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TMI Blog2003 (8) TMI 475X X X X Extracts X X X X X X X X Extracts X X X X ..... owable. On behalf of the Department, the main contention was that the documentation had been so created as to give the transaction a touch of a genuine sale and lease-back arrangement and therefore, on the basis of the rule laid down by the Supreme Court in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148, the assessee should not be allowed depreciation. It was contended that the transaction in truth was borrowing of monies by the RSEB on the security of the assets, but the documentation had been so prepared as if it was a sale and lease-back arrangement. If it is a simple borrowing on the security of the assets, the assessee would not be entitled to depreciation. The Division Bench, for reasons recorded in the referral order, took the view that the matter may require deeper consideration not only because it affects many assessees who have adopted such sale and leaseback transactions, but also because of the complexity of the issue . It observed that the true effect of the documentation may need to be considered in deeper perspective because the Department is questioning the very stand of the assessee that the true effect of the documentation is that of a lease. In the opinion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel Mr. V. H. Patil and Mr. S. E. Dastur, respectively. West Coast Paper Mills Ltd., the intervener, was heard through Mr. Dastur. The Income-tax Department was heard through Mr. Sahai, Commissioner of Income-tax (DR) and Mr. Girish Dave, Commissioner of Income-tax (DR), respectively. Since the matter is one of general importance for the taxpayers as well as the Income-tax Department and also because of its complexity, we have bestowed upon it our careful and deep consideration to the best of our ability and grasp and by holding several rounds of discussions amongst us. We are indebted to learned counsel who appeared for both the appellants and the learned Commissioner of Income-tax (DRs) who appeared for the Income-tax Department. Their incisive and intellectual analysis of the issue and assiduous and able presentation with the supporting documentation, laced with case law, have been of enormous assistance to us in coming to a decision. Facts of Mid East Portfolio Management The facts in Mid East Portfolio Management Ltd. are these. In the return, the assessee claimed depreciation of Rs. 97.50 lakhs in respect of purchase of air pollution equipment, being Electrostatic Prec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and details of expenditure incurred in connection therewith, evidence as to how the assessee was satisfied that the price it paid to RSEB was in conformity with the market value of the equipment at the time of purchase, explanation as to how the assessee has the right of ownership without the right of removal, shifting, sale, etc., of the equipment as per the agreement and so on. The Assessing Officer also informed the assessee that as a result of independent enquiries conducted with RSEB, it transpired that the genuineness of the lease transaction has not been proved and it appears to be a mere finance transaction. He enclosed the copies of the replies submitted by RSEB with the letter. Accordingly, the assessee was required to prove genuineness of lease transaction with irrefutable evidence . In reply, the assessee furnished a detailed explanation in its letters dated March 10, 1998, and March 18, 1998. It was admitted that no physical inspection of its own was undertaken before purchasing the equipment from RSEB but the assessee relied on the valuation done by Choudhary and Associates. This was in the letter dated March 18, 1998. However, in the first letter dated Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial difficulties, forcing them to approach companies to provide funds to them under the nomenclature of sale and lease-back arrangement. This suited both the parties. The Electricity Boards got the funds they needed and the financiers got the benefit of depreciation. RSEB itself, as per its own information, sold and took back on lease various assets worth Rs. 175 crores from companies at Delhi, Mumbai and Madras as on March 31, 1995. After making the above general observations, the Assessing Officer proceeded to invoke the doctrine of McDowell [1985] 154 ITR 148 (SC). He observed that if the form of purchase and lease back given by the assessee to the transaction is to be disregarded and if the reality of the situation is to be viewed, it will be apparent that what the assessee has done is merely to advance monies to RSEB for fixed returns, which is nothing but a loan transaction. Therefore, the assessee s claim for depreciation has to be disallowed. Accordingly, the depreciation claim of Rs. 97.50 lakhs was disallowed. The lease rent received by the assessee was treated as income received pursuant to the financing transaction. The assessee appealed to the Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss, it is almost clear that the assessee is not the owner of the assets. In other words, the Commissioner of Income-tax (Appeals) held that since the assessee was not the owner, he did not undertake to bear any loss. (d) The intention of the assessee gathered from the surrounding circumstances is not to enter into a genuine lease transaction, but to enter into only a finance transaction. He placed strong reliance on the decision of the Supreme Court in the case of Sundaram Finance Ltd. v. State of Kerala, AIR 1966 SC 1178 ; [1966] 17 STC 489, where it was held that the true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. Several other decisions were also referred to by him. He also referred to the CBDT Circular No. 760 dated January 13, 1998 (see [1998] 229 ITR (St.) 42), where it was observed that in ascertaining whether a transaction is a hire purchase or a loan, regard must be had to the substance thereof by looking into the terms of the agreement, its nature, etc., so as to determine the real intention of the parties. (e) The intention of the assessee was only to reduce its taxable income by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, only one transaction is in dispute, viz., the lease of boiler package and auxiliaries acquired from the Gujarat Electricity Board (hereinafter referred to as GEB ) on March 12, 1993, and leased to them on the same day. The amount received from GEB as lease rental during the year was Rs. 1,18,25,000. These details are available in the form of a chart at page 145 of the paperbook. In the assessment proceedings, the Assessing Officer appears to have raised queries with regard to the SLB transactions entered into between Wipro Infotech and GEB, but finally seems to have accepted the transaction with the former. In respect of the SLB transaction with GEB, the facts are these. GEB acquired two boilers, one in the year 1990 and the other in the year 1991 at the cost of Rs. 65.54 crores. In the year 1993, the assessee acquired these boilers from GEB for Rs. 50 crores. The amount was paid in five installments between February 2, 1993, and February 22, 1993. The equipment was leased to GEB for a period of five years under a lease agreement dated January 29, 1993. In the return of income, the assessee bifurcated the assets into own assets and leased assets for purposes of claiming de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of company law as per the rates provided by the Electricity (Supply) Act, 1948, because these assets form part of the block of assets and from this it was clear that the agreement of lease and papers relating to sale are sham transactions and are totally unreliable . According to the Assessing Officer, the non-furnishing of the details such as the proper cost of the assets, the profit which GEB earned on the sale, etc., was deliberate and leads to an inference that the SLB transaction was a sham. The assessee also did not enjoy the rights of ownership such as right of removal, shifting, sale, demolition, etc. The assessee was not able to exercise these rights since the boiler was being used by the power station of GEB and it cannot be conceived that such rights which are incidental to ownership could be exercised by the assessee. In the annual accounts for the year ended March 31, 1993, in paragraph 22, the board of directors of the GEB have stated that GEB has availed finance under lease finance arrangements from various institutions and under the said arrangements, the leased assets will get transferred to the board on expiry of the lease period on payment of termin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts to the leasing company (i.e., ICICI) have been provided towards charges for interest and balance towards the liability for the assets on lease. GEB had also shown in its accounts the sale proceeds or lease liabilities as loans in Schedule 32 at page 53 of the annual accounts. From these facts, the Assessing Officer concluded that without any doubt this was only a loan finance and not a lease finance. Accordingly, he rejected the assessee s claim for depreciation on the boiler and auxiliaries which are the leased assets. On appeal, the Commissioner of Income-tax (Appeals) considered the matter in paragraphs 16 to 23 of his order. His conclusions are contained in paragraphs 24 and 25. He found that the equipment was ordered by GEB from BHEL and the latter had received payment directly from GEB. Therefore, when the lease agreement was entered into, the equipment had already been installed and commissioned and the payments were already made. The amount paid by the assessee was admittedly not utilized by GEB for the acquisition of the equipment, but was utilized for meeting its commitments for new schemes. He therefore concluded that the transaction was only a loan and not a lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The assessee s accounts did not contain any reference to the excise duty paid by the purchaser. For the purposes of sales tax, the assessee had to declare its turnover which under the relevant sales tax law included excise duty. However, the company declared the turnover excluding the excise duty paid by the purchaser. The Sales Tax Officer took the view that the excise duty paid by the purchasers should be included in the turnover. The assessee contested this and the matter reached the Supreme Court. The Supreme Court held that the excise duty paid by the purchasers did not go into the common bill of the company and, therefore, the sales tax authorities were not competent to include the same in the turnover. After the judgment of the Supreme Court, the relevant Distillery Rules were amended to provide that the excise duty paid by the purchaser of the liquor is includible in the turnover. Consequent to the amendment, notices were issued by the Sales Tax Officer to the company proposing to include such excise duty in the turnover. The matter again reached the Supreme Court at the instance of the assessee. The Supreme Court held that its earlier judgment that the intending purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itish Courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare state like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of blackmoney, directly causing inflation. Then there is the large hidden loss to the community (as pointed out by Master Wheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the taxavoider and