Holding

The Tribunal cannot withdraw depreciation benefits already granted by the Assessing Officer, and the AO’s remand finding on the first transaction is final, while the second transaction is a sham and not eligible for depreciation.

Summary

The assessee, a lessor of soft‑drink bottles, claimed depreciation under Section 32(1)(ii) of the Income‑Tax Act for two lease transactions dated 15‑Feb‑1991 and 15‑Mar‑1991. The Assessing Officer (AO) allowed depreciation only for 42,000 bottles out of 5,46,000 for the first transaction and disallowed depreciation for the second, deeming it a sham. The Tribunal and High Court upheld the disallowance for both transactions, but the AO, on remand, later concluded that all 5,46,000 bottles were sold before 31‑Mar‑1991, granting 100% depreciation for the first transaction, a finding that was not challenged. The Supreme Court held that the Tribunal cannot retract the benefit granted by the AO and that the AO’s remand finding on the first transaction is final, so the disallowance of Rs 18,04,572 must be set aside. However, the Court affirmed the AO’s finding that the second transaction was not proved and was a sham, upholding the disallowance of Rs 30,17,122. Consequently, the appeal was partly allowed, restoring depreciation for the first transaction while maintaining the disallowance for the second.

Issues considered

The scope of the Tribunal’s power to alter depreciation benefits granted by the Assessing Officer.
Whether the AO’s remand finding that all bottles were sold before 31‑Mar‑1991 is final and binding.
Whether the transaction dated 15‑Mar‑1991 constitutes a valid lease or a sham, and thus qualifies for depreciation.

Legislation cited

Income Tax Act, 1961s. 254(1), s. 32(1)(ii), s. 33(4)

Subjects

depreciationincome taxlease transactionfinancial arrangementassessment ordertribunal powerssham transactionSection 32Section 33appeal

Judgment

[2009] 2 S.C.R. 213

MCORP GLOBAL PVT. LTD. A
v.
COMMISSIONER OF INCOME-TAX, GHAZIABAD
Civil Appeal No. 955 of 2009
FEBRUARY 12, 2009
B
[S.H. KAPADIA AND H.L.DATTU, JJ.]
Income Tax Act, 1961 :
....J
Depreciation - claim for - In respect of two lease trans-
c
actions by the assessee- In respect of first transaction initially
partly denied by AO but on remission of the matter assessee
held to be 100% entitled- Order of AO on remission not cha/-
Jenged - The order of AO denying depreciation confirmed by
Tribunal and High Court - In respect of second transactions,
depreciation denied by AO and the appellate court~ holding
D
+ the same to be a sham- On appeal, held: Denial of deprecia-
tion in respect of first transaction not correct - Tribunal has no
power to enhance the assessment- The order of AO after re-
mand granting depreciation also attained finality - Second
transaction since not proved and since held to be a sham,
denial of depreciation, correct. E

Assessing Officer disallowed claim of the assessee
a lessor of soft drink bottles, for depreciation, in respect
of two transactions i.e. regarding lease dated 15.2.1991
and regarding lease dated 15.3.1991. F
In respect of first transaction, as regards lease of
5,46,000 bottles, depreciation was allowed by AO only in
respect of 42,000 bottles having been received prior to
31.3.1999 i.e. ttie relevant period. The depreciation claim
of assessee was also disallowed by Income Tax Appel- G
..,,( late Tribunal and by High Court. During pendency of the
~
appeal before Tribunal, the case having been remanded
by CIT(A), the AO held that the assessee was entitled to

213 H
214 SUPREf\/1E COUR-r f~t:F'()R1··~ [2009] 2 S.C.R.

A 100% depreciation. That findir;g of AO has not been chal-
lenged so far. ·~

In respect of the second transaction, AO denied de-
preciation, holding that the lease deed was not proved
and in fact it was a sham. The said finding was accepted
B by the Tribunal and the High Court. Hence, the present
appeal in respect of both the transactions.
Partly allowing the appeal, the Court
..... " ..
HELD : 1.1 The Tribunal is not authorized to take back
c the benefit granted to the assessee by the AO. The Tribu-
nal has no power to enhance .the assessment. In the
present case, the AO had granted depreciation in respect
of 42,000 bottles out of the total number of bottles
(5A6,000), by reason of the impugned judgment. That
D benefit is sought to be taken away by the Department, _._
which is not permissible in law. [Para 6) [218-8, CJ
1.2 According to the impugned judgments of the High
Court and the Tribunal, the transaction dated 15.2.1991
was a financial transaction and not a lease. If deprecia-
E tion is to be granted for 42,000 bottles under transaction
dated 15.2.1991 then it cannot be said that 42,000 bottles
came within the lease dated 15.2.1991 and the balance
came within the so-called financial arrangement. In the .,_.
I

