TaxTMI 
TaxTMI 
2006 (11) TMI 653
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....ss Objection is disposed of by this common/consolidated order. 3. Revenue's Appeal (ITA No. 1427/Ahd/2003):- 3.1 The brief facts of only issue involved in revenue's appeal which relates to allowance on depreciation to the assessee on assets covered by purchase and lease-back transactions and as have been revealed from the records are that the assessee, which is a Limited Company, is in the business of leasing of assets. The return for assessment year 1994-95 was furnished on 29-11-1994 declaring a total income of Rs. 1,19,93,544 which was inclusive of lease rent received from leasing out the machinery to M/s. Salem Textiles Ltd. situated at Bangalore. 3.2 The facts resulting in receipt of lease rent form M/s. Salem Textiles Ltd., Bangalore were that M/s. Salem Textiles Bangalore was initial owner of various machineries, but since it was in need of finances, it sold the following machineries to the assessee for a price of Rs. 50,10,100 on 20-1-1994 :- Bill No. Date Name of machinery Amount lakhs Remarks S. 1. Purchased (Rs.)[lakhs] Bill No. Date Name of machinery A....
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....xtiles Ltd. Bangalore without taking possession of the machinery and movement of the machinery from Bangalore to Ahmedabad and vice-versa was not of purchase and lease back nature, rather was simply in the nature of providing finance to M/s. Salem Textiles Ltd. and, therefore, the assessee was not entitled to depreciation on the machineries alleged to have been purchased and leased back. The relevant part of conclusion arrived at by the Assessing Officer as contained in page Nos. 9 to 13, reads as under:- "However, the conclusions which can be reached in the case of the assessee Company are as broadly are as follows:- Even if it is presumed that assessee was the owner of equipments it could at best be treated as a fractional owner as the equipments leased were only indivisible parts of the plants set up by lessees. A fractional owner of an asset is not enticed to depreciation under section 32 in view of the decision of Supreme Court in the case of Seth Banarasidas Gupta (176 ITR 783). From the analysis of the terms of lease agreements and the facts surrounding the alleged lease transactions the following facts emerge, which indicate the real intention of the parties ....
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.... lease assets, would go to lessee on payment of token money. Thus, leased assets are with the lessee from beginning till end. Lessor remains owner only on paper for a few years without any right or obligation. The major lease assets are essential part of main plant and in no eventuality the same can be removed. Even there is no use of such assets independent of plant so ownership, if any is only technical and on paper for a limited time. In sale and leased back transactions, the assets form integral and indispensable parts of lessee's manufacturing/operational facilities and except providing securities of such assets on paper, there cannot be any basis for purchases and sale. In all lease cases lessees had approached the lessor with a request for finance either to meet their requirement of purchase of asset or to meet their other liabilities (sale and lease back transaction) and lessor (assessee) had agreed to give finance. Thus, all these transactions are to be constructed under general law as loan transaction looking to the substance of transactions and not to be related as genuine lease transactions. The assets were acquired by the assessee with a specific understanding th....
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....ance that is its true legal effect rather to the form in which it is carried out. A party cannot escape the consequence of law merely by describing an agreement in a particular form though in essence and in substance it may be a different transaction. In the case of assessee lease transactions are nothing but finance arrangement in substance only invoices are exchanged and agreements are made in such a way that it gives a colour of sale and actual lease back. All the circumstances and assessee's involvement of interest in leased asset clearly proves that the transaction as finance transaction. In view of the factual and legal position establishing assessee's lease transactions as finance leases, the claim of depreciation on leased assets made by the assessee is not considered allowable. The same is not allowed considering the lease transactions of the assessee as finance leases as against operating lease. And purely loan funding arrangement." 3.7 The Assessing Officer, rejected the assessee's alternative ground, wherein it was pleaded that in case depreciation is not allowed, then only the interest computed involved in monthly lease rent be taxed, by observing as under:- ....
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....Lease rent Credited As per Asstt. Order Depreciation Principal Interest 1993-94 1.5 1,99,148 12,25,250 73,898 6,26,263 1994-95 12 15,93,180 10,02,000 5,91,180 10,95,959 1995-96 12 15,93,180 10,02,000 6,91,180 8,21,696 1996-97 12 15,93,180 10,02,000 5,91,180 6,16,477 1997-98 12 15,93,180 10,02,000 5,91,180 6,16,477 1998-99 10.5 13,94,033 8,76,750 5,17,282 3,46,768 Total 79,55,901 50,10,000 29,55,900 39,69,794 5. It was, in view of the above facts and circumstances of the case, that the CIT (Appeals), after considering the submissions made by the assessee as well as the findings of Assessing Officer and the decision of ITAT Ahmedabad Bench "B" in the case of Lok Prakashan Ltd. [ITA No. 2071/Ahd/2000 assessment year 1996-97] and of ITAT Mumbai Bench "B" in the case of Berlia Chemicals & Traders (P.) Ltd. v. Asstt. CIT ( 76 TTJ 974) [Mum.] duly referred to in paragraph Nos. 20.2 & 20.3 respectively as well as another decision of the Tribunal in the case of Bombay Burmah Trading Corpn. v. Asstt. CIT [2002] 82 ITD 531 (Mum....
