TMI Blog2017 (4) TMI 345X X X X Extracts X X X X X X X X Extracts X X X X ..... on and has not given the same to the assessee for rebuttal, and the documents collected during search have also not been given to the assessee for, their comments and rebuttal. This is in gross violation of the principles of natural justice and the observation made by us for WPL squarely applies here. We also found that all the details in relation to the assets leased to Kedia Distilleries are on the records of the AO. These details and documents include photo copy of lease agreement, invoices of the assets purchased which have been leased, details of payment, installation certificates, details of insurance, details of lease rent received, details of assets either having been received back or sold at the end of the lease term, valuation report, amongst other details.In view of the above disallowance of depreciation in respect of assets leased to KDS Distilleries is not sustainable. Assets leased to DCM Shriram Consolidated the genuineness of the transaction has not been doubted by the AO to disallow the claim of the assessee. It is merely on the basis of the aforesaid alleged non-verified letter, which cannot be the basis of the impugned disallowance. We also found that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back transactions. We also verified the facts of leased assets and found that the leased assets have either been received back from lessee at the end of the lease period or sold to the lessee and the resultant income or loss has been incorporated in the profit and loss account of said period. In category C The depreciation in respect of this category transactions pertain to assets that have been purchased and leased in the earlier years, that is, the disallowance is not in respect of the assets that have been purchased/ given on lease during the previous year ended on 31st March, 1993. The AO for income-tax assessment year 1992-93 passed the assessment order dated 22.02.1995 under section 143(3) wherein the entire claim of depreciation on these assets has been allowed by him. Thus, once the AO has applied his mind and allowed depreciation on the assets leased, then, in the subsequent year, the AO is obliged to allow depreciation on such assets, and cannot take a different view, without bringing any adverse material on record that would suggest otherwise of the assets acquired in the earlier year(s). Assets given on lease and returning back to the assessee and again given on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, 2302, 2303, 2304, 2305/Mum/2008, ITA No. 1799, 2432, 2433, 1363, 2128, 2127/Mum/2006, ITA No.6091/Mum/2007 - - - Dated:- 21-3-2017 - SHRI R.C.SHARMA, AM AND SHRI AMARJIT SINGH, JM For The Assessee : Shri. Rajiv Khandelwal For The Revenue : Shri. Vikram Batra ORDER PER BENCH: These are the cross appeals filed by the assessee and revenue against the order of CIT(A) for the Assessment Years 1993-1994 to 2002-2003 in the matter of order passed under Section 143(3) read with section 254 of the I.T. Act as well as orders passed u/s.271(1)(c) of IT Act.. 2. Similar grounds have been taken by the assessee and revenue in all the years which pertains to disallowance of claim of depreciation on sale and lease back transactions inspite of the fact that the assessee has satisfied the conditions laid down by Income Tax Appellate Tribunal, Special Bench in the case of Mideast Portfolio Management Limited. 3. Grounds taken by the assessee in the assessment year 1993-1994 (ITA No.1363/M/2006 reads as under:- 1.1 The Learned Commissioner of Income Tax (Appeals) VIII, Mumbai hereinafter referred to as CIT(A) erred on facts and in law in confirming the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order the assessee was granted relief in respect of the capital recoveries amounting to ₹ 42,15,675/- which was computed in accordance with the directions of the CIT(A) for assessee s own case in A.Y.1997-98. The assessee preferred appeal against the said order and the appeal was dismissed by the CIT(Appeals) VIII, Mumbai. Assessee aggrieved by the order of the CIT(Appeals)VIII, Mumbai, filed an appeal with the Tribunal. The Hon'ble Tribunal vide its order no. ITA NO. 4327/MUM/2003 dated 12 1- 2004 set-aside the order of CIT(Appeals) and sent back the matter to the assessing officer with the direction to examine the issue in light of the decision in the case of Mid East Portfolio Management Ltd by Hon'ble Special Bench, I.T.A.T., Mumbai 87 ITD 537. 6. In the assessment orders framed under Section 143(3) r.w.s 254 dated 29/03/2005 AO observed that the details submitted were perused and after careful study and analysis of the paperbook furnished by the assessee which was also produced before the Hon'ble ITAT, the following facts were emerged which are discussed as under: 7. The pages 1 to 89 of the paperbook contain copies of lease agreement, copi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th by the AO 10 1,63,31,184 B Depreciation pertaining to parties to whom summons were issued but there was no response 11 64,52,104 C C Depreciation pertaining to parties for which no enquires were conducted by the AO 37 31,68,566 Total 58 2,59,52,054 Less: Relief granted by the AO as mentioned above 5,49,648 Balance 2,54,02,406 11. In relation to assets leased to Western Pacgues India Limited (WPIL), we found that the AO has doubted the existence of the assets leased to WPIL and the genuineness of the lease transactions by placing reliance on the documents that have been collected in pursuance to a survey action conducted at the premises of WPIL and further, placing reliance on the statement of various persons recorded during the survey action. From the record we found that the above en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is on the basis of this hypothecation agreement that the assessee has availed loan from the bank. Moreover, from the perusal of the assessment order dated 31.03.1999, page nos 17 to 19 of the order, the AO himself mentions that during the course of survey and inquiries, two biogas plants were found to be installed out of 14 biogas plants taken on lease by WPIL from different companies - one in distillery unit and the other in paper unit. However, these two biogas plants were supplied by the assessee. The AO has not brought anything on record to prove that the 2 biogas plants found at the premises of WPIL do not belong to the assessee. In this scenario, the observation in the assessment order supports the fact that assets are found to be installed and cannot be treated as sham, consequently, denying the depreciation is on facts, erroneous and contrary to the material on record. However, without giving the evidence gathered behind the back of the assessee, how can the assessee rebut the contents of such evidences. 