2019 (3) TMI 140 - HC - Income Tax

Depreciation on windmill denied - sham transaction - proof of ownership - assessment u/s 143(3) - AO disbelieved the transaction to be one of purchase of 80% shares in the windmill and held that the transaction is only a finance transaction - tribunal allowed depreciation - HELD THAT - Tribunal has analysed the entire transactions in great depth to confirm the order passed by the CIT(A), had analysed the business prudence and found that no businessman doing finance would lend money to earn such a low interest even assuming that the assessee is able to get the benefit of depreciation at 100% which would result in reduction of the income of the assessee in the present case over a period of two years by ₹ 8.10 Crores. Tribunal observed that it would be of no benefit to the assessee, insofar as when the windmill is sold at any point of time the windmill will be depreciated asset and the income would be taxable as a short term capital gain due to the applicability of Section 50. The Tribunal noted that the existence of the windmill was not disputed by the Revenue and the payment by M/s.Surana Industries Ltd., to the assessee in regard to the quantum and the method of computation of quantum was also not disputed. Further, it analysed every attendant facts and circumstances, and rejected the stand taken by the Assessing Officer that the transaction was a sham transaction - no substantial question of law.

Summary

Issues:
1. Ownership of the asset and entitlement to depreciation.
2. Genuine nature of the transfer of windmill.
3. Allocation of cost of windmill on a pro rata basis.

Ownership of the Asset and Entitlement to Depreciation:
The appeal filed by the Revenue under Section 260A of the Income-tax Act, 1961 challenged the order of the Income Tax Appellate Tribunal (ITAT) regarding the ownership of the asset and the entitlement to depreciation amounting to ?3,87,06,802. The Tribunal had confirmed the order passed by the Commissioner of Income Tax (Appeals) and followed the assessee's case for the assessment year 2006-07. The Revenue contended that the ITAT's decision for the previous year had not attained finality, but the Tribunal upheld its earlier order, leading to the dismissal of the Revenue's appeal.

Genuine Nature of the Transfer of Windmill:
The Tribunal analyzed the transaction of the transfer of the windmill to the assessee and concluded that it was a genuine transaction. The Assessing Officer had initially disbelieved the transaction, terming it as a 'sham transaction' and denying depreciation. However, the CIT(A) followed the order for the assessment year 2006-07 and allowed the assessee's appeal. The Tribunal, upon reviewing the entire transaction in detail, found that the transaction was not a sham one and that the business prudence supported the genuineness of the transfer.

Allocation of Cost of Windmill on a Pro Rata Basis:
The Tribunal further examined the allocation of the cost of the windmill on a pro rata basis out of the total cost incurred by M/s.Surana Industries Ltd. The Tribunal analyzed various aspects, including the benefit to the assessee, the applicability of Section 50 of the Act, and the factual circumstances surrounding the transaction. It concluded that no benefit would accrue to the assessee if the windmill was sold later, as it would result in taxable income as a short-term capital gain. The Tribunal's order was well-reasoned, considering all facts and circumstances, and it rejected the Assessing Officer's contention that the transaction was a sham.

In conclusion, the High Court dismissed the Revenue's appeal, stating that no substantial question of law arose for consideration in the present appeal. The Court found the Tribunal's order to be well-reasoned and based on a thorough analysis of the factual position, thereby upholding the decision in favor of the assessee.