ACIT, Bellary v. M/s. Bellary steels & Alloys Ltd.,, Bellary

ITA 90/BANG/2004 | 1999-2000
Pronouncement Date: 10-02-2010 | Result: Dismissed

Appeal Details

RSA Number 9021114 RSA 2004
Bench Bangalore
Appeal Number ITA 90/BANG/2004
Duration Of Justice 6 year(s) 13 day(s)
Appellant ACIT, Bellary
Respondent M/s. Bellary steels & Alloys Ltd.,, Bellary
Appeal Type Income Tax Appeal
Pronouncement Date 10-02-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 10-02-2010
Date Of Final Hearing 07-12-2009
Next Hearing Date 07-12-2009
Assessment Year 1999-2000
Appeal Filed On 28-01-2004
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI K.P.T. THANGAL VICE PRESIDENT AND SHRI A. MOHAN ALANKAMONY ACCOUNTANT MEMBER ITA NOS.711 & 1154/BANG/2003 45/BANG/2004 ASSESSMENT YEARS : 1998-99 1999-2000 1997-98 M/S. BELLARY STEELS & ALLOYS LTD. S. 10/11 ANANTAPUR ROAD BANGALORE. : APPELLANT VS. THE JT. COMMISSIONER OF INCOME TAX (ASSESSMENT) SPECIAL RANGE HUBLI. THE ASST. COMMISSIONER OF INCOME TAX CIRCLE 1 BANGALORE. THE ASST. COMMISSIONER OF INCOME TAX CIRCLE 1 BELLARY. : RESPONDENTS ITA NOS.838/BANG/2003 & 90/BANG/2004 ASSESSMENT YEARS : 1999-2000 & 1997-98 THE ASST. COMMISSIONER OF INCOME TAX CIRCLE 1 BELLARY. : APPELLANT VS. M/S. BELLARY STEELS & ALLOYS LTD. S. 10/11 ANANTAPUR ROAD BANGALORE. : RESPONDENT ITA NO.711/B/03 ETC. PAGE 2 OF 52 ASSESSEE BY : SHRI S. VENKATESAN REVENUE BY : SHRI JASON P. BOAZ O R D E R PER A. MOHAN ALANKAMONY ACCOUNTANT MEMBER THESE FIVE APPEALS (I) THREE APPEALS BY THE ASSESSEE COMPANY ARE DIRECTED AGAINST THE ORDERS OF THE LD.CSIT(A) GULBARGA FOR THE ASSESSMENT YEARS 1997-1998 1998-1999 AND 1999-2000 AND (II) TWO APPEALS PREFERRED BY THE REVENUE ARE DIRECTED AGAINST THE ORDERS OF THE LD.CSIT(A) GULBARGA FOR THE ASSESSMENT YEARS 1997- 1998 AND 1999-2000. 2. ASSESSMENT YEAR 1997-98 : (I) ITA NO:45/B/2004 BY THE ASSESSEE : THE CRUX OF THE ISSUE RAISED BY THE ASSESSEE IS T HAT THE CIT (A) ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE AO IN RESPECT OF LEASE RENTALS PAID TO VARIOUS FINANCIAL INSTITUTIONS TOWARDS LEASE OF ASSETS. SUBSEQUENTLY A REVISED FORM NO.36 WAS FURNISHED ON 2.2.2004; HOWEVER THE GROUNDS RAISED WERE IDENTICAL TO THE ORIGINAL G ROUNDS RAISED IN FORM NO.36 WHICH WAS FURNISHED ON 20.1.2004. IN FACT TH E FURNISHING OF A REVISED FORM WAS NECESSITATED TO CURE CERTAIN TECHNICAL FLA WS WHICH HAVE CREPT IN IN THE FORM NO.36 ORIGINALLY FILED. THE SAME WAS OR DERED TO BE PLACED ON RECORD. THE ASSESSEE VIDES ITS APPLICATION DATED 9.9.2008 H AD PRAYED FOR ADMISSION OF ADDITIONAL GROUNDS WHICH ARE AS UNDER: ITA NO.711/B/03 ETC. PAGE 3 OF 52 1. THE APPELLANT SUBMITS THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE CONDITIONS PRECEDENT BEING ABSENT THE RE-OPENING OF THE ASSESSMENT U/S. 147 OF THE AC T WAS WITHOUT JURISDICTION AND THUS THE REASSESSMENT WAS INVALID AND LIABLE TO BE CANCELLED. 2. THE AUTHORITIES BELOW OUGHT TO HAVE APPRECIATED THAT THERE BEING NO ESCAPEMENT OF INCOME IN THE ORIGINAL ASSES SMENT AS MADE THE RE-OPENING OF THE ASSESSMENT IS LIABLE TO BE SET ASIDE. (II) ITA NO:90/B/2004 BY THE REVENUE : OUT OF FIVE GROUNDS RAISED BY THE REVENUE GROUND N OS.1 4 AND 5 BEING GENERAL AND NO SPECIFIC ISSUES INVOLVED THEY HAVE BECOME NON- CONSEQUENTIAL. IN THE REMAINING GROUNDS THE CRUXE S OF THE ISSUES ARE THAT (I) THE CIT(A) HAD ERRED IN ALLOWING THE EXPENDITURE O F RS.5.44 CRORES OF FINANCIAL CHARGES AND RS.2.31 CRORES OF U PFRONT FEE PAYMENTS FOR THE NEW PLANT UNDER EXECUTION; & (II) THE CIT(A) HAD ERRED IN DIRECTING THE AO TO EXAMINE LEASE RENT PAID WHICH WAS DISALLOWED BY THE AO AND TO FIND OUT THE INTEREST PORTION IN IT AND TO ALLOW THE SAME AS FINANCE CHAR GES. 3. ASSESSMENT YEAR 1998-99 : (I) ITA NO: 711/B/2003 BY THE ASSESSEE : IN THIS APPEAL THE ASSESSEE HAS RAISED FIVE EXHAUS TIVE GROUNDS OUT OF WHICH GROUND NO.5 BEING GENERAL AND NO SPECIFIC IS SUE WAS RAISED. IN THE REMAINING GROUNDS THE ESSENCES OF THE ISSUES ARE R EFORMULATED IN CONCISE MANNER AS UNDER: (I) THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE AO IN RESPECT OF LEASE RENT HOLDING THAT THERE WAS NO ASSET AND THE TRANSACTIONS WERE ONLY FINANCIAL TRANSACTIONS AND T HE AMOUNT PAID WAS ONLY FINANCIAL CHARGE; ITA NO.711/B/03 ETC. PAGE 4 OF 52 (II) SUSTAINING THE ADDITION OF RS.71630000/- MADE U/S 6 8 OF THE ACT; & (III) SUSTAINING THE DISALLOWANCE OF RS.345925/- BY INVOK ING THE PROVISIONS OF S.40A(2)(B) OF THE ACT IN RESPECT OF PAYMENT OF CONVERSION CHARGES TO M/S. BELLARY STEELS ROLLING M ILLS. (IV) THE CIT(A) OUGHT TO HAVE DECIDED THAT THE ADDITIONA L TAX CHARGED ON THE TAX ARRIVED AT ON THE INCOME COMPUTED U/S 11 5J SHALL NOT BE LEVIABLE. 4. ASSESSMENT YEAR 1999-00 : (I) ITA NO:1154/B/2003 BY THE ASSESSEE : IN THIS APPEAL TOO THE ASSESSEE COMPANY HAS RAISED SIX EXHAUSTIVE AND ELABORATE GROUNDS. ON A PERUSAL GROUND NOS: 1 AND 6 ARE GENERAL WHICH IN OUR CONSIDERED VIEW DO NOT SURVIVE FOR ADJUDICA TION. IN THE REMAINING GROUNDS THE COMPLEX OF ISSUES IS TWO-FOLDS - (I) THE CIT(A) ERRED IN DISALLOWING THE LEASE RENTALS OF RS.4463063/- ON THE GROUND THAT THIS GROUND WAS NOT PRESSED BY T HE A.R.; & (II) DISALLOWANCE OF INTEREST ON BORROWED FUNDS AMOUNTIN G TO RS.49165609/- (II) ITA NO: 838/B/2003 BY THE REVENUE : EVEN THOUGH THE REVENUE HAS RAISED FOUR GROUNDS T HE LONE SURVIVAL GROUND [THE REMAINING GROUNDS BEING GENERAL] FOR A DJUDICATION IS THAT THE CIT(A) HAS ERRED IN ALLOWING THE EXPENDITURE OF RS. 436626270/- BEING THE AMOUNT SPENT TOWARDS FINANCIAL AND UPFRONT SYNDICAT E FEES ON THE NEW PROJECT AS REVENUE EXPENDITURE. ITA NO.711/B/03 ETC. PAGE 5 OF 52 5. CONDONATION OF DELAY : IT WAS NOTICED THAT THERE WAS A CONSIDERABLE DELAY IN PREFERRING THE APPEAL FOR THE ASSESSMENT YEAR 1999- 2000 BY THE ASSESSEE COMPANY. DURING THE COURSE OF HEARING OF APPEALS THE LD. AR SUBMITTED THAT ON RECEIPT OF APPELLATE O RDER FOR THE ASSESSMENT YEAR IN QUESTION THE PREVIOUS COUNSEL WAS INSTRUCT ED TO PREFER AN APPEAL AGAINST THE SAID ORDER BEFORE THIS HONBLE BENCH. DUE TO LACKLUSTRE APPROACH ON THE PART OF THE SAID COUNSEL IT WAS SU BMITTED THERE WAS A DELAY OF 113 DAYS IN PREFERRING THIS APPEAL WHICH M AY BE CONDONED AND THE APPEAL BE ADMITTED FOR ADJUDICATION. AN AFFIDAVIT WAS FURNISHED TO SUBSTANTIATE THE CLAIM. 5.1. AFTER DUE CONSIDERATION OF THE LD. COUNS ELS PLEA AND ALSO PERUSAL OF THE AFFIDAVIT WE ARE OF THE UNANIMOUS VIEW THAT THE ASSESSEE COMPANY WAS PREVENTED BY A REASONABLE CAUSE IN NOT PREFERRI NG THE APPEAL IN TIME AND THUS THE DELAY IN QUESTION WAS CONDONED AND THE REGISTRY WAS DIRECTED TO TAKE THE APPEAL ON RECORD. 6. COMMON ORDER : AS THE ISSUES RAISED BY THE BOTH PARTIES ARE COMMON AND INTER-LINKED ALL THESE FIVE APPEALS ARE CONSIDERED TOGETHER AND DISPOSED OFF FOR THE SAKE OF CONVENIENCE IN T HIS COMMON ORDER. I . LET US NOW ADDRESS TO THE GRIEVANCES OF THE ASSE SSEE COMPANY. 7. A.Y 1997-1998: TO FAMILIARIZE WITH THE ISSUES L ET US HAVE A LOOK AT THE FACTS WHICH ARE AS UNDER: THE ASSESSEE COMPANY (THE ASSESS EE IN SHORT) WAS THE MANUFACTURERS OF STEEL PRODUCTS. THERE WAS A SURVE Y OPERATION U/S133A OF ITA NO.711/B/03 ETC. PAGE 6 OF 52 THE ACT ON THE BUSINESS PREMISES OF THE ASSESSEE AN D ON THE BASIS OF THE MATERIALS FOUND AND SUBSEQUENT INQUIRIES THE REVEN UE HAD FORMED AN OPINION THAT THE ASSESSEE WAS CLAIMING BOGUS LEASE RENTALS AND ACCOMMODATING THE OTHER FINANCIAL INSTITUTIONS IN C LAIMING DEPRECIATION IN RESPECT OF NON-EXISTING ASSETS. A NOTICE U/S 148 W AS SERVED ON THE ASSESSEE AFTER RECORDING THE REASONS FOR RE-OPENING OF THE ASSESSMENT. (I) THE ASSESSEE MANUFACTURES SPONGE IRON AND IT HAD STEEL SMELTING SHOP AND ROLLING MILLS. THE ALLEGATION OF THE REVE NUE WAS THAT THE ASSESSEE HAD INFLATED THE NUMBER OF SPECIAL GRADE CAST IRON ROLLS [SGCI] CLAIMED TO HAVE BEEN TAKEN ON LEASE. SGCI ROLLS WERE HEAVY SO LID CAST ALLOY STEEL/IRON CYLINDRICAL OBJECTS USED TO ROLL IRON BI LLETS INTO RODS OF VARIOUS SIZES. THE PRE-HEATED IRON BILLETS WERE ROLLED THR OUGH A SERIES OF ROLLS MOUNTED ON STANDS. THE LIFE OF A ROLL WAS 3 5 YE ARS BUT DEPRECIATION WAS CLAIMED AND ALLOWED AT 100% ON SUCH ROLLS. THE PROCEDURE FOLLOWED IN LEASE TRANSACTION WAS THE INVOLVEMENT OF THREE PARTNERS NAMELY THE SUPPLIER THE LESSOR AN D THE LESSEE. THE LESSEE WHO USES THE SGCI ROLLS PLACE ORDERS FOR SUPPLY OF ROLLS WITH THE SUPPLIERS WITH SPECIFICATIONS. THE LESSEES - ACCORDING TO TH E AO - WHO USUALLY DO NOT HAVE FINANCIAL BACKGROUND TO PURCHASE THE SAID ROLL S WILL ENTER INTO A LEASE AGREEMENT WITH THE LESSORS WHO WERE MAINLY THE FINA NCE COMPANIES. THE LESSOR MAKE DIRECT PAYMENTS TO THE SUPPLIERS/MANUFA CTURERS. AFTER THE RECEIPT OF ROLLS BY THE LESSEE THEY SEND A COPY OF INVOICE DELIVERY CHALLAN LORRY RECEIPT INSTALLATION REPORT TO THE LESSORS T HE RECEIPT OF ROLLS AND THEIR INSTALLATION ETC. THE LEASE AGREEMENT CONTAINS A C LAUSE GIVING A RIGHT OF OWNERSHIP TO THE LESSORS AND PERMIT THE LESSEES TO USE THOSE ROLLS FOR THE ITA NO.711/B/03 ETC. PAGE 7 OF 52 LEASE PERIOD ON PAYMENT OF LEASE RENT. THE SAFE US E OF THESE ROLLS FOR THE LEASE PERIOD WILL BE MENTIONED IN THE AGREEMENT AND ALSO COVER THE MODE OF PAYMENT OF LEASE RENTALS AND THE TIME OF PAYMENT S. DURING THE COURSE OF SURVEY IT WAS NOTICED THAT NONE OF THE BASIC FACTORS WERE FOLLOWED TO PROVE THE GENUINENESS OF T HE LEASE AGREEMENT. THERE WERE ALSO SHORTAGE OF SGCI ROLLS AS PER THE S TOCK AND ALSO NO DOCUMENTARY EVIDENCE TO PROVE THAT THE SGCI ROLLS W ERE TRANSPORTED FROM THE SUPPLIERS TO THE FACTORY PREMISES. THE ASSESSE E HAD SUBSTANTIAL CREDITORS UNDER THE HEAD ADVANCE AGAINST SALES SU NDRY CREDITORS AND THOSE PARTIES DID NOT HAVE ANY INDEPENDENT SOURCES TO ADVANCE TO THE ASSESSEE. ON AN INQUIRY IT WAS FOUND THAT THE IDBI HAD PURCHASED ONLY THE USED SGCI ROLLS FROM THE ASSESSEE AND LEASED BACK T HE SAME ASSETS TO THE ASSESSEE WITHOUT EFFECTING ANY PHYSICAL MOVEMEN T OF THE ASSETS AS A RESULT THE SGCI ROLLS WHICH WERE PURCHASED BY THE ASSESSEE IN 1993 WERE SOLD TO IDBI AFTER GETTING 100% DEPRECIATION ON SGC I ROLLS. THE ASSESSEE CLAIMED TO HAVE ENTERED INTO A LEASE AGREEMENT WITH IDBI TO LEASE THE SAID ASSET BY THE ASSESSEE BY PAYING LEASE RENT AND ALSO RESERVING ONE CLAUSE FOR TRANSFER OF THIS ASSET AFTER THE LEASE PERIOD B Y PAYING ONLY 1% OF THE COST WHICH SHOWS THAT THE ASSESSEE HAD ALREADY CLAIMED 1 00% DEPRECIATION WAS TRANSFERRED TO IDBI BY WAY OF BOOK ENTRY EFFECT ING AS SALES AND GETTING BACK THE SAME ASSET FOR ITS USE BY WAY OF ENTERING TO A LEASE AGREEMENT AND PAYING LEASE RENT. BY SUCH ADJUSTMENTS THE AS SESSEE HAD INDIRECTLY HELPED THE IDBI TO CLAIM 100% DEPRECIATION AGAIN ON THE ASSET SO CLAIMED ITA NO.711/B/03 ETC. PAGE 8 OF 52 TO HAVE BEEN TRANSFERRED BY WAY OF SALE THROUGH BOO K ENTRIES AND CLAIMED LEASE RENT AS A REVENUE EXPENDITURE IN ITS BOOKS OF ACCOUNT. REGARDING THE LEASE RENT CLAIMED TO HAVE BEEN PAID BY RPG TELECOM LTD. MYSORE IT WAS ESTABLISHED THAT THE SAID COMPANY HA D NEVER LEASED ANY MACHINERY TO THE ASSESSEE. NO DETAILS WERE FORTH-C OMING IN RESPECT OF THE MACHINERY RENT TO OTHERS AMOUNTING TO RS.9 32 000/- . IN THE ABSENCE OF ANY DETAILS THE PAYMENT OF LEASE RENT AMOUNTING TO RS.1 38 65 266/- WAS DISALLOWED. (II) WITH REGARD TO SETTING UP OF