2008 (3) TMI 512 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Depreciation on Energy Saving Devices.
2. Nature of Sale and Lease Back Transaction.
3. Genuineness of the Transaction.
4. Applicability of McDowell's Case and Tax Planning.

Summary:

1. Disallowance of Depreciation on Energy Saving Devices:
The assessee claimed depreciation at 50% on energy-saving devices leased to M/s. Gremach CNC Ltd. The Assessing Officer (AO) doubted the transaction, treating it as a financial transaction rather than a genuine lease, and disallowed the depreciation. The CIT(A) confirmed the AO's order. The Tribunal, however, found that the purchase of the asset was supported by an invoice, a valuation report, and a lease deed, and concluded that the transaction was genuine. The Tribunal held that the usage of the asset by the lessee is irrelevant for allowing the claim of depreciation.

2. Nature of Sale and Lease Back Transaction:
The AO questioned the sale and lease back transaction, suspecting it to be a financial arrangement rather than a genuine lease. The Tribunal, referencing the case of CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308 (SC), held that the assessee is entitled to depreciation for assets leased out in the course of its ordinary business. The Tribunal emphasized that the real intention of the parties should be ascertained, and in this case, the transaction was found to be a genuine lease.

3. Genuineness of the Transaction:
The Tribunal examined the documents, including the invoice, lease deed, and valuation report, and concluded that the transaction was genuine. The Tribunal noted that the AO had not verified the existence of the leased equipment with the concerned party and had based his conclusion on a general clause in the lease agreement. The Tribunal found that the transaction was not a sham and that the assessee was entitled to depreciation.

4. Applicability of McDowell's Case and Tax Planning:
The Tribunal discussed the applicability of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) and the subsequent dilution of its principles by the Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706. The Tribunal concluded that a transaction that is otherwise valid in law cannot be treated as non est merely because it results in a reduction of tax liability. The Tribunal held that the sale and lease back transaction was genuine and not a colorable device for tax evasion.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the order of the CIT(A) and granting the claim of depreciation on the energy-saving devices. The Tribunal emphasized the genuineness of the transaction and the irrelevance of the lessee's usage of the asset for allowing depreciation.