TaxTMI 
TaxTMI 
2015 (9) TMI 1187
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....hin the meaning of section 2 (14) of the Act? (2) Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that lease of facilities i.e. plant and machinery along with and building amounted to transfer within the meaning of Section 2(47) of the Act? (3)Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that transaction of lease of facilities was a case of sale of leasehold rights? (4) Whether in the facts and circumstances of the case the ITAT erred in holding that the transaction tantamounts to transaction of lease of land, building thereon and lease of plant and machinery and not the sale of plant and machinery itself? (5) Whether on the facts and circumstances of the case, the ITAT erred in holding that the transaction is chargeable to capital gains under Section 45 but not u/s 50 of the Income tax Act?" Background facts 3. The Assessee Teletube Electronics Ltd. ("TEL") had two divisions i.e. a picture tube division situated at Ghaziabad in Uttar Pradesh and a glass bulb division at Bhiwadi, Rajasthan for manufacturing glass shells/bulbs for domestic us....
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....t disclosed "nil" income after adjustment of brought forward business losses and allowances. The lease rental receipts from SGL were disclosed as revenue receipts. The Assessee claimed depreciation in respect of the facilities leased out to SGL. The Assessment Order 7. The case was picked up for scrutiny and various queries were raised by the Assessing Officer ("AO"). On 13th March 1997, the AO issued a show cause notice ("SCN") requiring the Assessee to explain why the lease agreement should not be treated as a transaction in the nature of sale of the movable/depreciable assets and capital gain not be charged under Section 45 read with Section 50 of the Act. In respect of the said SCN, the Assessee replied on 25th March 1997 contending that the lease could not be treated as "transfer". 8. By the order dated 27th March 1997, the AO rejected the above plea and held the lease agreement was in effect a transfer within the meaning of Section 45 read with Section 2 (47) of the Act. The reasons given in the order of the AO for the said conclusion were as under: (i) The definition of "transfer" in Section 2(47) of the Act was an inclusive one. On the strength of the decision o....
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.... a handsome payment. (iv) In respect of the lease agreement, the Assessee had itself applied under Section 230A of the Act for a "no objection certificate" (NOC) in anticipation of the transfer of the leasehold rights in respect of the land which had been leased to the Assessee by RIICO along with the building and the ownership rights of the plant and machinery. In column 7 (2) of the application the Assessee had stated that its rights, interests, title in the property were "proposed to be transferred" and the nature of the rights is described as the "lease/ownership rights" in the land at Bhiwadi and the ownership rights over the plant and machinery. The name of the transferee/assignee was shown as SGL. Thus even if the transaction was made to appear as an agreement of a lease, it was indeed a transfer of capital asset within the meaning of Section 2 (47) read with Section 45 of the Act. (v) The routine management of the SGL was in the hands of Samtel Group and the Assessee only had equity participation which had been pledged to RIICO as an additional security. Given the above relationship between the TEL and SGL, it was plain that the SGL was also part of the Samtel Group. ....
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....ns raised by the AO remained to be satisfactorily answered and, therefore, it is concluded that these were "collusive and shady transactions". 11. The CIT (A) also referred to the statements recorded during the course of the assessment proceedings and the survey in great detail and agreed with the conclusion reached by the AO that the accounting treatment given by SGL revealed that it had started treating the plant and machinery as its own. The total lease value was Rs. 20.73 crores and after adjusting the down payment of Rs. 3.46 crores, the lessee was due to pay 14% interest on the balance of Rs. 17.09 crores. The treatment of Rs. 20.73 crores was as if it was due to the lessor in the relevant previous year. This was a case of accrual during a previous year as per the mercantile method of book keeping. Therefore, this was a case of a sham transaction entered into between the lessor and lessee to postpone the liability of taxes. Addition made by the AO under Section 50 of the Act in the sum of Rs. 20,30,61,973 was upheld. Order of the ITAT 12. The Assessee then filed ITA No. 892/Del/99 before the ITAT. The ITAT found that there was no material or evidence on the basis of ....
