TaxTMI 
TaxTMI 
2012 (3) TMI 212
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....ts of the case for the A.Y. 1998-99 are that the assessee bank filed its return claiming depreciation of Rs. 25,70,03,293. The Assessing Officer observed that there was substantial variation between the amount of depreciation as per books of account and that claimed in the computation of income. Such variation was found mainly due to 100% depreciation claimed on leased assets to the tune of Rs. 9,72,74,434 during the year. This depreciation was in addition to the claim of depreciation in respect of certain other assets leased in earlier years. The Assessing Officer observed that the claim of depreciation on assets leased up to assessment year 1997-98 was disallowed by him making a detailed discussion in the assessment order passed for assessment year 1997-98. Following the same, he disallowed depreciation on the assets leased prior to the year in question. In the present special bench we are concerned only with the depreciation on the asset claimed to have been leased during the current year. The particulars of such asset purchased and claimed to have been leased out during the year have been tabulated in para 2.4 of the assessment order in which it has been noted that ....
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....A.Y. 1999-2000, in so far as the question before the special bench is concerned, are exactly similar. The assessee claimed depreciation for Rs. .9.72 crore at half of the cost of the asset in A.Y. 1998-99 on the ground that it was leased out for a period of less than six months. The remaining amount of Rs. .9.72 crore of the depreciation was claimed in the A.Y. 1999-2000. The AO disallowed such depreciation in the succeeding year also by following the view taken by him in the immediately preceding year. The first appeals for both the years did not change the fortune of the assessee on this issue. It will not be out of place to mention that another assessee, namely, Axis Bank was permitted, on request, to intervene in the Special Bench. However no one has appeared on its behalf. 4. We have heard the rival submissions and perused the relevant material on record in the light of precedents relied upon. We are taking up the facts for the A.Y. 1998-99 for decision, in respect of which the leading orders have been passed by both the authorities below. The assessee claimed to have leased out boiler to Indo Gulf Fertilizers by maintaining that it was the owner of the asset an....
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....lay plus a return on the funds invested during the lease term. Such a lease is normally non-cancellable and the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset.' The learned AR has invited our attention towards clause 28 of this Guidance note which provides that the recommendations of this Guidance Note shall apply to all assets leased during the accounting periods beginning on or after 1st April, 1995. It was put forth that the assessee entered into the instant lease transaction during the previous year relevant to the assessment year 1998-99 and hence this Guidance Note shall be relevant for determining the distinction between the operating and finance lease in the years in question. From the above Guidance note we can understand the ambit of finance lease in a generic sense to mean a lease under which the lessor secures the recovery of his capital outgo plus a return on such funds during the lease term and the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset. An....
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....ease from the Guidance note and Accounting Standard 19 above we find there is not much difference between the two. Operating lease has been defined in both as a lease other than finance lease. And when we examine the meaning of 'Finance lease' as per Guidance note along with Explanation given in para 4, it turns out that its scope is almost the same as that given in the AS 19. Rather the AS simply elaborates the concept of finance lease as given in the Guidance Note without making any qualitative addition to or subtraction from that. 5.6 At this juncture it would be relevant to note the case of Asea Brown Boveri Limited v. Industrial Finance Corporation of India [(2006) 154 Taxman 512 (SC)]. This judgment has been rendered u/s 10 of the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992. The facts of the case are that IFCI carried on the business of financing money to various buyers. Vide agreement dated 4th December, 1990, ABB Ltd. entered into lease agreement with M/s. Fairgrowth Financial Services Limited. Pursuant to the letter of offer dated 26th July, 1990 under this lease finance agreement, ABB Ltd. had taken lease finance of total 5....
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....st. Therefore, the lease is non-cancellable by either party. 5. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period. 6. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation. 7. The lessor is typically a financial institution and cannot render specialized service in connection with the asset. 8. The lease is usually full-pay-out, that is, the single lease repays the cost of the asset together with the interest." 5.7 On making painstaking examination, the Hon'ble Apex Court has summed up the features of finance lease as under :- "In our opinion, financial lease is a transaction current in the commercial world, the primary purpose whereof is the financing of the purchase by the financier. The purchase of assets or equipment or machinery is by the borrower. For all practical purposes, the borrower becomes the owner of the property inasmuch as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use and occupation of the property, bears the wear and tear, maintains and operates the machinery/equ....