A NEW STE EL PLANT INTEGRAL STEEL PLANT [ISP] ON VERIFICATION OF DETAILS FURNISHED AND ALS O THE AUDIT REPORT THE AO WAS OF THE VIEW THAT THE SAID PROJECT WAS A NEW PRO JECT BUT WAS NOT AN EXPANSION OF ALREADY EXISTING UNIT. THOUGH THE NE W PROJECT WAS NOT COMPLETED DURING THE ACCOUNTING PERIOD THE ASSESSE E CLAIMED INTEREST AND FINANCIAL CHARGES ON TERM LOAN AMOUNTING TO RS.5 44 42 584 AND UP-FRONT FEE PAYMENTS TO FINANCIAL INSTITUTION AND BANKS AMO UNTING TO RS.2 31 00 000/- AS DEDUCTION. FOR THE REASONS SET -OUT IN THE ASSESSMENT ORDER FOR THE AY 99-00 THE AO RESORTED TO DISALLOW THE SAME. THUS THE DISALLOWANCES FOR THE ASSESSMENT YEAR 199 7-98 ARE AS UNDER: LEASE RENT RS.1 38 65 266 INTEREST & FINANCIAL CHARGES ON TERM LOAN RS.5 44 42 584 UPFRONT FREE PAYMENTS TO FINANCIAL INSTITUTIONS/BAN KS RS.2 31 00 000 AGGRIEVED THE ASSESSEE TOOK UP THE FOLLOWING ISSUES WITH TH E CIT(A) GULBARGA FOR REDRESSAL. ITA NO.711/B/03 ETC. PAGE 9 OF 52 (I) RE-OPENING OF THE ASSESSMENT WITHOUT JURISDICTION: WITH REGARD TO THE ASSESSEES PLEA THAT THE AO HAD REOPENED THE ASSESSMENT U/S 147 OF THE ACT WITHOUT JURISDICTION AND THAT THE REASON S RECORDED WERE NOT FURNISHED FOR THE REBUTTAL OF THE ASSESSEE THE LD. CIT(A) HAD OBSERVED THAT ON THE BASIS OF MATERIALS FOUND DURING THE SURVEY A ND AFTERMATH THE REVENUE FOUND THAT THE ASSESSEE WAS CLAIMING BOGUS LEASE RENTALS AND ACCOMMODATING OTHER FINANCE COMPANIES IN CLAIMING D EPRECIATION IN RESPECT OF NON-EXISTING ASSETS. THESE FACTS THEMSE LVES WERE SUFFICIENT AND VALID REASON TO FORM CONDITION PRECEDENT SET-OUT FO R REOPENING OF THE ASSESSMENT. HOWEVER THE CIT(A) CONCEDED THAT THER E WAS A TECHNICAL FLAW ON THE PART OF THE AO FOR NOT HAVING FURNISHED THE REASONS RECORDED FOR REOPENING OF THE ASSESSMENT TO THE ASSESSEE FOR REB UTTAL. TAKING SHELTER UNDER THE RULING OF THE HONBLE APEX COURT IN THE C ASE OF GKN DRIVESHAFT (I) LTD. V. ITO & OTHERS (259 ITR 19) THE CIT(A) OPINE D THAT THE ASSESSEE WAS RIGHTLY AGGRIEVED ON THE TECHNICAL ISSUE OF ITS RIG HT OF BEING INFORMED REGARDING THE REASONS BEHIND RE-OPENING OF THE ASSE SSMENT. HOWEVER CONSEQUENT ON SURVEY OPERATION OPPORTUNITY AFFORDE D DURING THE ASSESSMENT PROCEEDINGS ON THE ISSUE OF DISALLOWANCE OF LEASE RENTALS ETC THE CIT(A) HAD REJECTED THE ASSESSEES PLEA TO QUAS H THE RE-ASSESSMENT PROCEEDINGS MERELY ON TECHNICAL GROUND OF NON-INTIM ATION OF REASONS BEHIND RE-OPENING OF ASSESSMENT. (II) LEASE RENTS : AFTER CONSIDERING THE RIVAL SUBMISSIONS THE CIT(A) WAS OF THE VIEW THAT THE ASSETS IN QUESTION WERE SG CI ROLLS WHICH ENJOY 100% DEPRECIATION UNDER THE I.T.RULES. THE FACT OF SALE OF SGCI ROLLS TO IDBI AFTER AVAILING OF 100% DEPRECIATION BY THE ASS ESSEE FOR ENABLING THE ITA NO.711/B/03 ETC. PAGE 10 OF 52 IDBI TO AGAIN CLAIM THE BENEFIT OF DEPRECIATION CLE ARLY RAISES THE DOUBTS AS TO THE MOTIVES BEHIND THE SALE AND LEASE BACK TRANS ACTION. THERE WAS NO PHYSICAL MOVEMENT OF TRANSFER OF ASSETS. IN VIEW OF NON-ACQUISITION OF ASSETS IN QUESTION PHYSICALLY IT WAS A PAPER TRA NSACTION ENTERED INTO BY THE ASSESSEE WITH A SOLE AIM OF CREATING A COLOURAB LE DEVICE. TAKING CUE FROM THE DECISION OF THE HONBLE ITAT SPECIAL BEN CH MUMBAI IN THE CASE OF M/S MID EAST PORTFOLIO MANAGEMENT LTD. AND ICICI LTD IN WHICH IT WAS HELD THAT THE TRANSACTIONS WHICH HAVE BEEN STYLED AS SALE AN D LEASE BACK TRANSACTIONS WERE IN REALITY PURE FINANCE TRANSACTI ONS AND THE INTENTION OF THE PARTIES WERE NOT THAT THE PROPERTY IN THE EQUIP MENT ALLEGEDLY SOLD SHOULD PASS TO THE ASSESSEE BY WAY OF SALE AND CONCLUDED T HAT MEPML & ICICI LTD WERE NOT ENTITLED TO 100% DEPRECIATION ALLOWANCE CL AIMED IN RESPECT OF ASSETS/EQUIPMENTS LEASED OUT THE CIT(A) OBSERVED THAT THE SALE AND LEASE BACK TRANSACTION ENTERED INTO BY THE APPELLANT ARE NOTHING BUT MERE SUBTERFUGES AND THE SERIES OF TRANSACTIONS EXECUTED ON PAPER ARE INDEED COLOURABLE DEVICES AND HENCE THE LEASE RENT CLAIM ED BY THE APPELLANT CANNOT BE ALLOWED . (III) FINANCIAL CHARGES AND UPFRONT FEES : IT HAS BEEN OBSERVED BY THE CIT (A) THAT THE ARGUMENTS PUT-FORTH BY THE LEARNED COUNSEL OF THE APPELLANT ARE SEEN TO BE QUITE MERIT-WORTHY. THE AO IN PARA 5 OF THE ASS T. ORDER MERELY STATED THAT THE DETAILS FILED WITH THE RETURN CLEARLY ESTA BLISH THAT THE PROJECT IN QUESTION WAS A NEW PROJECTION AND NOT AN EXPANSION OF THE ALREADY EXISTING UNIT. THE AO HOWEVER HAS NOT CLARIFIED IN THE AS ST. ORDER THE PRECISE BASIS ON WHICH HE HAS COME TO SUCH A CONCLUSION. THE AO HAS ALSO STATED THAT THE ISSUE HAS BEEN DISCUSSED IN DETAIL IN ASST. ORDER F OR AY 1999-2000. IT IS WORTH NOTING THAT THE APPELLATE DECISION IN RESPECT OF AY 1999-2000 HAS ITA NO.711/B/03 ETC. PAGE 11 OF 52 BEEN RECEIVED MUCH EARLIER WHEREIN THE APPELLANT HA S SUCCEEDED ON THE ISSUE UNDER DISCUSSION. AS THE APPELLATE AUTHORITY IS DUTY BOUND TO RESPECT THE DECISIONS GIVEN BY ITS OFFICE ON THE SIMILAR IS SUES IN THE PAST THE ISSUE IN RESPECT OF ALLOWABILITY OF FINANCIAL CHARGES ON TER MS LOANS AND UPFRONT FEE PAYMENT FOR THIS YEAR ALSO HAS TO BE ANSWERED IN FA VOUR OF THE APPELLANT RESPECTFULLY FOLLOWING THE DECISION OF MY PREDECESS OR ON THE ISSUE UNDER DISCUSSION. EVEN ON MERITS ALSO THE DECISION RELI ED UPON BY THE APPELLANT IN THE CASE OF CIT V. ALEMBIC GLASS INDUSTRIES LTD. (1 03 ITR 715 GUJ) IS DIRECTLY ON THE POINT UNDER CONSIDERATION AND CLINC HES THE ISSUE IN FAVOUR OF THE APPELLANT. THE REVENUE HAS NOT DISPUTED THAT T HE BUSINESS ORGANIZATION ADMINISTRATION AND FUND OF BOTH THE UNITS OF THE AP PELLANT WERE COMMON. INDEED THE APPELLANT COMPANY WAS THE ONE WHICH CONT ROLLED THE ADMINISTRATION OF BOTH THE UNITS WHICH SUPPLIED THE STAFF TO THE BOTH THE UNITS AND WHICH MANAGED THE WHOLE OF THE BUSINESS ORGANIZ ATION OF BOTH THE UNITS. IT IS NOT THE CASE OF THE REVENUE THAT THE PRODUCTI ON OF NEW UNIT IS NOT THE PRODUCTION OF THE APPELLANT COMPANY. IN BRIEF THE RE IS COMPLETE INTER- CONNECTION INTER-LACING AND INTER-DEPENDENCE OF BO TH THE UNITS BELONGING TO THE APPELLANT. AND AS A LOGICAL COROLLARY I HAVE NO OPTION BUT TO HOLD THAT THE NEW PLANT WAS ONLY AN ESTABLISHMENT OF A NEW UN IT OF THE EXISTING BUSINESS AND IT DID NOT CONSTITUTE A NEW BUSINESS AS HAS BEEN CONTEMPLATED BY THE AO. THUS BASED ON FACTS AND CIRCUMSTANCES OF THE CASE THE COURT DECISION RELIED UPON BY THE APPELLANT AND THE DECIS ION GIVEN BY MY PREDECESSOR ON THE SIMILAR ISSUE INVOLVED IN AY 199 9-2000 I HAVE TO DIRECT THE AO TO ALLOW THE CLAIM OF THE APPELLANT IN RESPE CT OF INTEREST AND FINANCIAL CHARGES PAID ON TERM-LOANS AT RS.54448584/- (SIC.) RS.5 44 42 584) AND UPFRONT FEE PAYMENT AMOUNTING TO RS.23100000/- THE EXPENDITURE BEING REVENUE IN NATURE BY DELETING THE CONCERNED DISALLO WANCES EFFECTED. A.Y 1998-1999: (I) AS IN LAST YEAR FOR THE REASONS DELIBERATED IN THE IMPUGNED ORDER THE AO HAD OBSERVED THAT 8.IT IS CLEAR THAT THE LEASE RENTALS PAID BY THE ASSESSEE COMPANY AND DEBITED TO P & L ACCOUNT WOULD NEED TO BE DISALLOWED IN VIEW OF THE FACT THAT THERE ARE NO AS SETS WITH REFERENCE TO WHICH THE LEASE RENTAL CAN BECOME AN ALLOWABLE EXPE NDITURE. ALTHOUGH IT WAS ARGUED BY THE AUTHORIZED REPRESENTATIVE THAT TH E LEASE RENTAL IN ANY CASE IS ALLOWABLE EXPENDITURE IF NOT AS LEASE RENTAL T HEN AS FINANCIAL CHARGES. I AM NOT IMPRESSED BY THE ARGUMENTS OF THE AR FOR THE SIMPLE REASON THAT THE ITA NO.711/B/03 ETC. PAGE 12 OF 52 ASSESSEE COMPANY NEITHER UNDER IT ACT NOR IN EQUITY IS ENTITLED TO REAP THE FRUITS OF ITS OWN MISDEEDS. DURING THE YEAR UNDER C ONSIDERATION A TOTAL PAYMENT OF LEASE RENTAL TO THE TUNE OF RS.23 99 48 270/- WAS MADE. HOWEVER OUT OF THIS AN AMOUNT OF RS.16310230/- ON LY IS DEBITED TO P & L ACCOUNT AND THE BALANCE AMOUNT OF RS.223638040/- HA S BEEN TAKEN AS CLOSING WORK-IN-PROGRESS INTEGRATED STEEL PLANT. IN VIEW OF FOREGOING DISCUSSION I MAKE DISALLOWANCE OF RS.16310230/-. (II) THE ASSESSEE HAD CLAIMED THE ADVANCES AGAINS T SALES AND ADVANCES FOR ISP TO THE TUNE OF RS.71.63 CRORES. THE ASSES SEE WAS CALLED UPON TO FURNISH THE LIST OF PARTIES WITH THEIR POSTAL ADDRE SSES AND CONFIRMATION LETTERS ETC. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE HAD FURNISHED THE ADDRESS OF THE PARTIES FOR OUTSTANDIN G AMOUNTS EXCEEDING RS.50 LAKHS. IT WAS OBSERVED BY THE AO THAT 11..IT IS NOT CLEARLY APPEARING IS TO HOW MUCH AMOUNT IS STANDING TO CRED IT OF EACH OF THE PARTY. MOREOVER IN ANY (SIC) MANY CASES THE CONFIRMATION S HAVE NOT BEEN FILED. AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES AND T HE FACT THAT THE ASSESSEE COMPANY THROUGH THE MANAGING DIRECTOR SRI S.MADHAVA BY WAY OF AN AFFIDAVIT ADMITTED FINANCIAL LEASES AND NOT OPE RATIONAL LEASES AND AFTER CONSIDERING THAT NO DETAILS OF PARTIES OR OF THE AM OUNT OF THE ALLEGED CREDITORS UNDER VARIOUS HEADS ARE AVAILABLE OR FORT HCOMING I DEEMED IT FIT AND NECESSARY TO CONSIDER 10% OF THE TOTAL ADVANCES ALLEGEDLY RECEIVED DURING THE YEAR UNDER CONSIDERATION AS NOT HAVING BEEN SATISFACTORILY ITA NO.711/B/03 ETC. PAGE 13 OF 52 EXPLAINED U/S 68. I THEREFORE BRING AN AMOUNT OF R S.71630000/- TO TAX U/S 68 AS UNEXPLAINED CASH CREDITS. (III) THE ASSESSEE COMPANY HAD MADE PAYMENT OF CO NVERSION CHARGES TO ITS ASSOCIATE NAMELY M/S. BELLARY STEEL ROLLING M ILLS WHICH WAS HIGHER BY RS.135 PMT COMPARED TO OTHER PAYMENTS FOR SIMILAR S ERVICE. AS PER ORDER SHEET ENTRY DATED: 29.3.01 THE AO HAD BROUGHT TO T AX U/S 40A (2)(B) A SUM OF RS.344925/-. 8. AGGRIEVED THE ASSESSEE HAD APPROACHED THE LD.CIT(A) FOR RELIEF. (I) LEASE RENT : DULY CONSIDERING THE FORCEFUL CONTENTIONS OF THE ASSESSEE AND THE FINDINGS OF THE AO THE LD.CIT(A) HAD OBSER VED THUS IT IS NOT CORRECT TO SAY THAT THE FINDING OF THE S URVEY WAS NOT CONVEYED TO THE APPELLANT. AS A MATTER OF FACT THE DDI AND THE ASSESSING OFFICER HAVE GIVEN ENOUGH OPPORTUNITY TO THE APPELLANT. IT IS A LSO A FACT THAT THE APPELLANT HAS FILED AN AFFIDAVIT THROUGH ITS MANAGING DIRECTO R SRI S.MADHAVA ADMITTING THE FACT THAT THERE WERE NO MACHINERIES I NSTALLED IN THE ASSESSEE FACTORY FOR WHICH LEASE RENTALS WERE SHOWN TO HAVE BEEN PAID. AS SUCH THE ASSESSING OFFICER IS JUSTIFIED IN DISALLOWING THE L EASE RENTALS DEBITED IN THE P & L ACCOUNT. THE PAYMENT OF LEASE RENTALS CANNOT A LSO BE ALLOWED AS FINANCIAL CHARGES AS THE SAME DOES NOT TANTAMOUNT T O FINANCIAL CHARGES AND THE ASSESSING OFFICER HAS RIGHTLY HELD THAT NO ONE SHOULD BE ALLOWED TO TAKE ADVANTAGE OF HIS OWN WRONG. AS SUCH THE DISALLOWA NCE IS CONFIRMED. (II) UNEXPLAINED CASH CREDITS : THE CRYPTIC OBSERVATION OF THE LD.CIT(A) WAS THAT I HAVE DULY CONSIDERED THE SUBMISSIONS OF THE AUTH ORIZED REPRESENTATIVE VIS--VIS FINDINGS OF THE ASSESSING OFFICER. THE A SSESSING OFFICER HAS STATED THAT NO CONFIRMATIONS WERE FILED BEFORE HIM. EVEN BEFORE THE UNDERSIGNED NO CONFIRMATIONS WERE FILED TO SUBSTANTIATE THE GEN UINENESS OF THE CASH CREDITS. AS SUCH I HOLD THAT THE DISALLOWANCE OF PART OF THE CASH CREDIT U/S 68 IS JUSTIFIED. ITA NO.711/B/03 ETC. PAGE 14 OF 52 (III) DISALLOWANCE U/S 40A(2)(B) : THE LD.CIT(A) WAS OF THE VIEW THAT - THE AUTHORIZED REPRESENTATIVE CONTESTED THIS ADDIT ION WITHOUT GIVING ANY EVIDENCE OR ARGUMENT AGAINST THE ADDITION. SINCE T HE ASSESSING OFFICER HAS GIVEN A CLEAR FINDING AND NO CONTRARY EVIDENCE WAS FURNISHED EITHER BEFORE THE ASSESSING OFFICER OR BEFORE THE UNDERSIGNED TH E DISALLOWANCE IS CONFIRMED A.Y 1999-2000: (I) WITH REGARD TO LEASE (MACHINERY) RENT FOR THE REASONS SET-OUT IN THE ASSESSMENT ORDER FOR THE AY 1998-99 THE AO HAD DI SALLOWED A SUM OF RS.4463063/-. (II) THE ASSESSEE HAD INVESTED RS.45.5 CRORES IN S. N.PROJECTS LTD. BANGALORE FOR THE PURPOSE OF GENERATION OF ELECTRI CITY AND SUPPLY IT TO THE ASSESSEE. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS IT WAS FOUND THAT THE SAID COMPANY HAD NEITHER GENERATED THE ELECTRIC ITY NOR SUPPLIED TO THE ASSESSEE BUT ASCERTAINED THAT THE COMPANY HAD SIP HONED OFF RS.25 CRORES TO S.N. SECURITIES LIMITED AS UNSECURED LOAN S. FURTHER IT CAME TO LIGHT THAT S.N.SECURITIES LIMITED HAVE INVESTED THE SAID MONEY WITH THE ASSESSEE (THE ORIGINAL INVESTOR) TOWARDS THE PURCHA SE OF SHARES. ON VERIFICATION OF VARIOUS FACTS THE AO CAME TO THE C ONCLUSION THAT - (A) THE ASSESSEE HAD INVESTED RS.45.5 CRORES WITH S .N.PROJECTS LTD. FOR GENERATION OF ELECTRICITY AND OUT OF THE SAID AMOUN T RS.25 CRORES WERE DIVERTED TO S.N.SECURITIES LTD. AS UNSECURED L OAN WHICH IN TURN CAME TO THE ASSESSEE AS SHARE CAPITAL; - RS.25 CRORES BELONGING TO THE ASSESSEE HAD BEEN ROU TED THROUGH THE SAID TWO COMPANIES IN A CIRCUITOUS ROUT E; - THE SO CALLED INVESTMENT TOWARDS GENERAL OF ELECTRI CITY WAS A SHAM TRANSACTION WITH A MOTIVE FOR DIVERSION OF BU SINESS FUNDS; - ALL THESE THREE COMPANIES WERE HAVING DIRECTORS WIT H COMMON INTERESTS AND SHARE HOLDINGS. ITA NO.711/B/03 ETC. PAGE 15 OF 52 THOUGH THE ASSESSEE HAD ENTERED INTO MOU WITH S.N.P ROJECTS LTD. FOR GENERATION AND SUPPLY OF ELECTRICITY THE ASSESSEE HAD NOT ADVANCED ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE THAT THE LATTE R HAD UNDERTOOK INFRASTRUCTURAL WORKS FOR GENERATION OF ELECTRICITY AND THUS THE AO WAS OF THE VIEW THAT THE AMOUNT OF RS.45.5 CRORES OUT OF T HE BORROWED FUNDS FROM BANKS AND FINANCIAL INSTITUTIONS DIVERTED AND INVES TED IN VARIOUS ASSOCIATED COMPANIES WAS NOT A GENUINE BUSINESS TRANSACTION AN D HENCE PROPORTIONATE INTEREST AT THE PREVAILING RATE PAID BY THE ASSESSEE AMOUNTING TO RS.49165609 WAS DISALLOWED. DISILLUSIONED THE ASSESSEE TOOK UP THE ISSUES BEFORE THE CIT (A ) AS IN THE PREVIOUS ASSESSMENT YEARS FOR REMEDIES. (I) LEASE RENT : WITH REGARD TO MACHINERY (LEASE RENT) THE BAFFL ING REASONING OF THE LD.CIT(A) WAS THAT THE NEXT GROUND OF APPEAL IS AGAINST THE DISALLOWANCE OF MACHINERY RENT AMOUNTING TO RS. 4463063/-. THE AUTHORIZED REPRESENTATIVE DID NOT PRESS FOR THIS GR OUND OF APPEAL. AS SUCH THIS GROUND IS DISMISSED AS WITHDRAWN. (II) DIVERSION OF FUNDS : AFTER CONSIDERING THE LENGTHY AND VEHEMENT CONTENTIONS OF THE ASSESSEE THE REASONING OF THE L D.CIT(A) WAS THAT - I DO NOT AGREE WITH THE SUBMISSION OF THE AUTHORIZ ED REPRESENTATIVE. THE ASSESSING OFFICER HAS RIGHTLY HELD THAT THE INTERES T FREE ADVANCE GIVEN BY THE APPELLANT IS NOT FOR THE BUSINESS OF THE ASSESSEE. THE BUSINESS OF THE ASSESSEE IS PRODUCTION OF STEEL WHEREAS THE BUSINES S OF S.N.PROJECT LTD. IS PRODUCTION OF ELECTRICITY. ALTHOUGH AS PER THE MEM ORANDUM OF UNDERSTANDING SIGNED BY THE PARTIES THE ELECTRICITY GENERATED HAS TO BE USED BY THE APPELLANT EVEN THEN IT CANNOT BE SAID THAT S .N.PROJECT LTD. IS WORKING FOR THE APPELLANT EXCLUSIVELY. IN LEGAL PARLANCE B OTH THE COMPANIES ARE ITA NO.711/B/03 ETC. PAGE 16 OF 52 SEPARATE ENTITIES. AS SUCH S.N.PROJECT LTD. HAS TO FIND FINANCE FOR ITS PROJECTS SEPARATELY. THE AMOUNT ADVANCED BY M/S. B ELLARY STEEL AND ALLOYS LTD. CANNOT BE REGARDED FOR PURPOSE OF BUSINESS OF THE APPELLANT. AS SUCH THE ASSESSING OFFICER IS JUSTIFIED IN TREATING THIS TRANSACTION AS DIVERSION OF FUNDS FOR NON-BUSINESS PURPOSES. THE DISALLOWANCE OF INTEREST OF RS.49165609/- IS SUSTAINED 9. AGGRIEVED BY THE FINDINGS OF THE LD. CSIT(A) T HE ASSESSEE HAS COME UP WITH THE PRESENT APPEALS BEFORE US FOR THE AY 1997-98 1998- 99 AND 1999-2000. THE GIST OF THE ASSESSEES GRIEVANCES FOR THE ABO VE MENTIONED AYS ARE LISTED OUT AS UNDER: A.Y 97-98 (I) THE RE-OPENING OF THE ASSESSMENT U/S 147 OF THE ACT WITHOUT JURISDICTION; (II) DISALLOWANCE OF LEASE RENTALS. A.Y 98-99 (I) DISALLOWANCE OF LEASE RENTALS; (II) SUSTAINING THE ADDITION OF RS.71630000/- MADE U/S 68 OF THE ACT; & (III) SUSTAINING THE DISALLOWANCE OF RS.344925/- BY INVOKING THE PROVISIONS OF S.40A(2)(B) OF THE ACT IN RESPECT OF PAYMENT OF CON VERSION CHARGES TO M/S. BELLARY STEELS ROLLING MILLS. A.Y 99-00 (I) DISCLAIMED THE CIT(A)S VERSION THAT THE AR OF THE ASSESSEE DID NOT PRESS THE DISALLOWANCE OF LEASE RENTALS MADE BY THE AO; & (II)DISALLOWANCE OF INTEREST ON BORROWED FUNDS ADDITIONAL GROUND: 10. WITH REGARD TO THE PRAYER FOR ADMISSION OF ADD ITIONAL GROUNDS AFTER DUE CONSIDERATION OF THE CONTENTIONS OF THE L D. AR WE ARE OF THE CONSIDERED VIEW THAT THERE WAS A FORCE IN THE ARGUM ENT OF THE LD. A.R. IN ITA NO.711/B/03 ETC. PAGE 17 OF 52 THE INTEREST OF JUSTICE AND EQUITY THE ADDITIONAL GROUNDS RAISED BY THE APPELLANT WERE ADMITTED FOR ADJUDICATION. 10.1. THE LD. AR HAD VEHEMENTLY ARGUED THAT THE A SSESSING OFFICER HAD NOT FURNISHED REASONS FOR RE-OPENING OF THE ASSESSMENT ON THE REQUISITION LETTER OF THE A.R DATED 20.3.2003 WH ICH WAS FILED DURING THE COURSE OF ASSESSMENT PROCEEDINGS ON 21.3.2003. BUT TRESS HIS ARGUMENT; LD. AR HAD PLACED STRONG RELIANCE ON THE DECISION O F THE HONBLE JURISDICTIONAL HIGH COURT IN INCOME TAX APPEAL NOS. 120 TO 135/2004 AND C/W. I.T.A. NOS.561 549 559 OF 2001 90 TO 98 OF 2003 AND 550/01 IN THE CASES OF SRI L. SOHANRAJ & ORS. V. DY. CIT. 10.1.1. THE LD. D.R PRESENT WAS ALSO HEARD. WITH RESPECTS WE HAVE PERUSED THE FINDING OF THE HONBLE COURT AN D THE RELEVANT PORTION OF THE OBSERVATIONS OF THE HONBLE COURT IS REPRODU CED HERE-BELOW: 6. AT THE TIME OF ADDRESSING ARGUMENTS BY THE LEAR NED COUNSEL FOR THE PARTIES OUR ATTENTION WAS INVITED TO THE DECISION OF THE SUPREME COURT IN THE CASE OF GKN DRIVESHAFTS (I NDIA) LTD. REFERRED TO SUPRA. AFTER CAREFUL READING OF THE SA ME AND OTHER JUDGMENTS OF THE OTHER HIGH COURTS UPON WHICH STRON G RELIANCE IS PLACED BY THE LEARNED COUNSEL ON BEHALF OF THE ASSE SSEES AND ON CAREFUL EXAMINATION OF SECTIONS 140 142 147 148 148(2) WE THOUGHT IT FIT TO ANSWER THE SUBSTANTIAL QUESTION N O. (III) AND ACCORDINGLY WE PROCEED TO ANSWER THE SAME BY RECORD ING THE FOLLOWING REASONS. 7. THE SUPREME COURT IN THE CASE OF GKN DRIVESHAFTS (INDIA) LTD. REFERRED TO SUPRA HAS MADE CERTAIN OBSERVATIONS WHICH READ THUS: WE SEE NO JUSTIFIABLE REASON TO INTERFER E WITH THE ORDER UNDER CHALLENGE. HOWEVER WE CLARIFY THAT WHEN A N OTICE UNDER SECTION 148 OF THE INCOME-TAX ACT IS ISSUED THE PR OPER COURSE OF ACTION FOR THE NOTICEE IS TO FILE A RETURN AND IF H E SO DESIRES TO SEEK REASONS FOR ISSUING NOTICES. THE ASSESSING OFFICER IS BOUND TO FURNISH REASONS WITHIN A REASONABLE TIME. ON RECEI PT OF REASONS THE ITA NO.711/B/03 ETC. PAGE 18 OF 52 NOTICEE IS ENTITLED TO FILE OBJECTIONS OF NOTICE AN D THE ASSESSING OFFICER IS BOUND TO DISPOSE OF THE SAME BY PASSING A SPEAKING ORDER. IN THE INSTANT CASE AS THE REASONS HAVE BEEN DISCL OSED IN THESE PROCEEDINGS THE ASSESSING OFFICER HAS TO DISPOSE O F THE OBJECTIONS IF FILED BY PASSING A SPEAKING ORDER BEFORE PROCE EDING WITH THE ASSESSMENT IN RESPECT OF THE ABOVE SAID FIVE ASSESS MENT YEARS. SO ALSO WE WILL REFER TO DECISION OF THE BOMBAY HIG H COURT IN THE CASE OF ALLANA COLD STORAGE LTD. AT PARA 7 THE COURT HELD THAT: THE LAW AS LAID DOWN BY THE APEX COURT I S BINDING ON THIS COURT AS WELL AS ON THE AUTHORITIES FUNCTIONING UNDER THE STATUTE. THIS BEING THE POSITION WE FAIL TO UNDERSTAND AS TO WHY THE FIRST RESPONDENT DID NOT DECIDE THE OBJECTIONS SEPARATELY WHICH HE IS DUTY B OUND TO DECIDE. THE WHOLE IDEA IN LAYING DOWN THE LAW IN THE ABOVE REFE RRED JUDGMENT OF THE APEX COURT IS TO GIVE AN OPPORTUNITY TO THE ASSESSE E TO KNOW AS TO WHAT IS THE DECISION ON HIS OBJECTIONS WHICH DECISION HAS ALSO TO BE ARRIVED AT AFTER GIVING AN OPPORTUNITY TO THE ASSESSEE. THE DELHI HIGH COURT ALSO AFTER REFERRING TO THE AP EX COURT DECISION REFERRED TO SUPRA TAKEN THE SIMILAR VIEW. 8. IN THE INSTANT CASE IT IS AN UNDISPUTED FACT TH AT UNDER SECTION 148(2) NOTICE CONTAINING REASONS WAS NOT SERVED UPO N THE ASSESSEE DESPITE REQUEST WAS MADE IN THIS REGARD. IT IS AN UNDISPUTED FACT THAT THE ASST. COMMISSIONER OF INCOME TAX IN HIS LETTER DATE D 7.8.1985 ADDRESSED TO ONE OF THE ASSESSEES NAMELY S. BHARATHRAJ. THE RELEVANT PORTION OF THE SAME READ THUS: YOU HAVE REQUESTED FOR COPY OF THE REASONS RECORDE D FOR REOPENING OF THE PROCEEDINGS. IN THIS REGARD YOU ARE INFORMED T HAT THERE ARE PLETHORAS OF DECISION OF HIGH COURT AND ALSO SUPREME COURT TO THE SAID EFFECT THAT THE ASSESSEE IS NOT ENTITLED TO A COPY OF THE REASO NS RECORDED BY THE ASSESSING OFFICER. HOWEVER YOU ARE ALSO INFORMED THAT ALL THE REASONS WOULD BE PUTFORTH TO YOU IN THE FORM OF QUESTIONNAI RE AFTER GIVING REASONABLE OPPORTUNITY .. 9. IN VIEW OF THE AFORESAID STAND TAKEN BY THE ASS ESSING OFFICER THE STATUTORY REQUIREMENT OF SECTION 148(2) OF THE ACT HAS NOT BEEN COMPLIED WITH IN THESE CASES. THEREFORE THE OBSERVATIONS M ADE BY THE SUPREME COURT IN GKN DRIVESHAFTS (INDIA) LTD.S CASE REFERRED TO SUPRA WITH ALL FOURS WOULD BE APPLICABLE TO THE FACT SITUATION OF THESE CASES. 10.1.2. REVERTING BACK TO THE PRESENT CASE AFTER DULY PERUSING THE PAPER BOOK FURNISHED BY THE LD.A.R. WE ARE OF THE CONSIDERED VIEW THAT THE SEQUENCE OF EVENT(S) TOOK PLACE DURING THE COURSE OF REASSESSMENT ITA NO.711/B/03 ETC. PAGE 19 OF 52 PROCEEDINGS ARE VERY RELEVANT WHICH ARE ILLUSTRATED AS UNDER FOR THE SAKE OF CLARITY AND PROPER UNDERSTANDING OF THE ISSUE: (A) IN COMPLIANCE WITH THE ISSUANCE OF NOTICE U /S 147 THE ASSESSEE - THROUGH ITS AR - VIDE ITS LETTER DATED 25/2/2003 HA D FURNISHED THE REQUIRED INFORMATION AS CALLED FOR. IN ITS CONCLUDING PARAG RAPH IT HAS BEEN MENTIONED THAT - WITH DUE RESPECT TO THE SUBMISSIONS MADE HEREINABOV E IN RESPONSE TO DETAILS CALLED FOR DURING THE COURSE OF DISCUSSIONS THE ASSESSEE FEELS THAT REOPENING OF ASSESSMENT U/S 147 IS NOT P ROPER IN THE CIRCUMSTANCES PREVAILING. THE ABOVE NARRATION REVEALS THAT THE ASSESSEE HAD R ESPONDED TO THE NOTICE U/S 148 BY FURNISHING OF THE REQUIRED INFORMATION. HOWEVER IT HAD NEITHER PROTESTED THE REOPENING OF THE ASSESSMENT NOR SOUGH T THE REASONS RECORDED FOR SUCH REOPENING OF THE ASSESSMENT BUT HAD RATHER MADE A PASSING REMARK WHICH IN OUR VIEW OF NO CONSEQUENC E; (B) SUBSEQUENTLY THE AO VIDE HIS LETTER DT.12/3/ 2003 HAD CALLED FOR CERTAIN DETAILS REQUIRING THE ASSESSEE TO FURNISH T HE SAME BY 21/3/2003 AND ALSO TO FILE ITS OBJECTIONS IF ANY ON THE PROPOSALS SET-OUT IN THE SAID COMMUNICATION. THE ASSESSEE WAS TOLD IN CERTAIN TE RMS THAT THE ASSESSMENT INVOLVED IS TIME-BARRING ONE WHICH HAS TO BE COMPLETED ON OR BEFORE 31/3/2003 . HOWEVER THE ASSESSEE HAD MAINTAINED A STEADY SILEN CE TILL 20/3/2003 AND PERHAPS WOKE UP FROM THE SLUMBER AND CAME UP WITH A LETTER DT.20/3/2003 WHICH WAS FILED DURING THE COURSE OF HEARING ON 21 /3/2003 THAT ITA NO.711/B/03 ETC. PAGE 20 OF 52 BEFORE SUBMITTING THE DETAILS AS CALLED FOR IN THE ABOVE REFERRED LETTER WE WOULD LIKE TO REQUEST YOUR KIND-SELF TO SUBMIT THE REASONS FOR REOPENING