his expert team of advisers, lawyers and accountants on the one side and the tax-gatherers and his perhaps not so skilful advisers on the other side. Then again there is the sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it . Last, but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the artful dodgers . It may, indeed, be difficul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the company and hence includible in the company s turnover for purposes of sales tax and that this was always the correct legal position, recognised by the amendment made to the Distillery Rules. It was contended that this is the ratio of the judgment which is binding on all the lower courts and the observations regarding tax evasion or avoidance are not binding. It was said that the observations were not necessary for the disposal of the case before the court. We were referred by Mr. Dastur to Additional District Magistrate v. Shivakant Shukla [1976] AIR 1976 SC 1207, and portions of the judgment were read out where guidelines were laid down as to how a judgment of a court should be read and understood. It was contended on the basis of this judgment that no judgment can be read as if it is a statute, that the general expressions found in a judgment are not intended to be expositions of the whole law, but are governed and qualified by the particular facts of the case, that the essence of a decision is its ratio and not every observation found therein, that an obiter cannot take the place of the ratio, that obiter does not have any binding effect nor are they conclusive and tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of any such guidelines, the approach to the question of tax avoidance is likely to be arbitrary or whimsical or uncertain or even perverse, a situation which certainly does not augur well for the tax administration. As a matter of fact in the course of his arguments, Mr. Dastur, the learned counsel for ICICI did submit on the strength of the House of Lords decision in Macniven (H. M. Inspector of Taxes) v. Westmoreland Investments Ltd. [2002] 255 ITR 612 that McDowell [1985] 154 ITR 148 (SC) does not lay down any rule and that at best (it lays down) only an approach . McDowell [1985] 154 ITR 148 (SC), in our opinion also, is more of an approach to the facts of a particular case than any inviolable rule laid down regarding tax evasion. It is a call to the courts and Tribunals to expose subterfuges, colourable devices and dubious methods in tax cases. It is a caution administered that lawful dues to the State cannot be withheld under schemes acquired off-the-shelf or through transactions that have no commercial or economic value or by taking certain pre-ordained steps which are calculated to cancel out each other. The approach in such cases must be to take the entire transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment arises where what the income-tax authorities do is not to doubt or dispute the genuineness of the transaction/agreement/document, but to add to its terms what they think should be added or delete therefrom what according to them should be deleted so that it can be interpreted in their favour enabling them to collect more taxes. This approach has been strongly deprecated by the courts. The right of the parties to enter into transactions according to their free will and choice has always been protected, the only rider being that both the professed intention and the real intention should be the same. The income-tax authorities have without exception been denied the right to vary the terms of the contract between the parties merely because the agreed terms are not to their liking in the sense that they do not add to the statistics of collection of taxes. Cases on point are CIT v. Motors and General Stores (P.) Ltd. [1967] 66 ITR 692 (SC) and CIT v. B. M. Kharwar [1969] 72 ITR 603 (SC). This approach has been reiterated recently by the Gujarat High Court in Banyan and Berry v. CIT [1996] 222 ITR 831. McDowell [1985] 154 ITR 148 (SC) therefore did not depart from what has already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of their genuineness, which resulted in a reduction of tax liability would be hit by a rule. In Banyan and Berry [1996] 222 ITR 831, the Gujarat High Court confirmed the right of freedom of business and to enter into commercial transactions and confined the applicability of the rule in McDowell [1985] 154 ITR 148 (SC) to a case where a colourable device or a subterfuge is adopted to evade the tax liability. The applicability of the approach in McDowell [1985] 154 ITR 148 (SC) should be confined to a case where the sole motive of the parties to the transaction is the avoidance of tax and for this purpose the courts are bound to enquire into the reality. Union of India v. Playworld Electronics Pvt. Ltd. [1990] 184 ITR 308 (SC) is a case where it was reiterated that tax planning may be legitimate provided it is within the framework of the law. It was stated that colourable devices cannot be part of tax planning. It was also observed that one must find out the true nature of the transaction. In the light of these cases in which McDowell [1985] 154 ITR 148 (SC) has been considered, it seems to us that the proper way to understand the observations in McDowell [1985] 154 ITR 148 (SC) rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is sought to attach a tax or a tax consequence and if that emerges from a series or a combination of transactions, intended to operate as such, it is that series or combination which shall be regarded. We understand the learned law Lord as saying that we are not bound to consider individually each separate step in a composite transaction intended to be carried through as a whole and that we are to look at the transaction as a whole to find out if it is a subterfuge. The learned law Lord had also observed that while the court was under an obligation to accept documents and transactions found to be genuine as such, it is under no compulsion to look at the document or transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or a transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded. To do so is not to prefer form to substance, or substance to form. We were treated by counsel to some classic observations from recent English cases where the rule of W. T. Ramsay [1982] A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Since the means adopted were not objectionable, and the only objection being that it resulted in tax mitigation, the House of Lords held that the arrangement must be given effect to. It thus appears to us that where the means adopted are bona fide and not a subterfuge and the series of transactions which are followed as the means are not colourable devices or dubious methods, the mere fact that there is tax mitigation does not attract the approach in McDowell [1985] 154 ITR 148 (SC). As Mr. Dastur put it, you would apply the McDowell [1985] 154 ITR 148 (SC) approach to a case where prima facie the transaction is not what it purports to be, an approach which was adopted by the Mumbai Bench of the Tribunal in Kantilal Manilal and Co. v. Deputy CIT [2002] 82 ITD 354, or to a fake transaction. It is in the light of our above understanding of the observations relating to tax avoidance made in McDowell [1985] 154 ITR 148 (SC), that we set out to deal with the issues raised before us in the appeals. What is a sale and lease-back transaction (SLB) ? Can it be misused ? A sale and lease-back transaction is one where an asset is sold by A to B and simultaneously B agrees to lease o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof. Normally in such a transaction, if it is viewed as a pure financing transaction with the asset continuing to be owned by the assessee who has lent the money merely for purposes of security, what is received by the assessee from the lessee must be considered as interest on the monies advanced. The business would be that of money lending. The assessee would not be entitled to the depreciation on the asset because it is not used in the business of money-lending. In order to get over this situation, the SLB arrangement was thought of. If the SLB arrangement is viewed as a leasing transaction, the assessee-lessor would be entitled to depreciation on the asset leased out since his business would be that of leasing and not mere money-lending. That an assessee who is engaged in the business of leasing is eligible for depreciation on the assets leased out has been recognised by the Supreme Court in the case of Shaan Finance [1998] 231 ITR 308. The same decision is sought to be invoked in support of the claim for depreciation in respect of assets leased out in a SLB arrangement. The finance lease is normally a method of financing the assets through the medium of a lease. For examp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1998] 231 ITR 308 can claim depreciation in respect of the assets leased out. This is the modification brought about to a simple loan arrangement. A question may arise like this : As far as depreciation is concerned, it was earlier being claimed by company B, whereas the same is now being claimed by company A and therefore what is the advantage ? The answer to this depends on the fact as to what would be the benefit derived by the allowance of depreciation or rather which of the two parties, company A or company B, would derive more benefit because of the allowance of depreciation. This would depend on the profit figures of both the companies. If company B is a loss-making company and therefore the allowance of depreciation would make no difference in its income-tax assessments, it would be more beneficial to have the depreciation allowed in the assessments of company A, if it is a profit-making company. Now the further question would arise as to how to shift the depreciation allowance from company B to company A. Under section 32 of the Income-tax Act, two conditions have to be satisfied before depreciation allowance can be claimed. First, the assessee should be the owner of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs were placed before us, as also the transactions in the present cases, is that the parties are particular that the asset is one which enjoys 100 per cent. depreciation allowance under the Income-tax Act. We shall presently see that in the case of Mid East Portfolio Management Ltd. there is repeated reference to assets eligible for 100 per cent. depreciation under the Act, in the negotiations and the documentation such as the agenda note, etc. Both under finance and operational leases, normally the parties should not be unduly concerned about the choice of the assets, for that would be determined by the needs of the lessee s business. But where the parties show undue interest in ensuring that the asset which is to be sold and leased back is one which enjoys 100 per cent. depreciation allowance under the Act, it would raise doubt as to the motive of the parties. The Act and the Rules provide for depreciation allowance at 100 per cent. of the cost/written down value of energy-saving devices, pollution-control devices, waste-control or management devices, etc. These provisions were apparently introduced with the object of controlling pollution, efficient management of waste, conserva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the transaction was not a borrowing of money, but a bona fide sale and hiring of the rolling stock, and was therefore valid both against the railway company and