TaxTMI 
TaxTMI 
2016 (4) TMI 913
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.... 2. The revenue has raised following grounds: "1. On the facts and circumstances of the case, the CIT(A) erred in directing the A.O. to allow depreciation of Rs. 46.75 crores to the assessee in respect of the boiler leased to Andhra Pradesh State Electricity Board as claimed by the assessee in the return of income. 2. On the facts and circumstances of the case, the CIT(A) erred in directing the A.O. to recompute the depreciation admissible as per law taking into account the increase in the cost of assets on account of fluctuation in foreign exchange rates as on the last date of the accounting year i.e. 31.03. 1996. 3. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the AO be restored." 3. Ground No.1: In this ground the revenue is aggrieved with the action of Ld. CIT(A) in directing the AO to allow depreciation to the assessee in respect of boiler which was purchased from and leased back to Andhra Pradesh State Electricity Board (APSEB). 3.1. The brief facts as borne out from the orders of the lower authorities are that the assessee company was engaged in the business of manufacturing and sale of textiles. It had been ex....
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....rights as an owner. 3.2. In nutshell, according to the AO, the transaction was in the nature of finance transaction and the assessee was interested in recovering only lease rentals and not at all interested in the asset. The valuation made by the valuer was on the higher side and it was used for receiving substantial finance. As per AO, the reading of the lease agreement suggest that the assessee did not bear any risk, the lesser did not give any warranty for fitness or suitability etc. of the asset and the lease tenure was fixed for a fixed period and the lessee was bound to pay monthly lease rentals in advance and that lessee was not given any right in the lease agreement to terminate the lease at its option. The AO relied upon various case laws to come to the conclusion that the said transaction was a sham transaction. Keeping in view all these observations, he denied the benefit of depreciation. 3.3. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A), wherein detailed submissions were filed by the assessee, meeting each and every adverse observations of the AO and also citing various judgments in support of claim of the assessee wherein it was held that i....
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....le Supreme Court in the case of Asea Brown Boveri (supra) was considered and distinguished by the Hon'ble Delhi High Court in the case of CIT vs. Cosmo Films Ltd 338 ITR 266 (Del). In addition to the above, in support of his claim, he relied upon following judgments: 1. CIT vs. West Coast Paper Mills (ITA No.389 of 2008) (Bombay HC) 2. West Coast Paper Mills vs. JCIT 100 TTJ 833 (Mumbai) 3. Development Credit Bank vs. DCIT (40 taxmann.com 532) (Mumbai-Trib) 4. Bombay Burmah Trading Co. Pvt. Ltd v. ACIT (82 ITD 531) (Mum) 5. DCIT vs. M/s. Sheba Properties Ltd. (ITA Nos. 1954/Mum/2003) 6. JCIT vs. M/s Cable Corporation of India Ltd. (2007-TIOL- 397-ITAT-Mum) 7. CIT vs. Cosmo Films Ltd. (2011) (12taxmann.com 217) Delhi High Court) 8. Industrial Development Corp of Orissa Ltd. vs. CIT (137 Taxman 556) (Ori) 9. CIT vs. Punjab State Electricity Board 183 Taxman 419 (Punj & Har) 3.7. He also took us through Explanation 4A of Section 43(1) to argue that legislature has also recognized and brought the concept of sale and lease back of assets and consequential benefits to be provided for such transactions within the provisions of law. 3.8. We have gone throug....
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....ion Report of A.L. Jain and Associates, valuing the Coal Fired Boiler 4. Copy of Bank Advice and receipt from APSEB confirming receipt of sale proceeds. With the assistance of the parties, we have gone through all these relevant documents and more specifically few clauses of the lease agreement signed by both the parties i.e. assessee company and APSEB, to examine whether the ownership of the Boiler was duly transferred to the assessee company as per law and facts. Our attention has been drawn specifically on the following clauses of the lease agreement: "2. The lessor hereby undertakes to, and covenants with, the lessee as under, namely: - (a) That the lessor is the absolute owner of the said equipment and that no other person has- any right, title or interest therein, except the lessor's bankers/lending financial institution/any other financiers as and by way of a charge thereon. 3. The lessee hereby covenants with, and undertakes to, the lessor as under: - (b) To keep the said equipment protected from inclement weather and maintain and keep the same in good working order, condition and repaid at its own cost in all respects, and to replace and make good imm....
