TaxTMI 
TaxTMI 
1999 (4) TMI 104
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..... 101. (c) The learned CIT(A) has erred in not considering strong commercial justifications for the entire arrangement and therefore lease of said assets could not be held as sham transactions. (d) The learned CIT(A) has erred by not considering the circumstances that approvals were obtained from the Government of Rajasthan, public advertisements were issued by RSEB, mandates had been given to merchant bankers, funds were paid out and risk of default has been taken by the Appellant-company which establish the transactions were not sham transactions. (e) The learned CIT(A) has failed to appreciate the international and domestic trade practices in sale and lease back transactions and that such practice has been given statutory recognition under the Income-tax Act, 1961. He has erred in not accepting that the Income-tax Act, 1961 also recognises the commercial existence of transactions of sale and lease back in Explanation 4A to section 43(1). (f) The learned CIT(A) has also erred by not holding that rate of depreciation applicable to the said assets under item III(v)(c) of Appendix 1 of the Income-tax Rules, 1962 was 100% and not 25% as taken by the Assessing Officer. ....
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....between RSEB, ITC Bhadrachalam and the assessee on the basis of which the assessee has claimed depreciation are as under: 13-1-1995 RSEB invites public offer for Sale and Lease Back of its machinery installed at Kota plant under Sale and Lease Back Finance Scheme. 19-1-1995 M/s. Kotak Mahindra Finance Ltd. gives its offer on behalf of a consortium of financiers including ITC Bhadrachalam. 2-2-1995 The said offer by M/s. Kotak Mahindra Finance Ltd. is accepted by RSEB. 15-2-1995 M/s. Chaudhary & Associates, Registered Valuer places value of the plant and machinery comprising of Water Pollution Control Equipment installed at Kota Plant of RSEB after inspection on 11-2-1995 at Rs. 292 lacs. 18-3-1995 Rajasthan Government exempts the transactions of sale of Water Pollution Control Equipment by RSEB to ITC Bhadrachalam from sales-tax. 25-3-1995 Invoice raised by RSEB upon ITC Bhadrachalam for Rs. 206 lacs. 27-3-1995 ITC Bhadrachalam gives the assets (Water Pollution Control Equipment) on Hire Purchase to the assessee, Unimed Technologies. 25/27-3-1995 The assessee Unimed Technologies gives these very assets (Water Pollution ....
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....ssets were relating to the year 1988-89. (iii) The assets have been sold at the value of Rs. 2.06 crores and then taken back on lease as per terms and conditions of lease agreement. (iv) The equipment was installed at Kota Thermal Power Station, Kota and still it is located at the same place. (v) Being sale & lease back transaction there was no physical movement of the assets.' 6. On the basis of the above facts, the Assessing Officer concluded that the sole and primary motive behind these transactions entered into by the assessee is to avail benefit of depreciation at the rate of 100% of cost of assets and in order to avail such benefits, the assessee created the make believe transactions with RSEB on one hand and with that of ITC Bhadrachalam on the other hand. According to the Assessing Officer, RSEB was in need of funds from the market; ITC Bhadrachalam was looking for new financing avenues and the assessee Unimed Technologies required 100% depreciation to reduce its tax burden to NIL. According to the Assessing Officer, one Shri Dilip S. Sanghvi, Financial Consultant acted as an intermediary among the three companies and decided on the modalities of mutually ben....
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..... 2,06,00,000. (iii) RSEB sold the assets only on paper to ITC Bhadrachalam vide a sale deed dated 27-3-1995 and received the consideration amounting to Rs. 1,60,32,730 vide Demand Draft No. 17584 dated 30-3-1995. (iv) ITC Bhadrachalam Finance & Investments Ltd. entered into a hire purchase agreement with the assessee and the assessee entered into a lease agreement with RSEB though it was not the owner of such assets. (v) The whole transactions were collusive with the sole intention to defraud the Revenue by climbing 100% depreciation. (vi) The purchase bills were not produced by the assessee although specifically asked. (vii) Copies of transportation documents in support of movement of assets from the supplier upto the place where the assets were installed are not available with the assessee. (viii) Insurance particulars of leased assets were not available with the assessee. (ix) No lease taxes were paid in respect of the lease transactions. (x) The assessee did not prove the ownership of the assets over which the depreciation is claimed. (xi) It never made any physical inspection of leased assets. (xii) No installation certificates were furnished. ....
