TaxTMI 
TaxTMI 
2013 (8) TMI 408
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....sed back to GEB: 3. The facts of the case are that the appellant purchased 1,43,600 energy meters of different makes for measuring electrical energy as per sales invoice dated 23rdMarch, 1994 for a consideration of Rs. 49972800.00 from Gujarat State Electricity Board , herein referred to as GEB. These meters (assets) were then immediately leased back to GEB vide lease agreement dated 21/23-3-1994. After deduction of lease management fee and first month's rental, the appellant paid Rs. 4,83,86,154/- to GEB. In the P & L A/c, the appellant has credited lease rental income and lease management fees of Rs.8.16 lakhs and at the same time it has claimed depreciation of Rs. 4,99,72,800/- i.e. @ 100% of the cost of assets, under proviso to Section 32(1) of the I.T. Act, on the ground that the cost of each meters was below Rs.5,000/-. Income-tax return was earlier processed under section 143(1)(a) accepting the returned loss. However, subsequently, notice under section 148 dated 25.10.1999 was issued in response to which the assessee filed the return of income showing net loss of Rs. 11,676/-. The assessment was completed on income of Rs.5,15,19,234/- as the A.O. rejected the claim for d....
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....which was in the nature of a finance transaction only. G) The lessee has been made liable to obtain all consents/licences/approvals, etc. for import, storage, installation, use, operation of the asset during the currency of the lease and also to meet all costs in connection with preservation, insurance, maintenance and operation of the asset. H) Other important clauses as mentioned in the notice u/s 142(1) which are said to be contrary or inconsistent to claim of legal and absolute ownership over leased assets and are also contrary to the legal norms regarding mutual rights and liabilities of a lessor and lessee are:- i) Lease was for a fixed period which was non-cancellable either by lessor or lessee except as provided in the agreement. ii) All payments made/cost incurred by the lessor (for acquisition of asset) will carry interest at a stipulated rate. iii) The lessor would be entitled to terminate the lease for any default committed by the lessee on occurrence of any event as enumerated in Article 8.1 and on such termination, the lessor would be entitled to repossess the assets and shall recover and the lessee should pay the entire amount of rental for the fixed p....
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....d 17 that the lessor should only recognize from year to year the interest component of the lease rentals received as income in consonance with the inherent nature of a 'finance lease'. The guidance note also suggests that one can also follow the International Accounting Standard 17 in the matter of such accounting. O) Reference has been made to the accounting policies in respect of such lease transaction adopted by the GEB and it is stated in para 13 of the Annual Report as under:- "Having recognized the position of the lease arrangements and associated terms and conditions thereof and the principles followed as stated above, the lease rentals payable by the board in installments of the leasing company have been provided towards charges for interest and balance towards the liability for the assets on lease." P) Para 13 of the notes to the Annual Accounts (reproduced below) strengthens the view that the appellant is not the legal owner of the assets:- "The board has availed finance under Lease Finance Arrangements from various institutions and under the said arrangements, the leased assets will get transferred to the Board on expiry of the lease period on payment of term....
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....as held to be a finance transaction, capital component of payment comprised in lease rental as worked out by the appellant at Rs. 3,16,000/- was deducted as a consequence of the treatment accorded to the transaction subject to rectification. 5 The ld. CIT(A) vide impugned order under appeal also upheld the action of the A.O. in disallowing the claim of depreciation to the assessee. 6. Before us the learned representative of the assessee has submitted that the assessee is a company which inter alia carries on leasing activities. There was constructive delivery of energy meters and as such physical movement of the meters was not necessary. The meters have been installed in Godhra O & M Circle of GEB. A confirmation of existence of assets by State Electricity Board of Government of Gujarat is concrete and complete evidence of the existence of the assets. it was only for the assessee and not for the Income-tax authorities to decide whether to enter into any transaction without insisting on the exact specification of the items or not; and that by avoiding physical delivery of meters as the same had already been installed in various residences and industrial places, the assessee ha....
