2006 (9) TMI 138 - HC - Income Tax

Disallowance u/s 32 - Eligible for 100% depreciation on the soft drink bottles or Not - lease agreement between the Parties for a period of three years - Jurisdiction of the Tribunal to examine the lease deed - Transaction was a financial arrangement or a lease - HELD THAT - In order to appreciate the claim of the assessee, it was necessary for the Tribunal and for that matter any adjudicating body to go into the different clauses of the lease agreement. If the Assessing Officer or the CIT(A) had not looked into the lease agreement and considered the claim of the assessee only on the face of it, no fault can be found with the Tribunal for analysing the lease agreement by looking into its different clauses and finding the true import of the lease agreement. We, therefore, consider that there is no force in this argument of the appellant/assessee. No question of law arises for our consideration. On Persual of the lease agreement, It is clear from the conduct of the parties that the intention of the parties was not to lease and the lease agreement was executed not to be implemented and actually it was a financial arrangement between the assessee and the lessee and the lessee paid the amount back to the assessee along with market rate of interest spread over quarterly instalments in three years starting from February 28, 1991, irrespective of the fact that no bottles were delivered on February 28, 1991. The same is the fate of the other lease agreement entered into between the assessee and M/s. Aravali Leasing Limited. It is the case of the assessee that M/s. Aravali Leasing Limited executed a sub-lease but the tone and tenor of this sub-lease is that of a first lease. The terms and conditions are also the same as between the assessee and Aravali and both have claimed to be the owner. We have considered all the aspects of the transaction between the assessee and the lessee and carefully scrutinized the documents/lease deeds. We consider that the Tribunal rightly came to the conclusion that the transactions between the assessee and the lessees were not transactions of lease but that of financial arrangements, given the colour of a lease to claim 100 per cent. depreciation. In the annexure to the lease itself the rate of depreciation is shown to be 100 per cent. and this certainly was meant for consumption of the Income-tax Officer as it had nothing to do with the lessee. We find no substantial question of law arises. Whether or not there was a lease between the assessee and other parties is a question of fact. The Tribunal has correctly come to the conclusion that there was no lease between the parties and it was a financial arrangement. Accordingly, the petition is hereby dismissed.

Summary

Issues Involved:
1. Jurisdiction of the Tribunal to examine the lease deed.
2. Entitlement of the assessee to 100% depreciation on leased bottles.
3. Nature of the transactions between the assessee and the lessees.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Tribunal to Examine the Lease Deed:
The appellant argued that the Tribunal exceeded its jurisdiction by examining the lease deed and determining that the transaction was financial rather than a lease. The Tribunal, under Section 254(1) of the Income-tax Act, 1961, has broad powers to pass orders as it thinks fit after giving both parties an opportunity to be heard. The Tribunal is not restricted from considering crucial documents and can arrive at a different conclusion than the Assessing Officer and the Commissioner of Income-tax (Appeals). The Tribunal is also empowered to entertain new grounds necessary for the just decision of the case. The Tribunal's examination of the lease deed was within its jurisdiction to correctly assess the tax liability of the assessee.

2. Entitlement of the Assessee to 100% Depreciation on Leased Bottles:
The appellant claimed entitlement to 100% depreciation on soft drink bottles leased to M/s. Coolade Beverages Pvt. Ltd. and M/s. Aravali Leasing Limited. The Tribunal found that the transactions were financial arrangements rather than genuine leases. The lease agreement with M/s. Coolade Beverages Pvt. Ltd. was executed before the bottles were manufactured, and the lease rent commenced before the bottles were delivered. The bottles were never returned after the lease period, indicating a financial arrangement rather than a lease. Similarly, the lease agreement with M/s. Aravali Leasing Limited was found to be a paper transaction, as M/s. Aravali Leasing Limited had already sub-leased the bottles before becoming the lessee. The Tribunal concluded that the transactions were structured to claim depreciation and were not genuine leases.

3. Nature of the Transactions Between the Assessee and the Lessees:
The Tribunal analyzed the lease agreements and surrounding circumstances to determine the true nature of the transactions. The lease agreement with M/s. Coolade Beverages Pvt. Ltd. had clauses inconsistent with the nature of soft drink bottles, indicating it was a pro forma lease agreement used for other types of equipment. The conduct of the parties, such as not recalling the bottles after the lease period and the lessee bearing all transportation and breakage responsibilities, further supported the conclusion that the transactions were financial arrangements. The Tribunal found that the agreements were designed to give the appearance of leases to claim 100% depreciation, but in reality, they were financial transactions.

Conclusion:
The Tribunal's decision to disallow the depreciation claims was upheld. The transactions between the assessee and the lessees were financial arrangements rather than genuine leases. The Tribunal acted within its jurisdiction in examining the lease deeds and determining the true nature of the transactions. The appeal was dismissed, and no substantial question of law was found to arise from the Tribunal's findings.