TaxTMI 
TaxTMI 
2005 (9) TMI 234
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....was stated to have acquired from M/s. Larsen and Toubro Ltd. (L&T) vide invoice No. G/139394 dated 25-3-1991 and leased out to Reliance Petrochemicals Ltd. (RPL) under lease agreement dated 26-3-1991. Further investigation by the Assessing Authority (A.O.) revealed that prior to purchase of the said plant and machinery, a Memorandum of Understanding by way of tripartite agreement was entered into on 15-3-1991 between the assessee, RPL and L&T, which showed that RPL had already entered into an agreement with L&T for acquisition of Captive Co-generation Plant (CCP) which was to be installed at the premises of RPL at Hazira. The consideration for the same was Rs. 6,25,02,000. Since RPL was not in a position to provide finance of its own for acquiring the CCP, it entered into the tripartite agreement with L&T and the assessee under which, the entire benefit and rights in the contract between RPL and L&T was to be transferred in favour of assessee and in turn it would, under separate agreement, lease the said plant and machinery to RPL for a period of 30 years (extendable for further period of 22 years) against payment of lease rentals to be specified. It also revealed that RPL had alre....
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....en erected and constructed in the business premises of RPL who were in full possession of the same even prior to purchase by the assessee company. (viii) That there was no real intention of assessee to acquire plant and machinery and the entire exercise was merely a device with the sole objective of avoidance of tax liability. The Assessing Officer was of the view that in case depreciation is held to be allowable, then depreciation would be allowed @ 25 per cent since plant and machinery leased is part of the generating plant and is not the full system on which 100 per cent depreciation could be claimed. 5. In respect of assessment year 1992-93, the assessee had claimed depreciation of Rs. 1,56,25,500 being 25 per cent of the cost of plant and machinery inasmuch as in the preceding assessment year, the claim of depreciation had been restricted to 75 per cent. The Assessing Officer disallowed the claim of the assessee following his order for assessment year 1991-92. 6. On appeal, the Learned CIT(Appeals) posed two questions -(i) whether assessee is the owner of the plant and machinery and (ii) whether such plant and machinery is separately owned and identifiable. On exami....
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....see had reiterated the reasonings given by the Learned CIT (Appeals). Apart from that, he relied on the judgment of the Apex Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706, wherein, it has been held that legitimate tax planning is permissible if it is within the parameter of law and the decision of Supreme Court in the case of McDowell would not apply to such a situation. In support of the submission, he also relied on the judgment of Orissa High Court in the case of Industrial Development Corporation of Orissa Ltd. v. CIT [2004] 268 ITR 130 and the judgment of Guwahati High Court in the case of CIT v. George Williamson (Assam) Ltd. [2004] 265 ITR 626, where the claim of depreciation was held to be allowable in the case of sale and lease back of the assets. Accordingly, it was contended that the decision of the Tribunal, Special Bench, in the case of Mid East Portfolio Management Ltd. is no more a good law. Proceeding further, it was submitted that no adverse inference could be drawn merely because the plant and machinery were fixed to the earth. He also relied on various decisions of the Tribunal reported as Sharyans Resources Ltd. v. Joint CIT [200....
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....stances [National Cement Mines Industries Ltd. v. CIT [1961] 42 ITR 69 (SC)]. It is also true that legal character of the transaction cannot be ignored unless it is shown that parties have concealed the legal relation by adopting a device [CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC) and Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC)]. It is also the settled legal position that what is apparent is real unless proved otherwise and the onus to prove otherwise is on the person who alleges so [CIT v. Daulatram Rawatmull [1973] 87 ITR 349 (SC)]. In the background of this legal position, let us examine the real issue before us. 12. In the present case, the stand of the Assessing Officer has been that the entire arrangement was merely a financing arrangement and a device was adopted to give a colour of lease in order to claim 100 per cent depreciation with a view to avoid the legitimate tax due to the Revenue. On the other hand, the stand of the assessee is that the plant and machinery was acquired by the assessee itself and then it was given on lease to RPL. Thus, the assessee being the owner of the plant and machinery which was identifiable was legally entitled to depreciation under ....