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....t is stated that while striking a business deal, tax aspect will always be considered, because it directly affects the fund flow and cash flow situation of the business. It has been elaborated that to claim depreciation on assets, two conditions need to be fulfilled- one that the assessee must be the owner of the assets and secondly the assets must be used for the business of the assessee. According to the assessee it is beyond doubt, it is the full and true owner of the meters and that the said meters and the meters have been used by it in its business of leasing. Accordingly, both the conditions as stated above have been fulfilled and the assessee is therefore, entitled to claim depreciation. The assessee has also relied upon various case laws, which we will discuss in subsequent paras of this order. 7. The Ld. DR on the other hand relied upon the detailed orders of the authorities below. 8. We have carefully considered the rival submissions made on behalf of the parties and have also minutely gone through the record. Our findings in respect of the matter are as under: There is no doubt about the legal provisions that an assessee being the owner of the assets is entitled....
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....ear and tear suffered by a capital asset that is set aside to facilitate its replacement when the asset becomes dysfunctional. In P.K. Badiani Vs. Commissioner of Income Tax, Bombay[2], this Court has observed that allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting relevant to the assessment year and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes place. 11. Black's Law Dictionary (5th Edn.) defines 'depreciation' to mean, inter alia:"A fall in value; reduction of worth. The deterioration or the loss or lessening in value, arising from age, use, and improvements, due to better methods. A decline in value of property caused by wear or obsolescence and is usually measured by a set formula which reflects these elements over a given period of useful life of property.... Consistent gradual process of estimating and allocating cost of capital investments over estimated useful life of asset in order to match cost against earnings..." The 6th Edition defines it, inter alia, in the following ways: "In accounting, spreading out the cost of a capital asset over....
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.... mention here that there is no definition given either of operating lease or of the finance lease either under the Income Tax Act or under the Transfer of Property Act so as to make a distinction between the two. However the term lease has been defined under Section 105 of the Transfer of Property Act, 1882 but the same is in context to lease of immovable property. The said definition is reproduced as under:- "a lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms" The said definition when applied in case of lease of moveable properties would mean that the lease is the transfer of right to enjoy the property in question. Such a transfer of right can be made for a fixed time or for indefinite time and in lieu of getting the right to possess and enjoy the property, the lessee has to pay certain considerations either in cash or in kind to the lessor. ....
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....conomic life of the asset. - The initial lease period is settled in such a way so as to fully recover the investment of the lessor together with interest thereon. - Lessor is always interested in the recoupment of his investment with interest in the shape of rentals over the period of lease and not the asset or its user. - It is the responsibility of the lessee to bear all costs of insurance, repairs and maintenance and other related costs and expenses for the leased equipment. - Though the equipment is chosen by the lessee but the payment to the supplier is made by the lessor. Thus it is the lessee who chooses the assets, takes delivery, enjoys the use of the asset, bears its wear and tear. It is the lessee who becomes the real owner of the asset. - It is the lessee who pays taxes etc. in relation to such asset. - The risks and rewards incidental to the ownership vest with the lessee. - The features of bailment are absent in such a lease. - The lessor simply holds the title of asset as his security till his investment and interest thereon is recouped. The lessor is only symbolic owner during the period of lease and on the expiry of lease period, even such s....
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....nt provisions of 'Sales of Goods Act,1930, as to what constitutes a valid sale. The term sale has been defined under Section 4 of the sales of the Goods Act, 1930 as under:- "4. Sale and Agreement to sell- (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another. (2) A contract of sale may be absolute or conditional. (3) Where under a contract of sale, the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred." 13. A perusal of section 4 of the sale of Goods Act as reproduced above, reveals that there are three essentials for the contract of sale i.e. (i) There must be a transfer of general property in the goods sold (ii....