the sureties. This case was placed before us to show that SLB transactions have been recognised in the commercial world for long and that by a judicial decision they cannot be done away with. Our attention was also drawn to the fact that in that case what originally started as a simple loan arrangement was altered in the course of negotiations between the companies on taking counsel s opinion with respect to the powers to borrow and lend monies and thereafter it took the colour of sale and hire back transaction and that notwithstanding this, the Chancery Division did not hold that the transaction was a simple borrowing of money, but held that it was a bona fide sale and hire back transaction, valid against both the companies. We have considered this aspect of the matter very carefully. There can be no doubt that SLB transactions have been recognised and acted upon in the commercial world for quite sometime, if the judgment of the Chancery Division cited above is any indication. Undoubtedly, they cannot be derec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be to sell the rolling stock and then to take a lease of it from the purchasers and in that way to retain the use of it on payment of what was equivalent to the loan and interest in 5 years by way or rent, that the events took a different turn, resolutions were altered and documents were prepared on the basis of counsel s advice. Considerations of income-tax did not enter the picture at all. It was held that the original intention of the railway company was modified and they adopted a different method to achieve the object, viz., the obtaining of funds. The object of wagon company was to get back the money with interest over a period of 5 years and the mode of carrying it out was indifferent to them so long as they were safe and the finding is that therefore they acceded to the terms suggested to them by the railway company to make it a sale and lease. Lindley, L. J. in his separate judgment, observed that the learned judge of the court below considered the transaction of hire as a mere device or cloak to conceal a loan and admitted that if he had been of the same view of the facts, he also would have come to the same conclusion and in that case, he would have disregard(ed) or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oney at a low rate of interest by notional sale of plant and machinery and to take them back on lease. (iii) The valuation report prepared by Choudhary and Associates. It was submitted that RSEB intended to sell the plant machinery and then take it back on lease and thus there was a real sale. It was submitted that the word notional used by the Board of RSEB in their decision should be understood in the context without attributing any other meaning, and certainly not the meaning that the sale was not a real sale. The word notional was not used in the sense of being fictional. It was used in the sense that the equipment had to come back to RSEB as lease. At any rate, no adverse inference is possible merely because of the use of the word notional by RSEB and not by the assessee. RSEB, it was pointed out, did not claim any depreciation in its return, consistent with the position that there was a real sale. Our attention was also drawn to the fact that the Government of Rajasthan issued a Notification exempting the sale of the equipment by RSEB from the levy of sales tax, which was quite unnecessary if there was no real sale. The sale was exempt from sales tax on grounds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant principles of valuation. At any rate, according to him, there was nothing to show overvaluation of the assets. (b) The Assessing Officer had also taken the objection that the assessee did not become the real owner of the equipment since the rights remaining with the assessee after the lease deed was executed were not mentioned in the same. With regard to this objection, Mr. Patil submitted that there was no need to specify the rights remaining with the assessee in the lease deed. With regard to the Assessing Officer s query as to why the sale deed as well as the lease deed were executed simultaneously, Mr. Patil submitted that, that was the feature of an SLB transaction and there was nothing unusual about the same. (c) One of the allegations of the Assessing Officer was that the written down value figures had not been furnished by the assessee. To this, Mr. Patil submitted that after the block asset concept introduced from April 1, 1988, it is difficult to ascertain the written down value of each asset and hence could not be furnished. (d) Mr. Patil also criticized the conclusions drawn by the Commissioner of Income-tax (Appeals) in paragraphs 28 to 34 of his order and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of assets leased out under a SLB arrangement, whereas after the amendment, the assessee would be entitled to a lesser amount of depreciation. This, according to Mr. Patil, was the only change in the law with effect from October 1, 1996. Thus, both before and after the amendment, the Income-tax Act itself recognizes the claim for depreciation in respect of assets leased out under a SLB transaction. It was therefore contended that SLB transactions as such should not be viewed with any suspicion or a preconceived notion and so long as such transactions are genuine, the law itself recognizes the right of the lessor to depreciation. Since the present transaction with the RSEB is a genuine lease under a SLB arrangement, the assessee was entitled to the depreciation as claimed. It was thus pointed out by Mr. Patil that the Income-tax Department and the judiciary have accepted a finance lease to be essentially a lease and not a mere money-lending transaction, and if so, the assessee is entitled to depreciation on the assets leased out. (C) Is McDowell [1985] 154 ITR 148 (SC) applicable ? Apart from the general arguments regarding McDowell, which we have already adverted to, Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and also incidentally confer some tax benefit. If two options are open to achieve the same business result, it is open to the assessee to choose the one with a reduced tax liability without attracting McDowell. This is only a tax planning or tax mitigating effort and not tax evasion or tax avoidance. Mr. Patil contended that the assessee was merely taking the benefit of tax advantage given by the law itself and therefore there is nothing colourable or dubious about it. The very essence of a SLB transaction is that there would be a sale first to the would be lessor and thereafter a lease back to the erstwhile owner of the asset and it was this form which the parties chose to adopt with all sincerity and genuineness, the tax benefit by way of depreciation allowance to the assessee being only an incidental consideration. Mr. Patil also filed a statement titled cash flow for Income-tax liabilities to demonstrate that there was no tax avoidance if a period of 5 to 10 years is taken into consideration. In fact, he even went to the extent of saying that the assessee would end up paying more taxes if its claim is accepted. Mr. Patil assured us that all the assumptions on the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the residual value thereof be ascertained at all ? He further posed the question as to how the leasing company can be expected to know the residual value of the equipment without even knowing what equipment is going to be sold by the RSEB, what is its cost, etc. (e) The agenda note submitted to the Board of Directors of the RSEB refers to the fact that the cost of raising the finance from the assessee works out to 6.67 per cent. per annum and that this rate has been computed considering the amount of initial inflow and the period for which the different amounts would be actually available for utilisation, as the monthly lease rental payable includes the element of interest as well as the repayment of principal amount . This shows that the RSEB considered it as a finance transaction only. (f) In the RSEB s letter dated February 2, 1995, to the syndicate of which the assessee was a member, the residual value of the equipment has been shown at 20 per cent. (col. 5 of the letter) which will be adjusted against 20 per cent. retained security deposit for transfer of ownership back to the RSEB (lessee) . This shows that the parties have decided, even at the embryo stage of the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has not given any description of the ingredients of the equipment. He has not seen the equipment at all. The annexures stated to have been enclosed to the valuation report are not in fact enclosed. There is no discussion by the valuer as to how he arrived at the value. Mr. Sahai also referred to the letter dated March 9, 1998, written by the RSEB to the assessee stating, inter alia, that photographs of the assets may not be possible due to security reasons. He also referred to the letter written by M. Choudhary, the valuer on April 11, 2001 to the Deputy Commissioner of Income-tax, Special Range, 27, Aaykar Bhavan, Mumbai, on the subject valuation of plant and machinery assets of M/s. Rajasthan State Electricity Board . In this letter, the valuer has admitted that though he visited Kota Thermal Power Station on February 11, 1995, for inspection, the exact equipment mentioned in his valuation report were not seen by him and that the valuation was done on the basis of information provided by the employees of the RSEB. (l) The security for the money advanced by the assessee to the RSEB was provided by a lien on the Collection Account of the RSEB with the bank, without any due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t apposite to movable property and that the word bailment is the more appropriate word as has been used in section 148 of the Contract Act, 1872. Section 160 of the Contract Act obliges the bailee to return the goods to the bailor after the purpose of the bailment has been served. Contrary thereto, there is no provision in the lease agreement as to what will happen to the equipment at the end of the period of lease (bailment). Under the agreement, the assessee has no right to remove the asset for default in payment of lease rent during the currency of the agreement. Therefore, two essential ingredients of lease are missing. The transaction is also not a hire purchase transaction since the lease agreement does not contain any provision conferring an option to the RSEB to purchase the equipment. However, it is argued that if one goes by the intention of the parties, it may appear as if it was considered by them to be a hire purchase transaction. Mr. Sahai filed some calculations to show that the assessee receives less than its investment and hence incurs a loss and therefore the only attraction is the depreciation, for which necessary documentation has been prepared to project a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term lessor in the lease agreement. He also filed a copy of the order of the Mumbai Bench of the Tribunal in the case of CMIE where even though the lease document contained a clause that the lessor will take back the equipment on termination of the lease, it was held that the document embodied a sale, but given the caption as agreement of lease . (C) Assuming that there is a valid lease by the assessee to the RSEB, to what depreciation would the assessee be entitled ? Mr. Sahai referred to section 32(1)(ii) and submitted that in the case of any