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.... no valid sale of the asset by APSEB to the Appellant. It must be pointed out that the transaction is entered between State Govt Undertaking and a Public Ltd Co. It is obvious from the facts and surrounding circumstances of the case that the transaction was entered into by the two companies keeping in view their respective over all business interests and acted upon the bonafide belief that it was legally permissible. The asset is very much there. The amount was paid through Banks. The lease transaction was completed as per the legally prescribed procedures. The lease agreement also empowers the Appellant to remove the asset on the completion of lease period or otherwise. The Appellant has also submitted a letter from the Chartered Engineers to the effect that the asset can be removed from the site subject to certain conditions. The Chartered Engineers has also certified that the asset after its removal will fetch some value but will not have the same value as they would have as a composite unit. Hence the asset is a movable property. Further, the APSEB has collected sales tax on sale of its boiler which proves beyond doubt that it is a sale of movable property. 8.3 Ownership ....
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.... disadvantage and the assessee is the best person to decide which is the best option suitable for their business. In the instant case, the Appellant has purchased the asset and given it on lease to APSEB. The Appellant secured a security deposit of Rs. 11.69 crores from the lessee. The Appellant is getting lease rentals every month through their banks. It may be true that the Appellant has incurred Rs. 46.75 crores as cost of the asset and the same is almost recovered by way of lease rentals during the lease period. The A.O. has observed that since only the cost is recovered during the lease period and further the asset cannot be removed by the Appellant, the said is in the nature of finance transaction because the Appellant is interested only in transaction recovering lease rentals and not all interested in the asset. What the A.O. has missed out is that the Appellant has obtained a security deposit of Rs. 11.69 crores from the lessee and hence in effect the Appellant has paid only Rs. 34.59 crores to the lessee. The Appellant has been enjoying the security deposit in their business. Further if at all, the whole transaction is to be construed as finance transaction, then why shoul....
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.... boiler i.e. 'Coal Fired Boiler"(whose thermal efficiency is exceeding 75%). It is pertinent to refer Appendix I (Table of rates at which depreciation is admissible) of rule 5 wherein clause 3(u) A(d) under the head Plant & Machinery prescribes depreciation of 1001/o for "High efficiency boiler (thermal efficiency higher than 75% in case of coal fired and 801/o in case of oil/ gas fired boilers). In fact, if one goes through the depreciation schedule, there are many items which may not be a plant by itself; but can be operational only if the same is attached to some other plant. But the legislature has prescribed different depreciation rates for many such items. This clearly establishes that that depreciation is to be allowed on the items as prescribed in the Schedule irrespective of the fact whether such item is a plant and machinery by itself or not. 8.9 The A.O. has raised objections to the method of valuations of the boiler under reference. As per the valuation report, the original cost stated to be at Rs. 108 crores. The valuation determined by the valuer was at Rs. 75.60 crores as against this the purchase price was negotiated at Rs. 42.50 crores plus Rs. 4.25 crores b....
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....olding this lease transaction to be in the nature of financial lease." 3.13. During the course of hearing before us, both the parties have made their respective arguments. The Ld. DR has not been able to controvert the factual findings recorded by the Ld. CIT(A). He has only relied upon judgments in favour of revenue on this issue which we shall discuss subsequently in this order. Thus, on the basis of un-assailed factual findings of Ld. CIT(A), it can be concluded that: (a) The asset was used by the assessee in its leasing business; (b) Though charge of the revenue was that the impugned transaction has been entered for the purpose of saving the tax, but the transactions cannot be held to be sham or bogus; (c) After the sale of asset, APSEB did not claim depreciation on the said asset in its return. 3.14. In addition to the above factual findings, the conclusion drawn by the Ld. CIT(A) after analyzing entire facts and various judgments is also very relevant to be discussed here. The operative part of his conclusion is reproduced here under: "16. Now to sum up, the sale and lease back transaction is the genuine transaction. The transaction is entered into between t....
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.... these are reproduced hereunder: "Heard the Learned Counsel appearing for both the sides. The case of the appellant before the Tribunal was that the transactions of buy back of lease equipments and granting lease of that equipment to various boards, were sham transactions entered into only for the purpose of claiming benefit of 100% depreciation. The Tribunal has considered that aspect of the matter in the light of the material on record and has recorded the finding that it is not a sham and bogus transaction. One of the grounds considered for recording that finding is that when the other party is a statutory body the question of evasion of tax does not arise and therefore, according to the Tribunal, inference of collusion cannot be drawn. Hence, no question of law arises." 3.17. Similar view was taken by the Mumbai Bench in the case of Development Credit Bank vs. DCIT (supra) wherein it was held that where relevant lease agreement, appeals of purchase of assets, inspection report, insurance papers etc. were produced then sale and lease back transactions could not be treated as sham for being the benefit of depreciation to the assessee. 3.18. Further, in the case of Bombay....
