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2015 (9) TMI 1187

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..... se 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 permission of the Department cannot be held against it as far as the correct legal position is concerned. In other words the fact that certain columns in the concerned form were filled by the Assessee to imply that there was a transfer of leasehold/ownership rights cannot be read to constitute a waiver by the Assessee of the legal defences that flow from a correct interpretation of the clauses of the lease agreement and from a correct reading of Section 2 (47) with Section 45 of the Act. This Court is 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. Th .....

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..... e and has been acted upon by the parties as such. This was not a device adopted by the Assessee for tax avoidance. ITAT erred in holding that the transaction in question was chargeable to capital gain under Section 45 of the Act. There was no occasion for the ITAT to remand the matter to the AO for re-computation 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 impugned common order dated 28th September 2001 passed by the Income Tax Appellate Tribunal ( ITAT ) in ITA No. 892/Del/99 for Assessment Year 1994-95. Questions of law 2. On 25th November 2002 while admitting the appeals, the following questions of law were framed for consideration: (1) Whether on the facts and circumstances of the case, the Tribuna .....

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..... 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 crores. This formed the basis for fixing the consideration for the facilities leased out. The lease agreement noted that an advance of ₹ 3.64 crores had already been paid by SGL to the Assessee on 25th January 1993. The balance sum of ₹ 17.09 crores was payable in 16 equal half-yearly instalment with add on interest @14% per month. After accounting for a moratorium of two years, the payment of lease rental was to commence with effect from 1st April 1996. The payment of interest however, 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 .....

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..... and building was in fact not leased. The survey revealed that a training centre called Samtel Training Centre was in operation in the premises; the front portion of the factory building was being used for theoretical 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 that the premises was still being utilised by the Assessee and its sister concern for their own purposes. (iii) SGL was to provide plant and machinery for manufacturing the glass component and SIL was to provide sealing facility which in the context could only be plant and machinery. The valuation report of the CA showed that the residual life of the plant and equipment was not more than 8 to 10 years and, therefore, their useful life would come to an end by 2004 and by that tim .....

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..... fore, in terms of the lease agreement, the assets to be reverted to the Assessee would only have scrap value. Consequently, the lease was a transfer attracting capital gains but only in relation to transfer of movable assets. Thus short term capital gains were attracted under Section 50 of the Act. Order of the CIT (A) 9. The appeal filed by the Assessee was dismissed by the CIT (A) by an order dated 23rd February 1999. The CIT (A) affirmed the factual findings of the AO and concluded that the fact of the use of the Bhiwadi premises by other parties; the shifting of Line-II before the date of the lease; the prohibition on 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 3.1(c) of the lease agreement, the lessee had to take prior w .....

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..... g was concerned, the ITAT observed that the contents 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 and machinery. It could not be held to be a colourable device as contended by the Revenue. 14. The ITAT referred to the decisions of the Supreme Court in A.R. Krishnamurthy v. CIT (1989) 176 ITR 417 (SC) as well as in Palshikhar HUF v. CIT 172 ITR 311(SC) and held that the transaction of lease would fall within the general meaning of transfer of a capital asset. Therefore, it would be futile to examine whether Section 269UA was applicable. The ITAT held that the Explanation to Section 2(47) could be invoked only where the transaction did not fall either in the general meaning of the word 'transfer' or within any of the sub-claus .....

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..... find substance in the submissions of Id counsel of assessee that Tribunal has inherent power to clarify its order, however, subject to the condition that it does not affect or alter the findings recorded by the Tribunal. We are also in agreement with Mr. Sahu that total consideration for sale of leasehold business assets has been determined by the Tribunal and, therefore, the same cannot be altered by any means. However, it is also true that such sale consideration 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 litigation, the AO is directed to bifurcate the sale consideration in respect of different categories of assets and then compute the capital gains in accordance with the directions given in our order. Proceedings pursuant to the reman .....

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..... 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 that the ITAT ignored the facts revealed in the survey that was undertaken in the premises of the Assessee on 28th January 1997. The survey made it plain that only the possession of plant and machinery was given to SGL whereas the land and building were retained by the Assessee for the purposes of running a training centre. No goods belonging to the lessee SGL were found in the premises. Further it was revealed that the Line 2 of the plant and machinery at Bhiwadi had been shifted from April 1993 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 .....