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....from Ambalal Agency that they did not purchase any machinery from Salem Textiles. Even this observation also go against the allegation stated above. Besides this the assessee in the present case has paid the consideration directly to Salem Textiles Ltd. The assessee has earned lease rental from the said concern from year to year and it is offered for tax, which can be seen from the figures given in the submissions of the appellant. Much reliance has been placed in the case of Salem Textiles on the statement of the managing director of the said concern. However, as claimed by the assessee it is a fact that before using such statement in the case of the assessee for disallowing its claim for depreciation the appellant has not been provided copy of such statement and cross-examination of the managing director. On other hand the transaction is supported by agreement for lease, payment by the assessee of the consideration and the action of the assessee of offering lease rentals for taxation from year to year. In the circumstances, it cannot be held that the transaction was not genuine. It is also a fact that the transaction of sale and lease back of assets are considered to be commercia....
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....is is evident from the provisions in the eight Explanations itself. It follows, therefore, that when a new situation is dealt with by the legislature, there is nothing clarificatory about it. The situation never existed on the statute book earlier which needed clarification. It is added as an Explanation to section 43(1) merely because what would he the actual cost in such a situation has to be specified. As a matter of fact, Explanation 3 is there to deal with the situation in Explanation 4A, but the legislature thought it appropriate to deal with that situation in a manner different than provided in Explanation 3. Thus, a different mischief was carved out with a different remedy which never existed earlier. Therefore, there can be no clarification of a thing which never existed earlier. If the intention was to make it retrospectively effective, it would have specified so in no uncertain terms as was done when Explanation 8 was inserted by the Finance Act, 1986, with retrospective effect from 1-4-1974. Explanation 4A has no retrospective operation, memorandum explaining the provisions in Finance (No. 2) Bill, 1996, through which Explanation 4A was inserted to section 43(1), makes ....
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....When the seller of the asset has offered Rs. 26 lakhs for taxation as short term capital gain and when the lease rentals earned by the assessee have suffered tax, it is difficult to conclude that the transaction was entered into with the sole motive of getting tax benefit by claiming 100 per cent depreciation. It needs to be appreciated 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. Thus, the tax aspect is very much an integral part of the business decision which should not be looked down as a taboo. If tax aspect is not taken into consideration, it is quite unbusiness like for the businessman to do. This is not to suggest that assessees do not ever adopt colourable devices to dodge the revenue. But wherever benefit is derived by the assessee, it cannot automatically attract the label of a colourable device. In any case, if such a doubt was there, the Assessing Officer should have carried out an exercise, considering the incomes of both, the seller as well as purchaser, with and without the transaction and should have seen the net effect on the exchequer. Be that as it may....
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....an integral part of the business decision, which should not be looked down as a taboo. This view is followed in the case of Bombay Burmah Trading Corpn. v. Asstt. CIT 76 TTJ 983 , wherein such transaction was not held to be colourable device. 20.5 Considering the entirety of facts and ratios of decisions, almost on the identical facts, I hold that the transaction of sale and lease back was a genuine transaction of an existent asset. As this asset was used for the purpose of business and as there is no evidence that the cost of asset to the lessor was lower than paid, the depreciation as claimed is allowable. The Assessing Officer is directed to allow the depreciation as claimed." 6. It was, in view of the above facts and circumstances of the case, that the ld. DR, in addition to supporting the assessment order, submitted that the order of the CIT (Appeals) was liable to be reversed because of decision of ITAT Bombay Bench (Special Bench) in the case of Mid East Portfolio Management Ltd. (MEPML) v. Dy. CIT [2003] 87 ITD 537 [Mum.](SB). 7. The ld.counsel for the assessee, on the other hand, while supporting the order of the CIT (Appeals), submitted that the assessee being in....