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....g to the decision of the Special Bench in the case of IndusInd Bank Ltd. Vs. ACIT 135 ITD 165 (Mum) (SB), the transaction is merely a financial transaction and hence the assessee is not the owner of the asset and therefore depreciation cannot be availed by the assessee. On the other hand, it is the contention of the Ld. Senior Counsel for the assessee that at the time of rendering the decision in the case of Induslnd Bank Ltd (supra), the decision of the Delhi High Court in the case of CIT Vs. Cosmo Films Ltd. (2011) 338 ITR 266 (Del) has not been pointed out before the Special Bench of the Tribunal and therefore according to the said decision of the Delhi High Court, the assessee is entitled for the claim of depreciation. The Ld. Senior Counsel has further relied on the decision of the Hon'ble Apex Court in the case of M/s. ICDS Ltd. Vs.CIT1 Mysore (2013), 350 ITR 527(SC), the decisions of the Co-ordinate Benches of the Tribunal in the cases of Development Credit Bank Vs. DCIT (ITA No. 3006/Mum/2011), M/s. Larsen and Turbo Ltd. Vs. JCIT (ITA No. 2200/Mum/2000) and SIMCOM Ltd. Vs. JCIT(ITA No. 79011Mum/2003) in support of the claim of the assessee. After considering the submiss....
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....w. They are within the four corners of law. Therefore, in obedience of the decision of the Orissa High Court as stated above, we have to hold that the assessee is entitled to claim depreciation at the rate of 100% on the assets leased out by it to APSEB. 30. It is the argument of the Revenue that the transactions involved in the present case did not answer the tests laid down by the Supreme Court in the case of Asea Borwn Boveri Ltd. Vs. Industrial Finance Corporation of India (154 Taxman 512). The property in the equipments has been transferred by APSEB to the assessee as the first limb of the transaction. This is clear from the invoice, valuation report and payment details. There is no dispute that the energy saving device has been identified with reasonable clarity. The purchase was made on the basis of the price determined on the basis of a valuation report prepared by approved valuer. The approved valuer has given a detailed valuation report. The Revenue has not pointed out any material defect in the said valuation report or in the value determined by the parties, the terms of the lease agreement do not bring out any case that the transactions were of a nature other than a ....
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....judgment of Hon'ble Orissa High Court in the case of Industrial Development Corp of Orissa Ltd. vs. CIT 268 ITR 130 wherein after discussing the facts of the similar transaction of purchase cum lease agreement between assessee and Orissa State Electricity Board ( State Government undertaking), it was held that if the transaction is otherwise valid in law and results in deduction of tax to assessee, same cannot be brushed aside on the basis of a presumption that motive of making the transaction was only to reduce tax liability. 3.23. Similarly, Hon'ble Punjab and Haryana High Court in the case of CIT vs. Punjab State Electricity Board, (supra) after analyzing various judgments relied upon by the Revenue and its argument that the machinery continue to remain with the seller, it was held that transactions could not be treated as sham or artificial transaction. It was held that: "Only contention raised by the learned counsel for the revenue is that the machinery was integral part of the boilers and the same continued to be with the assessee in spite of sale. The fact remains that the sale consideration was received by the assessee and lease rental was paid by the assessee. Merely....
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....rt of lease agreement (Page 17 of FPB) 5 Application of explanation 4A to sec 43(1) WDV as per 43(1) not identified (Page 5 Para 8) N/A-since Explanation is applicable w.e.f. 01/10/1996 and is not retrospective in operation. 6 Determination of market value (MV) MV not ascertained (Page 5 Para 8) Ascertained as per Independent Valuation Report. (Page 2 Para 4.8 of CIT(A)'s order) 7 Physical delivery of asset under agreement/deed No actual delivery has taken place (Page 5 Para 8) No actual delivery, however, constructive delivery is also a very much acceptable mode of delivery under the Income Tax Act. (Page 2 of Assessment order) 8 Physical condition of asset under the agreement/ deed Water treatment plant is embedded to earth (Page 5 Para 8) Boiler can be removed as per the Registered Valuer's report. (Page 2 Para 4.8 of CIT(A)'s order) 9 Production of invoices, installation certificate and other basic details before lower authorities Invoices / other basic details were never produced before lower authorities (Page 6 Para 10) Invoices, installation certificate and all basic details were produced before authorities and veri....
