2012 (10) TMI 754 - AT - Income Tax

Tribunal upholds assessment reopening, disallows depreciation on leased assets in sham transactions

The Tribunal upheld the reopening of the assessment under section 147, supporting the disallowance of depreciation on leased assets due to sham ... Validity of reopening of assessment u/s 147 - Assessee purchase the assets and lease back to the same party – Claim 100% depreciation on leased out of assets – AO issue notice u/s 148 on the basis of Investigation report of ADIT - Excessive and wrong allowance of the claim of depreciation on leased assets – Assessee contended that basis is only change of opinion – Held that:- As concluded from the facts AO did have tangible new material to reopen the assessment u/s 147 and to form a reason to believe that income had escaped assessment. There is nothing either in the assessment order passed u/s 143(3) or in the details or explanation filed by the assessee in response to notice u/s 143(2) to show that the AO had made any enquiry on the issue of allowability of depreciation and whether the nature of transaction is operating leased or a finance lease. We are unable to accept the contention of the assessee that full and true particulars relating to the purchase and leased back transaction were furnished with ROI. Therefore, investigation report of ADIT is very relevant and tangible additional material for formation of belief that income chargeable to tax has escaped assessment on account of excess claim of depreciation allowed in the original assessment. Reopening of assessment on the basis of wrong facts - Non existence of the asset was detected only during the investigation and enquiry of investigation wing – Held that:- The assessee has not conclusively established that the facts pointed out in the investigation report are absolutely wrong. The claim of depreciation was finally disallowed on the ground that the transaction of purchase and lease back were sham, than it cannot be said that the reopening is on the basis of wrong facts. Merger of Order of assessing authority with CIT (A) – Assessee contended that reopening of assessment when the assessment order has merged with the order of CIT(A), then reopening of the assessment is bad in law – Held that:- There is nothing either in the assessment order or in the record available at the time of assessment to suggest that the AO had made any attempt to address this issue. As no such issue was under consideration before the appellate authority and the assessment order was not set aside. Therefore notice u/s 148 can be issue for on the basis of belief that has not been raised before CIT(A) Depreciation on leased assets – The assessee has purchased the assets on hire purchase basis and then leased back to the same parties - AO argued that transactions of sale and lease back of assets are sham & remained with the lessee itself – Held that:- Following the decision in case of Induslnd Bank Ltd (2012 (3) TMI 212 - ITAT MUMBAI) that under finance lease, the asset in question is stated as sold to the lessee at a predetermined price already received by the assessee as security. This peculiar feature shows that the assessee had no interest in the asset itself; but the interest of the assessee was to recover the entire investment and avail the benefit of 100% appreciation. Since rental receipts has been taxed, this issue has not been adjudicated by the CIT(A). Accordingly, the issue of capital component in the rental receipt not to be taxed is set aside to the record of the CIT(A). Issue remand back to CIT(A) Issues Involved:1. Validity of reopening of assessment under section 147.2. Treatment of lease and sale back transactions as sham and colourable.3. Disallowance of 100% depreciation on leased assets.4. Additional grounds regarding the reassessment's validity and the merger of the assessment order with the CIT(A)'s order.5. Tax treatment of lease rentals if depreciation is disallowed.Issue-wise Detailed Analysis:1. Validity of Reopening of Assessment under Section 147:The assessee contested the reopening of the assessment under section 147, arguing that the original assessment was completed with full disclosure and application of mind by the Assessing Officer (AO). The AO issued a notice under section 148 based on an investigation report indicating that the biogas plants claimed for depreciation were non-existent. The Tribunal held that the reopening was justified as the AO had tangible new material (the investigation report) to form a belief that income had escaped assessment. The Tribunal emphasized that the sufficiency of reasons is not required to be conclusively tested at the reopening stage; what is necessary is the existence of a reason to believe that income has escaped assessment.2. Treatment of Lease and Sale Back Transactions as Sham and Colourable:The CIT(A) upheld the AO's view that the lease and sale back transactions were sham and colourable, aimed at claiming 100% depreciation on non-existent assets. The Tribunal supported this finding, noting that the transactions were structured to benefit from depreciation without actual transfer of ownership or control of the assets. The Tribunal cited the Special Bench decision in IndusInd Bank Ltd., which laid down the characteristics of finance leases, concluding that the transactions in question were finance leases rather than genuine operating leases.3. Disallowance of 100% Depreciation on Leased Assets:The AO disallowed the depreciation claimed on the leased assets, amounting to Rs. 2.81 crores, on the grounds that the transactions were sham. The Tribunal upheld this disallowance, agreeing with the AO's findings that the transactions were structured to claim undue tax benefits. The Tribunal noted that the agreements included clauses to adjust lease rentals if the depreciation claim was disallowed, indicating a premeditated arrangement to exploit tax benefits.4. Additional Grounds Regarding the Reassessment's Validity and Merger of Assessment Order with CIT(A)'s Order:The assessee argued that the reassessment was based on wrong facts and that the assessment order had merged with the CIT(A)'s order, making the notice under section 148 invalid. The Tribunal rejected these arguments, stating that the reassessment was based on tangible new material (the investigation report) and that the issue of depreciation was not adjudicated in the original assessment or the CIT(A)'s order. Therefore, the doctrine of merger did not apply.5. Tax Treatment of Lease Rentals if Depreciation is Disallowed:The assessee contended that if the depreciation on leased assets was disallowed, the corresponding lease rentals should not be treated as income. The Tribunal agreed that this issue had not been adjudicated by the CIT(A) and remanded it back for reconsideration in light of the Special Bench decision in IndusInd Bank Ltd., which allowed for the exclusion of the capital component in lease rentals from taxable income if the transaction was treated as a loan.Conclusion:The Tribunal upheld the reopening of the assessment and the disallowance of depreciation on leased assets, finding the transactions to be sham and aimed at claiming undue tax benefits. The issue of the tax treatment of lease rentals was remanded to the CIT(A) for reconsideration. The appeal was partly allowed for statistical purposes.