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....mmencement Date" The Commencement date shall be - (i)The date of delivery of the equipments/assets by the Manufacturer/Supplier Or (ii)The date of disbursements of the purchase price of the equipments/assets by the lessor to the manufacturer/supplier/ exclusive of any other costs/charges forming part of the purchase/supply terms between the manufacturer/supplier and the lessees as if the constructive delivery of the equipment/asset has already been taken by the lessees. Provided that if for whatsoever reasons the delivery is not effected by the manufacturer/supplier to the lessee, the lessor shall not be liable for any loss that may be suffered by the lessee. Provided further that if for whatsoever reasons the full purchase price of the equipments is not disbursed by the lessor at the behest of the lessee or not instructed by the lessee to pay the full purchase price, within a reasonable period which in the view of lessor would be unduly delaying the commencement date, in such a case, the lessor shall determine the commencement date which shall be binding on the lessee/user. 2.3 The lessee shall pay to the lessor lease rent as mentioned in the Schedule. 2.6 ....
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....nsidered of simple finance, then the taxable income will be Rs. 29,55,900 (in six assessment years). 7.3 From the aforesaid computation, the ld. counsel for the assessee derived a proposition that the assessee having offered more income for taxation, the allegation of tax planning with a view to defraud the revenue cannot be sustained and, therefore, the proposition of law held by the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC), which is being referred time and again by the revenue for considering such transactions as sham transaction, is not applicable to the present case. 7.4 With respect to revenue's reliance on the decision of ITAT Mumbai Bench (Special Bench) in the case of Mid East Portfolio Management Ltd. (supra), the ld. counsel for the assessee submitted that this decision has been considered by the ITAT Mumbai subsequently, in the case of Shah Investments Financial Developments Consultants Ltd. v. Asstt. CIT [2006] 8 SOT 334 [Mum.] (copy placed at page Nos. 76 to 86 of the assessee's paper-book), wherein the Hon'ble Tribunal, after considering the decision relied upon by the ld. DR has came to the conclusion that the ques....
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....ention gathered from the documenation are the same must be considered to be a genuine SLB transaction. In our view, various cases which have been cited before us lay down the undisputed rule that if an SLB transaction is genuine and legally correct, depreciation as claimed by the assessee cannot be disallowed. Thus, ultimately the question boils down to genuineness of the transaction. In our view, each case has to be judged and decided having regard to the peculiar factual position of that case while drawing support from the judicial and legal principles and guidelines which emerge from the various cases available. In our view, the Supreme Court decision in the case of Azadi Bachao Andolan (supra) cannot be interpreted in a way so as to conclude that depreciation has to be necessarily allowed even in respect of a transaction which is not genuine and while is not intended to be acted upon by the parties." 7.5 The ld. counsel for the assessee further submitted that the Assessing Officer having taxed whole of the monthly lease rent, it cannot take a stand that the assessee is not entitled to depreciation and for this purpose has raised various decisions which will be considered in ....
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....in this case as have been revealed from the reported decision are that the assessee - Mid East Portfolio Management Ltd. purchased Air Pollution Equipments from Rajasthan State electricity Board (RSEB) and simultaneously leased it back on rent to the said RSEB. The assessee claimed 100 per cent depreciation on the said equipment. The revenue, however, rejected the claim on the basis of rule laid down in McDowell & Co. Ltd. (supra) holding that the aforesaid transaction in truth was a borrowing of money by the RSEB on the security of asset but the documentation had been so prepared as if it was a sale and lease back (SLB) transaction and, therefore the assessee was not entitled to depreciation. On second appeal, the Division Bench of the Tribunal was of the view that the true effect of the documentation needed to be considered in deeper perspective and, therefore, referred the matter to the Special Bench. (iii) It was, in view of above facts that the Hon'ble ITAT Mumbai Special Bench on the facts and circumstances of that case came to the conclusion that the assessee was not entitled to depreciation because the transaction was not one of the purchases and lease back transaction. ....
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....by taking certain pre-ordained steps which are calculated to cancel out each other. The approach in such cases must be to take the entire transaction or arrangement as a whole and see if it makes any economic or commercial sense without attaching weight to the steps that go to make up the scheme, each of which may be legally valid. The genuineness of the arrangement has to be viewed not in relation to every step taken to achieve the result but in relation to the final result. That the Courts (and Tribunals) always have the freedom to 'go behind' the documents to find out the real intention of the parties has always been recognised. This rule presupposes that in a given case the real intention of the parties to a document/transaction/arrangement could be different from what it appears from it ex facie. The Court must normally proceed on the basis of the professed intention, but if that is under doubt or is disputed or challenged, then its power to find out the real intention of the parties by ignoring the apparent has to be, and has always been conceded. It is difficult to imagine where this is possible except in cases of a make believe arrangement or a subterfuge or a dubious or co....
