9911796707
TMI Blog2013 (8) TMI 408X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the appellant purchased 1,43,600 energy meters of different makes for measuring electrical energy as per sales invoice dated 23rdMarch, 1994 for a consideration of Rs. 49972800.00 from Gujarat State Electricity Board , herein referred to as GEB. These meters (assets) were then immediately leased back to GEB vide lease agreement dated 21/23-3-1994. After deduction of lease management fee and first month's rental, the appellant paid Rs. 4,83,86,154/- to GEB. In the P & L A/c, the appellant has credited lease rental income and lease management fees of Rs.8.16 lakhs and at the same time it has claimed depreciation of Rs. 4,99,72,800/- i.e. @ 100% of the cost of assets, under proviso to Section 32(1) of the I.T. Act, on the ground that the cost of each meters was below Rs.5,000/-. Income-tax return was earlier processed under section 143(1)(a) accepting the returned loss. However, subsequently, notice under section 148 dated 25.10.1999 was issued in response to which the assessee filed the return of income showing net loss of Rs. 11,676/-. The assessment was completed on income of Rs.5,15,19,234/- as the A.O. rejected the claim for depreciation of Rs.4,99,72,800/- and also made d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The lessee has been made liable to obtain all consents/licences/approvals, etc. for import, storage, installation, use, operation of the asset during the currency of the lease and also to meet all costs in connection with preservation, insurance, maintenance and operation of the asset. H) Other important clauses as mentioned in the notice u/s 142(1) which are said to be contrary or inconsistent to claim of legal and absolute ownership over leased assets and are also contrary to the legal norms regarding mutual rights and liabilities of a lessor and lessee are:- i) Lease was for a fixed period which was non-cancellable either by lessor or lessee except as provided in the agreement. ii) All payments made/cost incurred by the lessor (for acquisition of asset) will carry interest at a stipulated rate. iii) The lessor would be entitled to terminate the lease for any default committed by the lessee on occurrence of any event as enumerated in Article 8.1 and on such termination, the lessor would be entitled to repossess the assets and shall recover and the lessee should pay the entire amount of rental for the fixed period including the rental for the unexpired portion of the fixed per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the lease rentals received as income in consonance with the inherent nature of a 'finance lease'. The guidance note also suggests that one can also follow the International Accounting Standard 17 in the matter of such accounting. O) Reference has been made to the accounting policies in respect of such lease transaction adopted by the GEB and it is stated in para 13 of the Annual Report as under:- "Having recognized the position of the lease arrangements and associated terms and conditions thereof and the principles followed as stated above, the lease rentals payable by the board in installments of the leasing company have been provided towards charges for interest and balance towards the liability for the assets on lease." P) Para 13 of the notes to the Annual Accounts (reproduced below) strengthens the view that the appellant is not the legal owner of the assets:- "The board has availed finance under Lease Finance Arrangements from various institutions and under the said arrangements, the leased assets will get transferred to the Board on expiry of the lease period on payment of terminal value ranging from 1 to 2% of the original cost of the relevant assets. Accordingly, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant at Rs. 3,16,000/- was deducted as a consequence of the treatment accorded to the transaction subject to rectification. 5 The ld. CIT(A) vide impugned order under appeal also upheld the action of the A.O. in disallowing the claim of depreciation to the assessee. 6. Before us the learned representative of the assessee has submitted that the assessee is a company which inter alia carries on leasing activities. There was constructive delivery of energy meters and as such physical movement of the meters was not necessary. The meters have been installed in Godhra O & M Circle of GEB. A confirmation of existence of assets by State Electricity Board of Government of Gujarat is concrete and complete evidence of the existence of the assets. it was only for the assessee and not for the Income-tax authorities to decide whether to enter into any transaction without insisting on the exact specification of the items or not; and that by avoiding physical delivery of meters as the same had already been installed in various residences and industrial places, the assessee has not only avoided unnecessary expenditure on removing and reaffixing of the meters but also helped the consumers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the fund flow and cash flow situation of the business. It has been elaborated that to claim depreciation on assets, two conditions need to be fulfilled- one that the assessee must be the owner of the assets and secondly the assets must be used for the business of the assessee. According to the assessee it is beyond doubt, it is the full and true owner of the meters and that the said meters and the meters have been used by it in its business of leasing. Accordingly, both the conditions as stated above have been fulfilled and the assessee is therefore, entitled to claim depreciation. The assessee has also relied upon various case laws, which we will discuss in subsequent paras of this order. 