2007 (5) TMI 287 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of depreciation claimed on sale and lease back transactions with Tamil Nadu Electricity Board (TNEB).
2. Disallowance of depreciation with reference to assets where lease agreements have expired.

Detailed Analysis:

1. Disallowance of Depreciation on Sale and Lease Back Transactions:

Facts:
The assessee, First Leasing Company of India Ltd. (FLCI), entered into 14 sale and lease back agreements with TNEB, involving assets like meters, capacitor banks, and outdoor circuit breakers, totaling Rs. 39,44,27,143. These assets were eligible for 100% depreciation, but since they were not used for more than 182 days, the assessee claimed only 50% depreciation. The lease agreement was executed on 31st March of the accounting year, and no lease rental income was recognized for that year as the first installment was due in the next financial year.

Assessing Officer's Findings:
The Assessing Officer (AO) referred to the Special Bench decision in Mid East Port Folio Management Ltd. and Karnataka High Court's decision in Avasarala Automation Ltd., concluding that the transactions were mere finance agreements, not genuine lease agreements. Hence, the depreciation claimed was disallowed.

Commissioner of Income-tax (Appeals) Decision:
The Commissioner of Income-tax (Appeals) accepted the assessee's claim, stating that the transactions met the conditions for claiming depreciation under section 32 of the Income-tax Act and dismissed the AO's findings.

Tribunal's Analysis:
The Tribunal examined the provisions of section 32(1) of the Income-tax Act, focusing on whether the assets were used for business purposes. It was noted that no lease income was offered for the current assessment year, indicating that the assets were not used for business purposes. Additionally, the lease agreement commenced on 31-3-2001, with the first rental due on 12-4-2001, implying operational commencement beyond the previous year. Thus, no depreciation was allowable.

Genuineness of Transactions:
The Tribunal referred to the Special Bench decision in Mid East Port Folio Management Ltd., which emphasized examining the genuineness of sale and lease back transactions. It was found that the transactions were not genuine as there was no physical delivery of assets, and several clauses in the agreement indicated a finance arrangement rather than a lease. The Tribunal concluded that the transactions were a colourable device to claim depreciation and disallowed the depreciation.

2. Disallowance of Depreciation on Expired Lease Agreements:

Facts:
The AO noted that for four lessees, the lease period had expired, and the assets were not returned to the lessor (assessee). Despite this, the assessee claimed depreciation without recognizing any rental income or liquidated damages as stipulated in the lease agreement.

Commissioner of Income-tax (Appeals) Decision:
The Commissioner of Income-tax (Appeals) allowed the depreciation claim, reasoning that as long as the assets were part of the block of assets and the assessee was in the leasing business, depreciation could not be denied.

Tribunal's Analysis:
The Tribunal disagreed, stating that once the lease period is over and the assets are not returned, they cannot be considered used for business purposes. The assessee did not recognize any lease rental or liquidated damages, indicating that the assets were not used in the leasing business. Allowing depreciation in such a scenario would cause double jeopardy to the revenue. Hence, the Tribunal set aside the Commissioner of Income-tax (Appeals) decision and disallowed the depreciation.

Conclusion:
The Tribunal allowed the revenue's appeal, disallowing the depreciation claimed on both the sale and lease back transactions with TNEB and the assets where lease agreements had expired.