block of assets, depreciation is to be allowed at such percentage on the written down value thereof as may be prescribed. Section 43(6)(c)(i)(A) provides that the written down value, in the case of block of assets, shall be increased by the actual cost of any asset falling within that block acquired during the previous year. Section 43(1) defines actual cost to mean the actual cost of the assets to the assessee, reduced by that portion of the cost which has been directly or indirectly met by any other person or authority. Mr. Sahai referred to the judgment of the Delhi High Court in CIT v. Dalmia Dadri Cement Ltd. [1980] 125 ITR 510 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no discussion in the report on vital issues such as original cost of the equipment, life of the equipment, date of purchase, etc. (c) The valuation of the equipment is stated to have been carried out on a single day. It is impossible to carry out such a stupendous task in one day. (d) The valuer has simply relied on information supplied by the staff of the RSEB without personally inspecting the equipment for valuation purposes. (e) The credibility of Mr. Choudhary himself is in question as he has admitted before the income-tax authorities of ante-dating the valuation report in the case of Haryana State Electricity Board. Mr. Sahai referred in this connection to page 27 of the Department s paperbook which is a statement given by Mr. Choudhary before the Income-tax Department. In answer to question No. 7 he has admitted that he had ante-dated the valuation report as required by the leasing company concerned (in the case before the income-tax authorities), that he did not visit the site where the equipment was located, nor did he physically inspect the machinery before issuing the valuation report. (f) The amount shown as market value of the equipment has no relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n allowance is admissible on those assets, and the buyer again claimed depreciation on these assets at the sale value. There have also been cases, as pointed out in the memorandum, where such SLB transactions have been effected at values much higher than the fair market value of the assets. In order to curb such transactions, i.e., where an asset has been sold and reacquired by an assessee by way of lease, hire or otherwise, it was proposed to make an amendment to the effect that in such cases the actual cost for the purpose of deduction of depreciation shall be the written down value at the time of transfer in the hands of the seller. While admitting that it may not be possible or proper to characterise all SLB transactions as colourable devices or subterfuges, Mr. Sahai submitted that even after the above Explanation was inserted, the power of the Department to examine whether the transaction is a real and genuine SLB or is a mere financing transaction is not taken away. If it is found to be a genuine SLB, actual cost will be computed as per the above Explanation. If on the other hand, it is found to be a mere financing transaction, the interest received will be taxed and section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words notional sale must be considered to have been consciously discarded by both the parties. It was submitted that a loose expression coined in the agenda note should not be given undue weight. (e) As regards the identification of the equipment, Mr. Patil filed a colour drawing of the air-pollution equipment and reiterated that the equipment was identifiable, that a price has been paid by the assessee for the same and constructive delivery was also taken and thus there was a completed sale thereof by the RSEB to the assessee. (f) With reference to the letter dated February 2, 1995, written by the RSEB to the assessee on which heavy reliance was placed by the learned Commissioner of Income-tax (Departmental Representative), Mr. Patil pointed out that there was nothing in the lease document to show that the equipment was to be repurchased by the RSEB at the end of the lease period. Thus, it was contended, the so-called mandate given in the letter has been spurned by the assessee or if it is taken as an offer to the assessee, the same has been rejected. It was submitted that clause 12(g) of the lease agreement, when it refers to mandate , merely enables the identification o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the department are based on the facts and circumstances of those cases. For instance, in the case of Kantilal Manilal [2002] 82 ITD 354 (Mumbai), it was a case of a nongenuine transaction. In the case of Shaw Wallace (supra), the lease back bore a date which was even before the date of sale and the meters fixed in the buildings of consumers, which were the subject of lease, cannot be removed. The above is the summary of Mr. Patil s reply to the arguments made on behalf of the Department by Mr. Sahai. ICICI Ltd. Rival contentions Contentions of the assessee : Mr. S. E. Dastur, learned counsel for the assessee raised the following contentions : (A) The ownership rights over the equipment (boilers) vest with the assessee The terms of the lease agreement dated January 29, 1993, between the assessee and GEB were analysed and it was submitted that a reading of them as a whole showed that the assessee was the owner of the boilers. Clause 2.12 provides for the return of the boilers by GEB to the assessee at the end of the lease period at its own costs and expenses. There is reference to the return of the boilers in the lessee s warranty s clause (3.2). In clause 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the boilers. The assessee shall also be entitled to sell, release or otherwise dispose of the boilers in such manner as it thinks fit without being bound to account to GEB in any manner whatsoever. This right available to the assessee is inconsistent with the position that what the assessee advanced was merely a loan because in the case of a loan, the creditor, when he enforces the security, is obliged to account for the proceeds to the debtor. Clause 9.1 gives the power of assignment to the assessee of any of its rights under the lease agreement and the assignee shall be entitled to the full benefit of such rights. In contrast, clause 4.12 prohibits the lessee (GEB) from assigning its rights/obligations or interest under the lease agreement and in general from dealing with the boilers as its own. Both the clauses read together show that the assessee is the owner of the boilers. In the schedule to the lease agreement, clause 7 says that depreciation allowance has been taken into account while fixing the lease rentals. The contention was that a mere taking into account of the taxation aspect while entering into the lease agreement is not heinous provided the means adopted are hone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to GEB by a registered dealer or by a lease finance company or financial institution, provided the GEB furnishes to the dealer or to the lease finance company or financial institution a certificate in the form appended to the notification declaring, inter alia, that the plant and machinery so purchased shall be used by GEB in the generation and public distribution of electricity. In the same Gazette, another notification was issued granting exemption from sales tax in respect of sale of plant and machinery by GEB to any lease finance company or financial institution, if the authorised officer of the GEB incorporates a declaration in the form appended to the notification in the bill or invoice issued by him in respect of the sale. The declaration in the prescribed form is as under : I (name) (designation of the authorized officer of Gujarat Electricity Board) do hereby certify that the plant and machinery sold by the Gujarat Electricity Board to M/s. . shall be taken on lease by the Gujarat Electricity Board from the lease finance company or financial institution for the use by the Gujarat Electricity Board in the generation and public distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was pointed out that GEB did not claim depreciation on the boilers in its income-tax assessments and that this was confirmed by its letter dated July 30, 1996, written to the assessee (page 146 of the paperbook). Attention was also drawn to page 152G of the paperbook, which is a copy of the statement of Mr. P. K. Das, General Manager (Finance), GEB recorded under section 131 of the Income-tax Act on March 21, 1996, by the Deputy Commissioner of Incometax, Special Range 36, Mumbai. In this statement, in answer to question No. 3, he has stated that in the books of GEB, depreciation was provided and was being provided till date for the purpose of arriving at the actual profit or loss for the year in terms of the provisions of section 59 read with section 63 of the Electricity (Supply) Act, 1948, and that however while working out the taxable income of the Board, a decision was taken to add back the realised value of the assets sold to their net block according to the Income-tax Act and not to claim any depreciation on the assets obtained on lease. We were also referred to an earlier letter dated March 20, 1996, written by GSEB to the Assessing Officer wherein it was clarified that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on payment of terminal value ranging from 1 to 2 per cent. of the original cost of the relevant assets. Accordingly, the board s financial obligations under the lease arrangements have been provided as liability in the books of account and correspondingly the leased assets are taken under the block of fixed assets. Depreciation has also been provided for on the leased assets for the use of these assets. Having recognised position of lease arrangements and associated terms and conditions thereof and the principle followed as stated above, the lease rentals payable by the Board in instalments to the leasing company have been provided towards charges for interest and balance towards the liability for the assets on lease. (Statement 1, Schedule 12, Statement 3, Schedule 19, Schedule 21 and Schedule 32). The Assessing Officer has therefore raised the question as to why did GEB say that the leased assets will come back to it, when all along the claim of the assessee has been that there is no such provision in the SLB arrangement. He would appear to have started the enquiry by the letter dated March 4, 1996. Mr. Dastur has drawn our attention to GEB s letter dated July 26, 1996, add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... get compulsorily sold to GEB and nobody else, on termination of the lease period. To counter this, Mr. Dastur has relied heavily on the remarks of the AG. According to him, the AG s understanding of the lease agreements should prevail, and his criticism of the GEB s view of the lease agreements must be considered valid because he is an independent authority whose duty it was to conduct an audit of the accounts of GEB. The AG has found fault with GEB s understanding of the lease agreements to the effect that the leased assets will get transferred to it on the expiry of the lease period. Such an erroneous understanding, according to the AG, was generated by the offer letters only. Such a stipulation did not find a place in the final agreement. Thus, according to Mr. Dastur, note No. 22 to the annual accounts of GEB for the year ended March 31, 1993, is contrary to (a) the express provisions of the lease agreement, (b) the letter written by GEB itself to