Tribunal disallows Gallus machine depreciation, labels transaction as sham for tax evasion. Lease rentals excluded from taxation.

The Tribunal upheld the disallowance of depreciation on the Gallus machine, considering the transaction a sham arrangement designed for tax evasion. It also directed the exclusion of lease rentals from taxation as a consequential outcome of the sham transaction. The appeal was partly allowed based on these findings.

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Issues:
1. Disallowance of depreciation of Gallus machine.
2. Treatment of transaction of purchase of machinery and lease back as a sham transaction.
3. Exclusion of lease rentals of the Gallus Machine leased to another company.

Issue 1: Disallowance of Depreciation of Gallus Machine:
The appeal concerned the disallowance of depreciation on a Gallus machine. The assessee initially raised a ground challenging the disallowance but later withdrew it. The Assessing Officer (AO) disallowed depreciation claimed on the purchase of the machine, asserting it was a second-hand machine and not eligible for additional depreciation. The AO found a sham transaction between the assessee and a sister concern regarding the purchase and lease-back of the machine. The Commissioner of Income Tax (Appeals) upheld the disallowance, considering the transaction a colorable device to reduce taxable income. The Tribunal affirmed the lower authorities' decision, concluding the transaction was designed for tax evasion and providing interest-free funds to the sister concern. The disallowance of depreciation was confirmed.

Issue 2: Treatment of Transaction as a Sham Transaction:
The second issue revolved around the treatment of the purchase and lease-back transaction as a sham arrangement. The AO and CIT(A) found that the transaction was pre-decided, with the MOU for lease signed before becoming the owner of the asset. The MOU aimed to cover up the transaction, indicating a colorable device to reduce taxable income. The Tribunal concurred with the lower authorities, emphasizing that the transaction was not genuine and was orchestrated to avoid tax. The AO disallowed depreciation, and the Tribunal upheld this decision, dismissing the appeal against the order of the CIT(A).

Issue 3: Exclusion of Lease Rentals:
The final issue related to the exclusion of lease rentals received by the assessee for leasing the Gallus Machine to another company. The assessee raised a ground challenging the taxation of lease rentals, but later withdrew it as it was a consequential ground to the disallowance of depreciation. The Tribunal directed the AO to exclude the lease rental income from taxation since the depreciation was disallowed due to the sham transaction. The issue of exclusion of lease rentals was allowed, and the appeal was partly allowed by the Tribunal.

In conclusion, the Tribunal upheld the disallowance of depreciation on the Gallus machine due to a sham transaction and directed the exclusion of lease rentals from taxation as a consequential outcome of the sham transaction finding. The appeal was partly allowed based on the issues discussed and analyzed in the judgment.

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