2004 (3) TMI 43 - HC - Income Tax

Depreciation - the conclusions of the Commissioner in the order u/s 263 and of the Tribunal in the impugned order are set aside, the order of reassessment passed by the Assistant CIT pursuant to the order of the Commissioner and the notice of demand raised and the attachment made pursuant to the said order of reassessment are also set aside and the matter is remanded to the Tribunal to determine the W.D.V. of the machinery and plant purchased by the appellant from the OSEB, for the purpose of determination of the exact quantum of depreciation that will be admissible on the plant and machinery u/r 5, Appendix I, Part III(3)(iii)B(a) of the Rules

Issues Involved:
1. Whether the assessment order passed by the Assessing Officer with regard to depreciation of 100 per cent on the plant and machinery in question was erroneous so as to justify interference by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961.
2. Whether the decision of the Commissioner of Income-tax that the sale and lease back agreement is a colourable device is based upon any legal evidence or material or is based upon conjectures, suspicion, and surmises and is otherwise perverse.
3. Whether the finding of the Tribunal that the plant and machinery which have been purchased by the assessee and leased out to the vendor is eligible for 25 per cent depreciation is correct in law considering the fact that these plant and machinery are used for reducing the high voltage to lower voltage and is energy monitoring system which is entitled to 100 per cent depreciation under the law.
4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in affirming the decision of the Commissioner of Income-tax without considering the various submissions which were placed before the Tribunal by the assessee and without considering the various facts regarding the sale and lease back agreement and without giving any reason for coming to such a decision.

Detailed Analysis:

Issue 1: Erroneous Assessment Order and Justification for Interference
The Commissioner of Income-tax held that the machinery valued at Rs. 25 crores did not qualify as "energy saving devices" under rule 5, Appendix I, Part III(3)(iii)B of the Income-tax Rules, 1962, and thus, the appellant was not entitled to 100 per cent depreciation. The Tribunal upheld this view. The appellant argued that the machinery included items required for monitoring energy flow and thus qualified for 100 per cent depreciation. The court examined the expert opinion provided by Swayin and Associates, which supported the appellant's claim that the machinery was for monitoring energy flow and thus qualified for 100 per cent depreciation. The court concluded that the machinery did qualify for 100 per cent depreciation under the relevant rules, and the Commissioner's finding of error in the assessment order was incorrect.

Issue 2: Colourable Device and Legal Evidence
The Commissioner and the Tribunal concluded that the sale and lease back arrangement was a colourable device intended to reduce tax liability. The appellant contended that the transaction was genuine, involving real financial transactions and legal obligations among State Government undertakings. The court referred to the Supreme Court's decision in Union of India v. Azadi Bachao Andolan, which upheld the principle that a transaction valid in law cannot be disregarded merely due to an underlying motive to reduce tax liability. The court found that the Commissioner's conclusion was based on conjectures and not on any legal evidence or material, thus answering that the decision was incorrect in law.

Issue 3: Depreciation Eligibility
The court found that the machinery in question, as per expert opinion, formed part of an automatic electrical load monitoring system and thus fell under the category of "energy saving devices" eligible for 100 per cent depreciation under rule 5, Appendix I, Part III(3)(iii)B of the Income-tax Rules. The Tribunal's finding that the machinery was eligible for only 25 per cent depreciation was deemed incorrect.

Issue 4: Tribunal's Affirmation Without Consideration
The court noted that the Tribunal had affirmed the Commissioner's decision without considering the various submissions and facts presented by the appellant. The Tribunal failed to address the expert opinion and other relevant evidence, leading the court to conclude that the Tribunal's decision was not justified.

Conclusion and Remand:
The court set aside the conclusions of the Commissioner and the Tribunal on the substantial questions of law. The reassessment order and subsequent actions based on it were also set aside. The matter was remanded to the Tribunal to determine the written down value of the machinery and plant for the purpose of determining the exact quantum of depreciation admissible under the relevant rules.

Result:
The appeal was allowed to the extent indicated, and the case was remanded to the Tribunal for further determination. The parties were ordered to bear their own costs.

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