IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.S.GOPINATHAN TUESDAY, THE 25TH MAY 2010 / 4TH JYAISHTA 1932 ITA.No. 65 of 2008() -------------------- ITA.4/2000 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT:- ---------------------------------------- THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENT/APPELLANT:- -------------------------------------- ENGLISH INDIAN CLAYS LTD., THIRUVANANTHAPURAM. ADV. SRI.A.KUMAR. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 10/2/2010, THE COURT ON 25/5/2010 DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & P.S.GOPINATHAN, JJ. = = = = = = = = = = = = = I.T.Appeal No.65 of 2008. = = = = = = = = = = = = = Dated this the 25th day of May, 2010. J U D G M E N T Gopinathan, J. Appeal is by the Revenue under Section 260A of the Income Tax Act. On 26.11.1996 the respondent-assessee- company filed return admitting income of Rs.34,76,480/- for the assessment year 1996-'97. The assessee claimed to have entered into a lease agreement with M/s.Prakash Industries Ltd., New Delhi whereby Air Pollution Control Equipment and Flameless Furnaces claimed to have been purchased by the assessee from M/s.Pioneer Engineering Company, Jamshedpur and M/s.Ashish Engineering Company, Durg, Madhyapradesh respectively were leased out to M/s.Prakash Industries Ltd. In the return, I.T.Appeal No.65 of 2008. -: 2 :- filed declaring income, the assessee claimed 100% depreciation amounting to Rs.3,60,19,500/- as cost of the above said equipments. The Department conducted search and enquiry on the genuineness of claim of depreciation. The respondent was also heard and assessment was finalised rejecting the claim for 100% depreciation towards cost of the above said equipments along with certain other claims. 2. The assessee respondent feeling aggrieved preferred appeal before the Commissioner of Income Tax (Appeals), Thiruvananthapuram. The first appellate authority, though allowed the appeal partly, confirmed the assessment order so far as it relates to the denial of depreciation of the above said equipments along with certain other deductions and allowances. 3. The respondent assessee preferred second appeal before the Income Tax Appellate Tribunal, Kochi. Appellant I.T.Appeal No.65 of 2008. -: 3 :- herein preferred cross objection so far as the first appellate order went against it. Before the Appellate Tribunal three grounds were urged by the respondent. The first ground is relating to the depreciation in respect of the above mentioned equipments. When the appeal came up for hearing, on behalf of the respondent assessee it was submitted that the first ground was not pressed, but an alternate ground was raised with a contention that in respect of the lease transaction there was criminal complaint before the Chief Metropolitan Magistrate, New Delhi and that was settled between the respondent assessee and the lessee and that by way of settlement, a sum of Rs.1,30,00,000/- was obtained. It was also submitted that the respondent assessee had obtained some amount towards rental for the equipments leased. After adjusting the rentals along with the amount said to have been received by the respondent assessee by way of settlement of I.T.Appeal No.65 of 2008. -: 4 :- the criminal case, an amount of Rs.1,55,45,447/- was requested to be calculated as business loss out of lease transaction during the relevant assessment year. That is the additional ground urged. The Appellate Tribunal dismissed the first ground as not pressed. Additional ground was considered and answered in favour of the assessee respondent. The other two grounds raised in the appeal memorandum were answered against the respondent on merits as against which no appeal is filed. Cross objection filed by the department was also rejected. The Department was directed to finalise the assessment by counting the above mentioned amount as business loss. Assailing the above order granting business loss, the Department has now come up in appeal. 4. The following are the substantial questions of law raised in the appeal memorandum: 1) Whether, on the facts and in the circumstances of the case and also the ground raised before the Income Tax Appellate Tribunal being not a pure I.T.Appeal No.65 of 2008. -: 5 :- question of law but one depending upon various facts, factors and the same being disputed/disputable, the Tribunal is justified in considering the same by itself or on its own without remanding the same for being considered by the Assessing Officer on merits in accordance with law and with jurisdiction? 2) Whether, on the facts and in the circumstances of the case and in the light of the findings by the Assessing Officer and Commissioner of Income Tax (Appeals) that the entire lease transaction are bogus and mere paper transactions, in the absence of a definite contrary finding by Tribunal, the Tribunal is right in law and fact in holding that “But as far as the assessee company is concerned it has incurred a loss,” the loss has been incurred in the course of carrying on of that regular business activity” “it is not a loss by way of loss of capital assets” and are not the findings wrong erroneous and against facts and realities? 3) Whether, on the facts and in the circumstances of the case the assessee is entitled to claim deduction of the loss in the assessment year 1996-97 and the Tribunal is right in law in giving a direction to the officer to that effect? 