OF THE ASSESSMENT ENABLING THE ASSESS EE COMPANY TO SUBMIT THE REQUISITE DETAILS IN A PROPER WAY.. HOWEVER IT WENT ON TO FURNISHING THE REQUIRED INFO RMATION AS CALLED FOR BY THE AO VIDE ITS LETTER CITED SUPRA IN THE SUBSEQUE NT PARAGRAPHS. ON A PERUSAL OF THE PAPER-BOOK-II ON PAGE 171 WHICH CONTAINED THE LETTER OF THE AO VIDE F.NO.CB-1/ACIT/C-1/BLY/02-03 DATED 12.3 .2003 CALLING FOR FURTHER DETAILS WHEREIN WE FIND THAT ALL THE REASON S FOR REOPENING OF THE ASSESSMENT WERE EMBEDDED. THE CONTENTS OF THE LETT ER ARE REPRODUCED HERE-BELOW FOR READY REFERENCE: IN ORDER TO ENABLE ME TO FINALIZE THE RE-OPENED ASSESSMENT FOR THE ASST. YEAR 1997-98 YOU ARE REQU ESTED TO FILE THE FOLLOWING DETAILS ON 21 ST MARCH 2003. YOU ARE ALSO GIVEN A PERSONAL OPPORTUNITY OF HEARING ON THE SAID DATE. 1) AS PER THE INFORMATION RECEIVED DURING THE SURV EY CONDUCTED IN YOUR BUSINESS PREMISES THAT YOU WERE R ECEIVING CASH REMITTANCES FROM CERTAIN CONCERNS VIZ. (I) B.M. ST EELS (II) BH ENTERPRISES (III) B.H. INTERNATIONAL WHO ARE CLAI MED TO BE MANUFACTURING CONCERNS OF SGCI ROLLS. ON THE BASIS OF INFORMATION AVAILABLE THE PEAK CREDITS APPEARING I N YOUR BOOKS IN THE NAME OF THESE THREE CONCERNS DURING THE PERI OD RELEVANT FOR THE ASST. YEAR 1997-98 WORKS OUT TO RS.20 99 72 559 /-. AS ALREADY DISCUSSED DURING THE SURVEY OPERATIONS AND THE SUBSEQUENT HEARINGS IT WAS NOTICED THAT THE THREE CONCERNS MENTIONED ABOVE DID NOT HAVE CAPACITY TO MANUFACTUR E AND SUPPLY THE MACHINERY AS CLAIMED BY YOU AND THESE CO NCERNS HAVE ISSUED ONLY THE INVOICES. CONSIDERING THE EVIDENCE S COLLECTED DURING SURVEY AND SUBSEQUENT PROCEEDINGS THESE CON CERNS HAVE ISSUED ONLY THE INVOICES. CONSIDERING THE EVIDENCE S COLLECTED DURING SURVEY AND SUBSEQUENT PROCEEDINGS THESE CON CERNS DID NOT HAVE THE FINANCIAL CAPACITY TO LEND SUCH HUGE I NTEREST FREE AMOUNTS TO YOUR COMPANY. THEREFORE IT IS PROPOSED TO TAX THE PEAK CREDITS STANDING IN THE NAME OF THREE CONCERNS IN YOUR BOOKS ITA NO.711/B/03 ETC. PAGE 21 OF 52 OF ACCOUNTS AMOUNTING TO RS.20 99 72 539/- AS UN-EX PLAINED CREDITS DURING THE YEAR. YOU ARE REQUESTED TO FILE YOUR OBJECTIONS IF ANY ON THE ABOVE PROPOSITION. 2) YOU HAVE CLAIMED RS.5 44 42 584/- AS INTEREST PA YMENT CAPITALIZED TO CAPITAL WORK IN PROGRESS AND CLAIMED RS.2 31 00 000/- AS UP-FRONT FEES PAYMENTS TO FINAN CIAL INSTITUTIONS AS DEDUCTION IN THE COMPUTATION OF THE INCOME. THESE PAYMENTS ARE MADE ON THE LOANS TAKEN FOR SETTING UP A NEW INTEGRAL STEEL PLANT AND ALSO CAPTIVE POWER PLANT W HICH WAS NOT COMPLETED DURING THE YEAR. THEREFORE THE CLAIM MA DE BY AS DEDUCTION IN THE COMPUTATION OF INCOME IS NOT CORRE CT AND ACCORDINGLY PROPOSED TO BE DISALLOWED. YOU ARE REQ UESTED TO FILE YOUR OBJECTIONS IF ANY FOR THE ABOVE PROPOSITION. 3) PLEASE REFER TO THE ASSESSMENT ORDER PASSED FOR THE ASST. YEARS 1999-2000. THE ISSUE REGARDING SHAM LEASE TR ANSACTIONS IN RESPECT OF SGCI ROLLS CONTINUES FOR THIS ASSESSMEN T YEAR ALSO. IN VIEW OF THE DETAILED REASONS STATED IN THE ASSES SMENT ORDER PASSED FOR THE ASST. YEAR 1998-99 & 1999-2000 IT IS PROPOSED TO DISALLOW THE LEASE RENT OF RS.1 38 65 266/-. PLEAS E FILE YOUR OBJECTIONS IF ANY FOR THE ABOVE PROPOSITION. 4) YOU ARE ALSO REQUESTED TO FILE THE DETAILS OF CA PITAL WORK IN PROGRESS ADDITION TO PLANT & MACHINERY ALONG WITH SUPPORTING EVIDENCE SUCH AS PURCHASE INVOICES ETC. AND ALSO THE DETAILS OF DEPRECIATION CLAIMED ON THESE ASSET DETAILS OF TOTA L LEASE RENTALS DEBITED AND PAID. THESE DETAILS TO BE FILED ON THE DATE OF HEARING. NOTICES U/S. 143(2)/142(1) IS ENCLOSED HEREWITH FO R YOUR COMPLIANCE. PLEASE NOTE THAT NO ADJOURNMENT WILL BE GRANTED UN DER ANY CIRCUMSTANCES AS THE ASSESSMENT INVOLVED IS TIME B ARRING ONE WHICH HAS TO BE COMPLETED ON OR BEFORE 31-3-2003. FURTHER YOU MAY ALSO NOTE THAT IF THERE IS NO COMPLIANCE I AM COMPELLED TO COMPLETE THE TIME BARRING ASSESSMENT AS PROPOSED AB OVE. 10.1.3. FROM THE ABOVE IT IS ABUNDANTLY CLEAR THA T THE ASSESSEE WAS FURNISHED WITH THE REASONS FOR RE-OPEN ING OF THE ASSESSMENT PRIOR TO THE DATE OF ITS REQUISITION. AS PER THE R ULING OF THE HONBLE APEX COURT IN THE CASE OF GKN DRIVESHAFTS (INDIA) LTD. V . ITO AND OTHERS ITA NO.711/B/03 ETC. PAGE 22 OF 52 REPORTED IN (2003) 259 ITR 19 THE ASSESSEE HAD EV ERY RIGHT TO OBJECT TO THE REASONS RECORDED BY THE ASSESSING OFFICER IF A NY. THE ASSESSING OFFICER WAS THEN BOUND TO DISPOSE OFF THE SAME BY PASSING A SPEAKING ORDER AS OBSERVED BY THE HONBLE SUPREME COURT. T O ILLUSTRATE FURTHER THE RELEVANT OBSERVATIONS OF THE HONBLE APEX COURT ARE THAT THE ASSESSING OFFICER HAD TO DISPOSE OF THE OBJECTIONS IF FILED BY PASSING A SPEAKING ORDER BEFORE PROCEEDING WITH THE ASSESSMENTS FOR THOSE YEARS. HOWEVER THE PRESENT ASSESSEE ON RECEIPT THE LETTER DATED: 12/3/2003 FRO M THE AO HAD NOT RESPONDED. HAD THERE BEEN A BONA FIDE INTENTION OF DOING SO THE ASSESSEE SHOULD HAVE ASKED THE AO TO FURNISH THE REASONS REC ORDED FOR REOPENING OF THE ASSESSMENT. IN STEAD IN RESPONSE TO THE AOS QUERIES THE AR OF THE ASSESSEE CAME UP WITH A REQUEST FOR REASONS RECORD ED FOR REOPENING OF THE ASSESSMENT THAT TOO AT THE FAG END OF THE MONT H IN WHICH THE AR IF NOT THE ASSESSEE WOULD HAVE BEEN WELL AWARE OF THE FAC T THAT THE ASSESSMENT IN QUESTION WAS TO BE BARRED BY LIMITATION BY 31.3. 2003. HAD THE ASSESSEES BONA FIDE INTENTION OF FINDING OUT THE R EASONS FOR SUCH RE- OPENING OF THE ASSESSMENT IT WOULD HAVE COME UP WI TH SUCH A SPECIFIC REQUEST ON RECEIPT OF NOTICE U/S 148 OF THE ACT ITS ELF? EVEN ON RECEIPT OF THE AOS LETTER DATED: 12/3/2003 THE ASSESSEE SHOU LD HAVE IMMEDIATELY OBJECTED TO THE REOPENING OF THE ASSESSMENT. INSTEA D OF DOING SO THE ASSESSEES AR IN ITS LETTER DATED: 20/3/2003 AFTER MAKING A REFERENCE IN ITS FIRST PARAGRAPH WENT ON TO FURNISHING THE REQUIRED DETAILS WHICH INFERS EVEN FOR A COMMON MAN THAT SUCH REFERENCE WAS MADE FOR T HE SAKE OF MAKING A MERE REFERENCE AND NOTHING-ELSE. THE TIMING OF S EEKING OF REASONS FOR REOPENING OF THE ASSESSMENT BY THE ASSESSEE PUT I T MILDLY IS ANYBODYS ITA NO.711/B/03 ETC. PAGE 23 OF 52 GUESS AS THE ASSESSMENT WAS TO BE COMPLETED BY 31/ 3/2003 OTHERWISE IT WOULD HAVE BEEN HIT BY LIMITATION. IN AN OVERA LL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE ISSUE ON HAND W E ARE OF THE CONSIDERED VIEW THAT THE AO HAD DISCHARGED THE ONUS BY DISCLOS ING THE REASONS FOR REOPENING OF ASSESSMENT AND ON THE BASIS OF WHICH HE SOUGHT CERTAIN CLARIFICATIONS FROM THE ASSESSEE. WITH RESPECTS WE HAVE ALSO PERUSED THE ORDER O F THE JURISDICTIONAL HIGH COURT REFERRED SUPRA. THE FINDING OF THE HON BLE COURT IS ON THE DIFFERENT FOOTING SINCE IN THOSE CASES THE ASSESSI NG OFFICER HAD NOT COMPLIED WITH THE STATUTORY REQUIREMENTS OF S.148(2 ) OF THE ACT WHEREAS IN THE CASE ON HAND THE AO HAD IN FACT RECORDED TH E REASONS BEFORE ISSUING OF NOTICE U/S 148 OF THE ACT. WITH DUE RESPECTS W E ARE OF THE CONSIDERED VIEW THAT THE FINDING OF THE HONBLE HIGH COURT ON WHICH THE LD. A.R PLACED ON STRONG RELIANCE IS DISTINGUISHABLE. 10.1.4. MOREOVER ON A PERUSAL OF THE ASSESSMENT OR DER WE FIND THAT THE LD. AO HAD MADE IT CLEAR IN PARA 1 THAT NOTICE U/S. 148 WAS ISSUED AND SERVED ON THE ASSESSEE AFTER RECORDING THE REASONS FOR REOPENING OF THE ASSESSMENT. IN SUCH A SITUATION WE ARE DECLINED TO AGREE WITH THE OBSERVATION OF THE LD. CIT (A) ON PAGE 4 OF HIS ORD ER THAT HOWEVER THE PLEA OF THE LD. COUNSEL THAT THE AO HAS NOT FURNISH ED THE REASONS RECORDED FOR REOPENING OF ASSESSMENT TO THE APPELLANT FOR RE BUTTAL HAS SOME MERIT AS IT DOESNT SEEMS TO BE APPROPRIATE IN THE LIGHT OF THE LETTER SENT BY THE AO TO THE ASSESSEE DATED 12.3.2003 REFERRED SUPRA. PE RHAPS THE LD.CIT MADE THIS OBSERVATION IN A HUFF WITHOUT APPRECIATIN G THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.711/B/03 ETC. PAGE 24 OF 52 10.1.5. IN THESE CIRCUMSTANCES WE DO NOT FIND ANY MERIT IN THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE THAT THE REOPENING OF THE ASSESSMENT U/S. 147 WAS WITHOUT JURISDICTION AND T HUS THE REASSESSMENT MADE WAS INVALID AND LIABLE TO BE CANCELLED AS THE ASSESSEE HAD FAILED TO BRING ON RECORD ANY DOCUMENTARY EVIDENCE TO THE CON TRARY. 10.1.6. THUS THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS DISMISSED. AYS 97-98 98-99 & 99-00 - DISALLOWANCE OF LEASE RENTALS : 11. WITH REGARD TO THE DISALLOWANCE OF THE LEASE RENTALS FOR THE AYS UNDER DISPUTE THE CONTENTIONS OF THE LD. COUNSEL FOR THE SAKE OF CLARITY ARE SUMMARIZED AS UNDER: (I) THE LEASE TRANSACTIONS WERE GENUINE AND THE LEASE R ENTALS WERE PAID IN THE COURSE OF BUSINESS FOR ACQUIRING ASSETS ON LEASE AND PUT TO USE FOR THE PURPOSE OF THE ASSESSEES BUSINE SS; (II) THE LEASED ASSETS WERE IDENTIFIABLE THE LESSOR AND LESSEE WERE ALSO IDENTIFIABLE AND THE TRANSACTIONS WERE INDEED SUPPO RTED BY PROPER DOCUMENTS; (III) THE APPELLATE AUTHORITY OUGHT TO HAVE APPRECIATED T HAT THE OUTCOME OF THE SURVEY PROCEEDINGS U/S 132A HAD NOT BEEN COMMUNICATED TO THE ASSESSEE FOR ITS REBUTTAL AND T HE RELIANCE PLACED ON SUCH OBSERVATIONS WERE NOT JUSTIFIED AND THE DISALLOWANCE ON THE BASIS OF SUCH OBSERVATIONS WAS LIABLE TO BE CANCELLED; (IV) WITHOUT PREJUDICE EVEN ASSUMING THE LEASE RENTALS AS CLAIMED BY THE ASSESSEE WERE FINANCIAL CHARGES STILL SUCH CHA RGES WERE REVENUE EXPENDITURE AND THUS LIABLE TO BE ALLOWED; - THE APPELLATE AUTHORITY OUGHT TO HAVE APPRECIATED THAT THE TRANSFERS WERE GENUINE AND THE RENTS CLAIMED AS DED UCTION WERE PAID ON ACQUIRING ASSETS ON LEASE AND ACCORDI NGLY THE DEDUCTIONS WERE LIABLE TO BE ALLOWED IN FULL; ITA NO.711/B/03 ETC. PAGE 25 OF 52 (V) THE APPELLATE AUTHORITY WAS NOT JUSTIFIED IN DISMIS SING THE CONTENTIONS OF THE ASSESSEE WITH REGARD TO THE DISA LLOWANCE OF LEASE RENTALS FOR THE AY 99-00 ON THE GROUND THAT T HE AR DID NOT PRESS THE SAID CLAIM WHICH IS CONTRARY TO THE FACT THAT THE AR HAD IN FACT VEHEMENTLY URGED DURING THE COURSE OF APPEL LATE PROCEEDINGS AND ALSO WRITTEN SUBMISSIONS MADE ON 26 /2/03. THUS CIT(A) WAS NOT JUSTIFIED IN DISMISSING THE CLAIM WI THOUT ADVERTING TO THE MERITS OF THE CONTENTIONS MADE; (VI) THE LEASE TRANSACTIONS OF THE ASSESSEE WAS IN THE N ATURE OF A FINANCIAL LEASE FOR PURCHASE OF ASSETS AND CONSEQUE NTLY THE LEASE RENTALS PAID BY THE ASSESSEE WAS ONLY AN EXPENDITUR E LIABLE TO BE ALLOWED; - THE DISALLOWANCE MADE WAS PURELY ON SUSPICION SURM ISE ASSUMPTION AND PRESUMPTION WHICH WERE IN FACT LIABL E TO BE ALLOWED; - WITHOUT PREJUDICE IF FOR AN REASON LEASE RENTS WE RE REQUIRED TO BE DISALLOWED AS THEY WERE FINANCIAL LEASES THE N THE FINANCE CHARGES RELATING TO THESE FINANCIAL LEASE T RANSACTIONS WERE REQUIRED TO BE ALLOWED AS THE SAME WAS UNDOUBT EDLY LAID OUT WHOLLY AND EXCLUSIVELY FOR THE BUSINESS AS THE TRANSACTIONS IN QUESTION RELATE TO THE PROVISIONS OF FINANCE TO THE ASSESSEE; (VII) RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: (A) CIT V. PUNJAB STATE ELECTRICITY BOARD (2009) 30 DTR (P&H) 153 (B) ICICI LTD. V. JCIT (2008) 307 ITR (AT) 262 (MUMBAI) ; (C) ICDS LTD. V. CIT (2007) 291 ITR 18 (KAR) (D) AVASARALA AUTOMATION LTD. V. JCIT (2004) 266 ITR 17 8 (KAR) 11.1. ON THE OTHER HAND THE LD. D R HAD VE HEMENTLY ARGUED THAT THE ASSESSEE HAD NOT FOLLOWED ANY BASIC PROCEDURES WHIC H WERE ESSENTIAL AND NECESSARY TO PROVE THE GENUINENESS OF THE LEASE AGR EEMENTS. AS POINTED OUT BY THE AO THERE WERE SHORTAGES IN THE STOCK OF SGCI ROLLS AND THE ASSESSEE WAS ALSO NOT IN A POSITION TO SUPPORT ITS CLAIM OF TRANSPORTATION OF SGCI ROLLS FROM THE SUPPLIERS TO ITS FACTORY. FOR THE DETAILED REASONS SET- OUT IN THE ASSESSMENT ORDER FOR THE ASSESSMENT YEA R 1998-99 THE CLAIM OF ITA NO.711/B/03 ETC. PAGE 26 OF 52 THE ASSESSEE OF LEASE RENTALS WERE SHAM TRANSACTION S WHICH HAS BEEN BROUGHT OUT BY THE AO IN THE IMPUGNED ORDERS. THE LD. CSIT(A) HAVE ALSO SUSTAINED THE DISALLOWANCES OF LEASE RENTALS AS CLA IMED BY THE ASSESSEE FOR THE AYS. IN QUESTION. IT WAS THEREFORE PLEAD ED THAT THE FINDING OF THE LOWER AUTHORITIES BE SUSTAINED ON THIS COUNT. DUR ING THE COURSE OF HEARING THE LD. D R HAS FURNISHED A PAPER BOOK CONTAINING 1 -80 PAGES WHICH CONSISTS OF INTER-ALIA COPIES OF (I) SURVEY REPOR T; (II) SWORN STATEMENTS; (III) CORRESPONDENCE WITH VARIOUS OFFICERS ETC. RELIANC E WAS PLACED ON THE FOLLOWING CASE LAWS: (A) I.C.D.S.LTD. V. CIT (2007)291 ITR 18 (KAR) (B) INDUSTRIAL CABLES (I.) LTD. V. CIT & ANOTHER - 272 ITR 159 (P & H) 11.2. WE HAVE CAREFULLY CONSIDERED THE RIV AL SUBMISSIONS PERUSED THE RELEVANT RECORDS AND ALSO THE VOLUMINOUS DOCUME NTARY EVIDENCES ADVANCED BY EITHER PARTY. 