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2015 (9) TMI 1187 - HC - Income TaxNature of the transaction - lease agreement or in the nature of transfer of capital assets - Whether the Tribunal was right in law in holding that lease for a period of ten years of plant and machinery along with land and building was a capital asset within the meaning of section 2 (14)? - Held that - It might be possible in theory for a leasehold right to be construed as a capital asset since the words used in Section 2 (14) (a) are indeed of a wide amplitude, in the context of the present case, where under the lease agreement dated 24th February 1994 what is given to SGL is a limited right to hold and possess the facilities leased to it for a limited period of ten years, with further restriction on sub-letting it or transferring any right or interest therein to anyone without the permission of the lessor and with the lease agreement making it explicit that at the end of the lease period the facilities leased it SGL would revert to the Assessee, it is difficult to hold that the leasehold rights given to the Assessee under the lease agreement is a capital asset . Consequently, question is answered by holding that the leasehold right, given to SGL for a period of ten years, of the plant and machinery along with land and building, is not a capital asset within the meaning of Section 2 (14) (a) of the Act. Was there a transfer of a capital asset? - Held that - The mere fact that the Assessee may have applied under Section 230A of the Act to seek permission of the Department cannot be held against it as far as the correct legal position is concerned. In other words the fact that certain columns in the concerned form were filled by the Assessee to imply that there was a transfer of leasehold/ownership rights cannot be read to constitute a waiver by the Assessee of the legal defences that flow from a correct interpretation of the clauses of the lease agreement and from a correct reading of Section 2 (47) with Section 45 of the Act. This Court is also unable to agree with the contention of the learned counsel for the Revenue that the lease of the plant and machinery can be separated from the lease of the land and buildings and the former transaction held to be valid and the latter a sham transaction. The Court is of the view that the context in which the decision in Shin Satellite Public Co. Ltd. v. Jain Studios Ltd. (2006 (1) TMI 552 - SUPREME COURT OF INDIA ) was rendered was entirely different from the present case and that decision is of no assistance to the Revenue here Whether a transaction pertaining to land and building or of plant and machinery could be treated as sale of either the leasehold rights in respect of the land or the sale of the plant and machinery itself? - Held that - The order of the CIT (A) dated 30th August 2011 has been perused by the Court. It holds that the sale of the land by the Assessee to an unrelated third party, M/s. Blossom Automotives, for a consideration of ₹ 4.01 crores took place on 8th September 2005 and after accepting the Assessee s valuation of the said land the CIT (A) has directed that the Assessee be taxed on long term capital gains arising out of the said sale of the land. The said order also shows that for the building, which was also sold as part of the sale of land, the Assessee has continued to claim depreciation till the date of such sale. The fact that the Assessee continued to claim depreciation on the plant and machinery and building is another indication that the Assessee continued to assert ownership of the assets in question during the relevant AYs. The above order of the CIT (A) forms part of the records of the Department and has naturally not been disputed by it. Although this development could not have been anticipated at the time the AO or the CIT (A) decided the issue in the present case, it completely vindicates the Assessee s stand in relation to the nature of the transaction forming the subject matter of the lease agreement. Consequently, there are several factors in favour of the Assessee that persuade the Court to hold, that the ITAT was not right in holding that the transaction of lease of the facilities was a sale of leasehold rights and that there was in any event a sale of the plant and machinery. Decided in favour of the Assessee and against the Revenue. Whether there could be said to be any capital gains under Section 45 of the Act? - Held that - In light of the above discussion, the question will have to be answered in favour of the Assessee and against the Revenue. The Court is of the view that the transaction in question was nothing more than a transaction of lease and has been acted upon by the parties as such. This was not a device adopted by the Assessee for tax avoidance. ITAT erred in holding that the transaction in question was chargeable to capital gain under Section 45 of the Act. There was no occasion for the ITAT to remand the matter to the AO for re-computation of the capital gains. - Decided in favour of assessee.
Issues Involved:
1. Whether the lease for a period of ten years of plant and machinery along with land and building was a capital asset within the meaning of Section 2(14) of the Income Tax Act. 2. Whether the lease of facilities i.e., plant and machinery along with land and building amounted to a transfer within the meaning of Section 2(47) of the Act. 3. Whether the transaction of lease of facilities was a case of sale of leasehold rights. 4. Whether the transaction amounted to a lease of land, building, and plant and machinery or the sale of plant and machinery itself. 5. Whether the transaction is chargeable to capital gains under Section 45 but not under Section 50 of the Income Tax Act. Detailed Analysis: 1. Lease as a Capital Asset: The court examined whether the leasehold rights in the plant and machinery, land, and buildings constituted a 'capital asset' under Section 2(14) of the Act. It was held that the leasehold right for a period of ten years did not qualify as a 'capital asset' because the lease agreement provided only a limited right to hold and possess the facilities for ten years, with restrictions on sub-letting or transferring any right or interest, and the facilities were to revert to the lessor at the end of the lease period. 2. Lease as a Transfer: The court analyzed whether the lease constituted a 'transfer' of a capital asset under Section 2(47) of the Act. It was concluded that since the lease was for a period of ten years, it did not amount to a 'transfer' as defined under Section 2(47) read with Explanation 1 and Section 269UA(f)(i), which requires a lease term of not less than twelve years to be considered a transfer. 3. Sale of Leasehold Rights: The court found that the ITAT erred in concluding that there was a sale of leasehold rights. The lease agreement did not confer any proprietary rights on the lessee, and the lessee was prohibited from sub-letting or transferring any rights without the lessor's consent. The lease was for a fixed period, and the facilities were to revert to the lessor, indicating that there was no sale of leasehold rights. 4. Lease vs. Sale of Plant and Machinery: The court held that the transaction was a lease and not a sale of plant and machinery. The valuation of the business as a going concern and the fixing of lease rentals were based on the loss of business opportunity for the lessor, not on the sale of the assets. The fact that the land, building, and plant and machinery reverted to the lessor after the lease period further supported this conclusion. 5. Chargeability to Capital Gains: The court concluded that the transaction did not attract capital gains under Section 45 of the Act. The lease agreement was not a device for tax avoidance, and the transaction was genuinely a lease. Therefore, there was no occasion to remand the matter to the AO for re-computation of capital gains. Conclusion: The court allowed the appeal of the Assessee and dismissed the Revenue's appeal, setting aside the ITAT's order to the extent it held the transaction chargeable to capital gains under Section 45 of the Act. The court held that the transaction was a lease and not a transfer or sale of a capital asset.
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