circumstances, the benefit of depreciation given to the
F assessee by the AO in respect of 42,000 bottles out of
5,46,000 bottles cannot be withdrawn by the Department
and to that extent alone the assessee succeeds in this
civil appeal.[Para 7) [ 218-D, E, F]
1.3 CIT(A) had remitted the matter to the AO who on
G
remand came to the conclusion that all 5,46,000 bottles
stood sold before 31.3.1991. This finding of fact has be- \- >-
I
come final. It has not been challenged. Hence, the Depart-
ment has erred in disallowing depreciation of Rs.
18,04,572/-. [Para 7] [218-F, G]
H
MCORP GL08AL PVT. LTO. V. 21 ~
COMMISSIONER OF INCOME-TAX, GHAZIABAD

Hµkumchand Mills 4td. vs. CIT (1997) 63 ITR 232 ..,.. re- A
lied on.
2. 1 The a$se~!rne has ngt proved the transaction
dated 16.3. 1991. Th~ qµe&tion (lf '1appropriation" of the
bottles to a particular c;ontrnc.t is different from the con,.
cept relating to the nature Qf the transaction, !n the present B
case, ~ub .. lease is dated 8.3.1~l!1 between le~see ~nd syb,,
lessee precede$ the l~~se ~~tact 1~-3,1991 between the,
assessee (let1$or) and les~e~, As rj~fltly q~~~1ion~q l?Y
the AO as to lessee could tiave entered into a sub-lease
on 8.3.1991 when it had not acquired leasehold rights till c
16,3.1991 from the assessee as the lessor. Moreover, there
Is nothing in the alleged lease deed dated 15.3.1991 indi-
cating commencement of the !e~s@ from a prior date.
There Is nothing In the $O-called lease dated 15.3.1991 as
to the arrangement between the parties prior to 15.3.1991.
There Is nothing. indicating any prior practice. On the D
contrary, the ao·"Called lea1~ dated 1 !$.S.1991 recites tllat
It shall commence cmly from 1fi,3.19$1. Me.r~over, "'"~@r
the sub ..Jeaa~ It Is stated thctt the lessee i$ the ab$olute
owner of the bottles. l.il$tly, the so-called !ease dated
16,3.1991 &tipuh1ted that the lessee, shall have no right, f:
title or Interest to creat@ a 1u~-lea$e without the permis-
sion of tho le11or. No fHH~h permi$:sion has been pro-
duced. For the aforeatated re~son$, there is no infirmity
In the concurrent findings of faat reoorded by the authori ..
ties below.[Pera 11] [ 220,p, G. H: 2~1"A, la, C, D, ~l F
2.2 The matter cannot be remitted for recalculation.
The concurrent finding shows that transaction dated
1S.3.1991 Is a aham. The fincUng shows that the transac-
tion had not been proved by the assessee .. [Para 12]
[221·G. H; 222·A] G
Ca1e Law Refernece
(1967) 63 ITR 232 Relied on Para 6
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 955
of 2009
H
216 SUPREME COURT REPORTS [2009] 2 S.C.R.

A . From the Judgement and Order dated 22.9.2006 of the
High Court of Delhi at New Delhi in I.TA. No. 164 of 2004.
Ajay Vohra, Kavita Jha and Sandeep Karhail (for Bhargava
V. Desai) for the Appellant.
B V. Shekhar, 11. Raghavendra Rao, Shweta Garg, Ashish
Gopal Garg and B.V. Balaram Das, with him for the Respon-
dent.
The Judgement of the Court was delivered by
-·- .
c S.H. KAPADIA, J.
1. Leave granted.
2. This civil appeal filed by the assessee is directed
against judgment and order dated 22.9.2006 in ITA No. 164/04
by the Delhi High Court. By the impugned judgment, confirming
D
the decision of the Tribunal, the High Court has held that the -~