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....ress or implied, and may be given either before or after the appropriation is made. (2) Delivery to carrier. Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the Purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract." So even in case of sale of unascertained goods or future goods by description, the goods of that description in deliverable state should be unconditionally appropriated to the contract and both the buyer and seller must have given their ascent to it. The very essential for passing of the property in goods is that the goods must be ascertained and the same should be in a deliverable state and further should be appropriated to the contract and both the parties to the contract must have assented to the said apportionment. 15. Now coming to the case in hand, the goods were allegedly owned by the GEB. The same are allegedly purchased by the assessee vide sale invoice dated 23.03.1994. A perusal of the said sale invoice, copy of which has been placed in the file....
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.... by the GEB to the assessee and further leased out by the assessee to the GEB cannot be ascertained. Hence it can be safely observed that the property in the goods never passed to the alleged buyer and thus the alleged contract of sale is hit by the provisions of the sale of Goods Act 1930. Once it has been found that the transaction in question cannot be said to be a "Sale" being falling short of the requirements of the provisions of the "Sale of Goods Act, 1930", the assessee cannot be said to be the owner of the goods and as such the subsequent lease back of the goods automatically gets invalidated. 17. The learned AR before us, has relied upon a certificate issued by GEB dated 22.03.1994 vide which, it has been certified that 1,43,600 of meters sold to assessee vide sale invoice dated 23.3.1994 have been installed in the premises of various customers located in the State of Gujarat and have been put to use. Even this certificate also does not reveal the identity as to which specifically ascertained meters were actually purchased by the assessee from the GEB. 18. Another fact which can be noted here is that the sale invoice is dated 23.03.1994, whereas, the certifica....
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....he lessee is liable to pay the rental only when the leased goods are delivered or possessed by him for use, but, in the case in hand, the moment, the assessee makes payment to the manufacturer for purchase of the goods ,the rental would start, irrespective of the fact, whether or not the goods are delivered for the use of the lessee. The first clause of the agreement itself reveals that interest on the loan amount starts on the day as and when the financer pays money for the purchase of equipment and not when the lessor has delivered the goods to the lessee i.e.GEB. (III) As per clause 2.4 of the said lease agreement, whenever, the lessor will place order(s) on the manufacturer of the goods at the request of the lessee and if the lessor makes any advance for other payments towards the purchase of the equipment, but the manufacturer fails to deliver the equipment to the lessor by the stipulated date, the lessee shall make payment to the lessor of the advance along with costs, charges, expenses and even interest on the amount paid by the lessor to the manufacturer. This type of clause is strange to a lease agreement. Further it has been provided that the lessee agrees to indemn....
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....see alone, as an agent of the Lessor, is responsible for obtaining timely delivery of the Equipment and also for obtaining all the necessary clearances, statutory or otherwise required for obtaining such delivery. The Equipment is of the required size, design, capacity and manufacture, suitable for its purpose and is selected by the Lessee relying entirely on its own judgment and not on the statements or representations if any, made by the Lessor or its agents or servants." "6.2 The Lessor is not the manufacturer or dealer of the Equipment and that the essential function of the Lessor in this Lease is to purchase the Equipment selected by the Lessee from the Manufacturer designated by the Lessee." "8.2.2. Without prejudice to and in addition in the Lessor's rights provided in Clause 8.2.1 hereinabove, the Lessor shall also be entitled to recover from the Lessee and the Lessee shall be bound to pay to the Lessor the following amounts, viz: (a) the entire amount of the rental for the fixed period of the Lease computed in the manner set out in the Schedule on the footing and as if the Agreement had not been terminated to the end and intent that the Lessee shall pay to the ....
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....t or exploiting the same for profit in the capacity of the owner. The transaction in question was a collusive arrangement for avoiding incidence and payment of income-tax by claiming huge depreciation against a small rental income offered to tax from the alleged leased transaction. The lease was non-cancelable by the two parties except as provided in the agreement. It is very important to note that the lease can be renewed indefinitely at the sole discretion of GEB on a year to year basis on payment of a token lease rental @ Rs. 1/- per Rs. 1,000/- of the cost of the asset. This would mean that though the assessee on paper had become the owner of the electric meters but in reality it could never take possession of those assets. In fact, the lease rentals appeared to have been fixed at such a rate that the investment of the assessee together with the interest would be recoverable over the lease period and thereafter the assessee was to receive token lease rental only. Another important condition which is there in the lease agreement is that even in the event of irreparable loss or damage to the asset as a whole for whatever reason, the lessor would be entitled to recover from GEB th....
