Sham transaction doctrine defeats depreciation claim where cylinder loan arrangement lacked commercial substance and genuine business records.

An arrangement that formally involved purchasing cylinders, filling them with gas and "loaning" them to another concern was rejected as lacking real commercial substance. The record showed key discrepancies: permissions were not in the assessee's name, some approvals were obtained after the alleged loaning, batch permissions did not consistently match the cylinders said to have been purchased, and the absence of proper batch-wise loan records remained unexplained. On the totality of circumstances, the tribunal treated the transaction as a sham and a colourable device designed to secure depreciation and tax advantage, so depreciation on the cylinders was disallowed.

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Issues: Whether the assessee's arrangement of purchasing cylinders, filling them with gas and "loaning" them to another concern was a sham or colourable device, and whether depreciation on the cylinders was allowable.

Analysis: The transaction was examined in the light of the statutory permissions, BIS certificates, batch-wise approvals and the sequence of purchase, filling and loaning. The record showed material discrepancies: permissions were not in the assessee's name, some permissions were obtained after the alleged loaning, certain batch permissions covered cylinders not shown to have been purchased by the assessee, and the explanation for the absence of batch-wise loan records was found unsatisfactory. The arrangement was viewed cumulatively as lacking real commercial substance and designed mainly to secure 100% depreciation and tax advantage. Applying the principle that the tax authority may look beyond the facade of documentation to the real nature of the transaction, the claimed business character of the arrangement was rejected.

Conclusion: The transaction was held to be a sham and depreciation on the cylinders was disallowed.

Final Conclusion: The assessee failed to establish a genuine business transaction for the cylinders, and the orders denying depreciation were sustained.

Ratio Decidendi: A transaction supported by formal compliance documents may still be disregarded if, on the totality of circumstances, it is found to be a sham devised primarily for tax avoidance rather than a genuine business arrangement.

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