AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2004 (3) TMI 43
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....ution and supply of electricity. By the said agreement, the appellant purchased electrical machinery of some sub-stations of OSEB for a price of Rs. 25 crores and leased out the said machinery back to the OSEB for a lease rent of Rs. 34,38,00,000 (rupees thirty-four crores thirty eight lakhs) for a period of 60 (sixty) months. Towards the price of Rs. 25 crores the appellant paid Rs. 20 crores to the OSEB and retained the balance of Rs. 5 crores as security money. The said sum of Rs. 20 crores was borrowed by the appellant from the Industrial Promotion and Investment Corporation of Orissa Limited (for short "the IPICOL") at an interest rate of 16.5 per cent, per annum for a period of 60 (sixty) months. After deducting the interest that was payable to IPICOL from the lease rent, a net amount of Rs. 4.48 crores was available in the hands of the appellant as surplus. The appellant claimed depreciation on the said machinery at the rate of 100 per cent, on the ground that the said machinery were energy saving devices entitled to depreciation at the rate of 100 per cent, under the relevant rules relating to depreciation and filed return accordingly for the assessment year 1996-97. The sa....
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....cuit breakers, transformers, lightining arrestors, isolators, control panel, etc. All these are normal components of voltage step-down system where high voltage transmission is stepped down to lower voltage. The Income-tax Rules provide 100 per cent, depreciation for specific "energy saving devices" as mentioned in rule 5, Appendix I, Part III(3)(iii)B. In the case of the appellant, the machinery of Rs. 25 crores mentioned in the valuation report do not at all fall under the above category. Therefore, the appellant was not entitled to depreciation at the rate of 100 per cent, on these machinery. Hence, the allowance of 100 per cent, depreciation was a clear error in so far as it was prejudicial to the interests of the Revenue. (ii) The valuation report further shows that the valuer Er. K. B. Swayin has taken the replacement cost on the basis of the present market value of new machinery and thereafter has estimated the value of the old machinery. The Assessing Officer has simply accepted the valuation without verifying the veracity of the computations, the basis of determination of the present market value of a new machine as well as the estimation of the value of the old mach....
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....for the financial year 1995-96. The AC failed to pinpoint as to how and why the assessee did not have any profitable share on investments as against earning less amount thereby disturbing the main objection of the assessee-company hitherto. We, therefore, uphold the initiation proceedings under section 263 as justified and we do not find any merit in the appeal filed by the assessee for quashing the order under section 263 of the Act. 6. In the result, the appeal of the assessee is dismissed." The appellant has filed the present appeal against the aforesaid order dated February 7, 2003, of the Tribunal and on March 27, 2003, this court admitted the appeal and issued notices to the respondents and passed interim orders in Miscellaneous Case No. 15 of 2003 that in the meantime the attachment under annexure 3 will be lifted. On October 15, 2003, the court passed further orders in Miscellaneous Case No. 15 of 2003 that no action shall be taken by the respondents for realisation of the disputed demand from the appellant. On October 30, 2003, the court, after hearing learned counsel for the appellant, ordered that the appeal will be heard on the following four substantial questions of....
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....on at the rate of 100 per cent, on these machinery and the allowance of 100 per cent, depreciation was a clear error and was prejudicial to the interests of the Revenue. The Tribunal has upheld the aforesaid order passed by the Commissioner. Thus, according to the Tribunal, the plant and machinery which have been purchased by the appellant and leased out to the OSEB is not eligible to 100 per cent, but 25 per cent, depreciation. The third substantial question of law is whether this finding of the Tribunal that the plant and machinery which have been purchased by the appellant and leased out to the OSEB is eligible for 25 per cent, depreciation is correct in law. The first and third substantial questions of law being interrelated can be considered together. Dr. Pal, learned counsel for the appellant, submitted that rule 5, Appendix I, Part III (3)(iii) B, allowed depreciation at 100 per cent, on instrumentation or monitoring systems for monitoring energy flows and sub-item (a) there under mentioned "automatic electric load monitoring systems". He submitted that the certificate of M/s. Swayin Associates dated November 16,2002, in annexure 18 to the appeal memorandum would show tha....
