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Teletube Electronics Ltd. Versus Commissioner of Income Tax, Delhi-VI And Vica-Versa

2015 (9) TMI 1187 - DELHI HIGH COURT

Nature of the transaction - lease agreement or in the nature of transfer of capital assets - Whether the Tribunal was right in law in holding that lease for a period of ten years of plant and machinery along with land and building was a capital asset within the meaning of section 2 (14)? - Held that:- It might be possible in theory for a leasehold right to be construed as a capital asset since the words used in Section 2 (14) (a) are indeed of a wide amplitude, in the context of the present case .....

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old rights given to the Assessee under the lease agreement is a 'capital asset'.

Consequently, question is answered by holding that the leasehold right, given to SGL for a period of ten years, of the plant and machinery along with land and building, is not a 'capital asset' within the meaning of Section 2 (14) (a) of the Act.

Was there a 'transfer' of a capital asset? - Held that:- The mere fact that the Assessee may have applied under Section 230A of the Act to seek permis .....

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also unable to agree with the contention of the learned counsel for the Revenue that the lease of the plant and machinery can be separated from the lease of the land and buildings and the former transaction held to be valid and the latter a sham transaction. The Court is of the view that the context in which the decision in Shin Satellite Public Co. Ltd. v. Jain Studios Ltd. (2006 (1) TMI 552 - SUPREME COURT OF INDIA ) was rendered was entirely different from the present case and that decision .....

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ook place on 8th September 2005 and after accepting the Assessee's valuation of the said land the CIT (A) has directed that the Assessee be taxed on long term capital gains arising out of the said sale of the land. The said order also shows that for the building, which was also sold as part of the sale of land, the Assessee has continued to claim depreciation till the date of such sale. The fact that the Assessee continued to claim depreciation on the plant and machinery and building is another .....

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Consequently, there are several factors in favour of the Assessee that persuade the Court to hold, that the ITAT was not right in holding that the transaction of lease of the facilities was a sale of leasehold rights and that there was in any event a sale of the plant and machinery. Decided in favour of the Assessee and against the Revenue.

Whether there could be said to be any capital gains under Section 45 of the Act? - Held that:- In light of the above discussion, the q .....

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omputation of the capital gains. - Decided in favour of assessee. - ITA 38/2002, ITA 132/2002 - Dated:- 24-9-2015 - Dr. S. Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr. Ajay Vohra, Senior Advocate with Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advocates For the Respondent : Mr. Raghvendra K. Singh and Mr.Kamal Sawhney, Advocates JUDGMENT Dr. S. Muralidhar, J. 1. These are two appeals under Section 260A of the Income Tax Act, 1961 ( Act ) by the Assessee and the Revenue against the imp .....

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eaning of section 2 (14) of the Act? (2) Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that lease of facilities i.e. plant and machinery along with and building amounted to transfer within the meaning of Section 2(47) of the Act? (3)Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that transaction of lease of facilities was a case of sale of leasehold rights? (4) Whether in the facts and circumstan .....

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division situated at Ghaziabad in Uttar Pradesh and a glass bulb division at Bhiwadi, Rajasthan for manufacturing glass shells/bulbs for domestic use. The said glass bulb division, which had three lines i.e. Line-I, Line-II and Line-III, became operational during the AY 1984-85. The land on which the Bhiwadi division was situated, i.e. 496/497 RIICO Industrial Area, was given on lease to the Assessee by the Rajasthan Industrial Development and Investment Corporation Limited (RIICO) under a lease .....

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ruary 1994 between the Assessee and the SGL whereby the facilities defined as the plant and machinery and land and buildings of the glass bulb division at Bhiwadi, Rajasthan was leased to SGL for a period of 10 years with effect from that date. 5. For the purposes of determining the lease rental to be charged, the Assessee got the business of the glass bulb division valued by M/s. S.S. Kothari & Co., Chartered Accountants (CA). They valued the business as a going concern at ₹ 20.72 cro .....

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was to commence from the date of agreement i.e. 24th February 1994. During the moratorium period, the Assessee was under an obligation to shift the plant and machinery from Bhiwadi and instal it at the premises of SGL at Kota. The cost of shifting was to be reimbursed by SGL. 6. Pursuant to the approval of the draft lease agreement by the financial institutions, Line-II was shifted from Bhiwadi to Kota in April 1993. Lines-I and III were shifted after July 1994. In the return of income filed on .....

