TMI Blog2006 (11) TMI 653X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Salem Textiles Ltd. concluded that the transactions entered, into by the assessee by first purchasing the machinery owned by M/s. Salem Textiles Ltd. for a sum of ₹ 50,10,000 and then leasing back the same for a monthly least rent of ₹ 1,32,765 to M/s. Salem Textiles Ltd. Bangalore without taking possession of the machinery and movement of the machinery from Bangalore to Ahmedabad and vice-versa was not of purchase and lease back nature, rather was simply in the nature 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been calculated in a manner that after taking into account the tax benefit obtained by lessor the lease rental would recoup the lessor s investment on behalf of the lessee with interest for use of finance. Lease is for fixed period and after the expiry the ownership of lease assets, would go to lessee on payment of token money. Thus, leased assets are with the lessee from beginning till end. Lessor remains owner only on paper for a few years without any right or obligation. The major lease 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship is actually with lessee who should be entitled to claim depreciation. Supreme Court has observed in the case of CED v. Alok Mitra 126 ITR 599 that it has always been settled law that in applying the Act to any particular transaction regard must be had to its substance that is its true legal effect rather to the form in which it is carried out. A party cannot escape the consequence of law merely by describing an agreement in a particular form though in essence and in substance it may be a different 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 pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of lease, financial years involved, lease rent, interest component and the depreciation which was furnished by the assessee and, as has been reproduced by the CIT (Appeals) in paragraph 19.1 of his order, contains the following details:- F.Y. Period Months Lease rent Credited As per Asstt. Order Depreciation Principal Interest 1993-94 1.5 1,99,148 12,25,250 73,898 6,26,263 1994-95 12 15,93,180 10,02,000 5,91,180 10,95,959 1995-96 12 15,93,180 10,02,000 6,91,180 8,21,696 1996-97 12 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lessor has moved for recovery of claim for balance and the restoration of machinery. (vii)The appellant has offered lease rent and interest as its income on accrual basis as per chart. Thus, if it is treated as a loan transaction, the appellant would be entitled to withdrawal of income offered to the extent of ₹ 50.10 lakhs being payment of principal and will have to be taxed on ₹ 39.70 lakhs by way of withdrawal of depreciation between assessment year 1994-95 to 1999-2000 i.e. the termination of lease. 20.1 After considering the order of the Assessing Officer of Salem Textiles and the order of CIT(A), the Assessing Officer finally held that the transaction is of machinery purchased by the appellant from M/s. Salem Textiles and leased back to them. There was no transaction between the intermediary parties referred to above. In the case of Salem Textiles the Assessing Officer had collected the details from Ambalal Agency that they did not purchase any machinery from Salem Textiles. Even this observation also go against the allegation stated above. Besides this the assessee in the present case has paid the consideration directly to Salem Textiles Ltd. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement have referred this transaction as transaction of sale by RSEB to the assessee and its subsequent lease back by the assessee to RSEB through the agreement of lease and no material has been brought on record by the Departmental Authorities to hold that what is apparently stated in this agreement is not real. 20.3 In the case of Behia Chemicals Traders (P.) Ltd. v. Asstt. CIT 76 TTJ 974 ] the Hon ble ITAT, Mumbai B Bench had an occasion to interpret the scope of Explanation 4A to section 43(1) inserted with effect from 1-10-1996. It held as under (as per head notes). Whenever a situation arises, which the legislature thinks it should be curbed, a new Explanation can be added Explanation 4A is one such situation which, in the opinion of the legislature needed to be discouraged and accordingly inserted the said Explanation with effect from 1-10-1996. Hence each situation has to be dealt with in a different manner. This is evident from the provisions in the eight Explanations itself. It follows, therefore, that when a new situation is dealt with by the legislature, there is nothing clarificatory about it. The situation never existed on the statute book earlier which ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Is it not unfair to recognise only that part of the transaction which is beneficial to the State and show disrespect to that part which is beneficial to the subject and which is also permissible under the law. The departmental representative has, no doubt, indicated the fact that the lease agreement was terminated within 14 months. However, neither the Assessing Officer nor the CIT(A) has either brought out this fact or investigated into the causes of termination and also into the fall out of the termination. Hence, there is nothing wrong in the purchase of the asset and its lease back to the seller. The assessee did become the owner of the asset on buying it from BC. The decision to purchase the asset and lease it back to the seller was purely a business decision