In my own appeal the Tribunal has taken away a deduction the Assessing Officer had already allowed me — can it do that?
No. The Supreme Court held that the Tribunal has no power to enhance an assessment or to take back a benefit the Assessing Officer had granted, applying Hukumchand Mills. Depreciation had been allowed on 42,000 bottles; the Tribunal and the High Court, by holding the whole transaction to be a financial arrangement rather than a lease, took that benefit away, and that was not permissible. The disallowance of Rs 18,04,572 was deleted. On the second transaction the Court upheld the concurrent finding that the lease was a sham and confirmed the disallowance of Rs 30,17,122. The appeal was partly allowed.
Decided by the Supreme Court (Supreme Court of India — S.H. Kapadia and H.L. Dattu JJ (judgment by Kapadia J)) on 2009-02-12, reported as AIRONLINE 2009 SC 385; Civil Appeal No. 955 of 2009. It bears on section 254(1), section 32(1)(ii) of the Income Tax Act 1961, in Appeals and Assessment & Scrutiny matters.
Two things make this worth citing. First, the limit on the Tribunal's appellate power: in the assessee's own appeal it cannot leave the assessee worse off than the assessment left him, which is the practical answer to a Departmental submission that invites the Tribunal to re-open a matter already decided in the assessee's favour. Second, an internal consistency point the Court makes on the way — if depreciation stands for part of the assets, the transaction cannot simultaneously be a lease for that part and a financial arrangement for the rest. The second half of the judgment is a caution: where the documents themselves contradict the arrangement, as a sub-lease dated before the lease did here, a sham finding is a finding of fact and no alternative claim to be taxed only on the interest element survives it.
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For assessment year 1991-92 the assessee traded in lamination, binding and punching machines and also carried on leasing. Two transactions were in issue. Under the first, dated 15 February 1991, it bought 5,46,000 soft drink bottles from M/s Glass & Ceramic Decorators for Rs 19,54,953 and leased them to M/s Coolade Beverages Pvt. Ltd., the bottles being supplied directly by the manufacturer. The Assessing Officer found that only 42,000 bottles had reached Coolade by 31 March 1991 and the rest between 3 and 18 April 1991, so she restricted depreciation to 42,000 bottles and disallowed Rs 18,04,572. On appeal the Commissioner (Appeals) formulated a user test and remanded; on remand the Assessing Officer held that all 5,46,000 bottles had been paid for and despatched before 31 March 1991, and that finding was never challenged. When the appeals reached the Tribunal it held that, the lease not having been renewed and the bottles not having been returned on expiry, the transaction was a financial arrangement and not a lease, and disallowed the depreciation altogether; the Delhi High Court confirmed this on 22 September 2006. Under the second transaction, a lease dated 15 March 1991 between the assessee as lessor and M/s Aravali Leasing Ltd as lessee, with a sub-lease to M/s Unikol Bottlers Ltd dated 8 March 1991 and bottles manufactured by M/s Arizona Printers & Packers, the Assessing Officer held the transaction unproved and a sham: nobody owned the liability for transport charges though the lease placed it on Aravali, there was no evidence of who transported the bottles, and the sub-lease predated the head lease. She disallowed Rs 30,17,122. The Tribunal and the High Court upheld that concurrently. Of a total depreciation claim of Rs 1,80,30,489 the Assessing Officer had allowed Rs 1,32,08,795.
The civil appeal was partly allowed, with no order as to costs. The disallowance of Rs 18,04,572 under the first transaction was deleted and the disallowance of Rs 30,17,122 under the second was upheld. On the first transaction, the Assessing Officer had granted depreciation on 42,000 bottles, and the effect of the impugned judgment was that the Department took that benefit away, which is not permissible in law. The Court also pointed to an inconsistency: if depreciation is to be granted for 42,000 bottles under the transaction of 15 February 1991, it cannot be said that those bottles fell within the lease and the balance within a so-called financial arrangement. Further, the Assessing Officer's finding on remand that all 5,46,000 bottles were sold before 31 March 1991 had become final, never having been challenged, so the Department erred in disallowing the depreciation. On the second transaction the Court found no infirmity in the concurrent findings of fact and held the transaction of 15 March 1991 not proved. The alternative submission that, if it were a financial arrangement, only the interest embedded in the lease rentals could be taxed, and that the matter should be remitted for recalculation, was rejected because the concurrent finding was that the transaction was a sham and unproved.
