2021 (8) TMI 688 - AT - Income Tax

Disallowance of claim of depreciation on the assets leased -operating lease - right of an assessee who is engaged in the business of leasing - AO disallowed the claim of depreciation on the ground that purchase of Plant and Machinery i.e. Oxygen Plants from M/s. BSL at an amount by obtaining loan from Banks by mortgaging such equipments/assets and thereafter on the same day leasing back of the asset to M/s. BSL for lease rent is nothing but a sham transaction - HELD THAT - It is clear that the various allegations of the A.O. as well as the arguments of the Ld. D.R. has been answered in Brace Iron And Steel Pvt. Ltd 2020 (12) TMI 1256 - DELHI HIGH COURT treating the Lease Agreement as genuine and thereby directing the respondent i.e. Tata Steel BSL Ltd. who has acquired M/s. BSL to make the payment as per the terms of the very same Lease Agreement which was doubted by the Revenue as sham and colourable. From the various details furnished by the assessee as well as submissions made before the Hon ble Delhi High Court it is noted that the assessee is no way related to M/s. BSL. It has no concern or connection with the erstwhile M/s. BSL Group and the shareholding of the assessee-company is owned by SREI Alternative Investment Trust. The assessee has not been named in any charge-sheet filed by the SFIO. Therefore the question of furtherance of business of M/s. BSL in our opinion does not arise. As been demonstrated before the Hon ble High Court that the terms of the Lease Agreement are at arm s length. When the entire transaction was appraised by Seventeen 17 Banks led by State Bank of India and since most of the Banks are Government of India undertakings therefore making a serious allegation treating the transaction as sham and colourable in absence of any evidence before the Revenue Authorities in our opinion is not justified. So far as the allegation of the A.O. that the assessee-company has no finance worth since it has paidup capital of Rs. 1 lakh only and it has no assets and had no business activity prior to its decision to purchase the plant and machinery of M/s. BSL at the end of 2014-2015 is also has no basis especially when the assessee belongs to the famous SREI International Group of Companies engaged in business of leasing hire purchase etc. having huge net worth. Further being the subsidiary of SREI Alternative Investment Trust the assessee-company has backing of the SREI International Group of Companies and therefore the observations of the Revenue Authorities on this issue does not hold any merit. Clause-2.1 of the Lease Agreement that this Lease Agreement entered into is in the nature of an operating lease where the idea is not to finance the lessee but to enable the lessee to operate the asset and earn profits and where the assessee-lesser would be entitled to depreciation on the asset leased-out since his business would be that of leasing and not mere money lending. We, find merit in the arguments of the Assessee that the assessee in his capacity as the lessor-owner is entitled to claim depreciation under section 32 of the Income Tax Act, 1961 which allows for depreciation on specified tangible assets and intangible assets when such assets are owned wholly or partly by the assessee and are used for the purpose of its business or profession. A perusal of the object clause of the Memorandum of Association of the Company shows that the assessee is in the business of leasing of assets. Since in the instant case the assessee owned the asset as per the Purchase Agreement Dated 23.02.2015 and has utilised such assets for the purpose of its business therefore the requirement of Section 32 stands satisfied notwithstanding the non-usage of these assets by the assessee itself as the section only requires that the assessee must use the assets for the purpose of business and nowhere it mandates the usage of such assets by the assessee itself. Hon ble Supreme Court in the case of CIT vs. Shaan Finance Pvt. Ltd. 1998 (3) TMI 8 - SUPREME COURT has clearly recognized the right of an assessee who is engaged in the business of leasing as being eligible for the investment allowance under section 32A if the ingredients in the said section stand met. Hon ble Supreme Court in the case of Mysore Minerals Ltd. 1999 (9) TMI 1 - SUPREME COURT has held that registered ownership is not necessary. It has been held in the said decision that building owned by the assessee under section 32 of the I.T. Act means the person who having acquired possession over the building in his own right uses the same for the purpose of his business or profession though a legal title has not been conveyed to him/her as per the requirement of Law such as the Transfer of Property Act and the Registration Act but nevertheless is entitled to hold the property to the exclusion of all others. Lower authorities have also ignored the fact that the assessee company was incorporated with the objective of entering into such leasing arrangements which is evident from the object clause of the Memorandum of Association. Therefore when the assessee had realised that BSL was undergoing a financial crunch it capitalized on the business opportunity and purchased the assets from the latter by way of a loan against hypothecation of the assets raising compulsory convertible debentures etc. Since BSL was interested in utilising the assets involved the same were leased back to the latter under an operative lease in return for an assured and profitable rental income. Allegation of the Revenue that the Assessee does not have any infrastructure is concerned we are of the considered opinion that leasing business does not require any such elaborate infrastructure and any such multi-location SCLB arrangement can be entered into without the physical movement of the assets depending on the commercial viability of the transaction. Since the A.O. in the instant case has not disputed the genuineness of the Asset Purchase Agreement Dated 23.02.2015 and the simultaneous Lease Agreement Dated 26.02.2015 entered into between both the parties for the SCLB transaction therefore we find merit in the arguments of the Learned Counsel for the Assessee that the transaction cannot be doubted by the A.O. in absence of any valid and sufficient material available to support such a conclusion. So far as the allegation of the A.O. that the assessee herein has purchased only oxygen plant devoid of building civil work and other accompaniments is concerned the same is also factually incorrect since the assessee in the instant case has purchased both oxygen plants and other related equipments and also other ancillary installation equipments which is clearly evident from Schedule-1 of the Asset Purchase Agreement Dated 23.02.2015 as well as from Schedule-1 of the Lease Agreement Dated 26.02.2015. Therefore the allegation of the Revenue on this count also fails. A.O. has also failed to consider the fact that depreciation claimed either by BSL or the assessee under the SCLB transaction would amount to the same showing that the situation is tax neutral. Therefore the assessee company cannot in any manner be accused of entering into the SCLB transaction with BSL as a tax evasion mechanism. SCLB transaction in the instant case can in no manner be called as a device to avoid the payment of legitimate tax when both the intention and the documentation/evidences at hand point towards the legitimate nature of the SLBC arrangement. It is the settled position of Law that the assessee is well within its rights to run its business activity in any such manner that it may deem fit and proper. Therefore the very allegation that the SCBL transaction is a paper and dubious transaction is not correct in the absence of any conclusive evidence brought on record by the A.O. to that effect. In our opinion the A.O. cannot step into the shoes of the businessman and dictate how to run the business. Lease Agreement entered into is in the nature of operating lease and that the assessee being the owner of the assets and leasing is one of its main objects as per its Object Clause in the Memorandum of Association is entitled to claim depreciation on the assets leased as per the provisions of Section 32 read with Explanation 4A of Section 43(1). In view of our above discussion in the preceding paragraphs we are of the considered opinion that the assessee is entitled to claim depreciation on the assets leased. Therefore the Order of the Ld. CIT(A) on this issue is set aside and the first issue raised in the grounds of appeal challenging the disallowance of depreciation is allowed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation claim of Rs. 71,43,75,000.
2. Disallowance of Rs. 1,10,82,175 being up-front fee.
3. Disallowance of interest expenditure of Rs. 1,62,10,881.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Claim of Rs. 71,43,75,000:

The Assessing Officer (A.O.) disallowed the depreciation claim on the grounds that the transaction between the assessee and M/s. BSL was a "sham transaction" aimed at claiming higher depreciation. The A.O. highlighted that the assessee had no financial worth, no prior business activity, and purchased the assets at an inflated cost. The assets were not physically transferred and remained with M/s. BSL, indicating a mere paper transaction.

The CIT(A) upheld the A.O.'s decision, stating that the assessee arranged the transaction to avoid taxes by paying a disproportionately high price for the assets and not utilizing the equipment for its own business purposes.

The Tribunal, however, found merit in the assessee's arguments, supported by the Hon'ble Delhi High Court's decision in M/s. Brace Iron & Steel Pvt. Ltd. vs. Tata Steel BSL Ltd., which upheld the validity of the Lease Agreement and rejected the Revenue's claim of it being a sham transaction. The Tribunal noted that the transaction was appraised by 17 banks, and the terms were at arm's length. The Tribunal also referenced various judicial precedents, including the Hon'ble Supreme Court's decisions, which supported the assessee's claim for depreciation under Section 32 of the Income Tax Act, even if the assets were not physically used by the assessee but leased out.

2. Disallowance of Rs. 1,10,82,175 Being Up-front Fee:

The A.O. disallowed the up-front fee of Rs. 1,10,82,175, considering it a capital expenditure. The CIT(A) upheld this disallowance on the grounds that the assessee had not carried out any business operations or utilized the machinery for business purposes.

The Tribunal, however, allowed the claim, noting that the up-front fee was related to the term loan taken for acquiring the fixed asset, which is an allowable business expenditure. The Tribunal referenced judicial precedents, including the Hon'ble Supreme Court's decision in Commissioner of Income Tax vs. Rama Multi Tech Ltd., which allowed such fees as revenue expenditure.

3. Disallowance of Interest Expenditure of Rs. 1,62,10,881:

The A.O. disallowed the interest expenditure on the grounds that the assessee had not undertaken any business activity and the transaction with M/s. BSL was a sham. The CIT(A) upheld this disallowance.

The Tribunal, however, allowed the claim, reiterating that the transaction was genuine and the interest expenditure was incurred for business purposes. The Tribunal referenced the Hon'ble Delhi High Court's decision and other judicial precedents supporting the claim.

Conclusion:

The Tribunal set aside the orders of the A.O. and CIT(A) on all issues, allowing the assessee's claims for depreciation, up-front fee, and interest expenditure. The Tribunal emphasized the genuineness of the transaction and the applicability of relevant judicial precedents in favor of the assessee.