16. In relation to assets leased to Kedia Distilleries, we found that the AO has on the basis of the facts given below disallowed depreciation of ₹ 9,27,764 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever given a copy of this letter to the assessee. The CIT(A) in para 64 on page nos 18 and 19, has upheld the disallowance of depreciation on the ground that the transaction is a sham. 20. From the record, we found that the assessee, contrary to the alleged letter, has furnished a certificate issued by the lessee which confirms that they have not claimed depreciation on the gas cylinders leased out to them. This certificate is with the AO which has been filed by the assessee, whereas the existence of the letter alleged by the AO is in doubt inasmuch as it has neither been given to the assessee nor attached to the assessment order. The CIT(A) also has not seen this letter. Thus, the impugned disallowance on the basis of non-existent non- verifiable letter is without any basis. The impugned disallowance by the AO is by placing reliance on the letter dated 16.03.99. The AO has not given the same to the assessee for rebuttal, or for their comments. This is in gross violation of the principles of natural justice and hence the observation made by us hereinabove in case of WPL squarely applies to the case of DCM Shriram Consolidated. Further, the genuineness of the transaction has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be restored back to the file of AO. We therefore direct the AO to delete the disallowance of depreciation. 24. In Category B, the AO has dealt with assets pertaining to parties to whom summons were issued but there was no response. In this regard, we found that the assessee has filed with the AO and CIT(A) complete details in respect of each lease transaction which includes photo copy of lease agreement, invoices of the assets purchased which have been leased, details of payment, installation certificates, details of insurance, details of lease rent received, details of assets either having been received back or sold at the end of the lease term, valuation report, amongst other details. These details have been filed at the time of original assessment proceedings itself and have once again been filed with him pursuant to the directions of the Tribunal to the AO to examine the claim of the assessee afresh. 25. The AO on the basis of the details given by the assessee has issued summons to the parties and these summons have been served on the parties. Mere non-compliance by the parties has led the AO to disallow the claim of depreciation in respect of the said lessees. The fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im of depreciation pertaining to parties for which no queries were conducted by the AO. The AO in these cases has disallowed the claim of depreciation without assigning any concrete reasons. The AO merely mentions that in light of the pattern emerging from the individual lease transactions C discussed earlier in above categories), the impugned category of lease is a finance lease and therefore, the claim of depreciation is disallowed. 30. After going through the lease agreement we found that the lease are genuine lease on the basis that the assessee has filed with the AO and CIT(A) complete details in respect of each lease transaction which includes photo copy of lease agreement, invoices of the assets purchased which have been leased, details of payment, installation certificates, details of insurance, details of lease rent received, details of assets either having been received back or sold at the end of the lease term, valuation report, amongst other details. The depreciation in respect of this category transactions pertain to assets that have been purchased and leased in the earlier years, that is, the disallowance is not in respect of the assets that have been purchased/ gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of sale and lease back transactions, the property in the asset(s) is transferred by the seller to the assessee as the first limb of the transaction. This is clear from the invoice, valuation report and payment details. The purchase has been made on the basis of the price determined on the basis of a valuation report of approved valuer. 33. We had carefully gone through the various sale and lease back transactions entered by the assessee and found that assessee has leased vehicles, plant and machinery, office equipment, Computers, Furniture and fixtures etc., to the various parties of sale. The sale and lease back transactions in the cases on hand cannot be termed as Finance leases inasmuch as such a situation can arise only when the purchase price of assets is higher than the valuation price. The assessee has valued the asset through qualified, engineers approved by the Government and hence, there is not much left to the Department to object, that it was done with an intention to defraud the Revenue unless the transaction is between associate or related parties, which is not the case here. Here the lease transactions are entered into between a public limited company an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.2) Bill 1996 in which it was stated as under: The practice of sale and lease back of assets results in passing of very high depreciation to the leasing concerns. This practice needs to be curbed. Hence, I propose to provide in the Income- Tax Act that in case of Sale-and-lease back transactions, the written down value of the asset, in the hands of the lessee, who was the previous owner, will be treated as cost in the hands of the lessor. This measure, while not affecting bonafide transactions will prevent loss making concerns from indulging in unhealthy trade off of depreciation. 36. In view of the above amendment, the cost of acquisition in the hands of the lessor was restricted w.e.f.01/10/1996, to the written down value in the hands of the previous owner; otherwise, the Act has given recognition to sale and lease back transactions. 