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....ments. He reemphasized that the final decision of any judgment should be confined to that very statute alone under which it is rendered and should not be applied in other statutes. On the basis of such reasoning it was insisted that importing the ratio decidendi from the case of Asea Brown Boveri Limited (supra) to the Income-tax Act, 1961, was wholly improper. 5.9 The contention of the learned AR that the meaning assigned to the finance lease by the Hon'ble Supreme Court in Asea Brown Boveri Limited (supra) should not be considered under the Income-tax Act, in our considered opinion, is wholly bereft of any force. There is no doubt that the case of Asea Brown Boveri Limited (supra) has been decided by the Hon'ble Supreme Court in the context of Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992. This Act consists of sections 1 to 15. Section 2 contains definitions of the words etc. used in this Act. It is pertinent to note that there is no definition of 'lease' much less operating or finance lease under that Act. Thus it becomes clear that the Hon'ble Supreme Court in that case considered and decided the concept and ambit of operatin....
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....politan Magistrate seeking permission to go abroad and also sought direction against the DRI for return of the passport. As no decision was communicated to the petitioner, the petitioner filed petition before the Hon'ble Bombay High Court. The petitioner relied upon a judgment rendered by the Hon'ble Supreme Court in the case of Suresh Nanda v. CBI [(2008) 3 SCC 674] holding that Passport Act is a complete code in relation to impounding of the passport and even a Court exercising powers u/s 104 of Criminal Procedure Code has no authority to impound a passport. While interpreting the term "documents" appearing in section 104 of the Criminal Procedure Code, the Hon'ble Supreme Court held that the term "documents" cannot be read so widely as to include passport. In the opposition it was contended by the learned Solicitor General that section 23 of the Passport Act itself provides that the provisions of FERA etc. are in addition to and not in derogation of the provisions of the Passport Act. By relying on section 37(3) of FEMA, it was submitted that the power and authority of DRI includes the powers which are conferred on Income-tax authorities u/s 131(3) of the Income-tax Act, 1961 wh....
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....istinction to the provisions under the present Act in so far as this issue is concerned. The concepts of finance and operating lease, which are implicit under the Income-tax Act, 1961 have been made explicit under the Direct Tax Code Bill, 2010. In view of the foregoing reasons we are of the considered opinion that this contention raised by the learned AR is incapable of acceptance. The same is, therefore, jettisoned. 5.13 It is interesting to note that the Hon'ble Supreme Court once again in the case of Association of Leasing & Financial Services Companies v. Union of India & Ors. [2010-(SC2)-GJX-0838-SC] considered the controversy pertaining to validity of sections 65(12) and 65(105)(zm) of the Finance Act, 1994 seeking the levy of service tax on leasing and hire purchase. The Association contended that the levy of service tax under these sections on financial leasing services including equipment leasing and hire purchase was beyond the legislative competence of Parliament. Rejecting this contention and dismissing the appeal, the Hon'ble Supreme Court held that the imposition of service tax relating on financial leasing services including equipments leasing and hire purchase i....
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....y interest [its reversionary right]. If the lease is terminated prematurely, the lessor is entitled to recoup its capital investment [less the realizable value of the equipment at the time] and its expected finance charges [less an allowance to reflect the return of the capital]. In the case of hire-purchase agreement the periodical payments made by the hirer is made up of : (a) consideration for hire (b) payment on account of purchase" 5.14 Thus it is apparent that the broader guidelines laid down by the Hon'ble Supreme Court in the case of ABB Ltd have been reiterated in the latter case of Association of Leasing & Financial Services Companies v. Union of India & Ors. On a fair reading of the aforenoted two judgments rendered by the Hon'ble Supreme Court in the light of the Guidance Note and the AS 19, we can draw the following broad features of finance lease :- - Such a lease is non-cancellable and there is a fixed obligation on the lessee for payment of lease money. In case lease is terminated prematurely by the lessee, the lessor is entitled to recover his investment with expected interest. - Such a lease is always for a fixed period, which period is decided by t....