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....ons stated in the contract. Finance leasing is basically a method of financing. In a finance lease, the asset is transferred to the lessor first as and by way of security for the finance. This is invariably the case in SLB transactions where the seller of the asset becomes the lessee subsequently. In the case of an operational lease, where the owner of the assessee effects a simple lease thereof to the lessee for lease rentals, the question of the asset itself being security is satisfied by appropriate safeguards in the lease agreements. Here, the idea is not to finance the lessee, but to enable him to operate the asset and earn profits. In such cases, the asset is not previously owned by the lessee. However, in the case of a SLB which is a specie of a finance lease, the asset is first purchased by the assessee and almost simultaneously leased back to the seller, who thereafter holds and uses the same in a different capacity. The erstwhile owner becomes to lessee after the lease. The advantage he gets is the money on sale of the asset to the assessee. The assessee is thus the owner of the asset but at the same time, the asset continues to remain with the seller, who has now become ....
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....quired the cylinders from the manufacturers and leased them to company B. The problem was solved so far as company B was concerned. What would have been allowed as depreciation if it had owned the cylinders was more or less achieved by claiming the lease rentals as deduction. The leasing company i.e., company A being owner of the cylinders and the cylinders having been used in its business which is that of leasing, obtained the depreciation allowance and quite rightly so. In the latter illustration, the real requirement of company B is not the gas cylinders, but finance. It has no funds but it has some assets. It has located company A which can spare the funds. It may be that company A is also engaged in the money lending business. But it requires security before it could advance monies to company B. Company B can offer its assets as security for the monies and company A can accept the same. In this transaction, company A will be receiving the interest on the monies advanced. Company B would be getting the depreciation allowance in respect of the assets held by it. What the parties do now is to adopt the SLB mode. The asset is sold to company A for a price. Thus, company B gets the....
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....graph of the agenda note it has been stated that the "proposal herein is to seek approval of the Board to raise money at a low rate of interest by notional sale of plant and machinery and to take the same back on lease". In the third paragraph there is reference to the fact that other state electricity boards "have also resorted to the course of raising money by notional sale and lease back of existing assets". Finally, the agenda note exhorts the Board to consider and approve the raising of monies "by notional sale and lease back of existing assets" and to pass the resolutions as annexed. The resolution authorizes the Board "to notionally sell and take back the aforesaid plant and machinery on lease from the aforesaid lessors on the terms and conditions mutually agreed". In the agenda note prepared for the meeting held on 28-1-1995, no doubt the word "notional" is not found used with reference to the sale and lease back, but this by itself is not sufficient to displace the inference that from the very inception the intention of the parties was never to sell/purchase the air-pollution equipment in the real and true sense of the word but was only to prepare documentation to show tha....
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....pointer to the conclusion that the whole exercise was gone through mechanically. In fact, it would appear to be a pre-planned or pre-ordained exercise. It appears that the Board resolution was passed on 28-1-1995, in which it was decided to borrow Rs. 150 crores from KM or other lessors arranged by them. The assessee is one of the other lessors belonging to the syndicate formed by the KM and was allotted a specific amount to be advanced to RSEB. Thereafter, the actual sale deed between RSEB and the assessee was entered into on 12-3-1995. It will be seen from the chronology that even before the advertisements were issued in the newspapers inviting offers for obtaining leasing finance, a decision had been taken to enter into the SLB transaction with the members of the syndicate led by KM, of which the assessee was one. Thus, the advertisement in the newspaper would only appear to be a mere formality or a ritual that was gone through in adherence to the form. From the above events, it appears that right from the beginning, it had been decided between RSEB and the assessee that the assessee would advance monies at low rates of interest to RSEB. The transaction would take the form of a ....
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....mentioned in his valuation report were not seen by him and that the valuation was done on the basis of information provided by the employees of the RSEB. No annexures are found enclosed. This is not an inconsequential slip of omission, but it has serious repercussions. It throws grave doubts on the veracity, credibility and acceptability of the valuation report itself. The overall impression gained on a careful perusal of the valuation report and the rival contentions with regard thereto, is that it is totally unconvincing. The question of the Assessing Officer certaining a report from the Departmental Valuation Officer would has arisen only if the transaction was genuine, but in the opinion of the Assessing Officer, the figure of actual cost was initiated. Had that been the case, it was incumbent upon him to obtain a counter valuation report so that the proper amount of depreciation could be allowed. But when he takes the view that no depreciation is allowable at all on the ground that the entire arrangement is a sham, no purpose would have been served by his obtaining a counter-valuation report. (compressed para 114) Even when the actual cost of the assets was not known, th....
