Income Tax Appeal No. 127 of 2005 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 127 of 2005 Date of decision: 29.3.2011 M/s. P.K.J. Builders Pvt. Ltd. --- Appellant Versus Commissioner of Income Tax Chandigarh --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present: Mr. D.K. Goyal, Advocate for the appellant-assessee. Ms. Urvashi Dhugga, Senior Standing Counsel for 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 order dated 31.12.2004, passed by the Income Tax Appellate Tribunal Chandigarh 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 been claimed for determination of this Court: Income Tax Appeal No. 127 of 2005 2 (a) Whether under the facts and circumstances of the case the Tribunal was justified in law on an interpretation of agreement dated 3.2.1996 and hire purchase agreement dated 30.1.1996 that the agreement entered into between M/s. K.P. Earthmovers and the appellant is not bona fide and genuine which finding is perverse? (b) Whether under the facts and circumstances of the case the Tribunal at the stage of the appeal could give a finding at its own coming to a different conclusion and adopting a different basis which was not a ground of appeal of the respondent before the Tribunal or the first Assessing Authority and hence, such an action is un-jurisdictional? (c) Whether under the facts and circumstances of the case the Tribunal was justified in law by ignoring the evidence and the material on record which proves the ownership and user of the equipment by the appellant in terms of Section 32 of the Income Tax Act and thereby not allowing the depreciation? (d) Whether under the facts and circumstances of the case the Tribunal was justified in disallowing the interest amounting to Rs. 65,894/- on the hire purchase instalment for equipment purchased 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 Hydraulic excavator from Telco in the name of its sister concern, M/s. K.P. Earthmovers. For making purchase of the aforesaid equipment, the assessee felt need of finance and hence, applied for a loan. The request of the assessee for grant of the loan was, however, declined on Income Tax Appeal No. 127 of 2005 3 the ground that it was a new concern. The Tata Finance Ltd. to whom the assessee had applied for grant of the loan agreed to finance the equipment in the name of M/s. K.P. Earthmovers. By virtue of a decision in the meeting of the Board of the Directors of the assessee- Company, it was decided that the excavator would be purchased from Telco in the name of M/s. K.P. Earthmovers and an agreement be would be executed between assessee and M/s. K.P. Earthmovers to compensate the latter for any loss, if any, arising from the purchase of the said equipment in its name. The assessee, thus, claimed that the equipment in question was owned by it and it has rightly claimed depreciation. The assessing officer, however, after considering the matter, disallowed the deduction claimed on account of depreciation in the sum of Rs. 3,75,080/-, by order dated 25.9.1998. 4. The assessee preferred appeal before the Commissioner of Income-tax (Appeals) {in short “the CIT(A)”}. The appellate authority vide order dated 1.12.1999 allowed the appeal by holding that the equipment had been purchased by the assessee-company and it had only been got financed through its sister concern and thus, the assessee was the owner of the said equipment and was entitled to claim the benefit of depreciation and interest. 5. The Revenue took the matter in further appeal before the Tribunal. The Tribunal by the order under appeal here accepted the plea of the Revenue, reversed the order of the CIT(A) and upheld that of the assessing officer, necessitating the assessee to file the present appeal. 6. We have heard learned counsel for the parties and have perused the record. Income Tax Appeal No. 127 of 2005 4 7. The primary point in issue in this case is, whether the agreement which was entered into by the assessee with its sister concern, 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 Tax Vs. Fazilka Dabwali Transport Company Pvt. (Ltd.), (2004) 270 ITR 398 (Pb. & Hr.) to contend that the Tribunal had erred in adjudicating the issue against the assessee. The hire-purchase agreement dated 30.1.1996 and agreement dated 3.2.1996 between the assessee and its sister concern, M/s. K.P. Earthmovers had resulted in conferring ownership rights on the assessee and, therefore, depreciation and interest 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 conclusion that the sister concern, M/s. K.P. Earthmovers, was owner of the equipment and the alleged agreement of the said concern with the assessee was not a bona fide transaction. The Tribunal further concluded that the agreement between the assessee and its sister concern, 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 to why the assessee did not purchase this asset in its own name and entered into a hire-purchase agreement with Tata Income Tax Appeal No. 127 of 2005 5 Finance Ltd., in its own name when in fact this equipment was to be owned and used by the assessee itself? The plea of the assessee before us as well as before the tax authorities below is that in the instant case, assessee had applied for loan to Tata Finance who declined to finance for the purchase of the equipment in the name of the assessee company on the ground that it was a new concern but expressed the