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....s an erroneous order prejudicial to the interests of the Revenue and the order passed by the Commissioner under section 263 is not correct in law. Mr. Mohapatra, learned counsel for the Income-tax Department, on the other hand, submitted that 100 per cent, depreciation is allowable for specific gadgets as mentioned in rule 5, Appendix I, Part III(3)(iii)B, but all the machinery purchased and leased back by the appellant to the OSEB do not fall under the aforesaid category. He relied on a report dated November 7, 2003, of the Chief Electrical Officer, Bhubaneswar, a copy of which was furnished to us at the time of hearing and it was stated therein that only the following plant and machinery were energy saving devices: --------------------------------------------------------- Written down value of Name of the plant and the plant and machi machinery &n....
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.... revise an order if he finds the same to be erroneous and prejudicial to the interests of the Revenue where the errors made in the order cannot be rectified under section 154 of the Act by the Assessing Officer. Such power of the Commissioner under section 263 is much wider than the power of the Assessing Officer under section 154 of the Act. He cited the decision of the Supreme Court in South India Steel Rolling Mills v. CIT [1997] 224 ITR 654, wherein it was held that Explanation (b) in section 263 clearly prescribed that the word "record" includes all records relating to any proceedings under the Act available at the time of examination by the Commissioner under section 263 of the Act. He argued that the Commissioner, therefore, can take into consideration any fact which comes on record, whether before or after the assessment, while exercising power under section 263 of the Act. He also cited the decision of the Supreme Court in CIT v. Shree Manjunathesware Packing Products and Camphor Works [1998] 231 ITR 53, wherein it has been clarified that section 263 of the Act empowers the Commissioner to make such further inquiries as may be considered necessary and the Commissioner can ....
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....art III(3)(iii)B of the rules. In the oft-quoted decision of the Supreme Court in Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd., AIR 1962 SC 1314, the Supreme Court held: "(7) Applying these tests it would be clear that the question involved in this appeal, that is, the construction of the managing agency agreement is not only one of law but also it is neither simple nor free from doubt. In the circumstances we have no hesitation in saying that the High Court was in error in refusing to grant the appellant a certificate that the appeal involves a substantial question of law. It has to be borne in mind that upon the success or failure of the contention of the parties, they stand to succeed or fail with respect to their claim for nearly 26 lakhs of rupees." Thus, in the aforesaid case of Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd., AIR 1962 SC 1314, the Supreme Court found that the question involved in the appeal before them involved the construction of the managing agency agreement which was not only one of law but also neither simple nor free from doubt and that on the answer to the said question of l....
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....p; written down value --------------------------------------------------------- (1) (2) --------------------------------------------------------- Part A. Tangible assets : III. Machinery and plant: (3)(iii) Energy saving devices, being- A. Specialised boilers and furnaces : (a) Ignifluid/fluidized bed boilers (b) Flameless furnaces and continuous 100 pusher type furnaces (c) Fluidized bed type heat treatment furnaces ....
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....Thermally energy efficient, stenters (which require 800 or less kilo calories of heat to evaporate one kilogram of water) F. Burners : (a) 0 to 10 per cent, excess air burners (b) Emulsion burners 100 (c) Burners using air with high pre-heat temperature (above 300° C) G. Other equipments: (a) Wet air oxidation equipment for recovery of chemicals and heat (b) Mechanical vapour recompressors (c) Thin film evaporators (d) Automatic micro-processor based load demand controllers (e) Coal based producer gas plants 100". (f) Fluid drives and fluid couplings (g) Turbo charges/super-charges --------------------------------------------------------- It will be clear from Appendix I, Part III(3)(iii) extracted above that "energy saving devices" being A. Specialised boilers and furnaces, B. I....