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....be owned by the assessee. It gives authority to the RSEB to sell the equipment to anyone including RSEB itself. This power of attorney has no purpose to serve since the air-pollution equipment at no point of time became the property of the assessee. The power of attorney exposes the device adopted by the parties to pass off a simple finance transaction as a SLB transaction. (compressed Para 122) It is not possible to exclude the applicability of the rule in McDowell merely because one of the parties to the transaction is a State Government undertaking. At best, it can only be stated that RSEB was indifferent to the documentation executed. 9. (ii) Similarly, the findings of Hon'ble Special Bench in the case of ICICI Ltd., who had entered into purchase and lease back transactions with Gujarat Electricity Board was found to be that of simple finance and not of purchase and lease back transaction. The relevant part as contained in paragraph Nos. 123, 124, 127, 131, 136, 137, 139, 141, 144, 155, & 157 (compressed) is in the following terms:- "123. In our opinion, there was no intention on the part of GEB to pass the property in the boilers to the assessee in the first ....
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....hase of the subject asset of KLTPS." (compressed paras 124 & 125) The modus operand in the case of ICICI is more or less the same as in the case of MEP discussed earlier except that in the present case the documentation is more sophisticated, presumably because the assessee has experience in such matters and also because the assessee is a professionally managed company. That however, does not detract from the position that GEB never intended to convey the property in the equipment to the assessee by way of sale. The sale made by GEB was beyond the scope of the powers of the Board. The Board could not be imagined to have acted without any authority in this behalf, and in the absence of any specific authority conferred upon them, the inference would be that GEB did not intend at all to convey any property in the equipment to the assessee. Thus, there was no intention at any point of time on the part of GEB to pass on the title to the boilers to the assessee. It cannot be imagined how GEB would continue to generate electricity without the boilers which generate the steam. Severance of the boilers from the KLTPS would have seriously jeopardized or affected the generation of elect....
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....he entries made in its books of accounts, both by showing the equipment in the balance sheet and by providing for depreciation thereon, reflect GEB's understanding of the transaction as one, where though an invoice is made out to show as if the equipment has been sold to the assessee, in reality, there was no such sale. It is too remote to accept that if GEB has understood this position clearly, the assessee would still be under the impression that there was in truth and reality a sale in its favour. The assessee, a professionally managed company, cannot be seen to be so naive as to be under the erroneous impression that the property has been conveyed to it. The further objection that entries made in the books of account are not conclusive is a proposition which generally holds good, but there is no rule to the effect that they should be completely ignored in ascertaining the true nature or the implications of a particular business transaction. If the entries are a cogent piece of evidence, there is nothing wrong in relying on the same to arrive at the proper conclusion. If all other circumstances point to conclusion (A) the fact that entries have been made in the books to point to....
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....t any rate, for that reason alone, the assessee's claim cannot be upheld. (compressed paragraph 139) The Explanation 4A to section 43(1) only seeks to thwart the move to inflate the value of the asset leased out in order solely to obtain the benefit of 100 per cent depreciation. It applies to an otherwise genuine transaction. If the 5LB itself is not genuine (a finding to be arrived at on the basis of evidence including surrounding circumstances and the intention of the parties), then there is no need to invoke the Explanation. Genuine 5LB transactions which have been recognised by the commercial world cannot by a stroke of pen be de-recognized. They can only be regulated so that an assessee does not misuse them. That is the purpose of the Explanation. But if the 5LB transaction is established to be non-genuine or a make-believe, it cannot be recognised either as a fact or in law, and in that case, no depreciation would be allowable at all; it would not be a case of merely regulating the value of the asset (as envisaged in the Explanation) for purposes of allowing the correct amount of depreciation. The Explanation applies only to a genuine 5LB where the value of the asset sh....
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....ness of a transaction is something which is to be likened to the soul; the facts merely constitute the body and similarity between the bodies does not ipso facto mean that the souls are also identical. The temptation to generalize or to lay down norms in such cases should be resisted. Norms may be laid down only if it is absolutely necessary to do so. In fact, there can be no common rules for finding out the genuineness of a particular SLB transaction, which can be of universal application. Nor can any such norms be exhaustive. However, very broadly and without limiting to what has been stated earlier the following may be considered to be relevant factors to be kept in view : (a) Was there an intention to pass the properly in the equipment to the assessee? (b) Was the equipment identified/ascertained with reasonable clarity? (c) Was the equipment valued, and if so, whether it was a bona fide valuation? Was the value inflated? How credible is the report of the valuer, if there is one. (d) What are the terms of the lease? Is the document more of an arrangement for security for the loan and less of a lease? (e) Is there any parallel or collateral documentation or correspondence or an ....
