2016 (2) TMI 1344 - HC - Income Tax

Depreciation on a sale and lease back transaction relating to wind electric generators - Claim denied where the assessee itself is not the owner of the land on which the generators have been installed, and hence cannot be treated as owner of the windmills - HELD THAT - As assessee is in the business of hire purchase finance, leasing and allied activities and it is a non-banking finance company. The owner of the land on which the windmills were erected and installed wanted to set up a wind power generation unit. The owner approached the respondent/assessee for finance. There are two options available to a finance company under such circumstances. One option is to allow the borrower to purchase the machinery and install it in his own land and pay the cost of the machinery on condition that the amount financed for the purchase of the machinery is repaid together with interest in equal monthly instalments.The second option available to a financier is to buy the plant and machinery in their own name and lease it out to the borrower. If the first option is exercised, the land owner gets title to the plant and machinery and the interest component of the equated monthly instalments is treated as revenue income for the financier. But the owner will claim depreciation on the machinery. If the second option is exercised, the financier claims depreciation, but treats the lease rentals as revenue income and pays tax. Therefore, in either of the two options the borrower and financier are placed on different sides of the same table. In such circumstances, the question of the revenue losing something does not arise. As rightly pointed out by the Commissioner of Income Tax (Appeals), the question of ownership of the land has nothing to do with the claim for depreciation. Depreciation is claimed in respect of the plant and machinery installed on the land. Unfortunately, the Assessing Officer was misguided by the fact that the Electricity Authority granted permission only to the land owner to run the windmills. It is not the case of the Department or the respondent herein that the respondent was in the business of generating power through windmills. There is no restriction by the Electricity Board that unless the applicant for the generation of wind power also owns the plant and machinery he would not be entitled to a license. Assessing Officer as well as the Tribunal misdirected themselves to the actual issue on hand, without realizing what is the income either from the land owner or from the financier depending each side of the table as per the terms of the financing agreement. The Revenue cannot claim revenue from both. Therefore, the question of law is answered against the Revenue.

Summary

Issues:
1. Allowance of depreciation on a sale and leaseback transaction involving wind electric generators.
2. Ownership of land in relation to depreciation claim.
3. Disallowance of depreciation by Assessing Officer.
4. Reversal of Assessing Officer's opinion by First Appellate Authority.
5. Tribunal's decision on the appeals filed by the Revenue.

Analysis:
1. The case involved Tax Case Appeals filed by the Revenue concerning the allowance of depreciation on a sale and leaseback transaction involving wind electric generators. The main question of law was whether the Tribunal was correct in allowing depreciation in such a scenario where the assessee was not the owner of the land on which the generators were installed, thus raising doubts on the assessee's ownership of the windmills.

2. The Assessing Officer disallowed the depreciation claim citing the lack of land ownership by the assessee where the windmills were situated. However, the First Appellate Authority disagreed, emphasizing that once the machinery's genuineness and installation were proven, disallowing depreciation solely based on land ownership was incorrect. The Commissioner of Income Tax (Appeals) also supported this view, stating that land ownership was not a fundamental requirement for depreciation allowance.

3. The Revenue filed appeals against the Appellate Commissioner's decision, but the Tribunal dismissed all three appeals and upheld the initial decision. The Tribunal's stance was that the ownership of the land did not impact the claim for depreciation, as it was related to the machinery installed on the land, not the land itself.

4. The judgment highlighted that the assessee, a non-banking finance company, was approached by the landowner to finance the wind power generation project. The company had two options: either allow the borrower to purchase and install the machinery on their land or buy the machinery themselves and lease it out. In either scenario, depreciation and revenue income treatment differed, but the ownership of the land did not affect the depreciation claim on the machinery.

5. The judgment concluded that the Assessing Officer and the Tribunal had misunderstood the core issue by focusing on land ownership rather than the machinery's depreciation claim. It clarified that the revenue from either the landowner or the financier, based on their financing agreement, should be considered, and the Revenue could not claim revenue from both sides. Therefore, the question of law was resolved against the Revenue, leading to the dismissal of the appeals.