the assessee on July 26, 1996, (c) the understanding of the AG, of the lease agreements, and (d) an affidavit dated August 16, 1996, filed by one Mr. Rajendra M. Desai, Deputy Zonal Manager of the assessee, incharge of leasing activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. According to it, a lease may be considered to be a finance lease if any one of the following conditions are satisfied : (1) The lease transfers the ownership of the asset to the lessee by the end of the lease term. This is nothing but hire purchase. (2) The lease contains a bargain purchase option. (3) Had the lessee owned the asset, 75 per cent. or more of the initial value (actual cost or WDV) of the asset would have been available as depreciation. (4) The present value of minimum lease payments (lease rentals + guaranteed residual value) at the beginning of the lease term is 90 per cent. or more of the initial value. The rate of interest taken here is the highest rate of interest at which the lessor has taken loan from a bank or financial institution. In the absence of this information, a rate of 20 per cent. is to be taken. According to Mr. Dastur, in order to put into effect the approach paper (as the Assessing Officer wants to), the rules framed under the Income-tax Act must provide for it, thus giving authority to the Assessing Officer to do so. No such authority has in fact been given. Therefore, at best, the approach paper can be looked at only for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, according to Mr. Dastur, to the evils brought to its notice, is the insertion of Explanation 4A to section 43(1) by the Finance (No. 2) Act, 1996, with effect from the assessment year 1997-98. The amendment was made from October 1, 1996, but the first assessment year from which it was to take effect was the assessment year 1997-98. The effect of the Explanation is that for the purposes of depreciation allowable in the hands of the lessor, the actual cost shall be the same as the WDV of the assets at the time of sale thereof by the lessee. When we know the evil sought to be remedied and the remedial provisions, it can hardly be suggested that the Assessing Officer shall disallow the claim of depreciation in the lessor s hands. Mr. Dastur contended that when a specific tool is given to the Assessing Officer in the form of a statutory provision to tackle a particular situation, the Assessing Officer can use that tool only and none else. He cannot try to over reach the statutory provision by disallowing the depreciation in toto. If the WDV of the asset in the hands of the lessee at the time of the sale to the lessor is not known, then the same has to be ascertained in accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se who is the lessor, thus refusing to recognize one part of the same transaction which is wholly unjustified. Two decisions were cited to show that such an inconsistent position cannot be taken by the income-tax authorities : (1) Tribhovandas Bhimji Zaveri v. Asst. CIT [2001] 247 ITR 727, 732-734 (Bom) ; and (2) M. V. S. Kathirvelu Nadar v. CAIT [1968] 68 ITR 786 (Mad). (M) Is Explanation 3 to section 43(1) applicable ? The initial objection of Mr. Dastur was that the question referred to the Special Bench does not cover this aspect and therefore cannot be gone into. He however submitted that if the Assessing Officer had felt that the actual cost of Rs. 50 crores paid by the assessee was excessive, he could have invoked this Explanation and reduced the figure of actual cost in the manner provided in the Explanation, but in any case the Assessing Officer cannot ignore the lease transaction and consider it as a simple loan. If the figure of written down value was required, the Assessing Officer was free to get the same either from the assessee or GEB and if it was not forthcoming, he could have worked it out himself as he had the figure of actual cost before him, and the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identified, according to Mr. Dastur, has not been doubted by the Assessing Officer. The intention of the parties was clear from the sale deed which constitutes the terms of the contract. The delivery of the goods can be constructive or symbolic under the Sale of Goods Act and in the case of a SLB transaction, delivery need not be actual in fact, it was contended that it is always constructive. The ratio laid down by the Supreme Court in J. B. Boda and Co. (P.) Ltd. v. CBDT [1997] 223 ITR 271-277 that an empty formality need not be followed and the transaction cannot get invalidated because such an empty formality was not followed, should be adopted in such cases and there should be no insistence on the empty formality of physically handing over delivery on sale and again physical redelivery on lease back. It was thus contended by Mr. Dastur that there was a valid sale of high efficiency boilers by GEB to the assessee in the first instance. Case-law : In the course of his arguments, Mr. Dastur, learned counsel for the assessee took us through several authorities, a few of which were heavily relied upon by him. We shall now notice them : (1) 20th Century Finance and Consultan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the lessee-appellant on mutually agreed terms. The ownership of the machinery vested with the bank. The court recognised that it must construe the true effect of a transaction from the terms of the agreement considered in the light of the surrounding circumstances. In this connection, the decision of the Supreme Court in Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489 was referred to and the test laid down in that decision were applied. The hon ble Bombay High Court examined the conduct of the parties as well as the correspondence on record and came to the conclusion that the ownership of the machinery vested with the lessor-bank and it was only leased to the lessee-appellant on certain terms and conditions and was to be returned to the bank on the expiry of the lease period. Thus, the judgment of the hon ble single judge was affirmed. This judgment has become final, the special leave petition filed against the same by Prakash Industries Ltd. having been dismissed by the Supreme Court by the order dated May 11, 1989 (copy placed at page 556 of the paperbook). Mr. Dastur filed a chart showing the similarity in clauses between the lease agreements entered into in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arliament. It was submitted that this decision actually supports the present arrangement. (6) CMIE v. Deputy CIT (I. T. A. No. 3820/Bom of 1990 dated April 19, 1996). It was submitted that this decision can no longer be applied as it was contrary to the judgment of the hon ble Bombay High Court in the case of Prakash Industries Ltd. v. Development Credit Bank (supra). Even otherwise in the case before the Tribunal, there was no allegation of any malpractice or subterfuge and therefore, there was all the more reason why it should have been decided otherwise. Further, the order of the Delhi Bench of the Tribunal in Oriental Leasing Co. v. Deputy CIT [1996] 55 TTJ 294 which was decided earlier was not pointed out to the Mumbai Bench. The Delhi Bench has pointed out the circumstances under which an agreement could be treated as non-genuine. (7) Peacock Chemicals (P.) Ltd. v. Deputy CIT [1995] 51 TTJ 264 (Delhi) affirmed in CIT v. Peacock Chemicals (P.) Ltd. [2000] 241 ITR 305 (Delhi). (8) Shaw Wallace and Co. Ltd. v. Asst. CIT (I. T. A. No. 674/Cal of 1998). This order is based on the special facts of the case such as the fact that the electric meters which were the subject m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keep this spirit behind this judgment in view while deciding the present case and submitted that if it is found that the parties before us had adopted a subterfuge or colourable device aimed at tax evasion, the same should be curbed strongly. Countering the argument of the assessee, he pointed out that the observations of the Supreme Court in McDowell [1985] 154 ITR 148 regarding tax avoidance are not obiter, but they were guidelines to be followed by all the subordinate courts and Tribunals, wherever the question of tax evasion arises. Reliance was placed on the order of the Mumbai Bench of the Tribunal in Deputy CWT v. Ashwin C. Shah [2002] 254 ITR (AT) 90 at 103 where it was held that even the obiter of the Supreme Court was binding on the Income-tax Appellate Tribunal. He submitted that the observations made in McDowell [1985] 154 ITR 148 (SC) were not confined to a pre-ordained series of transactions, but were applicable generally to cases where a subterfuge or colourable device or dubious methods are practiced for the purpose of tax evasion. (B) Are attributes of commerce present in the transaction in question ? Mr. Dave took this point for examination under three broad d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs attached to the earth, or permanently fastened to anything attached to the earth. The contention of Mr. Dave therefore was that boilers were immovable property since they are either (a) themselves attached to the earth, or (b) attached to something that is embedded to the earth. Reference was made to the judgment of the Allahabad High Court in CST v. Prahlad Industries [1999] 112 STC 548. In this judgment, it was held that the plant and machinery which were attached to the earth were immovable property and cannot be considered as goods within the meaning of section 2(d) of the U. P. Trade Tax Act, 1948. There was also no agreement between the parties that the lessee of the factory was entitled to sever the goods fastened to the earth. The second division under this aspect examined by Mr. Dave was the events leading upto the execution of the lease deed which disclose the real intention of the parties. He drew our attention to the proceedings of the GEB in connection with the lease arrangement with ICICI which are at pages 18 to 21 of the Department s paperbook No. 1. It was pointed out that the proceedings are in a standardized form which is quite unusual and showed that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was presented was by an ana lysis of the various clauses of the lease deed. In fact, the analysis also helps, according to Mr. Dave, in gathering the real intention of the parties, which according to him, was only that this was to be a case of simple financing agreement and not a SLB arrangement. He prefixed this part of the argument with a reference to the judgment of the Supreme Court in Sundaram Finance Ltd. [1966] 17 STC 489 and the judgment of the Supreme Court in CIT v. Panipat Woollen and General Mills Ltd. [1976] 103 ITR 66. In these cases, it has been held that the intention of the parties must prevail over the words used. Having said that, Mr. Dave referred to the fact that the lease was renewable at the option of GEB after the primary period of five years and during this period, it cannot be terminated. The option was available only to GEB and not the assessee. The first lease deed has to be read with the subsequent renewal agreements to find out the real intention of the parties. Clause 2.4 of the lease deed expressly makes the lessee (GEB) responsible for the delay on the part of the manufacturer. Thus, the lessee s liability starts even before the delivery of the equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rental for the fixed period of the lease computed in the manner set out in the schedule on the footing and