2003 (9) TMI 36 - HC - Income Tax

Colorable transaction - avoidance of payment of tax Transaction between the appellant and the APSEB - Claim of Depreciation - ownership - While the APSEB was interested in securing financial assistance by way of loan and for the said purpose the machinery/equipment was offered as a security by creating the documents in question to assure repayment of the loan advanced, the appellant found it convenient to enter into such a transaction as a device adopted to avoid payment of tax Thus held that it was a sham transaction

Issues Involved:

1. Nature of the transaction between the assessee and APSEB.
2. Ownership and identification of the assets.
3. Eligibility for 100% depreciation on the leased assets.
4. Treatment of the transaction as a financial transaction and taxation of notional interest.
5. Allegation of the transaction being a sham or colourable.

Issue-wise Detailed Analysis:

1. Nature of the Transaction:
The primary issue was whether the transaction between the assessee and APSEB was genuine or a colourable device to avoid tax. The Tribunal and lower authorities concluded that the transaction was not genuine but a colourable one intended to evade tax. The court upheld this finding, emphasizing that while tax planning is permissible, creating documents to present a make-believe transaction for tax evasion is not allowed.

2. Ownership and Identification of the Assets:
The Tribunal held that the assessee failed to establish ownership and proper identification of the assets. The assessee did not provide sufficient evidence, such as detailed invoices or a valuation report, to substantiate the purchase and leaseback of the machinery. The court noted that the machinery was embedded to the earth, making it difficult to identify and separate from the property, further supporting the conclusion that the transaction was not genuine.

3. Eligibility for 100% Depreciation:
The assessee claimed 100% depreciation on the leased machinery, asserting it was pollution control equipment. However, the Tribunal and lower authorities found that the machinery's ownership and existence were not adequately proven. The court concurred, noting that the burden of proof lies with the assessee to demonstrate entitlement to depreciation, which was not met in this case.

4. Treatment as a Financial Transaction and Taxation of Notional Interest:
The Tribunal treated the transaction as a financial transaction rather than a genuine lease, leading to the taxation of notional interest. The court upheld this view, noting that the transaction appeared to be a loan rather than a sale and leaseback arrangement. The authorities' decision to tax deemed interest at 18% per annum on the advanced amount was deemed appropriate.

5. Allegation of Sham or Colourable Transaction:
The court agreed with the Tribunal that the transaction was a sham. The lack of registration of documents, inability to identify the machinery, and absence of physical transfer of assets supported this conclusion. The court emphasized that the taxing authorities have the right to scrutinize the genuineness of transactions to prevent tax evasion, and in this case, their findings were justified.

Conclusion:
The court concluded that the findings of the Tribunal and lower authorities were based on substantial evidence and did not involve any errors of law. The appeal was dismissed, and all questions of law were answered against the assessee and in favor of the Revenue. The court emphasized the importance of genuine transactions in tax planning and upheld the authorities' right to investigate and determine the true nature of transactions.

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