to earn income by way of lease rental. In the process, if assessee gets tax sops to which it is entitled under the law, it cannot be described as a colourable device. When the seller of the asset has offered ₹ 26 lakhs for taxation as short term capital gain and when the lease rentals earned by the assessee have suffered tax, it is difficult to conclude that the transaction was entered into with the sole motive of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly at a lower amount, resulting in offer of lower income by lessee and capital gain in the hands of lessee. Further looking into the chart, there appears to be no motive to enter/into a sham transaction and offer more income over a period of time than the benefit available by any of deduction. In this case also, the asset used by a concern were sold and but taken back on lease. It was a business decision guided by dynamics to raise finance by sale of equipment. The physical movement of property was not essential and as, the rewards in the form of lease rentals are reaped by buyer by leasing back the asset, the essential characteristic of sale is met. On facts, there appears to be nothing as colourable illegal in the entire transaction. The Hon ble Tribunal held that while striking a business deal, tax aspect will always be considered because it directly affects the fund flow and cash flow and thus the tax aspect is very much an integral part of the business decision, which should not be looked down as a taboo. This view is followed in the case of Bombay Burmah Trading Corpn. v. Asstt. CIT 76 TTJ 983 , wherein such transaction was not held to be colourable device. 20.5 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chinery. 7.1 So far as present case is concerned, the ld. counsel for the assessee submitted that it is an admitted fact that revenue has accepted the factum of existing of machinery with M/s. Salem Textiles Ltd. though, of course, were being used by that party prior to entering into the transactions under reference and, therefore, there is no question of considering the transaction as sham. The ld. counsel for the assessee further submitted that the revenue has also not doubted the factum of payment of ₹ 50,10,100 having been made by the assessee direct to M/s. Salem Textiles Ltd. and, therefore, on this account also, the transaction cannot be termed as sham or bogus one. The ld. counsel for the assessee further submitted that the transactions was duly evidenced by a written lease-deed (copy placed at page No. 20 of the paper-book), and referred to Article Nos. 1.1 , 2.3, 2.6 2.8, which are in the following terms:- 1.1 Commencement Date The Commencement date shall be - (i)The date of delivery of the equipments/assets by the Manufacturer/Supplier Or (ii)The date of disbursements of the purchase price of the equipments/assets by the lessor to the manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Chart which was called for by the CIT (Appeals), which has been reproduced by us in paragraph No. 3.9 of this order, and submitted that if the revenue s case is accepted, then it can tax only an amount of ₹ 20,55,900 being interest component received/receivable in six assessment years starting from assessment years 1994-95 and ending with assessment year 1999-2000, whereas the assessee has offered the total income on account of lease rent from this transaction at ₹ 79,55,901 in those very six assessment years and even if the assessee s claim of depreciation, which is totalling to ₹ 39,69,794, is taken care of, then also the net income offered for taxation by the assessee on account of lease rent to six assessment years comes to ₹ 39,86,107 (Rs.79,55,901 - Depreciation ₹ 39,69,794); meaning thereby that if the transaction is considered as of lease, then the taxable income will be ₹ 39,86,107 and if the transaction is considered of simple finance, then the taxable income will be ₹ 29,55,900 (in six assessment years). 7.3 From the aforesaid computation, the ld. counsel for the assessee derived a proposition that the assessee having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of MEPML ( supra) may be reproduced below : We are therefore of the opinion that all SLB transactions as such cannot be considered to be dubious or colourable devices or subterfuges aimed at tax evasion. The enquiry which a court or Tribunal can make, when faced with an SLB transaction, is to find out the real intention of the parties and ascertain whether a simple loan transaction masquerades as an SLB transaction. Any transaction in which the professed intention and the intention gathered from the documentation are the same, viz., a sale and lease back, must be considered to be a genuine SLB transaction. If the Special Bench decision is carefully gone through and analyzed, the principle which emerges is that each case must be and has to be decided on the basis of the peculiar facts and circumstances of that case. However, the important observation made by the Special Bench is that any transaction in which the professed intention and the intention gathered from the documenation are the same must be considered to be a genuine SLB transaction. In our view, various cases which have been cited before us lay down the undisputed rule that if an SLB transaction is genuine and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Morarjee Goculdas Spg. Wvg. Co. Ltd. v. Dy. CIT [2005] 95 ITD 1 (Mum.) (TM) 7.7 The ld. counsel for the assessee further submitted that even Explanation-4A to section 43 of the Act which has been brought on statute with effect from 1-10-1996 is prospective in nature and for that purpose relied upon the decision of Hon ble Madras High Court in the case of Om Sindhoori Capital Investments Ltd. v. Jt. CIT [2005] 274 ITR 427. 