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Issues: (i) Whether the sale-cum-leaseback transaction was a genuine transaction or a colourable device and whether depreciation on the leased machinery was admissible; (ii) Whether the authorities were justified in characterising the transaction as a financial arrangement and bringing to tax notional interest.
Issue (i): Whether the sale-cum-leaseback transaction was a genuine transaction or a colourable device and whether depreciation on the leased machinery was admissible.
Analysis: The authorities found that the assessee did not establish clear identification of the machinery, its delivery and redelivery, the written down value, or the market value of the assets, and the documents did not satisfactorily demonstrate a real transfer of possession. The machinery was found to be embedded to the earth, the lease and sale documents were not acted upon as genuine commercial transactions, and the assessee failed to co-operate fully in the assessment proceedings. In such a claim for depreciation, the burden lay on the assessee to show that the transaction was real and that the statutory requirements for allowance were satisfied.
Conclusion: The transaction was rightly treated as a sham and colourable device, and the disallowance of depreciation was upheld against the assessee.
Issue (ii): Whether the authorities were justified in characterising the transaction as a financial arrangement and bringing to tax notional interest.
Analysis: Once the transaction was found to be unreal and intended to avoid tax, the authorities were entitled to look beyond the form of the documents and determine the true legal character of the arrangement. On that basis, the arrangement was treated as a financing transaction rather than a genuine lease, and the income consequences were examined accordingly. The court found no substantial question of law in that approach.
Conclusion: The treatment of the transaction as a financial arrangement and the taxation of notional interest were sustained against the assessee.
Final Conclusion: The appeal failed in entirety, and the findings of the Tribunal and the lower authorities were affirmed on all substantial questions raised.
Ratio Decidendi: In a claim for depreciation arising from a sale-cum-leaseback arrangement, the Revenue may disregard the form of the documents and examine the real nature of the transaction; if the assessee fails to prove a genuine transfer and the arrangement is found to be a sham or colourable device to avoid tax, the claim can be disallowed and the tax consequences determined on the true character of the transaction.
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