9911796707
TMI Blog2006 (11) TMI 653X X X X Extracts X X X X X X X X Extracts X X X X ..... lidated order. 3. Revenue's Appeal (ITA No. 1427/Ahd/2003):- 3.1 The brief facts of only issue involved in revenue's appeal which relates to allowance on depreciation to the assessee on assets covered by purchase and lease-back transactions and as have been revealed from the records are that the assessee, which is a Limited Company, is in the business of leasing of assets. The return for assessment year 1994-95 was furnished on 29-11-1994 declaring a total income of ₹ 1,19,93,544 which was inclusive of lease rent received from leasing out the machinery to M/s. Salem Textiles Ltd. situated at Bangalore. 3.2 The facts resulting in receipt of lease rent form M/s. Salem Textiles Ltd., Bangalore were that M/s. Salem Textiles Bangalore was initial owner of various machineries, but since it was in need of finances, it sold the following machineries to the assessee for a price of ₹ 50,10,100 on 20-1-1994 :- Bill No. Date Name of machinery Amount lakhs Remarks S. 1. Purchased (Rs.)[lakhs] Bill No. Date Name of machinery Amount lakhs Remarks S. 1. Purchased (Rs.)[lakhs] 20 3-1-1994 SH Confed Speed Frames 12.00 11.506 21 4-1-1994 4 SHILR draw frames 2 SHILR Speed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of providing finance to M/s. Salem Textiles Ltd. and, therefore, the assessee was not entitled to depreciation on the machineries alleged to have been purchased and leased back. The relevant part of conclusion arrived at by the Assessing Officer as contained in page Nos. 9 to 13, reads as under:- "However, the conclusions which can be reached in the case of the assessee Company are as broadly are as follows:- Even if it is presumed that assessee was the owner of equipments it could at best be treated as a fractional owner as the equipments leased were only indivisible parts of the plants set up by lessees. A fractional owner of an asset is not enticed to depreciation under section 32 in view of the decision of Supreme Court in the case of Seth Banarasidas Gupta (176 ITR 783). From the analysis of the terms of lease agreements and the facts surrounding the alleged lease transactions the following facts emerge, which indicate the real intention of the parties to the agreements and which are contrary to the form of lease and the claim of absolute ownership of the assessee over the leased assets. The payment of cost of acquisition of an asset can be made by a person in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets are essential part of main plant and in no eventuality the same can be removed. Even there is no use of such assets independent of plant so ownership, if any is only technical and on paper for a limited time. In sale and leased back transactions, the assets form integral and indispensable parts of lessee's manufacturing/operational facilities and except providing securities of such assets on paper, there cannot be any basis for purchases and sale. In all lease cases lessees had approached the lessor with a request for finance either to meet their requirement of purchase of asset or to meet their other liabilities (sale and lease back transaction) and lessor (assessee) had agreed to give finance. Thus, all these transactions are to be constructed under general law as loan transaction looking to the substance of transactions and not to be related as genuine lease transactions. The assets were acquired by the assessee with a specific understanding that the lessees would take the assets on lease for the whole useful life and it never intended to posses the asset or exploit it on its own. Bombay High Court's decision in the case of Sohanlal Naraindas v. Laxmidas (67 Bom. L.R. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. In the case of assessee lease transactions are nothing but finance arrangement in substance only invoices are exchanged and agreements are made in such a way that it gives a colour of sale and actual lease back. All the circumstances and assessee's involvement of interest in leased asset clearly proves that the transaction as finance transaction. In view of the factual and legal position establishing assessee's lease transactions as finance leases, the claim of depreciation on leased assets made by the assessee is not considered allowable. The same is not allowed considering the lease transactions of the assessee as finance leases as against operating lease. And purely loan funding arrangement." 3.7 The Assessing Officer, rejected the assessee's alternative ground, wherein it was pleaded that in case depreciation is not allowed, then only the interest computed involved in monthly lease rent be taxed, by observing as under:- "Since assessee has not agreed/accepted the addition on account of depreciation claimed on finance leases and will contest the same in appeal, this issue is not finally settled and therefore, lease income offered by the assessee in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15,93,180 10,02,000 5,91,180 6,16,477 1997-98 12 15,93,180 10,02,000 5,91,180 6,16,477 1998-99 10.5 13,94,033 8,76,750 5,17,282 3,46,768 Total 79,55,901 50,10,000 29,55,900 39,69,794 5. It was, in view of the above facts and circumstances of the case, that the CIT (Appeals), after considering the submissions made by the assessee as well as the findings of Assessing Officer and the decision of ITAT Ahmedabad Bench "B" in the case of Lok Prakashan Ltd. [ITA No. 2071/Ahd/2000 assessment year 1996-97] and of ITAT Mumbai Bench "B" in the case of Berlia Chemicals & Traders (P.) Ltd. v. Asstt. CIT ( 76 TTJ 974) [Mum.] duly referred to in paragraph Nos. 20.2 & 20.3 respectively as well as another decision of the Tribunal in the case of Bombay Burmah Trading Corpn. v. Asstt. CIT [2002] 82 ITD 531 (Mum.), came to the conclusion that the transaction of sale and lease back was genuine transaction of existing assessee and, therefore, the assessee was liable to deduction on account of