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....tance of lease rentals, to terminate this Lease, without any notice except as specified in 18.1.2 hereof and at any time after the occurrence of such event." Clauses 18.1.1 to 18.1.6 of the Agreement speak of the inability of the lessee either to pay lease rentals or to neglect to perform any breach of the agreement etc. Clause 18.2 stipulates that on termination of this lease pursuant to clause 18.1, the lessor as per clause 18.2.1 shall be entitled to remove and repossess the equipment and clause 18.2.2(i) stipulates that in addition to lessor's right under clause 18.2.1, the lessor shall be entitled to recover from the lessee 'the entire amount of lease rentals for the fixed period of lease'. The lessee is not only liable to pay to the lessor all arrears of lease rentals up to the date of pre-mature termination of the lease but also such further amount for the then expired residue, the amount which the lessee would have been otherwise bound to pay to the lessor had the lease continued. These clauses indicate that the lease agreement is non-cancellable and there is fixed obligation on the lessee for payment of lease rental for the entire lease period of seven years notwiths....
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....and repair at its cost and expenses. It is further relevant to note that the entire liability towards insurance has been cast on the lessee and not the assessee-lessor. Clause 8.1 of the agreement clearly provides that the equipment shall be insured in the joint names of the lessor and lessee but the insurance premium shall be paid by the lessee alone. Clause 8.3 is quite relevant, the relevant portion of which is reproduced as under:- "8.3 Notwithstanding anything herein contained in 8.2 above the Lessor may at its option agree that any insurance receipts recoverable under the said insurance shall be applied at the option of the Lessor: (i) in making good the damage, or (ii) in replacing the Equipment to which the terms of this Lease shall apply. (iii) In appropriating all the outstanding dues of the lessee and the principal outstanding (as per CRR method) under the lease. Any shortfall / surplus available after adjusting all the dues would be on lessee's account. ......... provided that in the event of irreparable loss or damage to the Equipment as a whole the Lessor shall be entitled to terminate this Lease and to retain any insurance receipts by the Lessor in res....
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....ies, taxes other charges and penalties as may as may be levied from time to time by the Government or any other authority pertaining to or in respect of this Lease and pay the same on demand by the Lessor. 9.2 The Lessee agrees that the transaction covered by this Lease is not understood to be a sale eligible to tax under the existing sales tax laws. If, however, by reason of any amendments of any law, Central or State, this transaction is held to be eligible to tax, as a sale or otherwise, either in whole or in part, or any input or material or equipment used or supplied in executing of or in connections with the Lease are eligible to tax, the Lessee shall pay such tax immediately upon the same becoming payable or reimburse the same to the Lessor in addition to the lease rentals payable under the Agreement. .......... 9.4 The Lessee shall punctually and duly pay or cause to be paid all rates, taxes licence fees, surcharges, registration charges and other outgoings payable in respect of the Equipment or the storage, installation, use or operation thereof or of the premises where the same is kept and on demand produce to the Lessor all receipts and other evidence of ....
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....amount of care of it described in section 151". On a conjoint reading of the above relevant sections of the Indian Contract Act, it clearly emerges that the duty of the bailee to take care of the goods under bailment is equal to that a man of ordinary prudence takes. Taking such care of goods bailed excludes special care on account of the reasons beyond the control of bailee. It is simple and plain that if during the period of bailment, the item bailed is destroyed due to natural calamity etc. which is obviously beyond the control of bailee, no responsibility for such loss can be put on him. The bailee, in the absence of any special contract, can never be saddled with a liability towards the loss occurring to the goods bailed for the reasons absolutely beyond his control. That is the reason for which operating lease can be equated with bailment because it is the lessor who is responsible for the loss of goods during the lease period arising due to no fault of the lessee. For example, if a motor car is leased for a period of a week and during such period earthquake occurs causing immense loss to the car, in such a situation the lessee cannot be held responsible for the loss to the m....
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....cted by the Lessor, in that behalf." From the above clauses it can be seen that it is the lessee who has been made absolutely responsible to bear the loss due to damage or destruction of the equipment for any reason whatsoever. The responsibility of the lessee is not restricted only to taking "as much care as a man of ordinary prudence would" as warranted under section 151 of the Contract Act, but complete in all respects extending to all situations. Any loss occurring to the equipment or its parts, while taking due care or otherwise, is the solitary liability of the lessee. Even if the loss arises due to any natural calamity such as fire, accident, or in any manner whatsoever, it is the lessee who shall bear such loss. It is further imperative to note that it is not only the liability put on the lessee to bear the loss to equipment under any circumstance, but clause 14 of the agreement also mandates that the lessee will be liable even for the damages to third parties towards any loss caused due to equipment. Thus it is manifest that the element of bailment is completely missing in the instant agreement. h. Risks and Rewards We have noticed above that in the case of financ....