11.2.1. ON A CAREFUL PERUSAL OF THE IMPUGNED ORDERS OF THE AOS WE FIND THAT THEY HAVE INDEED RELIED SOLELY ON THE SURVEY R EPORT OF THE DDI HUBLI. HOWEVER NO DISCREET INQUIRIES HAVE BEEN MADE OUT B Y THE ASSESSING OFFICER CONCERNED TO BRING OUT THE FACTUAL POSITION ON RECORD WITH DOCUMENTARY EVIDENCE. ON THE OTHER HAND THE ASSES SEE HAD FURNISHED COPIES OF LEASE AGREEMENTS ENTERED INTO (I) M/S.ARU NA SUGARS FINANCE LIMITED (II) ASSOCIATED RUBBER INDUSTRIES LTD. (I II) DEVELOPMENT CREDIT BANK LIMITED (IV) KOTAK MAHINDRA FINANCE LIMITED E TC. WE HAVE ALSO DULY GONE THROUGH THE STATEMENTS (YEAR-WISE) THE DETAILS OF LEASE RENTALS PAID TO ITA NO.711/B/03 ETC. PAGE 27 OF 52 VARIOUS PARTIES. ON THE OTHER HAND THE REVENUE H AS NOT COME UP WITH ANY COMPREHENSIVE PROOF TO REFUTE THE ASSESSEES CL AIM ON THIS COUNT. 11.2.2. WE HAVE DULY PERUSED THE STATEMENT S SHOWING THE DETAILS OF LEASE RENTALS PAID DURING THE ASSESSMENT YEARS UNDE R DISPUTE WHICH HAVE NOT BEEN CONTROVERTED BY THE AUTHORITIES BELOW WITH ANY DOCUMENTARY EVIDENCE. THEIR THRUSTS IN OUR VIEW WERE SOLELY ON THE SURVEY REPORT ONLY. HOWEVER THE SURVEY REPORT CANNOT BE A FINAL SAY IN THE ASSESSMENT ITSELF. A SURVEY REPORT CAN BE AN INDICATOR OR AT BEST BE A GUIDING FACTOR FOR THE ASSESSING OFFICER TO PROBE INTO THE ISSUE AT DEPTH. FOR EXAMPLE ON A PERUSAL OF THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 1997-98 REVEALS THAT THE AO HAD NOT EXAMINED THE VARIOUS ASPECTS TO COME TO A DISCREET CONCLUSION THAT THE SO CALLED SUNDRY CREDITORS DID NOT HAVE ANY INDEPENDENT SOURCE TO ADVANCE MONEY TO THE ASSESSEE. IN STEAD HE HAD FOLLOWED THE DETAILS APPEAR TO HAVE BEEN SET-OUT IN THE ASSESSME NT ORDER FOR THE AY 98- 99 WHICH AMPLY IMPLY THAT THE AO HAD IN FACT NOT APPLIED HIS MIND AT ALL. 11.2.3. THE STAND OF THE REVENUE IS THAT THE LEASE RENTALS PAID BY THE ASSESSEE AND DEBITED TO P & L ACCOUNT WOULD NEE D TO BE DISALLOWED IN VIEW OF THE FACT THAT THERE WERE NO ASSETS WITH REF ERENCE TO WHICH THE LEASE RENTAL CAN BECOME AN ALLOWABLE EXPENDITURE. 11.2.4. ON THE OTHER HAND THE CLAIM O F THE ASSESSEE THAT THE LEASE RENTAL IN ANY CASE AN ALLOWABLE EXPENDITURE IF NOT AS LEASE RENTALS BUT AS FINANCIAL CHARGES COMMANDS WORTH CONSIDERATION. ITA NO.711/B/03 ETC. PAGE 28 OF 52 11.2.5. FOR THE ASSESSMENT YEAR 1997-98 T HE ASSESSING OFFICER HAD DISALLOWED RS.1 38 65 266/- BEING THE CLAIM OF THE ASSESSEE AS MACHINERY RENT. 11.2.6. HOWEVER FOR THE ASSESSMENT YEAR 1998-99 WHILE MAKING THE DISALLOWANCE OF RS.1 63 10 230/- THE AO HAD O BSERVED THUS: 8.IT IS CLEAR THAT THE LEASE RENTALS PAID BY THE ASSESSEE COMPANY AND DEBITED TO P & L ACCOUNT WOULD NEED TO BE DISALLOWED IN VIEW OF THE FACT THAT THERE ARE NO ASSETS WITH REFERENCE TO WHICH THE LEASE RENTAL CAN BECOME AN ALLOWABLE EXPENDITURE. ALTHOUGH IT W AS ARGUED BY THE AUTHORIZED REPRESENTATIVE THAT THE LEASE RENTALS IN ANY CASE IS ALLOWABLE EXPENDITURE IF NOT AS LEASE RENTAL THEN AS FINANC IAL CHARGES I AM NOT IMPRESSED BY THE ARGUMENTS OF THE AUTHORIZED REPRES ENTATIVE FOR THE SIMPLE REASON THAT THE ASSESSEE COMPANY NEITHER UNDER I.T. ACT NOR IN EQUITY IS ENTITLED TO REAP THE FRUITS OF ITS OWN MISDEEDS. D URING THE YEAR UNDER CONSIDERATION A TOTAL PAYMENT OF LEASE RENTAL TO T HE TUNE OF RS.239948270/- WAS MADE. HOWEVER OUT OF THIS AN AMOUNT OF RS.16 310230/- ONLY IS DEBITED TO P & L ACCOUNT AND THE BALANCE AMOUNT OF RS.22363 8040/- HAS BEEN TAKEN AS CLOSING WORK IN PROGRESS INTEGRATED STEEL PLAN T. IN VIEW OF THE FOREGOING DISCUSSION I MAKE DISALLOWANCE OF RS.163 10230/-. 11.2.7. A PLAIN READING OF THE ABOVE OBSER VATIONS OF THE ASSESSING OFFICER WOULD INVARIABLY SUGGEST THAT THE AO HAD IN FACT ADMITTED THE TOTAL PAYMENTS TO THE TUNE OF RS.23.99 CRORES MADE BY TH E ASSESSEE DURING THE ASSESSMENT YEAR UNDER DISPUTE AND SINCE THE ASSESSE E HAD DEBITED ONLY RS.16310230/- IN THE P & L ACCOUNT AS LEASE RENTALS THE AO HAD RESORTED TO MAKE THE DISALLOWANCE ONLY TO THE EXTENT OF RS.1 .63 CRORES WHICH IN OTHER WORDS HE HAD CONCEDED THAT THE ASSESSEE DID MAKE PAYMENTS TO THE EXTENT OF RS.23.99 CRORES. 11.2.8. FOR THE ASSESSMENT YEAR 99.00 UNDE R DISPUTE THE ASSESSING OFFICERS CRYPTIC OBSERVATION WAS THAT THE FACTS RELATING TO THE LEASING PLANT ITA NO.711/B/03 ETC. PAGE 29 OF 52 AND MACHINERY AND ITS CLAIM FOR INSTALLATION OF MAC HINERY AS DISCUSSED IN DETAIL THE ASSESSMENT ORDER PASSED FOR THE ASSESSME NT YEAR 98-99 CONTINUES FOR THIS YEAR ALSO. ON THE BASIS OF THE FINDINGS I N THE ASSESSMENT ORDER PASSED FOR THE ASSESSMENT YEAR 98-99 THE FOLLOWING MACHINERY RENT PAID DURING THE YEAR IS DISALLOWED.. 11.2.9. AS COULD BE SEEN FROM THE FINDING OF THE AO FOR THE AY 98-99 THAT A TOTAL PAYMENT OF LEASE RENT TO THE TUNE OF RS.239948270/- WAS CLAIMED OUT OF WHICH ONLY RS.16310230/- WAS DEBIT ED TO P & L ACCOUNT AND THE BALANCE AMOUNT WAS TAKEN AS CLOSING WORK-IN -PROGRESS I.E. TO SAY THAT THE ASSETS REMAINED WITH THE ASSESSEE FOR WHI CH THE ASSESSEE HAD CLAIMED AS LEASE RENTALS WHICH HAS BEEN TURNED DOWN BY THE AO. HOWEVER THE AO HAD NOT RECORDED THE SPECIFIC REASO NS FOR NOT HAVING ACCEDED TO THE ASSESSEES REQUEST BUT MADE SWEEPIN G REMARKS THAT I AM NOT IMPRESSED BY THE ARGUMENTS OF THE AUTHORIZED RE PRESENTATIVE FOR THE SIMPLE REASON THAT THE ASSESSEE COMPANY NEITHER UND ER I.T.ACT NOR IN EQUITY IS ENTITLED TO REAP THE FRUITS OF ITS OWN MISDEEDS. 11.2.10 WE HAVE DULY CONSIDERED THE CASE LA WS ON WHICH THE ASSESSEE HAD PLACED RELIANCE AS UNDER: (I) CIT V. PUNJAB STATE ELECTRICITY BOARD (2009) 30 DTR (P&H) 153 : THE ISSUE BEFORE THE HONBLE HIGH COURT WAS THE SAL E AND LEASE BACK TRANSACTION VIS--VIS AND THE ONLY CONTENTION RAISE D BY THE REVENUE WAS THAT THE MACHINERY WAS INTEGRAL PART OF THE BOILERS AND THE SAME CONTINUED TO BE WITH THE ASSESSEE IN SPITE OF SALE FOR WHICH THE HONBLE COURT OBSERVED THAT THE FACT REMAINS THAT THE SALE CONSIDERATION RECEIVED BY THE ASSESSEE AND LEASE RENTAL WAS PAID BY THE ASSESSEE. MERELY BECAUSE TAX LIABILITY WAS REDUCED COULD NOT BE CONCLUSIVE OF ITA NO.711/B/03 ETC. PAGE 30 OF 52 ARRANGEMENT BEING SHAM OR A DEVICE . IN CONCLUSION IT WAS OBSERVED THAT THE ASSESSEE HAVING SOLD THE MACHINERY AND THEN AC QUIRED THE SAME ON LEASE AND LEASE RENTAL WAS ALSO PAID IT COULD N OT BE SAID THAT THE TRANSACTION WAS SHAM OR A DEVICE. THE RATIO OF THE ABOVE FINDING IS APPLICABLE TO THE ISSUE ON HAND EVEN THOUGH THE EXPENDITURE CLAIMED IS ON DIFFERENT HEAD S BUT OF THE SAME NATURE. (II) ICICI LTD. V. JCIT (2008) 307 ITR (AT) 262 (MUMBAI): THE ISSUE BEFORE THE HONBLE TRIBUNAL IN BRIEF WAS THAT THE ASSESSEE FILED ITS ROI CLAIMING DEPRECIATION AND SUBSEQUENTLY FILED A R EVISED STATEMENT CLAIMING HIGHER DEPRECIATION ON THE PLEA THAT CERTA IN ADDITIONS WERE MADE IN THE AY 93-94. THE AO CONSIDERED THE DEPREC IATION CLAIMED ACCORDING TO THE ORIGINAL RETURN. THE AO FURTHER NO TED THAT IN AN EARLIER YEAR THE ASSESSEE HAD CLAIMED DEPRECIATION ON BOIL ER PLANT AUXILIARIES FROM GEB AND LEASED BACK TO GEB. SIMILARLY THE AS SESSEE HAD PURCHASED ASSETS FROM RSEB IN AN EARLIER YEAR AND L EASED THEM BACK TO RSEB. THE CLAIM OF 100% DEPRECIATION FOR THE AY 94-95 WAS NEGATED HOLDING THAT THE TRANSACTIONS WERE LOAN TRA NSACTIONS AND THE CLAIM FOR AY 93-94 WAS ALSO NEGATED. THE CLAIM OF 100% DEPRECIATION ON THE ASSETS PURCHASED FROM GEB AND RSEB FOR THE A Y 95-96 WAS ALSO NEGATED. ON AN APPEAL THE CIT(A) HAD CONFIRM ED THE AOS ACTION ON THE GROUND THAT THE ASSESSEE WAS NOT ENTITLED TO ANY DEPRECIATION U/S 32 OF THE ACT AS THE ASSETS WERE NOT OWNED BY IT BU T WERE FOR THE PURPOSE OF SECURITY AGAINST LOAN GIVEN TO PARTIES D URING THE COURSE OF FINANCING TRANSACTIONS. ITA NO.711/B/03 ETC. PAGE 31 OF 52 ON AN APPEAL IT WAS HELD BY THE HONBLE TRIBUNAL T HAT WHENEVER THESE ASSETS WERE TAKEN BACK THEY WERE SHOWN AS TAKEN BAC K AND WHENEVER THESE ASSETS WERE SOLD THEY WERE SHOWN AS SOLD. IN SURANCE COVER IN RESPECT OF THE ITEMS INVOLVED IN THESE TRANSACTIONS WAS IN THE NAME OF THE ASSESSEE. ANY LIABILITY ON ACCOUNT OF INSURANCE PRE MIUM OR ON ACCOUNT OF THEFT DAMAGE ETC. WAS ON ACCOUNT OF THE ASSESSEE. THEREFORE MERELY ON SUSPICION OR CONJECTURES DOUBTING THAT THE TRANSAC TIONS WERE ENTERED INTO FOR CLAIMING HIGHER DEPRECIATION WAS NOT JUSTI FIED APPLYING THE SAME RATIO WE ARE OF THE CONSIDERED V IEW THAT THE AO IN THE PRESENT WAS NOT JUSTIFIED TO DISALLOW THE CLAIM ON MERE SUSPICION AND CONJECTURES. (III) ICDS LTD. V. CIT (2007) 291 ITR 18 (KAR) IN THIS CASE THE ISSUE BEFORE THE HONBLE COURT TH AT DEPRECIATION WAS CLAIMED ON LEASE OF EQUIPMENT TO EDUCATIONAL INSTIT UTION. AFTER CONSIDERING THE ISSUE IN DEPTH THE HONBLE COURT H AD RULED THAT THE ASSESSEE WAS NOT ENTITLED TO DEPRECIATION ON LEASED EQUIPMENT ON THE GROUND THAT THE EDUCATIONAL INSTITUTIONS AND THE AS SESSEE CONTROLLED BY THE SAME PERSONS. WITH RESPECTS WE WOULD LIKE TO POINT OUT THAT IN T HE CASE ON HAND THE ASSESSEE HAD TAKEN THE MACHINERY ON LEASE FROM VARI OUS ENTITIES AND THUS THE RATIO LAID DOWN BY THE HONBLE COURT IS DISTINGUISHABLE AND NOT APPLICABLE TO THE ISSUE BEFORE US. ITA NO.711/B/03 ETC. PAGE 32 OF 52 CASE LAWS RELIED BY THE REVENUE (I) AVASARALA AUTOMATION LTD. V. JCIT (2004) 266 ITR 178 (KAR) : THE ISSUE BEFORE THE HONBLE COURT WAS THE ASSESSE E HAD CLAIMED THAT IT HAD PURCHASED MACHINERY/EQUIPMENT FROM APSEB BY VIRTUE OF AN AGREEMENT OF SALE DEED FOR A CONSIDERATION AND ON T HE SAME DAY BY MEANS OF A SEPARATE LEASE DEED IT HAD LEASED BACK THE SAID MACHINERY TO THE BOARD FOR MONTHLY RENT FOR A PERIOD OF 72 MO NTHS AND THE ASSESSEE HAD CLAIMED DEPRECIATION AT 100%. THE AO HELD THAT THE TRANSACTION WAS NOT GENUINE AND REJECTED THE ASSESS EES CLAIM. THE TRIBUNAL TOOK A VIEW THAT THE TRANSACTION WAS NOT G ENUINE AS THERE WAS NO ACTUAL DELIVERY OR HANDING OVER OF POSSESSION OF THE MACHINERY AND WAS ALSO NO REDELIVERY OR HANDING OVER OF POSSESSIO N OF THE MACHINERY ETC. AND THUS UPHELD THE ACTION OF THE LOWER AUTHO RITIES. ON A