Per Shri R.K. Bali (Accountant Member) - This is an appeal by the assessee against the order dated 30-10-1998 passed by the CIT(A)-I, Surat. The assessee has taken the following substantive grounds :

(1)(a)The learned CIT(A)-I, Surat has erred in confirming disallowance of Rs. 1,23,85,750 being depreciation on assets leased to Rajasthan State Electricity Board (RSEB). He ought to have directed the Assessing Officer to allow depreciation in respect of the said assets.

(b)The learned CIT(A) has erred by not directing the Assessing Officer to refrain from applying the provisions of Explanation 3 to section 43(1) to the assets leased to RSEB. Without prejudice to the foregoing, he should have directed the Assessing Officer to consider the market value of the said assets as per the Registered Valuer’s valuation report laid before him, and not an arbitrary figure of Rs. 101.

(c)The learned CIT(A) has erred in not considering strong commercial justifications for the entire arrangement and therefore lease of said assets could not be held as sham transactions.

(d)The learned CIT(A) has erred by not considering the circumstances that approvals were obtained from the Government of Rajasthan, public advertisements were issued by RSEB, mandates had been given to merchant bankers, funds were paid out and risk of default has been taken by the Appellant-company which establish the transactions were not sham transactions.

(e)The learned CIT(A) has failed to appreciate the international and domestic trade practices in sale and lease back transactions and that such practice has been given statutory recognition under the Income-tax Act, 1961. He has erred in not accepting that the Income-tax Act, 1961 also recognises the commercial existence of transactions of sale and lease back in Explanation 4A to section 43(1).

(f)The learned CIT(A) has also erred by not holding that rate of depreciation applicable to the said assets under item III(v)(c) of Appendix 1 of the Income-tax Rules, 1962 was 100% and not 25% as taken by the Assessing Officer.

(g)The learned CIT(A) has also erred in ignoring the provisions of the Sale of Goods Act, 1930.

(2)(a)The learned CIT(A) has erred in upholding the disallowance of Rs. 25,39,770 under section 43B on account of deferred sales-tax, whereas the said amount was not covered under the provisions of the said section.

(b)He has also erred by not directing the Assessing Officer to follow Circular No. 496 dated 25th September, 1987 and Circular No. 764 dated 29-12-1993 issued by the Central Board of Direct Taxes in this matter.

(3)The learned CIT(A) has erred in confirming addition of Rs. 1,09,583 being amount of lease rent under the contractual obligation. He ought to have directed the Assessing Officer to allow the said sum as a deduction.

(4)The learned CIT(A) has erred in confirming disallowance of Rs. 8,549 out of Garden Maintenance expenses on the grounds that the same were not wholly, necessarily and exclusively for the purpose of business. He ought to have appreciated that the disallowance is based on surmises and conjectures and has no basis in fact.

2. The assessee a Private Limited Company; furnished its return of income for assessment year 1995-96 on 6-11-1995 declaring total income at a loss of Rs. 49,23,400. The assessment was however completed by the Assessing Officer under section 143(3) at a total income of Rs. 80,15,101.

3. The main point of dispute as projected in the ground of appeal Nos. (1)(a) to (g) is with regard to the disallowance of claim of depreciation which the assessee-company claimed at the rate of 100% on Water Pollution Control Equipment leased by it to Rajasthan State Electric Board (RSEB) at a figure of Rs. 1,23,85,750.

4. Briefly the facts as narrated by the Assessing Officer in the assessment order relating to the claim of depreciation and its disallowance by the Assessing Officer which disallowance was confirmed by the CIT(A) are as under :

During the year under consideration, the assessee t