to dispose of this unit to avoid losses. It was also claimed that the assessee had made efforts to sell the unit but no buyer was available and, thus, the unit was sold to its sister concern, M/s. I.C.L. Steel (Haryana) Limited. The unit in jind was incurring huge losses and, therefore, the management had taken a decision to dispose of this unit to avoid losses. It was also claimed that the assessee had made efforts to sell the unit but no buyer was available and, thus, the unit was sold to its sister concern, M/s. I.C.L. Steel (Haryana) Limited. It was further explained that since certain orders were still to be fulfilled, the unit was taken on lease on the same day. The assessing officer did not accept this explanation and held that the arrangement by the assessee was only to reduce the tax liability. Accordingly, the lease rent paid to the sister concern was disallowed. 5. On appeal by the assessee, the CIT (A) deleted the disallowances on the ground that the conclusions drawn by the assessing officer were merely conjectural and that the assessing officer had failed to consider the fact that the losses suffered by the assessee were far in excess of lease money paid by it. He also observed that the interest free loan had subsequently been received back by the assessee in March, 1993. 6. Aggrieved by the orders of the CIT (A), the revenue preferred appeals before the Tribunal. The Tribunal vide the impugned orders has allowed the appeals of the revenue on this issue and restored the disallowances made by the assessing officer. The relevant findings of the Tribunal are contained in paragraphs 23 to 28 of its order for the assessment year 1993-94, which are reproduced below : "23. The Tribunal vide the impugned orders has allowed the appeals of the revenue on this issue and restored the disallowances made by the assessing officer. The relevant findings of the Tribunal are contained in paragraphs 23 to 28 of its order for the assessment year 1993-94, which are reproduced below : "23. The first plea of the assessee that as on this very ground, no addition has been made in the assessment year 1992-93, so, the assessing officer is not justified in making addition in the assessment year 1993-94, has no force, firstly because this issue is discussed on merits in the assessment year 1993-94 involved in the instant ground of appeal by the assessing officer was never discussed and adjudicated by the assessing officer while framing the assessment in the assessment year 1992-93 because in that assessment year the assessing officer has simply framed the assessment under section 143(1) of the Income Tax Act and not under section 143(3) of the Income Tax Act, so, no addition made in the assessment year 1992-93 does not debar the assessing officer in making addition in the assessment year 1993-94 in view of the conclusions of the facts arrived at by the assessing officer in the assessment year 1993-94 under question because even in the citation relied upon by both the parties, the ratio of the decision is that on considering certain facts and material circumstances of the case and after recording proper reasons, the assessing authority could depart from its previous view taken in the earlier assessment year. 24. Now, coming to the other plea taken by the assessee that it gave interest-free loan of Rs. 50 lakhs to ICLS Ltd, from whom it received a sum of Rs. 45,35,451 as sale price of the assets, so, that business of M/s. ICLS Ltd. gets running smoothly, also does not seem to have any force because in that case the assessee could have simply advanced the interest free loan to M/s. ICLS Ltd. instead of entering into this transaction of selling the land, building and machinery to ICLS Ltd. and then taking back the same on lease at a monthly rent of Rs. 1.50 lakhs. 1.50 lakhs. Had this transaction been genuine and genuinely entered wholly and exclusively for the purpose of the business either of the assessee or of ICLS Ltd., there was no need of entering into such type of sale, lease agreement and then in advancing interest-free loan to M/s. ICLS Ltd., and more so when no business activity was carried out by ICLS Ltd. after the purchase and lease of these assets during the assessment year 1993-94. 25. Another explanation given by the assessee for premises and machinery on lease from M/s. ICLS Ltd. when the same was sold by the assessee to M/s. ICLS Ltd., was that the assessee had some orders in hand and the goods had to be supplied to the customers, so, for manufacturing the goods from raw material, the assessee took on lease the building and machinery from M/s. ICLS Ltd. but we again find that in the assessment year 1993-94, there is no such evidence brought to our notice as to how much raw material was manufactured by the assessee during the assessment year 1993-94 and what material was left behind though the assessee claims to have done manufacturing in the assessment year 1993-94. On the contrary, the learned departmental Representative for the revenue has argued that no manufacturing was done by the assessee in the assessment year 1993-94. 