5. The first question of law raised is regarding the error in the procedure adopted by the Appellate Tribunal after arriving a finding regarding the alleged business loss. The I.T.Appeal No.65 of 2008. -: 6 :- second question of law is the one pertaining to the actual dispute. So, the first question of law arises only if we arrive at a finding in favour of the respondent regarding the second question of law. The third question of law raised is also one incidental to the second question of law. Hence we are considering the second question of law first. 6. Going by the assessment order and the first appellate order, we find that the assessing officer as well as the first Appellate Authority considered the claim urged by the respondent threadbare and arrived at a finding against the respondent that the purchase of machinery mentioned earlier and the so called lease arrangement are bogus and the respondent is not entitled to any depreciation as cost of the machineries purchased and leased out to M/s.Prakash Industries Ltd. The assessing officer had arrived at a conclusion that the deduction was sought on the basis of purchase of assets that never existed from an alleged concern that never existed and transported the non-existing assets I.T.Appeal No.65 of 2008. -: 7 :- through alleged transporter that never existed. It was also found by the assessing officer that the search conducted by the Department had revealed a huge play of fraud of mammoth proportion. The Managing Partner of M/s.Pioneer Engineering Co., from where Air Pollution Control Equipment was claimed to have been purchased categorically stated that the said firm had not supplied/sold any equipment to the assessee or transported the same to the so called lessee. In the first appeal, a contention was raised that the respondent was not given an opportunity to cross examine the Managing Partner. The appellate authority was good enough to give an opportunity to the respondent to examine the said person. But, later the respondent declined to examine him. Therefore, his evidence denying the purchase of that equipment and transport to the alleged lessee remains unimpeached and credible to arrive a safe conclusion that there was no lease transaction. It was also revealed that M/s.Ashish Engineering Co., from where flameless furnaces were said to have been purchased for letting out I.T.Appeal No.65 of 2008. -: 8 :- to the lessee never existed. The first appellate authority had considered the entire materials on record by a detailed order in lucid style concurred with the assessing officer. The conclusion arrived is that there was neither any purchase of the above mentioned equipments nor any lease transaction. It is in the above circumstance, the claim for 100% depreciation was disallowed by the assessing authority as well as the first appellate authority. Though the above concurrent finding was assailed in the second appeal, the respondent didn't pursue the ground raised in the appeal memorandum assailing the said finding. The result is that the said finding that there was no lease transaction had become final. 7. Going by the order impugned and the additional ground urged by the respondent, we find that the additional ground urged is only an attempt to make it appear that the bogus transaction had taken place and to avoid payment of tax in the form of a claim of business loss which the appellate tribunal found as a complementary issue to the main issue of I.T.Appeal No.65 of 2008. -: 9 :- 100% depreciation and answered in favour of the respondent with an observation that no enquiry regarding the facts are called for to adjudicate the additional grounds. 8. The learned Senior Counsel on behalf of the appellant would argue that since the assessing officer as well as the first appellate authority had found that the story of purchase of the equipments mentioned earlier and transport of the same to the lessee and the lease transactions were found bogus, the respondent is not entitled to claim any deduction as business loss. There cannot be any loss on a transaction that never occurred, so submitted. On the other hand, Adv.Shri.A.Kumar, the learned counsel appearing for the respondent submitted that whatever may be the finding of the assessing officer as well as the first appellate authority, a transaction occurred whereby the respondent spent a sum of Rs.3,60,19,500/- and on realizing that it was a case of deception, forgery, falsification of account etc., the respondent preferred a complaint before the Chief Metropolitan I.T.Appeal No.65 of 2008. -: 10 :- Magistrate, New Delhi which was first forwarded to the Station House Officer, Hauz Khas Police Station and then on finding that the offences alleged occurred within the territorial limits of Sarojini Nagar Police Station, the complaint was forwarded to the Sarojini Nagar Police Station, New Delhi under Sec.156(3) of the Criminal Procedure Code and later the matter was settled between the respondent and the accused and an agreement of settlement was executed and in pursuance of the settlement agreement the respondent received a sum of Rs.1,30,00,000/- and the complaint was withdrawn. According to the learned counsel, all relevant documents were produced before the appellate tribunal and basing upon the documents produced the additional ground was urged and that after adjusting the amount so received in pursuance to the settlement agreement as well as the amount received towards the rentals, there was loss amounting to Rs.1,55,45,447/- and that the appellate tribunal was perfectly justified in computing