7. The Ld. DR on the other hand relied upon the detailed orders of the authorities below. 8. We have carefully considered the rival submissions made on behalf of the parties and have also minutely gone through the record. Our findings in respect of the matter are as under: There is no doubt about the legal provisions that an assessee being the owner of the assets is entitled to claim the depreciation on assets under Section 32 of the Income Tax Act. The meaning of the word 'depreciation' as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs. Commissioner of Income Tax, Bombay[2], this Court has observed that allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting relevant to the assessment year and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes place. 11. Black's Law Dictionary (5th Edn.) defines 'depreciation' to mean, inter alia:"A fall in value; reduction of worth. The deterioration or the loss or lessening in value, arising from age, use, and improvements, due to better methods. A decline in value of property caused by wear or obsolescence and is usually measured by a set formula which reflects these elements over a given period of useful life of property.... Consistent gradual process of estimating and allocating cost of capital investments over estimated useful life of asset in order to match cost against earnings..." The 6th Edition defines it, inter alia, in the following ways: "In accounting, spreading out the cost of a capital asset over its estimated useful life. A decline in the value of property caused by wear or obsolescence and is usually measured by a set formula which reflect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act so as to make a distinction between the two. However the term lease has been defined under Section 105 of the Transfer of Property Act, 1882 but the same is in context to lease of immovable property. The said definition is reproduced as under:- "a lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms" The said definition when applied in case of lease of moveable properties would mean that the lease is the transfer of right to enjoy the property in question. Such a transfer of right can be made for a fixed time or for indefinite time and in lieu of getting the right to possess and enjoy the property, the lessee has to pay certain considerations either in cash or in kind to the lessor. The terms like finance lease, operating lease, sale and lease back etc. have found their mention in commercial transactions. The terms finance lease and operating lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterested in the recoupment of his investment with interest in the shape of rentals over the period of lease and not the asset or its user. - It is the responsibility of the lessee to bear all costs of insurance, repairs and maintenance and other related costs and expenses for the leased equipment. - Though the equipment is chosen by the lessee but the payment to the supplier is made by the lessor. Thus it is the lessee who chooses the assets, takes delivery, enjoys the use of the asset, bears its wear and tear. It is the lessee who becomes the real owner of the asset. - It is the lessee who pays taxes etc. in relation to such asset. - The risks and rewards incidental to the ownership vest with the lessee. - The features of bailment are absent in such a lease. - The lessor simply holds the title of asset as his security till his investment and interest thereon is recouped. The lessor is only symbolic owner during the period of lease and on the expiry of lease period, even such symbolic ownership also comes to an end." 12. From the perusal of the above said features drawn by the 'Hon'ble Special Bench' of the ITAT, it can be gathered that in fact a 'finance lease' can be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another. (2) A contract of sale may be absolute or conditional. (3) Where under a contract of sale, the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred." 13. A perusal of section 4 of the sale of Goods Act as reproduced above, reveals that there are three essentials for the contract of sale i.e. (i) There must be a transfer of general property in the goods sold (ii) It must be by the seller to the buyer which means from one person to another i.e. the seller and buyer must be different persons. It follows from the general rule that a person cannot purchase his own goods. (iii) The third ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er or not) for the Purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract." So even in case of sale of unascertained goods or future goods by description, the goods of that description in deliverable state should be unconditionally appropriated to the contract and both the buyer and seller must have given their ascent to it. The very essential for passing of the property in goods is that the goods must be ascertained and the same should be in a deliverable state and further should be appropriated to the contract and both the parties to the contract must have assented to the said apportionment. 