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essee to explain why the lease agreement should not be treated as a transaction in the nature of sale of the movable/depreciable assets and capital gain not be charged under Section 45 read with Section 50 of the Act. In respect of the said SCN, the Assessee replied on 25th March 1997 contending that the lease could not be treated as transfer . 8. By the order dated 27th March 1997, the AO rejected the above plea and held the lease agreement was in effect a transfer within the meaning of Section .....

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n, termination, cessation or cancellation by satisfaction or otherwise of all or any of bundle of rights which the Assessee has in capital assets whether such asset is corporeal or incorporeal. The essence of the lease did not exclude the contextual or ordinary meaning of the word transfer . (ii) A survey carried out by the Income Tax Department (ITD) on 28th January 1997 showed that the Assessee had not parted with possession of either the land or the building and had only shifted the plant and .....

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cal as well as practical teaching; the Administrative Block is converted into a dormitory type accommodation for the trainees and there was a canteen as well as a volley ball and cricket ground. The middle and rear portion of the factory building had a lot of old machinery scrap belonging to SIL, a sister concern of the Assessee. Some plant and machinery like DG Sets, two Compressors, one Transformer, two Diesel Tanks and two LPG Tanks still remained in the factory premises. This made it appear .....

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White Television market would also disappear. The inevitable conclusion was that the sealing facility had been in effect sold for a handsome payment. (iv) In respect of the lease agreement, the Assessee had itself applied under Section 230A of the Act for a no objection certificate (NOC) in anticipation of the transfer of the leasehold rights in respect of the land which had been leased to the Assessee by RIICO along with the building and the ownership rights of the plant and machinery. In colu .....

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th Section 45 of the Act. (v) The routine management of the SGL was in the hands of Samtel Group and the Assessee only had equity participation which had been pledged to RIICO as an additional security. Given the above relationship between the TEL and SGL, it was plain that the SGL was also part of the Samtel Group. From the joint venture (JV) agreement between Corning and SIL, particularly in view of the non-compete clause , it was plain that the intention was to get rid of the sealing facility .....

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Y 1995-96 and 1996-97 it had been incurring losses. By resorting to the said device, SGL was shown to be incurring expenditure and Assessee as earning income which was getting absorbed by its losses and carried forward losses. Lines-I and II would have completed their life terms much before the expiry of the lease period and Line-III would have zero life by 2004. Therefore, in terms of the lease agreement, the assets to be reverted to the Assessee would only have scrap value. Consequently, the l .....

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the Appellant carrying on a competing business and other terms of the lease made the transaction of the lease a colourable device. 10. The CIT (A) too held that the application made by the Assessee under Section 230A of the Act revealed that the Assessee s real intention to treat the transaction as one of transfer of plant and machinery by way of sale. The lessee had no use of land and building and whatever use was there was at the behest of the lessee and its sister concern. In terms of Clause .....

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th the conclusion reached by the AO that the accounting treatment given by SGL revealed that it had started treating the plant and machinery as its own. The total lease value was ₹ 20.73 crores and after adjusting the down payment of ₹ 3.46 crores, the lessee was due to pay 14% interest on the balance of ₹ 17.09 crores. The treatment of ₹ 20.73 crores was as if it was due to the lessor in the relevant previous year. This was a case of accrual during a previous year as per .....

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ter expiry of the lease the plant and machinery would have very little value since the black and white television market was in a decline was not relevant for coming to the conclusion that there was a sale of plant and machinery. It was not the case of the Revenue that the plant and machinery would continue to remain in possession with the lessee since on expiry of the period of the lease, the lessee was bound to restore it to the lessor. The Revenue had failed to prove that there was in fact a .....

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s of the lease deed clearly showed that there was a grant of lease of the land with building thereon as well as the plant and machinery against huge consideration. The finding of the AO that the Assessee was not dispossessed of the land and building was based on suspicion and conjectures . The AO had not given any concrete material to prove whether the lease was a sham transaction. Therefore, the conclusion reached by the ITAT was that there was a package deal for lease of the building and plant .....

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ld be invoked only where the transaction did not fall either in the general meaning of the word 'transfer' or within any of the sub-clauses in Section 2 (47) of the Act. The meaning of transfer in Section 269UA(f) has to be restricted for the purposes of Chapter XXC. The ITAT also held that merely because the payment of instalment was shown as lease rental, it could not be said that the instalments paid did not form part of the price. Once the price of the asset was fixed it was between .....