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....at the discretion of the lessor to the extent of the loss or gain to the lessor on account of such increase/decrease in the claim of depreciation. 21. So a perusal of the above mentioned schedule reveals beyond doubt that the agreement in question is a finance agreement. The rates of interest/ rental has been fixed taking into consideration that the equipments are eligible for 100% claim of depreciation for the purpose of Income Tax Act. If the banks' minimum lending rate would increase, the rental rate would also increase. If for any reason, the claim of depreciation is increased, decreased or disallowed, the rate of rentals in the shape of interest will accordingly decrease or increase. In ordinary sense, these types of clauses cannot be a part of any lease agreement but finance agreement only. The only and only purpose or object of the assessee for this agreement is to earn interest on its capital together with timely refund of the invested capital. The object and purpose of the GEB is to wrongly transfer the right/ eligibility to claim depreciation@100% to the assessee and in lieu thereof to get the loan or finance at a reduced rate of interest in proportion to the gains whi....
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....and not to the respective State Govt. and further not to the respective State Board or corporation, may be the relevant considerations for the State Govt. undertaking to enter intosuch transactions. However we are not supposed to go deep into the matter to search out the cause or the reason as to why the GEB has entered into such a transaction, but are concerned only to find out whether the said transaction was sham or a valid transaction for the purpose of claim of the assessee regarding depreciation on the assets under the Income Tax act. 23. The ld. counsel for the assessee has relied on the decision of the co- ordinate Bench of this Tribunal in assessee's own case for A.Y. 1995-96 rendered vide its order dated 19.01.2004 in ITA No.976/Mum/1997. A perusal of the said order of the Tribunal shows that the appeal for A.Y. 1995- 96 was filed by the assessee against the order passed by the ld. CIT u/s 263 of the Act whereby the order of the A.O. was held to be erroneous and prejudicial to the interest of the Revenue by the ld. CIT on the ground that the claim of the assessee for depreciation was allowed by the A.O. without conducting proper enquiries to ascertain as to whether the....
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....s leased back in the event of the transaction being held as finance lease and the same was decided against the assessee by holding that only the lessee can be treated as owner of the asset in the case of finance lease and it is he who is entitled to claim depreciation as per law and not the lessor. The decision of the Special Bench of the Tribunal in the case of Indus Ind Bank Ltd. (supra), in our opinion, thus supports the Revenue's case on the issue under consideration. 25. He has further submitted that the Hon'ble Supreme Court in the case of Arvind Narottam-173 ITR 479 (SC) has held that where the true effect on the construction of the deeds is clear, the appeal to discourage tax avoidance is not a relevant consideration. It has been further submitted that in the case of New deal Finance & Investment Ltd; ITAT Chennai Bench in a similar type of case of sale and lease back of electric meters involving RSEB had held that there is no illegality in the claim of the assessee (the lessor) for depreciation because once the assessee is considered as the owner of the assets, the assessee is eligible for the allowance under the Act. Apart from the authorities which found mention in th....
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.... genuine or sham cannot be a question of law but the question of fact only. In our humble view, there is no doubt about the legal position as stated above that once the transaction is held to be genuine or the assessee is considered as the owner of the assets, he will be eligible to claim depreciation on the assets as per provisions of the act. However whether the transaction is genuine or not or the assessee is the real owner of the assets or not is again a question of fact which can be determined from the perusal and consideration of the facts of each of the individual case and findings in this respect may differ from case to case. No straight jacket formula can be adopted to say that every case of sale and lease back transactions is sham or genuine. The finding in this respect can be given after appreciation of facts of each case separately. A perusal of the above mentioned authorities reveal that the judges of the Honb'le Apex Court as well Hon'ble High Courts are unanimous to hold that the true legal relation arising from a transaction determines the taxability of the receipt arising from the transaction under the Income Tax Act. In a case, where the terms of the transaction a....
