Depreciation allowance - Assets leased by assessee

ITAT, Mumbai ACIT vs Jasper Investments Ltd. ITA No. 9157/Mum/1992; Asst. yr. 1989-90 R.K. Gupta, J.M and V.K. Gupta, A.M 9 November 2006 Ravindra Kumar for the Appellant Prakash Jotwani for the Respondent ORDER R.K. Gupta, J.M -: This is an appeal filed by the Department against the order of the CIT(A) relating to asst. yr. 1989-90. 2. The Department is objecting in allowing the claim of the assessee of 100 per cent depreciation on account of 32 steel rollers purchased from M/s S.P. Engineering Works and in allowing the business expenses at Rs. 14,13,312 by treating the same as revenue expenditure against capital expenditure treated by the AO. 3. Regarding the purchase of 32 steel rollers from M/s S.P. Engineering Works (SPEW), Bakura Howrah, the briefly stated facts are that the assessee purchased these rollers for a sum of Rs. 25,62,000. These rollers were leased out to M/s Usha Rectifiers Corpn. (India) Ltd., Gauriganj (Usha Rectifiers) Sultanpur, UP. During the course of assessment proceedings the AO inquired into the genuineness of the purchases of rollers. The AO summarized the results of his inquiry that Mrs. Sarmishta Ganguli, proprietor of M/s SPEW is a housewife. M/s SPEW do not have a sales-tax number/Central Sales-tax number. The suppliers of the rollers to M/s SPEW also do not have ST/CST numbers. Inquiries were also made from such suppliers. One of them stated that he had given the blank bills with his signature to M/s SPEW. Another party stated that he simply signed the bill, without filling any particulars. It was also mentioned that parties were not traceable at the address given in the bills. By observing this observation, the AO treated the purchase of rollers as bogus and depreciation claimed @ 100 per cent on account of leased out the impugned asset was negated by the AO. While negating the claim of the assessee, the AO has also observed in his order that the orders for the supply of rollers were placed oh 10th March, 1989 and the dispatches were made from Calcutta on 13th March, 1989. Since M/s SPEW had not done any business in the past, it is not feasible for them to have executed the order in such a short time. There is no proof of payment of freight or octroi duty. M/s SPEW had started purchasing rollers from November, 1988 onwards. These rollers were made to specific design numbers. It has not been explained how M/s SPEW could have access to specific designs and why the purchases were made without any order on hand as the order was placed by the assessee on 10th March, 1989 only. Accordingly, it was observed by the AO that the purchases made by the assessee are not genuine. It was submitted before the CIT(A) that the assessee company was engaged in the business of finance. However, the board of directors decided to commence leasing business w.c.f. 24th June, 1988. It was further submitted that Mani Management Consultant (P) Ltd., 306, Churchgate Chambers, Bombay, vide their letter dt. 28th July, 1988 to the assessee company introduced themselves and offered that "it should be possible for us to submit lease proposals to you on a regular basis from well reputed public limited companies. The assets acquired under lease are plant and machinery eligible for normal depreciation and even depreciation @ 100 per cent in the very first year of installation. The lease period is normally for five years. At present, we shall be in a position to offer you lease proposals for the acquisition of plant and machinery eligible for 100 per cent depreciation in the very first year from M/s Tata Chemicals Ltd. as well as Mangalam Cement Ltd." There was a series of correspondence between the assessee company and consultant, which finally culminated in assessee agreeing to extend lease finance facility to Usha Rectifiers for the purchase of rollers on terms and conditions enumerated in the lease agreement. Copies of correspondence and lease agreement were filed before the CIT(A). The details of purchases and orders from M/s SPEW for the purchase of rollers, delivery certificate, dt. 27th March, 1989 from Usha Rectifiers regarding installation were filed before the CIT(A). Attention of the CIT(A) was also drawn on the delivery certificate wherein lessee confirmed having taken delivery of the equipment on behalf of the assessee company. They further certified that the inspected the equipment and found that the same were in accordance with the specifications given by them and that the equipment conformed to their requirements. It was further certified by the lessee that the equipments are installed at their galvanized steel division, Gauriganj, Sultanpur, UP. The lessee further reported that the equipments have been put to use on 23rd March, 1989. In view of these facts, it was argued that these evidences could not be controverted by the AO as these details were before him also. On a query from CIT(A), it was replied that the AO has mentioned in his order that during the course of assessment proceedings, correspondence filed regarding purchase of rollers was not produced. But, all the details regarding installation of rollers at the premises of Usha Rectifiers and other details were available to the AO. Attention of the CIT(A) was also drawn on the letter dt. 24th March, 1992 filed before the AO. After considering the details and remand report, the CIT(A) found that there was no justification in not allowing the claim of the assessee. The CIT(A) has discussed the issue in detail and then found that the purchases made by the assessee were genuine and, therefore, depreciation claimed on account of leased out the assets to Usha Rectifiers is allowable. Accordingly, he allowed the claim of the assessee. 3.1 The learned Departmental Representative, who appeared before the Tribunal, firstly, placed reliance on the order of the CIT(A). It was further submitted that the delivery letter was dt. 27th March, 1989 and further submitted that the assets were put to use on 23rd March, 1988. In this background, it is impossible to install the assets for use on 23rd March, 1989 whereas the delivery was made on 27th March, 1989. Accordingly, it was submitted that there was no material available with the assessee and the AO was correct in treating the purchase as bogus. 