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....ot on the basis of a particular decision in a particular case. 10.2 As brought to our notice by the ld.counsel for the assessee, this decision of Hon'ble Special Bench had been a subject matter of consideration by the ITAT Bombay Bench itself in the case of Shah Investments Financial Developments Consultants Ltd. (supra) [copy placed at page Nos. 76 to 86] and in paragraph No. 7 at page 341 of the Report, the Hon'ble Division Bench 'H' Bombay observed that after consideration of decision of Special Bench (supra) and also the decision of Hon'ble Supreme Court in Azadi Bachao Andolan, it cannot be concluded that depreciation has to be allowed even in respect of that transaction which is not genuine and which is not entitled to be acted upon by the parties. According to the Hon'ble Bench, the ultimate question which boils down from the aforesaid question was with respect to genuineness of the transaction; i.e., if the transaction was found to be correct which in turn was to be judged and decided having regard to the peculiar factual position of a particular case, the depreciation was to be allowed. 10.3 In view of above facts, we are of the opinion that rather allowability of de....
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.... of he persons dealing with the assessee for purchase of the machinery were not given. Even the confirmations from persons who had made payments to the company were not given. He, therefore, held vide discussion in paragraph 9 that the whole transaction was sham and collusive with a view to claim 100 per cent depreciation to defraud the revenue and disallowed the clam of depreciation. (ii)On appeal by the assessee, the CIT (Appeals) allowed the assessee's claim of depreciation as per his findings contained in paragraph Nos. 15 to 18 of the appellate order which have been reproduced by the Tribunal in paragraph No. 3 of its order dated 6-1-2006, and are in the following terms :- "15. In the face of these conflicting range of evidence, it is the burden of this office to weigh the pros & cons, consider the various probabilities and arrive at a conclusion about the genuineness of the appellant's claim. On the one hand, the supplier of the machinery is not traceable, the address' given on the bill is non genuine, & the transporter too is similarly not traceable. On the other hand, there are the CST/GST documents, testimony of a banker that he had actually seen the machine Hi....
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..... The AR has responded that : "In that case assessee had failed to establish the genuineness of any expenditure nor assessee produced before the Assessing Officer any suppliers, brokers in spite of specific opportunities. Also, payment were made by the Crossed cheque and all the cheques were encashed through bank account of only one person. Also, Close link between the Person from whose bank account cheques were encashed, was established by the Assessing Officer. Also, in that cafe some of the parties had accepted the fact that they had entered into fictitious transaction with the assessee. On the contrary, in the present case, appellant had during the course of assessment proceedings, submitted various documentary evidences in the form of Purchase bills, Delivery Challan, Sales Tax Assessment Order in respect of the Machinery in question, Address proof on Registrar of Companies (ROC) record in respect of the supplier, Transportation bill etc. Also, payment were made through account payee drafts and appellant had submitted before the Assessing Officer complete details of banker from where demand drafts were issued. Alto, Assessing Officer had made enquiry with the banker t....
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....ew of the above facts and circumstances of the case, that the Hon'ble Tribunal after considering the findings of the CIT (Appeals), Director's reply to question No. 12 put during recording of statement by the Assessing Officer and statement of Branch Manager of Kalupur Commercial Bank and relying on the Third Member decision of Ellenbarrie Industrial Gases Ltd. (supra) 83 ITD 11 1 as well as Third Member decision of ITAT Mumbai Bench in the case of Morarjee Goculdas Spg. & Wvg. Co. Ltd. (supra) at paqe No. 101 - paragraph No. 18 upheld the order of the CIT (Appeals) granting assessee's claim of depreciation. The relevant part of the Tribunal's order (supra) as contained in paragraph Nos. 4 to 8, are as under:- "4. We have heard the parties and considered their rival submissions. The material on record shows that the assessee had made part payment on the consideration by way of demand draft of 2 lakhs on 28-9-1995 through Punjab National Bank and another Demand Draft of Rs. 10 lakhs on Ahmedabad Mercantile Co-operative Bank Ltd. dated 13-12-1995, Rs. 5 lakhs on 8-6-1996 again by Demand Draft on Punjab National Bank, Mumbai and a receipt dated 4-1-1997 of Ahmedabad Peoples C....
