2012 (8) TMI 282 - AT - Income Tax

Disallowance of depreciation - iron rolls purchased by the assessee and leased back to the same party - CIT(A) allowed claim of depreciation - Held that - Tribunal in this case had set aside the issue to the file of AO, to look into the fact as to what happened to the roll after expiry of lease period who has given a clear finding that the rolls remained with the original seller even after expiry of lease period. CIT(A) has however neither considered this aspect nor has given any finding on this issue - The transactions can not be considered as genuine merely on the ground that the same are supported by bills and agreements asfor a transaction to be a colourable device, it is not necessary that there should be pre-existing relationship between parties. As the Original seller had claimed 100% depreciation on the assets which shows that these were highly depreciable asset and the assessee however, has shown the purchase price of Rs. 34,97,500/- when ISIM had purchased the same at Rs. 36,88,540/- i.e. almost at the same price even after use and claim of 100% depreciation - as observations suggest that transaction may not be a genuine lease transaction but only a financial transaction order of CIT(A)for allowing the claim of depreciation is set aside and the issue is restored back for passing a fresh order after necessary examination - in favour of revenue.

Summary

Issues Involved:
1. Allowability of depreciation on plant and machinery leased out by the assessee.
2. Determination of the genuineness of the purchase and lease-back transaction.
3. Examination of the physical movement and possession of the leased assets.
4. Assessment of the valuation of the leased assets.
5. Consideration of the tax implications and potential tax avoidance.

Issue-wise Detailed Analysis:

1. Allowability of Depreciation on Plant and Machinery Leased Out by the Assessee:
The primary dispute in the appeal was the allowability of depreciation on iron rolls purchased by the assessee and leased back to the seller, ISIM. The assessee claimed depreciation of Rs. 17,48,750/- at 50% of the normal rate, arguing that the transaction was genuine and supported by lease agreements, purchase bills, and payment confirmations. However, the AO disallowed the claim, asserting that the transaction was a sham intended to reduce tax liability, as there was no physical transfer of the rolls to the assessee, and the rolls remained with ISIM throughout the lease period.

2. Determination of the Genuineness of the Purchase and Lease-Back Transaction:
The AO deemed the transaction a sham, stating that it was a simple loan transaction disguised as a lease to reduce tax liability. The AO's stance was based on the lack of physical transfer of the rolls and the fact that ISIM had already claimed 100% depreciation on the rolls. The CIT(A), however, allowed the claim, citing documentary evidence and the taxation of lease rentals in subsequent years as indicators of a genuine transaction. The Tribunal noted that the genuineness of the transaction should consider the substance over form and the actual conduct of the assessee regarding the asset post-lease period.

3. Examination of the Physical Movement and Possession of the Leased Assets:
The AO highlighted that the iron rolls never physically moved from ISIM to the assessee, even after the lease period ended. The Tribunal emphasized the importance of examining what happened to the rolls post-lease period to determine the genuineness of the transaction. The CIT(A) failed to address this aspect, which was crucial in assessing whether the transaction was a genuine lease or merely a financial arrangement.

4. Assessment of the Valuation of the Leased Assets:
The valuation of the iron rolls was contested, with the AO questioning the basis of the valuation provided by the chartered engineer, Shri Navin Goyal. The rolls were purchased by the assessee for Rs. 34,97,500/-, close to the original purchase price by ISIM, despite ISIM having claimed 100% depreciation. The Tribunal noted that the valuation certificate lacked a clear basis, and this aspect required further scrutiny to ascertain the transaction's genuineness.

5. Consideration of the Tax Implications and Potential Tax Avoidance:
The Tribunal highlighted the need to examine whether the assessee derived any tax advantage from the arrangement, as this could indicate a colourable device aimed at tax avoidance. The AO noted that the lease rentals were taxed in subsequent years, but it was unclear whether the assessee effectively paid tax on these rentals. The Tribunal stressed the importance of a thorough examination of the tax implications, particularly given the assessee's subsequent status as a sick company under BIFR.

Conclusion:
The Tribunal set aside the order of the CIT(A) and remanded the matter for a fresh examination, emphasizing the need to consider the substance of the transaction, the conduct of the assessee post-lease period, the valuation of the assets, and the tax implications. The appeal by the revenue was allowed for statistical purposes, with instructions for the CIT(A) to pass a fresh order after necessary examination and allowing the assessee an opportunity for a hearing.