2011 (4) TMI 108 - HC - Income Tax

Disallowance - Lease rentals on the computers and accessories - sale and lease back - AO disallowed claim of lease rental - Held that it is to be seen that when the assessee company has the capacity to purchase the assets of its own, why it has chosen to sell the same to another company without any profit i.e., for the purchase money and chose to enter lease agreement - his aspect of the case can also be viewed from another angle. - As per Section 54 of the Transfer of Property Act, Sale is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised - Admittedly, in the present case, the ingredients spelled out in the aforesaid Section are not found - Accordingly there is no evidence for sale that there is transfer of property in goods - Hence decided against the assessee and in favor of revenue by reversing order of CIT(A) and ITAT.

Issues:
1. Disallowance of lease rentals on computers and accessories.
2. Constructive sale / paper transaction without physical movement of goods.
3. Validity of lease agreement and claimed deductions.

Analysis:

Issue 1: Disallowance of lease rentals on computers and accessories
The case involves an appeal by the Revenue against the order of the Income Tax Appellate Tribunal regarding the disallowance of lease rentals on computers and accessories for the assessment year 1998-99. The Assessing Officer disallowed the lease rental paid by the assessee, considering it a tax reduction device. However, the Commissioner of Income-tax (Appeals) held that the transaction was a business decision by the appellant and allowed the appeal, deleting the disallowance. The Appellate Tribunal upheld the Commissioner's decision, emphasizing that the lessor confirmed the lease and claimed depreciation on the assets. The Revenue challenged this decision, arguing that the lease agreement was a method to claim deductions while being eligible for depreciation. The Tribunal set aside the Commissioner's order, confirming the Assessing Officer's decision to disallow the lease rentals.

Issue 2: Constructive sale / paper transaction without physical movement of goods
The Revenue contended that the lease agreement was a colorable device to evade tax, as there was no physical movement of goods despite showing them as sold. The assessee purchased computers and accessories, then immediately sold them to another company for the same amount and entered into a lease agreement with a third company, claiming lease rentals exceeding 75% of the purchase amount. These transactions were deemed as attempts to avoid tax liabilities through a lease agreement without genuine transfer of ownership. The Tribunal found the transactions suspicious due to the lack of profit in the sale and the subsequent lease agreement, indicating a deliberate tax avoidance scheme.

Issue 3: Validity of lease agreement and claimed deductions
The Tribunal highlighted that the sale was not complete as per the Transfer of Property Act, as the computers remained in the possession of the assessee, who was the seller. The absence of actual transfer of ownership raised doubts about the genuineness of the transactions. The Tribunal set aside the Commissioner's decision and confirmed the Assessing Officer's stance, emphasizing that the lease agreement was a tax avoidance strategy. The judgment favored the Revenue, rejecting the appellant's claim for deductions based on the lease agreement. The decision underscored the importance of genuine transactions and ownership transfer to claim tax benefits lawfully, dismissing attempts to manipulate lease agreements for tax advantages.

This comprehensive analysis of the judgment highlights the key issues, arguments presented, and the final decision reached by the Tribunal, emphasizing the significance of genuine transactions and adherence to legal provisions in tax matters.

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