37. Looking at the overall tax treatment of the whole transaction, it cannot be said that the transaction was intended to reduce the tax liability by claiming depreciation on the cost of the asset. It is to be noted that though in the first year, there was a reduction in, tax liability, but in subsequent years, the assessee has offered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the said equipment or any part or parts thereof or with any interest therein or in this Agreement but shall keep the said equipment in his own possession. Lessee to pay rent -Clause 13 - The Lessee shall duly and punctually pay all rents, rates, taxes, licence fees, in respect of the equipment. Loss, theft, etc -Clause 9 - The Company shall not be liable to the Lessee for any loss, theft, damage, destruction or any claim whatsoever . Lessee - not the owner, therefore, no depreciation Clause 14 - Lessee is not the owner of the said equipment, the Lessee shall not claim any relief by way of any deduction, allowance, or grant, available to the Company as owner of the said equipment under the Income-tax Act, 1961, or under any other statute, rules or regulations which it would have been entitled to if it were the owner thereof. Certificate from lessee -Clause 15 - The Lessee shall at the end of each financial year of the Company provide to the Company such information as it may require to claim relief by way of any deduction, allowance or grant as the owner of the said equipment under the provisions of the Income-tax Act, 1961 Right to inspect - Clause 17 - The Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lessee failing so to do, the Company, its servants and agents shall be entitled without any notice to enter upon any premises where the said equipment may be and take possession thereof . 39. In terms of the above clauses, it is clear that ownership of the assets belongs to the assessee. The assessee has paid for the asset(s) and using the same for the purpose of their business of leasing. The assessee has secured a security deposit from the lessee. The assessee is getting lease rentals every month as per the terms of lease agreement. The assessee by virtue of the lease agreement possesses complete right to take back the asset, dispose of, remove the asset, etc. The lease agreement empowers the assessee to remove the asset(s) on the completion of the lease period or otherwise. The asset is being shown in the accounts of the assessee as they hold the title to the asset. The owner of the asset possesses the authority to re-possess the asset on completion of the lease period or on the happening of some event as mentioned in the agreement, and in such case, the lessee will have no legal right to prevent the assessee from re- possessing the asset. The terms of the lease agreement do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) Was there an intention to pass the property in the equipment to the assessee? Yes, it is there in the case of appellant (b) Was the equipment identified / ascertained with reasonable clarity? Yes, the equipment can be easily identified/ascertained (c) Was the equipment valued, and if so, whether it was a bonafide valuation? Was the value inflated? How credible is the report of the valuer, if there is one? All the equipments have been purchased at the prevailing market rate. It is not the claim of the A.O. that the value is inflated. The value is duly supported by valuation reports, which have not been specifically controverted by the A.O. (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? In each and every case, the terms of the lease are clear and the document is a lease deed and not an arrangement for security. (e) Is there any parallel or collateral documentation or correspondence or an understanding between the parties, which throws doubt on thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expiry of the lease period, the vehicles have been transferred to third parties after taking possession of the vehicles from the lessee, the CIT(A) did not accept this evidence for the reason that only debit notes have been filed in evidence which does not contain acknowledgement of the buyer for receipt of the vehicle; though however, no evidence has been brought on record by the lower authorities that the vehicles have not been transferred in the name of the buyer or no notice, either under section 131 or 133(6) has been issued to the buyer to take his confirmation. We restore the matter back to the file of AO for deciding afresh after verifying these evidences. In respect of assets leased to DCM Sriram Consolidated Ltd., we had restored the matter back to the file of the AO in terms of our observation made in para 20. Accordingly, AO is to decide afresh in terms of the direction given in para 20. 48. In respect of appeals filed by the department wherein CIT(A) has deleted the disallowance of depreciation in terms of the finding recorded by CIT(A) vis- -vis, our observation made hereinabove, we do not find any infirmity in the order of CIT(A) for deleting the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assets involved in the said transactions. He will also subject to tax the corresponding lease rent amount credited by the appellant in the profit and loss account. (iii) that in respect of the leasing of motor vehicles made during the accounting year the findings of the Assessing Officer that these represent the finance lease arrangement and therefore, the is not entitled for deduction of depreciation and only the corresponding interest amount forming part of the lease rent is taxable is upheld. . . (iv) that in respect of the plant: and machinery leased out during the year again, the findings of the Assessing Officer that these represented finance leasing and the appellant is not entitled for depreciation is upheld. (v) that in respect of the other assets leased during the year, the arrangement is to be taken as one of the operating lease. Therefore the Assessing Office shall allow depreciation on the cost of these assets while bringing to tax the corresponding lease rent amount credited to the profit and Loss account. (vi) In respect of the lease arrangements which has been accepted by the Assessing Officer as operating lease in the assessment order under ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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