7.8 Alternatively, the ld. counsel for the assessee, again, submitted that in case the assessee s claim of depreciation is not allowed, then only the interest component contained in the monthly installments received as lease rent can be taxed because refund of capital part of financed amount cannot be taxed under the provisions of Income-tax Act. 8. After having considered the rival submissions, facts and circumstances of the case, various provisions of Explanation-4A to section 43 of the Act and various decisions relied upon by the parties, we are of the opinion that to decide the issue involved in this appeal, it is desirable first to consider the proposition of law held by various decisions and, therefore, we p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the highest Court of the country and even assuming for the sake of argument that the observations do not constitute the ratio of the decision, they are indicative of the approach to be adopted by the lower Courts which includes the Tribunal (which deals exclusively with tax matters), to the question of tax avoidance. Therefore, without seriously entering into the complex question as to whether the observations amount to obiter, as opposed to the ratio, of the Supreme Court and if so, whether they are binding on the other Courts, it is held that the observations relating to the question of tax evasion or avoidance made in McDowell have to be followed as guiding principles while deciding whether there was tax evasion or not on the facts and circumstances of a given case. In the absence of any such guidelines, the approach to the question of tax avoidance is likely to be arbitrary or whimsical or uncertain or even perverse, a situation which certainly does not augur well for the (ax administration. McDowell, is more of an approach to the facts of a particular case than any inviolable rule laid down regarding tax evasion. It is a call to the Courts and Tribunals to expose subterf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided that they are genuine, bona fide and not colourable transactions,-McDowell Co. Ltd. v. CTO [1985] 47 CTR (SC) 126 : [1985] 154 ITR 148 (SC), Jiyajee Rao Cotton Mills Ltd. v. CIT [1958] 34 ITR 888 (SC) and Union of India v. Play world Electronics (P.) Ltd. [1990] 184 ITR 308 (SC), applied. 31. A sale and lease back transaction is one where an asset is sold by A to B and simplineously B agrees to lease out the assets to A for a consideration which is known as lease rental. According to the approach paper prepared by the CBDT and sent to FICCI, CII, Assocham, ICAI and the Association of Leasing Finance Companies (pp. 199 to 206 of the paper book filed by ICICI), there are three main types of leases : (i) finance lease; (ii) operating lease; and (iii) hire purchase contract. A finance lease is stated to be a lease that transfers substantially all the risks and returns of ownership of an asset to the lessee. Under this arrangement, the lessee is the economic owner. He can and usually does exclude the legal owner from the use of the asset for a period long enough to reduce the value of the property to a point where the legal title is economically insignificant. An opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in the business of leasing is eligible for depreciation on the assets leased cut has been recognised by the Supreme Court in the case of CIT v. Shaan Finance (P.) Ltd. (supra). The same decision is sought to be invoked in support of the claim for depreciation in respect of assets leased out in a SLB arrangement. The finance lease is normally a method of financing the assets through the medium of a lease. For example, company A which is a leasing company purchases gas cylinders which are leased out to company B which actually puts the cylinders to use in its business. The assets are paid for by company A. Company B pays the lease rentals which are allowed as a deduction in its income-tax assessments. Company A claims depreciation in respect of the cylinders, because they are used in its leasing business. This basic idea is slightly modified in the case of a SLB transaction. Instead of company A buying the assets from the manufacturer of gas cylinders, it purchases the gas cylinders from company B itself and simultaneously leases them back to company B. The same tax treatment as was given in the earlier illustration is sought to be given to this arrangement also, here also, comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, can examine the genuineness of the particular transaction which is called in question. All SLB transactions as such cannot be considered to be dubious or colourable devices or subterfuges aimed at tax evasion. The enquiry which a Court or Tribunal can make, when faced with an SLB transaction, is to find out the real intention of the parties and ascertain whether a simple loan transaction masquerades as an SLB transaction. Any transaction in which the professed intention and the intention gathered from the documentation are the same, viz., a sale and a lease back, must be considered to be a genuine SLB transaction. 