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....otive behind the transaction was financing of the plant. (iv) The lease rent was fixed on the basis of interest rate of 17 per cent per annum. The above facts, in our humble opinion, clearly indicate that the real intention behind the tripartite agreement was to provide finance to RPL to meet the cost of plant purchased by L&T from RPL. 14. The next question is whether any colourable device was adopted to avoid the payment of tax. In a pure financial arrangement, there was no need for assessee to purchase the plant and then lease the same to RPL. The object of finance could be achieved by giving loans to RPL and the plant could be kept under pledge/hypothecation by way of security. Such a course was neither beneficial to assessee nor to RPL from the tax point of view. The reason is obvious. The RPL was in the process of setting up the plant and, therefore, depreciation could not be allowed to RPL prior to commencement of business. Even after the business had commenced, it would not be beneficial to RPL as in the initial stage, since the RPL would not be in a position for same years to earn sufficient profits to absorb the depreciation. On the other hand, if assessee is shown as....
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....and machinery is condition precedent for allowing the claim of depreciation. The actual user is RPL and not the assessee. The judgment of the Apex Court in the case of CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308, can be applied only where the assessee is engaged in the business of leasing of plant and machinery. Thus, if any lease is effected in the course of financing or money-lending business, the requirement of section 32 cannot be said to be fulfilled. This view is also fortified by the observations of the Special Bench mentioned above Mid East Portfolio Management Ltd.'s case. Therefore, even on this account, the claim of assessee cannot be accepted. 16. Before parting with this issue, we would like to say few words about the case law referred to. The Learned Counsel for the assessee has referred to the judgment of Hon'ble Supreme Court in the case of Azadi Bachao Andolan, in support of his contention that judgment of Supreme Court in the case of McDowell is no more applicable and tax planning, if any, is permissible in law. According to him, the judgment of Supreme Court in the case of CIT v. A. Raman & Co. [1968] 67 ITR 11, is still applicable wherein it was h....
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....appeals on the assumption that the partnership firm in question is a genuine firm and not the result of a sham or unreal transaction and that the transfer by the partner of his personal asset to partnership firm represents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business. If the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income-tax on a capital gain, it will be open to the income-tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax....
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....d not offer any income of interest where the specified date would fall beyond the accounting period. However, the Assessing Officer was of the view that interest on securities accrued to assessee on day to day basis and, therefore, the assessee was liable to tax on such interest as assessee had been following mercantile method of accounting. Assessing Officer determined the amounts of interest on such securities as mentioned in earlier para and included the same in the assessment for these years. 22. On appeal, the Learned CIT (Appeals) did not agree with the views expressed by the Assessing Officer. The Learned CIT (Appeals) held that interest on securities did not accrue on day to day basis but accrued on fixed or prescribed dates. He also relied on the High Court judgment in the case of CIT v. Canara Bank [1992] 195 ITR 66 (Kar.), wherein it was held that unless a debt was created in one's favour and a right is acquired to receive the payment, it cannot be said that any income had accrued. Accordingly, it was held by him that assessee did not acquire any right to receive the interest till the due date or date of maturity and, therefore, no interest accrued to assessee befor....
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....tion 37(1) can be disallowed under section 37(3) or 37(4) of the Act. The decision of Special Bench cannot be applied to the assessee within the jurisdiction of Bombay High Court as the judgment of Bombay High Court is binding on the authorities as well as the Tribunal functioning within its jurisdiction. The reference may also be made to the decision of the Tribunal in the case of Hindustan Lever Ltd. v. LAC [1996] 58 ITD 555 (Bom.) where it has been held that expenditure relating to guest house falling within the ambit of the provisions of sections 30 to 36 (including depreciation) cannot be disallowed. The Bench also discussed the subsequent judgments of Bombay High Court in the cases of Ocean Carriers (P.) Ltd. and Raja Bahadur Motilal Poona Mills Ltd. and held that these decisions were distinguishable on facts. We may also mention that Special Bench has not adversely commented on the judgments of Bombay High Court in the case of Chase Bright Steel Ltd. and in the case of Century Spg. & Mfg. Co. Ltd. v. CIT [1991] 189 ITR 660 (Bom.). The following observations of the Special Bench in Para 26 [Eicher Tractors Ltd.'s case] of the order are noteworthy. "Before we part with t....