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....en shown that all the required details called for were submitted and due cooperation was extended during the assessment proceedings. In the case of Avasarala's Valuation Report, it was not clear whether equipment can be detached and removed from the place where it was installed, whereas in the case of assessee before us, the Valuation Report is clear that the equipment can be detached and removed. In the case of 'Avasarala', all lower authorities after considering materials placed before them had recorded a finding that it was a sham transaction, whereas in the case of assessee before us, Ld CIT(A) after considering the factual details, concluded that it was a genuine transaction. 3.26. Similarly Ld. DR vehemently relied upon another judgment of the Mumbai Bench in the case of Hathway Investment P. Ltd. In this regard also detailed note has been filed before us showing distinguishing feature of the said case with the case of the assessee and the same is reproduced below: Particulars Hathway Investments Bombay Dyeing (assessee) 1 Transaction with Gujarat State Electricity Board (GEB) i.e. PSU (Page 7 Para 2) Andhra Pradesh State Electricity Board(APSEB) i.e. PSU (Page....
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....led to cost of the equipment plus other expenses incurred (Page 18 Para 20.VII) No such clause Lessee as the agent of lessor will be responsible for obtaining timely delivery of the equipment (Page 18 Para 20.VII) No such clause Function of lessor in the lease is to purchase the equipment selected by the lessee from the Manufacturer designated by lessee (Page 18 Para 20.VII) No such clause In the event of upward revision in minimum lending rates of commercial banks, lease rental will be revised accordingly (Page 20 Para 20. XI) No such clause Lease rentals have been worked out taking into consideration the depreciation on assets presently available to lessor (Page 20 Para 20.XI) No such clause If eligibility of lessor to claim depreciation is increased/decreased, or the claim is disallowed ,the rates of rentals will be increased/decreased to the extent of gain or loss to the lessor (Page 20 Para 20.XI) No such clause Option on lessee to renew the lease indefinitely (Page 19 Para 20.X) Option to renew the lease on lessee, only on mutually agreed terms though not indefinitely (Page 9 Para 9 of FPB) On termination of the lease agreem....
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....s, the same should not be categorized as a colorable device merely because its results in reduction of tax liability. Further, it has been established that ownership of the impugned asset was with the assessee and the same was used for the purpose of business of leasing carried on by the assessee; under these circumstances the assessee was entitled for the benefit of depreciation. Therefore, AO is directed to grant the benefit of depreciation. This ground of the revenue's appeal is dismissed. 4. Ground No.2: In this ground, the revenue is aggrieved with the action of Ld. CIT(A) in directing the AO to re-compute the depreciation admissible as per law taking into account the increase in the cost of assets on account of fluctuation in foreign exchange rates as on the last date of the accounting year i.e. 31.03.1996. 4.1. The unanimous stand of both the parties before us was that this issue is covered in the favour of the assessee by the orders of the Tribunal in assessee's own case. 4.2. It is noted that Ld. CIT(A) has followed his own order of earlier years i.e. assessment years 1992-93, 1993-94 & 1995- 96, while deciding this issue in favour of the assessee. It is noted by ....
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....ed in confirming the disallowance made by the Assessing Officer towards the notional interest of Rs. 76,82,959/- on overdraft facility from the bank towards the payment of advance tax. 5. Deduction u/s 80 HHC of the Income Tax Act, 1961. 5.1 The CIT (A) erred in disallowing deduction u/s 80HHC of Rs. 89,66,944/- on the basis that this deduction purely represents 90% of the export incentives received by the Appellants and that this is claimed without adjusting it with the Export loss of Rs. 20,78,79,287/-. 6. Expenditure On G.D.R. Issue 6.1 The CIT (A) erred in disallowing the Appellants claim for deduction of Rs. 28.74 Lacs u/s 37 (1) in respect of expenditure incurred in connection with Global Depository Receipt on the basis that it was a capital expenditure since it was in connection with issue of shares and led to an increase in the share capital of the Appellants. " 7.1. During the course of hearing, assessee also filed ground no.7 which is claimed to be alternate ground to ground no.6 of the main grounds, reproduced as under: "Without Prejudice to Ground No. 6: Ground No. 7: Claim under section 35D of the Act: The CIT(A) erred in confirming the disallow....