The limit on the Tribunal's power came from Hukumchand Mills, where this Court held that under section 33(4) of the 1922 Act, the equivalent of section 254(1) of the 1961 Act, the Tribunal was not authorised to take back a benefit granted to the assessee by the Assessing Officer, and has no power to enhance the assessment. Applying that ratio, the withdrawal of depreciation already allowed on 42,000 bottles could not stand. The Court reinforced the conclusion with the logical point that a single transaction cannot be treated as a lease for part of the goods and a financial arrangement for the rest, and with the finality of the unchallenged remand finding. On the second transaction the Court separated two questions the assessee's argument had run together: appropriation of the bottles to a particular contract is one thing, the nature of the transaction another, and the appeal concerned the latter. The documents themselves defeated the assessee. The sub-lease of 8 March 1991 preceded the lease of 15 March 1991, so Aravali could not have sub-leased rights it had not yet acquired; nothing in the lease showed it commenced from an earlier date, recorded any prior arrangement or practice, and on the contrary it recited commencement from 15 March 1991; the sub-lease described Aravali as absolute owner of the bottles; and the lease forbade any sub-lease without the lessor's permission, which was never produced. The evidence of the manufacturer, the 'put to use' certificate, the sub-lessee's acknowledgment and the transport agent's commission went to despatch and delivery, not to the genuineness of the leasing arrangement.
the Tribunal was not authorized to take back the benefit granted to the assessee by the AO. The Tribunal has no power to enhance the assessment.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that the Tribunal has no power to enhance an assessment or to take back a benefit the Assessing Officer had granted, applying Hukumchand Mills. Depreciation had been allowed on 42,000 bottles; the Tribunal and the High Court, by holding the whole transaction to be a financial arrangement rather than a lease, took that benefit away, and that was not permissible. The disallowance of Rs 18,04,572 was deleted. On the second transaction the Court upheld the concurrent finding that the lease was a sham and confirmed the disallowance of Rs 30,17,122. The appeal was partly allowed. This was decided by the Supreme Court (Supreme Court of India — S.H. Kapadia and H.L. Dattu JJ (judgment by Kapadia J)) and bears on section 254(1), section 32(1)(ii) of the Income Tax Act 1961. It is reported as AIRONLINE 2009 SC 385; Civil Appeal No. 955 of 2009. Two things make this worth citing. First, the limit on the Tribunal's appellate power: in the assessee's own appeal it cannot leave the assessee worse off than the assessment left him, which is the practical answer to a Departmental submission that invites the Tribunal to re-open a matter already decided in the assessee's favour. Second, an internal consistency point the Court makes on the way — if depreciation stands for part of the assets, the transaction cannot simultaneously be a lease for that part and a financial arrangement for the rest. The second half of the judgment is a caution: where the documents themselves contradict the arrangement, as a sub-lease dated before the lease did here, a sham finding is a finding of fact and no alternative claim to be taxed only on the interest element survives it. If it applies to you, the first step is this: If the Tribunal proposes to disturb relief already granted in the assessment, take the Hukumchand Mills point at once: it has no power to enhance or to withdraw a benefit the Assessing Officer gave.
