TMI Blog2012 (12) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... nd operation, which is also satisfied since lessee is required to pay all taxes penalty etc. levied either in connection with the transaction or the asset by sales tax, interest tax etc. and he is also to bear all costs in connection with the preservation of asset by insurance, repair etc. Hence the lease in the present case is the finance lease and consequently depreciation is allowable to the lessee and not to the lesser. See Induslnd Bank Ltd. vs. ACIT (2012 (3) TMI 212 - ITAT MUMBAI), Asea Brown Boveri Limited v. IFCI (2004 - TMI - 106804 - Supreme Court Of India). Penalty u/s 271(1)(c) – dis-allowance of depreciation - Held that:- In the present case, the penalty u/s 271(1)(c) is not justified in respect of dis-allowance of depreciation. It is seen that the same is in respect of dis-allowance of depreciation on finance lease although the claim was on this basis that these are operating lease. We find that there was no clarity on this aspect and therefore, it cannot be said that there is any concealment of income or furnishing of inaccurate particulars of income in the facts of present case because issue was debatable till very recently when Special Bench of the Tribunal cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) of the order of ld. CIT (A) which are reproduced below for the sake of ready reference:- (ii) As regards the issue of machinery given on lease to M/s. Rajinder Steels Ltd. to be found in existence and so disallowance of depreciation being not justified, appellant has given evidence of having attended meeting, (called on 9.5.2003, in compliance of the High Court Allahabad order dated 23.4.2003), of the secured creditors for formation of Asset Sale Committee in the office of the official liquidator U.P. at Allahabad in matter of M/s. Rajinder Steels Ltd. (in liquidation). Also evidence is given that machineries were identified there and the exact machineries which were purchased by the appellant at Rs.1,47,81,250/- were listed by the valuers G.S.Birdie, and valued on 6.2.2003 on physical inspection at a value of Rs. 20 lakhs . I find that this establishes existence of machines, but the AO has disallowed claim of depreciation not just on ground of non-existence but also for reason that the lease transactions were not considered as operating lease. To quote, the paras 7 and 8 of A.Os order are very relevant and are so given hereunder: "7. In response to the above show cau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hest of the lessee as the deed reads. "whereas the lessee has requested the lessor to purchase the equipment" ..... " and whereas the lessee has offered to take on lease the equipment so purchased by the lessor" ........ This argument is also therefore not acceptable. (iv) The arguments raised that decisions of the ITAT, Spl. Bench in case of Mid East Portfolio Management Ltd. are not applicable to appellant's case because of vital points of distinction in terms of leases and because the Spl. Bench had relied on decision of McDowcll which is overruled by Azadi Bachao Audolan 263 1TR 706 is also not acceptable. The issue in Me Dowell and Azadi Bachao of there being an underlying motive supposedly resulting in some economic detriment or prejudice to the national interests is not required to be established here. It is here a case of merely a matter of establishing that the lease were only financial leases and not operational ones. Now, I find that appellant has not given any evidence to disprove finding of A.O. in this behalf. There is no attempt to explain that the findings of A.O in paras 9 to 14.1 on pages 4 to 11 of the assessment order are not justified or are incorrect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y sold to the respective lessee at 1% of the original cost of asset. He submitted that the asset was sold to Monarch Dyestuffs Industries Exports Ltd. for Rs.25,300/- whereas the original cost of assest was Rs.25.30 lacs. He further submitted that accordingly asset was sold to M/s. Prakash Industries Limited for Rs.1.02 lacs and Rs. 0.83 lac whereas the original cost of these assets were Rs.102 lacs and Rs.83 lacs respectively. He further submitted that similarly in respect of other assets also, the assets were sold to the lessee at 1% of the original cost of the concerned assets. In the rejoinder, the ld. A.R. of the assessee placed reliance on the judgment of Hon ble the Apex Court rendered in the case of Southern Technologies Ltd. V. JCIT as reported in 320 ITR 577 (SC). 8. Now we produce here the chart submitted by ld. A.R. of the assessee in which he has made efforts to point out difference in facts in the present case and in the case of Induslnd Bank Ltd. vs. ACIT (Supra). This is as under:- Sr. Facts in case of Indusind Bank Ltd. Facts in case of GRUH Finance Ltd. Remarks 1. Initially the bank sanctioned Short Term Loan then converted it into Lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s but lessee was having accumulated brought forward losses : Page 55 - Para 7.9 It can be observed from the assessment order that the assessee filed its return declaring total income of Rs.100.78 crore after claiming the said depreciation. On the other hand, the so called lessee i.e. Indo Gulf Fertilizer Chemical Corporation Limited had accumulated brought forward losses and they filed loss return. This fact is apparent from para 2.21 of the assessment order. ..........................The attending circumstances of the case run in complete contradistinction to the cloak of lease agreement which has been used by the assessee in connivance with Indo Gulf Fertilizer Chemical Corporation Limited as a dubious way to mitigate the rightful tax liability. ............................ It can be appreciated without any difficulty that the so-called lease agreement is sham which was executed with the sole intention of allowing the assessee to claim depreciation in its hands as a measure of tax avoidance. Tax neutrality is present since both the lessor and lessee are showing profits and paying taxes at the same rate being companies. Net profit as per Profit Loss A/c as shown in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and lessor. Further as per Board Circular No.2 dated 09/02/2001:- "It has come to the notice of the Board that the new Accounting Standard on 'leases' issued by ICA1 require capitalization of asset by lessee in financial lease transaction. By itself the accounting standard will have no implication on allowance of depreciation on assets under the provisions of Income Tax Act. (Judgement paper book page-117) Lease charges debited in P L A/c PB Page No. 1. RSL 375 2. Datar 195 3. Swil 313 4. Tata 13 (copy attached hereto) Disclosure in Notes on Accounts PB Page No. 1. RSL 387 2. Swil 315 Circular not brought to notice of the Hon ble Bench in Indus Ind Bank case. Circular is binding on department. Navnitlal C. Zaveri v. CIT [56 ITR 198 (SC)] 6. The Appellant has claimed 100% depreciation. Page 2 - Para 2 Briefly stated the facts of the case for the A.Y. 1998-99 are that the assessee bank filed its return claiming depreciation of Rs.25,70,03,293. The Assessing Officer observed that there was substantial variation between the amount of depreciation as per books of account and that claimed in the computation of income. Such variation was found mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cided afresh. 4. Insurance in name of lessor. 5. Life span of asset is more than lease period. In case of Asea Brown Boveri Ltd., the payment by lessee was made in full and period of lease viz. five years had expired. Naturally, as per provisions of agreement, lessee is the owner while in case of Appellant, this is first year of lease agreement. This judgement of Asea Brown Boveri Ltd. mentioned has already been considered in case of CIT v. Cosmo Film Ltd. (See PBPageNo.l35 to 145) 10. Reference to judgment of CIT v. Podar Cement (P) Ltd. [226ITR 625 (SC)] and Mysore Minerals Ltd Vs CIT [239 ITR 775 (SC)] Page 41 Para 6.6 By applying the ratio decidendi of the judgment in the case of Mysore Minerals Ltd. to the facts of the present case, there hardly remains any complexity in deciding that it is the lessee who is the real owner of boiler. It is the lessee who is in possession of property exercising control over the boiler by excluding others including the assesseelessor there from. M/s Indo Gulf has the right to use and to occupy the property in its own right. Apart from exercising complete control over the boiler and having full right to use, there is prior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the previous year relevant to the assessment year 1998-99 and hence this Guidance Note shall be relevant for determining the distinction between the operating and finance lease in the years in question. From the above Guidance note we can understand the ambit of finance lease in a generic sense to mean a lease under which the lessor secures the recovery of his capital outgo plus a return on such funds during the lease term and the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset. Another highlight of such a lease is that it is normally non-cancellable. 10. From the above para of the decision of the Special Bench of the Tribunal, we find that it is noted by the Special Bench of the Tribunal that the guidance note shall apply to all assets leased during the accounting periods beginning on or after 1st April, 1995 and therefore, the same are applicable in the present two years which are before us. In para no.5.6 of this decision of the Tribunal, the Special Bench of the Tribunal has considered the judgment of Hon ble Apex Court rendered in the case of Asea Brown Boveri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hardly remains any complexity in deciding that it is the lessee who is the real owner of boiler. It is the lessee who is in possession of property exercising control over the boilder by excluding others including the assessee-lessor there from. M/s Indo Gulf has the right to use and to occupy the property in its own right. Apart from exercising complete control over the boiler and having full right to use, there is prior understanding with the lessor that after the expiry of the lease period the boiler will be transferred to it at a predetermined 1% value. The assessee-lessor has absolutely no control over the property during the lease period. It has no option to repossess the boiled either during the continuation of lease period or after that. All the risks and rewards attached to the property are that of the lessee. By no standard whatsoever the assessee-lessor can be described as the owner of the property. Thus whereas in a case of operating lease, the lessor is both de facto and de jure owner, in the case of finance lease, the lessee is de facto owner and the lessor is only de jure owner. We, therefore, hold that in case of a finance lease it is the lessee who is the owner of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs the facts of the present case are tallying with the facts in the case of Induslnd Bank Ltd. vs. ACIT(supra). 14. Regarding the first aspect as to whether the asset in question was selected by the lessee, we find that it is noted by the A.O. in page no.9 of the assessment order for A.Y.96-97 that lease assets are various types depending upon the requirement of the lessee and in all the cases, the lessee purchased the asset on a lease finance of assets required by him and that the asset is user specific and is selected by the lessee for his own use and hence the first condition regarding finance lease is satisfied in the present case. The second aspect is that risk and rewards, incidental to ownership are passed on to the lessee. In this regard, we find that in para no.10(e), it is noted by the A.O. in assessment order for A.Y.96-97 that lessor shall in no way be liable to the lessee for any liability/claim etc. in respect of any damage/loss of the asset its transportation, delivery, use or its failure to perform operate etc. It is noted by the A.O. that lessor is not required to bear any expense in connection to insurance, repair etc. as per para 10(f). All these clauses of lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts in connection with the preservation of asset by insurance, repair etc. Hence, it is clear that this condition is also fulfilled for holding that the lease in the present case is the finance lease. We have already seen that the lease is not cancellable by any of the parties. It is also pointed out by the ld. D.R. of the Revenue that as per the submission of the assessee dated 19.02.2003 submitted to the A.O. for A.Y. 97-98, which is available on page nos. 34 to 56 of the paper book for that year, all the assets were ultimately sold to the lessee at 1 % of the original cost of the asset 15. Considering these facts, we are satisfied that in the present case, the assessee has satisfied and fulfilled all the important features of a finance lease as noted by Hon ble Apex Court and reproduced by the Special Bench of the Tribunal in para no.5.6 of the decision and therefore, even if there are some difference in facts on other issues in the present case and in the case of Induslnd Bank Ltd. vs. ACIT (supra), it does not make any difference and inspite of other differences, if any, it has to be held in the present case that the lease in question is a finance lease and not an operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled to investment allowance u/s 32 A of the IT Act or not. It is seen that in that case, this issue was not in dispute before Hon ble Apex Court as to whether the assessee who has given finance lease is entitled to depreciation or not. Hence, this judgment is also not applicable in the present case. The fifth judgment cited by him is the judgment of Hon ble Gujarat High court in the case of CIT v. Pinnacle Finance Ltd.(Supra). In this case, it was not the issue in dispute before the Hon ble Gujarat High Court as to whether the assessee giving a finance lease is entitled to depreciation or not. Hence, this judgment is also not applicable in the present case. The sixth judgment cited by him is the judgment of Hon ble Delhi High Court in the case of CIT v. Cosmo Films Ltd.(Supra). In that case, this issue was not in dispute before Hon ble Delhi High Court as to whether the assessee carrying out business of giving finance lease is eligible for depreciation and hence, this judgment of Hon ble Delhi High Court is also not applicable in the present case. The seventh judgment cited by him is the judgment of Hon ble Delhi High Court in the case of CIT, Delhi-VI v. Instalment Supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um proceeding is against the assessee, penalty is not justified in the facts of present case because allowability of the depreciation on finance lease was a debatable issue till the decision of the Special Bench of the Tribunal rendered on 14.03.2012. He also placed reliance on the judgment of Hon ble Apex Court rendered in the case of Reliance Petro Products P. Ltd. 322 ITR 158. Ld. D.R. of the Revenue supported the order of authorities below. 22. We have considered the rival submissions and perused the material on record and gone through the order of the authorities below and the judgment cited by the ld. A.R. of the assessee. 23. Considering the facts in the present case, we are of the considered opinion that in the present case, the penalty u/s 271(1)(c) is not justified in respect of disallowance of depreciation. It is seen that the same is in respect of disallowance of depreciation on finance lease although the claim was on this basis that these are operating lease. We find that there was no clarity on this aspect and therefore, it cannot be said that there is any concealment of income or furnishing of inaccurate particulars of income in the facts of present case because ..... X X X X Extracts X X X X X X X X Extracts X X X X
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