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....scussed above that any loss occurring due to obsolescence of the boiler shall be borne by the lessee alone. In no way the assessee-lessor can be compelled to share the loss from the technical obsolescence of the boiler. Further if the boiler is not found to be fit for use it is the lessee alone who is responsible. Clause 13 of the agreement as extracted above clearly shows that the lessee shall bear the entire loss of damage or destruction to the equipment. Further clause 15.1 of the agreement also clearly stipulates that the lessor appoints the lessee to inspect and receive the delivery and installation of the equipment. Clause 15.3 of the agreement makes it abundantly clear that : "The Lessor shall not be responsible for any direct, indirect or consequential loss to the Lessee or third party arising from any delay in delivery and / or installation of the Equipment either by the action of the manufacturer or otherwise however or by reason of any delay in the commencement of the Lease". It is relevant to note clauses 16.5 and 16.6, as reproduced below, which make it absolutely clear that the assessee shall in no way be responsible to the lessee for any loss, damage arising from the....
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....tely absent. The risks and rewards incidental to the ownership are vested with the lessee. What the assessee as a lessor owns is not any asset but the contracted stream of payments in the shape of lease rental covering its entire investment plus interest. Such lease rentals have been ensured by way of the assessee taking post-dated cheques for the entire lease period. On the other hand what the lessee has got is not just a rented boiler but a fixed non-terminable agreement under which it is obliged to pay the rentals. These factors strongly indicate that whereas the lessee is the actual or real owner, the lessor-assessee is only nominal or symbolic or the so-called perceived owner. 5.17 Here it is important to note the underlying basic distinction between advancing a simple loan and finance lease. Where as financing is genus, finance lease is its species. In the case of a loan simpliciter, the lender only advances loan without acquiring even a nominal title in the asset against which loan is given. It has been noted above that a lease contemplates a lessor, a lessee and the asset which is leased. In that view of the matter, the very nature of finance lease presupposes that exist....
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....te to allow or create any lien, charge etc. in any manner to part with the possession of the equipment. ix. Clause 14 provides that the lessee shall indemnify and keep indemnified the lessor at all times against any loss or the seizure of the equipment. x. Clause 18.1.1 provides that if the lessee fails to pay rentals on the dates given in the supplementary lease schedule, the lessor has right to terminate this lease. 5.19 In the light of the above clauses, the learned AR vehemently argued that there was a clear mandate in the lease agreement that it is the assessee who is the real owner of the equipment and hence it should be considered as a case of operating lease and not a finance lease. 5.20 In view of the fact that the ld. AR has lodged a strong claim to consider the present agreement as that of operating and not a finance lease, it is imperative to understand the distinction between the two as under :- a. In the case of an operating lease, the lessor provides the asset for use for a certain period of time to the lessee for rent. On the expiry of such lease period, the lessor has to inevitably repossess the asset. On the other hand, a case of finance leas....
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....on payout lease is peculiar to operating lease. 5.21 From the above points of distinction between operating lease and finance lease, the salient features of operating lease have become glaring. Now let us ascertain as to whether the above clauses, claimed by the ld. AR as amply proving it to be a case of operating lease agreement, do in fact prove it so. In an earlier para we have observed that this lease agreement fully satisfies all the characteristics of finance lease. The position which, therefore, emerges is that some clauses of the agreement tend to give impression of this being an operating lease whereas the others largely indicate it to be a finance lease. How to resolve the conflict? In order to decide as to whether the instant lease agreement be characterized as operating or finance lease, we need to take shelter of the doctrine of pith and substance. This rule stipulates that if there is some overlapping in the contents of the clauses of an agreement, then it becomes necessary to examine the pith and substance of the agreement. It can be done by seeing as to whether it predominantly satisfies the conditions of operating lease or finance lease. The crux is that we shou....
