2011 (7) TMI 32 - HC - Income Tax

Depreciation - Sale and lease back of equipment - Whether the Tribunal was justified in law in allowing depreciation on the assets for which the Assessing Officer had treated the transaction as that of finance and not of leasing - In the case of Industrial Development Corporation of Orissa Limited v. Commissioner of Income-tax and Others (2004 (3) TMI 43 - ORISSA High Court ) - Held that the revenue could, however, discard the said transaction only if there were materials or evidence before it to show that the intentions of the parties were different from what had been incorporated in the sale and lease back agreements and that the transaction was really a sham and dubious transaction and was a colourable device - It has not at all been established on the basis of evidence on record that the transaction was a colourable device entered into by and between the HSEB and the assessee - Decided against the revenue

Issues Involved:
1. Whether the transaction between the assessee and the Haryana State Electricity Board (HSEB) was a genuine sale and lease back transaction or merely a financial lease.
2. Whether the assessee was entitled to claim 100% depreciation on the equipment purchased from HSEB.

Issue-wise Detailed Analysis:

1. Genuine Transaction vs. Financial Lease:
The primary issue was whether the transaction between the assessee and HSEB was a genuine sale and lease back transaction or merely a financial lease. The Assessing Officer had disallowed the claim of 100% depreciation on the equipment, treating the transaction as a financial lease, relying on the Supreme Court decision in McDowell and Company Limited v. Commercial Tax Officer. However, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal (ITAT) found the transaction to be genuine. The Tribunal noted that the departmental representative could not provide any evidence to show that the transaction was not genuine. The Tribunal relied on decisions from the High Courts of Bombay and Rajasthan, which allowed depreciation claims in similar transactions involving State Electricity Boards.

2. Entitlement to Depreciation:
The second issue was whether the assessee was entitled to claim 100% depreciation on the equipment. The Tribunal and the Commissioner of Income-tax (Appeals) held that since the assessee was carrying on the business of leasing, it was entitled to claim depreciation. The Tribunal observed that the ownership of the equipment was with the assessee, as evidenced by the sale deed and lease agreement. The Tribunal also noted that the transaction was not a sham or bogus, as the revenue could not prove otherwise.

Detailed Analysis:

Background and Facts:
The assessee purchased equipment from HSEB, which was already installed at HSEB's Thermal Power Station at Faridabad, and immediately leased it back to HSEB. The Assessing Officer disallowed the depreciation claim, treating the transaction as a financial lease. The Commissioner of Income-tax (Appeals) allowed the claim, and the ITAT upheld this decision, leading to the present appeal.

Arguments of the Revenue:
The revenue argued that the transaction was a means of raising finance and not a genuine sale and lease back transaction. They relied on a letter from HSEB indicating the transaction was for raising finance and on the Karnataka High Court decision in Avasarala Automation Ltd. They also cited the Supreme Court decision in Asea Brown Boveri Ltd, arguing that the transaction was a financial lease where the lessee bore all risks and rewards of ownership.

Arguments of the Assessee:
The assessee argued that the transaction was genuine, with ownership of the equipment transferred to them, and they were entitled to claim depreciation. They cited several High Court decisions supporting their claim and emphasized that the Tribunal, as the final fact-finding authority, found the transaction genuine. The assessee also pointed out that the revenue had not framed any question of law regarding the genuineness of the transaction.

Court's Findings:
The court examined the sale deed, invoice-cum-delivery challan, and lease agreement, concluding that the ownership of the equipment was with the assessee. The court noted that the sale deed transferred title to the assessee, and the lease agreement confirmed the lessee's (HSEB's) possession and use of the equipment. The court found no evidence suggesting the transaction was not genuine or a subterfuge.

Legal Precedents and Principles:
The court referred to the Supreme Court decision in Union of India v. Azadi Bachao Andolan, which upheld the principle that tax planning within the framework of law is legitimate. The court distinguished the present case from Avasarala Automation Ltd, where the transaction was found not genuine. The court also cited decisions from the Orissa, Rajasthan, and Gujarat High Courts, which supported the assessee's claim for depreciation in similar transactions.

Conclusion:
The court concluded that the transaction was genuine and that the assessee was entitled to claim depreciation. The court answered the question of law in favor of the assessee and dismissed the revenue's appeal, with no order as to costs.

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