2006 (9) TMI 90 - HC - Income Tax

Depreciation on the soft drink bottles which the assessee had purchased and leased out to other party but tribunal rejected assessee claim on the ground of no lease agreement between the parties and only financial arrangement made by the parties - All aspects of the transaction between the assessee and the lessee and carefully scrutinized the documents/lease deeds. We consider that Tribunal rightly came to the conclusion that transaction between the assessee and the lessees were not transactions of lease but that of financial arrangements given color of a lease to claim 100% depreciation. In the annexure to the lease itself the rate of depreciation is shown to be 100% and this certainly was meant for consumption of the income tax officer as it had nothing to do with the lessee.

Issues Involved:

1. Jurisdiction of the Tribunal to examine the nature of the transaction.
2. Entitlement of the assessee to claim 100% depreciation on leased soft drink bottles.
3. Nature of the transaction between the assessee and the lessees: lease or financial arrangement.
4. Validity of the lease agreements and their execution.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Tribunal to Examine the Nature of the Transaction:

The appellant argued that the Tribunal exceeded its jurisdiction by examining the nature of the transaction, asserting that the Tribunal should not have adjudicated whether it was a lease or a financial transaction since no such question was raised before it by either party. However, the judgment clarified that under Section 254(1) of the Income Tax Act, the Tribunal possesses the authority to pass such orders as it deems fit after giving both parties an opportunity to be heard. The Tribunal is not restricted from considering issues that arise during an appeal, even if they were not initially raised, especially when crucial documents are involved. The Tribunal has the discretion to entertain new grounds necessary for a just decision, as supported by precedents like CIT v. Bhopal Sagar Industries Ltd. and CIT v. George Williamson (Assam) Ltd. Thus, the Tribunal was within its rights to analyze the lease agreements and determine their true nature.

2. Entitlement of the Assessee to Claim 100% Depreciation on Leased Soft Drink Bottles:

The appellant contended that the leasing of assets was part of its business, and it was entitled to depreciation once the assets were put into use. The appellant claimed that it became the owner of the bottles before March 31, 1991, and thus was entitled to depreciation. However, the Tribunal found that the lease agreements were financial arrangements rather than genuine leases. The Tribunal observed that the agreements were structured to recover the entire lease value within three years, with significant interest, indicating a financial transaction rather than a lease. The Tribunal concluded that the appellant was not the absolute owner of the bottles and disallowed the depreciation claim.

3. Nature of the Transaction Between the Assessee and the Lessees: Lease or Financial Arrangement:

The Tribunal examined the lease agreements and found them to be financial arrangements disguised as leases to claim depreciation. The agreements included clauses inconsistent with typical leasing arrangements, such as the lease commencing before the bottles were manufactured and the lessee bearing responsibility for the bottles even before delivery. The Tribunal noted that the conduct of the parties, such as the non-renewal of the lease and the lack of recall of the bottles, supported the conclusion that the transactions were financial arrangements. The Tribunal applied the tests from Damodar Valley Corporation v. State of Bihar to determine the true nature of the agreements, concluding that the transactions were not genuine leases.

4. Validity of the Lease Agreements and Their Execution:

The Tribunal found that the lease agreements were proforma documents not intended for actual implementation. The agreements contained clauses applicable to industrial machinery rather than soft drink bottles, indicating they were not genuine leases. The Tribunal noted inconsistencies, such as the lease rent commencing before the bottles were manufactured and the lessee's responsibility for the bottles even before delivery. The Tribunal concluded that the agreements were camouflages to claim depreciation, and the real intention was a financial arrangement.

Conclusion:

The Tribunal's decision to disallow the depreciation claim was upheld, as the transactions were deemed financial arrangements rather than genuine leases. The Tribunal's jurisdiction to examine the nature of the transaction was affirmed, and no substantial question of law arose from the case. The petition was dismissed.

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