FURTHER APPEAL THE HONBLE COURT AFTER CONSIDERING THE IS SUE IN DETAIL HAD HELD THAT THE TRIBUNAL AND AUTHORITIES BELOW HAD RECORDE D A FINDING THAT THE TRANSACTION IN QUESTION WAS NOT REAL AND GENUINE. THE FINDING RECORDED BY THE AUTHORITIES DID NOT SUFFER FROM ANY ERROR; T HE HONBLE COURT HAD DECLINED TO INTERFERE WITH THE FINDING OF THE TRIBU NAL. THE HONBLE COURT HAD FURTHER HELD THAT THE FACTS SHOWED THAT WHILE THE BOARD WAS INTERESTED IN SECURING FINANCIAL ASSISTAN CE BY WAY OF LOAN AND FOR THE SAID PURPOSE THE MACHINERY/EQUIPMENT WAS OF FERED AS A SECURITY BY CREATING THE DOCUMENTS IN QUESTION TO ASSURE REP AYMENT OF THE LOAN ADVANCED THE ASSESSEE FOUND IT CONVENIENT TO ENTER INTO SUCH A TRANSACTION AS A DEVICE ADOPTED TO AVOID PAYMENT OF TAX. THE TRIBUNAL ITA NO.711/B/03 ETC. PAGE 33 OF 52 THE APPELLATE AUTHORITY AND THE ASSESSING OFFICER H AD RECORDED A FINDING THAT THE TRANSACTION IN QUESTION WAS NOT REAL AND G ENUINE; IT WAS NOT IN THE NATURE OF A TAX PLANNING WHICH IS WITHIN THE FR AMEWORK OF LAW. THE FINDING RECORDED BY THE AUTHORITIES DID NOT SUFFER FROM ANY ERROR MUCH LESS AN ERROR INVOLVING A SUBSTANTIAL QUESTION OF L AW WITH DUE REGARDS WE WOULD LIKE TO POINT OUT THAT I N THE ABOVE CASE THE BOARD FOR THE PURPOSE OF SECURING FINANCIAL ASSIST ANCE BY WAY OF LOAN AND FOR THAT PURPOSE THE BOARD HAD OFFERED ITS MAC HINERY/EQUIPMENT AS A SECURITY WHEREAS IN THE CASE ON HAND NEITHER THE ASSESSING OFFICER NOR THE APPELLATE AUTHORITIES HAVE BROUGHT ON RECOR D ANY TANGIBLE EVIDENCE TO SUGGEST THAT THE ASSESSEE HAD INDULGED IN TO AVOID PAYMENT OF TAX. IN FACT THE ASSESSEE HAD ENTERED INTO LEASE AGREEMENTS WITH IDBI ARUNA SUGARS FINANCE LTD ETC. WHICH HAVE NOT BEEN CONTRADICTED OR LESS RECORDED A FINDING TO THE EFFECT THAT IT WAS A COLOURFUL DEVICE ON THE PART OF THE ASSESSEE. IT IS PERTINENT TO NOTE THAT THE ASSESSEE HAD NOT WRITTEN OFF THE ENTIRE LEASE C HARGES TO P&L ACCOUNT BUT HAD WRITTEN OFF ONLY TO THE EXTENT OF T HE FINANCIAL CHARGE. CONSIDERING ALL THESE FACTS WE ARE OF THE VIEW THA T THIS CASE LAW IS DISTINGUISHABLE AND NOT DIRECTLY APPLICABLE TO THE ISSUE ON HAND. (II) ICDS LTD. V. CIT (2007) 291 ITR 18 (KAR) IN THIS CASE THE ISSUE BEFORE THE HONBLE COURT TH AT DEPRECIATION WAS CLAIMED ON LEASE OF EQUIPMENT TO EDUCATIONAL INSTIT UTION. AFTER CONSIDERING THE ISSUE IN DEPTH THE HONBLE COURT H AD RULED THAT THE ITA NO.711/B/03 ETC. PAGE 34 OF 52 ASSESSEE WAS NOT ENTITLED TO DEPRECIATION ON LEASED EQUIPMENT ON THE GROUND THAT THE EDUCATIONAL INSTITUTIONS AND THE AS SESSEE CONTROLLED BY THE SAME PERSONS. WITH RESPECTS WE WOULD LIKE TO POINT OUT THAT IN T HE CASE ON HAND THE ASSESSEE HAD TAKEN THE MACHINERY ON LEASE FROM VARI OUS ENTITIES AND THUS THE RATIO LAID DOWN BY THE HONBLE COURT IS DISTINGUISHABLE AND NOT APPLICABLE TO THE ISSUE BEFORE US. (III) INDUSTRIAL CABLES (I.) LTD. V. CIT & ANOTHER - 272 ITR 159 (P&H): THE ISSUE BEFORE THE HONBLE COURT WAS THAT THE ASS ETS BELONGING TO THE ASSESSEE WERE SOLD TO A SISTER CONCERN AND ON THE S AME DAY THESE ASSETS WERE TAKEN ON LEASE FROM THE SISTER CONCERN. AFTER A FEW DAYS FROM RECEIVING THE SALE CONSIDERATION THE ASSESSEE ADVANCED AN INTEREST-FREE LOAN OF RS.50 LAKHS TO THE SISTER CON CERN. THE ASSESSEE HAD CLAIMED DEDUCTION OF LEASE RENT PAID TO ITS SIS TER CONCERN. THE AO WAS OF THE VIEW THAT THE ASSESSEE HAD ENTERED INTO ALL THESE TRANSACTIONS MERELY TO DIVERT ITS INCOME TO ITS SIS TER CONCERN AS THE ASSESSEE HAD NOT RECEIVED ANY BENEFIT FROM THE SALE OF THESE ASSETS. EVEN THE SALE CONSIDERATION HAD BEEN RETURNED TO TH E PURCHASER AS INTEREST-FREE LOAN WITHIN A FEW DAYS OF ITS RECEIPT . AFTER CONSIDERING THE ISSUE THE HONBLE COURT HAD HELD THAT THE ASSESSEE HAD ALSO FAILED TO SUBSTANTIATE ITS CL AIM 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 SI STER CONCERN ALSO DID NOT CARRY OUT ANY BUSINESS ACTIVITY AFTER PURCHASING AN D LEASING OF THE ASSETS. THE TRIBUNAL HAS RIGHTLY HELD THAT THE EXPENDITURE CANNOT BE SAID TO HAVE ITA NO.711/B/03 ETC. PAGE 35 OF 52 BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOS E OF THE BUSINESS AS NO CONNECTION HAD BEEN ESTABLISHED BETWEEN THE EXPENDI TURE INCURRED AND THE ACTIVITY UNDERTAKEN BY THE ASSESSEE. EVEN OTHERWISE THE FINDINGS RECORDED BY THE TRIBUNAL ARE PURE FINDINGS OF FACTS. THE TRI BUNAL HAS TAKEN A POSSIBLE VIEW WHICH DOES NOT SUFFER FROM ANY FACTUAL OR LEGA L INFIRMITY. WE ARE THEREFORE SATISFIED THAT NO SUBSTANTIAL QUESTION O F LAW ARISES OUT OF THE ORDER OF THE TRIBUNAL WARRANTING INTERFERENCE BY THIS COU RT. WE HAVE DULY PERUSED THE FINDING OF THE HONBLE COU RT WHEREIN ISSUE WAS THAT THE ASSESSEE HAD SOLD ITS ASSETS TO A SISTER C ONCERN AND ON THE SAME DAY TOOK THOSE ASSETS ON LEASE. AFTER A FEW DAYS THE ASSESSEE HAD ADVANCED AN INTEREST FREE LOAN OF RS.50 LAKHS TO IT S SISTER CONCERN AND CLAIMED AS DEDUCTION OF LEASE RENT PAID TO ITS SIST ER CONCERN. THE AO TOOK A STAND THAT THE ASSESSEE DEVISED THIS FORMULA TO M ERELY DIVERT ITS INCOME TO ITS SISTER CONCERN AND THE ASSESSEE HAD NOT RECE IVED ANY BENEFIT FROM THE SALE OF THESE ASSETS. IN THIS CONNECTION WE W OULD LIKE TO POINT OUT THAT THE PRESENT ASSESSEES TRANSACTION WAS ENTIRELY ON A DIFFERENT FOOTING AND IT HAD NOT LENT ANY INTEREST FREE LOAN AND AS SUCH T HE ABOVE FINDING IS OF NO HELP TO THE REVENUE. IT IS DISTINGUISHABLE. 11.2.11. THE CASE LAWS ON WHICH THE ASSESS EE HAS PLACED RELIANCE ARE MORE OR LESS SIMILAR TO THAT OF THE ISSUE BEFOR E US. UNLESS THE REVENUE HAS DISPUTED THE ASSESSEES CLAIM WITH DOCUMENTARY EVIDENCE IT CANNOT BE TERMED AS SHAM OR A DEVICE. IN FACT THE REVENUE HA S PLACED MORE STRESS ON THE SURVEY REPORT RATHER THAN MAKING DISCREET IN QUIRIES TO PIN POINT WHERE THE ASSESSEE WAS AT FAULT. THE ASSESSEE HAD IN FACT CLAIMED ONLY RS.1.38 CRORES RS.1.63 CRORES AND RS.44.63 LAKHS A ND DEBITED TO ITS P & L ACCOUNTS FOR THE AYS 97.98 98-99 AND 1999-2000 RES PECTIVELY AS LEASE ITA NO.711/B/03 ETC. PAGE 36 OF 52 RENTALS OR FINANCIAL CHARGES AS THE CASE MAY BE WHEREAS SUBSTANTIAL AMOUNTS PAID UNDER THIS HEAD HAVE BEEN TAKEN AS CLO SING WORK-IN-PROGRESS AS CONCEDED BY THE AO FOR THE AY 98-99 UNDER DISPUT E. 11.2.12. IN AN OVERALL CONSIDERATI ON OF THE FACTS AND CIRCUMSTANCES OF THE CASE AS DISCUSSED ABOVE AND A LSO THE CRUCIAL FACT THAT THE ASSESSEE FOR HAVING ENTERED INTO LEASE AG REEMENTS WITH VARIOUS FINANCIAL INSTITUTIONS AND ALSO MADE FINANCIAL TRAN SACTIONS WITH THEM CANNOT MERELY BE BRUSHED ASIDE. IF THE LEASE RENTALS AS C LAIMED BY THE ASSESSEE CANNOT BE ALLOWED THE EXCESS AMOUNTS CLAIMED MORE THAN THE AMOUNTS WHICH HAVE BEEN TAKEN AS CLOSING WORK IN PROGRESS [ AS RECORDED BY THE AO IN THE ASSESSMENT ORDER FOR THE AY 98-99 REFERRED S UPRA] SHOULD BE TREATED AS INTEREST PAID FOR THE FINANCIAL LOANS SO AVAILED FROM THE VARIOUS FINANCIAL INSTITUTIONS. IN VIEW OF THE ABOVE AND IN THE INTE REST OF JUSTICE AND EQUITY THE TRANSACTIONS MADE BY THE ASSESSEE DURING THE A SSESSMENT YEARS UNDER DISPUTE WERE TREATED AS FINANCIAL TRANSACTIO NS AND THE CLAIMS OF RS.1 38 65 266/- RS.1 63 10 230/- AND RS.44 63 063 /- FOR THE AYS 97-98 98-99 AND 99-00 RESPECTIVELY ARE TREATED AS THE INT ERESTS PAID FOR THE FINANCIAL LOANS AVAILED BY THE ASSESSEE AND THAT TH E ASSESSEE IS ENTITLED TO CLAIM THE SAME AS ALLOWABLE DEDUCTION FOR THE RESPE CTIVE ASSESSMENT YEARS UNDER DISPUTE. 12. A.Y 1998-99: UN-EXPLAINED CASH CREDITS OF RS.7.16 30 000: (I) THE ADVANCES AGAINST SALES AND ADVANCES FO R ISP WERE AS UNDER: 1. SCRAPS AND SID SUPPLIES RS.18.53 CRORES 2. CREDITORS FOR EXPENSE RS. 2.33 CRORE S 3. ADVANCES AGAINST SALES RS.41.33 CRORES 4. ADVANCES FOR ISP RS. 7.33 CRORES 5. OTHER ADVANCES RS. 2.11 CRORES TOTAL RS. 71.63 CRORES ITA NO.711/B/03 ETC. PAGE 37 OF 52 12.1. THE ASSESSEE WAS REQUIRED BY THE AO T O FURNISH A LIST OF PARTIES WITH THEIR POSTAL ADDRESSES AND CONFIRMATIONS SO AS TO DISCHARGE THE ONUS U/S 68. ACCORDINGLY THE ASSESSEE HAD FURNISHED TH E ADDRESSES OF THE PARTIES FOR OUTSTANDING AMOUNTS EXCEEDING RS.50 LAK HS. NO DETAILS OF PARTIES OR OF THE AMOUNT OF THE ALLEGED CREDITORS U NDER VARIOUS HEADS WERE FORTH-COMING THE AO CONSIDERED 10%OF THE TOTAL ADV ANCES ALLEGEDLY RECEIVED AS NOT HAVING BEEN SATISFACTORILY EXPLAINE D U/S 68 HE DISALLOWED RS.7.16 CRORES OUT OF RS.71.63 CRORES AS UNEXPLAIN ED CASH CREDITS. 12.1.1. ON AN APPEAL AFTER CONSIDERING THE AS SESSEES VERSION THE LD. CIT(A) WAS OF THE VIEW THAT THE ASSESSING OFFICER HAS STATED THAT NO CONFIRMATION WERE FILED BEFORE HIM. EVEN BEFORE TH E UNDERSIGNED NO CONFIRMATION WERE FILED TO SUBSTANTIATE THE GENUINENESS OF THE C ASH CREDITS. AS SUCH I HOLD THAT THE DISALLOWANCE OF PART OF THE CASE CREDIT U/S 68 IS JUSTIFIED. 12.1.2. IT WAS CONTENDED BEFORE US THAT THE CREDI TS WERE ON ACCOUNT OF FINANCIAL LEASES AND CONSEQUENTLY THEY WERE GENUINE AND THE PROVISIONS OF S.68 OF THE ACT WERE NOT ATTRACTED AND THAT THE ARB ITRARY DISALLOWANCE OF 10% OF THE TOTAL CREDITS WITHOUT MAKING PROPER INQU IRY WAS UNSUSTAINABLE AND THUS THE IMPUGNED ADDITION WAS LIABLE TO BE D ELETED. 12.1.3. LET US HAVE A GLIMPSE OF WHAT S.68 SAYS ? 68. WHERE ANY SUM IS FOUND CREDITED IN THE BOOKS O F AN ASSESSEE MAINTAINED FOR ANY PREVIOUS YEAR; AND THE ASSESSEE OFFERS NO EXPLANATION ABOUT THE NATURE AND SOURCE THEREOF OR THE EXPLANAT ION OFFERED BY HIM IS NOT IN THE OPINION OF THE ASSESSING OFFICER SATISFACTO RY THE SUM SO CREDITED MAY BE CHARGED TO INCOME-TAX AS THE INCOME OF THE ASSES SEE OF THAT PREVIOUS YEAR. ITA NO.711/B/03 ETC. PAGE 38 OF 52 12.1.4. AS COULD BE SEEN FROM THE IMPUGNED ORDE R OF THE AO THAT ON A QUERY FROM THE AO THE ASSESSEE HAD FURNISHED THE N AMES AND ADDRESSES OF THE PARTIES FOR OUTSTANDING AMOUNTS EXCEEDING RS .50 LAKHS. AFTER PROCURING THE DETAILS OF THE SO CALLED CREDITORS I T COULD NOT BE GAUGED FROM THE ASSESSMENT ORDER AS TO WHETHER THE AO MADE ANY INQUIRIES WITH THE ALLEGED CREDITORS TO ASCERTAIN THE GENUINENESS OF T HE ASSESSEES CLAIM. IN STEAD HE WENT ON TO OBSERVE THAT AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES AND THE FACT THAT THE ASSESSEE COMPAN Y THROUGH THE MANAGING DIRECTOR SRI S.MADHAVA BY WAY OF AN AFFIDAVIT ADMI TTED FINANCIAL LEASES AND NOT OPERATIONAL LEASES AND AFTER CONSIDERING THAT NO DETAILS OF PARTIES OR OF THE AMOUNT OF THE ALLEGED CREDITORS UNDER VAR IOUS HEADS ARE AVAILABLE OR FORTHCOMING. I DEEMED IT FIT AND NECESSARY TO C ONSIDER 10% OF THE TOTAL ADVANCES ALLEGEDLY RECEIVED DURING THE YEAR UNDER CONSIDERATION AS NOT HAVING BEEN SATISFACTORILY EXPLAINED U/S 68. 