2006 (3) TMI 272 - AT - Income Tax

Summary

Issues Involved:
1. Whether the lease transactions entered by the assessee with six parties are sham transactions or genuine transactions for the allowance of claim depreciation.
2. Whether the amount received from Das Lagerway Windfarm Ltd. (DLWL) claimed as advance is income of the assessee for the relevant assessment year.

Issue-Wise Detailed Analysis:

1. Lease Transactions and Claim of Depreciation:

The assessee claimed to have purchased 5000 solar photo voltaic lanterns (SPVL) from M/s Photo Energy Systems Ltd. (PESL) and leased them to six parties. The assessee capitalized these SPVLs and claimed depreciation. The transactions were scrutinized by the AO, who found that the payments made by the assessee to PESL were returned the next day, indicating circular transactions. Moreover, the AO issued summons to the lessees, some of whom could not be located, and others confirmed purchasing SPVLs directly from PESL, not from the assessee. The AO concluded that the transactions were sham and disallowed the depreciation claim. The CIT(A) upheld this decision.

The assessee argued that the principles of natural justice were violated as the statement from PESL's CEO was not put to the assessee for cross-examination. The assessee also contended that the transactions were genuine, supported by lease agreements and other documents. However, the Tribunal found that the transactions were indeed sham, as the assessee failed to produce the lessees or their books of account, and the payments were merely circular transactions. Consequently, the Tribunal upheld the disallowance of depreciation but directed the AO to exclude the income returned on account of lease rentals, acknowledging that if the transactions were sham, the lease income should not be taxed.

2. Amount Received from Das Lagerway Windfarm Ltd. (DLWL):

The assessee received remittances from DLWL for the execution of civil and electrical work and treated these as advances in its books. The AO, however, assessed these amounts as income, noting that the assessee followed the accrual basis of accounting and had recognized similar receipts as income in previous years. The AO also referred to MoUs between the assessee and DLWL, which indicated that the payments were for completed contract work. The CIT(A) upheld this addition.

The assessee argued that the amounts were advances due to ongoing disputes and provided evidence of legal proceedings. However, the Tribunal found that the disputes mentioned were unrelated to the contract payments and that the MoUs indicated a final settlement of accounts. Therefore, the Tribunal concluded that the amounts received were indeed income and upheld the AO's and CIT(A)'s decisions.

Conclusion:

The Tribunal concluded that the lease transactions were sham and upheld the disallowance of depreciation but directed the exclusion of lease income. Regarding the amount received from DLWL, the Tribunal affirmed that it was income, not an advance, and upheld the addition. The first issue was partly allowed, and the second issue was dismissed.