15. Now coming to the case in hand, the goods were allegedly owned by the GEB. The same are allegedly purchased by the assessee vide sale invoice dated 23.03.1994. A perusal of the said sale invoice, copy of which has been placed in the file as Annexure-A, reveals that it is a general sale invoice regarding sale of 1,43,600 ISI marked AC single phase 2.5/10 and 5/20 240 volts energy meters of different make. The specific description of the meters have not been mentioned in the sale invoice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Goods Act 1930. Once it has been found that the transaction in question cannot be said to be a "Sale" being falling short of the requirements of the provisions of the "Sale of Goods Act, 1930", the assessee cannot be said to be the owner of the goods and as such the subsequent lease back of the goods automatically gets invalidated. 17. The learned AR before us, has relied upon a certificate issued by GEB dated 22.03.1994 vide which, it has been certified that 1,43,600 of meters sold to assessee vide sale invoice dated 23.3.1994 have been installed in the premises of various customers located in the State of Gujarat and have been put to use. Even this certificate also does not reveal the identity as to which specifically ascertained meters were actually purchased by the assessee from the GEB. 18. Another fact which can be noted here is that the sale invoice is dated 23.03.1994, whereas, the certificate in which reference has been made to the sale invoice dated 23.03.1994 has been surprisingly issued by the GEB on 22.03.1994 i.e. one day prior to the date of sale of invoice. 19. Further the lease deed which is claimed to have been executed after the transaction of sale of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delivered for the use of the lessee. The first clause of the agreement itself reveals that interest on the loan amount starts on the day as and when the financer pays money for the purchase of equipment and not when the lessor has delivered the goods to the lessee i.e.GEB. (III) As per clause 2.4 of the said lease agreement, whenever, the lessor will place order(s) on the manufacturer of the goods at the request of the lessee and if the lessor makes any advance for other payments towards the purchase of the equipment, but the manufacturer fails to deliver the equipment to the lessor by the stipulated date, the lessee shall make payment to the lessor of the advance along with costs, charges, expenses and even interest on the amount paid by the lessor to the manufacturer. This type of clause is strange to a lease agreement. Further it has been provided that the lessee agrees to indemnify the lessor against all type of losses and damages, the lessor may suffer on account of non delivery by the manufacturer. We are unable to understand as if the equipment will not be delivered by the manufacturer to the lessor, which in turn, is to be leased to the lessee, how can the lessee be liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is selected by the Lessee relying entirely on its own judgment and not on the statements or representations if any, made by the Lessor or its agents or servants." "6.2 The Lessor is not the manufacturer or dealer of the Equipment and that the essential function of the Lessor in this Lease is to purchase the Equipment selected by the Lessee from the Manufacturer designated by the Lessee." "8.2.2. Without prejudice to and in addition in the Lessor's rights provided in Clause 8.2.1 hereinabove, the Lessor shall also be entitled to recover from the Lessee and the Lessee shall be bound to pay to the Lessor the following amounts, viz: (a) the entire amount of the rental for the fixed period of the Lease computed in the manner set out in the Schedule on the footing and as if the Agreement had not been terminated to the end and intent that the Lessee shall pay to the Lessor not only arrears of installments of rental upto the date of termination of the Agreement but also such further installment for the then unexpired residue of the term which the Lessee would have been bound to pay to the Lessor had the Agreement continued. (b) the cost of all repairs and maintenance of the Equipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cept as provided in the agreement. It is very important to note that the lease can be renewed indefinitely at the sole discretion of GEB on a year to year basis on payment of a token lease rental @ Rs. 1/- per Rs. 1,000/- of the cost of the asset. This would mean that though the assessee on paper had become the owner of the electric meters but in reality it could never take possession of those assets. In fact, the lease rentals appeared to have been fixed at such a rate that the investment of the assessee together with the interest would be recoverable over the lease period and thereafter the assessee was to receive token lease rental only. Another important condition which is there in the lease agreement is that even in the event of irreparable loss or damage to the asset as a whole for whatever reason, the lessor would be entitled to recover from GEB the entire amount of rental in the fixed period including the rental for the unexpired portion of the fixed period as if the lease has not been terminated and all other costs incurred by the lessor. According to this strange condition, even after the asset is no longer in existence the lessee has to pay the lease rental even for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the equipments are eligible for 100% claim of depreciation for the purpose of Income Tax Act. If