2013 (8) TMI 408 - AT - Income Tax

Tax Planning versus Tax Avoidance - Finance Lease / Operating lease - Sale and Lease back transaction, whether genuine transaction or sham transaction - Appellant purchased energy meters of different makes for measuring electrical energy for a consideration from Gujarat State Electricity Board , referred to as GEB. These meters (assets) were then immediately leased back to GEB vide lease agreement. After deduction of lease management fee and first month s rental, the appellant paid balance to GEB. In the P & L A/c, the appellant has credited lease rental income and lease management fees and at the same time it has claimed depreciation @ 100% of the cost of assets, under proviso to Section 32(1) of the I.T. Act, on the ground that the cost of each meters was below Rs.5,000/- - Held that Considering the numerous case laws viz. McDowell & Company. Ltd.- 1985 (4) TMI 64 - SUPREME Court ; B.M. Karwar 1968 (8) TMI 14 - SUPREME Court etc., it has been well observed that in none of the authorities it has been held that each case of Sale and Lease back transaction or of thelease whether claimed to be operative or financial, the depreciation or the deduction or relief under the Income Tax act is to be allowed or disallowed. In each of the authorities as mentioned above, it is only after considering the facts and the evidence on the file, the various courts have given finding in the respective authorities to the effect that transactions in question were genuine transactions or sham transactions - Whether a transaction or the agreement etc. is genuine or sham cannot be a question of law but the question of fact only - No straight jacket formula can be adopted to say that every case of sale and lease back transactions is sham or genuine - For the purpose of deciding whether a particular transaction is a lease or not, the question of intentions of the parties is to be determined and the intention has to be inferred from the circumstances of each case. In the case in hand the sole motive or object of the agreement in question is to defeat the provisions of Income Tax Act,1961 so as to enable the assessee to claim depreciation @ 100% on the value of goods worth Rs.49972800.00 to which it otherwise is not entitled to and, further, to get mutual benefit of this wrongful claim by making wrongful loss to the revenue - Tax avoidance by way of tax planning or structuring the transactions so as to reap the largest tax benefit may be permissible under law but fraudulent transfer of assets or income or engaging in sham transactions with the object of reducing the tax liability cannot be said to be a case of tax avoidance but of tax evasion - In the case in hand, whole of the effort has been made to transfer the right to claim depreciation on the assets to the assessee for the purpose of the Income Tax Act, but not the assets itself. It is always the goods or the assets itself which are the primary subject of a valid transfer, not the incidental benefits, which automatically pass to the transferee with the transferred asset. In the case in hand, only the incidental tax benefits are intended to be transferred without any intention to transfer the asset itself - In Para 13 of the notes to the Annual Accounts of GEB for F.Y. 1993-94, as reproduced in para which has been reproduced in Para 3.(P) indicates that the real intention was to enter into transaction of loan/finance only and the assessee was never intended to be the real and legal owner of the assets Depreciation not allowed Decided against the Assessee. Lease rental income in the Sale and lease back transaction , whether includible in income under the head profits and gains from business and profession Held that - Transaction in question is held to be a finance transaction, the principal component in the lease rent received cannot be treated as income. Evidently, since the transaction was held to be for financing the electric meters, only that portion of the lease rent which represents interest/finance charges can be treated as income. The capital component included in the lease rent being return of capital investment cannot be treated as income. Applicability of Section 234B of the IT Act Held that - As per explanation 2 to section 234B, it has been provided that where an assessment is made for the first time under section 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purpose of this section. Section 234(3) is to be read in conjunction with and not in isolation to section 234(1) of the Act. Hence the contention of the assessee is also not found to be tenable

Summary

Issues Involved:
1. Disallowance of depreciation claim on electric meters.
2. Levy of interest under section 234B.
3. Disallowance of depreciation on office and residential premises.
4. Treatment of capital component in lease rent received.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Claim on Electric Meters:
The primary issue was the disallowance of a depreciation claim of Rs. 4,99,72,800/- on electric meters acquired from Gujarat State Electricity Board (GEB) and leased back to GEB. The appellant claimed depreciation under Section 32(1) of the Income Tax Act, asserting ownership of the meters. The Assessing Officer (AO) disallowed the claim, arguing that the transaction was a finance arrangement rather than a genuine lease, citing several reasons including lack of physical delivery, non-assumption of ownership risk by the appellant, and terms of the lease agreement indicating a finance transaction. The CIT(A) upheld the AO's decision. The Tribunal also agreed with the AO and CIT(A), noting that the transaction was a sham designed to claim undue tax benefits. The Tribunal emphasized that the transaction did not meet the requirements of a genuine sale under the Sale of Goods Act, 1930, and highlighted various clauses of the lease agreement that indicated a finance arrangement rather than a lease.

2. Levy of Interest Under Section 234B:
The appellant contested the levy of interest under Section 234B, arguing that no interest was levied in the initial intimation under Section 143(1)(a) and that the reassessment should not attract interest. The Tribunal rejected this argument, stating that the appellant was aware of its tax liability and had engaged in a sham transaction to evade tax. The Tribunal referenced the Supreme Court's ruling in Karanvir Singh Gossal v. Commissioner of Income-tax, which held that interest under Section 234B is mandatory and compensatory in nature.

3. Disallowance of Depreciation on Office and Residential Premises:
The AO disallowed a portion of the depreciation claimed on office and residential premises, estimating the cost of the superstructure separately from the land. The CIT(A) deleted the disallowance, but the Tribunal partially upheld the AO's decision, directing that the cost of the land be determined based on a government-approved valuer's report submitted by the appellant. The Tribunal emphasized that the appellant, as a member of the cooperative society, had a proportional ownership in the land and thus the value of the land should not be ignored.

4. Treatment of Capital Component in Lease Rent Received:
The revenue's appeal challenged the CIT(A)'s decision to cancel the withdrawal of the capital component of Rs. 87,99,044/- from the lease rent received from GEB. The Tribunal, in line with its finding that the transaction was a finance arrangement, held that only the interest/finance charges portion of the lease rent could be treated as income, and the capital component should not be treated as income. Consequently, the Tribunal dismissed the revenue's appeal on this issue.

Conclusion:
The Tribunal dismissed the appellant's appeal regarding the disallowance of depreciation on electric meters and the levy of interest under Section 234B, while partially allowing the revenue's appeals on the disallowance of depreciation on office and residential premises. The Tribunal upheld the CIT(A)'s decision on the treatment of the capital component in lease rent received, confirming that it should not be treated as income.