as if the lease agreement had not been terminated, Mr. Dave, countering the argument of Mr. Dastur that there is nothing strange in such a clause being inserted by a prudent lessor and that it was a matter of contract between the parties, contended that the lessee is made liable to pay rentals even after termination of the lease agreement only because of the fact that it is a loan transaction. In fact, Mr. Dave characterized this clause as unconscionable It was then pointed out by Mr. Dave that under section 150 of the Contract Act (second para) if the goods are bailed for hire, the bailor is responsible for any damage, whether he was or was not aware of the existence of any faults in the goods bailed and that in the present case, this rule has not been followed and GEB has been made liable for damage arising out of faults in the goods. He also invited attention to section 152 which says that the bailee, in the absence of any special contract is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care described in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended by the company that there was an express provision in the lease deed that the company would continue to be the owner of the equipment notwithstanding that the equipment was affixed to the land or building. The contention was accepted. The Crown appealed. It was held by the Chancery Division that even though the equipment had been affixed to the land or building belonging to the local authority, it had no right to retain the equipment except during the term of the lease and on payment of rent. However, in the case of central heating equipment installed in a council house, a tenant thereof had a right to enjoy the land free from any right of the company which had leased out the equipment to enter and remove the equipment and on this basis, the equipment ceased to belong to the company on installation and therefore any expenditure incurred by the company on such equipment did not qualify for any allowance. Mr. Dave placed reliance on this decision to show that the boilers having been permanently attached to the earth, became part of the land and GEB could enjoy it free from any right of the assessee to remove the same and this was inconsistent with the assessee s claim that it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be served by those papers has been shown. (b) All that was said by Mr. Dave, the learned Commissioner of Income tax (Departmental Representative) was that the papers were equally important for the case, but that cannot be sufficient ground for admission. (c) Even according to Mr. Dave, pages 1 to 4 may be ignored (d) Pages 5 and 6 have been filed to show that the boilers are immovable property , but this is a totally new case made out now which cannot be permitted. Reliance is placed on CIT v. Babulal Nim [1963] 47 ITR 864 (MP). (e) Pages 11 to 17 have been filed to show that the SLB transaction under consideration is merely an indication of a deeper malady . That is wholly irrelevant for the case and hence those papers cannot be admitted. (C) Economic substance or sense The last limb of Mr. Dave s arguments was that the SLB transaction does not make any economic substance or sense. His arguments in this behalf were supplemented by Mr. Anand Kedia, Joint Commissioner of Income-tax, who was present for the purpose. These arguments will be considered in some detail at a later stage, but suffice at this stage to note that the argument was that (a) the cost of bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edded to the earth. This involves investigation into the factual position which cannot be permitted at this stage. Attention is drawn to the judgment of the Madras High Court in Perumal Naicker v. T. Ramaswami Kone, AIR 1969 Mad 346. Referring to page 5 of the paperbook containing the additional evidence filed by the Department, Mr. Dastur pointed out that it refers to Gandhinagar TPS which is different from the power station with which we are concerned in the present case. Page 4 refers to Rs. 50 crores which is for the Gandhinagar TPS. Thus, these two pages are not relevant to the present controversy. Page 5 does not also show that the equipment mentioned therein is immovable property, which is a matter of evidence. Page 6 also refers only to Gandhinagar and not Kutch. It was further pointed out that the departmental authorities, before insisting on an agreement between the parties that the goods shall be severed from the earth, have to first show that the goods are attached to and form part of the land and this has not been discharged by them. In support of his objections to the filing of the additional evidence, Mr. Dastur relied on the following judgments : (i) CIT v. Fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hy valuation was not done earlier, he clarified that since only depreciation of Rs. 6.25 crores was claimed in the return filed for the assessment year 1992-93, no valuation was considered necessary. He also referred to the statement of Mr. P. K. Das under section 131 of the Income-tax Act relating to the claim of depreciation. In answer to question No. 3, Mr. Das had stated that the factual position of the exact amount of depreciation claimed in the earlier years after the assets were commissioned and the subsequent reduction of value of net block in respect of KLTPS-I + II would be intimated to the Assessing Officer on reaching Baroda. Mr. Dastur drew our attention to the letter dated March 22, 1996, written by GEB to the Assessing Officer (page 13 of the department s paperbook No. I) in which it was clarified that only depreciation of Rs. 6.25 crores was claimed in the assessment year 1992-93. The letter of BHEL which supplied the boilers to GEB (dated March 11, 1996 page 11 of Department s paperbook No. I) was before the Assessing Officer wherein the cost of the boilers was given at Rs. 59.04 crores. Even if the depreciation of Rs. 6.25 crores is reduced from the cost, still th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the property in the goods has passed on to the assessee. (7) Tax avoidance With reference to the judgment of the Gujarat High Court in Wood Polymer [1977] 109 ITR 177 which was approved in McDowell [1985] 154 ITR 148 (SC) Mr. Dastur submitted that there can be no quarrel with the propositions laid down in that case which were three : (1) In the case of arrangements and compromises under the Companies Act, public interest should be the only criterion. (2) The court should not be requested to sanction any tax evasion. (3) However, the parties right to indulge in tax planning is not taken away by the judgment. It was pointed out by Mr. Dastur that there was no justification for Mr. Dave to characterise the clause in the lease deed as unconscionable in the absence of any complaint from anybody. Further, the parties were not in a position to influence each other. (8) Economic sense of the transaction Mr. Dastur clarified that as per the GEB s financial review, the average cost of borrowings was only 13.4 per cent. The assessee had own funds which increased from Rs. 896 crores in the earlier year to Rs. 1,206 crores for the present year. The interest paid was Rs. 1,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agenda note exhorts the board to consider and approve the raising of monies by notional sale and lease back of existing assets and to pass the resolutions as annexed. The resolution authorizes the board to notionally sell and take back the aforesaid plant and machinery on lease from the aforesaid lessors on the terms and conditions mutually agreed . All this took place in the 443rd meeting of the board (RSEB) on January 6, 1995. This was followed up by a decision on January 28, 1995, to raise finance by a sale and lease back arrangement by issuing advertisements in leading newspapers. In the agenda note prepared for the meeting held on January 28, 1995, no doubt the word notional is not found used with reference to the sale and lease back, but this by itself is not sufficient to displace the inference drawn by us that from the very inception the intention of the parties was never to sell/purchase the air-pollution equipment in the real and true sense of the word but was only to prepare documentation to show that the assets were actually sold/purchased and then leased back to RSEB. There are reasons for this. Firstly, we have to remember that RSEB is a statutory body constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaking, which is required for the purpose of the generation and distribution of electricity. It can be, and in fact it was, countered by Mr. Patil that the word notional was used with reference to the sale only because the equipment was to come back to RSEB in the form of a lease. The question of the equipment coming back to RSEB in the form of a lease would arise only if there was a real and genuine sale of the equipment to the assessee in the first place. The intention of the parties was that the equipment, though stated to be sold by RSEB to the assessee, would never operate as a sale in the real sense of the term. As we have already pointed out, it is impossible to appreciate as to how a public utility undertaking can plan to sell a part of its undertaking. If the answer is that it could be sold because by the very same transaction it has been ensured that it would physically remain with the seller, then that takes away the bottom of the transaction and the sale is only a shell without any substance or content which make up the ingredients of a sale. The intention of the parties is not that the property in the equipment should pass from RSEB to the assessee. There is an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived in response to the advertisement, of which the offer from the assessee was one, another agenda note was prepared for the perusal of the board at its meeting on January 28, 1995. It appears that the board resolution was passed on January 28, 1995, in which it was decided to borrow Rs. 150 crores from Kotak Mahindra Finance or other lessors arranged by them. The assessee is one of the other lessors belonging to the syndicate formed by the Kotak Mahindra Finance and was allotted a specific amount to be advanced to RSEB. Thereafter, the actual sale deed between RSEB and the assessee was entered into on March 12, 1995. It will be seen from the chronology that even before the advertisements were issued in the newspapers inviting offers for obtaining leasing finance, a decision had been taken to enter into the SLB transaction with the members of the syndicate led by Kotak Mahindra, of which the assessee was one. Thus, the advertisement in the newspaper would only appear to be a mere formality or a ritual that was gone through in adherence to the form. From the above events, it appears to us that right from the beginning, it had been decided between RSEB and the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation. For example, the agenda note prepared for the board meeting on January 6, 1995, refers to the fact that the board received proposals from various lease financing companies to make available funds under sale and lease arrangements against already existing assets, attracting 100 per cent. depreciation benefit under the Income-tax Act, 1961 . (underlining ours). The agenda note contained an appeal to the board to get the existing assets attracting 100 per cent. depreciation under the Income-tax Act, 1961, revalued through registered/Government approved