2017 (12) TMI 925 - AT - Income Tax

Denial of depreciation - treating the transaction of purchase of machinery from Primark Labels (P) Ltd and lease back the same to the said concern as the sham transaction - Held that - The affair was designed for tax evasion and also providing interest-free fund to the sister concern. The assessee has claimed additional depreciation on the said machine even though it was well known that sister concern had already claimed the same. Thus, A.O. has regarded such arrangement as sham transaction and finally has disallowed depreciation of ₹ 98,29,345/-. We find that now before us, the learned counsel for the assessee could not controvert the above findings of CIT(A) and that also of the AO. Once the assessee has designed the transaction in such a way to reduce the tax and claimed the depreciation on the asset first by the sister concern and consequently, the assessee also, this is a Sham transaction. Accordingly, the AO and CIT(A) has rightly confirmed the disallowance of depreciation. We confirm the orders of the lower authorities - Decided against assessee Taxation of lease rentals - exclusion of lease rentals of the Gallus Machine leased to Primark Levels (P). Ltd - Held that - Once, we have given finding that no depreciation is allowed on Gallus Machine leased to Primark Levels (P). Ltd. holding the same as Sham transaction, the consequence of the same will be that the lease rentals included by the assessee as income has to be excluded. Accordingly, we direct the AO to exclude the lease rental income of ₹ 12 lacks earned by the assessee from lease of Gallus Machine to Primark Levels (P). Ltd. The AO will examine the claim of assessee after verification of facts. This issue of assessee s appeal is allowed.

Summary

Issues:
1. Disallowance of depreciation of Gallus machine.
2. Treatment of transaction of purchase of machinery and lease back as a sham transaction.
3. Exclusion of lease rentals of the Gallus Machine leased to another company.

Issue 1: Disallowance of Depreciation of Gallus Machine:
The appeal concerned the disallowance of depreciation on a Gallus machine. The assessee initially raised a ground challenging the disallowance but later withdrew it. The Assessing Officer (AO) disallowed depreciation claimed on the purchase of the machine, asserting it was a second-hand machine and not eligible for additional depreciation. The AO found a sham transaction between the assessee and a sister concern regarding the purchase and lease-back of the machine. The Commissioner of Income Tax (Appeals) upheld the disallowance, considering the transaction a colorable device to reduce taxable income. The Tribunal affirmed the lower authorities' decision, concluding the transaction was designed for tax evasion and providing interest-free funds to the sister concern. The disallowance of depreciation was confirmed.

Issue 2: Treatment of Transaction as a Sham Transaction:
The second issue revolved around the treatment of the purchase and lease-back transaction as a sham arrangement. The AO and CIT(A) found that the transaction was pre-decided, with the MOU for lease signed before becoming the owner of the asset. The MOU aimed to cover up the transaction, indicating a colorable device to reduce taxable income. The Tribunal concurred with the lower authorities, emphasizing that the transaction was not genuine and was orchestrated to avoid tax. The AO disallowed depreciation, and the Tribunal upheld this decision, dismissing the appeal against the order of the CIT(A).

Issue 3: Exclusion of Lease Rentals:
The final issue related to the exclusion of lease rentals received by the assessee for leasing the Gallus Machine to another company. The assessee raised a ground challenging the taxation of lease rentals, but later withdrew it as it was a consequential ground to the disallowance of depreciation. The Tribunal directed the AO to exclude the lease rental income from taxation since the depreciation was disallowed due to the sham transaction. The issue of exclusion of lease rentals was allowed, and the appeal was partly allowed by the Tribunal.

In conclusion, the Tribunal upheld the disallowance of depreciation on the Gallus machine due to a sham transaction and directed the exclusion of lease rentals from taxation as a consequential outcome of the sham transaction finding. The appeal was partly allowed based on the issues discussed and analyzed in the judgment.