deduction. He, therefore, directed the Assessing Officer to allow the assessee's claim of deduction. The relevant part of order of the CIT (Appeals) as contained in paragr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be seen from the figures given in the submissions of the appellant. Much reliance has been placed in the case of Salem Textiles on the statement of the managing director of the said concern. However, as claimed by the assessee it is a fact that before using such statement in the case of the assessee for disallowing its claim for depreciation the appellant has not been provided copy of such statement and cross-examination of the managing director. On other hand the transaction is supported by agreement for lease, payment by the assessee of the consideration and the action of the assessee of offering lease rentals for taxation from year to year. In the circumstances, it cannot be held that the transaction was not genuine. It is also a fact that the transaction of sale and lease back of assets are considered to be commercial leasing transactions in various ITAT decisions. Even the legislative amendment also considers that there can be leasing by way of sale and lease back transactions. 20.2 In this case of Lok Prakashan Ltd. (ITA No. 2071/Ahd/2000 assessment year 1996-97) the issue before the Hon'ble ITAT, Ahmedabad Bench 'B', was allowability of depreciation of ₹ 5,12,38,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al cost in such a situation has to be specified. As a matter of fact, Explanation 3 is there to deal with the situation in Explanation 4A, but the legislature thought it appropriate to deal with that situation in a manner different than provided in Explanation 3. Thus, a different mischief was carved out with a different remedy which never existed earlier. Therefore, there can be no clarification of a thing which never existed earlier. If the intention was to make it retrospectively effective, it would have specified so in no uncertain terms as was done when Explanation 8 was inserted by the Finance Act, 1986, with retrospective effect from 1-4-1974. Explanation 4A has no retrospective operation, memorandum explaining the provisions in Finance (No. 2) Bill, 1996, through which Explanation 4A was inserted to section 43(1), makes it expressively clear that the amendment will come into effect from 1-4-1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. Thus, Explanation 4A has no application to the year under consideration in this appeal. It is true that the equipment was already in use by BC. But selling to the assessee and taking it back o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a business deal, tax aspect will always be considered, because it directly affects the fund flow and cash flow situation of the business. Thus, the tax aspect is very much an integral part of the business decision which should not be looked down as a taboo. If tax aspect is not taken into consideration, it is quite unbusiness like for the businessman to do. This is not to suggest that assessees do not ever adopt colourable devices to dodge the revenue. But wherever benefit is derived by the assessee, it cannot automatically attract the label of a colourable device. In any case, if such a doubt was there, the Assessing Officer should have carried out an exercise, considering the incomes of both, the seller as well as purchaser, with and without the transaction and should have seen the net effect on the exchequer. Be that as it may, one does not see anything illegitimate about the transaction to treat it as a colourable device and hence, the second aspect also holds no water, it is on record that assessee has leased its assets not only to BC, but to other unrelated parties also and has continued to do so in the subsequent years as well. In the face of these facts, therefore, the all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of sale and lease back was a genuine transaction of an existent asset. As this asset was used for the purpose of business and as there is no evidence that the cost of asset to the lessor was lower than paid, the depreciation as claimed is allowable. The Assessing Officer is directed to allow the depreciation as claimed." 6. It was, in view of the above facts and circumstances of the case, that the ld. DR, in addition to supporting the assessment order, submitted that the order of the CIT (Appeals) was liable to be reversed because of decision of ITAT Bombay Bench (Special Bench) in the case of Mid East Portfolio Management Ltd. (MEPML) v. Dy. CIT [2003] 87 ITD 537 [Mum.](SB). 7. The ld.counsel for the assessee, on the other hand, while supporting the order of the CIT (Appeals), submitted that the assessee being in the regular business of leasing and financing, there was no reason for doubting the genuineness of the transaction. According to him, such transactions are well recognized in the commercial world and are being entered into by various parties from time to time. It was, further submitted by the ld. counsel for the assessee that in case of sale and lease back or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturer/supplier and the lessees as if the constructive delivery of the equipment/asset has already been taken by the lessees. Provided that if for whatsoever reasons the delivery is not effected by the manufacturer/supplier to the lessee, the lessor shall not be liable for any loss that may be suffered by the lessee. Provided further that if for whatsoever reasons the full purchase price of the equipments is not disbursed by the lessor at the behest of the lessee or not instructed by the lessee to pay the full purchase price, within a reasonable period which in the view of lessor would be unduly delaying the commencement date, in such a case, the lessor shall determine the commencement date which shall be binding on the lessee/user. 2.3 The lessee shall pay to the lessor lease rent as mentioned in the Schedule. 