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....v) What is the actual cost to the assessee for the purpose of claiming depreciation ? After formulating the issues, the learned counsel for the assessee made his submissions in respect of issue No. (i) first and submitted that a reference to the chronology of events (which have been reproduced in para 4 above) clearly indicates that the equipment has been sold by RSEB to ITC Bhadrachalam. Equally ITC Bhadrachalam has given it on hire purchase to the assessee, Unimed Technologies. The assessee has given the equipment on lease to RSEB. Thus it was submitted that it is a case of sale and lease back. It was pleaded that according to the Departmental Authorities this transaction is not a bona fide one OR is a sham transaction because of the reasons given by the Assessing Officer in para 6 of the assessment order, which has been summarised by us in para 6. It was pleaded that some of the reasons given are factually incorrect and some are legally impermissible. In respect of its reasons given, the learned counsel for the assessee made the following submissions : (1) As regards the delivery of the assets being not actually taken by the assessee, it was submitted that symbolic/constru....
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....tled to depreciation in accordance with the CBDT Circular No. 9 dated 23-3-1943 as noted by the Supreme Court in CIT v. Shaan Finance (P.) Ltd [1998] 231 ITR 308/97 Taxman 435 at page 306/117. (11) As regards the assessee having not physically inspected the assets, the same was submitted to be irrelevant consideration and in any case it was pleaded that the existence of assets has not been doubted by the Department. (12) As regards no installation certificate, it was submitted that it is a case of sale and lease back and the user certificate was given by RSEB copy of which is given to us at page 56 of the paper book and in any case it was pleaded that it is not the case of the Department that the assets were not installed and operating. (13) As regards item No. 14 relating to movement of goods and the documents being not registered, it was submitted that the physical movement was neither possible nor necessary in case of sale and lease back and in such a case documents are not required to be registered under any law. Accordingly, it was submitted that all the reasons given by the Assessing Officer for denying the claim are not cogent reasons and the assessee is entitled....
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....pleaded that what the Income-tax Department finds to be sham, the Govt. of Rajasthan deems necessary in public interest. The assets are acquired by the assessee from ITC Bhadrachalam, which is unrelated to the assessee. The whole transaction is finalised after public offer and after it was found that the offer was the best in response to advertisement published by a Govt. Corporation in the newspaper and entitling public at large to scrutinise and know of the transactions and Govt. of Rajasthan grants exemption to the transaction in public interest. It was submitted that where the documents are clear in their intention which is undisputed fact in the present case, they have to be given full effect as per the ratio of the decision of the Supreme Court in the case of CWT v. Arvind Narottam [1988] 173 ITR 479/39 Taxman 368. Accordingly it was pleaded that the action of the Departmental Authorities to treat the entire transaction as sham was not sustainable in law. 10. Coming to issue No. 2 it was submitted that the assessee acquired the assets under a hire purchase agreement in which clauses 3 and 4 are material. Copy of the hire purchase agreement has been given to us at pages 32 ....
