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TMI Blog2001 (9) TMI 243X X X X Extracts X X X X X X X X Extracts X X X X ..... had set up a new industrial undertaking at SPA 496/ 497, RIICO Industrial Area, Bhiwadi, Distt. Alwar, Rajasthan for the manufacture of glass shells/bulbs which came into operation on28th March, 1984. Further during the accounting period ending31st March, 1989, the assessee had set up another unit, being unit No. II, of this division for the manufacture of glass shells. Both these units were leased out by the assessee to M/s SGL,Kota, w.e.f.24-2-1994with moratorium of two years. The agreement is dated24-2-1994. The properties leased out included the land, building thereon as well as the plant and machinery. Since there was a period of two years as a moratorium, the lease consideration was to be paid from1-4-1996in 16 half-yearly instalments of Rs.237.14 lacs each termed as lease rent. It is to be noted that an advance of Rs.364 lakhs was given by lessee to the assessee which was to be adjusted against 19th and 20th instalments as per the detail given in clause 2.4 of the agreement. During this period of moratorium, the assessee was under an obligation to shift plant and machinery from Bhiwadi and install the same at the premises of the lessee atKota. The cost of shifting was to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise of all or any of the bundle of rights which the assessee has in a capital asset, whether such asset is corporeal or incorporeal. In this connection, he relied on the decision of Supreme Courtin the case of A.R. Krishnamurthy v. CIT [1989] 176 ITR 417 wherein conveying of mining rights underlease agreement for a period of 10 years was held to be transfer of the capital asset. According to him, in the instant case, the assessee has a leasehold right over the land for 99 years, which is a property under section 2(14) of the Act along with the building, plant and machinery and, therefore, granting of the right to use of such properties for a period of 10 years would clearly tantamount to transfer of capital asset and consequently, the provisions of section 45 would be applicable. He also relied on the decision of the Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, wherein it has again been held that definition under section 2(47) is merely inclusive and does not exhaust other kinds of transfer. He also relied on the decision of Kerala High Court in the case of Blue Bay Fisheries (P.) Ltd. v. CIT [1987] 166 ITR 13, wherein the High Court held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be on the person who draws a different meaning. According to him, such onus can be discharged not only by referring to the language of the written instrument but also by finding our what has happened in fact in pursuance of such instrument. Thus, he rejected the contention of the assessee that the written instrument should be construed only according to sections 90 and 91 of the Indian Evidence Act. After considering various substantial evidence to which reference would be made hereafter, he concluded that there was no transfer of immovable property and in fact it was a case of transfer of immovable/depreciable asset only by way of sale. Further according to him, the assessee had adopted the colourable devise to avoid the payment of tax by resorting to dubious methods. Reference was also made to the decision of the Hon'ble Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148. In coming to this conclusion, he relied on the following circumstantial evidences: (i) Survey at the premises of the assessee on28-1-1997revealed that assessee had not really dispossessed itself from the land and the building. Further it was found that except certain items, it was onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ix) That more than a crore was spent on dismantling of the plant and machinery and shifting of the same toKota. In view of the above discussion, the Assessing Officer rejected the lease deed and relied on the decision of the Supreme Court in the case of CIT v. Durga Prasad More [1971] 82 ITR 540. According to him, there was no transfer of either land or building thereon and in fact it was the sale of plant and machinery only. Hence, section 50 of 1961 Act was attracted since such plant and machinery were depreciable assets. Consequently, the difference between the WDV and the sale consideration amounted to short term capital gain liable to tax in the year under consideration. Further, according to him, it was a case of colourable devise to avoid payment of tax by resorting to dubious methods. Regarding interest element, it was held by him that it will be taxable in the respective years on accrual basis. 7. On appeal, the CIT(A) agreed with the findings and the conclusions of the Assessing Officer for the reasons given by him. Though the CIT(A) agreed that tax authorities could not interfere with any commercial decision yet he was of the view their economic implications must be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Tribunal. 8. The learned counsel for the assessee Mr. Syali has vehemently assailed the orders of lower authorities at length. His main arguments are twofolds. Firstly, the transaction between the assessee and SGL is a transaction of lease of land, building thereon as well as plant and machinery and not a transfer by way of sale of plant and machinery only as held by the lower authorities. Secondly, the lease transaction per se does not amount to transfer within the definition clause (47) of section 2. 