2.6 If the lessee makes default in payment of any one or more of the instalments or interest or lease rent or any money payable to the lessor, the lessee shall pay to the lessor on the sum or sums in arrears, the late fee as mentioned in the Lease Summary Schedule attached to the agreement, or such other compensation as may be decided by the Lessor from time to time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and, therefore, the proposition of law held by the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC), which is being referred time and again by the revenue for considering such transactions as sham transaction, is not applicable to the present case. 7.4 With respect to revenue's reliance on the decision of ITAT Mumbai Bench (Special Bench) in the case of Mid East Portfolio Management Ltd. (supra), the ld. counsel for the assessee submitted that this decision has been considered by the ITAT Mumbai subsequently, in the case of Shah Investments Financial Developments Consultants Ltd. v. Asstt. CIT [2006] 8 SOT 334 [Mum.] (copy placed at page Nos. 76 to 86 of the assessee's paper-book), wherein the Hon'ble Tribunal, after considering the decision relied upon by the ld. DR has came to the conclusion that the question relating to the genuineness of the lease transactions in each case has to be judged and decided having regard to the peculiar factual position of that case and drawing support from the judicial and legal principles and guidelines which emerge from the various cases available. The relevant part of the order of the Tribunal in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn to genuineness of the transaction. In our view, each case has to be judged and decided having regard to the peculiar factual position of that case while drawing support from the judicial and legal principles and guidelines which emerge from the various cases available. In our view, the Supreme Court decision in the case of Azadi Bachao Andolan (supra) cannot be interpreted in a way so as to conclude that depreciation has to be necessarily allowed even in respect of a transaction which is not genuine and while is not intended to be acted upon by the parties." 7.5 The ld. counsel for the assessee further submitted that the Assessing Officer having taxed whole of the monthly lease rent, it cannot take a stand that the assessee is not entitled to depreciation and for this purpose has raised various decisions which will be considered in the later part of this order. 7.6 In support of aforesaid submissions, the ld. counsel for the assessee relied upon the decisions as detailed below:- Sl.No(s) Decision in the case of Reported at or in 1. Joint CIT v. Sumeru Leasing & Finance Ltd. IT Appeal No. 1063(Ahd) of 2000 2. Maa Communication Bozell Ltd. v. Dy. CIT [2006] 7 SOT 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid transaction in truth was a borrowing of money by the RSEB on the security of asset but the documentation had been so prepared as if it was a sale and lease back (SLB) transaction and, therefore the assessee was not entitled to depreciation. On second appeal, the Division Bench of the Tribunal was of the view that the true effect of the documentation needed to be considered in deeper perspective and, therefore, referred the matter to the Special Bench. (iii) It was, in view of above facts that the Hon'ble ITAT Mumbai Special Bench on the facts and circumstances of that case came to the conclusion that the assessee was not entitled to depreciation because the transaction was not one of the purchases and lease back transaction. The relevant portion relating to various findings of the Hon'ble Special Bench as contained in paragraph Nos. 22, 23, 25, 31, 35, 36, 101, 102, 104, 106, 108, 110, 111, 113, 114, 119 & 120, 121 & 122 and the same as concise/compressed in the form of Head Notes, read as under:- (Compressed paras 22 to 25) "The legal position under Article 141 of the Constitution of India may be that it is the ratio laid down by the Supreme Court that is binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to the final result. That the Courts (and Tribunals) always have the freedom to 'go behind' the documents to find out the real intention of the parties has always been recognised. This rule presupposes that in a given case the real intention of the parties to a document/transaction/arrangement could be different from what it appears from it ex facie. The Court must normally proceed on the basis of the professed intention, but if that is under doubt or is disputed or challenged, then its power to find out the real intention of the parties by ignoring the apparent has to be, and has always been conceded. It is difficult to imagine where this is possible except in cases of a make believe arrangement or a subterfuge or a dubious or colourable device adopted. In such a case, the Court will be merely removing the facade to expose the real intention of the parties cleverly cloaked and if that intention is discovered to be the evasion of taxes, it cannot be given effect to merely because all the steps taken as component parts of the arrangement are legally correct or valid. This is far different from saying that the Court cannot rewrite an agreement for the parties. If the real inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the asset itself being security is satisfied by appropriate safeguards in the lease agreements. Here, the idea is not to finance the lessee, but to enable him to operate the asset and earn profits. In such cases, the asset is not previously owned by the lessee. However, in the case of a SLB which is a specie of a finance lease, the asset is first purchased by the assessee and almost simultaneously leased back to the seller, who thereafter holds and uses the same in a different capacity. The erstwhile owner becomes to lessee after the lease. The advantage he gets is the money on sale of the asset to the assessee. The assessee is thus the owner of the asset but at the same