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....r miscellaneous receipts, etc. are not the income derived from the undertaking and, therefore, in view of the decision of the Hon'ble Supreme Court in the cases of Pandian Chemicals Limited Vs. CIT, reported in 262 ITR 278(SC), CIT Vs. Sterling Foods, reported in 237 ITR 278 (SC) and Liberty India Vs. CIT, reported in 317 ITR 218 (SC), the deduction under Section 80HH & 80I is not allowable on these incomes. Hence, ground No.7.1 is partly allowed." 10.1. Thus, respectfully following the orders of the Tribunal, we direct the AO to grant benefit of deduction u/s 80HH & 80IA on the amount of interest received from customers/dealers. Thus, this ground is allowed. 11. Ground No.2: This ground is against the action of lower authorities by bringing to tax an amount of Rs. 68,38,000/- being Technical Know-how fees from P. T. Five Star Industries Ltd., Indonesia by treating the same as income accrued during the relevant assessment year though it was not received/accrued. It is noted that this issue has also been decided by the Tribunal in earlier years. In A.Y. 1992-93, the Tribunal held as under: "6.1 We have heard the learned AR of the assessee as well as learned DR and considere....
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.... current year. We confirm the order of CIT(A) in directing the Assessing Officer to verify the extent of income on account of technical fees brought to tax in the earlier years and to exclude the same while computing the income for the year under consideration i.e., the year in which the assessee had offered the total receipt of technical fee as income on receipt basis. The Assessing Officer shall afford a reasonable opportunity of hearing to the assessee. The ground No.1 raised by the Revenue is thus allowed for statistical purpose." 6.2 Accordingly, we direct the Assessing Officer to verify the fact of amount of technical know-how fee of Rs. 15.33 crores as has been taxed for the assessment year 1998-99 and accordingly reconsider the issue of addition of Rs. 55.77 lakhs on account of technical know-how fee for this year." 11.1. In view of the orders of the Tribunal, we send this issue back to the file of the AO and direct him to follow the directions of Tribunal given in the orders of the earlier years and reexamine the facts and re-decide this issue after giving adequate opportunity of hearing to the assessee to file requisite details and documentary evidences. This ground....
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....pect of such disallowance is upheld. This ground of appeal is dismissed." 3.2 Learned AR has relied upon the case of Hindustan Lever Limited Vs. ACIT, reported in 58 ITD 555. On the other hand, learned DR has submitted that the CIT(A) has given a finding of fact that the assessee has not complied with the conditions as provided under clause (b) of Second Proviso to Section 37(4) of the Income Tax Act. We are of the view that when the issue has been considered and decided by this Tribunal in the assessee's own case for the assessment year 1990-91 then the decision cited by the learned AR ITA for the assessee would not help the case of the assessee being factual in nature. Accordingly, following the earlier orders of this Tribunal in assessee's own case for the assessment year 1990-91, we decide this issue against the assessee and in favour of the revenue." 12.1. No distinction has been pointed out in the facts, therefore respectfully following the order of the Tribunal of earlier years; this issue is decided against the assessee. Accordingly, the disallowance made by the AO is upheld. Thus, this ground is rejected. 13. Ground no.4: In this ground, the assessee has raised gr....
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....ncentives should be allowed to it as per the proviso below subsection (3) of section 80HHC without off-setting the loss as worked out under the said sub section. However, in the assessment framed, the AO did not accept the contention of the assessee on the reason that while working out the deduction u/s 80 HHC, at the first stage, when the profit and loss from the manufacturing operation is worked out, it resulted in a loss, as 90% of the export incentives are removed from the profits and gains and are added only at the last stage of formula. Accordingly, the AO disallowed the claim of deduction as there is no profit, there is no question of adding proportionate export incentive to the profit under the proviso to sub section (3) of 80 HHC does not arise. On appeal, the Ld.CIT(A) by relying on various decisions confirmed the said disallowance made by the AO. Aggrieved by the impugned decision, the assessee has raised this ground in the appeal before us. 8.1 Having heard both the sides and perused the material on record, it is pertinent to mention that the said issue is covered against the assessee in view of the decisions of the Apex Court in the cases of IPCA Laboratory Ltd. vs. DC....
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....ee has made a claim for allowing the expenses incurred in connection with Global Depository Receipt (GDR) for the reason that if these are treated as capital expenditure on the ground that these were in connection with issue of shares which led to an increase in the share capital of the Assessee Company, then, alternatively, these expenses can be allowed u/s 35D at the rate of one-tenth of the total amount in the year under consideration, since expenditure incurred was in respect of expansion of the existing business of the assessee. With the assistance of both the parties, it is noted that primary claim of the assessee made u/s 37 has been decided against it by the Tribunal in the order passed for 1994-95, but the alternative claim made u/s 35D has been sent back to the file of the AO for re-examination on facts. The relevant portion of the order of the Tribunal is reproduced below: "12.1 Having heard both the sides and perused the material on record, it is pertinent to mention that the Hon'ble Apex Court in the case of Brooke Bond India Ltd Vs CIT reported in 225 ITR 798 has held that though the increase in the capital results in expansion of the capital base of the company an....