For assessment year 1991-92 the assessee traded in lamination, binding and punching machines and also carried on leasing. Two transactions were in issue. Under the first, dated 15 February 1991, it bought 5,46,000 soft drink bottles from M/s Glass & Ceramic Decorators for Rs 19,54,953 and leased them to M/s Coolade Beverages Pvt. Ltd., the bottles being supplied directly by the manufacturer. The Assessing Officer found that only 42,000 bottles had reached Coolade by 31 March 1991 and the rest between 3 and 18 April 1991, so she restricted depreciation to 42,000 bottles and disallowed Rs 18,04,572. On appeal the Commissioner (Appeals) formulated a user test and remanded; on remand the Assessing Officer held that all 5,46,000 bottles had been paid for and despatched before 31 March 1991, and that finding was never challenged. When the appeals reached the Tribunal it held that, the lease not having been renewed and the bottles not having been returned on expiry, the transaction was a financial arrangement and not a lease, and disallowed the depreciation altogether; the Delhi High Court confirmed this on 22 September 2006. Under the second transaction, a lease dated 15 March 1991 between the assessee as lessor and M/s Aravali Leasing Ltd as lessee, with a sub-lease to M/s Unikol Bottlers Ltd dated 8 March 1991 and bottles manufactured by M/s Arizona Printers & Packers, the Assessing Officer held the transaction unproved and a sham: nobody owned the liability for transport charges though the lease placed it on Aravali, there was no evidence of who transported the bottles, and the sub-lease predated the head lease. She disallowed Rs 30,17,122. The Tribunal and the High Court upheld that concurrently. Of a total depreciation claim of Rs 1,80,30,489 the Assessing Officer had allowed Rs 1,32,08,795. The matter was decided on 2009-02-12 by the Supreme Court (Supreme Court of India — S.H. Kapadia and H.L. Dattu JJ (judgment by Kapadia J)). On those facts the Supreme Court held as follows. The civil appeal was partly allowed, with no order as to costs. The disallowance of Rs 18,04,572 under the first transaction was deleted and the disallowance of Rs 30,17,122 under the second was upheld. On the first transaction, the Assessing Officer had granted depreciation on 42,000 bottles, and the effect of the impugned judgment was that the Department took that benefit away, which is not permissible in law. The Court also pointed to an inconsistency: if depreciation is to be granted for 42,000 bottles under the transaction of 15 February 1991, it cannot be said that those bottles fell within the lease and the balance within a so-called financial arrangement. Further, the Assessing Officer's finding on remand that all 5,46,000 bottles were sold before 31 March 1991 had become final, never having been challenged, so the Department erred in disallowing the depreciation. On the second transaction the Court found no infirmity in the concurrent findings of fact and held the transaction of 15 March 1991 not proved. The alternative submission that, if it were a financial arrangement, only the interest embedded in the lease rentals could be taxed, and that the matter should be remitted for recalculation, was rejected because the concurrent finding was that the transaction was a sham and unproved.
The limit on the Tribunal's power came from Hukumchand Mills, where this Court held that under section 33(4) of the 1922 Act, the equivalent of section 254(1) of the 1961 Act, the Tribunal was not authorised to take back a benefit granted to the assessee by the Assessing Officer, and has no power to enhance the assessment. Applying that ratio, the withdrawal of depreciation already allowed on 42,000 bottles could not stand. The Court reinforced the conclusion with the logical point that a single transaction cannot be treated as a lease for part of the goods and a financial arrangement for the rest, and with the finality of the unchallenged remand finding. On the second transaction the Court separated two questions the assessee's argument had run together: appropriation of the bottles to a particular contract is one thing, the nature of the transaction another, and the appeal concerned the latter. The documents themselves defeated the assessee. The sub-lease of 8 March 1991 preceded the lease of 15 March 1991, so Aravali could not have sub-leased rights it had not yet acquired; nothing in the lease showed it commenced from an earlier date, recorded any prior arrangement or practice, and on the contrary it recited commencement from 15 March 1991; the sub-lease described Aravali as absolute owner of the bottles; and the lease forbade any sub-lease without the lessor's permission, which was never produced. The evidence of the manufacturer, the 'put to use' certificate, the sub-lessee's acknowledgment and the transport agent's commission went to despatch and delivery, not to the genuineness of the leasing arrangement. In the words reproduced by the source cited on this page: "the Tribunal was not authorized to take back the benefit granted to the assessee by the AO. The Tribunal has no power to enhance the assessment."