12.1.5. THE STAND OF THE ASSESSING OFFICER IS CO NTRARY TO THE PRINCIPLES LAID DOWN BY THE JUDICIARY NOTABLY:- (A) KHANDELWAL CONSTRUCTIONS V. CIT 227 ITR 900 (GAU ): THE ISSUE BEFORE THE HONBLE COURT WAS THAT THE ASS ESSEE SHOWN CASH CREDIT RECEIVED FROM THE SEVEN PERSONS. THE ASSESS EE FURNISHED DETAILS LIKE CONFIRMATION LETTERS GIR NOS. ETC. ITO SUMMON ED THEM UNDER SEC. 131 ALSO. FOUR CREDITORS APPEARED. OTHER THREE DID NOT APPEAR FOR WANT OF PROPER SERVICE OF NOTICE/SUMMONS. THE DEPARTMENT IN VOKED SEC. 68 AND ADDED THE CREDITS OF THREE PERSONS WHO DID NOT APPE AR. ITA NO.711/B/03 ETC. PAGE 39 OF 52 AFTER CONSIDERING THE ISSUE IN DETAIL AND POSED A Q UESTION BY THE HONBLE COURT THAT WHETHER THE ASSESSEE FAILED TO PROVE THE CAPACITY O F CREDITORS AND WHETHER SEC. 68 IS ATTRACTED? AND ANSWERED ITSELF WITH A FIRM NO. IT WENT ON FURTHER TO OBSERVE THAT IT WAS THE DUTY OF THE TRIBUNAL TO LOOK INTO AND DIRECT THE ASSESSING OFFICER TO PRODUCE ALL THE RETURNS AND VERIFY THE SAME. THE TRIBUNAL ABDICATED THE POWER AND RESPONSI BILITY IN DISCHARGING THE DUTY. THE ASSESSING OFFICER HAD THE JURISDICTIO N TO LOOK INTO CASH CREDITS. THE ENQUIRY WAS NOT PROPERLY MADE. THE ASSESSING OF FICER COULD NOT HAVE COME TO THE CONCLUSION THAT THE CREDITS ARE FICTITI OUS WHEN HE HAD NOT LOOKED INTO ATTENDANT CIRCUMSTANCES. (B) CIT V. ORISSA CORPORATION PVT. LTD 159 ITR 78 (SC) : AFTER CONSIDERING THE FACTS OF THE ISSUE THE HONB LE APEX COURT HAD OBSERVED THUS - IN THIS CASE THE ASSESSEE HAD GIVEN THE NAMES AND ADDRESSES OF THE ALLEGED CREDITORS. IT WAS IN THE KNOWLEDGE OF THE REVENUE T HAT THE SAID CREDITORS WERE INCOME-TAX ASSESSEES. THEIR INDEX NUMBERS WERE IN THE FILE OF THE REVENUE. THE REVENUE APART FROM ISSUING NOTICES UN DER SECTION 131 AT THE INSTANCE OF THE ASSESSEE DID NOT PURSUE THE MATTER FURTHER. THE REVENUE DID NOT EXAMINE THE SOURCE OF INCOME OF THE SAID ALLEGE D CREDITORS TO FIND OUT WHETHER THEY WERE CREDITWORTHY OR WERE SUCH WHO COU LD ADVANCE THE ALLEGED LOANS. THERE WAS NO EFFORT MADE TO PURSUE THE SO-CA LLED ALLEGED CREDITORS. IN THOSE CIRCUMSTANCES THE ASSESSEE COULD NOT DO ANYT HING FURTHER. IN THE PREMISES IF THE TRIBUNAL CAME TO THE CONCLUSION TH AT THE ASSESSEE HAS DISCHARGED THE BURDEN THAT LAY ON HIM THEN IT COUL D NOT BE SAID THAT SUCH A CONCLUSION WAS UNREASONABLE OR PERVERSE OR BASED ON NO EVIDENCE. 12.1.6. THUS IT IS CLEAR FROM THE ABOVE THA T THE ASSESSING OFFICER HAD NOT DISCHARGED THE ONUS CAST UPON HIM TO LOOK INTO THE CASH CREDIT AND MAKE NECESSARY ENQUIRY AND COME TO A FINDING ON SUC H AN ENQUIRY IN A PROPER AND FAIR MANNER AND THEREFORE WE ARE OF THE FIRM VIEW THAT WITHOU T ITA NO.711/B/03 ETC. PAGE 40 OF 52 CAUSING ANY INQUIRY TREATING 10% OF TOTAL ADVANCES AS UNEXPLAINED CASH CREDITS IS CONTRARY TO THE SPIRIT OF JUDICIAL PRECE DENTS. EVEN THE LD. CIT(A) DID NOT MAKE AN EFFORT TO FIND OUT THE CAUSE OF SUC H ACTION OF THE AO. IN STEAD HE HAD JUSTIFIED THE STAND OF THE AO IN TOTO . 12.1.7. IN VIEW OF THE ABOVE WE ARE O F THE FIRM VIEW THAT THE AO WAS NOT JUSTIFIED IN TREATING RS.7 16 30 000/- AS UNEXPLAINED CASH CREDITS U/S 68 OF THE ACT. 13. (II) CONVERSION CHARGES : THE AO HAD BROUGHT TO TAX U/S 40A(2)(B) OF THE ACT A SUM OF RS.344925/- ON THE GR OUND THAT THE ASSESSEE HAD MADE PAYMENT OF CONVERSION CHARGES TO ITS ASSOC IATE NAMELY BELLARY STEEL ROLLING MILLS WHICH WAS HIGHER BY RS.135 PMT COMPARED TO OTHER PAYMENTS FOR SIMILAR SERVICE (AS PER ORDER SHEET EN TRY DATED: 29.3.01). 13.1. THE CRYPTIC FINDING OF THE LD. CIT(A) WA S THAT SINCE THE ASSESSING OFFICER HAS GIVEN A CLEAR FINDING AND NO CONTRARY E VIDENCE WAS FURNISHED EITHER BEFORE THE ASSESSING OFFICER OR BEFORE THE U NDER-SIGNED THE DISALLOWANCE IS CONFIRMED. 13.1.1. BEFORE US THE CONTENTION OF THE ASSESSE E WAS CONFINED TO THAT THE CIT(A) OUGHT TO HAVE APPRECIATED THAT ARBITRARY DIS ALLOWANCE OF RS.345925/- BY INVOKING THE PROVISIONS OF S.40A(2)( B) OF THE ACT IN RESPECT OF THE PAYMENT OF CONVERSION CHARGES. NO FURTHER A RGUMENT WAS ADVANCED TO QUESTION THE STAND OF LOWER AUTHORITIES. ITA NO.711/B/03 ETC. PAGE 41 OF 52 13.1.2. HOWEVER WE FIND FROM THE IMPUGNED ORDER OF THE AO THAT THE DISALLOWANCE WAS RESORTED TO SOLELY ON THE BASIS OF ORDER SHEET ENTRY DATED: 29.3.2001. THE CONTENTS OF THE ORDER SHEET ENTRY HAVE NOT BEEN BROUGHT TO THE REFERENCE OF THIS BENCH FOR CONSIDER ATION BY EITHER PARTY. IN THE INTEREST OF JUSTICE AND EQUITY THIS ISSUE IS REMITTED BACK ON THE FILE OF THE AO FOR FRESH CONSIDERATION. THE ASSESSEE THRO UGH ITS LD. COUNSEL IS ADVISED TO APPROACH THE AO FOR CONSIDERATION OF ISS UE AFRESH TO ADVANCE ITS CONTENTIONS WITH PROOF OF COMPARATIVE FIGURES IF A NY. IT IS ORDERED ACCORDINGLY. 14. (III) THE GRIEVANCE OF THE ASSESSEE WAS THAT THE CIT (A) OUGHT TO HAVE DECIDED THAT THE ADDITIONAL TAX CHARGED ON THE TAX ARRIVED AT ON THE INCOME COMPUTED U/S 115J SHALL NOT BE LEVIABLE. 14.1. HOWEVER ON A PERUSAL OF THE IMPUGNE D ORDER OF THE CIT (A) WE FIND THAT THE AUTHORIZED REPRESENTATIVE ALSO CONTESTED THE C OMPUTATION OF INCOME U/S 115J. HOWEVER HE DID NOT PRESS FOR THI S GROUND OF APPEAL. AS SUCH THIS GROUND OF APPEAL IS DISMISSED AS WITHDRA WN. 14.2. SINCE THE ASSESSEE HAD CONCEDED BE FORE THE CIT(A) BY NOT PRESSING THE ISSUE THE ASSESSEE SHOULD NOW HAVE N O GRIEVANCE OVER THE ISSUE. THIS GROUND IS NOT MAINTAINABLE AND THUS DISMISSED ACCORDINGLY. A.Y 1999-00: 15. DISALLOWANCE OF INTEREST ON BORROWED FUND S AMOUNTING TO RS.49165609/-: THE ASSESSEE HAD INVESTED RS.45.5 CRORES WITH S.N.P ROJECTS LIMITED [SNPL] BANGALORE FOR THE PURPOSE OF GENERATION OF ELECTRICITY AND SUPPLY OF ITA NO.711/B/03 ETC. PAGE 42 OF 52 THE SAME TO THE ASSESSEE. ACCORDING TO THE AO SNPL HAD NEITHER GENERATED THE ELECTRICITY NOR SUPPLIED IT TO THE AS SESSEE. HOWEVER IT HAD LENT A SUM OF RS.25 CRORES TO S.N.SECURITIES LIMITE D AS UNSECURED LOANS WHICH IN TURN INVESTED THE SAME WITH THE ASSESSEE T OWARDS THE PURCHASE OF SHARES. CONSIDERING THE SEQUENCE OF EVENTS THE AO TERMED THE INVESTMENTS TOWARDS THE GENERATION OF ELECTRICITY W AS A SHAM TRANSACTION AS A VIA MEDIA FOR DIVERSION OF FUNDS. 15.1. BEFORE THE LD. CIT(A) IT WAS CONT ENDED THAT THE AMOUNT ADVANCED TO SNPL. WAS FOR THE PURPOSE OF BUSINESS A ND THERE WAS NO DIVERSION OF FUNDS TOWARDS NON-BUSINESS PURPOSES. IT WAS PLEADED THAT THE ASSESSEE HAD UNDERTAKEN EXPANSION OF UNIT BY PUTTIN G UP AN INTEGRATED STEEL PLANT (ISP) WITH CHINESE TECHNOLOGY. INSTEAD OF PUTTING UP THE POWER PLANT ITSELF THE ASSESSEE HAD ENGAGED SNPL AND A M OU WERE ENTERED INTO TO IMPLEMENT THIS PROJECT. ACCORDING TO MOU THE AS SESSEE SHALL ALLOW THE ENTIRE WASTE GAS FOR GENERATION OF ELECTRICITY TO S NPL WHICH WOULD BE USED BY THE ASSESSEE. FOR THIS PURPOSE THE ASSESSEE HAD TO PROVIDE NECESSARY FUNDS TO THE EXTENT OF RS.60 CRORES AND THE SAID AM OUNTS WERE ADVANCED OUT OF COMMERCIAL EXPEDIENCY AND THEREFORE THERE WAS NO QUESTION OF DIVERSION OF FUNDS AS ALLEGED BY THE AO. 15.1.1. BRUSHING ASIDE THE ASSESSEES CON TENTION THE LD. CIT(A) WAS OF THE VIEW THAT ALTHOUGH AS PER THE MEMORANDUM OF UNDERSTANDING SIGNED BY THE PARTIES THE ELECTRICITY GENERATED HAS TO BE USED BY THE APPELLANT EVEN THEN IT CANNOT BE SAID THAT S.N. PRO JECT LTD. IS WORKING FOR THE APPELLANT EXCLUSIVELY. IN LEGAL PARLANCE BOTH THE COMPANIES ARE SEPARATE ITA NO.711/B/03 ETC. PAGE 43 OF 52 ENTITIES. AS SUCH S.N. PROJECT LTD. HAS TO FIND F INANCE FOR ITS PROJECTS SEPARATELY. THE AMOUNT ADVANCED BY BSAL CANNOT BE REGARDED FOR PURPOSE OF BUSINESS OF THE APPELLANT. AS SUCH THE AO IS J USTIFIED IN TREATING THIS TRANSACTION AS DIVERSION OF FUNDS FOR NON-BUSINESS PURPOSES.. 15.1.2. IT WAS CONTENDED BEFORE US THAT THE A SSESSEE WAS IN THE PROCESS OF EXPANSION OF ISP OF A CAPACITY OF 0.5 MI LLION TONNES PER ANNUM WITH CHINESE TECHNOLOGY FOR WHICH A CONSIDERABLE PO WER WAS REQUIRED. IT WAS CONCEIVED TO PUT UP A CAPTIVE POWER PLANT BY US ING THE WASTE GAS TO PRODUCE CAPTIVE POWER. SINCE SNPL HAD SHOWN ITS IN CLINATION TO GENERATE POWER UPON WHICH A MOU WAS ENTERED INTO BETWEEN THE ASSESSEE AND SNPL. ACCORDING TO THE SAID MOU THE ASSESSEE SHALL ALLOW THE ENTIRE WASTE GAS TO BE UTILIZED BY SNPL TO PRODUCE ELECTRI CITY. WHILE PRODUCING THE ELECTRICITY THE STEAM WHICH WOULD BE GENERATED TO BE UTILIZED BY THE ASSESSEE FREE OF COST. APART FROM THE ABOVE THE A SSESSEE SHALL HAVE TO PROVIDE LAND (AREA) TO PUT UP THE PLANT FUNDS TO T HE TUNE OF RS.60 CRORES TO SNPL TILL IT ACHIEVE ITS FINANCIAL CLOSURE ON ITS O WN. THUS IT WAS ARGUED IT WAS APPARENT THAT THE FUNDS PROVIDED WERE OUT OF CO MMERCIAL EXPEDIENCY AND FOR THE ASSESSEES ADVANTAGE TOO. THUS THERE WAS NO DIVERSION OF FUNDS AS ALLEGED BY THE AO. 15.1.3. WE HAVE DULY CONSIDERED THE RIVAL SU BMISSIONS. THE ASSESSEE WAS IN THE PROCESS OF EXPANSION OF ISP FOR WHICH A CONSIDERABLE POWER WAS NECESSITATED FOR SMOOTH RUNNING OF THE SAID PLANT. SINCE SNPL A SISTER CONCERN HAD INCLINED TO GENERATE THE REQUIRED POW ER FOR THE ASSESSEE FOR WHICH THE ASSESSEE HAD ADVANCED FUNDS FOR IMPLEMENT ATION OF THE SAID ITA NO.711/B/03 ETC. PAGE 44 OF 52 PROJECT AND ACCORDINGLY A MEMORANDUM OF THE UNDERST ANDING WAS DRAWN BETWEEN THEM. THIS VERY FACT HAS BEEN CONCEDED BY THE LD.CIT(A) IN THE IMPUGNED ORDER THAT ALTHOUGH AS PER THE MEMORANDUM OF UNDERSTANDI NG SIGNED BY THE PARTIES THE ELECTRICITY GENERATED HAS TO BE USED BY THE APPELLANT EVEN THEN IT CANNOT BE SAID THAT S.N. PRO JECT LTD. IS WORKING FOR THE APPELLANT EXCLUSIVELY. 15.1.4. EVEN THE REVENUE HAD ADMITTED THE VER Y FACT IN THE ASSESSMENT ORDER OF SNPL FOR THE AY 99-00 WHEREIN THE AO HAD A CKNOWLEDGED THAT THE ASSESSEE COMPANY WAS INCORPORATED ON 26.8.1996. THE MAIN OBJECTIVE OF THE COMPANY AS PER ITS MEMORANDUM OF ASSOCIATION IS GENERATION OF ELECTRICITY .. 15.1.5. SNPL IN ITS COMMUNICATION DATED 5.3.2 001 TO THE DCIT COMPANY CIRCLE 4(6) BANGALORE [SOURCE: P 184 OF PB ] HAD SUBMITTED THAT OUR COMPANY STARTED WITH THE MAIN IDEA OF PUTTING UP THE POWER PLANT OF 60MW CAPACITY TO FEE MAJOR ELECTRICITY I.E. PRODUCED TO M/S. BELLARY STEELS & ALLOYS LTD. ALONG WITH SUPPLYING ENTIRE STEAM TO THE SAME COMPANY. DUE TO TECHNICAL REASONS AND THE PROBLEMS FACED BY M/S. BELLARY STEELS & ALLOYS LTD. IMPLEMENTATION OF THE PROJECT GOT DELAYED. S INCE THE MANAGEMENT OF OUR COMPANY THOUGHT IT FIT TO INVEST SURPLUS FUNDS IN A REMUNERATIVE MANNER IT WAS DECIDED TO INVEST TOWARDS SHARE CAPITAL IN O NE OF OUR CONNECTED COMPANY NAMELY M/S .S.N. SECURITIES LIMITED. WITH THIS IDEA OUR COMPANY INVESTED RS.25 CRORES TOWARDS SHARE APPLICATION MON EY WITH M/S. S.N. SECURITIES LTD.. 15.1.6. AN INFERENCE CAN BE DRAWN FROM THE ABOVE NARRATION THAT THE PROJECT TOOK UP BY SNPL WAS NOT ABANDONED BUT IT GOT DELAYED DUE TO TECHNICAL SNAG. THE BONA-FIDE INTENTION OF THE ASSE SSEE WAS TO PROCURE THE ITA NO.711/B/03 ETC. PAGE 45 OF 52 ELECTRICITY FOR ITS USE FROM SNLP FOR WHICH IT HAD INVESTED RS.45.5 CRORES. DUE TO TECHNICAL SNAG BEING FACED BY SNLP THE PROP OSED PROJECT COULD NOT TAKE SHAPE AS WAS EXPECTED FOR WHICH THE ASSESSEE H AD NO CONTROL OVER IT. THE AOS ASSERTION WAS THAT ALL THESE THREE COMPANI ES WERE HAVING DIRECTORS WITH COMMON INTEREST AND SHARE HOLDINGS. HOWEVER ON A PERUSAL OF THE DOCUMENTS REVEAL THAT THE TOTAL NUMBER OF DI RECTORS WERE FOUR OUT OF WHICH THE MANAGING DIRECTOR OF THE ASSESSEE (S. MAD HAVA) WAS HOLDING ONLY 14.28% SHARES WHEREAS THE OTHER DIRECTORS TOGE THER WERE HOLDING THE REMAINING 85.72% OF SHARES. SUCH BEING THE GROUND R EALITIES THE AOS STAND THAT THE ENTIRE EXERCISE OF FUND FLOW AND THE ULTIMATE D ESTINATION OF THE FUNDS TO THE ASSESSEE COMPANY WOULD INDICATE T HAT THE OBJECTIVE OF GENERATION OF ELECTRICITY AND SUPPLY TO THE ASSESSE E COMPANY IN TOTO IS DEFEATED FURTHER IT IS ALSO NOT CLEAR WHEN THE PRO JECT OF POWER GENERATION WILL BE COMPLETED OR OTHERWISE SINCE MAJOR PORTION OF THE FUNDS HAVE BEEN DIVERTED IS LACKING CONVICTION. 