In the High Court of Judicature at Madras Dated: 08.12.2011 Coram: The Honourable Mr.Justice ELIPE DHARMA RAO and The 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, filed against the common order of the Income Tax Appellate Tribunal, Madras 'B' Bench dated 23.08.2006 in I.T.A. Nos.1974/Mds/2000 and 887/Mds/2001 respectively against the orders of the Commissioner of Income Tax (Appeals)-IX, Chennai-600 034 (i) dated 26.9.2000 and made in ITA.No.40/99-2000; and (ii) dated 20.2.2001 and made in ITA NO.115/2000-2001 respectively against the orders of the Joint Commissioner 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) dated 31.3.2000 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 the Revenue, 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/2000 and 887/Mds/2001. https://hcservices.ecourts.gov.in/hcservices/ 2. Both the appeals were admitted on the following substantial questions of law: (1) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that collection of contingency deposit against payment of sales tax would not form part of the income ? (2) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the depreciation on leased assets can be allowed in a year when the 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 sales tax, would form part of the income or not, is no more res integra, as it has already been answered against the assessee, by the decision rendered by a Division Bench of this Court reported in COMMISSIONER OF INCOME-TAX .vs. SOUTHERN EXPLOSIVES CO., ((2000) 242 ITR 107 (Mad), wherein it has been held that 'the receipt of the amount for payment 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 are of the view that the finding rendered by the Appellate Tribunal is liable to be set aside. Accordingly, the same is hereby set aside in both the appeals and the said question is answered in favour of the revenue. Substantial question of law No:2 4. The brief facts, which are necessary to decide the second substantial question of law, are as follows: During the assessment year 1997-98, the assessee claimed depreciation at 100% on 70 MTPH boiler, amounting to Rs.3,85,38,500/-, stating that the boiler was given on lease to M/s.Thiru.Arooran Sugars Limited(TASL) as per the lease agreement dated 29.03.1997. The boiler is located at Kollumangudi Village, Nannilam Taluk in the premises of TASL. Since the said asset was put into use on 26.03.1997, the assessee claimed depreciation for the second half of the assessment year. The enquiry made by the department revealed that the said 70 MTPH boiler is part of a co- generation power plant, commissioned by TASL and hence, a show cause notice dated 16.03.2000 was issued to the assessee as to why the depreciation should not be withdrawn. The relevant portion from the said notice reads as follows: https://hcservices.ecourts.gov.in/hcservices/ "This Office Inspectors have visited the factory premises of M/s.Thiru Arooran Sugars Ltd., at Kollumangudi Village on 11.03.2000, to make on the spot enquiries with regard to the boiler. The enquiries revealed that the said boiler is part of the 110KV/18/MW Co-generation Power Plant. As per letter No.16/BC/96-97 dated 26.03.1997 issued by the Deputy Chief Inspector of Boilers, permission was granted to put to use the 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 was actually commissioned and the Power Plant was synchronised with the Tamil Nadu Electricity Board Grid at 10.35 hours on 06.05.1997. Thus, the production of the Co-generation Plant commenced only on 06.05.1997. This is supported by the letter from the Chief Engineer (Distribution), Tamil Nadu Electricity Board, Trichirappalli. From the above, it may be seen that the boiler could be put to use only on 06.05.1997, on which date, the power plant actually started producing the energy. The boiler could not have been put to use otherwise also before 06.05.1997 as the sugar plant started production of sugar only from 19.01.1998. The boiler is part of the co- generation power plant and thus, in the circumstances of the assessee's case, it is very clear that the boiler was put to use only on 06.05.1997. So, the claim of 100% depreciation by you on the said boiler is not in accordance with the provisions of the Income Tax Act, as it had not been put to use before 31.03.1997. The depreciation claim at best can be considered only in the subsequent year...". 5. It is the contention of the revenue that the boiler was put to use only on 06.05.1997 on which date, the power plant actually started producing energy and it could not have been put to use otherwise also before 06.05.1997 as the sugar plant started production of sugar only from 19.01.1998; that the boiler is part of the co-generation power plant and in such circumstances, it is clear that the boiler was put to use only on 06.05.1997. So, the claim of 100% depreciation made by the assessee for the year 1996-97 is not in accordance with the provisions of the Income Tax Act as the boiler had not been put to use before 31.03.1997. The depreciation claim, at best, can be considered only in the subsequent year and not for the year 1996-97. 6. It is the further case of the revenue that the lease rental accrued on the boiler was not accounted as on 31.03.1997. As per the provisions of section 145 of the Income Tax Act, the assessee is supposed to recognise the income on accrual basis. The Board has also issued 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, accrual refers to the assumption that revenues and costs are accrued, https://hcservices.ecourts.gov.in/hcservices/ i.e.recognised as they are earned or incurred and recorded (not as money received or paid) and recorded in the financial statements of the periods to which they relate. When the lease transaction is recognised and the depreciation is claimed, then, the income should have been recognised and admitted in the return of income. But, no such lease rental is recognised as earned as on 31.03.1997. As per the Audit Report in Form-3 CD filed along with the return, it is stated that "income is accounted on accrual basis in accordance with the Prudential Norms prescribed by the Reserve Bank of India and the Accounting Standards notified by the Central Government vide Notification 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 is that as per the agreement entered into between the assessee and TASL on 29.03.1997, the boiler was given on lease i.e.just two days prior to the end of assessment year 1996-97. Therefore, the lessee TASL could not have put the asset in use before 31.03.1997. When that being so, the depreciation claimed by the assessee is liable to be withdrawn, at the best, the depreciation can be considered only in the subsequent year, whereas it is the case of the assessee that the boiler 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 for Rs.7,70,77,000/- in the books on 29.03.1997, the date of the