willingness to finance for the equipment in the name of M/s. K.P. Earthmovers, a sister concern of the assessee, so the assessee entered into a sale agreement with its sister concern M/s. K.P. Earthmovers and purchased the equipment and got the same financed in the name of M/s. K.P. Earthmovers, its sister concern, from Tata Finance Ltd. Now, in the light of this explanation of the assessee, we would be examining the bona fide and genuineness of this transaction. In the instant case, the assessee has not furnished any evidence to indicate that it ever entered into such type of correspondence with Tata Finance Ltd., for obtaining loan from them in its own name or that Tata Finance ever refused to advance loan to the assessee because it was a new concern and that they agreed to finance for the purchase of the equipment in the name of M/s. K.P. Earthmovers, a sister concern of the assessee. Secondly, even if the contention of the assessee is to be accepted for the sake of presumption then before executing the hire purchase agreement with Tata Finance in the name of M/s. K.P. Earthmovers, the sister concern of the Income Tax Appeal No. 127 of 2005 6 assessee, a tripartite agreement of sale between Tata Finance, M/s. K.P. Earthmovers and the assessee should have first been executed. In the instant case, there is no such tripartite agreement executed, on the contrary, even the sale agreement between the assessee and M/s. K.P. Earthmovers was executed on 3.2.96 after the execution of hire purchase agreement between Tata Finance Ltd., and M/s. K.P. Earthmovers on 30.1.1996 and even the first two instalments were paid to Tata Finance by M/s. K.P. Earthmovers. Since the hire-purchase agreement between Tata Finance and M/s. K.P. Earthmovers was executed on 30.1.96 then, on the basis of subsequent agreement to sell dated 3.2.96 entered between M/s. K.P. Earthmovers and the assessee, M/s. K.P. Earthmovers could not have any right to further transfer the ownership rights in favour of the assessee because as per the hire purchase agreement, M/s. K.P. Earthmovers are the hirers of the machinery and not the owners. We would also like to mention here that on a careful perusal of the nature of the hire purchase agreement dated 30.1.96, it is clear that though it is worded as a hiring agreement, it matures into a sale, so it can also be said to be a sale on instalments, which further means that the property / assets passes in such agreement on the basis of payment of last instalment, but till that time the ownership of the asset/ property vests in the financier and hence any subsequent agreement entered into by the hirer with a third party, ownership rights cannot be transferred in Income Tax Appeal No. 127 of 2005 7 favour of that third party without making the financiers as a party to that agreement and therefore, the sale agreement, subsequently entered into by the assessee with its sister concern, M/s. K.P. Earthmovers is not a valid agreement in the eyes of law and so M/s. K.P. Earthmovers could not have transferred any ownership rights in favour of the assessee, irrespective of any terms and conditions enunciated in that agreement. The CIT(A) erred here in coming to a conclusion that the assessee and M/s. K.P. Earthmovers entered into an arrangement of taking the asset in the name of M/s. K.P. Earthmovers though the equipment was purchased and owned by the assessee, because this aspect of the matter regarding the sale agreement and the hire purchase agreement as discussed by us herein above in this order was not taken into consideration by the CIT(A) while accepting the contention of the assessee regarding the genuineness of this transaction. Hence, we are of the opinion that the assessee failed in justifiably explaining as to why the hire purchase agreement in respect of the purchase of the asset was not entered into with Tata Finance in the name of the assessee, and, therefore, the subsequent arrangement made by the assessee with a third party, i.e. M/s. K.P. Earthmovers for transferring the ownership rights in favour of the assessee in respect of the assets in question cannot be held to be bona fide and genuine. Consequently, the subsequent entries recorded in the books of the assessee with regard to purchase of the asset, amount Income Tax Appeal No. 127 of 2005 8 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 the assessee is not the owner of the asset. So, we are of the opinion that the CIT(A) erred in allowing the impugned depreciation u/s 32 claimed by the assessee and on the excavator and so the impugned order of the CIT(A) in this regard is reversed and that of the A.O. denying the depreciation to the assessee is upheld. Accordingly, ground No.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 the absence of a genuine and bona fide agreement between the assessee and its sister concern, M/s. K.P. Earthmovers, the assessee was not entitled to claim depreciation and interest on instalments alleged to have been paid there-under as an expense. The finding of fact recorded by the Tribunal has not been shown to be perverse. The Tribunal has taken a plausible view. The substantial questions of law as claimed, thus, do not arise in this case. 11. In view of the above, there is no merit in the appeal and the same is dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) March 29, 2011 JUDGE *rkmalik* Income Tax Appeal No. 127 of 2005 9