2011 (8) TMI 1137 - HC - Income Tax

Summary

Issues Involved: The issues involved in this case are (A) Whether the Appellate Tribunal was correct in treating the lease and buy back transaction as a genuine transaction and allowing 100% depreciation on energy meters, (B) Whether the interest paid on capital borrowed for projects should be allowed, and (C) Whether the income should be enhanced by the depreciation allowed on leased assets without giving an opportunity to the Assessing Officer.

Issue (A): The issue pertains to an agreement of purchase and lease back of energy meters by the assessee in favor of Gujarat Electricity Company. The Assessing Officer initially held the arrangement to be non-genuine, but both the CIT(Appeals) and the tribunal concluded that the transaction was not sham. They found that the meters were purchased in the same year, contrary to the Assessing Officer's belief. The tribunal also considered similar transactions in the case of Unimed Technologies Ltd. and confirmed the genuineness of the transaction.

Issue (B): The contention here is regarding the interest paid on capital borrowed for setting up new units for energy generation. The Revenue argued that the interest should not be allowed as revenue expenditure, citing a case involving a different factual background. However, both the CIT(Appeals) and the tribunal found that the new units were set up for the same purpose of energy generation, using different technologies, and thus, the interest paid should be allowed as a deduction under Section 36(1)(iii) of the Act.

Issue (C): The question here is whether the income should be enhanced by the depreciation allowed on leased assets without giving an opportunity to the Assessing Officer. The tribunal, relying on the decision in the case of Unimed Technologies Ltd., confirmed the view of the CIT(Appeals) that the transaction was not sham. The court held that the clause allowing the lessor to vary lease rent based on depreciation allowance does not make the transaction bogus. Consequently, it was held in favor of the assessee and against the Revenue.

In conclusion, the High Court of Gujarat upheld the decisions of the CIT(Appeals) and the tribunal, dismissing the tax appeal as no substantial question of law was found to arise from the issues discussed.