26. Now coming to the issue of commercial exploitation and commercial expediency from the facts it appears that by this transaction of sale of assets and taking the same assets back on lease at a monthly rent of Rs. 1.50 lakhs and also out of sale proceeds advancement of loan of Rs. 50 lakhs by the assessee to the buyer, M/s. ICLS Ltd., the assessee apparently does not seem to have gained anything what to talk of reducing its own losses. On the contrary by this transaction the assessees sister concern, without doing any business from the assets purchased from the assessee, earned monthly rent of Rs. 1.50 lakhs and an interest-free loan of Rs. 50 lakhs and at the same time, the assessee got the benefit of diverting its profits to its sister concern. On the contrary by this transaction the assessees sister concern, without doing any business from the assets purchased from the assessee, earned monthly rent of Rs. 1.50 lakhs and an interest-free loan of Rs. 50 lakhs and at the same time, the assessee got the benefit of diverting its profits to its sister concern. The learned CIT (A) in his order has failed on considering all the abovementioned aspects and also failed in his duty in properly appreciating the facts and thereafter in analysing the same whether this entire transaction was genuine or ingenuine but he simply seems to be carried away by the plea of the assessee that this entire transaction has been entered into by the assessee with ICLS Ltd., with a view to reduce its losses. He also failed in his duty not considering the entire facts to see whether this simple looking transaction was entered into by the assessee (for business) considerations. So, the order of the CIT(A) in deleting the impugned addition, merely on the reasoning that the assessing officer cannot pass a judgment as to how the expenditure is to be incurred by the assessee and also on the reasoning that since losses suffered by the assessee were not excess of lease money and hence the assessee was able to establish the commercial exploitation, is devoid of any merit. Thus, we find that the CIT (A) has not considered the other aspects while allowing the relief under section 37 as laid down in the decision (supra) mentioned hereinabove as well as for the reasons as discussed by us hereinabove in this order. 27. Hence on considering the facts and circumstances of the case, we are unable to agree with the submissions of the learned authorised representative for the assessee. The question as to whether an item of expenditure is wholly and exclusively laid out for the purpose of the business or not, has to be decided on the facts of each case, the necessary condition being that it must be laid down or expended wholly or exclusively for the purpose of the assessees business is that it is incurred by the assessee as incidental to his trade for the purpose of getting the trade going and by making it pay and in any capacity as a trader. The word business used in section 37(1) in association with expression for the purpose of is a word of one commutation. In the context of taxing statute the word business would signify continued commercial activity which is carried on with the end in view of making and earning profits. Therefore, under section 37(1) of the Income Tax Act, connection has to be established between the expenditure incurred and the activity undertaken by the assessee with such, object which is wanting in the present case of the assessee. 28. Accordingly, the order of the CIT (A) in deleting the addition of Rs. 10,95,000 is reversed and the order of the assessing officer in making addition for the assessment year 1993-94 is restored. Ground No. 6 taken by the revenue in I.T.A. No. 1101 is allowed." Mr. Akshay Bhan, learned counsel for the appellant, has not been able to controvert the factual position as noticed by the Tribunal. The land and building in this case was sold by the assessee to its sister concern on 10-10-1991 for a consideration of Rs. 45,35,451 and immediately thereafter, the very same assets were taken on lease by the assessee from its sister concern. Not only this, even the consideration of Rs. 45,35,451 received on 10-10-1991 was indirectly transferred back by way of an interest-free loan of Rs. 50 lakhs within a few days of its receipt. The assessee had also failed to substantiate its claim that it had certain pending orders for the purpose of which the assets sold by it had been taken on lease. It failed to produce any evidence to show any manufacturing done by it. It has also been found as a fact that the sister concern also did not carry out any business activity after purchasing and leasing of the assets. In the face of these glaring facts, the Tribunal has rightly drawn the conclusion that the transactions entered into by the assessee with its sister concern were not genuine and had been entered into merely to divert its profits to the sister concern. In these circumstances, the Tribunal has rightly held that the expenditure cannot be said to have been incurred wholly and exclusively for the purpose of the business as no connection had been established between the expenditure incurred and the activity undertaken by the assessee. In these circumstances, the Tribunal has rightly held that the expenditure cannot be said to have been incurred wholly and exclusively for the purpose of the business as no connection had been established between the expenditure incurred and the activity undertaken by the assessee. Even otherwise, the findings recorded by the Tribunal are pure findings of facts. The Tribunal has taken a possible view which does not suffer from any factual or legal infirmity. We are, therefore, satisfied that no substantial question of law arises out of the order of the Tribunal warranting interference by this court. No other point has been raised. It may be specifically mentioned that counsel did not dispute the findings of the Tribunal in para. 23 of its order that merely because the lease rent got allowed in the assessment year 1992-93 on account of the return having been processed under section 143(1)(a) of the Act, the assessing officer was not debarred from examining its admissibility in subsequent years. The appeals are, accordingly, dismissed in limine.