time, the asset continues to remain with the seller, who has now become the lessee. In other words, the asset does not actually change hands, but the same person holds it in a different capacity and in the meantime has secured the funds on "sale" thereof. Normally in such a transaction, if it is viewed as a pure financing transaction with the asset continuing to be owned by the assessee who has lent the money merely for purposes of security, what is received by the assessee from the lessee must be consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation allowance and quite rightly so. In the latter illustration, the real requirement of company B is not the gas cylinders, but finance. It has no funds but it has some assets. It has located company A which can spare the funds. It may be that company A is also engaged in the money lending business. But it requires security before it could advance monies to company B. Company B can offer its assets as security for the monies and company A can accept the same. In this transaction, company A will be receiving the interest on the monies advanced. Company B would be getting the depreciation allowance in respect of the assets held by it. What the parties do now is to adopt the SLB mode. The asset is sold to company A for a price. Thus, company B gets the money. Simultaneously the assets are leased back by company A to company B. Company A can now claim that it is engaged in the leasing business and on the strength of Shaan Finance (supra) can claim depreciation in respect of the assets leased out. This is the modification brought about to a simple loan arrangement." (Compressed Paras 35 & 36) There can be no doubt that SLB transactions have been recognised and acted upon in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se back of existing assets". Finally, the agenda note exhorts the Board to consider and approve the raising of monies "by notional sale and lease back of existing assets" and to pass the resolutions as annexed. The resolution authorizes the Board "to notionally sell and take back the aforesaid plant and machinery on lease from the aforesaid lessors on the terms and conditions mutually agreed". In the agenda note prepared for the meeting held on 28-1-1995, no doubt the word "notional" is not found used with reference to the sale and lease back, but this by itself is not sufficient to displace the inference that from the very inception the intention of the parties was never to sell/purchase the air-pollution equipment in the real and true sense of the word but was only to prepare documentation to show that the assets were actually sold/purchased and then leased back to RSEB. It is difficult to imagine a situation where an electricity board plans to dispose of a part of its equipment by way of "sale". It may be necessary for the Board to replace worn out assets or parts of the assets by way of routine repair and maintenance, but to dispose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the other lessors belonging to the syndicate formed by the KM and was allotted a specific amount to be advanced to RSEB. Thereafter, the actual sale deed between RSEB and the assessee was entered into on 12-3-1995. It will be seen from the chronology that even before the advertisements were issued in the newspapers inviting offers for obtaining leasing finance, a decision had been taken to enter into the SLB transaction with the members of the syndicate led by KM, of which the assessee was one. Thus, the advertisement in the newspaper would only appear to be a mere formality or a ritual that was gone through in adherence to the form. From the above events, it appears that right from the beginning, it had been decided between RSEB and the assessee that the assessee would advance monies at low rates of interest to RSEB. The transaction would take the form of a SLB transaction under which there would be a notional sale of the air-pollution equipment to the assessee for ₹ 1.95 crores and a simultaneous lease back of the equipment by the assessee to RSEB. Thus, the entire transaction and the sequence of events were pre-ordained or pre-planned. Right from the beginning the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eracity, credibility and acceptability of the valuation report itself. The overall impression gained on a careful perusal of the valuation report and the rival contentions with regard thereto, is that it is totally unconvincing. The question of the Assessing Officer certaining a report from the Departmental Valuation Officer would has arisen only if the transaction was genuine, but in the opinion of the Assessing Officer, the figure of actual cost was initiated. Had that been the case, it was incumbent upon him to obtain a counter valuation report so that the proper amount of depreciation could be allowed. But when he takes the view that no depreciation is allowable at all on the ground that the entire arrangement is a sham, no purpose would have been served by his obtaining a counter-valuation report. (compressed para 114) Even when the actual cost of the assets was not known, the parties had agreed to the residual value of the asset. At best, the earliest point of time when the equipment may be stated to have been identified is on 11-2-1995, when the assessee's valuer was present in Kota. But even before this date, the parties have agreed upon the residual value. The resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pass off a simple finance transaction as a SLB transaction. (compressed Para 122) It is not possible to exclude the applicability of the rule in McDowell merely because one of the parties to the transaction is a State Government undertaking. At best, it can only be stated that RSEB was indifferent to the documentation executed. 