15.1.7. THE OTHER ALLEGATION OF THE AO TH AT APART FROM A MEMORANDUM OF UNDERSTANDING THE ASSESSEE COMPANY H AS NOT PRODUCED ANY MATERIAL EVIDENCE OR OTHER SUPPORTING DOCUMENTS TO SUBSTANTIATE THE CLAIM THAT S.N. PROJECT LIMITED HAVE UNDERTOOK INFR ASTRUCTURAL WORKS FOR GENERATION OF ELECTRICITY. HOWEVER THE ITO W-12(2) BANGALORE IN THE ASSESSMENT ORDER FOR THE AY 99-00 IN THE CASE OF SN PL HAD ACKNOWLEDGED THAT (AT THE COST OF REPETITION) THE ASSESSEE COMPANY WAS INCORPORATED ON 26.8.1996. THE MAIN OBJECTIVE OF THE COMPANY AS PE R ITS MEMORANDUM OF ASSOCIATION IS GENERATION OF ELECTRICITY. DURING T HE PERIOD RELEVANT TO THE ITA NO.711/B/03 ETC. PAGE 46 OF 52 ASST. YEAR AS VERIFIED FROM THE STATEMENT THERE I S NO BUSINESS ACTIVITY AS SUCH AND IS STILL IN THE STAGE OF COMPLETION .... 15.1.8. ON A CLOSE SCRUTINY OF THE BALANCE SHEET S OF THE ASSESSEE WE FIND THAT THERE WAS AN INCREASE IN SHARE HOLDERS FU NDS DURING THE ASSESSMENT YEARS 1995-96 TO 1998-99 TO THE TUNE OF RS.17033 LAKHS AND FOR THE YEAR-ENDED 31.3.1999 [ASSESSMENT YEAR 1999- 2000] THE SAID FUNDS WERE TO THE EXTENT OF RS.21303 LAKHS AND OUT OF W HICH THE TOTAL AMOUNTS ADVANCED TO SNPL UPTO THE ASSESSMENT YEAR UNDER DIS PUTE WAS RS.4550 LAKHS. THIS CLEARLY GOES TO JUSTIFY THE ASSESSEES CLAIM THAT IT WAS FINANCIALLY ON SOUND FOOTING AND THAT OUT OF ITS SH AREHOLDERS FUNDS IT HAD ADVANCED A SUM OF RS.4550 LAKHS TO SNPL AND NOT OUT OF THE LOANS AVAILED FROM FINANCIAL INSTITUTIONS. THE LOAN AMOUNTS RECEI VED FROM THE FINANCIAL INSTITUTIONS HAVE BEEN INVESTED FOR DIFFERENT PURPO SES AND NOT FOR ADVANCING TO SNPL AS ALLEGED BY THE REVENUE. THE S OLE INTENTION OF THE ASSESSEE WAS PERHAPS OUT OF ITS COMMERCIAL EXPEDI ENCY AND FOR ITS OWN ADVANTAGE IT MUST HAVE ENTERED INTO AN AGREEMENT W ITH SNPL AND ADVANCED THE REQUIRED FUNDS AS PER THE MOU WITH AN INTENTION TO BUY THE POWER WHICH WAS TO BE GENERATED BY THE SNPL. AS PER CLAUSE 7 OF MOU IT HAS FURTHER BEEN STATED THAT BSAL HAS TO PROVIDE THE FUNDS TO THE EXTENT OF RS.60 CRORES UNTIL SNPL IS ABLE TO ACHIEVE FINANCIAL CLOSURE. THE ABOVE ADVANCES SHALL BE INTEREST FREE . BSAL SHALL ALSO OBTAIN PERMISSION FROM ITS LENDING INSTITUTIONS AND BANKS TO CONVERT A PART OF THE ABOVE ASSISTANCE INTO EQUITY. THUS THE COMPLETION OF THE PROJECT WAS DEPENDING UPON THE PROVIDING OF FUNDS BY THE ASSESSEE. HAD T HE ASSESSEE NOT HONORED IN SOURCING THE FUNDS AS AGREED UPON IN THE SAID MOU NEITHER THE PROJECT COULD BE ACCOMPLISHED NOR THE FUNDS ALREADY ADVANCED TO SNPL BY THE ASSESSEE WOULD BE JEOPARDIZED? IN VIEW OF THE ABOVE IT CAN SAFELY BE ARRIVED AT A CONCLUSION THAT THERE WAS NO DIVERSION OF FUNDS AS ALLEGED BY THE AUTHORITIES BELOW IN THEIR IMPUGNED ORDERS. ITA NO.711/B/03 ETC. PAGE 47 OF 52 15.1.9. IN AN OVER ALL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE ISSUE WE ARE OF THE FIRM VIEW THAT THERE WAS N O QUESTION OF DIVERSION OF BUSINESS FUNDS ON THE PART OF THE ASSESSEE AND AS S UCH THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN DISALLOWING A SUM OF RS .4 91 65 609 /- FOR THE REASONS THAT - (I) THE AOS STAND OF THERE IS MATERIAL FACTS AND PRIMA FACIE EVIDENCE TO SUGGEST THAT THERE HAS CONJOINT ACTIONS BY THE PARTICIPATING COMPANIES TO SIPHON-OFF INTEREST BEAR ING BORROWED FUNDS FOR NON-BUSINESS PURPOSES ; & (II) THE LD.CIT(A)S VIEW OF THE AMOUNT ADVANCED BY M/S.BELLARY STEEL AND ALLOYS LTD. CANNOT BE REGARDED FOR PURPOS E OF BUSINESS OF THE APPELLANT. AS SUCH THE ASSESSING OFFICER I S JUSTIFIED IN TREATING THIS TRANSACTION AS DIVERSION OF FUNDS FOR NON-BUSINESS PURPOSES. WERE WITHOUT ANY DOCUMENTARY EVIDENCE TO BACK THEIR CONCLUSIONS. IT IS ORDERED ACCORDINGLY. II. LET US NOW PROCEED TO LOOK INTO THE GRIEVANCES OF THE REVENUE . 16. A.Y 1997-98: (I) THE CIT(A) HAD ERRED IN ALLOWING THE EXPENDIT URE OF RS.5.44 CRORES OF FINANCIAL CHARGES AND RS.2.31 CRORES OF UPFRONT FEE PAYMENTS FOR THE NEW PLANT UNDER EXECUTION; & (II) THE CIT(A) HAD ERRED IN DIRECTING THE AO TO EX AMINE LEASE RENT PAID WHICH WAS DISALLOWED BY THE AO AND TO FIND OUT THE INTEREST PORTION IN IT AND TO ALLOW THE SAME AS FINANCE CHARGES. A.Y.99-00 : (I) THE CIT(A) HAS ERRED IN ALLOWING THE EXPENDITURE OF RS.436626270/- BEING THE AMOUNT SPENT TOWARDS FINANCIAL AND UPFRONT SYNDICATE FEES ON THE NEW PROJECT AS REVENUE EXPENDITURE. 16.1. DURING THE COURSE OF HEARING THE LD. D.R S URGE REVOLVES AROUND WHAT HAS BEEN STATED BY THE AO IN THE IMPUGNED ORDE R. HE HAD RELIED ON THE FOLLOWING CASE LAWS IN SUPPORT OF HIS ARGUMENTS : ITA NO.711/B/03 ETC. PAGE 48 OF 52 (A) CIT V. MOTOR GENERAL FINANCE LIMITED (2002) 254 ITR 449 (DEL); (B) CIT V. MUNJAL SALES CORPORATION (2008) 298 ITR 294 (P& H); (C) CIT V. VARDHMAN POLYTEX LTD. (2008) 299 ITR 152 (P& H) 16.1.1. ON THE OTHER HAND THE LD. A.R. CON TENTED THAT THE EXTENSION PROGRAMME OF SETTING UP OF AN INTEGRAL STEEL PLANT [ISP] WAS THAT THE ASSESSEE WAS IN THIS LINE OF BUSINESS OVER A DECADE AND THE SAID PROGRAMME WAS CONCEIVED WITH AN OBJECT OF INCREASIN G THE TOTAL PRODUCTION WITH IMPROVISED TECHNOLOGY. THE END PRODUCTS IN TH E NEW UNIT WILL BE RODS AND BARS WHICH WOULD EASE OUT THE DIFFERENT PHASES AND SEVERAL INTERMEDIARY PROCESSES. IN THE UNIT ISP THE EN TIRE PROCESSES WERE STREAMLINED. ONCE THE RAW MATERIALS WERE FED THE END PRODUCTS LIKE RODS AND BARS WOULD BE MANUFACTURED AUTOMATICALLY. THU S THE UNIT WHICH WAS UNDER IMPLEMENTATION WAS NOTHING BUT AN EXPANSION O F THE PRESENT ACTIVITY WITH IMPROVISED TECHNOLOGY. THUS THE AO HAD FAILE D TO SEE THE RATIONALE BEHIND THE EXTENSION PROGRAMME OF THE ISP. HOWEVER THE LD. CSIT (A) WERE RATHER MAGNANIMOUS IN THEIR ENDEAVOUR FOR THE AYS 1997-98 AND 99- 00 IN CONCEDING TO THE ASSESSEES CLAIM IN RESPECT OF INTEREST AND FINANCIAL CHARGES PAID ON TERM LOANS AND UPFRONT FEE PAYMENTS THE EXPENDITURE BEING REVENUE IN NATURE AND ALLOWED THE SAME. 16.1.2. THE LD. A.R HAS PLACED STRONG RELIANCE ON THE FOLLOWING CASE LAWS TO DRIVE HOME HIS POINT NOTABLY: (I) GUJARAT STATE FERTILIZER & CHEMICALS LTD. ACIT (200 8) 15 DTR (GUJ) 108; (II) CIT DELHI II V. MONNET INDUSTRIES LTD. (2009) 176 TAXMAN 81 (DELHI); (III) CIT GUJARAT II V. ALEMBIC GLASS INDUSTRIES LTD. (19 76) 103 ITR 715 (GUJ); ITA NO.711/B/03 ETC. PAGE 49 OF 52 (IV) C.T.DESAI V. CIT (1979) 120 ITR 240 (KAR) (V) CIT V. H.C.SHANKARAPPA 234 ITR 15 (KAR) (VI) L.K.TRUST V. CIT 19 DTR (SC) 284; & (VII) (2009) 120 TTJ (AHD) 9SB) 721 16.1.3. WE HAVE DULY CONSIDERED THE RIVAL SUBM ISSIONS AND ALSO PERUSED THE RELEVANT RECORDS. 16.1.4. LET US HAVE A GLIMPSE OF THE VARIOUS JUDICI AL PRONOUNCEMENTS ON THE ISSUE: (I) CIT GUJARAT II V. ALEMBIC GLASS INDUSTRIES LTD. (19 76) 103 ITR 715 (GUJ ): THE HONBLE HIGH COURT HAS DULY CONSIDERING THE IS SUE AT LENGTH OBSERVED IN ITS WISDOM THUS (A) THAT IT COULD NOT BE DISPUTED THAT THE BUSINES S ORGANIZATION ADMINISTRATION AND FUND OF BOTH THE UNITS OF THE AS SESSEE NAMELY THE UNIT AT BARODA AND THE UNIT AT BANGALORE WERE COMMON. THE RE WAS ONE COMPANY WHICH CONTROLLED THE ADMINISTRATION OF BOTH THE UNI TS WHICH SUPPLIED THE STAFF TO BOTH THE UNITS AND WHICH MANAGED THE WHOLE OF THE BUSINESS ORGANIZATION OF BOTH THE UNITS. THE PRODUCTION OF BOTHER THE UNIT WAS CONSIDERED THE PRODUCTION OF THE ASSESSEE COMPANY I TSELF. IN THE APPLICATION FOR THE PROPOSED ESTABLISHMENT OF THE NEW UNIT AT B ANGALORE MADE BY THE ASSESSEE TO THE GOVERNMENT OF INDIA ON DECEMBER 8 1959 AND IN THE APPLICATION FOR LICENCE SUBMITTED BY THE ASSESSEE T O THE GOVT. IT WAS STATED THAT THE NEW UNIT AT BANGALORE WAS NOTHING BUT AN E XPANSION OF THE EXISTING BUSINESS. THUS THERE WAS COMPLETE INTER-CONNECTIO N INTER-LACING AND INTER- DEPENDENCE OF BOTH THE UNITS WHICH IS THE TEST LAI D DOWN FOR DETERMINING WHETHER TWO LINES OF BUSINESSES CONSTITUTE THE SAM E BUSINESS WITHIN THE MEANING OF SECTION 24(2)BY THE SUPREME COURT IN THE CASE OF CIT V PRITHVI INSURANCE CO. LTD. (1967) 63 ITR 632 AND AGAIN APPR OVED BY THE SUPREME COURT IN PRODUCE EXCHANGE CORPN. LTD. CIT (1970) 77 ITR 739. (II) IN THE CASE OF CIT V. H.C. SHANKARAPPA REPORTED IN (1998) 234 ITR 15 THE JURISDICTIONAL HONBLE HIGH COURT WAS VERY EMPH ATIC IN ITS RESOLVES THAT WHEN THE ASSESSEE IN THE LINE OF EXHIBITING FILMS WAS CONSTRUCTING A NEW ITA NO.711/B/03 ETC. PAGE 50 OF 52 CINEMA THEATRE THE CONSTRUCTION DID NOT CONSTITUTE A NEW BUSINESS AND THUS INTEREST ON AMOUNTS BORROWED FOR CONSTRUCTION OF NEW THEATRE WAS REVENUE EXPENDITURE; (III) YET AN ANOTHER RULING IN THE CASE OF C.T.DESAI V. CIT REPORTED IN (1979) 120 ITR 240 THE HONBLE COURT HAD OBSERVED THAT THE MONEY BORROWED FOR THE PURPOSE OF ACQUIRING LEASEHOLD RIG HT IN THE THEATRE AND THE CAPITAL BORROWED WAS FOR THE PURPOSES OF BUSINESS A ND AS SUCH THERE WAS NO SCOPE FOR TREATING INTEREST PAID FOR CAPITAL FOR EXISTING BUSINESS AS SEPARATE FROM THAT PAID FOR ACQUISITION OF ANOTHER BUSINESS ASSET. THERE WAS A CLEAR NEXUS BETWEEN THE CAPITAL BORROWED AND THE ACQUISITION OF BUSINESS ASSET AND THUS THE INTEREST PAID WAS AN ALLOWABLE DEDUCTION U/S 36(1)(III) OF THE ACT. 16.1.5. AS RIGHTLY HIGHLIGHTED BY THE LD. CIT(A) THAT THREE CONDITIONS ARE TO BE FULFILLED TO AVAIL DEDUCTION U/S 36(1)(III) O F THE ACT NAMELY; (I) THE CAPITAL MUST HAVE BEEN BORROWED BY THE ASSESSEE ; (II) THE BORROWED CAPITAL ESSENTIALLY BE FOR THE PURPOSE OF BUSINESS; & (III) THE ASSESSEE SHOULD HAVE PAID THE INTEREST FOR THE BORROWED CAPITAL. 16.1.6. SINCE THE ABOVE CONDITIONS HAVE BEEN FU LFILLED BY THE ASSESSEE THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DISALLOW ING THE FINANCIAL CHARGES AND UPFRONT SYNDICATE FEES AS CLAIMED BY THE ASSESS EE FOR THE AYS 1997- 98 AND 1999-00 IN QUESTION. IN OTHER WORDS WE UPH OLD THE STAND OF THE LD. CSIT(A) FOR THE AYS 1997-98 & 1999-00 ON THIS COUNT . ITA NO.711/B/03 ETC. PAGE 51 OF 52 16.1.7. WE WOULD LIKE TO MENTION HERE THAT WHI LE ARRIVING AT THE ABOVE CONCLUSION WE HAVE TAKEN INTO ACCOUNT THE CASE LAW S ON WHICH THE REVENUE HAS PLACED RELIANCE. 17. FOR THE AY 1997-98 THE REVENUES OTHER GRIEVANCE WAS THAT THE CIT (A) HAD ERRED IN DIRECTING THE AO TO EXAMI NE LEASE RENT PAID WHICH WAS DISALLOWED BY THE AO AND TO FIND OUT THE INTERE ST PORTION IN IT AND TO ALLOW THE SAME AS FINANCE CHARGES. 17.1. WE HAVE SINCE TREATED THE LEASE RENTS CLAIMED BY THE ASSESSEE AS THE INTERESTS PAID FOR THE FINANCIAL LOANS AVAIL ED BY THE ASSESSEE WHICH ARE ALLOWED AS ALLOWABLE DEDUCTIONS FOR THE RESPECT IVE ASSESSMENT YEARS (1997-98 98-99 AND 99-00) UNDER DISPUTE WE DISMISS THIS GROUND AS REDUNDANT . 18. BEFORE PARTING WITH THIS BENCH RECORDS ITS SINCERE APPRECIATION AND KUDOS TO SHRI JASON P. BOAZ THE LD. D.R AND TO SHRI S. VENKATESAN THE LD. A.R AS WELL FOR THEIR WELL SUST AINED EFFORTS AND IMPECCABLE ARGUMENTS PUT-FORTH TO DRIVE HOME THEIR RESPECTIVE POINTS DURING THE ENTIRE COURSE OF HEARING. 19. IN THE RESULT I. ASSESSEES APPEALS - (I) FOR THE A.Y 1997-98 AND 1998-99 ARE PARTLY ALLOWED ; & (II) FOR THE A.Y 1999-2000 IS ALLOWED . II. THE REVENUES APPEALS FOR THE A.YS 1997-98 AND 1999-00 ARE DISMISSED . ITA NO.711/B/03 ETC. PAGE 52 OF 52 PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF FEBRUARY 2010. SD/- SD/- ( K.P.T. THANGAL ) (A. MOHAN ALANKAMONY ) VICE PRESIDENT ACCOUNTANT MEMBER BANGALORE DATED THE 10 TH FEBRUARY 2010. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE.