2014 (6) TMI 70 - AT - Income Tax

Disallowance of depreciation @100% on leased out assets Genuineness of transaction of sale and lease back of COPS - Held that - Once the assessee has established with supporting evidence that the transaction in question has been actually carried out then in the absence of any contrary material or facts brought on record, the action of the authorities below in holding the transaction as bogus is not sustainable Following ICDS Vs CIT 2013 (1) TMI 344 - SUPREME COURT - as long as the asset is utilized for the purpose of business of the assessee, the requirement of Section 32 will stand satisfied, notwithstanding non-usage of the asset itself by the assesse - even otherwise the claim of 100% depreciation was otherwise allowed by the revenue on the COPS in the case of SSL other than the COPS - the Revenue itself has allowed 100% claim on the COPS - there is no dispute regarding the actual payment of consideration, valuation made by the Government Approved Chartered Engineer, ownership of asset and sale at the end of lease period - the investigation carried out by the ADI(Inv.)-II, Indore, wherein the transaction in question was confirmed thus, the assessee is eligible for 100% depreciation on the COPS Decided in favour of Assessee.

Issues Involved:
1. Disallowance of depreciation @ 100% claimed by the assessee on leased out assets.
2. Determination of whether the lease agreement was a sham transaction.
3. Application of Explanation 3 to Section 43(1) of the Income Tax Act.
4. Consideration of the decision in McDowell & Co. 154 ITR 148.
5. Application of the decision in Famous Cine Lab 121 ITR 648.
6. Reduction of tax liability by claiming depreciation.
7. Treatment of lease rentals as income or interest.
8. Charge of interest under Sections 234B and 234C.

Detailed Analysis:

1. Disallowance of Depreciation @ 100% Claimed by the Assessee on Leased Out Assets:
The assessee, engaged in the business of leasing equipment, claimed 100% depreciation on leased assets (COPS) purchased from M/s Sri Synthetics Ltd. (SSL). The Assessing Officer (AO) disallowed this claim, treating the lease as a sham transaction and purely a financial transaction. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, denying both 100% and normal depreciation.

2. Determination of Whether the Lease Agreement Was a Sham Transaction:
The AO and CIT(A) considered the lease agreement a sham, arguing that the transaction was merely a financial arrangement to provide funds to SSL. The AO's inquiry revealed that the COPS were not physically delivered and were already in use at SSL's premises, questioning the genuineness of the transaction. The assessee countered that the transaction was genuine, supported by a valuation report from a Government Approved Chartered Engineer, and that the COPS were hypothecated to a bank, indicating genuine ownership and use for business purposes.

3. Application of Explanation 3 to Section 43(1) of the Income Tax Act:
The CIT(A) invoked Explanation 3 to Section 43(1), suggesting that the main purpose of the asset transfer was tax reduction through depreciation claims. However, the tribunal noted that the AO did not determine the actual cost of the asset, rendering Explanation 3 inapplicable in this case.

4. Consideration of the Decision in McDowell & Co. 154 ITR 148:
The assessee argued that the McDowell & Co. decision, which addresses tax avoidance schemes, was not applicable as no tax evasion was proven, and the transaction was a bona fide commercial arrangement. The tribunal agreed, noting that the transaction was revenue-neutral, with SSL showing the sale proceeds as income.

5. Application of the Decision in Famous Cine Lab 121 ITR 648:
The CIT(A) relied on the Famous Cine Lab decision to deny depreciation. However, the tribunal found this reliance misplaced, as the valuation of the COPS was not disputed, and the transaction was genuine.

6. Reduction of Tax Liability by Claiming Depreciation:
The tribunal concluded that the transaction was not a colorable device to avoid tax, as it was revenue-neutral. The sale proceeds were treated as income by SSL, and the lease rentals were included in the assessee's income.

7. Treatment of Lease Rentals as Income or Interest:
The tribunal noted that the assessee included the full lease rental as income, and if the transaction were purely financial, only the interest component would be income. The tribunal upheld the assessee's treatment of lease rentals as income.

8. Charge of Interest Under Sections 234B and 234C:
The tribunal held that the interest under Sections 234B and 234C is consequential and requires no specific finding.

Conclusion:
The tribunal allowed the appeal, holding that the assessee is eligible for 100% depreciation on the COPS, as the cost of each COP was less than Rs. 5,000/-. The transaction was genuine, and the assessee met the conditions for claiming depreciation. The appeal was allowed, and the order was pronounced on October 25, 2013.

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