the banks' minimum lending rate would increase, the rental rate would also increase. If for any reason, the claim of depreciation is increased, decreased or disallowed, the rate of rentals in the shape of interest will accordingly decrease or increase. In ordinary sense, these types of clauses cannot be a part of any lease agreement but finance agreement only. The only and only purpose or object of the assessee for this agreement is to earn interest on its capital together with timely refund of the invested capital. The object and purpose of the GEB is to wrongly transfer the right/ eligibility to claim depreciation@100% to the assessee and in lieu thereof to get the loan or finance at a reduced rate of interest in proportion to the gains which the assessee would avail by claiming depreciation. Otherwise, in a normal lease agreement, how can the lessee be concerned as to what benefits are available to the owner/ lessor under income tax act. The lessee may be concerned in the use or enjoyment of the leased property not about the tax benefits available to the owner. The rentals in certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e concerned only to find out whether the said transaction was sham or a valid transaction for the purpose of claim of the assessee regarding depreciation on the assets under the Income Tax act. 23. The ld. counsel for the assessee has relied on the decision of the co- ordinate Bench of this Tribunal in assessee's own case for A.Y. 1995-96 rendered vide its order dated 19.01.2004 in ITA No.976/Mum/1997. A perusal of the said order of the Tribunal shows that the appeal for A.Y. 1995- 96 was filed by the assessee against the order passed by the ld. CIT u/s 263 of the Act whereby the order of the A.O. was held to be erroneous and prejudicial to the interest of the Revenue by the ld. CIT on the ground that the claim of the assessee for depreciation was allowed by the A.O. without conducting proper enquiries to ascertain as to whether the transaction was a lease transaction or a finance transaction. In this regard, six errors were pointed out by the ld. CIT in the order of the A.O. and keeping in view of the same, it was held by the Tribunal that the fact that these purported mistakes were observed by the ld. CIT was sufficient to show that material in this behalf was available on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Indus Ind Bank Ltd. (supra), in our opinion, thus supports the Revenue's case on the issue under consideration. 25. He has further submitted that the Hon'ble Supreme Court in the case of Arvind Narottam-173 ITR 479 (SC) has held that where the true effect on the construction of the deeds is clear, the appeal to discourage tax avoidance is not a relevant consideration. It has been further submitted that in the case of New deal Finance & Investment Ltd; ITAT Chennai Bench in a similar type of case of sale and lease back of electric meters involving RSEB had held that there is no illegality in the claim of the assessee (the lessor) for depreciation because once the assessee is considered as the owner of the assets, the assessee is eligible for the allowance under the Act. Apart from the authorities which found mention in the order under appeal, learned AR has further relied upon the following case laws in support of his averments: 1. The West Coast Paper Mills Ltd. Vs. JCIT ITA No. 5403 decided on 21.6.2005 by ITAT, Mumbai further upheld by the Hon'ble Bombay High court vide order dt. 16.10.2008 and by the supreme Court vide order dated 9.10.2009 2. Prakash Industries vs. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or the assessee is the real owner of the assets or not is again a question of fact which can be determined from the perusal and consideration of the facts of each of the individual case and findings in this respect may differ from case to case. No straight jacket formula can be adopted to say that every case of sale and lease back transactions is sham or genuine. The finding in this respect can be given after appreciation of facts of each case separately. A perusal of the above mentioned authorities reveal that the judges of the Honb'le Apex Court as well Hon'ble High Courts are unanimous to hold that the true legal relation arising from a transaction determines the taxability of the receipt arising from the transaction under the Income Tax Act. In a case, where the terms of the transaction are embodied in a document, the true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In each case the court has, unless prohibited by the Statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of document. For the purpose of deciding whether a particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the parties to the agreement in question was to directly or indirectly, enter into such transaction with a view to reduce the tax liability by claiming higher depreciation. We agree with the view of authorities below that we have to go by the true construction of the agreement between the two parties and not merely by the description given by the two parties. 