appellant (assessee) is not entitled to claim depreciation under
Section 32(1)(ii) of the Income-tax Act, 1961 ("1961 Act" for
short) in respect of two separate transactions dated 15.2.1991
and 15.3.1991. The impugned judgment has been rendered in
E respect of Assessment Year 1991-92 (corresponding to the pre-
vious year ending 31.3.1991).
(A) Facts Regarding Lease dated 15.2.1991 (Transaction ,_
I
No. I):
F 3. Before coming to the facts, the following is the relation-
ship between the parties:
- Mis Glass & Ceramic Decorators was the manufacturer
of soft drink bottles.
G
- Assessee was the 'lessor'.
- M/s Coolade Beverages Pvt. Ltd. was the 'lessee'.
4. During the relevant assessment year, the assessee car-
ried on the business of trading in lamination machines & bind-
H
MCORP GLOBAL PVT. LTD. V. COMMISSIONER OF 217
INCOME-TAX, GHAZIABAD [S.H. KAPADIA, J.]
ing and punching machines. In addition, it was also engaged in A
the leasing business. During the year in question, the asses-
see had bought 5,46,000 soft drink bottles from Mis Glass &
Ceramic Decorators worth Rs. 19,54,9531-. The bottles were
directly supplied to Mis Coolade Beverages Pvt. Ltd. ("Mis
Coolade" for short) in terms .of Lease dated 15.2.1991. Vide B
Assessment Order dated 28.3.1994, the AO found that Mis
Coolade had received only 42,000 bottles out of the total of
5,46,000 bottles receivable by them from the assessee and that
... ~
the remaining bottles stood received after 31.3.1991, i.e., be-
tween the period 3.4.1991 and 18.4.1991 and consequently, c
the AO restricted the depreciation only to 42,000 bottles and
consequently dis-allowed the depreciation of Rs. 18,04,5721-.
It may be mentioned that in Appeal the CIT(A) after formulating
the "User Test" remanded the matter to the AO who on remand
held that all 5,46,000 bottles stood paid for and dispatched
._ D
before 31.3.1991 and, therefore, the assessee was entitled to
100% depreciation on all 5,46,000 bottles. This finding was
given when the Appeal(s) was pending before the !TAT. How-
ever, till date the findings of the AO (on remand) has not been
challenged. To complete the chronology of events, when the
Appeal (s) came before the Tribunal, it was held that since the E
lease was not renewed and since the bottles were not returned
on expiry the transaction in question was only a financial ar-
-, rangement and not a Lease, hence, ITAT dis-allowed the de-
preciation claim of the assessee which finding stood confirmed
by the impugned judgment, hence this Civil Appeal. F
5. At this stage, it may be noted that out of the total claim
for depreciation of Rs. 1,80,30,489/- (in respect of both the trans-
actions), as claimed by the assessee, the AO disallowed de-
preciation of Rs. 18,04,5721- in respect of the First Transaction
and depreciation of Rs. 30,17,122 under the Second Transac-
G
-J tion. In all, she disallowed depreciation of Rs. 48,21 ,694/~ in the
first round. In other words, the AO allowed depreciation in re-
spect of both the transactions amounting to Rs. 1,32,08, 795
as against the claim of Rs. ,80,30,489/-.
H
218 SUPREME COURT REPORTS [2009] 2 S.C.R.

A 1'1!ndlngs:
6. In the case of Hukumchand Mills Ltd. v. CIT reported in
(1967) 63 ITR 232 this Court has held that under Section 33(4)
of the Income-tax Act. 1922 (equivalent to Section 254(1) of the
1961 AeO, the Tribunal was not authorized to take back the ben-
~ efit Qf~ntead tQ t!w ~asessae by the AO. The Tribunal has no
pow~r to enhance the assessment. Applying the ratio of the said
jµdgm~nt tq the present case, we are of the view that, in this
case, the AO hai;:J granted depreciation in respect of 42,000
bottles out of the total number of bottles (5,46,000), by reason
C of the impugned judgment. That benefit is sought to be taken
away by the Department, which is not permissible in law. This is
the infirmity in the impugned judgment of the High Court and the
Tribunal.

