TMI Blog2007 (5) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... assets were eligible for 100 per cent depreciation and since they were not used for more than 182 days, the assessee restricted the claim to 50 per cent of the depreciation. Actually the lease agreement was executed on 31st March of the accounting year. Against these lease agreements with TNEB, the assessee did not offer any income by way of lease rental because as per the lease agreement, the lease rentals are payable on half-yearly basis and first instalment was due on October 12th of next financial year. Therefore, according to the assessee no lease rental accrued till 31-3-2001. Hence, no income was recognized on the same. 2.2 In the assessment order, the Assessing Officer referred to a decision of the Special Bench of the Tribunal in the case of Mid East Port Folio Management Ltd v. Dy. CIT [2003] 87 ITD 537 (Mum.) for assessment year 1995-96 and Hon'ble Karnataka High Court decision in the case of Avasarala Automation Ltd v. Jt. CIT [2004] 266 ITR 178. The Assessing Officer elaborately discussed the findings in the Special Bench decision noted supra and analysed the facts of the present case with reference thereto and came to the conclusion that sale and lease back agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vii) Industrial Development Corpn. of Orissa Ltd. v. CIT [2004] 268 ITR 130 (Ori.). 2.5 The learned Departmental Representative, on the other hand, contended that this case was squarely covered by the decision of the Special Bench of this Tribunal as referred by the Assessing Officer. Further points raised by the revenue in this regard read as under:- - The learned Commissioner of Income-tax (Appeals) has failed to consider the decision relied upon by the Income-tax Appellate Tribunal, Special Bench, Mumbai in the case of ICICI Bank Ltd., wherein the Special Bench has laid down certain criteria to be examined which would determine whether a particular sale and lease back agreement is a genuine lease agreement or whether it is a mere finance agreement. -The learned Commissioner of Income-tax (Appeals) ought to have appreciated the action of the Assessing Officer in discussing the facts in this case with reference to the criteria as laid down by the Special Bench after which he arrived at a conclusion that this is a finance agreement. - It is submitted that the learned Commissioner of Income-tax (Appeals) has not rebutted any of the evidence laid down by the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the assessee for the current assessment year, so it can be concluded that asset has not been used by the assessee in its business and so no depreciation is allowable. 2.10 It is further seen in this case that the lease agreement was entered into on 31-3-2001. As per the lease agreement schedule, the lease period was seven years. The mode of payment of lease was half-yearly in arrears. Lease rent commencement date was 12-10-2001. In this manner, the subsequent due date for lease rentals was 12-4-2002 and so on up to 12-4-2008. Now, when the first half-yearly lease rental is due on 12-4-2001, it is but natural to assume that the operation of the lease for practical purposes of earning lease rental commenced from 12-4-2001 i.e., beyond the previous year. Now, in this case, because the agreement was entered into in 31-3-2001, the assessee had claimed 50 per cent of the depreciation for the whole year due for the purported one day use for 31-3-2001. However, the assessee had not admitted any lease rental on the plea that no lease rental has been due. In our opinion, this has been done as reading and analysis of the Schedule of the lease agreement establishes that lease agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision. The sum and substance of the exposition applicable to the present case is that decision in Mcdowell's case cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored or that every transaction or arrangement which is perfectly permissible under law which has the effect of reducing the tax burden of the assessee must be looked upon with disfavour. However, this decision nowhere expounds that colourable and sham devices adopted by the assessee should be completely ignored. As a matter of fact, the Apex Court has noted the following observations in the Mcdowell's case (which was a Full Bench of the Apex Court comprising five Hon'ble Judges):- "Tax planning may be legitimate provided it is within the frame-work of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges." 2.16 In the case of CIT v. Durga Prasad More [1971] 82 ITR 540, the Hon'ble Apex Court held that a little probing may be sufficient to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sequence of events were preordained or pre-planned - Overriding consideration appeared to be the prospect of getting 100 per cent depreciation - Fact that the assessee had agreed to the stipulation in a letter even when negotiations were on that it would transfer back the ownership right in the equipment to RSEB shows that there was no intention to convey any property to the assessee and the lease deed was a mere paper arrangement and a simple finance transaction was put under the garb of lease - Circumstances were similar in the case of GEB - Assessees were not, therefore, entitled to the 100 per cent depreciation allowance claimed in respect of the assets/equipment leased out to RSEB and GEB respectively." 2.18 Hon'ble Karnataka High Court in the case of Avasarala Automation Ltd. has held as under:- "The Assessing Officer is entitled to go into the genuineness or otherwise of a transaction for the purpose of determining whether any attempt is made by the assessee to avoid payment of tax. If an instrumentality of the State or the Department of the State, is one of the parties to the transaction, it may be one of the circumstances that may be taken into account by the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case with respect to that of the Special Bench decision and accordingly noted that the order of the Special Bench is applicable on the facts of the case. 2.20 Some important features noted in this regard regarding these lease agreements are as follows which go on to establish that this is not a genuine lease transaction:- The assets claimed to have been sold were already installed at the sites of TNEB at various places in Tamil Nadu. Hence there had been no physical delivery of the assets, neither at the time of sale by TNEB to the assessee nor at the time of lease by assessee to TNEB. In clause 8 of this agreement, it is stated that lease rentals are worked out after taking into consideration the benefits of depreciation available to the lessor. Not only this, but clause 8 goes to state that if for any reason, the depreciation (described in Schedule II to the lease agreement at the rate of 100 per cent p.a.) is increased or decreased or if the lessor is disallowed its claim of depreciation whether wholly or partly in any year during the period of lease, the lessor can unilaterally at its sole discretion increase the lease rentals to the extent of loss or benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny later point of time. This once again reduced to writing in the sale agreement corresponding to this lease agreement wherein it is clearly held that the Sales tax on the sale of assets by TNEB to FLCI would be borne by TNEB. 2.21 Another feature noted by the Assessing Officer is regarding the notings in the Board Meeting which is as follows:- "TNEB has also ratified the transaction with FLCI in its Board Meeting on 19-5-2001. The wordings of the TNEB Board Meeting are interesting. It once again mentions that the assets are eligible for 100 per cent depreciation under the Income-tax Act and that the TNEB has approved the proposal of availing lease finance of Rs. 30 crores from FLCI. It also approves the security of irrevocable standing instruction to the bankers and furnishing of sovereign guarantee for future lease rentals. This clearly goes to show that something similar to escrow account has been provided to FLCI as guaranteed by the transaction." 2.22 The items involved in these sales and lease back transactions were acquired as far back as March, 2000 by TNEB but they were sold and leased back at the cost mentioned in the original invoices or purchased by TNEB. It is fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d lease agreement once the lease period is over and the asset is not returned to the lessor. Hence, he held that these assets ceased to be leased assets and, therefore, no depreciation can be allowed. 3.2 Before the learned Commissioner of Income-tax (Appeals) it was submitted that as long as assets form part of block of assets and the assessee carries on business of leasing, the depreciation cannot be denied. The learned Commissioner of Income-tax (Appeals) accepted the contention and held that these equipments continue to be with the lessee and, therefore, it had to be presumed that equipments were used in the business of the assessee. Accordingly, the learned Commissioner of Income-tax (Appeals) allowed the assessee's appeal on this issue also. 3.3 We have heard the rival contentions and perused the relevant records. The learned Departmental Representative submitted that the assessee not only failed to credit the monthly rental in this regard but also failed to recognise the liquidated damages as stipulated in the lease agreement in case of failure of the lessee to return the assets and while assessee is not recognizing any income on these assets, it is claiming allowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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