TaxTMI 
TaxTMI 
2007 (3) TMI 408
X X X X Extracts X X X X
X X X X Extracts X X X X
....unted to sale transactions with deferred payment terms. 2.The learned CIT(A) ought to have allowed depreciation on windmills as claimed in view inter alia CBDT's Circular No. 9, dated 23rd March, 1943. 3.The learned Commissioner of Income-tax (A) erred in directing the Assessing Officer (AO) to grant depreciation on 3 windmills based on cost of Rs. 1,75,41,750. He ought to have directed the Assessing Officer to allow the said depreciation at the rate of 100 per cent based on cost of Rs. 2,85,00,000. 4.The learned CIT(A) erred in not correctly interpreting the provision of section 43(1) of the Income-tax Act and therefore erred in altering the cost to the appellant for the purpose of depreciation allowance claim. 5.The learned CIT(A) erred in making various baseless erroneous and improper remarks to the effect that the appellant had entered into transactions and/or had inflated certain items to improperly reduce profits and/or claim higher depreciation. 3. Under letter dated 12th February, 2007, the assessee has raised the following additional ground of appeal : "The learned Commissioner of Income-tax(A)-XXX[CIT(A)] failed to appreciate that his direction to grant depreciation....
X X X X Extracts X X X X
X X X X Extracts X X X X
....duction of depreciation and recorded a finding that the hire purchase agreement cannot be considered a genuine agreement and that the assessee deliberately resorted to a device to avoid tax on the capital gain of Rs. 5,17,81,778 earned by the assessee during the present assessment year by setting off the depreciation of Rs. 5.05 crores against the aforesaid income. The hire-purchase agreement was entered by the assessee on 7-9-2000 and on the same day, the assessee entered into another agreement with S.G.M. Wind Farms P. Ltd. (SGMW) under which the operation and maintenance of the 5 windmills was assigned to SGMW. The Assessing Officer was of the view that the entire transaction was in the nature of dubious or colurable device aimed at avoidance of tax and therefore, the ITAT, Mumbai Special Bench's decision in the case of Mid East Portfolio Management Ltd. v. Dy. CIT [2003] 87 ITD 535, was applicable. The Assessing Officer accordingly called upon the assessee to explain why the depreciation should not be disallowed. 6. The assessee contended before the Assessing Officer that the facts of Mid East Portfolio Management Ltd. (supra) related to sale and lease back (SLB) transaction w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee the premium and other payment made by them to the Insurance Company for the said purpose (Clause 15). 8. The Assessing Officer also considered the operation and maintenance agreement dated 7th September, 2000 entered by the assessee-company with SGMW. At page 4 of his order he has referred to the salient features of this agreement as under : "I.SGMW shall operate, run and maintain the windmills brought on here on behalf of the assessee-company. II.The assessee would permit SGMW to apply to the Electricity Board for transfer of the electric meter in their name. On expiry/termination of this Agreement the Operator shall immediately comply to the Electricity Board for transfer of the electric meter to the assessee or its nominee (Clause 5). III.SGMW will undertake to maintain the windmills, generate electricity and sell power to the Electricity Board or eligible consumers, recovery of sale proceeds and pay the same to the Company on payment of OMC charges at average Rs. 50,000 per machine per year (Clause 7). IV.SGMW shall hold the windmills of the company and not claim any right, title or interest in the said windmills (Clause 20). V.SGMW shall not transfer, assign or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... do not exist; he has made inquiries during the course of hearing, with his counterparts in Tamilnadu and confirmed their existence and operation; (b)That even today, they are existing, they are producing power and they are being distributed; it is yielding revenue; in the subject year in appeal, power was supplied to Ganapathy & Co. Limited and later it is supplied to the Tamilnadu Power Corporation also. (c)Regular bills are raised in the name of the company; revenue is to the coffers of the appellant company; (d)Since the company lacked initial expertise and recognition with the State Power Corporations, it engaged services of an operator who is maintaining and operating the units; a copy of the Operation and Management agreement has been placed on your records. Outsourcing is the order of the day. Department cannot shut its eyes to such facts, it cannot be gainsaid that all operations of the plant shall be conducted by the owner to claim expenses and allowances and that no activity could be outsourced. Concept of outsourcing is triggering wide expansions of business all over the world and bringing about economic growth and expansions. (e)The Company had initially paid Rs. 8....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s only financed this direct purchase of windmills by the assessee. (c)Only such assets can be given under hire-purchase agreement which are owned by the seller. On the contrary the 3 windmills were not owned by SFL. (d)As per the Board's circular the hire-purchase should be spread over evenly during the period of hire purchase, whereas in the present case there is upward increase in these charges. (e)By entering into the hire purchase agreement, the assessee is paying interest rate of 17% to SFL. Further SFL purchased two windmills at Rs. 1.8 crores and sold to the assessee at Rs. 2.2 crores thereby already earning a profit of Rs. 40 lakhs. If this is also considered the interest rate would increase to 21% whereas the assessee could have easily raised loans at interest rates ranging between 12.5 to 14.5%. (f)The purchase cost of windmills is inflated with a view to claim more depreciation. 