9. (ii) Similarly, the findings of Hon'ble Special Bench in the case of ICICI Ltd., who had entered into purchase and lease back transactions with Gujarat Electricity Board was found to be that of simple finance and not of purchase and lease back transaction. The relevant part as contained in paragraph Nos. 123, 124, 127, 131, 136, 137, 139, 141, 144, 155, & 157 (compressed) is in the following terms:- "123. In our opinion, there was no intention on the part of GEB to pass the property in the boilers to the assessee in the first place. The modus operandi in this case is more or less the same as in the case of Mid East Portfolio Management Ltd., except that in the present case the documentation is more sophisticated, presumably because the assessee has experience in such matters and also because the assessee is a professionally managed company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers and also because the assessee is a professionally managed company. That however, does not detract from the position that GEB never intended to convey the property in the equipment to the assessee by way of sale. The sale made by GEB was beyond the scope of the powers of the Board. The Board could not be imagined to have acted without any authority in this behalf, and in the absence of any specific authority conferred upon them, the inference would be that GEB did not intend at all to convey any property in the equipment to the assessee. Thus, there was no intention at any point of time on the part of GEB to pass on the title to the boilers to the assessee. It cannot be imagined how GEB would continue to generate electricity without the boilers which generate the steam. Severance of the boilers from the KLTPS would have seriously jeopardized or affected the generation of electricity. Therefore, it is not possible to infer an intention on the part of GEB to convey any property in the boilers of the assessee. (compressed paragraph 127) Even before the assessee purchased the asset, it was decided that it would be leased to GEB and even an agreement of lease had been drawn up on 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reality, there was no such sale. It is too remote to accept that if GEB has understood this position clearly, the assessee would still be under the impression that there was in truth and reality a sale in its favour. The assessee, a professionally managed company, cannot be seen to be so naive as to be under the erroneous impression that the property has been conveyed to it. The further objection that entries made in the books of account are not conclusive is a proposition which generally holds good, but there is no rule to the effect that they should be completely ignored in ascertaining the true nature or the implications of a particular business transaction. If the entries are a cogent piece of evidence, there is nothing wrong in relying on the same to arrive at the proper conclusion. If all other circumstances point to conclusion (A) the fact that entries have been made in the books to point to conclusion (B) is not conclusive. But when there are a number of facts and circumstances which point towards conclusion (A), the fact that the entries in the accounts also support such a conclusion cannot be ignored and it cannot be contended that the entries are not conclusive to the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an otherwise genuine transaction. If the 5LB itself is not genuine (a finding to be arrived at on the basis of evidence including surrounding circumstances and the intention of the parties), then there is no need to invoke the Explanation. Genuine 5LB transactions which have been recognised by the commercial world cannot by a stroke of pen be de-recognized. They can only be regulated so that an assessee does not misuse them. That is the purpose of the Explanation. But if the 5LB transaction is established to be non-genuine or a make-believe, it cannot be recognised either as a fact or in law, and in that case, no depreciation would be allowable at all; it would not be a case of merely regulating the value of the asset (as envisaged in the Explanation) for purposes of allowing the correct amount of depreciation. The Explanation applies only to a genuine 5LB where the value of the asset shall be determined to be the written down value in the hands of the lessee, when he sold the asset to the lessor. It recognises a SLB transaction only where the property in the assets was intended to and actually did, pass from the lessee to the lessor. Since the finding in the present cases is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only if it is absolutely necessary to do so. In fact, there can be no common rules for finding out the genuineness of a particular SLB transaction, which can be of universal application. Nor can any such norms be exhaustive. However, very broadly and without limiting to what has been stated earlier the following may be considered to be relevant factors to be kept in view : (a) Was there an intention to pass the properly in the equipment to the assessee? (b) Was the equipment identified/ascertained with reasonable clarity? (c) Was the equipment valued, and if so, whether it was a bona fide valuation? Was the value inflated? How credible is the report of the valuer, if there is one. (d) What are the terms of the lease? Is the document more of an arrangement for security for the loan and less of a lease? (e) Is there any parallel or collateral documentation or correspondence or an understanding between the parties which throws doubt on their intention professed by the principal documentation? (f ) What is the conduct of the parties? How transparent has it been? (g) If the lessee is a public utility undertaking, whether the sale of the equipment would be in conformity with the rationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tants Ltd. (supra) [copy placed at page Nos. 76 to 86] and in paragraph No. 7 at page 341 of the Report, the Hon'ble Division Bench 'H' Bombay observed that after consideration of decision of Special Bench (supra) and also the decision of Hon'ble Supreme Court in Azadi Bachao Andolan, it cannot be concluded that depreciation has to be allowed even in respect of that transaction which is not genuine and which is not entitled to be acted upon by the parties. According to the Hon'ble Bench, the ultimate question which boils down from the aforesaid question was with respect to genuineness of the transaction; i.e., if the transaction was found to be correct which in turn was to be judged and decided having regard to the peculiar factual position of a particular case, the depreciation was to be allowed. 