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nd building, the ITAT held that their ownership continued to remain with the Assessee. The order of the CIT(A) was modified and the AO was directed to re-compute the capital gain in accordance with law. The AO was also directed to re-adjudicate the consequential issues like depreciation, investment allowance, terminal allowance, etc. in accordance with law. ITAT's order on the Assessee's application under Section 254 (2) 17. The Assessee moved an application under Section 254(2) of the A .....

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apacity of the Assessee was given weightage in determining the value. According to the Assessee 66.67 % of the value was towards loss of profit earning capacity and, therefore, to that extent the sale consideration was to be split between lease consideration for lease of assets and sum received for the Assessee not indulging in a competing business. A direction was sought to clarify the said position. 18. In the said application, the Tribunal inter alia ordered as under: 4. After considering the .....

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n relates to total business assets comprising of various assets such as non depreciable land, buildings, plant and machinery (etc.). There may be different period of holding in respect of such assets and different computation will be required for computing capital gains. It is, therefore, necessary to apportion the sale consideration in respect of various assets which together form the leasehold business assets. Therefore, in the interest of justice and in order to avoid multiplicity of litigati .....

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tal gain at ₹ 55,62,066. The Assessee then took up that order in appeal before the CIT(A). The appeal was dismissed by the CIT (A) by order dated 10th November 2003. Against that order the Assessee filed ITA No.59/Del/2004 before the ITAT. By the order dated 18th August 2004, the appeal of the Assessee was partly allowed by the ITAT. That order forms subject matter of ITA No.240/2005 in this Court. Although the said appeal was originally listed together with the present appeals, it has bee .....

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he above facts on record by filing CM No.19803/2014. However, the said application was dismissed by the Court on 4th February, 2015, on the ground that the facts urged do not reflect on the merits of the case as they relate to assessment of later years. Mr. Vohra nevertheless sought to rely on the assessment orders and orders in appeal pertaining to the subsequent AYs which record the above transactions. 21. With the leave of the Court, Mr. Vohra placed on record the following documents: i. Copy .....

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Y 2006-2007 in the case of the Petitioner. Submissions of counsel for the Revenue 22. In the appeal filed by the Revenue, it was submitted by Mr. Raghvendra Singh, learned Junior Standing Counsel for the Revenue, that the lease agreement was an exercise in tax -avoidance and, therefore, both the AO and the CIT(A) rightly held that the real transaction was one of sale of the assets constituting transfer and attracting capital gains under Section 45 read with Section 50 of the Act. He submitted th .....

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itself, i.e. prior to the date of the lease agreement. 23. Mr. Singh further submitted that it is unlikely that there would be a lease for a value of ₹ 20.729 crore which was the entire value of the Assessee as a going concern if indeed what was being transferred was only the leasehold rights. Mr. Singh placed considerable reliance upon the application made by the Assessee under Section 230A of the Act seeking permission for transfer of the leasehold rights in the land at Bhiwadi together .....

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ubious methods and subterfuges and that the Assessee could not seek to take shelter behind a draft agreement not recognised by law. 25. Mr. Singh submitted that there was no answer to the Revenue s contention that the residual value of the plant and machinery after termination of the lease would be negligible and this when seen in light of the consideration of the transfer, i.e. ₹ 20.729 crore, it was evident that the intention was to sell the plant and machinery to the lessee. Mr. Singh r .....

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crore. According to Mr. Vohra the terms of the lease agreement clearly indicated that the lessee had no right to title and interest and the leased property which had to revert to the lessor at the end of the period of lease. 27. Mr. Vohra referred to Section 2 (47) (vi) read with Explanation 1 thereto of the Act which defines 'transfer' and read it along with the definition of 'immovable property' under 269 UA (d) (i) and (ii) of the Act and the word 'transfer' in Sectio .....

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transfer of long term capital assets and which shall be deemed to be the income of the previous year in which the transfer took place. The proviso stated that where the undertaking was held to be for not more than 36 months immediately preceding the date of transfer it would be deemed to be the capital gains arising from the transfer of short-term capital assets. If it was the case of the Revenue that there was in fact any such slump sale the treatment itself would be very different and the que .....

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e Act which is a sale-cum-lease transaction. He also referred to the decisions in Commissioner of Income Tax v. Cosmo Films Ltd. [2011] 12 taxmann.com 217 (Del) and Commissioner of Income Tax v. George Willamson (Assam) Limited [2004] 136 Taxmann 52 (Gau.). He submitted that the lease agreement was not intended as a tax avoidance device. The consideration was fixed on the basis of the value of the entire going concern because of the opportunity loss of the lessor. 29. Mr. Vohra distinguished the .....