valuer. (underlining1 ours). In the agenda note prepared for the meeting held on January 28, 1995, refers to the valuation of the actual assets available with us, which attract 100 per cent. depreciation. . . . (underlining1 ours) and goes on to say that most equipments available with RSEB does not fall into this category. In paragraph 2 of that part of the agenda note which contains the recommendation to the board, it is stated that the board may consider and approve the raising of Rs. 150 crores from Kotak Mahindra Finance Ltd. by availing lease finance under sale and lease back financing facility against existing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n were nullified, only for taxation purposes, by insisting on the acquisition of those assets which are eligible for 100 per cent. depreciation. We are unable to see any other motive behind the insistence of the assessee that it would acquire only those assets on which 100 per cent. depreciation was allowable under the Income-tax Act. (C) Identification of the equipment Mr. Sahai is right in saying that the equipment has not been identified in the sale deed itself. However, there is a reference in the sale deed to the invoices enclosed therein, in which the equipment is stated to be described or identified. This manner of execution of the sale deed appears to us to be quite unusual. The sale deed is in standard form with the name of the purchaser of the equipment, the consideration for the sale, the details of the cheque/DD/ Pay Order No., etc., being left blank which suggests that a number of such sale deeds have been executed by RSEB. In fact, Mr. Patil informed us that about 151 transactions have been entered into by RSEB concerning different assets or equipment. Therefore, a standardized form of sale deed was prepared and the assets were described in the invoices enclosed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been agreed between the parties. To us, this appears to be a very strange situation, to say the least. This is one more pointer to the fact that the entire documentation or transaction was a pre-planned or pre-ordained affair. (D) Valuation of the equipment The valuation of the air-pollution equipment was the subject matter of intense debate before us. In our opinion, the valuation report of M/s. M. Choudhary and Associates, dated March 27, 1995, is unreliable. It lacks the ingredients of an acceptable valuation report. It is at pages 34 to 41 of the assessee s paperbook No. 1. We have carefully perused the same. It first describes the three steps that are involved in the valuation process. Briefly, the first step is the collection and tabulation of the information such as description of the asset, year of purchase, year of commissioning, original cost, quantity, etc. The second step is the physical verification. The third and last step is the actual valuation of the asset by the application of various parameters such as current replacement value, technical obsolescence, adjusted current replacement value, depreciation, residual replacement value, residual life, etc. As far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly discusses the principles to be adopted without actually demonstrating as to how those principles have been applied to the equipment in question and how the application of those principles have led the valuer to arrive at the figure of Rs. 1,95,00,000. The most vital part of the valuation report, namely, the annexures which are stated to be enclosed with the valuation report, are missing. In the prescribed format of the report (Form No. O-7), column 5 refers to Description of the machinery/plant and column 6 refers to valuation of the machinery/plant . In column 6, it has been added in brackets that the valuer should discuss in detail the make of the machinery/plant, name of the manufacturer, original price, price to the owner if he is not the first owner, year of manufacture, present market price of similar new machinery/plant and other relevant factors . Against these two columns, the valuer has stated as per anenxures enclosed . But no annexures are found enclosed. This is not an inconsequential slip or omission, but in our view it has serious repercussions. It throws grave doubts on the veracity, credibility and acceptability of the valuation report itself. When we r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plete and correct in all respects and if it has been stated therein that the annexures are enclosed, it is the assessee s duty to ensure that the annexures are in place and are furnished along with the valuation report. The ultimate figure arrived at by the valuer or the method adopted by him may be a matter of opinion and may be accepted by one and rejected by another, but the process by which the final figure is reached must be transparent and made known to everybody who reads the valuation report. Otherwise, the whole purpose of obtaining a valuation report would be lost. Therefore, the reply of Mr. Patil, again with respect, is wholly inadequate to the requirements of the case and overlooks the importance of a valuation report. The importance of the valuation report in a case such as the present one cannot be over-emphasised. We are constrained to make these observations because of the attitude of the assessee to the question of valuation. It indicates that the assessee has taken the matter of valuation lightly. In fact, this attitude of the assessee to the question of valuation is an aspect which has influenced us in considerable measure in assessing the applicability of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the RSEB calls upon the interested parties (who wish to provide leasing finance) to submit their sealed offers giving full details such as lease rent, lease period, residual value if any, etc. A pertinent question posed by Mr. Sahai, the learned Commissioner of Income-tax (Departmental Representative), which was not answered satisfactorily on behalf of the assessee is as to how the leasing company can be expected to know the residual value without knowing first of all the asset which is to be sold and taken back on lease, the cost of the asset, etc. The advertisement, it may be recalled, was issued on January 13, 1995, and a copy thereof is at page 65 of paperbook No. V filed by the assessee. At pages 56-57 of the Department s paperbook is the copy of the letter dated February 2, 1995, written by RSEB to Kotak Mahindra Finance Ltd. which is the leader of the syndicate of which the assessee is a member. Even at this stage, it should be remembered, the asset has not been identified because the assessee s valuer has visited KTPS only on February 11, 1995, for the purposes of valuation. His report itself is dated February 15, 1995/March 27, 1995. Therefore, as on February 2, 1995, nei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act was referred to by Mr. Patil himself in the course of his arguments. The paperbook filed by the Department contains the complete details of such arrangements in a tabular form at pages 19 to 32. There is copious reference to similar arrangements entered into between the various Electricity Boards and leasing companies in the agenda note prepared for the board meetings on January 6, 1995 and January 28, 1995. There is reference to discussions held between RSEB and various leasing companies on the various aspects of finance lease through the SLB mode. All this shows a pattern or pre-ordained series of steps to be taken by the parties, including the assessee, so that the desired result is achieved. That is why the sale deed is also in a standard form, leaving the names of the purchaser, the purchase price, etc., blank so that it can be filled up suitably. The documentation thus follows a set pattern. It is apparent that the whole scheme has been purchased by RSEB off-the-shelf and this is the result of the discussions held between RSEB and various leasing companies. It does not matter that the assessee s name does not appear in the agenda note because it is common ground that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not the real owner so that the assessee can claim depreciation in respect of the assets in its income-tax assessments. Since physical delivery of the equipment sold would have ruined the plans and would have interrupted the power supply in the State of Rajasthan, the parties have taken the plea that physical delivery is not an essential requirement of a sale and that it is sufficient compliance with the law that symbolic or constructive delivery is given to the purchaser. This is a disingenuous argument. It serves two purposes. The first is that it absolves the RSEB from the need of giving an explanation as to how the assets of a public utility could be sold and how they could be severed from their location and delivered to the so-called purchaser. Second, it suits both the parties to say that constructive delivery is sufficient since in any case the assets are going to be leased back to RSEB. With great respect, the argument tends to undermine the theory of constructive or symbolic delivery. When there is no intention to sell in the first place, the question of delivery of the assets, either actual or symbolic, becomes wholly irrelevant. It is only with full realisation of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred back to it by the assessee and this cannot be considered to be a sale at all. What Mr. Sahai wants to convey is that if you agree at the time of the sale that the property shall be conveyed back to you by the purchaser, there is actually no sale in the first instance. He relied on the commentary on sale of goods by Benjamin in support of this proposition. When we asked him as to whether in the light of the definition of the lessor in clause (g) of the lease deed it is permissible to look into the letter dated February 2, 1995, Mr. Sahai submitted that the definition itself refers to the letter and therefore it is permissible to look into it in construing the lease document. We find force in his contention. Even when negotiations were on, there was a stipulation in the letter dated February 2, 1995, to the effect that the ownership in the equipment should be transferred back to RSEB. This is another pointer to the intention of the parties not to convey the property in the equipment. The lease document executed by the assessee in favour of RSEB is therefore only an arrangement in paper. It is permissible for us to refer to the letter dated February 2, 1995, since the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... executed. At any rate, it is a clear indication that the air pollution equipment never became the property of the assessee, though documentation has been put through as if there was an actual sale by RSEB to the assessee and then a lease back to RSEB. It may be the normal rule that a definition clause cannot control the operative part of the document, but we believe that it is equally true that we cannot ignore the reference to the letter dated February 2, 1995, in the definition of lessor in the lease document. (H) It is only a finance transaction A perusal of the lease deed dated March 27, 1995, reveals another interesting feature. Clause (9) of the preamble says that the lessee (RSEB) is maintaining a current account styled as Rajasthan State Electricity Board Account No. 1 with the State Bank of Bikaner and Jaipur, which is a collection account into which all the collections/realizations/revenues of RSEB