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..... F. I. E. (India), M. A. C. I. (U. S. A.), M. I. Superintending Engineer A. B. S. E., M. CON'e, FI V, C. Eng. (I), (Electrical) Retd. HALTD Chartered Engineer (F-11081)." The aforesaid certificate given by an expert shows that the items of machinery in the sub-stations purchase....
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....fully, (Sd.)........ 7/11/2003, Chief Electrical Inspector (T & D)." It will be clear from the aforesaid communication that as per the said expert opinion of the Chief Electrical Inspector (T & D), at least two of the items, namely, 63 MVAR capacitor bank and 100 MVAR capacitor bank at different sub-stations come under "energy saving devices". In the communication dated November 7, 2003, of the Chief Electrical Inspector (T & D) quoted above, he has not stated that the other items of machinery in the different grid sub-sections purchased by the appellant from the OSEB are not devices which can form part of "automatic electrical load monitoring systems". The Commissioner himself has observed in the order dated March 29, 2001, under section 263 of the Act that the transmission sub-stations consist of usual circuit breakers, transformers, isolators, arrestors, control panel, capacitor bank, etc., which are normal components of voltage step-down systems where high voltage transmission is stepped down to lower voltage. What the Commissioner lost sight of is that transmission of electrical energy is made at high voltage with a view to prevent loss of electrical energy during ....
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....a transaction can be considered sham only if the legal rights and obligations of parties to the transaction are different from the actual legal rights and obligations which the parties intend to create. He submitted that in the present case, the transaction has created legal rights and obligations of three parties, namely, the appellant, the OSEB and the IPICOL, which are all State Government undertakings in which the State Government of Orissa owns 100 per cent, shares. In accordance with the transaction, the appellant has taken a loan of Rs. 20 crores by cheque from IPICOL and paid interest to IPICOL at 16.5 per cent, per annum by account payee cheques. The appellant has also paid a sum of Rs. 20 crores to the OSEB by an account payee cheque and retained a sum of Rs. 5 crores towards security deposit. The lease rent of Rs. 57.30 lakhs has also been paid by the OSEB to the appellant by account payee cheques every month. In the books of account of the appellant-company, all these transactions have been reflected and accounted for. The transaction therefore is a genuine one. He further submitted that the Commissioner while observing in the order that the entire arrangement between t....
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....val the judgment of the Gujarat High Court in Banyan and Berry v. CIT [1996] 222 ITR 831, at page 850 of the Income-tax Reports that the principle enunciated in the case of McDowell and Co. ltd. v. CTO [1985] 154 ITR 148 (SC) has not affected the freedom of the citizen to act in a manner according to his requirements and his wishes in the manner of doing any trade, activity or planning his affairs with circumspection within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. Dr. Pal contended that the appellant thus was free to carry on its business activity and plan its affairs within the framework of law in such a manner so as to reduce its tax burden. He referred to the memorandum of association of the appellant-company to show that the purchase of the plant and machinery by the appellant from the OSEB and lease of the same to the OSEB were within the objects of the appellant-company as enumerated in the memorandum of association. He further submitted that sale and lease back agreements are a common feature in present-day business and have been rec....
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....enuineness of the arrangement has to be judged not in relation to every step taken to achieve the results but in relation to the financial results. He cited the decision of the Supreme Court in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 in support of his aforesaid arguments. Finally, he submitted that any finding as to whether a transaction was colourable one or not is essentially one of fact and cited the decisions in CIT v. Shri Prithvi Raj Daga [1986] 159 ITR 193 (Raj); CIT v. Assam Frontier Tea Ltd. [1996] 221 ITR 311 (Gauhati) and Bhagat Construction Co. (P.) Ltd. v. CIT [2001] 250 ITR 291 (Delhi). Question No. 2 in the present appeal is not whether the sale and lease back agreement as found by the Commissioner and the Tribunal is a colourable device or not but is whether the finding of the Commissioner as concurred in by the Tribunal on this factual question is based on any legal evidence or material or is based on conjectures, suspicion and surmises and is otherwise perverse. In our view, such a question is a question of law and since the success and failure of the parties in this appeal will depend upon our answer to the said question of law, this question of law is....
