TMI Blog2005 (9) TMI 234X X X X Extracts X X X X X X X X Extracts X X X X ..... . We have gone through the terms of both the agreements. After considering the same, we are of the view that it is not a case of genuine lease and in reality it is a case of financing arrangement between the parties. In our humble opinion, agreements clearly indicate that the real intention behind the tripartite agreement was to provide finance to RPL to meet the cost of plant purchased by L T from RPL. The RPL was in the process of setting up the plant and, therefore, depreciation could not be allowed to RPL prior to commencement of business. Even after the business had commenced, it would not be beneficial to RPL as in the initial stage, since the RPL would not be in a position for same years to earn sufficient profits to absorb the depreciation. On the other hand, if assessee is shown as owner by documentation, it would immediately be entitled to depreciation and set-off the same against income from financing as per the probable advice to the assessee. This is apparent from Clause 2 of the lease agreement which provides that lease rental had been calculated on the assumption that assessee would be allowed 100 per cent depreciation on such plant and machinery. It further provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment and in turn to assess only the interest component which had actually and legally accrued to the assessee. Interest on securities held as stock in trade - We find that the issue before us is squarely covered by the decision of the Tribunal in the case of Union Bank of India v. Dy. CIT [IT Appeal No. 8817/(Bom.) of 1992 dated 23-12-2003], wherein it has been held that (i) section 145 cannot override the provisions of section 5 and, therefore, no persons can be assessed unless any income accrues to him, (ii) interest on securities accrues to assessee on the specified dates and not on day to day basis as assessee has no right to receive the income before the fixed date. No contrary decision has been brought to our notice. Therefore, following the said decision, the issue is decided against the Revenue. The orders of the Learned CIT (Appeals) are, therefore, upheld. In the result, the appeals of the Revenue are partly allowed. - HON'BLE K.C. SINGHAL, JUDICIAL MEMBER AND V.V.S.N. MURTHY, ACCOUNTANT MEMBER For the Appellant : F.V. Irani, Adv. For the Respondent : Narendra Singh, Adv. ORDER Per KC. Singhal, Judicial Member. 1. Since common issues are involved in these appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that depreciation @ 100 per cent would be available to assessee under the provisions of the Income-tax Act, 1961 ('Act') and rules thereunder. However, if for any reason, the depreciation was not allowed wholly or partly, then the lease rental would be revised accordingly. It was also noted that period of lease was non cancellable. 4. The Assessing Officer disallowed the claim of assessee by observing as under:- (i) That it is a case of simple financing and colour of leasing has been given to ensure the security of money advanced. (ii) That civil work in connection with the erection of plant and machinery was carried out by RPL. After erection, the asset became immovable property and, therefore, there was no scope for further leasing to other parties. (iii) That the whole Captive Co-generation Plant was leased by four parties and, therefore, the same was incapable of being leased to other parties. (iv) That lessor does not have any right to conclude the lease before the period of 30 years while the lessee can extend the lease for further period of 22 years. Thus, after such a long period, the leased plant and machinery would hardly have any value. Therefore, impliedly, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n termination, the assessee is entitled to use, control or operate the said payments. Regarding the second question, he noted that lease finance for the entire Captive Co-generation Plant was done by a consortium of 4 parties including the assessee but it was apparent from the agreement that separate packages had been identified and separate lease agreements were entered into. In view of the fulfilment of these two conditions, it was held by him that assessee was entitled to depreciation. Regarding rate of depreciation, he restored the matter to the Assessing Officer for fresh adjudication. Aggrieved by the same, the Revenue is in appeal before the Tribunal for both the years. 7. The Learned Departmental Representative has assailed the orders of the Learned CIT (Appeals) by reiterating the reasonings given by the Assessing Officer and, therefore, the same need not be repeated. In addition, it was submitted that the Learned CIT (Appeals) had not made any observations regarding the finding of the Assessing Officer that the agreement between the parties was colourable device to evade the tax. Hence, without vacating such finding, the Learned CIT (Appeals) could not allow the depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable device with a view to evade the tax while on the other hand, he assessed the lease rent received by the assessee as its income. Such approach of the Assessing Officer was improper and erroneous in law. He could not blow hot and cold simultaneously. Having held that the entire arrangement was a colourable device, he was duty bound to carry its finding to the logical end. If the transaction was merely financing transaction as held by him, then he should not have assessed the leased rent in the hands of assessee. In the case of financial transaction, he should have assessed only the interest component, which accrues to the assessee under the aforesaid arrangement. 