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....lation of capital to risk asset ratio. Further, the extant guidelines on income recognition, asset classification, asset classification and provisioning would also be applicable to them." Paras 1(v) and (vi) which are also relevant read as under:- "(v) Banks undertaking equipment leasing departmentally should follow prudential accounting standards. The entire lease rental should not be taken to the bank's income account. It would be recognized that lease rentals comprise two elements a finance charge (i.e. interest charge) and a charge towards recovery of the cost of the asset. The interest component alone should be taken to the income account. The component representing the replacement cost of the asset should be carried to the balance sheet in the form of a provision for depreciation. (vi) As a prudent measure, full depreciation should be provided for during the primary lease period of the asset. The period of lease should not normally exceed five years. In exceptional cases, lease period not exceeding 7 years may be fixed in respect of lease transactions covering assets of Rs.1 crore and above, as the recovery of cost may not be possible in a period of 5 years." ....
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.... requested the A.O. that in case the depreciation on the leased asset to assessee is not to be granted by treating it as a loan transaction, then the capital recovery embedded in the lease rental should not be charged to tax. This issue has been discussed in para 2.30 of the assessment order. Acceding to the assessee's request, the Assessing Officer excluded the portion of capital recoveries from the rental income. Thus it can be observed that the action of the A.O. is fully in consonance with the RBI Circular which states that in case of equipment leasing the entire lease rental should not be treated as bank's income but only that component of such lease rental which represents finance charges i.e. interest should be recognized as income alone. 5.27 We, therefore, approve the view taken by the authorities below in coming to the conclusion that the lease agreement under consideration is that of finance lease and not operating lease. II. WHETHER DEPRECIATION ADMISSIBLE IN CASE OF GENUINE FINANCE LEASE 6.1 The learned Counsel for the assessee took his argument further by contending that even if it is treated as a case of finance lease still the claim of depreciation t....
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....e price. The role of the lessor is only to provide finance. In a case of finance lease, the lessor recovers his entire investment together with interest during the lease period itself and such lease agreement is non-cancellable. It is the sole responsibility of the lessee to bear all costs of insurance, repairs and maintenance and also suffer any obsolescence loss. All risks and rewards incidental to the ownership of asset vest with the lessee alone. The title of the lessor in the asset is only symbolic, which serves no purpose other than a security for the recoupment of his investment with interest in the shape of lease rentals. Such nominal ownership also ordinarily ceases with the coming to an end of the lease period. As against the lessor's nominal or the so called perceived ownership, it is the lessee who is the actual and real owner of the asset. 6.3 In the case of CIT v. Podar Cement (P) Ltd. [(1997) 226 ITR 625 (SC)], the assessee took the possession of flats after payment of the consideration. Such flats were let out to various persons. The assessee claimed that the rental income should be considered as "Income from other sources" and not "Income from house property" as....
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....on. Actual conveyance was not executed in favour of the assessee. A claim for depreciation u/s 32 was made which was rejected by the A.O. on the ground that the assessee was not the owner of the asset. When the matter came up before the Hon'ble Summit Court, it considered its earlier judgment in Podar Cement (P) Ltd. and described it "as a trend settor" in the concept of ownership. Assistance from the law laid down therein was taken by the Hon'ble Supreme Court in the latter case for adopting the meaning of the term "owned" as occurring in section 32(1) of the Act. Accepting the assessee's claim for allowing depreciation, the Hon'ble Supreme Court held as under:- "In our opinion, the term "owned" as occurring in section 32(1) of the Income-tax Act, 1961, must be assigned a wider meaning. Anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having the right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the buildings though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, th....
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....er of building for the purpose of section 32(1) notwithstanding the fact that a formal deed of title may not have been executed and registered in his name. By applying the ratio decidendi of the judgment in the case of Mysore Minerals Ltd. to the facts of the present case, there hardly remains any complexity in deciding that it is the lessee who is the real owner of boiler. It is the lessee who is in possession of property exercising control over the boiler by excluding others including the assessee-lessor there from. M/s Indo Gulf has the right to use and to occupy the property in its own right. Apart from exercising complete control over the boiler and having full right to use, there is prior understanding with the lessor that after the expiry of the lease period the boiler will be transferred to it at a predetermined 1% value. The assessee-lessor has absolutely no control over the property during the lease period. It has no option to repossess the boiler either during the continuation of lease period or after that. All the risks and rewards attached to the property are that of the lessee. By no standard whatsoever the assessee-lessor can be described as the owner of the property....
