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TMI Blog2007 (2) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... e assets. The security deposits were interest bearing. The lease rental payable by the lessee was equal to the interest payable on the security deposit. 4. The appellant claimed depreciation in respect of the assets under these transactions, the assessing authority denied the same, holding : (a) The appellant-company and the institution to which the assets were leased, were controlled by common members. (b) The transaction was a "self-cancelling transaction"-one where the appellant is in a position to use the security deposit to purchase the asset leased and claim to adjust the lease rental against interest payable on the security deposit. (c) The educational institutions which are not liable to pay Income-tax cannot also claim depreciation on any asset purchased by it. The net result of the above transactions however, enables a taxable entity to claim depreciation on an asset which is actually purchased with the funds of a non taxable entity. 5. Accordingly, the quantum of depreciation claimed amounting to Rs. 44,22,955 was added back to the appellant's income. The same having been challenged unsuccessfully before the first appellate authority and in further appeal bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncipal sum from out of the lease rents as relatable to the return of capital from the lessee. The full lease rent was offered for taxation and depreciation was claimed upon the leased assets. 11. Senior counsel would emphasise that the interest payable on the deposits by the educational institutions was on a par with other depositors and was independent of the lease transaction. The depreciation has been worked out in accordance with the Schedule to the Income-tax Rules, 1962. Counsel would point out that there are only two requirements for being entitled to the depreciation on assets. One is the ownership of the asset and the other is its use in business. Both these conditions are satisfied and hence the appellant is entitled to the depreciation on the leased assets. 12. The senior advocate places reliance on the following authorities : Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 -wherein the Supreme Court thought it necessary to consider the earlier judgment of the Supreme Court in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 in some detail as to "what it says, and what it does not say". 13. While pointing out that though Chinnappa Reddy J., dismissed the ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very 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. 17. The court has also accepted the view of the Gujarat High Court in Banyan and Berry v. CIT [1996] 222 ITR 831, 850 wherein the Gujarat High Court while referring to McDowell [1985] 154 ITR 148 (SC) has observed (page 759) : "The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act ; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation . . . in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on hand cannot be dubbed a colourable device or a sham transaction aimed at evasion of tax liability or even avoidance thereof. Counsel would pray that the appeal by the assessee be allowed and that by the Revenue be dismissed. 20. Per contra, Shri M. V. Seshachala, appearing on behalf of the Revenue would contend that as found by the Assessing Officer, the total quantum of investment by the assessee in the assets was received back from the lessee by way of security deposits. This coupled with the fact that the interest payable on the deposits was equal to the lease rent receivable from the lessee and that the lessees were educational institutions exempt from paying Income-tax, was an uncanny co-incidence which clearly points to the transactions having been entered into in order to claim depreciation in respect of these assets without actually investing any of its funds. The fact that the personnel in the management of the assessee-company and the educational institutions are common, clinches the issue. It is indeed naive on the part of the assessee to claim any semblance of genuineness to the transaction except the seemingly candid documentation. The incidental term as regards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. Are the said transactions to be viewed as regular commercial transactions ? Or, can it be said on the admitted factual matrix that they are designed to evade tax liability. 25. The assessee acquires the asset in its name and leases it to the educational institution which makes an interest bearing security deposit, equal to the entire value of the asset so leased, but agrees not to receive any interest which is to be adjusted entirely towards lease rentals. There is a remote possibility of termination of the lease and refund of the security deposit. 26. In the meanwhile the assessee claims depreciation on the asset, which the educational institution could not have claimed if it had directly acquired the asset, as it is exempt from payment of Income-tax. The further fact that the assessee and the lessees are managed by the same group of individuals, as directors in the assessee-company and in other capacities, managing the lessees would leave no room for doubt that the transactions are blatantly geared to evade the tax liability. It would be extremely naive to accept the transactions as commercially accepted transactions. The same cannot be considered as being a tidy ..... X X X X Extracts X X X X X X X X Extracts X X X X
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