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....se the payment of instalment was shown as lease rental, it could not be said that the instalments paid did not form part of the price. Once the price of the asset was fixed it was between the parties to decide about the terms of payments which unless prohibited in the statute cannot be gone behind. 15. On an examination of the lease deed, the ITAT held that the leasehold rights in the business assets were sold for Rs. 20.729 crore which was undoubtedly agreed to be paid in instalments with interest @ 14 per cent. Consequently, Section 45 was applicable. However, it was held that Section 50 is not applicable since the asset itself was not transferred. 16. As regards the land and building, the ITAT held that their ownership continued to remain with the Assessee. The order of the CIT(A) was modified and the AO was directed to re-compute the capital gain in accordance with law. The AO was also directed to re-adjudicate the consequential issues like depreciation, investment allowance, terminal allowance, etc. in accordance with law. ITAT's order on the Assessee's application under Section 254 (2) 17. The Assessee moved an application under Section 254(2) of the Act befo....
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....ated 11th March 2003 re-determined the long term capital gain at Rs. 19,70,66,665 and the short term capital gain at Rs. 55,62,066. The Assessee then took up that order in appeal before the CIT(A). The appeal was dismissed by the CIT (A) by order dated 10th November 2003. Against that order the Assessee filed ITA No.59/Del/2004 before the ITAT. By the order dated 18th August 2004, the appeal of the Assessee was partly allowed by the ITAT. That order forms subject matter of ITA No.240/2005 in this Court. Although the said appeal was originally listed together with the present appeals, it has been directed to be listed separately since the outcome of the present appeals will determine the fate of the said appeal. Subsequent developments 20. Mr. Ajay Vohra, learned Senior Counsel appearing for the Assessee at the outset pointed out that an important subsequent development was that after the 10 year period of the lease agreement dated 24th February 1994 expired, the land and building reverted to the Assessee and was sold by it to three unrelated parties. The Assessee had sought to bring the above facts on record by filing CM No.19803/2014. However, the said application was dismis....
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....the leasehold rights in the land at Bhiwadi together with the building and plant and machinery. He submitted that had such transaction not amounted to a transfer, there was no need for the Assessee to have made any such application in the first place. 24. Mr. Singh submitted that the findings of the ITAT were contradictory as effectively it made it impossible to tax the amount as short term capital gain or to tax the lease rentals as income. He submitted that the parties to the lease agreement had entered into a colourable device by resorting to dubious methods and subterfuges and that the Assessee could not seek to take shelter behind a draft agreement not recognised by law. 25. Mr. Singh submitted that there was no answer to the Revenue's contention that the residual value of the plant and machinery after termination of the lease would be negligible and this when seen in light of the consideration of the transfer, i.e. Rs. 20.729 crore, it was evident that the intention was to sell the plant and machinery to the lessee. Mr. Singh referred to the decisions in Vodafone International Holdings BV v. Union of India (2012) 341 ITR 1 and CIT v. Shivraj Gupta(2015) 372 ITR 337 (Del....
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....action. He also referred to the decisions in Commissioner of Income Tax v. Cosmo Films Ltd. [2011] 12 taxmann.com 217 (Del) and Commissioner of Income Tax v. George Willamson (Assam) Limited [2004] 136 Taxmann 52 (Gau.). He submitted that the lease agreement was not intended as a tax avoidance device. The consideration was fixed on the basis of the value of the entire going concern because of the opportunity loss of the lessor. 29. Mr. Vohra distinguished the decisions in Traders and Miners Ltd. v. CIT (1955) 27 ITR 341 (Patna) and A.R. Krishnamurthy (supra) where the context was the grant of lease of mining rights and which therefore was of a very different character. In this context he also referred to the decisions in Sun Engineering 198 ITR 227 (SC) and R.K. Palshikhar HUF (supra). Rejoinder submissions of the Revenue 30. In rejoinder Mr. Raghvendra Singh, learned counsel for the Revenue referred to the decision in Shin Satellite Public Co. Ltd. v. Jain Studios Ltd. (2006) 2 SCC 628 in support of his submission that the lease of the plant and machinery was capable of being severed from the lease of the land and building. He submitted that the consistent position taken ....
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....rs was a transfer of interest in the land and creates a right in rem. It was held that there is a transfer of interest in favour of the lessee notwithstanding that the property leased reverts to the lessor. This decision was approved by the Supreme Court in A.R. Krishnamurthy (supra). The grant of leasehold rights in a mining lease grants the lessee not only the right to possess and enjoy the property but also exploit it for the minerals. The lessee in a mining lease can, therefore, exploit the property and change its essential features and substratum with the permission of the lessor. This right, which is more than a mere right to possess a property to the exclusion of everyone else for a limited period, could partake the character of a capital asset. 35. However, in the present case, where the question arises in the context of the next question whether the lease deed results in a transfer of a 'capital asset', the answer will have to be found from a careful reading of the causes of the lease agreement itself. While de hors the context, it might be possible in theory for a leasehold right to be construed as a capital asset since the words used in Section 2 (14) (a) are ....