that amount as the business loss. I.T.Appeal No.65 of 2008. -: 11 :- 9. As we mentioned earlier, the assessing officer as well as the first appellate authority had arrived at a finding that the purchase of equipments and the lease alleged are bogus. It is a finding on facts based upon the documents produced. Since the appeal as far as it assailed the said finding was not pressed and the appeal to that extent was dismissed, that finding had become final. In the above circumstance, as argued by the Sr.Counsel appearing for the appellant, there is no business of lease transaction. Since there is no business of lease transaction there cannot be any loss on such business. The respondent having decided not to press ground No.1 pertaining to lease transaction, as mentioned above, finding of the assessing officer concurred by the appellate authority had become final and would operate as resjudicata as against plea of business of lease and any loss thereon. Though certain documents were seen produced by the assessee before the appellate tribunal and the appellate tribunal in para.24 of its order mentioned about some I.T.Appeal No.65 of 2008. -: 12 :- documents, there is no specific finding that any of the documents produced are either legally valid documents or that any such documents would establish a lease transaction between the assessee and the so called lessee. Neither is there any finding that the finding of the assessing officer or the appellate authority that the alleged lease transaction is bogus is unsustainable or that there was any lease transaction established. Without basing any document, the appellate tribunal accepted the assessee's version that there is loss out of lease transaction and allowed the appeal in the manner stated earlier. That finding without the support of any document is illegal and unsustainable. 10. Before us 16 documents (Annexures R1 to R16) along with a counter-affidavit were filed. Of these, Annexures R1 to R5 were concurrently rejected by the authorities below and no argument was advanced touching those documents. Many of the documents produced are not legible here and there. Some are even incomplete. So, those documents are I.T.Appeal No.65 of 2008. -: 13 :- not entertainable in this third appeal. However, we have carefully gone through Annexures R6 to R15. It is seen that Annexure R6 complaint was filed on behalf of the respondent against one S.R.Jain and four others alleging offences under Sec.120B, 409, 468, 470, 471 and 473 IPC and the said complaint now stands referred to Station House Officer, Sarojini Nagar Police Station, New Delhi and it is under investigation. It appears that the respondent made an attempt to issue process against the accused in the complaint during the investigation stage and that was rightly turned down by the learned Magistrate. What was the motive in applying for issuing process during investigation stage is not revealed. From Annexure R13 it appears that an application under Sec.257 of the Crl.P.C. was filed, but the copy of the petition was not seen produced. The case number is also not mentioned. Only copy of the docket is produced. So, we are at dark as to under what circumstance the said petition was filed and what was the prayer. According to the learned I.T.Appeal No.65 of 2008. -: 14 :- counsel for the respondent, the said application was filed in pursuance to the settlement agreement produced as Annexure R14. Going by Annexure R14 it is seen the same was drafted as a settlement between the respondent and M/s.Prakash Industries Ltd. In that settlement agreement there is an offer that M/s.Prakash Industries Ltd., would pay Rs.1,30,00,000/-. The mode of payment and whether the payment was made or not is not disclosed. However, there is no proof of payment. Who signed the agreement on behalf of M/s.Prakash Industries Ltd., and the respondent is not at all disclosed. Annexure R14 even does not disclose as to whether the so called settlement was between respondent or any of the accused. 11. According to the learned counsel, it is in pursuance of Annexure R14, the complaint was sought to be withdrawn and it was allowed by the court. For two reasons we find that no reliance can be given to Annexure R14 or to the so called order granting permission to withdraw the complaint. The first reason is that once a complaint is forwarded to the police I.T.Appeal No.65 of 2008. -: 15 :- station under Sec.156(3) of the Crl.P.C., no complaint would be pending before the Magistrate so as to enable the complainant to withdraw the same. Other thing is that, except offence under Sec.420 IPC, the other offences alleged are non- compoundable and the allegations in the complaint are of very grave in nature and is triable under Chapter XIX of the Code of Criminal Procedure. Once a case is registered by the police and investigation started, no court has got any authority to interfere with the investigation either by an order withdrawing the complaint or otherwise. Withdrawal of complaint under Sec.257 Crl.PC is permissible only in respect of offences triable under Chapter XX of the Crl.PC., if the allegation is true, the offences alleged being triable under Chapter XIX, the complaint is not liable to be withdrawn under Sec.257 Crl.PC. So, the contention of the respondent that the payment was made by the alleged accused in pursuance of a settlement agreement and withdrawing the complaint are not at all convincing and not legally entertainable. It appears that the I.T.Appeal