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2005 (9) TMI 234 - AT - Income TaxAllowance Or Rate Of depreciation - user of plant and machinery - colourable device to evade the tax - Interest on securities held as stock in trade - Whether the entire arrangement is a financing arrangement or the transaction between the assessee and RPL is really a leased transaction - HELD THAT - In the present case, the stand of the Assessing Officer has been that the entire arrangement was merely a financing arrangement and a device was adopted to give a colour of lease in order to claim 100 per cent depreciation with a view to avoid the legitimate tax due to the Revenue. On the other hand, the stand of the assessee is that the plant and machinery was acquired by the assessee itself and then it was given on lease to RPL. Thus, the assessee being the owner of the plant and machinery which was identifiable was legally entitled to depreciation under the provisions of the Act. We have gone through the terms of both the agreements. After considering the same, we are of the view that it is not a case of genuine lease and in reality it is a case of financing arrangement between the parties. In our humble opinion, agreements clearly indicate that the real intention behind the tripartite agreement was to provide finance to RPL to meet the cost of plant purchased by L T from RPL. The RPL was in the process of setting up the plant and, therefore, depreciation could not be allowed to RPL prior to commencement of business. Even after the business had commenced, it would not be beneficial to RPL as in the initial stage, since the RPL would not be in a position for same years to earn sufficient profits to absorb the depreciation. On the other hand, if assessee is shown as owner by documentation, it would immediately be entitled to depreciation and set-off the same against income from financing as per the probable advice to the assessee. This is apparent from Clause 2 of the lease agreement which provides that lease rental had been calculated on the assumption that assessee would be allowed 100 per cent depreciation on such plant and machinery. It further provides that lease rentals would be increased in case claim of depreciation is disallowed or allowed at a lesser rate. So, the purpose of entering into lease agreement was to get immediate benefit by way of tax saving. Such arrangement was also beneficial to RPL as it was required to pay lesser amount of lease rental. It is because of this motivation that RPL surrendered its ownership in favour of assessee and L T was allowed to issue invoice in the name of assessee. RPL was in reality not affected by such action since non cancellable lease was made for 30 years in favour of RPL which could be extended for further period of 22 years. That means, for all practical purposes, RPL was the owner without loosing anything. 52 years is more than the usual life of machinery. Thus, the arrangement was beneficial to both the parties. Therefore, the entire exercise, in our opinion, was made only to avoid the tax liability. In other words, the state exchequer was thus deprived of the legitimate tax. Hence, it is held that exercise was a colourable device to avoid the tax. Our view is also fortified by the decision of Special Bench in the case of Mid East Portfolio Management 2003 (8) TMI 475 - ITAT MUMBAI where sale and lease back transaction was found to be a colourable device to avoid the legitimate tax due to State and consequently, depreciation claimed by the financing company was disallowed. Admittedly, the assessee is not dealing in plant and machinery. It is also not in the business of leasing of plant and machinery. There is no evidence before us to indicate that assessee is in the business of leasing of plant and machinery. Considering this factual aspect, it cannot be said that plant and machinery was used by the assessee for the purpose of financing business carried on by it. The user of plant and machinery is condition precedent for allowing the claim of depreciation. The actual user is RPL and not the assessee. Therefore, even on this account, the claim of assessee cannot be accepted. Thus, the orders of the Learned CIT (Appeals) are set aside and the orders of the Assessing Officer disallowing the depreciation are sustained. However, we further hold that transaction of alleged lease has to be ignored since finding has to be carried to logical end. Accordingly, the Assessing Officer is directed to exclude the revenue receipt in the form of lease rent from the assessment and in turn to assess only the interest component which had actually and legally accrued to the assessee. Interest on securities held as stock in trade - We find that the issue before us is squarely covered by the decision of the Tribunal in the case of Union Bank of India v. Dy. CIT IT Appeal No. 8817/(Bom.) of 1992 dated 23-12-2003 , wherein it has been held that (i) section 145 cannot override the provisions of section 5 and, therefore, no persons can be assessed unless any income accrues to him, (ii) interest on securities accrues to assessee on the specified dates and not on day to day basis as assessee has no right to receive the income before the fixed date. No contrary decision has been brought to our notice. Therefore, following the said decision, the issue is decided against the Revenue. The orders of the Learned CIT (Appeals) are, therefore, upheld. In the result, the appeals of the Revenue are partly allowed.
Issues Involved:
1. Depreciation on leased plant and machinery. 2. Addition of interest on securities held as stock in trade. 3. Deletion of disallowances regarding guest house expenses. Detailed Analysis: Depreciation on Leased Plant and Machinery: The primary issue pertains to the depreciation claimed by the assessee on leased plant and machinery. The assessee, engaged in long-term housing finance, claimed depreciation for the assessment year 1991-92 on leased plant and machinery acquired from L&T and leased to RPL. The Assessing Officer (A.O.) disallowed the claim, arguing that the transaction was a financing arrangement disguised as a lease to secure tax benefits. The A.O. cited several reasons, including the non-cancellable nature of the lease, the fixed lease rentals based on the assumption of 100% depreciation, and the plant being immovable property post-erection. On appeal, the CIT(A) posed two questions: whether the assessee is the owner of the plant and machinery and whether such plant and machinery is separately owned and identifiable. The CIT(A) answered both affirmatively, relying on the agreements and material on record, and allowed the depreciation. The Revenue appealed, arguing that the CIT(A) did not address the A.O.'s finding that the arrangement was a colorable device to evade tax. The Tribunal held that the arrangement was indeed a financing arrangement and a colorable device to avoid tax. The Tribunal noted that the assessee was not in the business of leasing plant and machinery and that the entire transaction was structured to secure tax benefits. The Tribunal set aside the CIT(A)'s order, disallowing the depreciation and directing the A.O. to exclude the lease rent from the assessment and assess only the interest component. Addition of Interest on Securities Held as Stock in Trade: The second issue concerns the addition of interest on securities held as stock in trade. The A.O. included interest on securities on a day-to-day accrual basis, while the assessee offered interest income based on specified due dates. The CIT(A) held that interest on securities accrues on fixed dates, not daily, and deleted the additions. The Revenue appealed, but the Tribunal upheld the CIT(A)'s decision, citing a similar case (Union Bank of India v. Dy. CIT), which established that interest on securities accrues on specified dates and not on a day-to-day basis. Deletion of Disallowances Regarding Guest House Expenses: The final issue relates to the deletion of disallowances made by the CIT(A) in respect of guest house expenses. The Revenue argued that the CIT(A)'s order contradicted the Special Bench decision in Eicher Tractors Ltd. and judgments of the Bombay High Court. The Tribunal, however, upheld the CIT(A)'s decision, referencing the Bombay High Court's judgment in Chase Bright Steel Ltd., which held that section 37(3) and 37(4) could not override sections 30 to 36 of the Act. The Tribunal emphasized that the Bombay High Court's ruling is binding within its jurisdiction and that the Special Bench had not commented adversely on this judgment. Conclusion: The Tribunal's judgment comprehensively addresses the issues of depreciation on leased plant and machinery, the addition of interest on securities, and the deletion of guest house expenses. The Tribunal upheld the disallowance of depreciation, affirmed the CIT(A)'s deletion of interest additions, and maintained the deletion of guest house expense disallowances, partly allowing the Revenue's appeals.
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