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....he basis of the bill of suppliers and transport receipt. Q.12 Do you know the name of the manufacturers of machinery you inspected? A.12 I do not know the same at present. The same was reported in my detailed inspection report. Q.13 Can you give the dates on which you joined Panchwati Branch and you were transferred to H.O. from that Branch. A.13 I joined Panchwati Branch in the month of January, 1993 and was transferred in the month of February, 1996. Q.14 Your attention is invited to the details gathered by the Department that the manufacturers of machinery claimed to be inspected by you i.e. M/s. Electrosmelt India Ltd. Bombay and the transporters Vijay Roadlines have never supplied machinery of Rs. 95,13,720 mentioned in Bill No. 46 dated 1-9-1995 of Electrosmelt India Ltd. and has never been transported by M/s. Vijay Road Lines, B'bay. It has been concluded that no such machinery was in existence. What you have to say about this. A.14 We had inspected the machinery of Sumeru Leasing and Finance Ltd. who is our customers. We don't have to verify the genuineness of manufacturer or the transporter. Q.15 You said earlier that no loan was sanctioned against the....
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....to tax as such. The Third Member decision in the case of Ellenbarrie Industrial Gases Ltd. 83 ITD 11 1 relied upon by the assessee in similar circumstances observed in paragraph 28 as under:- '28. In this case one thing is to be noted that the Assessing Officer has not been fair and impartial. If according to him the entire sale-cum-lease-back transaction was bogus. In that situation he should not have assessed the income of the assessee offered on sale of cylinders to CCIL and SB. This action of the Assessing Officer shows that he himself is not sure as to how to proceedings with the whole affair. The Assessing Officer cannot breath hot and cold in the same time. In my considered view, therefore, I hold that sale-cum-lease-back transaction cannot be held to be bogus merely on some minor discrepancies here and there as stated above. I am constrained to point out in fact the ld. JM has not recorded his dissenting order having considered the matter analytically dealing with the submissions of both sides. He appears to have simply pointed out some of the paras of the assessment order and has given his final opinion that assessment under section 158 BC is correct. To the contr....
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....Revenue prefers to tax the lease rent as shown by the assessee as a whole, then there is no reason for disallowing the assessee's claim of depreciation. 12.1.2 So far as present case is concerned, admittedly, the Assessing Officer has, in spite of assessee's alternative argument that in case the transaction is not accepted to be purchase and lease back transaction, then only interest element contained in monthly installments should be taxed the whole of the monthly receipts which have been shown by the assessee on account of monthly lease rent. The Assessing Officer having preferred to tax the whole of the lease rent, though in spite of his observation with respect to assessee's alternative ground to the effect that since assessee has not agreed/accepted the addition on account of depreciation claimed on finance leases and will contest the same in appeal this issue is not finally settled and therefore, lease income offered by the assessee in return of income cannot be split at this stage and if the issue is finally decided in favour of Department or assessee accepts the Department's stand then assessee will be entitled the relief, it cannot be said that whole of the lease rent h....
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....n of the aforesaid decision, we are of the opinion that if existence of assets, which are the subject matter of transaction is established, then there is no question of doubting the genuineness of the transaction; meaning thereby that if the parties claims the transaction as one that all purchases and lease back/sale and lease back transaction and the assets in question are found to be in existence and are used, then there is no justification in refusing the claim of depreciation to the lessor. 12.3 The third decision relied upon by the ld.counsel for the assessee is the decision of ITAT Delhi Bench "G" in the case of Mansurpur Sugar Mills Ltd. (supra) (copy placed at page Nos. 64 to 75 of the paper-book). (a) The brief fact - The assessee-company was engaged in the business of manufacture and sale of sugar, the assessment for the assessment year 1993-94, was originally completed by the Assessing Officer under section 143(3) and disallowed deduction on account of lease rent paid to certain parties, including SRF, DSM and ISL. The Commissioner, acting under section 263, set aside the assessment. After initiating set aside proceedings, the Assessing Officer observed that ....
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.... DSM Ltd. on lease and accordingly, a lease agreement was entered into between the assessee-company and SRF Ltd. to that effect. As regards the machinery owned by DSM Ltd. but not out rightly purchased by the assessee-company, it was agreed that the same would be taken on lease by the assessee-company from DSM Ltd. and accordingly, a lease agreement was entered into between the assessee-company and DSM Ltd. It clearly shows that the machinery taken on lease by the assessee from DSM Ltd. and SRF Ltd. were already owned by the said lessor and there was no arrangement of sale and lease back between the assessee-company and the said two parties as misconstrued by the Assessing Officer. There was, therefore, no reason for the Assessing Officer to doubt the ownership of the machinery taken by the assessee on lease from DSM Ltd. and SRF Ltd. in the hands of the lessor and even the existence of the said machinery was established not only on the basis of valuation report prepared and furnished by a Chartered Engineer but the same was also impliedly proved by the fact that without the said machinery forming essential part of the sugar mill and plant, it was not possible for the assessee-comp....