7. There is one more aspect which needs to be mentioned.
0 According to the impugned judgments of the High Court and
the Tribunal, the transaction dated 15.2.1991 was a financial
transaction and not a lease. rfdepreciation is to be granted for
42,000 bottles under transaction dated 15.2.1991 then it can-
not be ~aid that 42,000 bottles came within the lease dated
E 15.2.1 ~91 and the balance came within the so-called financial
arrang~ment. In the circumstances, we hold that the benefit of
depreciation given to the assessee by the AO in respect of
42.000 bottle$ out of 5,46,000 bottles cannot be withdrawn by
the Department and to that extent alone the assessee succeeds
r in this civil appeal. La§tly, ills stated above, In this case the CIT(A)
had remitted the matter to the AO who on remand came to the
conclusion that all 5,46,000 bottles stood sold before 31.3.1991.
This find in~ of fact has become final. It has not been challenged.
Hence, the Department has erred in disallowing deprecia~
G tion of Ra. 18,04,572./-.
.\,
t_BJ Fa._!lt§ B_egarsting b_~_a,se, dated_ 15~3, 1991 (Transaction
Ne=- fl):
8. Before coming to the facts, the relationship of the par-
H ties, namely, stated:
MCORP GLOBAL PVT. LTD. V. COMMISSIONER OF 219
INCOME-TAX, GHAZIABAD [S.H. KAPADIA, J.]

- Assessee was the 'lessor' A
- Mis Aravali Leasing Ltd. was the 'lessee'
- Mis Unikel Bottlers Ltd. was the 'sub-lessee'
- Mis Arizona Printers & Packers was the 'manufacturer'
of the bottles B
_,
9. On 15.3.1991, lease was executed between the asses-
see as lessor and Mis Aravali Leasing as lessee whereas there
... ;
was a sub-lease between Mis Aravali Leasing and Mis Unikol
Bottlers dated 8.3.1991. The AO came to the conclusion that c
transaction dated 15.3.1991 was not proved. It was a sham.
The reasons given by the AO were as follows. Firstly, none of
the parties owed up the liability to pay transport charges though
in terms of the lease the liability to pay transport charges was
undertaken by MlsAravali Leasing. Secondly, no evidence was
D
brought on record as to who transported the bottles from the
... manufacturer, Mis Arizona Printers and Packers, to Mis Unikol
....i; ·-· Bottlers (sub-lessee). Lastly, the AO had doubted transaction
dated 15.3.1991 on the ground that the sub-lease between Mis
Aravali Leasing and Mis Unikol Bottlers stood dated 8.3.1991,
i.e., before acquiring the rights to the said bottles (which right E
stood acquired by Mis Aravali Leasing only on 15.3.1991 ).
Therefore, the AO came to the conclusion that the transaction
was not proved by the assessee and, therefore, the assessee
.., was not entitled to depreciation. Accordingly, the AO disallowed
the depreciation amounting to Rs. 30, 17, 1221-. This finding has F
been accepted by the Tribunal and the High Court. It is a con-
current finding.
Findings:
10. It was argued vehemently on behalf of the assessee G
that the findings given by the AO were pervArse. It was urged
-I that the transport charges were, in fact, paid by Mis Unikol Bot-
tiers, who could not produce evidence as there was a lock-out/
closure in its factory at the relevant time. According to the as-
sessee, the evidence of the manufacturer, Mis Arizona Print- H
220 SUPREME COURT REPORTS [2009) 2 S.C.R.