9. For the sake of convenience he addressed the Bench first on the second contention. He read out the definition clause to point out that at the best such transaction could fall within sub-clause (vi) which speaks of any transaction which has the effect of transferring or enabling the enjoyment of any immovable property. He then drew our attention to the Explanation below this clause which defines the meaning of 'immovable property' for the purpose of sub-clauses (v) and (vi). According to the Explanation the immovable property shall have the same meaning as in clause (a) of section 269UA. He then read out the provisions of section 269UA(d) which defines the words 'immovab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be equated with simple lease of land and therefore, the decision of Supreme Court cannot be applied to the present case. 12. Proceeding further, he drew our attention to the provisions of section 2(24) of Gift-tax Act to point out that definition of 'gift' in this clause specifically includes the lease within the purview of 'transfer'. According to him, there was no need to include the lease in the definition of the transfer if such lease could be included within the general meaning of the word'transfer'. So it was argued by him that lease transaction cannot be brought within the meaning of the word'transfer' under section 2(47) as it is not included specifically. In this connection, he relied on the observations of the Supreme Court in para 16 of the judgment in the case of Gram Panchayat v. Director, Consolidation of Holdings [1989] 2 SCC Supp. 465 wherein it has been held that expression of one thing is the exclusion of another. Accordingly, it was strongly submitted by him that inclusion of lease for a term of 12 years or more in section 269UA would amount to exclusion of lease of less than 12 years. 13. The next contention of the learned counsel for the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords . . . ." 14. Further he referred to the decision of Supreme Court in the case of Provash Chandra Dalui v. Biswanath Banerjee AIR 1989 SC 1834 for the proposition that document should be considered as a whole and not in piecemeal. Further the document should be construed according of the meaning of the words used and if there is any doubt then the circumstances surrounding their creation may be considered. He further referred to another decision of the Supreme Court in the case of TamilNadu Electricity Board v. N. Raju Reddeiary JT [1996] (6) SC 14 wherein it has been held: 'Once a contract is reduced to writing, by operation of section 91 of the Evidence Act it is not open to any of the parties to seek to prove the terms of the contract with 'reference to some oral or other documentary evidence to find out the intention of the parties. Under section 92 of the Evidence Act where the written instrument appears to contain the whole terms of the contract then parties to the contract are not entitled to lead any oral evidence to ascertain the terms of the contract. It is only when the written contract does not contain the whole of the agreement between the parties and there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efinition has nothing to do with the meaning of the word 'transfer'. According to him, what is incorporated in section 2(47) is only the definition of immovable property and the definition of the word 'transfer' in section 269UA(f) has to be restricted for the purpose of Chapter XXC and cannot be incorporated or extended to section 2(47). Therefore, the contention of assessee's counsel that lease for less than 12 years is excluded from the definition of transfer cannot be accepted. According to him, the transaction of lease involves transfer of exclusive possession and enjoyment of the property during the lease period. Reference was made to the decision of the Hon'ble Supreme Court in the case of A.R. Krishnamurthy wherein it has been held that lease for a period of 10 years amounted to transfer of leasehold right liable to tax under section 45. The decision of Supreme Court in the case of R.K. Palshikar (HUF) v. CIT [1988] 172 ITR 311 was also cited in this regard. 18. Proceeding further it was submitted by him that the provisions of sections 90 and 91 of Evidence Act are merely rule of convenience and cannot be applied strictly to income-tax proceedings. According to him, if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer as well as the payment schedule appearing at pages 84 and 219 of the paper book. According to him, it is nothing but the price of the property transferred which was paid in instalments along with interest. This arrangement was stated to be a financing arrangement and, therefore, it was pleaded that it could not be considered as lease. 20. Proceeding further he also pointed out that the sealing unit at Bhiwadi had started shifting in the month of April 1993 i.e., even before the execution of the so called lease deed. The life of the plant and machinery was only 10 years. Therefore, the fact that the plant and machinery was to be returned after the lease period became irrelevant. He further pointed out that the down payment of Rs.3.64 crores was made by SGL which was immediately returned by the assessee towards issue of share capital. Further the transaction was not at arm's length since the assessee had right of effective management in SGL. It was also submitted by him that there was no intention of re-starting the business by the assessee. Further there was no clause of termination as usually exists in every lease document. At this stage, the learned counsel for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est has not specified and the so called bifurcation of interest has been made by the DR alone and not even by Assessing Officer. Further in response to the query from the Bench it was stated that value of Rs.20.729 crores was for land and building as well as plant and machinery and not exclusively for plant and machinery. He also pointed out that different life of machinery had been given by different valuers and the residual value of the machinery was always there. He further stated that the demand of black and white TV is still there inIndiaas well as in developing countries and therefore, it cannot be said that there would be no residuals life of machinery after 10 years. According to him, it was only for determining the value of the asset that a particular life of machinery was taken into consideration but it does not mean that life of machinery after 10 years should be zero. Merely because the lessor has received the value, it does not mean that there was no lease. Regarding payment of Rs.3.68 crores, it was subm itted that both the payments were for different purpose and there was actual transfer of money from both sides and, therefore, no adverse inference could be drawn. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd and building thereon and plant and machinery. There is a clear distinction in law between transactions of sale and lease. A sale can be said to be made when there is a transfer of ownership rights from one person to the other against consideration ie., price. In such cases, the transferor loses all the rights of the ownership, the moment transfer is made. But in case of lease, it is only the right to enjoy the property against consideration which is transferred from the owner to the other party. It is in fact separation of ownership and possession as held by Supreme Court in the case of Samatha v. State ofU.P.[1997] 8 SCC 191. Unlike sale, in case of lease, the ownership vests in the lessor and it is only the right to use which is transferred to lessee. So there is fundamental distinction between these two transactions which has to be borne in mind. 26. The question whether there is transaction of lease or sale would depend upon the construction of the document itself unless proved otherwise. It is the cardinal rule that construction of a document and the interpretation of the statute should be made in the manner which carries out the intention behind it. The intention must fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. However, this rule of interpretation is not absolute. Where genuineness of such document itself is challenged as in the present case one cannot restrict itself to the language used in the document. No doubt in such cases the onus would be very heavy to disprove the contents of the document on the party who challenges the same. At this stage, it would be useful to refer to the following observations of their Lordships of Hon'ble Supreme Court (Bench of three Judges) in the case of Sundaram Finance Ltd.: 'The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In each case, the Court has, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of the documents.' 29. With reference to income-tax cases, the Hon'ble Supreme Court has repeatedly held that the department can always tear the veil and find out the real nature of the transaction. Reference can be made to the decisions of the apex court in the case of Sunil Siddharthbhai . The relevant observations at page Nos. 523 524 in the case of Sunil Siddharthbhai , m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to proceed on what they regard as 'the substance of the matter'. The taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authori ties to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction'. This principle applies alike to cases in which the legal relation is recorded in a formal document and to cases where it has to be gathered from evidence oral and documentary and conduct of the parties." 31. Reference can also be made to Supreme Court decision in the case of Vidhyadhar wherein following observation was made in para 21 of the judgment: 'As regards right of Defendant I to raise pleas, it is not possible to subscribe to the view expressed in broad terms in Lal Achal Ram case by Privy Council that a stranger to a sale deed cannot dispute payment of consideration or its adequacy. A distinction has to be drawn between a deed which was intended to be real or operative between the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od and thereafter the property reverts back to the lessor. Thereafter the lessor continues to be the owner of the property. It is immaterial as to what value of the property remain after the period of lease. It is not the case of the revenue that plant and machinery would continue to remain in the possession for ever with the lessee. After the period of lease, the lessee is bound to restore the same to the lessor. Therefore, it is held that revenue has failed to prove that there was sale of plant and machinery. On the contrary, contents of the lease deed shows that lessee was prohibited to assign any right in the property to the third party. It was bound to display that ownership of plant and machinery was of the lessor. Further after the period of lease, lessee was bound in law to return the property to the lessor. There is nothing in the lease deed to show that it was the sale of plant and machinery itself. Accordingly, we vacate the finding of the Assessing Officer that there was sale of plant and machinery and hold that there was lease of such plant and machinery. 