10. On the other hand, the Learned CIT (Appeals) did not make any observation regarding the finding of the Assessing Officer that the entire arrangement was a colourable device with a view to avoid tax. Without vacating such finding of the Assessing Officer, the Learned CIT (Appeals) could not adjudicate the claim of the assessee. Apart from the same, the Learned CIT (Appeals) posed two questions - (i) whether the assessee was owner of the plant and machinery, and (ii) whether such plant and machinery was an identifiab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rangement between the parties. This conclusion is based on the reasonings given hereafter: (i) The admitted fact is that the assessee is neither a dealer in nor a manufacturer of plant and machinery nor in the business of leasing of such items. On the contrary, the assessee is engaged in the business of providing long term finance for construction or purchase of house in India for residential purposes. This is apparent from Para 3 of the preamble of the tripartite agreement, which is reproduced as under:- HDFC is a public limited company incorporated under the Companies Act, 1956 and is engaged in the business of providing long term finance for construction or purchase of house in India for residential purposes. Thus, there was no need to acquire any plant and machinery for the purpose of leasing. (ii) In fact, the plant and machinery was designed and manufactured by L T as per the specification of RPL under the purchase order dated 25-8-1989 and the same was erected by L T at the premises of RPL at Hazira. The entire civil work was done by RPL for erection/construction of the plant. The possession of the plant, thus, had already been given to RPL before the assessee coming into pi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement was also beneficial to RPL as it was required to pay lesser amount of lease rental. It is because of this motivation that RPL surrendered its ownership in favour of assessee and L T was allowed to issue invoice in the name of assessee. RPL was in reality not affected by such action since non cancellable lease was made for 30 years in favour of RPL which could be extended for further period of 22 years. That means, for all practical purposes, RPL was the owner without loosing anything. 52 years is more than the usual life of machinery. Thus, the arrangement was beneficial to both the parties. Therefore, the entire exercise, in our opinion, was made only to avoid the tax liability. In other words, the state exchequer was thus deprived of the legitimate tax. Hence, it is held that exercise was a colourable device to avoid the tax. Our view is also fortified by the decision of Special Bench in the case of Mid East Portfolio Management where sale and lease back transaction was found to be a colourable device to avoid the legitimate tax due to State and consequently, depreciation claimed by the financing company was disallowed. 15. Even assuming for the sake of argument that entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Their Lordships, at Page 170 of 154 ITR, referred to the earlier judgments of Supreme Court in the case of A. Raman Co., B.M. Kharwar's case, Jiyajeerao Cotton Mills Ltd v. CIT [1958] 34 ITR 888 (SC), and judgment of Privy Council in the case of Bank of Chettinad Ltd. v. CIT [1940] 8 ITR 522, and then held as under:- 'Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious method. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. On this aspect, one of us, Chinnappa Reddy, J. has proposed a separate and detailed opinion with which we agree. The above observations are now the law of land since such observations have neither been commented upon nor overruled by any larger Bench. 18. Their Lordships of Supreme Court in the case of B.M. Kharwar held as under: The taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the lega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny of the transaction, for in the task of determining whether a transaction is a sham or illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth. The aforesaid observations in all judgments clearly show that tax planning is permitted provided it is within the framework of law but colourable device cannot be part of tax planning. It is the duty of the tax authorities to unravel the device if the parties have chosen to conceal by a device the legal relation. On fact of the case, we have already held that in reality the arrangement between the parties was financing arrangement which has been given the colour of lease transaction by adopting a device. All these exercises were made only to avoid the tax. 19. In view of the above discussions, the orders of the Learned CIT (Appeals) are set aside and the orders of the Assessing Officer disallowing the depreciation are sustained. However, we further hold that transaction of alleged lease has to be ignored since finding has to be carried to logical end. Accordingly, the Assessing Officer is directed to exclude the revenue receipt in the form of lease rent from the assessment and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not on day to day basis as assessee has no right to receive the income before the fixed date. No contrary decision has been brought to our notice. Therefore, following the said decision, the issue is decided against the Revenue. The orders of the Learned CIT (Appeals) are, therefore, upheld. 24. Before parting with this issue, we may mention that on going through the assessment order for the assessment year 1992-93, we do not find any addition of Rs. 2,28,36,460 in the computation of income. The Learned CIT (Appeals) had directed the Assessing Officer to delete this addition. The Assessing Officer is, therefore, directed to verify the same and take appropriate action in case of excess relief, if any, allowed to assessee in pursuance of order of Learned CIT (Appeals). 25. The last issue relates to deletion of disallowances made by the Learned CIT (Appeals) in respect of guest house expenses on account of rent, rates, taxes and repairs. The Learned Departmental Representative has submitted that order of the Learned CIT (Appeals) cannot be sustained in view of the Special Bench decision in the case of Eicher Tractors Ltd. v. Dy. CIT [2003] 84 ITD 49 (Delhi) and the judgments of Bombay ..... X X X X Extracts X X X X X X X X Extracts X X X X
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