ELIGIBILITY OF CLAIM OF DEPRECIATION ON ASSETS PURCHASED/LEASED OUT UNDER A SALE & LEASE BACK TRANSACTION
RATIO DECIDENDI
Once the assessee - leasing company is to be considered as the owner of the assets, it is eligible for depreciation according to the depreciation schedule to the Income-tax Rules since the theory of sale and lease back had not been invented by the assessee, in fact, it has been accepted by the Legislature
IN THE ITAT, BENCH ‘B’ CHENNAI
Premier Housing & Industrial Enterprises Ltd.
v.
ACIT
ITA NO. 1163/Mds./04
March 5, 2008
RELEVANT EXTRACTS :
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5. We have heard both the parties and perused the material on record. We have carefully gone through the entire facts of the case and also material on record. In respect of this transaction, the purchase of the asset is supported by the invoice No.047047 dated 04.03.1996. The valuation of the asset is also supported by the valuation report issued by Shri V.Subramanian, Chartered Engineer who has valued the asset at Rs.20,00,000/- per unit and also certified by Chartered Accountant, Shri M.-Srinivasan. The lease transaction also supported by lease deed dated 23.03.1996. According to this lease agreement, the asset was leased to M/s.Gremach CNC Ltd. There was one clause in the lease agreement which reads as follows.
"The Lessor will request the manufacturer/suppliers to effect delivery on or before the date of commencement of the rentals, but if, for whatever reason, delivery is not effected by the manufacturers/ suppliers by that date, lessor shall not be liable for any loss suffered by lessee thereby"
According to this clause, the assessee/lessor was to request M/s.Gremach CNC Ltd. to give delivery to the lessee. From this clause, the Assessing Officer meant that asset was not in the possession of M/s.Gremach CNC Ltd. and the lessee could not have sold the asset to the assessee and there was no actual sale and lease back transaction and accordingly there was no use of the asset by M/s.Gremach CNC Ltd. Accordingly, the Assessing Officer concluded that the assessee is not entitled for depreciation. In the case of CIT vs. Shana Finance Pvt. Ltd. reported in 231 ITR 308(5.C), it was heid that the assessee is entitled for depreciation in respect of asset which was leased out in the course of its ordinary business. After examining the invoice, lease deed, valuation report certified by the chartered accountant, in our opinion, this was a genuine transaction and the Assessing Officer doubted only because of certain general clauses appeared in the lease agreement. The Assessing Officer has not at all verified with the concerned party viz lessee regarding the existence of the leased equipment. He came to the conclusion only on the basis of this particular general clause appeared in lease agreement. The main contention of the lower authorities for disallowing the depreciation was the asset was not at all used by the lessee. The usage of the asset by the lessee is irrelevant consideration to grant the depreciation.
6. In our opinion, the real intention of the parties is to be ascertained before concluding whether the transaction was loan transaction or lease back transaction. The genuineness of the transaction could be gathered from the intention of the parties. On the basis of surrounding circumstances, in our opinion, the document produced before the lower authorities show that the manufacturer/ lessee intend to sell the impugned asset to the assessee and the lease agreement show, agreement for specified rate of lease rent. The asset was valued by the independent valuer and certified by the Chartered Accountant and after completion of the lease period, the asset is to be re-delivered to the lessor. In this factual position, we are of the opinion that the transaction is real lease transaction.
11. The facts and circumstances of the present assessee's case are similar to those considered by the earlier Bench of the Tribunal (supra). Respectfully following the decision of Apex Court in First Leasing Co. of India Ltd. (supra),, wherein their lordships held that the leasing company is to be considered as the owner of the assets and once the assessee is the owner of the assets, it is eligible for depreciation. Applying the said judgment to the facts of the present assessee's case we do not find any illegality in this claim of the assessee, because once the assessee is to be considered as the owner of the assets, the assessee is eligible for the allowances under the Income-Tax Act, namely depreciation according to the depreciation schedule to the income tax rules.
12. The theory of sale and lease back had not been invented by the assessee. In fact by virtue of the amendment brought in Sec.43 (1), Explanation (4A) by which sale and lease back has been accepted by the legislature.
13. In the case of McDowell & Co Ltd. v. Commercial Tax Officer (154 ITR 148) (SC) the ratio laid down is to the effect that each and every transaction can be regarded as colourable device if the transaction results in more reduction of tax liability. After the ratio laid down in the case of Union of India v. Azadi Bachao Andolan 263 ITR 206 (S.C.) principle of McDowell's case is diluted. After dilution of McDowell's case we can allow the claim of the assessee and as long as it is a genuine transaction and resulted in reduction of tax liability arising there from, it cannot automatically attract the label of the colourable device" as held by the Orissa High Court in Industrial Development Corporation of Orissa Ltd. v. CIT (268 ITR 130) and Bombay High Court decision in the case of Padamjee Pulp & paper Mills Ltd. v. CIT 210 ITR 97 and also the judgment of Hon'ble Madhya Pradesh high Court in the case of CIT vs. Dhayalal Meghji and Co. (149 CTR 126) and the order of this Tribunal in the case of Newdeal Finance & Investment Ltd. v. DCIT (74 ITD 469). The power of the authorities to go behind the apparent to find out the real and if the transaction is non-genuine or a facade or a make believe affair got up to evade the tax liability or if it appears that the series of steps taken to achieve the desired result is sham and collusive and in those circumstances, the authorities can ignore the transaction and apply the ratio laid down by the Hon'ble Supreme Court in McDowell's case (supra).
14. In other words the tax planning can be tolerated whereas tax evasion by dubious means cannot be countenanced. On seeing this it appears that each transaction can be scanned under the above scanner and it is easily segregated. But it is not so easy as it appears each and every transaction are to be viewed with caution so as to identify the intention of tax planning and tax evasion. The transaction which appears to be a tax evasion can on scrutiny of series 'of transactions, the transacting parties, the nature of transaction, the nature of trade, the nature of machinery, etc. will decide the ultimate litmus test. As already stated, that when a transaction, the genuineness of which is not doubted and there is a reduction of tax liability it automatically does not attract the ratio laid down Mcdowell's case. This juncture attracts the benefit of the decision of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andoian 263 ITR 206 and it cannot be viewed as a collurable devise. The Honjble Bombay High Court and M.P. High Court dealt this issue after the ratio laid down by Hon'ble Apex Court in the case of Bachao Andoian cited supra and held that each transaction shall be viewed with reference to the facts of each case.
17. (t is purely a business decision of the assessee to earn income by way of 'ease rentals. The decision to purchase and lease it back to the seller is therefore business decision of the assessee on which the department cannot sit in and decide the way the business could be done. It is the assessee's arm chair exclusively.
18. By these SLB assessee deriveo benefit and it is not automatic to apply rigour of rule of McDowell's. The Assessing Officer should have evaluated the same with reference to whole SLB transaction in one weighing pan and the other one dispensing SLB transaction. The scale which weightec high, the Assessing Officer can easily deduce and find out. This was not done by the Assessing Officer. This exercise was never attempted to by the Assessing Officer. However, be that as it may there was nothing illegitimate about the transaction to treat it as colorable device and hence the second allegation of collusiveness holds no water.
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