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....xplanation.- For the purposes of this sub- clause," land, building, part of a building, machinery, plant, furniture, fittings and other things" include any rights therein; (ii) any rights in or with respect to any land or any building or a part of a building (whether or not including any machinery, plant, furniture, fittings or other things, therein) which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a co- operative society, company or other association of persons or by way of any agreement or any arrangement of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building;" (emphasis supplied) 40. The combined reading of both the above sub-clauses makes it clear that the kind of right which is transferred under the lease agreement in question viz., leasehold right, can be relatable to sub-clause (i) of Section 269 UA (d) and not sub-clause (ii). That is not the end of the matter. The word 'transfer' for the purposes of Section 269UA (d) (i) has been defined under Section 269UA(f)(i) which sta....
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.... entire exercise is for ultimately determining if there has been any capital gains arising from the transaction. Under Section 45(1) 'capital gains' are any profits or gains arising from the transfer of a capital asset effected in the previous year. When the word "transfer" itself has been defined under Section 2(47) (vi) and by virtue of Explanation 1 "shall" have the same meaning as Section 269UA(d) then it is not possible to 'restrict' Explanation 1 to only those transactions described in Chapter XXC. Explanation 1 is a deeming fiction and incorporates by way of reference the provisions of Section 269 UA (d) in order to understand the meaning of the word 'transfer' for the purposes of Section 2 (47) (vi). Therefore, that entire scheme has to be given effect to. In other words, it is not possible to omit the reference to Section 269UA(d) (i) which in turn brings in Section 269UA(f) (i). The ITAT has therefore erred in conveniently choosing to not apply the Explanation 1 to Section 2 (47) in order to arrive at the conclusion there was indeed a 'transfer' of a capital asset brought about by the lease agreement in question. 44. The AO, the CIT (A) ....
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....essee had obtained permission to develop agricultural land to make it suitable for a housing colony. Thereafter he sub-divided the land into plots and gave them on 99 year lease. This was held to be a transfer in relation to a capital asset within the meaning of Section 12 B of the Income Tax Act 1922. One more fact distinguishing that case from the present one was that the consideration for the 99 year lease was salami and not the yearly rent. The capital gain was charged with reference to the salami. Here again, no dispute was raised that the land itself constituted a capital asset. 49. In CIT v. Narang Diary (supra), the issue concerned the interpretation of the words "otherwise transferred" in Section 33 of the Act. The context was the provision of rebate in respect of a new machinery and plant owned by an assessee and wholly used for the purpose of business. In that context it was held that not only ownership but also the exclusive use of the assets by the assessee was essential for claiming rebate. Under Section 45 there is no requirement of exclusive use by the owner of the asset. 50. The mere fact that the Assessee may have applied under Section 230A of the Act to see....
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....-avoidance rule, the Revenue may invoke the "substance over form" principle or "piercing the corporate veil" test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. To give an example, if a structure is used for circular trading or round tripping or to pay bribes then such transactions, though having a legal form, should be discarded by applying the test of fiscal nullity. Similarly, in a case where the Revenue finds that in a Holding Structure an entity which has no commercial/business substance has been interposed only to avoid tax then in such cases applying the test of fiscal nullity it would be open to the Revenue to discard such interpositioning of that entity. However, this has to be done at the threshold. In this connection, we may reiterate the "look at" principle enunciated in Ramsay (supra) in which it was held that the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs to. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire tra....
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...., the Court is unable to agree with the conclusion of the ITAT that in the present case there was a "sale" of leasehold rights by virtue of the lease agreement in question. 56. What appears to have weighed with the ITAT is the valuation of the business as a going concern and the said valuation forming the basis for determining the consideration for the grant of the lease and fixing of the yearly lease rentals. The explanation offered by the Assessee that the fact that it was not going to be in control of the assets or use them for its business, that there was going to be a loss of business opportunity which, therefore, had to be compensated and this weighed with the CAs in fixing the valuation appears to be a plausible one. While there is a non-compete in the agreement between the TEL and SGL, that by itself does not lead to the conclusion that the transaction of lease was in fact one of sale. 57. In any event this whole hypothesis stands disproved by the fact that on the expiry of the lease period, the land, building and plant and machinery reverted to the Assessee. The land and the building were sold by the Assessee to an unrelated third party. The said transactions formed ....