A ers, clearly shows that bottles were manufactured before
31.3.1991 and they were delivered to Mis Unikel Bottlers di-
rectly by them. According to the said evidence of the manufac-
turer, the transport bills were supposed to be with Mis Unikel
Bottlers, who were responsible for payment thereof. Learned
B counsel appearing for the assessee relied upon the evidence
. of Mis Arizona Printers at pp. 105-106 of the SLP paper book
to show that, according to Mis Arizona Printers, the bottles were
delivered directly to the sub-lessee, Mis Unikol Bottlers. Reli-
ance was also placed on the "use certificate" furnished by Mis
C Unikol Bottlers to Mis Arizona Printers to show that the bottles
stood dispatched prior to 31.3.1991. Further, on behalf of as-
sessee reliance was placed on the evidence of Mis Khanna
Goods Transport Co. (booking agent), who claimed to have re-
ceived commission in cash for supply of trucks. In short, it was
argued on behalf of the assessee that, the manufacture and
D dispatch of bottles from Mis Arizona Printers to Mis Unikol Bot-
tlers, before 31.3.1991, stood proved by the evidence adduced
by the assessee in the form of the statement of the manufac-
turer, the "Put to Use" Certificate given by Mis Unikol Bottlers,
the statement of Mis Unikol Bottlers having accepted delivery
E of the bottles from Mis Arizona Printers and the receipt of com-
mission by Mis Khanna Goods Transport Co .. Therefore, ac-
cording to the assessee, the manufacture and dispatch of bottles
and the receipt of bottles stood proved by the aforestated cir-
cumstances.
F
11. We do not find any merit in the above arguments. In
this case, we are concerned with the nature of transaction dated
15.3.1991. The question to be asked is - whether the assessee
has proved the transaction dated 15.3.1991? The question of
G "appropriation" of the bottles to a particular contract is different
from the concept relating to the nature of the transaction. In this
case, the tell-tale circumstance against the assessee was that \-
sub-lease is dated 8.3.1991. It is between Mis Aravali Leasing
(lessee) and Mis Unikol Bottlers (sub- lessee). This sub-lease
precedes the lease dated 15.3:1991 between the assessee
H
MCORP GLOBAL PVT. LTD. V. COMMISSIONER OF 221
INCOME-TAX, GHAZIABAD [S.H. KAPADIA, J.]

{lessor) and Mis Aravali Leasing (lessee). As rightly questioned A
.... by the AO as to how Mis Aravali Leasing (lessee) could have
entered into a sub-lease in favour of Mis Unikol bottlers on
8.3.1991 when it had not acquired leasehold ri~hts till 15.3.1991
from the assessee as the lessor. Moreover, there is nothing in
the alleged lease deed dated 15.3.1991 indicating commence- B
ment of the lease from a prior date. There is nothing in the so-
called lease dated 15.3.1991 as to the arrangement between
the parties prior to 15.3.1991. There is nothing in the so-called
...... lease dated 15.3.1991 indicating any prior practice as submit-
ted on behalf of assessee. On the contrary, the so-called lease
dated 15.3.1991 recites that it shall commence only from
c
15.3.1991. Moreover, under the sub-lease between Mis Aravali
Leasing and Mis Unikol Bottlers it is stated that Mis Aravali
Leasing is the absolute owner of the bottles. Lastly, the so-called
lease dated 15.3.1991 stipulated that the lessee, Mis Aravali
D
Leasing, shall have no right, title or interest to create a sub-
._

• lease without the permission of the lessor. No such permission
has been produced. For the aforestated reasons, we find no
infirmity in the concurrent findings of fact recorded by the au-
thorities below. We accordingly hold that transaction dated
15.3.1991 is not proved. Therefore, the AO was right in disal- E
lowing depreciation amounting to Rs. 30, 17, 1221-.

12. Before concluding, we may mention that an alternative
-; submission was advanced on behalf of the assessee in the
context of the second transaction that, if the said transaction
F
was a financial arrangement, as held by the Department, even
then the assessee could be taxed only on Interest embedded in
the amount of lease rentals received from the lessee, MlsAravali
Leasing. In this connection, it was submitted that the assessee
had earned total income of Rs. 6,33,5961- over a period of 36
G
months commencing from 15.3.1991 to 14.3.1994. Therefore,
>/ the matter should be remitted for recalculation. We do not find
any merit in this argument for the simple reason that the concur-
rent finding shows that transaction dated 15.3.1991 is a sham.
The finding shows that the transaction had not been proved by
,,... H
222 SUPREME COURr REPORTS [2009] 2 S.C.R.

A the assessee. In the circumstances, there is no question of the
matter being remitted, as prayed for. Consequently, the AO was ..-
rig ht in coming to the conclusion that transaction dated
15.3.1991 was not proved and that the assessee was not en-
titled to claim depreciation of Rs. 30, 17, 122/- in respect of the
B second transaction. f
13. In conclusion, we delete the disallowance of deprecia-
tion of Rs. 18,04,572/~ under the First Transaction but we disal-
low the depreciation of Rs. 30, 17, 122/- under the Second Trans- _.. __. t
action.
c 14. Accordingly, the civil appeal filed by the assessee is
partly allowed with no order as to costs.

K.K.T. Appeal party allowed.

.

...
I