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....xplanation 4A it can be observed that in a case of sale and lease back transaction, the legislature has itself provided that the actual cost of the asset in the hands of the first mentioned person (i.e. the lessor) shall be the same which is the w.d.v. in the hands of the second person (i.e. the lessee) at the time of transfer. Thus there is no prize for guessing that the legislature in its wisdom has treated the lessor as the owner of the asset in a case of sale and lease back transaction by specifically mandating that the written down value of the asset in case of the lessee shall be treated as the actual cost to the lessor. If there had been no intention of the legislature to allow depreciation to the lessor in case of sale and lease back, it would not have provided the meaning of 'actual cost' in the hands of the lessor. As depreciation on asset is not to be disallowed to both the lessor and also lessee, in case of genuine sale and lease back of asset, the admissibility of depreciation in the hands of the lessor is beyond the pale of doubt. However, there is nothing in the language of this provision which extends its scope to finance lease as well. It has been noticed abo....
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.... the assessee by the Assessing Officer in respect of 42,000 bottles out of 5,46,000 bottles could not have been withdrawn by the tribunal and to that extent alone the assessee succeeded. As regards depreciation on remaining bottles, the Hon'ble Summit Court observed that : 'in this case the Commissioner of Income-tax (Appeals) had remitted the matter to the Assessing Officer who on remand came to the conclusion that all 5,46,000 bottles stood sold before March 31, 1991. This finding of fact has become final. It has not been challenged'. 6.9 From the above judgment in respect of the first transaction of lease, it is evident that the Hon'ble Apex Court accepted the assessee's claim of depreciation on 42,000 bottles only on the ground that the tribunal has no power of enhancement inasmuch as when the AO had granted depreciation, the tribunal could not have taken it away. As regards the depreciation on remaining bottles is concerned, it was observed that the AO had himself allowed such depreciation in remand and such a finding became final because it was not challenged. This judgment has nowhere laid down that depreciation is allowable to lessor in case of finance....
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....tain machines which were owned by him and later on hired to different persons for the purposes of their business of manufacturing. In respect of these machines, the assessee claimed investment allowance which was denied by the lower authorities. The Hon'ble Supreme court held the assessee to be entitled to investment allowance by holding that : "when the business of the assessee is leasing of such machine, the machine so leased out are being used for the purpose of the assessee's business. The income by way of hire charges which the assessee receives is also taxed as business income of the assessee ........... The hirer has not acquired any new asset. The transaction of hire is, therefore, hiring of the machinery. There is no extinguishment of any right of the owner in the machinery. There is merely a license given to the hirer to use, for a temporary period, the machinery so hired". From the above verdict of the Hon'ble Supreme Court it can be easily seen that it was a case of operating lease and not a finance lease. The hirer or the lessee in that case did not acquire any asset and further there was no extinguishment of any right of the lessor owner in the machinery. It was under....
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....er of the property, should be granted depreciation merely for the reason that the lessee had not claimed depreciation on the leased asset? In our considered opinion, the answer to this question can be given in negative and negative alone. The obvious reason is that it is only the right person entitled under law, who can get the benefit of depreciation allowance. Parties can not, in disregard to law, mutually decide as to who out of them will be allowed the depreciation and then offer such proposal to the AO for implementation. It is the duty of the AO to find out as to whether the assessee before him is entitled to depreciation allowance as per law or not. The mutual agreement between the parties is of no consequence. It is impermissible to allow depreciation to A when as per law it is only B who is so entitled to it. The fact that B has not claimed depreciation is inconsequential when the point for determination is the admissibility or otherwise of depreciation to A. The authority for this proposition can be found from none other than the Hon'ble Supreme Court in the case of ITO v. Ch. Atchaiah [(1996) 218 ITR 239 (SC)]. It has been categorically held in this case in the context o....
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....ifferent from the apparent form, then it is such reality which needs to be considered in preference over the form. Reality can be gathered from the intention of the parties and such intention, in turn, can be inferred from the facts and circumstances of the case rather than the way in which it has been presented. The nomenclature or a description given to a particular agreement cannot and should not be allowed to change the true nature of transaction. It is in fact the substance of the transaction rather than its form which matters. Thus the true effect of a transaction can be determined by peeping in to the terms of the agreement seen in the light of the inherent intention of the parties and also the attending circumstances. 7.2 In the case of CIT v. Panipat Woollen and General Mills Co. Ltd. [(1976) 103 ITR 66 (SC)] the assessee entered into an agreement with S under which the latter was appointed as sole selling agent on the terms and conditions to finance the assessee-company to a particular extent and company agreed to pay 6% interest on the advance to be made by the agent and further agreed to pay 2% commission of net proceeds of sales. Before expiry of this agreement anot....
