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TMI Blog2012 (12) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Assessing Officer was right in invoking the provisions of Sectin 147 of the Income Tax Act, 1961 and had reason to believe that the income had escaped assessment. 2. The Learned Commissioner of Income Tax (Appeals) - IX, Ahmedabad has erred in law and on facts of the case by confirming the disallowance of depreciation of Rs.1,40,07,126/- made by the Assessing Officer in respect of assets given on lease though the assets leased were owned by the Appellant and used for its business of leasing. 3. The Learned Commissioner of Income Tax (Appeals) - IX, Ahmedabad has erred in law and on facts of the case by confirming the action of the Assessing Officer in treating lease transactions between the Appellant and lessees as financial leases and not operational leases though sufficient evidences were produced by the Appellant in support of its claim." 3. Ground no. 1 of the appeal was not pressed by the ld. AR of the assessee in both years. Accordingly, this ground is rejected as not pressed. 4. Remaining grounds are relating to only one issue i.e. disallowance of depreciation of Rs.1,40,07,126/-. 5. The brief facts regarding this issue till assessment stage along with decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no mention of operating lease or finance lease for the purpose of allowability of depreciation under the IT Act. Therefore depreciation is rightly claimed and allowed. " 8. I have carefully considered the reply of the assessee company and found not acceptable. Submissions made by the assessee have been considered carefully. In assessee's case real ownership of /fee owner is questioned and during the search and seizure operation by department it was found that there was no assets available at the premises of Rajinder Steel Limited. In view of the following reasons the lease transactions as referred above are not considered as operating lease and therefore depreciation on such lease is not allowable." These paras quoted above show that appellant was aware of A.O's both grounds for proposed disallowance of claim of depreciation in case of Rajender Steels and has also answered both the said grounds and therefore this objection is not acceptable. (iii) The purchase of machinery from a third party and then its delivery to M/s. Rajender Steels Ltd. does not change position as the condition of lease are as explained in detail by A.O to be such as raise doubts about right of are ample ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in the case of Navnitlal C. Zaveri v. K.K.Sen, CIT [1965] (SC), 56 ITR 198, in support of this contention that Board's circulars are binding on Department. Reliance was also placed on the following judicial pronouncements: (a) CIT vs. Gujarat Gas Co. Ltd. [2009] (Guj-HC), 380 ITR 243 (b) CIT vs. Rajasthan State Electricity Board, 204 CTR 415 (c) CIT v. Shaan Finance (P) Ltd.[1998] (SC), 231 ITR 308 (d) CIT v. Pinnacle Finance Ltd. [2004] (Guj-HC), 268 ITR 395 (e) CIT v. Cosmo Films Ltd., ITA No. 1404/2008, copy on page nos. 135 to 145 of paper book. (f) CIT, Delhi-VI v. Instalment Supply Ltd., [2012] 207 Taxman19 7. As against these, it was submitted by ld. D.R. of the Revenue that nothing is brought on record by ld. A.R. of the assessee that after the expiry of lease period, assets were taken back by the assessee lessor. He also submitted that pre-payment charges are there in terms as per lease agreement. He also drawn our attention to page nos. 34 to 56 of the paper book relating to assessment year 97-98 and submitted that it is assessee's letter dated 19.02.2003 submitted by the assessee before the A.O. and pointed out that as per those submissions of assessee before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore purchase of machines : Page 53 - Para 7.6 In financial terms, out of the total cost of the leased asset at Rs.19.45 crore the assessee made purchases approximately worth Rs.18.40 crore before"the date of lease agreement itself. This fact casts a serious doubt on the genuineness of the lease agreement itself. When around 95% of the purchase of units of boiler was made prior to the date of the lease agreement then how it could have been mentioned in the lease agreement that "the lessor has agreed to purchase" and let on lease the equipment to the lessee. The further fact that initially short term loan of Rs.19.00 crore was sanctioned by the assessee to Indo Gulf Fertilizer & Chemical Corporation Limited which as per the learned AR's version was later on converted into lease, evidently destroys the theory of genuine lease. Lease Agreement executed before purchase of machines but after placement of orders for machinery. Steps in acquiring leased machinery: 1. Machinery identification by lessee & orders placed. 2. Lease agreement executed with lessor-GRUH 3. Machinery purchased. 4. Total payment made by lessor. 3. Tax neutrality not present since lessor is having profits but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is completely missing in the instant agreement. Even if Lessee is made responsible for losses during lease period, the same is possible by virtue of special contract- Section 152 of the Indian Contract Act, 1872 and the contract does not cease to be bailment. 5. Reference to AS 19 and Guidance Note- indicators of finance lease. Page 6 Para 5.3 : On a perusal of the meaning of operating lease and finance lease from the Guidance note and Accounting Standard 19 above we find there is not much difference between the two. Operating lease has been defined in both as a lease other than finance lease. And when we examine the meaning of 'Finance lease' as per Guidance note along with Explanation given in para 4, it turns out that its scope is almost the same as that given in the AS 19. Rather the AS simply elaborates the concept of finance lease as given in the Guidance Note without making any qualitative addition to or subtraction from that. Appellant falls under Clause 23 to 46 (excluding clause 37 & 38) of AS 19 dealing with operating lease. All disclosures as required in case of operating lease has been made in books of lessee and lessor. Further as per Board Ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20.5 158 8. Repairs & insurance of the asset is the sole liability of lessee. Page 19 - Para d : Clause 7 of the agreement stipulates that the lessee shall install, use and operate the equipment carefully and maintain the same in good working condition and repair at its cost and expenses. It is further relevant to note that the entire liability towards insurance has been cast on the lessee and not the assessee-lessor. Insurance policy of the assets is in the name of lessor PB Page No. 1. RSL 89 2. Datar 117 3. Swil 168 9. Case relied upon : Asea Brown Boveri Ltd. Vs. IFCI [154 Taxman 512 (SC)] 1. Ownership in the name of lessee 2. 25% deposit taken. 3. At the end of 5 yr. lease period asset to be taken by lessee without any payment. 