TMI Blog2010 (2) TMI 691X X X X Extracts X X X X X X X X Extracts X X X X ..... d in this case - it was submitted by the counsel appearing for the appellant that it was not humanly possible to identify individually all the assets involved in this case - the fact remains that having regard to the nature of the assets dealt with by the appellant and the TNEB, which were all small electrical equipments/machinery, namely meters, shunt capacitor banks and outdoor circuit breakers, identification of the assets at the time of the sale as well as the lease back agreement was impossible of compliance When a claim of sale-cum-lease back agreement is based on an agreement reached between the parties and a clause in the agreement conveys a meaning that the machinery/equipment were to be purchased in future, while as a matter of fact, according to the appellant, it was not so, there was no valid explanation as to how such a clause, namely Clause 15(a) crept into the agreement, providing for a future purchase to be effected by the TNEB, backed by the appellant - sale-cum-lease back agreement along with the subsequent ratification by the Electricity Board discloses that the parties had real intention to pass the property in the plant and machinery to the assessee - So long ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal was right in holding that the depreciation claim is not available on the assets forming part of the block of asset since the lease period had expired and so the asset cannot be said to be put to use? 2. The brief facts which are required to be stated are that, the appellant is a leasing company. It entered into a Sale and Lease Back (SLB) Agreement in respect of certain assets, namely Meters, Shunt Capacitor Banks and Outdoor Circuit Breakers with the Tamil Nadu Electricity Board (TNEB). As per the SLB Agreement, the appellant purchased certain assets from TNEB and leased them back to it. The total value of such assets came to Rs.39,44,27,137/-. The assets were eligible for 100% depreciation. As they were not used for more than 182 days, the appellant restricted the claim of depreciation to 50%, which worked out to Rs.19,72,13,568/-. The Assessing Officer disallowed the claim for such depreciation treating those SLB transactions as loan transactions. Apart from the above, in respect of four other leases with M/s. Kedia Distilleries, Prakash Industries Ltd., Prestige Corporation Ltd. and Suckchain Cements Ltd., the lease period was over and as per the lease agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver of possession of the machinery/equipment by the TNEB to the assessee on completion of the sale and there was also no re-delivery or handing over of possession of the equipment by the assessee to the Board. The Tribunal, therefore, held that it was purely a finance transaction and therefore, no depreciation can be allowed. The Tribunal, by the orders impugned in these appeals dated 25.5.2007 and 4.3.2008 respectively, allowed the Revenue's appeals and restored the orders of the Assessing Officer. 5. We heard Mr. Arvind P. Datar, learned senior counsel appearing for Mr. V.S. Jayakumar, learned counsel for the appellant and Mr. K. Subramaniam, learned senior standing counsel for the Central Government for the respondent. 6. Mr. Arvind Datar, in the course of his submissions, contended that having regard to the fact that the assets covered by the SLB Agreement were the one classified in Appendix-I (3E) of Rule 5, the said assets being new, were entitled for 100% depreciation. According to the learned senior counsel, under Section 32 of the Income Tax Act and its second proviso, and having regard to the dictum of the Honourable Supreme Court reported in (1998) 231 I.T.R. 308 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the appellant and therefore, the disallowance was not justified. 7. As against the above submissions, Mr. K. Subramaniam, learned senior standing counsel for the respondent, after taking us through the Full Bench decision of the Karnataka Tribunal at length, contended that there is considerable doubt about the execution of the SLB Agreement. According to the learned senior standing counsel, the xerox copies of the lease agreement placed before the Court do not contain any date of issuance of the stamp paper and therefore, the doubt gets strengthened. The learned senior standing counsel, by referring to Section 17 of the Stamp Act, contended that in such a situation, the document itself would be invalid as there was every scope for creating such a document by ante-dating it. By referring to the dates contained in the invoices which were between January, 2001 and 30.3.2001, the learned senior standing counsel contended that the invoice price cannot be of the same value as on the date of the SLB Agreement and therefore, no valuation was necessary. The learned senior standing counsel contended that at least the assets which were purchased by the TNEB in March, 2000 should have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned senior standing counsel would, therefore, contend that the agreement was a farce and not real. The learned senior standing counsel then pointed out that in the absence of proper valuation of the assets as on 31.3.2001, which is the date of the SLB Agreement, considered in the light of the letter of the Financial Controller of the TNEB dated 12.2.2001, that a number of meters were purchased on 1.3.2000 and had been commissioned and utilised in various divisions and certain other assets were also purchased and utilised in the months of January and February, 2001, the invoice value could be taken as the proper sale value for the alleged sale made by the TNEB to the assessee. According to the learned senior standing counsel, to the extent used assets have been shown as sold at the invoice value, there was clear inflation of the sale price to benefit the appellant and therefore, in the absence of proper valuation of the used assets, it will have to be held that the transaction itself was not a genuine one. The learned senior standing counsel thereafter pointed out that the approval of TNEB was made only on 19.5.2001 and therefore, it reveals that the Board did not sanction t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness, it was fully governed by Section 32 of the Income Tax Act in order to claim 100% depreciation, as provided under Rule 5 read along with Appendix-I(3)(E). One other contention was that the initial period of re-payment of the lease amount was by way of instalments spread over a period of seven years, and after completion of the repayment of the lease amount, the appellant does not cease to be the owner of the assets, since thereafter, the TNEB was bound to pay Rs.1/- by way of lease amount per annum. 12. At the very outset, when we examine Section 32 of the Income Tax Act, it is clear that in order to claim the benefit of depreciation, among others in respect of tangible assets, the main criteria is ownership, wholly or partly, by the assessee and used for the purposes of the business. In this respect, when we refer to the decision relied upon by the appellant reported in 231 I.T.R. 308 (cited supra), which related to the appellant itself, the Honourable Supreme Court, while examining the grant of investment allowance under Section 32-A of the Income Tax Act, wherein also the criteria laid down is ownership by the assessee and is wholly used for the purposes of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessees business and; (3) the machinery is as specified in sub-sectoin (2). We are inclined to agree with this reasoning of the High Courts of Karnataka and Madras."(Underlining is ours) Therefore, by reading together the prescription contained in Section 32-A(1) and (2), the Honourable Supreme Court made it clear that even a leasing company owning such tangible assets can be held to use the said assets for the purpose of its business when such assets were leased out, which is its business, that such assets are put into use as stipulated in the relevant sub-clauses and thereby, fulfill the requirement for claiming the benefits of the investment allowance. Therefore, there is no difficulty in holding that as part of its business venture, if the appellant leases out the assets owned by it, it can be held that it fully satisfies the ingredients of Section 32 of the Income Tax Act in order to claim depreciation. 13. With the understanding of the above requirement of law under Section 32 of the Income Tax Act providing for depreciation, when we examine the case on hand, in order to answer the questions of law raised in these appeals, the following factors have to be necessarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business activity of leasing, is entitled to enter into a sale-cum-lease back agreement and thereby avail the benefit of depreciation provided under Section 32 of the Income Tax Act, the only question to be examined is, whether in the case on hand, the sale-cum-lease back agreement as claimed by the appellant can be accepted and the benefit of depreciation can be allowed to the appellant. 14. While according to the appellant the SLB entered into with the TNEB was genuine and the appellant is entitled for the depreciation as claimed, according to the respondent/Department, the transaction was not genuine owing to various pitfalls in the transaction, and applying the principles laid down in the judgment rendered by the Karnataka Full Bench Tribunal, which also related to two other Electricity Boards, viz. Rajasthan and Gujarat, the sale-cum-lease back agreement in the case on hand was rightly rejected by the Assessing Officer and confirmed by the Tribunal. 15. When we examine the various factors pointed out at the instance of the respondent to reject the present claim of SLB made by the appellant, the factors are that the sale executed by the TNEB in favour of the appellant c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the respondent brought to our notice that before the Tribunal also, it was submitted by the counsel appearing for the appellant that it was not humanly possible to identify individually all the assets involved in this case. The learned senior counsel appearing for the appellant, however, submitted that the said statement cannot be taken to mean that the assets said to have been sold in favour of the appellant can never be retrieved in the event of any breach of the lease agreement taking place. Whatever be the stand of the appellant on that score, the fact remains that having regard to the nature of the assets dealt with by the appellant and the TNEB, which were all small electrical equipments/machinery, namely meters, shunt capacitor banks and outdoor circuit breakers, identification of the assets at the time of the sale as well as the lease back agreement was impossible of compliance. When we were examining the allegation of genuineness of the so called sale of the assets, certainly the non-identification of the assets at the time of the sale was a relevant factor to be considered. 17. The next important factor pointed out by the learned senior standing counsel w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty to make such payments to the appellant. According to the respondent, apart from providing such priority, the repayment was also supported by a guarantee by the State Government, which put together, would virtually amount to the creation of an escrow account, which would only show that the transaction was not really a SLB, but a finance transaction. Here again, we are not impressed by the said contention raised on behalf of the respondent. Merely because the guarantee by the State Government was provided to support the SLB, it cannot be concluded that it will amount to the creation of an escrow account. Therefore, on that score too, the SLB transaction cannot be doubted. 20. It was then pointed out that while the sale-cum-lease back agreement was concluded by 30.3.2001, the TNEB ratified the transaction only on 19.5.2001. According to the learned senior standing counsel, the ratification by the Electricity Board on a later date, viz. after nearly two months, would only go to show that the sale itself was not real, but was a make-believe affair. When we consider the above submission, at the very outset, it will have to be stated that in order to ascertain the factum of any sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -lease back agreement. In our considered opinion, when as parties to the transaction there was a tacit agreement in the form of offer and acceptance for the sale of the assets and the existence of such assets cannot be doubted and the parties to the transaction were convinced about it, there is no reason why the said sale and its lease back should be rejected. One can understand if there was any inspection or investigation made at the instance of the Department which revealed any bogus purchase of assets and false sale of such assets effected not borne out by the relevant books of accounts or other records, then the Department can always reject any claim made based on such falsified records. In the absence of any such materials gathered by the respondent-Department, and when in the case on hand, the parties to the sale-cum-lease back agreement were an existing leasing company and a reputed State owned Electricity Board, in the absence of any material to the contrary, the claim made based on the sale-cum-lease back agreement before the respondent cannot be rejected. To put it differently, the claim of the initial sale and its lease back as between the appellant and the Electricity B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hors the existence of the said clause in the agreement, the sale-cum-lease back transaction was valid and in the event of any breach of any of the other terms, the parties would be well within their rights to work out their remedies. To put it differently, though in regard to the assets with reference to which the SLB came into existence, there was a valid contract between the appellant and the Board, the existence of Clause 15(a) would not in any way vitiate the real agreement entered into between the parties. Apart from the said clause being not in conflict with the SLB entered into between the appellant and the Electricity Board, the said clause could have been worked out by both the parties for any further creation of assets for the purpose of the sale-cum-lease back transaction. Therefore, going by the existence of that clause in the agreement, we are not in a position to hold that the whole agreement should be treated as sham or nominal. 25. The learned senior standing counsel for the respondent heavily relied upon the decision rendered by the Special Bench of the Income Tax Appellate Tribunal, Mumbai in the case of Mid East Portfolio Management Ltd. vs. Deputy Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the form of an agreement. The agreement as well as the deed of conveyance explicitly show that it was one by way of sale and thereafter, lease back. The provision for repayment of the lease amount by way of instalments from the current consumption charges is one mode of repayment in order to ensure that there is no default in paying the instalments. We do not find any flaw in such a provision made in the agreement for repayment. The guarantee offered by the State Government in addition to such a provision by itself cannot be equated to an escrow account. The guarantee offered by the State Government was only in addition to the repayment of lease amount to be made without any default. It is not quite uncommon to seek for such a guarantee in leasing business. So long as the terms of the agreement are not in violation of any statutory provision, there is no scope to hold that the transaction by itself cannot be held to be a make-believe affair or a farce in order to reject the agreement. Therefore, in respect of that test also, the appellant should succeed. 27. As far as the documentation or the correspondence or the understanding between the appellant and the Electricity Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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