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v. Jain Studios Ltd. (2006) 2 SCC 628 in support of his submission that the lease of the plant and machinery was capable of being severed from the lease of the land and building. He submitted that the consistent position taken by the Revenue throughout was that the lease of land and building was sham and it was in fact the Assessee who has, by making an application under Section 230A of the Act, been taking contradictory stands. He submitted that the fact that the lessee continued to be possess .....

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nd, therefore, it amounted to 'transfer' of a capital asset. According to him, Section 269UA(d)(ii) read with Section 269UA(f)(ii) expanded the scope of the definition rather than narrowing it. He also referred to Sections 105 and 108 of the Transfer of Property Act, 1882 ( TP Act ). Is the leasehold right a capital asset under Section 2 (14)? 32. The first issue that is required to be considered is whether the leasehold rights in the plant and machinery, land and buildings is a 'cap .....

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lects the legislative intent to bring within its fold even a lease of immovable property. However, the duration of the lease would be a critical factor in determining whether the property in question, viz., leasehold rights would be a capital asset. 34. For a lease of an immovable property defined as such in Section 105 of the TP Act to be a capital asset within the meaning of Section 2 (14) (a) of the Act, the nature of the leasehold right granted to the lessee under the lease deed will have to .....

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possess and enjoy the property but also exploit it for the minerals. The lessee in a mining lease can, therefore, exploit the property and change its essential features and substratum with the permission of the lessor. This right, which is more than a mere right to possess a property to the exclusion of everyone else for a limited period, could partake the character of a capital asset. 35. However, in the present case, where the question arises in the context of the next question whether the lea .....

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ess the facilities leased to it for a limited period of ten years, with further restriction on sub-letting it or transferring any right or interest therein to anyone without the permission of the lessor and with the lease agreement making it explicit that at the end of the lease period the facilities leased it SGL would revert to the Assessee, it is difficult to hold that the leasehold rights given to the Assessee under the lease agreement is a 'capital asset'. 36. Consequently, question .....

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is whether in the facts and circumstances the lease of the plant and machinery along with the land and building would amount to a 'transfer in relation to a capital asset' within the meaning of Section 2 (47) of the Act? 38. Section 2 (47) (vi) of the Act defines transfer to mean any transaction, whether "by way of any agreement or any arrangement or in any other manner whatsoever", which has the effect of "transferring, or enabling the enjoyment of, any immovable property .....

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or part of a building is to be transferred together with any machinery, plant, furniture, fittings or other things, such machinery, plant, furniture, fittings or other things also. Explanation.- For the purposes of this sub- clause," land, building, part of a building, machinery, plant, furniture, fittings and other things" include any rights therein; (ii) any rights in or with respect to any land or any building or a part of a building (whether or not including any machinery, plant, f .....

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e above sub-clauses makes it clear that the kind of right which is transferred under the lease agreement in question viz., leasehold right, can be relatable to sub-clause (i) of Section 269 UA (d) and not sub-clause (ii). That is not the end of the matter. The word 'transfer' for the purposes of Section 269UA (d) (i) has been defined under Section 269UA(f)(i) which states that: 269UA. (f) "transfer" (i) in relation to any immovable property referred to in sub-clause (i) of clau .....

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of not less than twelve years, if the aggregate of the term for which such lease is to be granted and the further term or terms for which it can be so extended is not less than twelve years; (emphasis supplied) 41. The case of the Assessee is that by virtue of Explanation (1) to Section 2 (47), Section 269UA (d) (i) is attracted. Section 269UA(f)(i) describes 'transfer' for the purposes of Section 269 UA (d) (i) to mean the transfer of property, including by way of lease, for a term not .....

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ion did not fall under the general meaning of the word transfer or the items listed at sub-clauses (i) to (v). It further pointed out that while the legislature had incorporated Section 269UA(d) it would be illegal to further incorporate the meaning of the words 'transfer' as defined in Section 269UA(f). It was held that the meaning of transfer in Section 269UA(f) had to be restricted only for the purposes of Chapter XXC. 43. The Court is unable to agree with the above approach of the IT .....

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nsfer itself has been defined under Section 2(47) (vi) and by virtue of Explanation 1 "shall" have the same meaning as Section 269UA(d) then it is not possible to 'restrict' Explanation 1 to only those transactions described in Chapter XXC. Explanation 1 is a deeming fiction and incorporates by way of reference the provisions of Section 269 UA (d) in order to understand the meaning of the word 'transfer' for the purposes of Section 2 (47) (vi). Therefore, that entire sc .....

