A lesson from case of Avasarala Technologies Ltd -not furnishing relevant details and evidence before authorities and furnishing superfluous documents can be costly.

[CA DEV KUMAR KOTHARI]

References:

AVASARALA TECHNOLOGIES LTD. Versus JOINT COMMISSIONER OF INCOME-TAX 2015 (8) TMI 521 - SUPREME COURT

Analysis of facts:

Vendor of plant and machinery:  Andhra Pradesh State Electricity Board

Purchaser of plant and machinery: AVASARALA TECHNOLOGIES LTD

Lessee: Andhra Pradesh State Electricity Board Who was previous owner.

Lessor: AVASARALA TECHNOLOGIES LTD, the new owner.

Sale deed dated September 29, 1995

Observations and order of the Assessing Officer:

The honourable Supreme Court has noted as follows, (with high lights added):

“The Assessing Officer by his order annexure E dated March 26, 1999, disallowed the depreciation claimed by the assessee to the extent of ₹ 1,60,18,854 on the ground that the assessee was unable to establish the ownership of the said equipment and explain the details of the assets and furnish the written down value of the said equipment in the hands of the assessee; and, therefore, in the facts and circumstances of the case, the transaction entered into between the assessee and the APSEB should be treated only as finance transaction and not a genuine lease transaction wherein a sum of ₹ 1,60,18,854 was advanced by the assessee to the APSEB. However, the Assessing Officer excluded from the gross total of income, the leased rental offered for taxation by the assessee to the extent of ₹ 14,63,322 (rupees fourteen lakhs sixty-three thousand three hundred twenty-two only). He proceeded to bring to tax the deemed interest income applying the rate of ihterest at 18 per cent. per annum on the net amount of ₹ 1,16,34,154 (rupees one crore sixteen lakhs thirty-four thousand one hundred fifty four only) advanced and brought to tax ₹ 10,47,100 (rupees ten lakhs forty-seven thousand one hundred only). The appellate authority, in its order annexure G dated March 22, 2001, while giving some relief in respect of a few other items, confirmed the order of assessment in so far as it relates to rejection of claim for depreciation in respect of the machinery/equipment in question purchased from the APSEB and leased back to the APSEB. The Tribunal, by means of its order dated October 30, 2001, rejected the appeal filed by the assessee challenging the correctness of the order annexure G passed by the appellate authority.

From above observations it is clear that the assessee did not provide certain details as required by the Assessing Officer. These are discussed below:

Brief of observation	Remarks:
The assessee was unable to: establish the ownership of the said equipment ,	Why the assessee did not furnish the details of assets acquired in block of assets eligible for 100% depreciation is not clear? The assessee could have easily provided the same.
explain the details of the assets	The assessee could have easily provided the same in the manner as required by the AO.
the written down value of the said equipment in the hands of the assessee (sic. APSEB)	WDV in hands of previous owner could have been confirmed. It can be nil due to dep[recitation allowed @ 100% but it does not mean that the asset had no market value.
details of depreciation claimed by the previous owner,	It could be informed and it can be 100% of cost considering the nature of machinery, but it does not mean that the market value of asset was nil or cost of asset  in hands of assessee was nil. APSEB also could have confirmed that on sale, the sale value has been deducted from their block of asset.
the copies of the invoices, details of installation and commissioning, etc	These could have been provided with explanation that the assets were already installed in premises of APSEB, and transfer was  on “as is where is condition”.  Beneficial ownership and insurable interest stood transferred on sale of plant and machinery.

It is further observed from the judgment that the assessee had refused to furnish the details and had only written the letter dated March 25, 1999, stating that some of the details called for by the Assessing Officer had already been furnished.

From observations in the judgment we find that before the CIT (A) a valuation report was furnished to establish existence of asset. This seems to be a superfluous document. Because the valuation may not be much relevant, the price can be negotiated between parties. Furthermore, an asset which is already is use and is being used is valuable asset, irrespective of fact that the WDV in hands of transferor, as per Income-tax provision may be nil. The report, went against assessee because from the report it became evident that the plant and machinery were embedded in the earth and were immovable property.

Therefore, it is clear that due to non-cooperation of assessee, by not furnishing relevant details and evidences, the authorities held that the transaction was sham and denied depreciation allowance.

Once the final fact finding authority that is the Tribunal had held that the transaction was sham and to avoid tax, it was finding of fact, and not being perverse or patently wrong, the High Court and the Supreme Court could not interfere into the same.

What assessee missed?

In case of sale and lease back transactions certain facts in ground realities are important, and therefore, in such circumstances the transactions must satisfy the factual ground realities. Some of such realities could have been brought on record if the transactions was planned properly. For example:

When there is scarcity of funds, even funds are not available for repair , maintenance and overhaul of plant and machinery. In such circumstances arrangements can be made by selling the same with understanding that after repair, overhaul etc. the plant and machinery shall be leased back to the seller under lease agreement. This way funds can be raised to finance repairs, overhaul and extra funds for other purposes.

There should be proper timing and event planning. For example, when plant and machinery was due for over haul, the same could be sold, transferred and handed over to the buyer.

The buyer gets the plant and machinery insured, and make arrangement for other insurance like workmen’s insurance for the purpose of overhaul of plant and machinery purchased.

Buyer could have dismantled it, overhaul it with necessary material, spares, and technology by deploying technical team at its own cost.

After such overhaul, repairs, etc.  The same could be delivered back to the previous owner (APSEB) under and lease arrangement.

On reading of the judgments we do not find any such activities carried by assessee (buyer and lessor)

Main thrust of the case:

The case is mainly oriented towards finding of facts. The High Court found that the facts concurrently found by three authorities are based on material available (and also not made available by assessee). The non-compliance by assessee in regard to furnishing of some information was vital because such non-compliance is an indicator of lack of genuineness. May be the assessee was not properly advised to furnish the details of cost and WDV in hands of APSEB. There was no harm if assessee had confirmed that APSEB has availed 100% depreciation under Income-tax and that WDV was nil. Because this is obvious. But by denying to furnish such obvious information, assessee prepared a ground for denial of depreciation allowance on ground of sham transaction.

Learning from the case:

A transaction must be planned in normal course of business realities and normal eventualities. It should be timed according to various events which could be vital to put through the transaction in normal course of business. Superfluous documents must be avoided. And there should be timely and reasonable compliance. There is no benefit in hiding obvious details and facts. In this case the fact of hiding fact that 100% depreciation was availed by APSEB and WDV in hands of APSEB was nil, really hampered the case. The assessee could have established its acquisition, actual cost and eligibility of depreciation by providing relevant details and evidences to the Assessing Officer.