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....ITR 291 (Delhi), Chief Justice Pasayat (as he then was) further held: "A conclusion about the nature of a transaction, i.e., whether it is colourable or otherwise, if supported by material or evidence is essentially one of fact." It will be clear from the aforesaid judgment of the Delhi High Court that only if the conclusion that a particular transaction is colourable is supported by material or evidence, the question is one of fact, but where such a conclusion that a transaction is colourable one is based on no material or evidence, the question is one of law and an appeal will be available under section 260A of the Act to the High Court. Coming now to the decision of the Supreme Court in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 on which great reliance has been placed by Mr. Mohapatra, we find that in the said decision, Chinnappa Reddy J., did observe that the time has come for us to depart from the Westminster principle as emphatically as the British courts have done, but Ranganath Misra J. speaking for the majority, observed that tax planning may be legitimate if it is within the framework of law. He, however, observed that colourable devices cannot be part of ta....
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....s 762 and 763: "The judgment of the Privy Council in Bank of Chettinad's case [1940] 8 ITR 522, wholeheartedly approving the dicta in the passage from the opinion of Lord Russel in Westminster's case [1936] AC 1 (HL); [1935] 19 TC 490, was the law in this country when the Constitution came into force. This was the law in force then, which continued by reason of article 372. Unless abrogated by an Act of Parliament, or by a dear pronouncement of this court, we think that this legal principle would continue to hold good. Having anxiously scanned McDowell's case [1985] 154 ITR 148 (SC), we find no reference therein to having dissented from or overruled the decision of the Privy Council in Bank of Chettinad's case 1940] 8 ITR 522 (PC). If any, the principle appears to have been reiterated with approval by the Constitutional Bench of this court in Mathuram's case [1999] 8 SCC 667 at page 12. We are, therefore, unable to accept the contention of the respondents that there has been a very drastic change in the fiscal jurisprudence, in India, as would entail a departure. In our judgment, from Westminster's case [1936] AC 1 (HL); 19 TC 490 to Bank of Chettinad's case [1940] 8 ITR 522 (PC....
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.... Commissioner cannot discard the said sale and lease back agreement on the ground that the underlying motive of the appellant to enter into the said transaction was to reduce its income-tax liability. The Commissioner could, however, discard the said transaction only if there were materials or evidence before him to show that the intention of the parties were different from what has been incorporated in the said sale and lease back agreement and the transaction was really a sham or dubious transaction and was a colourable device. In Snook v. London and West Riding Investments Ltd. [1967] 1 All ER 518 (CA), Lord Diplock L.J., explained the use of the word "sham" as a legal concept as follows: "... it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create ..."....
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....ve been discussed by the Commissioner in the said order under section 263 of the Act that the intention of the appellant and the OSEB in entering into the sale and lease back agreement was not to transfer the ownership of the machinery from the OSEB to the appellant and was not to lease back the machinery by the appellant to the OSEB. The only conjecture, suspicion or surmise which influenced the Commissioner to think that the whole arrangement was a colourable device and was not a genuine one is that the motive of the said sale and lease back agreement was to reduce the tax liability of both the appellant and the OSEB. The Tribunal in the impugned order has not relied on any other material or evidence but has only confirmed the aforesaid decision of the Commissioner that the sale and lease back agreement was a colourable device and not a genuine one and has refused to interfere with the said decision of the Commissioner. In our view, the decision of the Commissioner and the Tribunal that the sale and lease back agreement between the appellant and the OSEB is a colourable device and not a genuine one is not based on any legal evidence or material but is based on conjectures, suspic....