3.2 In reply, the learned counsel of the assessee strongly placed reliance on the order of the CIT(A). It was further submitted that the delivery was not taken on 27th Aug., 1988, but this is a certificate issued by Usha Rectifiers that delivery was taken prior to 23rd March, 1989. The assets were put to use on 23rd March, 1989. The attention of the Bench was drawn on the copy of the certificate and the copy of letter in regard to use of the assets by Usha Rectifiers and the copy of the certificate certifying that they have received the assets and have put to use also. It was further submitted that the assets were leased out on the basis of month to month and the lease rent was received in advance. It was further submitted that even during the assessment proceedings and during the appellate proceedings before the CIT(A), the assessee has received monthly lease rent regularly. Attention of the Bench was also drawn on the copy of lease rent placed on record. It was further submitted that no enquiry had been made by the Department directly from M/s SPEW or from Usha Rectifiers from whom the rollers were purchased and were leased out, respectively. It was further submitted that all the details in regard to purchase and leased out of assets were filed before the AO as well as before the CIT(A). The purchaser from whom the material is purchased is assessed to tax regularly and the payments were made through broker. It was further submitted that on a later stage these assets have been sold and they have been disclosed in the books of account. Attention of the Bench was drawn on p. 54 of the paper book where copy of sale bill is placed. It was further submitted that the assets were identified and the delivered to Usha Rectifiers. Copy of the delivery certificate is also placed on record. 4. After considering the submissions and perusing the relevant material available on record, we do not find any infirmity in the findings of the CIT(A). The CIT(A) has considered all the aspects in regard to purchase of rollers as well as leased them out to Usha Rectifiers. The CIT(A) has taken into consideration the payment details, delivery of the rollers and the installation and the use of the rollers at the premises of Usha Rectifiers as well as monthly rent on account of lease of the rollers. It has been seen by the CIT(A) that the assets in question were delivered at the premises of Usha Rectifiers who has used them for its business purposes. Experts of Usha Rectifiers examined the assets and they have certified that the assets in question are in good condition and they are fit for use for business purposes. The payments of monthly rents were also taken into consideration by the CIT(A). We further noted that use of each and every roller was taken into consideration by the CIT(A) and after ascertaining the factual position then only arrived at conclusion that the purchases were genuine and the assessee has in fact leased these rollers to Usha Rectifiers on monthly basis. In this background, the CIT(A), in our considered view, was justified in allowing the claim of the assessee. The findings of the CIT(A) neither could be controverted by the learned Departmental Representative nor any evidence to prove that the purchases were bogus or the assets were not leased out to Usha Rectifiers were brought on record on behalf of the Department. Without bringing any positive evidence claim of the assessee cannot be disallowed. We further noted that no enquiry was made by the AO either from M/s SPEW or Usha Rectifiers who have used the assets and they paid the monthly leased rent regularly. No prudent businessman will enter into an agreement on monthly rent. If the transactions are of colourable device then the lease rent always is paid in advance or after claiming the deduction. In the present case, the monthly rent is paid even after two years, which shows that the leased assets were genuine. In view of the above facts and the circumstances of the case, and in view of the reasoning given by the CIT(A), we confirm his order in this regard. 5. Regarding the second issue i.e. treating the software expenses as revenue expenditure, the briefly stated facts are that the assessee claimed Rs. 14,13,312 on account of software expenses as revenue expenditure. However, the AO treated them as capital expenditure. The CIT(A), after taking into consideration that software expenses on computer hardware are revenue in nature because computer hardware is capital expenditure and any expenditure on computer hardware has to be treated as revenue expenditure. 5.1 The learned Departmental Representative placed reliance on the order of the AO. Further reliance was placed on the decision in the case of Maruti Udyog vs. Dy. CIT (2005) $2 TTJ (Del) 987 : (2005) 92 ITD 119 (Del). On the other hand, the learned counsel of the assessee stated that the software expenses are revenue expenditure as it is a license and not a new software. Further reliance was placed on the decision in Jt. CIT vs. Citicrop Overseas Softwares Ltd. (2004) 85 TTJ(Mumbai) 87. 6. After considering the submissions and perusing the relevant material on record we find that the CIT(A) was justified in treating the expenses as revenue expenditure. The expenses incurred by the assessee were incurred on computer software and not for purchase of new software. Even in case of Maruti Udyog (supra), the Delhi Bench has held that on account of expenditure on computer software they have to be treated as revenue in nature. Various Benches of the Tribunal are taking consistent view that where software are in the nature of license and not in the nature of new softwares, then those expenses have to be treated as revenue in nature. In view of these facts and the circumstances, we confirm the order of the CIT(A) on this issue also. 7. In the result, the appeal filed by the Department is dismissed.