2006 (9) TMI 90 - HC - Income Tax

Depreciation - Assessee claim for 100% depreciation on the soft drink bottles which the assessee had purchased and leased out to other party but tribunal rejected assessee claim on the ground of no lease agreement between the parties and only financial arrangement made by the parties - SC upheld the tribunal order

Summary

Issues Involved:
1. Jurisdiction of the Tribunal to examine the lease deed.
2. Validity of the claim for 100% depreciation on soft drink bottles.
3. Nature of the transaction between the assessee and lessees (lease vs. financial arrangement).

Detailed Analysis:

1. Jurisdiction of the Tribunal to examine the lease deed:
The appellant contended that the Tribunal exceeded its jurisdiction by examining the nature of the lease transaction, which was not questioned by either party before the Tribunal. However, the court clarified that Section 254(1) of the Income Tax Act empowers the Tribunal to pass orders as it deems fit after giving both parties an opportunity to be heard. The Tribunal is not restricted from considering issues that arise during the appeal, even if they were not initially raised by the parties. The court cited precedents to support the Tribunal's discretion to entertain new grounds necessary for the just decision of the case. Therefore, the Tribunal was within its rights to scrutinize the lease agreements and determine their true nature.

2. Validity of the claim for 100% depreciation on soft drink bottles:
The appellant argued that the leasing of assets was part of its business, and it was entitled to claim 100% depreciation once the assets were put to use in the leasing business. The court examined the lease agreements and found inconsistencies and clauses that did not align with the nature of leasing soft drink bottles. The lease agreements appeared to be proforma documents typically used for industrial machinery or vehicles, not for consumable items like bottles. The court noted that the lease agreements were executed before the bottles were manufactured and that lease rent commenced before the bottles existed. Additionally, the bottles were not returned to the assessee after the lease period, nor was the lease renewed. These facts indicated that the transactions were not genuine leases but financial arrangements disguised as leases to claim tax benefits.

3. Nature of the transaction between the assessee and lessees (lease vs. financial arrangement):
The court analyzed the lease agreements and the conduct of the parties to determine the true nature of the transactions. It found that the agreements were structured to recover the cost of the bottles plus interest over three years, indicating a financial arrangement rather than a lease. The terms of the agreements, such as the commencement of lease rent before the bottles were manufactured and the lack of responsibility for transportation damages, further supported this conclusion. The court also noted that the bottles were not called back by the assessee after the lease period, reinforcing the view that the transactions were financial arrangements. The Tribunal's conclusion that the transactions were financial arrangements, not leases, was upheld.

Conclusion:
The court dismissed the appellant's petition, finding no substantial question of law. It upheld the Tribunal's decision that the transactions between the assessee and the lessees were financial arrangements rather than genuine leases, and therefore, the assessee was not entitled to claim 100% depreciation on the soft drink bottles.