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.... the Assessing Officer. Even the claim of the assessee-company of having purchased the three roller shafts in the year under consideration and sold to India Securities Ltd. was duly supported by the bill and this claim of the assessee-company was accepted by the learned CIT(A) only after verification of the said evidence which was also claimed to be filed before the Assessing Officer. Thus, the existence of the machinery as well as sale thereof by the assessee-company to India Securities Ltd. was duly established on evidence by the assessee-company and the same was also fortified from the fact that sale consideration of Rs. 1.5 crores was paid by India Securities Ltd. to the assessee-company. Further, the lease back of the said machinery by India Securities Ltd. to the assessee-company was supported by a lease agreement and both the parties having been bona fidely acted upon the terms and conditions stipulated in the said agreement, there was no reason to doubt the genuineness of the lease transaction between the assessee-company and India Securities Ltd. In the case of Indian Management Advisers & Leasing (P.) Ltd. v. Dy. CIT [1994] 51 ITD 566 , Delhi Bench of ITAT has held that i....
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.... to November 1997. The Assessing Officer doubted the genuineness of the entire transaction. He concluded that the transactions of manufacture and sale of the machine by HCC to the assessee and its lease back, were not genuine and, therefore, the assessee was not entitled to claim depreciation of Rs. 17,02,250 as claimed by it. The Tribunal held that the assessee had proved beyond doubt that it had got fabricated the skimmer machine and that the same had been given under lease to HCC. It also held that the lease transaction was genuine. It allowed the claim of the assessee. (b)It was, in view of the above facts and circumstances of the case, that the Hon'ble High Court (supra) upheld the order of the Tribunal wherein the Tribunal had reached to a finding, on facts, that the transaction of acquisition of Skimmer machine and its lease were genuine as per its findings contained in page No. 544 of the report. "....The Tribunal further considered (he fact that the lease rentals which were paid by the lessee not in accordance with the original terms as stipulated in the lease agreement, would not by itself prove that the assessee had not given the machinery on lease at a....
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....e of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), held as under:- "In Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 , the Supreme Court has approved the decision of the Madras High Court in M. V. Valliappan v. ITO [1988] 170 ITR 238 , where the Madras High Court had held that the decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. In view of the aforesaid legal principles laid down by the Supreme Court, it is clear that the principles aid down by the IRC v. Duke of Westminster [1936] AC 1; [1935] 19 TC 490; [1935] All ER Rep 259 (HL) are still applicable in this country and it is open to assessees to arrange their affairs in such a manner that it would not attract the tax liabilities, if it can be managed within the permissible limit of law. The respondent companies carried on business and followed the mercantile system of accounting and closed the....
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....ed back to the lessee but the lease payment was made from the yearly profit and not out of the capital realised from the sale of plant and machinery. On the aforesaid findings, the appellate authority reached the conclusion that the transactions had not been effected as a colourable device, but were a genuine business arrangement entered into for business purposes purely on business considerations and allowed the deduction of the lease rent by the company. The Revenue preferred appeals before the Income-tax Appellate Tribunal. The Appellate Tribunal upheld the findings arrived at by the first appellate authority and held that the transactions entered into by the assessees were genuine and validly entered into and there was no motive on the part of the assessees to defraud the Revenue. The only object of such transaction was to augment the fund which was invested by the assessees in the Unit Trust of India and the decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) had no application in the case. On appeals to the High Court: Held, dismissing the appeals, that the first appellate authority and the Tribunal had held that the transactions were genuine and validly entered....
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....sessment year in question, and since Explanation 4A to section 43(1) of the Income-tax Act, 1961, which provides that the actual cost to the assessee of assets which are the subject of sale and lease back shall be the written down value as at the time of transfer, came into force on 1-10-1996, it has no replication to the assessment year 1996-97." 13. After having considered the aforesaid decisions relied upon by the parties what we are able to understand is that for a transaction of sale and lease back/purchase and lease back to be genuine, following ingredients should be satisfied. (i)The assets involved in the transaction must be physically available and duly identifiable. (ii)The assets in question must be used for the business of the lessee. (iii)Movement of request is required only when the assets in question are purchased from manufacturer/supplier and in that case also it is not necessary that the assets so purchased should first move to the lessor. The assets in question can be directed to be delivered directly to the lessor. In case, the lessee is already having the assets and is in possession of the same, then to raise the funds he ....