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....961 so as to enable the assessee to claim depreciation @ 100% on the value of goods worth Rs.49972800.00 to which it otherwise is not entitled to and, further, to get mutual benefit of this wrongful claim by making wrongful loss to the revenue. Moreover ,in our view, the provisions of Explanation 3 to Section 43(1) of the Income Tax Act, 1961 are also get attracted in this case because the sole intention of the parties to the agreement in question was to directly or indirectly, enter into such transaction with a view to reduce the tax liability by claiming higher depreciation. We agree with the view of authorities below that we have to go by the true construction of the agreement between the two parties and not merely by the description given by the two parties. 29. It may be observed that tax avoidance by way of tax planning or structuring the transactions so as to reap the largest tax benefit may be permissible under law but fraudulent transfer of assets or income or engaging in sham transactions with the object of reducing the tax liability cannot be said to be a case of tax avoidance but of tax evasion. Any act or attempt to reduce the tax liability by deceit, subterfuge or ....
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....ders of the authorities below. 37. We have considered the rival submissions of the representatives of the parties. 38. The ratio of the law laid down in Datamatics Ltd.(supra), in our view, is not applicable to the case in hand. In the case of Datamatics (supra) the contention of the assessee was that additional liability had arisen consequent to the judicial decision subsequent to the filing of original return, hence levy of interest u/s 234B was not justified. It was further contended in the said case that the additional liability of tax was neither known nor anticipated at the time of filing of the revised return. It is also pertinent to mention here that in the said case, the assessee had already deposited advance tax more than the amount of tax which was finally worked out to be payable by the assessee in consequence of reassessment under section 147 of the Act. The ld. Tribunal in the said case while relying upon various case laws, observed that where due to subsequent judicial decisions of the High Court or the Hon'ble Supreme court, the tax liability of the assessee was increased in reassessment cases, and such additional liability was never anticipated by the assesse....
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....lats in a building known as Brindavan and office premises in Raheja Chambers. The Assessing Officer took a view that the amount paid by the assessee for the purchase of aforesaid premises will include the cost of land. He therefore, estimated the cost of super structure at Rs. 600/- per Sq. Ft. in respect of office premises and Rs. 400/- per Sq. ft. in respect of residential premises after taking into consideration the cost of construction of super class construction in the year 1993-94. On the aforesaid basis the cost of super structure was worked out at Rs. 75,36,000/- and entitlement of depreciation was worked out at Rs. 4,04,700/- against the claim of depreciation of Rs. 22,81,810/-. Thus, he disallowed depreciation to the extent of Rs. 18,74,110/-. While doing so, the Assessing Officer observed that the cost of the premises includes the cost of Landas well as cost of super structure. He referred to the judgment of Hon'ble Supreme Court in the case of Alps Theatre-65 ITR 317 as per which depreciation is admissible in respect of the cost of super structure only and not in respect of the cost of land. 45. On appeal the ld. CIT(A) deleted the said disallowance observing that th....
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....and in proportion to his share holding in the super structure over it. The learned AR has further submitted that even if the assessee is held to be proportionately owner of the land, the working out of the value of the land with regard to the share of the assessee will be very difficult and even such a value will be nominal and liable to be ignored. 48. It may be observed that the assessee itself before the CIT(A) has submitted the estimated cost of super structure valuation report obtained by it from the government approved valuer, which fact can be observed from para 5.3 of the CIT(A)'s order. Under such circumstances, the assessee is bound by the working of the cost/value of the land of super structure submitted by itself. The said valuation according to the assessee has been done by the government approved valuer. In our view, the estimation of the value of land by the Assessing Officer himself cannot be sustained in the presence of the report of the government approved valuer. Accordingly, we direct that the value of the land be taken as per the valuation report given by the assessee and the claim of depreciation of the super structure be allowed accordingly. 49. The ....