10.3 In view of above facts, we are of the opinion that rather allowability of depreciation in cases of purchase and lease back has to be decided on the peculiar facts and circumstances of that very case and if the transaction is found to be genuine, then depreciation is to be allowed, and, therefore, we shall have to test the transaction in the case before us on the facts and circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent depreciation to defraud the revenue and disallowed the clam of depreciation. (ii)On appeal by the assessee, the CIT (Appeals) allowed the assessee's claim of depreciation as per his findings contained in paragraph Nos. 15 to 18 of the appellate order which have been reproduced by the Tribunal in paragraph No. 3 of its order dated 6-1-2006, and are in the following terms :- "15. In the face of these conflicting range of evidence, it is the burden of this office to weigh the pros & cons, consider the various probabilities and arrive at a conclusion about the genuineness of the appellant's claim. On the one hand, the supplier of the machinery is not traceable, the address' given on the bill is non genuine, & the transporter too is similarly not traceable. On the other hand, there are the CST/GST documents, testimony of a banker that he had actually seen the machine Hi operation and thereafter processed the application for loan, and the testimony of the Director of the lessee company who had negotiated the deal, worked with the machine and whose production was duty disclosed by his company. Bangalore Tribunal in the case of Micro Land Ltd. v. Asst. CIT ( 67 ITD 446 ) had ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed through bank account of only one person. Also, Close link between the Person from whose bank account cheques were encashed, was established by the Assessing Officer. Also, in that cafe some of the parties had accepted the fact that they had entered into fictitious transaction with the assessee. On the contrary, in the present case, appellant had during the course of assessment proceedings, submitted various documentary evidences in the form of Purchase bills, Delivery Challan, Sales Tax Assessment Order in respect of the Machinery in question, Address proof on Registrar of Companies (ROC) record in respect of the supplier, Transportation bill etc. Also, payment were made through account payee drafts and appellant had submitted before the Assessing Officer complete details of banker from where demand drafts were issued. Alto, Assessing Officer had made enquiry with the banker to trace the bank account at which the said drafts were realised to which the banker of the appellant had replied positively with detail of name and branch of the bank at which same were realised. In the present case, Assessing Officer had completed the assessment without considering the various documental e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ird Member decision of Ellenbarrie Industrial Gases Ltd. (supra) 83 ITD 11 1 as well as Third Member decision of ITAT Mumbai Bench in the case of Morarjee Goculdas Spg. & Wvg. Co. Ltd. (supra) at paqe No. 101 - paragraph No. 18 upheld the order of the CIT (Appeals) granting assessee's claim of depreciation. The relevant part of the Tribunal's order (supra) as contained in paragraph Nos. 4 to 8, are as under:- "4. We have heard the parties and considered their rival submissions. The material on record shows that the assessee had made part payment on the consideration by way of demand draft of 2 lakhs on 28-9-1995 through Punjab National Bank and another Demand Draft of ₹ 10 lakhs on Ahmedabad Mercantile Co-operative Bank Ltd. dated 13-12-1995, ₹ 5 lakhs on 8-6-1996 again by Demand Draft on Punjab National Bank, Mumbai and a receipt dated 4-1-1997 of Ahmedabad Peoples Coop.Bank Ltd. issued in favour of Electrosmelt (India) Ltd. for depositing the DD No. 805514 of ₹ 5 lakhs. It had also filed the copies of the bills for the purchase of machinery dated 1-9-1995 along with copy of the challan also bearing No. 46 dated 4-9-1995. Lorry Receipt No. 1137 through Vij ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere transferred to H.O. from that Branch. A.13 I joined Panchwati Branch in the month of January, 1993 and was transferred in the month of February, 1996. Q.14 Your attention is invited to the details gathered by the Department that the manufacturers of machinery claimed to be inspected by you i.e. M/s. Electrosmelt India Ltd. Bombay and the transporters Vijay Roadlines have never supplied machinery of ₹ 95,13,720 mentioned in Bill No. 46 dated 1-9-1995 of Electrosmelt India Ltd. and has never been transported by M/s. Vijay Road Lines, B'bay. It has been concluded that no such machinery was in existence. What you have to say about this. A.14 We had inspected the machinery of Sumeru Leasing and Finance Ltd. who is our customers. We don't have to verify the genuineness of manufacturer or the transporter. Q.15 You said earlier that no loan was sanctioned against the said machinery. Please tell whether any payment is made against the purchase of machinery. In whose favour (name of the bank its branch & payee) the payment was made. A.15 No loan was ever disbursed against the machinery mentioned above. I don't know at present how the payment was made. But the details were subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire sale-cum-lease-back transaction was bogus. In that situation he should not have assessed