34. The remaining aspect of the question is whether there was grant of lease of the land, building thereon and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the possession was enjoyed exclusively by the lessor. The burden to prove the same is on the person who alleges so. Even if the lessee had allowed use of a negligible part of the building to the assessee, it cannot be said that grant of lease was invalid. So long as the lessee is paying consideration and the activity being carried on is within the knowledge of the lessee, it cannot be said that there was no lease of such land and building. The finding of Assessing Officer that assessee was not dispossessed of land and building is based on suspicion and conjecture. As already stated, no prudent businessman would pay such huge consideration unless possession of such property had been taken by him. The Assessing Officer has not given any concrete material to prove that such lease was sham and collusive one. Merely because the assessee had some say in the management of the lessee company and a part of premises was found in use by the sister concerns cannot be a ground for holding that the lease was sham or collusive particularly when there is no material to show that use of part of such building was allowed by the assessee. It is also not the case of the Assessing Officer that use of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Patna High Court in the case of Traders Miners Ltd. v. CIT [1955] 27 ITR 341: 'We think that the expression 'transfer' in the section includes not only a permanent transfer but also a temporary transfer of title to the property in question and lease of mines for any period would fall within the ambit of section 12B of the Act. It was also contended by Mr. Dutt that a transaction of lease did not tantamount to a transfer of title but that a mere contractual right was created. We do not think that this argument is correct. A lease of land is transfer of interest in the land and creates a right in rem: and there is a transfer of title in favour of the lessee though the lessor has right of reversion after the period of the lease terminates.' 37. These observations have been referred with approval by theApex Courtin the above two cases. This legal position is not even doubted by the ld. counsel for the assessee. 38. Now coming to the second issue, we would like to mention that profits arising from the transfer of capital asset were not exigible to tax under 1922 Act until the incorporation of section 12B. This section brought such profits within the net of tax under the hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the Id. counsel for the assessee as is apparent from the fact that assessee had to apply for permission under section 230A of 1961 Act in as much as no property could be transferred without the prior permission of the appropriate authority. In view of the above discussion, we are of the view that the transaction of the lease would fall within the general or natural meaning of the word 'transfer'itself. 41. The contention of theId.counsel for the assessee is however, on different line. According to him the legislature has itself excluded the lease transactions for a period of less than 12 years. According to him the transfer as defined in clause (47) of Section 2 does not specifically include the lease of assets and such transaction at best can be included only in subclause (vi) of clause (47) of section 2. It is his contention that for the purpose of such clause (vi), the definition of immovable property would be such as defined in clause (a) of Section 269UA by virtue of Explanation to section 2(47). That sub-clause (i) of clause (a) of Section 269UA takes within its ambit not only land or building along with plant and machinery but also the rights therein. His line of ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s includible in the ordinary meaning of the word 'transfer', the above contention of assessee's counsel has to be rejected. 43. The view taken by us is also fortified by the judgment of the Patna High Court in the case of Traders Miners Ltd. approved by the Hon'ble Supreme Court in the case of R.K. Palshikar (HUF) and in the case of A.R. Kirshnamurthy. The relevant observations of the Patna High Court have already been quoted by us in the preceding paras and therefore need not be repeated. The observations of Patna High Court were made with reference to Section 12B of the Act of 1922 which did not specifically include the lease transaction. Even then the lease transaction was held to be includible in the ordinary meaning of the word 'transfer'. The above judgment of the Patna High Court and the Supreme Court judgment in the case of A.R. Kirshnamurthy were tried to be distinguished by theId.counsel for the assessee on the ground that the lease considered by the courts was mining lease which included exploitation of assets while in the present case the lease was simple lease. We are unable to accept such distinction in view of the observations of their lordships of Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The material placed before us shows that assets to be leased were got valued by the assessee from M/s S.S. Kothari Co., Chartered Accountants, who had valued such assets at Rs.20,729 crores. The copy of the report appears at pages 149 to 156 of the paper book. According to this report, it was the business of the sealing unit of the assessee as a going concern which included land and building also. This value was admittedly adopted as consideration to be paid by the lessee to the assessee. It was agreed that down payment of Rs.3.64 crores was to be paid at the beginning and balance payment to be paid in 16 half-yearly instalments after moratorium period of two years subject to add on interest Ca) 14% per annum. According to this arrangement, the lease instalments of Rs. 237.14 lacs was determined to be paid every half-yearly after the period of moratorium. This is apparent from the schedule annexed with the lease deed. These facts have not been disputed before us. In our view, it is a case where the total value of the entire business of the sealing unit at Bhiwadi being Rs.20,729 crores was taken as consideration for use and enjoyment of such asset for a period of 10 years. This ..... X X X X Extracts X X X X X X X X Extracts X X X X
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