29. It may be observed that tax avoidance by way of tax planning or structuring the transactions so as to reap the largest tax benefit may be permissible under law but fraudulent transfer of assets or income or engaging in sham transactions with the object of reducing the tax liability cannot be said to be a case of tax avoidance but of tax evasion. Any act or attempt to reduce the tax liability by deceit, subterfuge or concealment is not permissible under law. 30. In the case in hand, whole of the effort has been made to transfer the right to claim depreciation on the assets to the assessee for the purpose of the Income Tax Act, but not the assets itself. It is always the goods or the assets itself which are the primary subject of a valid transfer, not the incidental benefits, which automatically pass to the transferee wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of interest u/s 234B was not justified. It was further contended in the said case that the additional liability of tax was neither known nor anticipated at the time of filing of the revised return. It is also pertinent to mention here that in the said case, the assessee had already deposited advance tax more than the amount of tax which was finally worked out to be payable by the assessee in consequence of reassessment under section 147 of the Act. The ld. Tribunal in the said case while relying upon various case laws, observed that where due to subsequent judicial decisions of the High Court or the Hon'ble Supreme court, the tax liability of the assessee was increased in reassessment cases, and such additional liability was never anticipated by the assessee and where the assessee has already deposited advance tax more than the amount of additional tax liability, the levy of interest under section 234B was held to be not justified. It was also observed by the Tribunal that where despite taking due care and diligence , the assessee could not have anticipated the enhancement of income, the levy of interest was not justified. 39. However, as observed above, in the instant case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... super class construction in the year 1993-94. On the aforesaid basis the cost of super structure was worked out at Rs. 75,36,000/- and entitlement of depreciation was worked out at Rs. 4,04,700/- against the claim of depreciation of Rs. 22,81,810/-. Thus, he disallowed depreciation to the extent of Rs. 18,74,110/-. While doing so, the Assessing Officer observed that the cost of the premises includes the cost of Landas well as cost of super structure. He referred to the judgment of Hon'ble Supreme Court in the case of Alps Theatre-65 ITR 317 as per which depreciation is admissible in respect of the cost of super structure only and not in respect of the cost of land. 45. On appeal the ld. CIT(A) deleted the said disallowance observing that the cost of land in comparison to the cost of flat might be very nominal and it was not possible to separately calculate the same, hence was liable to be ignored. 46 . The ld. DR before us has relied upon the Assessment order. He has further submitted that Assessee by becoming the member of the society gets his undivided share in the land owned by the society. On the other hand, the ld. AR has submitted that its claim for depreciation is fully al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... super structure valuation report obtained by it from the government approved valuer, which fact can be observed from para 5.3 of the CIT(A)'s order. Under such circumstances, the assessee is bound by the working of the cost/value of the land of super structure submitted by itself. The said valuation according to the assessee has been done by the government approved valuer. In our view, the estimation of the value of land by the Assessing Officer himself cannot be sustained in the presence of the report of the government approved valuer. Accordingly, we direct that the value of the land be taken as per the valuation report given by the assessee and the claim of depreciation of the super structure be allowed accordingly. 49. The appeal of the revenue on this issue, subject to our above observations, is hereby allowed. ITA No. 7317/M/02 A.Y. 1995-96 50. This appeal by the revenue is against the deletion of the disallowance of Rs.3770931 by the CIT(A) being the depreciation on office premises and residential premises. 51. The issue under consideration in this appeal is identical to the issue involved in ITA No. 2406/M/2001relevant to the AY. 1994-95. 52. In view of our findings g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned CIT(A) was not correct in cancelling the withdrawal of reduction of the so-called capital component of Rs.87,99,044/- out of the lease rent received from Gujrat Electricity Board when the same was offered to tax by the assessee in its return of income and no such claim was made before the Assessing Officer during the assessment proceedings. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in holding that the provisions of section 234D of the I.T. Act, 1961 are substantive and not procedural." 66. In view of our finding in ITA No. 4069/Mum/2001 for Assessment Year 1994-95 holding that the transaction in question is held to be a finance transaction, the principal component in the lease rent received cannot be treated as income. Evidently, since the transaction was held to be for financing the electric meters, only that portion of the lease rent which represents interest/finance charges can be treated as income. The capital component included in the lease rent being return of capital investment cannot be treated as income. In view of our finding above, we do not find any merits in this appeal of the revenue. It is accord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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