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....ets to RSEB, as far as the assessee is concerned, it put the assets to use and whether the asset is used by the lessee or not is irrelevant. Reliance was placed on the following decisions : (1) Mulraj Dwarkadas Goculdas v. Dy. CIT[1994] 48 TTJ 531 (2) K & Co. v. Dy. CIT[1996] 56 ITD 448 (Delhi) (3) ITA No. 853/Ahd./ 1992 decided by the ITAT. 12. As regards issue No. 4, it was submitted that the assessee is entitled to depreciation on the capital cost of assets viz. the cash value in the hire purchase agreement as per para 3 of Circular No. 9 of 1943 referred to above. It was submitted that the assessee has placed on record of the Assessing Officer, he valuation report of a registered valuer copies of which have been to us at pages 45 to 52 of the paper book. The Assessing Officer has not disputed the said valuation report and the following facts are undisputed : (a) The Assessing Officer did not appoint his own valuer ; (b) The Assessing Officer did not dispute the valuation report ; and (c) The Assessing Officer did not think it necessary to examine the said valuer. That being so, in absence of any other valuation report prepared by any agency and there bei....
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....party whom he deceived." It was submitted that the legal rights and obligations created as a result of various agreements signed by the different parties viz. sale agreement between RSEB and ITC Bhadrachalam and hire purchase agreement between ITC Bhadrachalam and the assessee M/s. Unimed Technologies and the lease agreement between the assessee M/s. Unimed Technologies and RSEB were quite different from the actual intention of those parties. To prove this, the learned Senior DR has filed a representative copy of the Resolution approved by the Board of Directors of the RSEB on 2-8-1995 approving the agenda noted for availing of lease finance under "Sale and Lease Back" of existing assets. It was submitted that that such decision must also have been taken for the impugned sale. It was submitted that a perusal of the resolution clearly indicates that the depreciation available on the assets were linked with the amount of security deposit and the rate of finance charges to be paid against the agreement of "sale and lease back". It was further submitted that had it been a normal sale transaction, then the purchaser and the seller would have drawn up a detailed inventory of the equip....
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....ion certificate dated 27-3-1995 given by RSEB to Unimed Technologies indicates that the date of lease agreement was originally mentioned as 25-3-1995 which has been cut and changed to 27-3-1995. It was submitted that such a certificate is not valid as it is undated. For all the aforesaid reasons it was submitted that all the steps taken by the three parties in the series of transactions were preplanned and preordained steps and the Tribunal should not accord approval to such transactions in view of the ratio of the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTD [1985] 154 ITR 148/22 Taxman 11. Reliance was also placed on the decision of the Supreme Court in the case of CIT v. Sakarlal Balabhai [1972] 86 ITR 2. Accordingly it was pleaded that the claim of depreciation made by the assessee was rightly rejected by the Assessing Officer and upheld by the CIT(A). 14. Without prejudice to the above stand and in the alternative, the learned Senior DR submitted that the depreciation to the assessee cannot be allowed because--- (i) Hire purchase agreement clearly indicates that till the last instalment is paid the hiree is the owner of the assets. The hirer ha....
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....d be the owner of the assets and that the hirer is not the owner of the equipment but only the bailee. And as such the assessee is not entitled to depreciation. Reliance was placed on the decision of the Madhya Pradesh High Court in the case of Sardar Tara Singh v. CIT [1963] 47 ITR 756 which dealt with the Board Circular No. 9 of 1943 and submitted that the Circular issued by the department for the guidance of the officials can not control or affect the meaning or construction of the provisions of the Act. Accordingly it was submitted that till the ownership rights, title and interest are passed to the hirer in express terms, he does not become the owner of the assets and so is not entitled to depreciation. Reliance was also placed on the decision of the Supreme Court in the case of Kerala Financial Corpn. v. CIT [1994] 210 ITR 129/75 Taxman 573 and the decision of the Himachal Pradesh High Court in the case of Himachal Pradesh State Forest Corpn. v. Dy. CIT [1998] 231 ITR 556 for the proposition that the Circulars are not binding on the authorities below if they are against the statutory provisions. Reliance was also placed on the decision of the Special Bench of the Tribunal in ....
