2006 (2) TMI 510 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition on account of disallowance of lease rentals paid in respect of plant and machinery taken on hire.
2. Allegation of financial arrangements disguised as sale and lease back transactions.
3. Physical transfer of machinery and the substantial interest of related companies.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Disallowance of Lease Rentals:
The Revenue appealed against the CIT(A)'s order which deleted an addition of Rs. 62,42,055 on account of disallowance of lease rentals paid by the assessee for plant and machinery taken on hire. The Assessing Officer (AO) originally allowed this deduction, but the CIT, Meerut set aside this assessment under section 263, directing the AO to reframe the assessment after conducting proper enquiries. The AO, upon re-assessment, disallowed the lease rent deduction on the grounds that the transactions were not genuine and were merely financial arrangements disguised as sale and lease back transactions.

The CIT(A), however, allowed the assessee's claim for deduction, stating that sale and lease back transactions are recognized methods of raising finance and are legitimate business practices. The CIT(A) cited the Supreme Court's recognition of such transactions in CIT v. Shaan Finance Pvt. Ltd. and the Delhi Bench of ITAT's ruling in Indian Management Advisers v. DGT. The CIT(A) found that the AO's suspicion over the ownership and physical existence of the assets was based on irrelevant considerations and that the transactions were genuine, supported by valuation reports and lease agreements.

2. Allegation of Financial Arrangements Disguised as Sale and Lease Back Transactions:
The AO argued that the lease payments were merely financial arrangements given the appearance of sale and lease back transactions, referencing the Supreme Court's decision in Mc. Dowell and Co. v. CIT. The AO suspected the genuineness of the transactions due to the lack of physical transfer of machinery and the absence of sales tax or excise duty on the sale.

The CIT(A) refuted this, explaining that the sale and lease back transaction is a recognized method of raising finance and that the transactions were bona fide. The CIT(A) emphasized that the physical delivery of assets is not necessary to establish the genuineness of such transactions, as supported by the Calcutta Bench of the Tribunal in Karamchand Thapar & Bros. v. DCIT. The CIT(A) found that the transactions were conducted at market value, with proper documentation and valuation reports, and were not colorable devices to defraud the revenue.

3. Physical Transfer of Machinery and Substantial Interest of Related Companies:
The AO questioned the physical transfer of machinery and the substantial interest of related companies in the assessee-company. The AO doubted the existence of the machinery and the genuineness of the transactions due to the lack of detailed evidence and physical transfer.

The CIT(A) concluded that the machinery's physical existence was verified by an expert engineer and supported by valuation reports. The CIT(A) noted that the machinery was essential for the sugar factory's operation, and the sale consideration was duly received by the assessee. The CIT(A) also pointed out that the lease agreements were duly signed and acted upon, and the transactions were genuine.

Conclusion:
The Tribunal upheld the CIT(A)'s order, agreeing that the lease transactions were genuine and supported by sufficient evidence. The Tribunal found no justifiable reason to interfere with the CIT(A)'s findings and dismissed the Revenue's appeal, allowing the assessee's claim for deduction on account of lease rent paid. The Tribunal emphasized that the transactions were bona fide and conducted at market value, with proper documentation and valuation reports, and were not intended to defraud the revenue.