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supra), A.R. Krishnamurthy (supra) and CIT v. Narang Diary Products (1996) 219 ITR 478 (SC). Reference has also been made to Section 2 (47) (ii) which talks of the "extinguishment of rights". 45. If the lease agreement dated 24th February 1994 is read carefully it is clear that no proprietary right is created in favour of SGL thereunder. Clause 3.1(c) which provides that the lessee, i.e. SGL, during the term of the lease shall not assign, sublet or part with possession of the facilitie .....

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ent footing. In Traders and Miners Ltd. (supra), the lease was for 99 years. The subject matter of the lease was not merely the right to hold the land but also exploit the valuable interest in the land, i.e. right to extract minerals therefrom. The consideration for the lease was the combination of a salami and a yearly reserve rent. Capital gain was charged with reference to the salami and not the yearly reserve rent. 47. In A.R. Krishnamurthy (supra) the mining rights were leased for a period .....

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without any other right to alter the nature or structure of the land or extract anything therefrom which is what has been transferred under the lease agreement in the present case. No premium has been paid by the lessee and SGL has not been granted any proprietary right in the land or the building. 48. In R.K. Palshikhar (supra), the Assessee had obtained permission to develop agricultural land to make it suitable for a housing colony. Thereafter he sub-divided the land into plots and gave them .....

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tation of the words "otherwise transferred" in Section 33 of the Act. The context was the provision of rebate in respect of a new machinery and plant owned by an assessee and wholly used for the purpose of business. In that context it was held that not only ownership but also the exclusive use of the assets by the assessee was essential for claiming rebate. Under Section 45 there is no requirement of exclusive use by the owner of the asset. 50. The mere fact that the Assessee may have .....

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ion 2 (47) with Section 45 of the Act. 51. The ITAT has itself observed that the mere fact that the land and building may not have been used by the lessee or that after expiry of the lease the plant and machinery would have very little value since the black and white television market was in a decline were by themselves not relevant for coming to the conclusion that there was a sale of plant and machinery or of the leasehold rights in the land and building. The lease agreement had to form the fu .....

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ld have to find out as to what was the real intention of the parties in entering into the agreement and that "such intention has to be gathered from the words in the said agreement in a tangible and in an objective manner and not upon a hypothetical assessment of the supposed motive of the Assessee to avoid tax." In CIT v. George Willamson (Assam) Limited (supra) the Court citing the decision of the Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 132 Taxman 373 (SC) obse .....

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e over form principle or piercing the corporate veil test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. To give an example, if a structure is used for circular trading or round tripping or to pay bribes then such transactions, though having a legal form, should be discarded by applying the test of fiscal nullity. Similarly, in a case where the Revenue finds that in a Holding Stru .....

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s to. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the look at test to ascertain its true legal nature [See Craven v. White (supra) which further observed that genuine strategic tax planning has not been aband .....

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from the present case and that decision is of no assistance to the Revenue here. Was there a 'sale' of leasehold rights? 54. This brings us to question Nos.3 and 4, i.e. whether a transaction pertaining to land and building or of plant and machinery could be treated as sale of either the leasehold rights in respect of the land or the sale of the plant and machinery itself? 55. There seems to be a contradiction in the order of the ITAT where in para 46 it states that in the present case .....

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w the ITAT has arrived at the concept of sale of leasehold rights because a sale connotes absolute transfer of rights with no reversion of any part thereof to the original owner. There has to be an extinguishment of ownership rights in order that a transaction can be said to be a 'sale'. Here, as noted earlier, the lessee does not even have the right of sub-letting the facilities. The leasehold right is only for a period of ten years and at the end of that period the leased facilities re .....

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t it was not going to be in control of the assets or use them for its business, that there was going to be a loss of business opportunity which, therefore, had to be compensated and this weighed with the CAs in fixing the valuation appears to be a plausible one. While there is a non-compete in the agreement between the TEL and SGL, that by itself does not lead to the conclusion that the transaction of lease was in fact one of sale. 57. In any event this whole hypothesis stands disproved by the f .....

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; 4.01 crores took place on 8th September 2005 and after accepting the Assessee's valuation of the said land the CIT (A) has directed that the Assessee be taxed on long term capital gains arising out of the said sale of the land. The said order also shows that for the building, which was also sold as part of the sale of land, the Assessee has continued to claim depreciation till the date of such sale. The fact that the Assessee continued to claim depreciation on the plant and machinery and b .....

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