the income of the assessee offered on sale of cylinders to CCIL and SB. This action of the Assessing Officer shows that he himself is not sure as to how to proceedings with the whole affair. The Assessing Officer cannot breath hot and cold in the same time. In my considered view, therefore, I hold that sale-cum-lease-back transaction cannot be held to be bogus merely on some minor discrepancies here and there as stated above. I am constrained to point out in fact the ld. JM has not recorded his dissenting order having considered the matter analytically dealing with the submissions of both sides. He appears to have simply pointed out some of the paras of the assessment order and has given his final opinion that assessment under section 158 BC is correct. To the contrary the ld. AM has examined the matter with details considering all the facts and circumstances of the case including the submissions from both sides and various decisions placed before the Bench. I agree with conclusion of the ld. Accountant Member that it is not a case where assessment under section 158BC of the Income-tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be purchase and lease back transaction, then only interest element contained in monthly installments should be taxed the whole of the monthly receipts which have been shown by the assessee on account of monthly lease rent. The Assessing Officer having preferred to tax the whole of the lease rent, though in spite of his observation with respect to assessee's alternative ground to the effect that since assessee has not agreed/accepted the addition on account of depreciation claimed on finance leases and will contest the same in appeal this issue is not finally settled and therefore, lease income offered by the assessee in return of income cannot be split at this stage and if the issue is finally decided in favour of Department or assessee accepts the Department's stand then assessee will be entitled the relief, it cannot be said that whole of the lease rent has not been taxed; meaning thereby that in the present case, the Assessing Officer having taxed the whole of the lease rent, the assessee is entitled depreciation as has been held by the ITAT Ahmedabad Bench "B" in the case of Sumeru Leasing & Finance Ltd. (supra). 12.2 Decision of ITAT Bangalore Bench "A" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ack/sale and lease back transaction and the assets in question are found to be in existence and are used, then there is no justification in refusing the claim of depreciation to the lessor. 12.3 The third decision relied upon by the ld.counsel for the assessee is the decision of ITAT Delhi Bench "G" in the case of Mansurpur Sugar Mills Ltd. (supra) (copy placed at page Nos. 64 to 75 of the paper-book). (a) The brief fact - The assessee-company was engaged in the business of manufacture and sale of sugar, the assessment for the assessment year 1993-94, was originally completed by the Assessing Officer under section 143(3) and disallowed deduction on account of lease rent paid to certain parties, including SRF, DSM and ISL. The Commissioner, acting under section 263, set aside the assessment. After initiating set aside proceedings, the Assessing Officer observed that no details or description of the fixed asset acquired by the assessee, such as sugar plant from DSM were furnished before him and even no evidence for the purchase of three roller shafts was filed before him. He, therefore, held that the sale of the equipments in question by the assessee to ISL, was not esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd accordingly, a lease agreement was entered into between the assessee-company and DSM Ltd. It clearly shows that the machinery taken on lease by the assessee from DSM Ltd. and SRF Ltd. were already owned by the said lessor and there was no arrangement of sale and lease back between the assessee-company and the said two parties as misconstrued by the Assessing Officer. There was, therefore, no reason for the Assessing Officer to doubt the ownership of the machinery taken by the assessee on lease from DSM Ltd. and SRF Ltd. in the hands of the lessor and even the existence of the said machinery was established not only on the basis of valuation report prepared and furnished by a Chartered Engineer but the same was also impliedly proved by the fact that without the said machinery forming essential part of the sugar mill and plant, it was not possible for the assessee-company to produce the sugar. It appears that all these relevant and material aspects, however, were ignored by the Assessing Officer while doubting the genuineness of the lease transaction between the assessee-company and DSM Ltd. as well as SRF Ltd. and the lease rent paid to the said lessor was disallowed by him merel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idence which was also claimed to be filed before the Assessing Officer. Thus, the existence of the machinery as well as sale thereof by the assessee-company to India Securities Ltd. was duly established on evidence by the assessee-company and the same was also fortified from the fact that sale consideration of ₹ 1.5 crores was paid by India Securities Ltd. to the assessee-company. Further, the lease back of the said machinery by India Securities Ltd. to the assessee-company was supported by a lease agreement and both the parties having been bona fidely acted upon the terms and conditions stipulated in the said agreement, there was no reason to doubt the genuineness of the lease transaction between the assessee-company and India Securities Ltd. In the case of Indian Management Advisers & Leasing (P.) Ltd. v. Dy. CIT [1994] 51 ITD 566 , Delhi Bench of ITAT has held that if the transaction has been entered into bona fidely and there is material to show that the same has been given effect to, then the sale and lease back transaction should not be doubted. In the present case, the machinery sold at ₹ 1.5 crores to India