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....ond hand equipment prevailing in the market as in the period of sale. There would also be details of the items which constitute the assets and the conditions in which they are but the valuation report given by Dr. M. Chowdhury contains nothing specific and therefore the value fixed for sale consideration is arbitrary and was rightly rejected by the Assessing Officer who has taken the value of these assets at Rs. 101. It was submitted that if the valuation adopted by the Assessing Officer appears to be very low, then the Tribunal may take any fair and reasonable valuation based on facts and record. 15. We have considered the rival submissions and have also gone through the orders passed by the Assessing Officer as well as the CIT(A). The first issue on which there is dispute between the assessee and the Department is as to whether in the facts and circumstances of the case it can be held that the transactions entered into by the assessee with ITC Bhadrachalam and RSEB are sham transactions? The Hon'ble Supreme Court in the case of Shree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 have occasion to consider the nature of benami transactions which also include sham transactions and....
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....not be called sham transactions as consideration were paid by the assessee to ITC Bhadrachalam and from ITC Bhadrachalam to RSEB. Reliance of the learned Senior DR on the case of McDowell & Co. is misplaced because even in that decision the Supreme Court has held at page 148 that tax planning may be legitimate provided it is within the framework of the law. Every assessee has legal rights to so arrange his affairs as to reduce the brunt of taxation to a minimum amount. Avoidance of tax is not tax evasion and it carries no ignominy with it, for it is sound law and, certainly, not bad morality, for anybody to so arrange his affairs to pay minimum possible tax. The above legal position has not altered even after the decision-of the Supreme Court in the case of McDowell & Co. Ltd. The argument of the learned Senior DR that the decision of the McDowell & Co. Ltd's case have changed and altered the legitimacy of the tax avoidance is not completely correct. To illustrate the point, let us take the case of a man who is carrying on business which is very profitable. He takes his three major sons into partnership and he tells the Income-tax Department "if you had no income-tax I would ....
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....hat the transactions were sham transactions. 16. Now we take up the second issue, i.e., whether the assessee is entitled to depreciation on assets when the same have been acquired under hire purchase agreement. In this connection, it is imperative to hold that the assessee is entitled to depreciation in view of Circular No. 9 of 1943 dated 23-3-1943 issued by the Central Board of Revenue which has been reconfirmed by Central Board of Revenue in its letter F. No. 17(20) IT/59, dated 26-6-1959 (in the context of development rate) at page 1714 of Chaturvedi & Pithisaria's Law on Income-tax. The same view has been reiterated in Instruction No. 1097 dated 19-9-1997 where on a pointed query raised before the C.B.D.T. it is clarified that the instructions contained in Circular No. 9 of 1943 and letter dated 26-6-1959 have not been withdrawn and are still in force and as such are to be followed. The Supreme Court in the case of Navnit Lal C Javeri v. K.K. Sen, AAC[1965] 56 ITR 198 has held that benevolent circulars issued by the CBDT must be followed by Income-tax authorities. The Supreme Court in the case of Shaan Finance (P.) Ltd has taken note of the Board's Circular No. 9 of 1943 at....
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....ding on the Income-tax authorities, we will hold that the assessee being a hire purchaser is entitled to depreciation. 18. As regards the third issue as to whether the equipments were put to use, it is pertinent to point out that the Assessing Officer has not disputed the use of the assets at all although the learned Senior DR has raised this issue. Nonetheless it is pertinent to note that in the case of sale and lease back transactions when the assets continue to be owned and possessed by the seller-lessee, they are bound to be used by him even after taking them on lease. In fact, it is because the seller-lessee required the assets in business that the sale and lease back transactions are entered into. So we will hold that the assets were in fact used by RSEB. 19. Coming to the fourth issue as to what is the actual cost to the assessee for the purpose of claiming depreciation, it is pertinent to note that the Explanation 3 to section 43(1) can be applied if the Assessing Officer is of the view that the fair market value of the assets has been inflated to claim excess depreciation. Only then, he can replace the fair market value with the estimated cost. In the case before us ....