agreement of lease with TASL. As the boiler (Lignite-cum-Bagasee) is specialised in nature having thermal efficiency above 75%, it is eligible for 100% depreciation as per item III(3)(iii)A(d) of Appendix-1 to the Income-Tax Rules, 1962. The conditions for claiming depreciation under section 32 of the Act has been satisfied in respect of the boiler, as mentioned below: "Ownership: As a lessor and as evidenced from the invoice raised by the BHEL, the assessee is the absolute owner of the asset. User: The boiler has been put to use in the business of leasing vide lease agreement dated 29.3.1997. The lessee, TASL, issued an installation certificate certifying that the boiler was installed and put to use on 28.3.97. The Deputy Chief Inspector of Boilers, Tiruchirapalli has certified that the boiler was erected on or before 26.3.97 and hydraulically tested to a pressure of 102 kg/cm2 and found satisfactory 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 into use for the purpose of leasing business even before 31.03.1997. But the case of the assessee was negated by the assessing officer, holding that the assessee has not proved that they are eligible for 100% depreciation as a specialised category and they have also not proved that the asset was put into use before 31.03.1997. But, on https://hcservices.ecourts.gov.in/hcservices/ appeal, the Commissioner of Income Tax (Appeals) upheld the order of the Joint Commissioner of Income Tax. Aggrieved over the same, the revenue has filed this appeal. 9. We have heard the learned counsel for both sides and perused the materials available on record. 10. It is the case of the revenue that the asset was actually put to use only on 06.05.1997 and in support of their contention, they have relied upon a letter from the Chief Engineer, Tamil Nadu Electricity Board, Tiruchirapalli to show that the permission was granted to the lessee to put to use the boiler on 06.05.1997, on which date the power plant of the lessee actually started producing energy. Since the asset was put to use on 06.05.1997 i.e. much later from the end of the assessment year 31.03.1997, the appellant can claim depreciation only for the subsequent year. But it is the contention of the assessee that the boiler has been installed in the factory of lessee in the month of February, 1997 itself and in support of the same, they relied upon a letter dated 01.07.1997 issued by BHEL, the supplier of boilers. Therefore, since the boiler was installed prior to 31.05.1997, they are eligible for depreciation for the assessment year 1996-97. 11. Whether the assessee is entitled for the depreciation on the assets for the assessment year 1996-97 or for the subsequent year is the question that has to be decided in this appeal. In fact, the judgments relied upon by the learned counsel for the respondent/assessee would give a fitting answer to this issue and the 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 appeal filed by the Revenue, holding that, "The assessee, admittedly had supplied the machinery before the end of the financial year and the assessee had received the lease rentals for the same. Whether the lessee had put to use the leased equipment would be irrelevant as long as the machinery in fact had been given on lease before the end of the financial year, as then it could be said that the assessee for the purpose of business had "used" the leased equipment. 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 the machines were installed at the place of the lessee it could be presumed that they had been utilised, even assuming that such actual user was a condition precedent for https://hcservices.ecourts.gov.in/hcservices/ the lessee to claim depreciation. The assessee was entitled to the depreciation". 13. This Court, in COMMISSIONER OF INCOME-TAX .vs. FIRST LEASING CO.OF INDIA LTD., ((1995) VOL.216 ITR 455 (Mad), has held as follows: "In other words, while the relevant provisions in section 33 provide that machinery or plant should be installed by the assessee in the premises used by it, or it is an asset or the said machinery or plant is an asset relating to the business carried on by the assessee, as the case may be, section 32A(2B) does not have any such stipulation. That is why the said Karnataka decision CIT v. Shaan Finance (P.) Ltd. [1993] 199 ITR 409, concludes by saying thus (at page 416) : "The benefit is given with reference to the actual user of the machinery, though the benefit may go to a person who does not exploit the machinery himself for manufacturing or producing any article. Such a situation is not entirely unknown in the field of taxation. If the object behind section 32A is understood as to encourage industrial activities and investment in capital goods to facilitate industrial developments, the provision would certainly 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 or machinery in the present cases has been leased out by the assessee, it is hit by the abovesaid provision in view of the fact that the terms "otherwise transferred" found therein would include such lease. So, according to him, the said allowance "shall be deemed to have been wrongly made". But, we are unable to accept this contention also. First of all, even on the footing that the term "otherwise transferred" would include such "leases" as given in the present cases, the said provision will not disentitle the assessees herein from securing investment allowance, since the said provision only speaks of "machinery or plant transferred by the assessees" at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed". In all the present cases, admittedly, the leases were only during the previous year in which the plant or machinery was acquired and not in the abovereferred to eight year period beginning from the end of the previous year". The dictum laid down in the above judgments would show that as and when the assets are installed at the place of the lessee, it could be presumed that they had been used and that such actual use was a condition precedent for the lessee to claim depreciation. https://hcservices.ecourts.gov.in/hcservices/ 14. In view of the legal position, we are unable to appreciate the contentions made by the Revenue that actual date on which the asset was put to use alone has to be taken into consideration. We do not find any infirmity in the common order passed by the Appellate Tribunal, allowing the claim of depreciation on leased assets. Therefore, the second substantial question of law is answered in the negative i.e. against the revenue. Accordingly, both the appeals are allowed in part by answering the first question in favour of the Revenue and answering the second question as against the Revenue. No costs. Sd/ Asst. Registrar /true copy/ Sub Asst.Registrar gl To 1. 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 157 of 2008 NG(CO) Eu 5.1.12 https://hcservices.ecourts.gov.in/hcservices/