Securities Ltd. lis reduced by the assessee-company fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 as claimed by it. The Tribunal held that the assessee had proved beyond doubt that it had got fabricated the skimmer machine and that the same had been given under lease to HCC. It also held that the lease transaction was genuine. It allowed the claim of the assessee. (b)It was, in view of the above facts and circumstances of the case, that the Hon'ble High Court (supra) upheld the order of the Tribunal wherein the Tribunal had reached to a finding, on facts, that the transaction of acquisition of Skimmer machine and its lease were genuine as per its findings contained in page No. 544 of the report. "....The Tribunal further considered (he fact that the lease rentals which were paid by the lessee not in accordance with the original terms as stipulated in the lease agreement, would not by itself prove that the assessee had not given the machinery on lease at all. The Tribunal has noted that it was open to the parties to accept lease rentals on dates different than those provided in the original lease agreement. A perusal of the order of the Tribunal shows that it has considered all the relevant evidence and given cogent reasons for its conclusion. The mere fact that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. In view of the aforesaid legal principles laid down by the Supreme Court, it is clear that the principles aid down by the IRC v. Duke of Westminster [1936] AC 1; [1935] 19 TC 490; [1935] All ER Rep 259 (HL) are still applicable in this country and it is open to assessees to arrange their affairs in such a manner that it would not attract the tax liabilities, if it can be managed within the permissible limit of law. The respondent companies carried on business and followed the mercantile system of accounting and closed their accounts on June 30 each year. The respondent-companies filed their returns and claimed deduction of lease rent paid in respect of the plant and machinery taken on lease, which had earlier been shown as sold in the previous years relevant to the assessment years. After the sale of plant and machinery, the assessee-comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angement entered into for business purposes purely on business considerations and allowed the deduction of the lease rent by the company. The Revenue preferred appeals before the Income-tax Appellate Tribunal. The Appellate Tribunal upheld the findings arrived at by the first appellate authority and held that the transactions entered into by the assessees were genuine and validly entered into and there was no motive on the part of the assessees to defraud the Revenue. The only object of such transaction was to augment the fund which was invested by the assessees in the Unit Trust of India and the decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) had no application in the case. On appeals to the High Court: Held, dismissing the appeals, that the first appellate authority and the Tribunal had held that the transactions were genuine and validly entered into and that the assets were sold and leased back purely on business considerations and there was no question of any colourable device because in the said transaction, the assessee-companies had got substantial benefit by selling their plant and machinery to the leasing company. The advantage, which the assessee-companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 1996-97." 13. After having considered the aforesaid decisions relied upon by the parties what we are able to understand is that for a transaction of sale and lease back/purchase and lease back to be genuine, following ingredients should be satisfied. (i)The assets involved in the transaction must be physically available and duly identifiable. (ii)The assets in question must be used for the business of the lessee. (iii)Movement of request is required only when the assets in question are purchased from manufacturer/supplier and in that case also it is not necessary that the assets so purchased should first move to the lessor. The assets in question can be directed to be delivered directly to the lessor. In case, the lessee is already having the assets and is in possession of the same, then to raise the funds he can enter into a transaction of sale and lease back and in that case, movement of those assets from lessee to lessor and then back from lessor to lessee is not necessary; meaning thereby that the question of movement of assets is relevant only when the assets in question are to be purchased from a party other than the lessor and lessee. (iv)Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smiss the revenue's appeal. 19. Cross Objection No. 88/Ahd./2004 by assessee (arising out ITA No. 1427/Ahd./2003). 19.1 In this Cross Objection, the assessee has raised the following grounds:- 1.In law and in the facts as well as circumstances of the respondent's case the learned CIT(A) has grossly erred in holding that the order is not bad in law when he ought to have so held. In not doing so he has failed to appreciate that notice issued under section 148 was without jurisdiction and that no notice under section 143(2) of the Income-tax Act was issued within the time allowed under the Proviso. This Hon'ble Tribunal may, therefore, be pleased to hold that the order is bad in law and direct the cancellation thereof. 20. We have heard the parties. 21. After careful consideration of the rival submissions and the facts and circumstances of the case, we are of the opinion that after the amendment brought in the provisions of section 148 of the Act with effect from 1-10-1991 by the Finance Act, 2006 whereby the service of notice under section 143(2) of the Act, in the cases where return has been furnished in response to notice under section 148 of the Act during the period commen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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