101. In our view, the rule laid down in McDowell Co. Ltd. s case (supra) and as understood by us applies to the case and the SLB transaction cannot be recognized for income-tax purposes, with the result that the assessee-company is not entitled to the depreciation claimed. The departmental authorities were right in denying the claim. (compressed paras 102 to 108) The use of the word notional , in the agenda note prepared for the Board of directors of RSEB, with reference to the sale of the air-pollution equipment to the assessee by RSEB is a give-away. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the seller, then that takes away the bottom of the transaction and the sale is only a shell without any substance or content which make up the ingredients of a sale. The intention of the parties is not that the property in the equipment should pass from RSEB to the assessee. There is an inherent snag in construing the transaction as a sale in the real sense of the term, since the equipment cannot be delivered to the assessee if physical delivery is insisted upon. The equipment cannot be severed from the earth without interrupting the power supply. It could never have been the intention of RSEB to allow the equipment to be severed and delivered to the assessee since that would have involved serious disruption in power supply. It is all very well to speak legally of a constructive or symbolic delivery, but when it comes to the gathering of the intention of the parties or to the tracing of the genesis of the transaction, the stark reality that RSEB would never think of severing and handing over physical delivery of the air-pollution equipment to the assessee pursuant to the so-called sale should not be lost sight of. In this light, it is not possible to infer an intention that the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the equipment that was to be sold and leased back in the earlier stages of negotiations. Despite this, the price payable, the tenure of the lease period, the lease rentals and even the residual value would appear to have been agreed between the parties. This appears to be a very strange situation, to say the least. This is one more pointer to the fact that the entire documentation or transaction was a pre-planned or pre-ordained affair. (compressed paras 111 113) The valuation report in unreliable. It lacks the ingredients of an acceptable valuation report. As regards the physical verification, though the valuation report says that the valuer had visited Kota Power Station from 10th-12th Feb., 1995, for physical verification of plant and machinery assets and during the visit held discussions with the technical personnel on various aspects relating to plant and machinery , there is nothing to show the kind of discussions which he had. If he had in fact had such discussions on the technical aspects of the equipment, one would reasonably expect those discussions to be incorporated in the valuation report, considering the importance of the matter. But there is no referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the collection account and deposited in the designated account. Thus, the real security is the lien on the designated account. The lease rentals are thus secured to the assessee. This shows that the amount advanced by the assessee to RSEB is a pure finance transaction on the security of a lien on the designated account. Thus, a simple finance transaction has been put under the garb of lease by means of elaborate documentation. (compressed Para 120) No provision has been made as to what would happen to the equipment after the tenure of the lease. The other aspect to be noticed is that under the lease deed, the assessee has no right to remove the equipment for default in payment of lease rent during the currency of the lease. This also shows that the lease document is not in truth and reality a document containing an agreement to lease. The terms and conditions are so worded that the assessee has very little rights or control over the equipment and this is in consonance with the original intention of the parties that the property in the equipment shall not pass to the assessee. (compressed para 121) The power of attorney executed by the Managing Director of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of Directors of GEB, similar to the proceedings of the Board of Directors of RSEB in the case of Mid East, to show that the events took place in a pre-ordained manner and that all the documentation was done by GEB at the behest of the assessee, the basic question remains viz., whether GEB could have really intended to sell the boilers, which was an essential part of its undertaking, to the assessee. In this connection it is pertinent to note that a specific question was put by the Assessing Officer to Mr. P.K. Das, GM (Finance) of GEB in the course of recording this statement on 21-3-1996 under section 131 of the Act:- Q. 2. It is gathered from the statements given by BHEL, vide their letter dated 11-3-1996 that the Kutch Lignite Thermal Power Station (KLTPS - IIX 70 MW) was commissioned in March in 1990 and March 1991. Since these plants were dedicated to the nation, in these respective years, under what circumstances it was sold to M/s. lCICI, in other words whose approval was obtained to sell the entire plant of KLTPS to ICICI in Financial Year 1992-93. Was there any agreement to sell the plant to ICICI. If yes, please produce the same? [Emphasis Supplied] Mr. P.K. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has already been fixed at ₹ 50 crores and the monies have also been paid between 2 and 22-2-1993, it does not accord with the theory that the price received was for the sale of the equipment if a letter is written subsequently that the price was erroneously calculated at a lower figure. That is more in conformity with the theory that since the value of the asset is higher than what was earlier calculated, more finance was required or was even justified. It is difficult to appreciate how the assessee-company can kindly consider sale and lease back for the total cost of the equipment . These words only contain a request by GEB to the assessee for more finance on the ground that the value of the asset charged as security is more than what was originally indicated. Thus the transaction in truth is only a finance transaction on the security of the boilers. (compressed paras Para 130 to 132) The boilers continued to remain in the ownership of GEB, despite the fact that an invoice had been made out to show that they have been sold to the assessee-company for ₹ 50 crores. The boilers obviously continued to be shown in the books of GEB as well as in their balance sheet a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n back on lease. (Compressed paragraph 36) The Notifications cannot advance the case of the assessee if in truth and reality, there was no sale of the boilers. If in truth and reality there was a sale, only then the Notifications would operate to exempt the sale from sales-tax. But the Notifications themselves cannot decide the question whether there was a sale of the boilers. That has to be examined independently and on the basis of the intention of the parties. That there was no intention on the part of GEB to convey the property in the boilers to the assessee-company. (compressed paragraph 137) There is no doubt no co-ordination between the two Assessing Officers. The assessments have been made at two different places. Ideally speaking, officers functioning within the same Department should not take inconsistent stands. But merely because that they took inconsistent stands in the assessments of the parties to the same transaction, the assessee s claim cannot be vindicated. That would be too simplistic an approach. The fact that in the assessment of GEB the lease rentals were allowed as a deduction cannot bind the Assessing Officer assessing the assessee-company, more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecifically from 1-10-1996. The Memorandum explaining the Explanation says that it will apply in relation to SLB transactions entered into from 1-10-1996. (Compressed paragraph 141) : The circulars issued by the CBDT can be given effect to if they are beneficial to the assessee, even if they deviate from the provisions of the Act. The circulars now under consideration are not of this type. But, they serve as guides to the background of the legislation. They throw light on the evils sought to be remedied by the amendment. They also contain guidelines to the Assessing Officer regarding the investigation to be carried out in cases of SLB transactions. It is true that the Circular dated 9-2-2001, refers to a SLB transaction without any alteration in the situation of assets and its working, but it nowhere says that in all such cases, depreciation has to be disallowed. It cannot be said that the circular has bluntly refused to recognize one of the basic features of the SLB transaction and is therefore hit by the ratio laid down in TISCO v. N.C. Upadhyaya [1974] 96 ITR 1 (Bom). (Paras 144, 155 157) : Each case has to be decided on its own merits and on the basis of the peculi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipment leased out to RSEB and GEB respectively. McDowell Co. Ltd. v. CTO [1985] 47 CTR (SC) 126 /[1985] 154 ITR 148 (SC) applied; 20th Century Finance and Consultancy v. Khanna Rayon Industries Ltd. (judgment of the Bombay High Court dated 24-10-1991, in Notice of Motion No. 1026 of 1991 in Suit No. 1092 of 1991), Development Credit Bank Ltd. v. Prakash Industries Ltd. (judgment of single Judge of the Bombay High Court in Notice of Motion No. 2346 of 1998 in Suit No. 3196 of 1998 dated 16-9-1998) and Prakash Industries Ltd. v. Development Credit Bank Ltd. (judgment of the Division Bench of the Bombay High Court dated 28-1-1999) distinguished. 10.1 After careful consideration of land mark judgment of the Hon ble Special Bench, we are of the opinion that the transaction in these cases were found to be in the nature of financing one and not of purchase and lease back transaction because of various reasons enumerated in the foregoing paras and gist of which is that for a transaction to be of purchase and lease back or sale and the undisputed rule is that assets in question must be in existence and must have been used by the party taking on lease; i.e., by the lessee; and, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had purchased machinery worth ₹ 95,13,720 from a company known as M/s. Electrosmelt (India) Ltd. as per Bill No. 46 dated 1-9-1995 and this machinery was leased out to M/s. Rushabh Chemicals Ltd. as per lease agreement dated 10-9-1995 for a period of 5 years from 10-10-1995 to 9-9-2000 on a lease rent of ₹ 2,47,360 per month. The total lease rent worked out to ₹ 1,48,41,600. The Assessing Officer made enquiries on the basis of the address given in the Bill at Bombay and Pune which according to him, revealed that the company of this name never existed either at Kalbadevi Road, Bombay or MIDC, Jejuri, Dist. Pune and the landlord of Bharat Chamber Bhavan, the address given by the Bombay office has stated he has never given any tenancy to that company. He, therefore, required the assessee to give the details of the shareholders to whom shares were allotted; details of share transactions; particulars of receipts issued by Electrosmelt (India) Ltd., along with the names of the persons with whom the company negotiated for purchase of machinery; leaflet or other literature supplied by it with the machinery and the names of the persons from the company who ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation of. . . . Has the department brought on record stronger evidence reject the appellant s claim? 