It was decided by the Supreme Court on 2009-02-12 and is reported as AIRONLINE 2009 SC 385; Civil Appeal No. 955 of 2009. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 254(1), section 32(1)(ii), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The civil appeal was partly allowed, with no order as to costs. The disallowance of Rs 18,04,572 under the first transaction was deleted and the disallowance of Rs 30,17,122 under the second was upheld. On the first transaction, the Assessing Officer had granted depreciation on 42,000 bottles, and the effect of the impugned judgment was that the Department took that benefit away, which is not permissible in law. The Court also pointed to an inconsistency: if depreciation is to be granted for 42,000 bottles under the transaction of 15 February 1991, it cannot be said that those bottles fell within the lease and the balance within a so-called financial arrangement. Further, the Assessing Officer's finding on remand that all 5,46,000 bottles were sold before 31 March 1991 had become final, never having been challenged, so the Department erred in disallowing the depreciation. On the second transaction the Court found no infirmity in the concurrent findings of fact and held the transaction of 15 March 1991 not proved. The alternative submission that, if it were a financial arrangement, only the interest embedded in the lease rentals could be taxed, and that the matter should be remitted for recalculation, was rejected because the concurrent finding was that the transaction was a sham and unproved. It arises in Appeals and Assessment & Scrutiny matters, on section 254(1), section 32(1)(ii) of the Income Tax Act 1961, and was decided by Supreme Court of India — S.H. Kapadia and H.L. Dattu JJ (judgment by Kapadia J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check whether any finding of the Assessing Officer on remand has gone unchallenged; the finding here that all the bottles were despatched before the year end had become final and decided the point. Get the chronology of lease documents right — a sub-lease predating the head lease was the tell-tale circumstance that sank the second transaction. Do not rely on an alternative case that only the interest element is taxable where the transaction has been found to be a sham; the Court refused to remit on that footing.
Still good law. It applies Hukumchand Mills, a decision of this Court on the corresponding provision of the 1922 Act, rather than departing from it, and the source page records about thirty citing decisions. Nothing in the judgment suggests any doubt about the proposition. Whether later decisions have qualified it, and how it sits with the Commissioner (Appeals)' express power of enhancement under section 251, was not checked; assessed from the judgment alone. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line lists section 254 generally; the operative provision applied is section 254(1), and section 32(1)(ii), under which the depreciation was claimed, has been added. The judgment does not set out the Tribunal's or the High Court's reasoning on the first transaction beyond the conclusion that it was a financial arrangement, so the Court's answer is directed at the outcome rather than at that reasoning. The bench is recorded on the source page as H.L. Dattu and S.H. Kapadia, with the judgment authored by Kapadia J. No reporter citation beyond AIRONLINE is carried by the source. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The civil appeal was partly allowed, with no order as to costs. The disallowance of Rs 18,04,572 under the first transaction was deleted and the disallowance of Rs 30,17,122 under the second was upheld. On the first transaction, the Assessing Officer had granted depreciation on 42,000 bottles, and the effect of the impugned judgment was that the Department took that benefit away, which is not permissible in law. The Court also pointed to an inconsistency: if depreciation is to be granted for 42,000 bottles under the transaction of 15 February 1991, it cannot be said that those bottles fell within the lease and the balance within a so-called financial arrangement. Further, the Assessing Officer's finding on remand that all 5,46,000 bottles were sold before 31 March 1991 had become final, never having been challenged, so the Department erred in disallowing the depreciation. On the second transaction the Court found no infirmity in the concurrent findings of fact and held the transaction of 15 March 1991 not proved. The alternative submission that, if it were a financial arrangement, only the interest embedded in the lease rentals could be taxed, and that the matter should be remitted for recalculation, was rejected because the concurrent finding was that the transaction was a sham and unproved.
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