4. Insurance by lessee. 5. Life Span of the asset is equal to lease period. Case quoted not applicable to the Appellant. 1. Ownership in the name of Lessor. 2. No security deposit 3. Amount to be decided at the end of 1 ease period on mutual agreement if lease is not extended. In case lease is extended,terms to be decided afresh. 4. Insurance in name of lessor. 5. Life span of asset is more than lease period. In case of Asea Brown B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue' as used in the definition of 'Finance lease' has been further defined to mean : 'The amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length transaction.' The Explanation further elaborates the definintion of 'Finance lease' by providing that: "A lease is classified as a finance lease if it secures for the lessor the recovery of his capital outlay plus a return on the funds invested during the lease term. Such a lease is normally noncancellable and the present value of the minimum lease payments at the inception of the leaseexceeds or is equal to substantially the whole of the fair value of the leased asset. 'The learned AR has invited our attention towards clause 28 of this Guidance note which provides that the recommendations of this Guidance Note shall apply to all assets leased during the accounting periods beginning on or after 1st April, 1995. It was put forth that the assessee entered into the instant lease transaction during 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 fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s issue in para no. 6.6 and held that in the case of finance lease, the lessee is entitled for depreciation whereas only in the case of operating lease, the lessor is entitled for depreciation. For the sake of ready reference, we reproduce para no.6.6 of the decision of the Special Bench, which is as under: "The corollary which follows on consideration of the Podar Cement (P) Ltd. (supra) along with Mysore Minerals Ltd. (Supra), is that for the purposes of section 32(1) the word "owner" is to be assigned a wider meaning so that anyone in possession of such property in his own title exercising such dominion over the property as would enable others as being excluded there from and having a right in his own right would be the owner of building for the propose of section 32(1) notwithdtanding the fact that a formal deed of title may not have been executed and registered in his name. By applying the ratio decidendi of the judgment in the case of Mysore Minerals Ltd. (supra) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se or operating lease and if it is seen that facts on that issue are similar then difference in facts on other aspects are not relevant. As per various salient features of finance lease noted by Hon'ble Apex Court and reproduced by the Special Bench of the Tribunal in para no.5.6 reproduced above, we find that if the asset is selected by the lessee and risks and rewards incidental to ownership are passed on to the lessee, the lessor only remains the legal owner of the asset. The other important aspect is this that the single lease repays the cost of the asset together with the interest. The other important feature noted by Hon'ble Apex Court and reproduced by the Special Bench is this that the lessor is typically a financial institution and cannot render specialized service in connection with the asset and it does not bear the cost of repairs and maintenance or operation. This is also held to be an important feature that lease is non-cancellable by either party. 13. Now, we examine whether on these parameters 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 questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest comes to Rs.236.50 lacs only whereas the assessee is getting rental of Rs.249.10 lacs in respect of this asset from the lessee and hence, it is seen that the single lease covers recovery of entire cost of asset plus interest for the entire lease period. Therefore, this condition of finance lease is also satisfied in the present case. Regarding this lease or any other lease, it was not brought on record by ld. A.R. of the assessee to show that lease rental is such that it will not recover the cost of asset plus interest and therefore we infer that this condition is fulfilled in respect of all the lease assets. The other important feature is that the lessor does not bear the cost of repairs, maintenance and operation. In this regard, a clear finding is given by the A.O. in para no. 10(f) of the assessment order for A.Y. 96-97 that the 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, it is clear that this condition is also fulfilled for holding that the lease in the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is judgment is also not applicable in the present case. The third judgment cited by him is the judgment of Hon'ble Rajasthan High Court in the case of CIT vs. Rajasthan State Electricity Board (Supra). Similarly in this case, the question before Rajasthan High Court was regarding the genuineness of sale and lease transaction. It is the finding that the sale and lease transaction entered into was genuine and the assessee is entitled to deduction of lease rent paid by it . In these facts, it is also held by Hon'ble Rajasthan High Court that this finding of the Tribunal is not perverse and therefore, no question of law arises. Since, the facts and issues are different, this judgment is also not applicable in the present case. The fourth judgment cited by him is the judgment of Hon'ble Supreme Court in the case of CIT v. Shaan Finance (P) Ltd.(Supra). In this case, the issue before Hon'ble the Apex Court was as to whether the assessee who is in the business of leasing of machinery to manufacture is entitled 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 giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in A.Y. 97-98 also, the ld. A.R. of the assessee did not press the ground no.1 regarding re-opening and apart from that, there is only one issue i.e. depreciation on lease assets and it was agreed by both the sides that the facts are similar in both the years and therefore, the decision can be on the basis of one order and the same can be followed in the next year. 18. In the result, both appeals of the assessee for quantum proceeding are dismissed. 19. Now we take up the assessee's appeal in penalty proceeding for A.Y. 97-98 in ITA No. 1008/Ahd/06. 20. The ground raised by the assessee is as under:- "1. The Learned CIT (A)-VIII, Ahmedabad has erred in law and facts of the case by confirming the penalty of Rs.18,27,740/- levied u/s 271(1)(c) of the IT Act, 1961 by the Assessing Officer after holding that the appellant has knowingly and deliberately furnished inaccurate particulars of income." 21. It is submitted by ld. A.R. of the assessee that even if the decision of Tribunal in quantum 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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