16. It has been contended that the appellant had made a payment of ₹ 12,00,000 against the machinery of ₹ 95,13,720 during the year under consideration, which according to the Assessing Officer is unbelievable. Appellant has responded that in total it had made a payment of ₹ 22,00,000, the payments was to be made through account payee cheques and it was a term of the sale agreement that only after satisfactory report from the lessee regarding satisfactory production of international quality, that the full and final payment would be disbursed. In furtherance to the same the appellant had got sanctioned a loan of ₹ 100 lacs from bank against the security of this Machinery. However, due to the consistent problems faced and intimated by the lessee (Copies of letter from lessee in this regard were annexed to the paper book), apparent had not paid the balance amount to the supplier and subsequently returned the Machinery to the supplier. The appellant have returned back the depreciation in respect of the said Machinery and treated the same as income fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premises of the lessee. Hence, appellant had established the genuineness of the transaction and existence of the machinery in question. Hence, it is clear that Judgement of the case cited by the Assessing Officer is clearly distinguishable on facts and Assessing Officer have failed to establish any relevance of the said Judgment to the present case. On the contrary judgment cited by the Appellant of Microland Ltd. v. Asst. CIT ( 67 ITD 446) is clearly attributable to the present case :- 18. In view of the detailed discussion in the preceding paras, 1 am of the view that [he appellant has discharged the onus of proving the claim by preponderance of evidence in support of its claim. In particular, I am swayed by the GST/CST order, and he fact that a public servant, viz., Manager of the Dank had not only testified to having personally inspected the Microprocessor in issue, in operation, but had also acted upon the inspection by the sanctioning of loans whereby funds forming a part of the sale consideration were actually transferred and credited to the account of the supplier in Mumbai. That being so, the existence of the machine and the title of the appellant thereon are establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against which the loan was to be sanctioned. I had made the spot inquiry and verified the machinery approximately in the month of October/November 1995.1 do not remember the exact date of my visit. I had prepared appraisal report on my visit and had submitted along with credit worthiness report of company and the directors to the Board. I do not have the copy of the same but same may be available with the bank. Q.10 Why you had to visit factory of Rushabh Rubber and Chemicals Ltd. when you had to advance loan to Sumeru Leasing and Finance Ltd. A.10 The machinery was owned by the Sumeru Leasing and Finance Ltd. but the same was leased to Rushabh Rubber and Chemicals Ltd. and was directly delivered at the place of Rushabh Rubbers and Chemicals Ltd. therefore, I was taken to the factory premises of Rushabh to verify the machinery against which the loan was to be sanctioned. Q.11 What inspection you made at the factory premises of Rushabh Rubbers and Chemicals Ltd. How you determined that the ownership of machinery which you inspected was of Sumeru and that the machinery you inspected was the same machinery for which bill was produced to you? How you determined the cost of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also gathered that Plot No. 6 MIDC Jejuri, Dist. Pune was surrendered by the company on 9-10-1992 without carrying out any manufacturing activities. It is also gathered that there is no transporter in the name of Vijay Roadlines at 51, Tantanpura Street, Bombay. All those evidences reveals that the transaction entered into by you for taking machinery on lease from Sumeru of Mimo Processor from Electrosmelt India Ltd. vide Invoice No. 46 dated 19-95 appears to be a fake transaction. What you have to say about this? A.12 Our technical person Shri Suresh Shah introduced to the marketing executive of Electrosmelt India Ltd. and we were provided with marketing literature of the machinery. Machinery in question was inspected at Bhilad Check Post by Gujarat Sales Tax. The machinery was also inspected by the bankers of Sumeru Leasing and also the payment was made to Electrosmelt India Ltd. by Sumeru by account payee draft. We have returned back the machinery and copy of receipt issued by the company is with us. Our complaint letter regarding defects in production was also received by Electrosmelt India Ltd. addressed at the address mentioned in the bill. We had identified machinery fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and assessed in assessment years 1995-96 to 2002-03 which amounting to ₹ 18.99 crores. Therefore, this