No.65 of 2008. -: 16 :- so called complaint and the settlement thereon etc. are only further attempts made by the respondent to create documents to make it appear that a transaction which was found bogus by the assessing officer as well as the first appellate authority and confirmed in second appeal had occurred. It is also very pertinent to note that the appellate tribunal without going to the merits or admissibility of the documents in support of the additional ground urged in the appeal arrived a conclusion that because of the so called payment the plea of the respondent that there was business loss is admissible. In fact, there is no proof of any payment. We find that the appellate tribunal had gone wrong in finding that there occurred a business loss out of a business transaction which had never occurred. The documents produced as well as the plea of payment of Rs.1,30,00,000/- are also sham and the story that there was settlement and consequent payment are all concocted. 12. Going by Annexure R6 complaint we find that there I.T.Appeal No.65 of 2008. -: 17 :- is no mention about the equipments said to have been leased. However, it is pleaded that ensuring payment of the rental, cheques for Rs.7,47,405/- were delivered. In Annexure R14, there is mention that civil cases as well as prosecutions under Sec.138 of the Negotiable Instruments Acts were filed. No case number is mentioned. No copy of the plaint and complaint is produced. Neither any copy of compromise petition filed in those cases nor order thereon is produced. The courts before which those cases were filed is also not revealed out. Everything appears to be mystery. If the story put forward by the respondent is true, the respondent has a very good case and in the normal course, it wouldn't be settled for half amount, that too without actual payment and on promise of payment. When all these matters are taken together we find it not convincing. We are constrained to reject the documents now produced to support the plea of business loss. 13. In support of the plea that the claim towards I.T.Appeal No.65 of 2008. -: 18 :- business loss is permissible even if it is found that the business alleged is illegal or that parties to the business had played any fraud, the learned counsel relied upon the decisions reported in George Maijo & Co. vs. Commissioner of Income Tax [(2003) 261 ITR 231]; Commissioner of Income Tax vs. Mahendra N.Shah [(2006) 280 ITR 462] and T.A.Quereshi (Dr.) vs. Commissioner of Income Tax [(2007) 2 SCC 759]. Going by the above judgments we find that the set of facts has no application to the case on hand. In George Maijo's case, the assessee had imported goods. The seller had reported that the goods were sent through ship which was reportedly sank. CBI enquiry revealed that the contracted goods were not put on Board. However, money was paid by the bank to the foreign seller. It was a case wherein the seller played fraud on the assessee. In Mahendra's case a false shipping document was created and money was collected. In T.A.Quereshi's case the assessee had manufactured heroin illegally and the heroin was seized by the authorities and thus I.T.Appeal No.65 of 2008. -: 19 :- loss was sustained to the assessee. Here, in this case there is no such transaction, but, the assessee had made documents as if equipments were purchased and lease transactions had taken place and payments were made. All documents were rejected by all authorities below. So, the dictum laid down in those cases cannot be applied to the facts of this case. 14. To conclude, the claim of business loss is not at all entertainable in view of the fact that the finding of the assessing officer as well as the first appellate authority that the lease transaction alleged based upon which the 100% depreciation was claimed is a bogus one. We concur with the first appellate authority and find that no lease transaction in respect of the equipments mentioned earlier had taken place in between the respondent and M/s.Prakash Industries Ltd., as alleged by the respondent. So, there cannot be any business loss on account of that business and no deduction on business loss is legally permissible. 15. The finding of the Tribunal below that the I.T.Appeal No.65 of 2008. -: 20 :- respondent is entitled to deduction for business loss is perverse and contrary to the materials available on record. The additional documents produced before the Tribunal as well as before this Court are not better than the documents produced before the assessing officer and rejected by him, which was confirmed by the first appellate authority. The additional documents produced and additional ground raised are continued attempts to establish the bogus transaction and deserves no better consideration other than that was given by the assessing officer and the first appellate authority in respect of the lease transaction. These are experimental attempts to evade tax. The respondent is not entitled to any deduction towards the business loss as found by the appellate tribunal. Question of law No.2 is answered in favour of the appellant. In view of our finding on question of law No.2, the other two do not arise for consideration. In the result, the appeal succeeds. We set aside the order of the appellate tribunal and restore that of the first I.T.Appeal No.65 of 2008. -: 21 :- appellate authority to the extent to which the appeal is filed. There will be no order as to costs. C.N.RAMACHANDRAN NAIR (Judge) P.S.GOPINATHAN (Judge) kvs/-