14. On the basis of these findings the learned CIT(A) held that the assessee would be entitled to depreciation on the full cost of two windmills being Rs. 2.2 crores. In respect of the other 3 windmills purchased from M/s. IWEL, he held that the cost price of Rs. 2.85 crores was inflated as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... These 5 windmills were leased to SGMW under another agreement for operation and maintenance. These agreements have been actually acted upon by the concerned parties during the preceding several years. The assessee is regularly paying the hire-purchase charges as per terms and conditions of the agreement and is also receiving income from generation of power. The income is being regularly assessed in the hands of the assessee and the assessee is getting deduction for the hire charges paid. The determination of cost at Rs. 5.05 crores is duly supported by the valuation reports of Government registered valuer and these reports are placed at pages 32 and 33 of the Paper Book. In our view there is hardly any basis for the assumption that this cost has been inflated. As already mentioned by us above, the total payment to be made by the assessee for the 5 windmills stands at Rs. 9.77 crores. Out of this Rs. 5.05 crores has been allocated towards the cost and the remaining amount has been treated as finance charges and spread over a period of 11 years. The assessee would be entitled to depreciation on the cost and the finance charges would be allowable as revenue expenditure. If the cost ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er thereof by the second mentioned person." 18. The Assessing Officer has never invoked Explanation 3. Actually this Explanation can be invoked with the previous approval of the Joint Commissioner. Explanation 4A is applicable only in the case of sale and lease back transactions. In our view, the learned CIT(A) has exceeded his jurisdiction in scaling down the cost of 3 windmills. We, therefore, hold that the actual cost has to be taken at Rs. 5.05 crores. 19. Coming to the assessee's claim for depreciation on the aforesaid cost of windmills, we have already observed above that the hire-purchase agreement cannot be treated as not genuine. Under a hire-purchase agreement the person who hires is never vested with ownership rights till the stipulated period is over and he exercises the option to acquire the assets. Therefore, we see no merit in the Assessing Officer's observation that depreciation is not admissible to the assessee because the assessee is not the owner of the assets. As a matter of fact, the assessee claimed depreciation by virtue of the Board's Circular No. 9, dated 23rd March, 1943. This Circular may be reproduced below : "The following instructions are issued for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s circular has been explained in detail by the ITAT Calcutta Bench in the case of Tirrihanah Co. Ltd. (supra) and it would be appropriate to reproduce below the facts and the ratio of this case from the head-note : "A plain reading of Circular No. 9, dated March 23, 1943, shows that it visualises two situations. The first situation is when ownership is transferred at once and the lessor has the right to sue for arrears of instalments but no for recovery of the leased asset and the second situation is when the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment. These conditions mentioned at paragraph (ii) and paragraph (iii) of the circular are mutually exclusive and they envisage different treatments for the purpose of depreciation. In the first case, according to the Central Board of Direct Taxes circular, the transaction is required to be treated as that of purchase by instalments and depreciation is to be computed on the entire purchase price as per the agreement. In the second case, the transaction is required to be treated as one of hire-purchase and the periodical paym....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he aforesaid decision of the Tribunal. We do not see any merit in the observations made by the learned CIT(A) that the Board's circular will not apply in the case of the assessee as the hire-purchase/finance charges payable annually have not been evenly spread over. In our view such spreading over depends upon the mutual convenience and agreement between the parties and there cannot be any mandatory condition that such charges should be evenly spread. Considering the entire facts and circumstances and the legal position, we hold that the assessee is entitled to depreciation at the rate of 100% on the cost of the windmills being Rs. 5.05 crores. The Assessing Officer is accordingly directed to allow depreciation. This disposes of the departmental appeal and the various grounds of appeal raised by the assessee in the appeal filed by it. 22. We now take up the remaining grounds of the assessee's appeal. Ground No. 6 is as under : "The learned CIT(A) erred in disallowing hire charges incurred or suffered by the appellant on acquisition of the windmills." 23. This ground has not been pressed by the learned counsel for the assessee and therefore, the same stands rejected as not presse....