is one more reason that the assessee having offered the same for assessment, it could not be perhaps open to the Revenue to disallow the depreciation claim of the assessee to retain the assessment ot the rental income from these very transactions, unless a finding is recorded that assessment of rental income is also not in accordance with law and facts of the case. 8. Here in this case also, the lease rental income has been assessed to the extent of ₹ 17,31,520 and, therefore, it would not be open to the revenue to disallow depreciation with respect to the assets from which the assessee has earned rental income and assessed to tax. It is further submitted that the machinery was ultimately found to be not satisfactory and was returned back by the lessee to the assessee and ultimately by the assessee to the seller Electrosmelt India Ltd. in the subsequent year and the difference arising on account of written down value and the depreciation claimed were offered to tax. In these circumstances, the CIT(A), in our opinion, was justified in allowing the claim of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransported to B in such a fashion, i.e., around 50 tonnes of weighment in one truck load which had capacity of 10 tonnes; was very absurd, that the assessee could not prove beyond doubt that the same coils had been transported as there was no sales tax seal on any of the transportation documents, that even in the premises of B the number of coils that were purportedly taken on lease, were not available and very few were available without any markings, that on verification it was found that the so-called manufacturer had no capacity to manufacture such a huge number of M.S. Rolis, that even the managing director of B had confessed to the fact that the company was raising lease finance in respect of non-existing assets with a view to raise funds for its capital expenditure, that it was also verified from the check-posts that the lorries alleged to have carried the said M.S. Rolls, in fact, had not passed through the checkposts on the dates claimed by the assessee, that it had been proved that the assessee had not shown payment of entry tax imposed by sales tax department at the rate of 2 per cent at the point of entry, that even the manufacturer had categorically denied stating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim, holding the transaction to be genuine. (b)It was, in view of the above facts and circumstances of the case, that the Hon ble Tribunal held the transaction of purchase and lease back, which was supported by a lease agreement and had been acted upon by both the parties as genuine and allowed the deduction of lease rent paid by the assessee. The relevant findings as contained in paragraph Nos. 8 and 9 are in the following terms:- 8. We have considered the rival submissions and also perused the relevant material on record. It is observed that the running sugar mill was acquired by the assessee-company form DSM Ltd. on 1-10-1992 and there is no dispute about this factual position. The said acquisition, was in three forms. Firstly, some of the machinery/equipments of the sugar, mill were out rightly purchased by the assessee from DSM Ltd. for an agreed lump sum consideration and the machinery so purchased was duly entered in the regular books of account of the assessee at the said value. Out of the remaining machinery, some of the machinery was owned by DSM Ltd. whereas the other machinery was taken by it on lease from SRF Ltd. Since the entire sugar mill/plant of DSM Ltd. wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uly entitled for deduction on account of lease rent paid in pursuance of the said agreements. 9. As regards the sale and lease back transaction between the assessee-company and India Securities Ltd., it is observed that out of the total machinery purchased by the assessee-company from DSM Ltd., some of the machinery was sold by it to India Securities Ltd. for a consideration of ₹ 1.5 crores which was fixed on the basis of valuation report prepared and furnished by a Chartered Engineer. As stated on behalf of the assessee-company before the authorities below as well as before us, the said valuation report was prepared by the Chartered Engineer after physical verification of the concerned machinery and the existence thereof thus was proved on the basis of the said valuation report. Moreover, the said machinery i.e., semi kestner and roller shafts were forming essential ingredients of the sugar mill within sugar production was not possible and this fact again was sufficient to fortify that the said items of machinery were actually in existence at the sugar plant of the assessee-company. It is also world white to note here that the sale consideration of the said machinery as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of the assessee for lease rent paid in respect of such transaction. In that view of the matter, we uphold his impugned order on this issue and dismiss this appeal filed by the Revenue. 12.31 From the aforesaid order, what we are able to understand is that, if the transaction of sale and lease back/purchase and lease back is evidenced by a duly executed lease-deed and both the parties have acted upon it, then the genuineness of the transaction cannot be doubted and, consequently, claim of deduction of lease rent paid by the lessee cannot be disallowed and once the deduction of lease rent is allowed in the hands of the lessee, it is natural consequence that claim of depreciation cannot be disallowed to the lessor. 