Sale-and-lease-back and treaty credit rules determine depreciation allowance and taxation of Tanzanian business income.

A bona fide sale and lease-back arrangement was treated as commercially substantive, so depreciation on the leased boiler was allowed and the disallowance was set aside; mere tax advantage did not make the transaction a colourable device, and Explanation 4A to section 43(1) was held not to apply retrospectively. On the foreign income issue, Article 7 of the India-Tanzania DTAA was construed to permit attribution of profits to the Tanzanian permanent establishment while operating on a credit basis, not an exemption basis; accordingly, the Tanzanian business income remained taxable in India, with credit relief available where tax is paid in both States.

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Issues: (i) Whether depreciation on the boiler leased to Bombay Dyeing was liable to be disallowed on the footing that the sale and lease-back arrangement was a colourable device; (ii) Whether income earned from the Tanzanian business was taxable in India under the India-Tanzania Double Taxation Avoidance Agreement.

Issue (i): Whether depreciation on the boiler leased to Bombay Dyeing was liable to be disallowed on the footing that the sale and lease-back arrangement was a colourable device.

Analysis: The transaction was examined as a sale and lease-back arrangement in which the assessee acquired the boiler and leased it back, while continuing to derive lease rental income which was offered to tax. The Tribunal held that mere tax advantage does not by itself render a transaction a colourable device where the arrangement is supported by commercial substance. The finding of sham was not borne out by the record, and the legislative restriction in Explanation 4A to section 43(1) of the Income-tax Act, 1961 was held not to apply retrospectively to the year in question.

Conclusion: Depreciation on the leased boiler was allowable and the disallowance was set aside.

Issue (ii): Whether income earned from the Tanzanian business was taxable in India under the India-Tanzania Double Taxation Avoidance Agreement.

Analysis: The Tribunal construed Article 7 of the Double Taxation Avoidance Agreement and held that the assessee, being an enterprise of India with a permanent establishment in Tanzania, could not claim complete exemption in India merely because the profits arose through the Tanzanian branch. The agreement was read as permitting attribution of business profits to the permanent establishment and as operating on the credit method to relieve double taxation, rather than an exemption method. Article 25 was noticed as providing credit relief where tax is paid in both States.

Conclusion: The Tanzanian income was held taxable in India.

Final Conclusion: The appeal succeeded on the depreciation issue and failed on the foreign income issue, resulting in a partial relief to the assessee with the remaining addition sustained.

Ratio Decidendi: A bona fide commercial sale and lease-back transaction cannot be disregarded as a colourable device merely because it results in a tax benefit, and business profits of a resident enterprise having a permanent establishment abroad may still be taxable in India where the applicable treaty proceeds on a credit mechanism.

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