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..... under Section 2 (14) of the Act. Mr. Vohra pointed out that Section 50B was a special provision for computation of capital gains in case of a slump sale which is inserted with effect from 1st April 2000. Under Section 50B (1) profits or gains arising from a slump sale would be chargeable to income tax as capital gains arising from the 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 question of any disallowance as a revenue expenditure would not even arise. He pointed out that the Revenue was unclear whether the transaction was a lease or a sale. 28. Emphasising that the substance of the transaction was only a lease, Mr. Vohra submitted that the actual terms of the lease deed have to be looked into to determine what the intention of the par .....

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..... 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 'capital asset' within the meaning of Section 2 (14) of the Act. 33. Section 2 (14) (a) of the Act defines 'capital asset' to mean property of any kind held by an Assessee, whether or not connected with his business or profession. The exceptions are set out in sub-clauses (i) to (vi). It is not the case of even the Assessee that the property in question falls within any of those exceptions. The words any kind which follow the word property' in Section 2 (47) (a) reflects 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 grant .....

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..... the lease agreement dated 24th February 1994 is a capital asset, the next question, which is by far the most crucial as far as the present appeals are concerned, 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. Explanation 1 to Section 2 (47) states that for the purposes of sub-clause (vi), immovable property shall have the same meaning as in clause (d) of Section 269UA. This insertion is given retrospective effect from 1st April, 1962. 39. Section 269UA (d) has, therefore, been incorporated by reference into Section 2 (47) (vi). It defines immovable property to mean: 269UA. (d) immovable property means- (i) any land or any building or part of a building, and includes, where any land or any building or part of a building is t .....

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..... ses of Section 269 UA (d) (i) to mean the transfer of property, including by way of lease, for a term not less than twelve years. Therefore, in the present case the Assessee is right in contending that since the lease is for a period of ten years, there is no 'transfer' of a capital asset within the meaning of Section 2 (47) (vi) of the Act read with Explanation 1 thereto. 42. The ITAT rejected the above contention since according to it the transaction of lease fell within the general meaning of 'transfer'. According to the ITAT Explanation 1 could be invoked only where the transaction 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 ITAT to interpreting what appear to be plain and unambiguous provisions of the Act. I .....

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..... ely different 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 of ten years. The consideration was a premium of ₹ 5 lakhs plus a royalty of ₹ 12 per sq. cubic ft of clay extracted subject to a minimum of ₹ 60,000 per year. Interestingly, the fact that there was a transfer of a capital asset was not contested by the Assessee in that case. The right transferred by the lease deed was the right to exploit the land and extract the clay which flowed from the ownership of the land. This was therefore more than a mere right to possess the property 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 pr .....

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..... p between the parties could not have been re-configured on the basis of surmises and conjectures. The AO and CIT (A) appeared to have proceeded on the basic suspicion that the lease agreement was a tax avoidance device and this prevented them from objectively viewing the transaction for what it in effect was. The decision in CIT v. Cosmo Films Ltd. (supra) reiterated the settled legal position that the court would 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) observed: It is open for Assessees to arrange their affairs in such a manner that it would not attract the tax liabilities, so far as it can be managed within the permissible limit of the law. Tax management is permissible, if the law authorises so. 52. Recently, in Vodafone International Hold .....

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..... 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 the land is not a depreciable asset and that as far as the building and plant and machinery were concerned, the ownership thereof remained in the Assessee and, therefore, it could not be said that either the asset itself have been sold or the block of assets ceased to be in existence. The ITAT appears to acknowledge that the ownership of the assets continued with the Assessee. However, the ITAT proceeded to hold that the leasehold rights and not the asset itself was sold. It is not understood how 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 .....

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..... t could not have been anticipated at the time the AO or the CIT (A) decided the issue in the present case, it completely vindicates the Assessee's stand in relation to the nature of the transaction forming the subject matter of the lease agreement. 58. Consequently, there are several factors in favour of the Assessee that persuade the Court to hold, with reference to question Nos. 3 and 4 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. The Court answers question Nos.3 and 4 in favour of the Assessee and against the Revenue. Was there a capital gain under Section 45? 59. The last question that requires to be addressed whether there could be said to be any capital gains under Section 45 of the Act? In light of the above discussion, the question will have to be answered in favour of the Assessee and against the Revenue. The Court is of the view that the transaction in question was nothing more than a transaction of lease and has been acted upon by the parties as such. This was not a device adopted by the Assessee for tax avoidance. 60 .....

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