12.4 The decision of Hon ble Bombay High Court in the case of CIt v. Zuari Finance Ltd. (supra) (a)In this case, the brief facts as have been revealed from the records - so far as lease transaction is concerned, are as under:- The assessee claimed depreciation at 100 per cent on a skimmer machine. The assessee claimed that it had purchased the machinery from its sister concern, HCC, on made-to-order basis and had paid to it a sum of ₹ 17,02,225 bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reached by the Tribunal that the transactions of acquisition of the skimmer machine and its lease were genuine transactions are pure questions of fact and they do not involve any question of law, much less a substantial question of law. The findings of the Tribunal are based on appreciation of evidence and cannot be interfered with in appeal under section 260A of the Act. In any event, we find no error of law, nor any error in reappreciation of evidence by the Tribunal. Questions Nos. 5A and D are, therefore, answered in the negative and question No. 5B, in the affirmative, i.e. against the Revenue. 12.4.1 From the analysis of the aforesaid decision, we are, once again, of the opinion that the law relating to purchase and lease back transaction is well settled and if transaction is found to be genuine, then there is no question of disallowing the claim of depreciation. 12.5 The decision of Hon ble Gauhati High Court in the case of George Williamson (Assam) Ltd. (supra) (copy placed at page No. 95 to 105 of the paper-book): (a)In this case, the transaction of sale and lease back was claimed by the Revenue to be a transaction to defraud the Revenue in the garb of tax planni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the transactions were a device adopted by the company solely for reduction of taxable profit and tax thereon and as per the dictum laid down in McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) the assessee was not entitled to claim deduction. The appellate authority on appreciation of materials placed on record held that it was not correct to say that the plant and machinery had not been delivered to the buyer. The delivery of goods to the buyer was proved by documents on record. The transactions of transfer of plant and machinery were entered into between the companies and third parties, the seller and buyer had no inter se interest in each other, that is the transaction of sale took place between the parties at arms length. The sale price of the plant and machinery was determined on the basis of valuation by an independent valuer and there was nothing on record to indicate that such valuation was doubtful and an exaggerated value had been put for sale transactions. Although the delivery of possession is an essential ingredient of sale of movable property, actual delivery of possession does not mean that the buyer should take away the assets after delivery and acknowledgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no question for making an effort to raise the corporate veil as was done by the Hon ble Supreme Court in the case of McDowell Co. Ltd. (supra), on the contrary the assesses will have benefit as per decision of Hon ble Supreme Court in the case of Azadi Bachao Andolan (supra). 12.5.2 So far as present case is concerned, it is quite clear from the details incorporated in paragraph No. 19.1 of the order of the CIT (Appeals) and duly reproduced by us in paragraph No. 3.9 of this order that the assessee, by claiming the transaction as one of the purchase and lease back has offered a net income of ₹ 39,86,107 for tax as against the amount of ₹ 29,55,900 which could be taxed if Revenue s stand that the transaction in question was finance is accepted and, therefore, it cannot be said that the assessee had planned its affair to reduce the tax liability or to defraud the Revenue. This stand of the Revenue is also not maintainable. 12.6 Decision of Hon ble Madras High Court in the case of Om Sindhoori Capital Investments Ltd. (supra) [copy placed at page Nos. 104 to 105 of the paper-book] : In this case, the Hon ble Madras High Court has held the Explanation 4A to sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were already owned and used by the lessee. (ii)The lessor has made the payment for purchase of relevant assets directly to the lessee; (iii)The lessee has been using the assets even after the transaction for his business. (iv)Transaction is evidenced by duly executed. (v)The parties have acted upon the lease-deed. 14.1 From the above facts of the present case, it is quite clear that it satisfies all the requirements for a transaction to be of purchase and lease back/sale or lease back. 15. In view of above facts, we are of the opinion that the assessee has succeeded in establishing all the ingredients of a genuine purchase and lease back/sale and lease back transaction and, therefore, transaction in question is held to be genuine one and once we arrive at this conclusion, then the natural outcome is that there is no reason for disallowing the claim of depreciation of the lessor and, therefore, we do not find any infirmity in the order of the CIT (Appeals) who has allowed the assessee s (lessor) claim of depreciation. 16. Even otherwise, the revenue having taxed whole of the lease rent, there is no justification for the revenue to deny the benefits of depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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