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....mine the nature of transaction, whatever may be the form of the document." Even Circular no.760 dated 13.01.1998 in the context of taxability of hire charges as interest under the Interest Tax Act, 1974, after taking note of the afore noted judgment of the Hon'ble Supreme Court in the case of Sundaram Finance (supra), requires the Assessing Officers to consider the question on merits after taking into account the terms of the agreement; the nature of the arrangement between the supplier of the asset, hire purchase company and the end user of the asset; and the intention of the parties which manifests itself in the fixation of the initial payment, the method of determination of hire purchase price etc. It has been provided in para 2 of the Circular : "that in the case of transactions which are, in substance, in the nature of hire-purchase, the receipts of hire charges would not be in the nature of interest. On the other hand, if the transactions are in substance in the nature of financing transaction, the hire charges should be treated as interest subject to interest tax". 7.3 All the judicial pronouncements discussed in the foregoing para are clear pointer towards the fact that ....
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....s been submitted which was addressed by the assessee bank to the lessee stating that : "we refer to your request for lease equipment for Rs. 20.79 crore with a facility of Rs. 19.00 crore as per capitalization advance (within Rs. 20.79 crore) and are pleased to advance sanction of the same on the following terms and conditions". This sanction letter dated 26th May, 1997 also states that "Short Term Loan" of Rs. 19.00 crore was sanctioned by the assessee bank. On a pertinent query, the learned AR submitted that initially a short term loan was sanctioned to the assessee on 26th May, 1997, which was later on converted into lease by way of the agreement dated 04.09.1997. It is further relevant to note complete details of invoices with purchase price of separate units of boiler with the respective bill numbers, bill date, description and price etc. as per page no.1 of the paper book, which contain 45 entries mainly towards 'Supply' and some others towards 'Erection' and 'Spares' and two towards some debit or credit notes. The total of this page at Rs. 19.45 crore is equal to the cost of the leased asset as depicted in the Synopsis of....
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....t has been effected only to facilitate the assessee to claim the benefit of depreciation. There is apparent conflict in various clauses of the agreement as regards the liability of the lessor on one hand and the lessee on the other to bear normal wear and tear of the equipment. Whereas in clause 3.4 it has been categorically provided that the lessee shall not be liable for fair and normal wear and tear of the equipment, the other clauses as discussed above clearly put the burden of repairs and maintenance of the boiler on the lessee only. It can be further seen from clause 12 of Lease Summary Schedule which is reproduced below:- "12. Repairs & Maintenance : At Lessee's cost who shall provide ongoing maintenance replace free of cost any component which are either defective or worn out due to wear and tear and keep the equipments in good condition." 7.8 A bare perusal of various clauses of the agreement clearly transpires that this lease agreement has been entered into with the sole purpose of enabling the assessee to artificially fulfill the twin requirements of ownership and user of the asset so as to claim depreciation, to which it was not otherwise entitled as per law an....
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....ed with the sole intention of allowing the assessee to claim depreciation in its hands as a measure of tax avoidance. 7.10 The law permits tax planning and not tax avoidance. If within the four corners of law a person arranges its affair in such a way that his overall tax liability is reduced, there cannot be any embargo on such tax planning. If however dubious means are adopted to reduce the incidence of tax by artificially inflating expenses or reducing income, it cannot be described as anything other than tax avoidance. The law permits only tax planning and not tax avoidance. When we consider the reality of the situation in the present case, it becomes abundantly manifest that a simple loan transaction was made to adorn the garb of lease to avoid the rightful tax due to the exchequer. We, therefore, refuse to accept the very genuineness of the so called lease agreement itself and hold that it is not even a case of finance lease. In our considered opinion, the authorities below were fully justified in refusing to grant depreciation to the assessee in both the years under consideration. 8. In view of the above discussion, we answer question no.1 in negative by holding that t....