are being deposited. Clause (10) states that RSEB is also maintaining a personal deposit account with the Collectorate Treasury, Jaipur, in which all the amounts lying to the credit of RSEB s collection account are transferred from time to time. Clause (11) says that the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we may briefly notice them. Before that we may straightaway record that on this aspect we are in general agreement with the findings of the Commissioner of Income-tax (Appeals). However, two further aspects may be noticed by us. There is no provision in the lease deed as to what will happen to the air pollution equipment at the end of the period of lease. Under section 160 of the Contract Act, the bailee is under a duty to return the goods. But if we keep in mind the stipulation or the mandate in the letter dated February 2, 1995, that the ownership rights in the equipment will be transferred back to RSEB, then there is no question of the equipment being returned to the assessee after the period of lease. In our opinion, therefore, advisedly, no provision has been made as to what would happen to the equipment after the tenure of the lease. The other aspect to be noticed is that under the lease deed, the assessee has no right to remove the equipment for default in payment of lease rent during the currency of the lease. We have already noticed clause (13)(a) of the terms and conditions of the lease deed which only give a right to the assessee to recover finance charges if there is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attorney within a few days of executing the lease document is a strong circumstance in favour of the Department. It is significant to note that under the power of attorney, RSEB could sell the equipment to itself. Thus, in our view, the power of attorney exposes the device adopted by the parties to pass off a simple finance transaction as a SLB transaction. (K) RSEB is a State Government undertaking does it affect the applicability of McDowell [1985] 154 ITR 148 (SC) ? In our opinion, the answer is in the negative. It has to be remembered that RSEB was in dire need of funds to the extent of Rs. 450 crores for its working capital requirements. The interest rates at which it could borrow were very high. The agenda note refers to the fact that RSEB has been raising money from financial institutions such as LIC, IDBI, Banks, etc., at interest rates ranging between 15 per cent., and 17.25 per cent. The funds were provided by them only for capital expenditure, but the requirement of RSEB was for dayto-day operations also. It was at this juncture that it came to know that other State Electricity Boards such as MPSEB, PSEB, etc., had resorted to the course of raising money by notional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in its assessment. In this situation, even if RSEB wanted, it would have perhaps not been in a position to resist the assessee s insistence on the form in which the transaction should take place. That explains the patronising manner in which RSEB went about the whole transaction, even going to the extent of showing the proforma of the board resolution to the syndicate, of which the assessee was a member, for approval. RSEB entered into 151 SLB transactions for the purpose of raising finance. It is therefore not possible to exclude the applicability of the rule in McDowell [1985] 154 ITR 148 (SC) merely because one of the parties to the transaction is a State Government undertaking. At best, it can only be stated that RSEB was indifferent to the documentation executed. Our decision ICICI Ltd. : (A) The assessee had no ownership rights over the boilers In our opinion, there was no intention on the part of GEB to pass the property in the boilers to the assessee in the first place. The modus operandi in this case is more or less the same as in the case of Mid East Portfolio Management Ltd., except that in the present case the documentation is more sophisticated, presumably b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made known to the income-tax authorities. Nor is there any evidence to show that the relevant documents showing the existing procedures which were stated to have been followed, were forwarded to the Deputy Commissioner of Income-tax by GEB. Therefore, it is a reasonable inference that no such procedures existed and therefore the sale was beyond the scope of the powers of the board. The board could not be imagined to have acted without any authority in this behalf, and in the absence of any specific authority conferred upon them, the inference would be that GEB did not intend at all to convey any property in the equipment to the assessee. Since GEB is functioning under the authority of the State Government of Gujarat, clearance for the arrangement of sale and lease back could have been obtained from the State Government by highlighting the fact that though the equipment was purported to be sold to the assessee, there was in fact no sale and therefore the interests of GEB were not being put to prejudice, nor was there any violation of the rules and regulations within which the board has to function. In its anxiety to ensure that funds are made available to GEB, the State Government c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into on January 29, 1993, itself, i.e., even before the purchase order was placed by the assessee. This is sought to be met by Mr. Dastur, learned counsel for the assessee, by contending that though the lease agreement was entered into on January 29, 1993, which is a date even before the purchase order was placed by the assessee, as per clause 1.2(a)(ii) of the lease deed, the date of commencement of the lease was determined as March 12, 1993, which is a date after the purchase order was placed and after the payments were completed. His contention was that the assessee became the owner of the equipment on March 12, 1993, which is also the date of commencement of the lease. The fact however remains that even before the assessee purchased the asset, it was decided that it would be leased to GEB and even an agreement of lease had been drawn up on January 29, 1993. This is an irregularity which cannot be brushed away as de minimis as suggested by Mr. Dastur. The irregularity is an indication of the anxiety of the parties to give the transaction an appearance of a SLB transaction. We are unable to accept the contention of Mr. Dastur that the question before us is only whether the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the value of the asset charged as security is more than what was originally indicated. Thus, the transaction in truth is only a finance transaction on the security of the boilers. (C) Claim of depreciation by GEB The Assessing Officer has relied on the fact that GEB has claimed depreciation on the boilers. He has apparently thought that this has been done only on the footing that GEB continues to be the owner of the boilers. In its letter dated July 30, 1996 (page 146 of the paperbook), GEB has pointed out to the assessee that for income-tax purposes the gross value realised out of the assets sold is reduced from the opening balance of the respective block of assets and that depreciation under the Income-tax Act is calculated at the applicable rates on such reduced amount of opening balance. In other words, GEB has stated that no depreciation has been claimed in its income-tax assessment. However, the fact remains that it has provided for depreciation in its books of account. This is confirmed by the statement of Mr. P. K. Das, General Manager (Finance) of GEB, recorded on March 21, 1996, under section 131 of the Income-tax Act by the Deputy Commissioner of Income-tax, Specia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The second objection is that the entries made in the books of account, whether by the assessee or by GEB are not conclusive of the matter. In our opinion, both the objections are not insurmountable. So far as the first objection is concerned, it is true that normally an assessee is not bound by the accounting treatment given to a particular transaction in somebody else s books of account. But there are exceptions to this rule. If really, GEB had understood the transaction to be a sale in fact and in law, of the boilers to the assessee and there being only one more party to the transaction, viz., the assessee, the chances of any misunderstanding or misappreciation of the situation would be very minimal. At any rate, such a basic question as to whether there was any sale at all, cannot admit of a misunderstanding between the parties to the transaction. As we have already pointed out, the fact that GEB, despite being specifically asked by the Deputy Commissioner of Income-tax, could not produce the authority to sell the boilers and gave a vague reply about the existence of such authority, has to be kept in mind while drawing the appropriate inference from the entries made in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion (A) the fact that entries have been made in the books to point to conclusion (B) is not conclusive. But when there are a number of facts and circumstances which point towards conclusion (A), the fact that the entries in the accounts also support such a conclusion cannot be ignored and it cannot be contended that the entries are not conclusive of the matter. In such circumstances, the entries add significant weight to the conclusion to be drawn and throw light on the real intention of the parties. In this view of the matter, we are inclined to attach considerable weight to the fact that GEB had provided for depreciation in its books in respect of the assets allegedly sold to the assessee and consider the fact to go a long way in establishing the case of the income-tax authorities. It was argued on behalf of the assessee that depreciation had been provided in the books of GEB only for the purpose of arriving at the actual profit or loss for the year in terms of section 59 read with section 63 of the Electricity (Supply) Act, 1948. Mr. Das has also stated so in answer to question No. 3 in the statement recorded under section 131. We have consulted these provisions. They app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g back those assets on lease does not arise. Therefore, the only way in which depreciation could be provided in the books of account of GEB is on the footing that it continues to be the owner of the assets. Even otherwise, the provisions of the Electricity (Supply) Annual Accounts Rules, 1985, which authorise the provision of depreciation in respect of the leasehold assets admirably suit the assessee s purpose in the sense that the provision of depreciation in the books of account of GEB can be explained with reference to those rules. We are even inclined to believe that the presence of a rule enabling the electricity board to provide for depreciation in its accounts even in respect of lease hold assets is a blessing to the electricity boards who have entered into SLB transactions in the sense that they can continue to provide for depreciation in respect of the lease hold assets and thus claim that they still continue to be the owner of the assets and when a question arises in the manner in which it has arisen in the present case, the entries can be explained as having been made only in compliance with the rules. In other words, it is a situation where both sides win. The electrici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the effect that the leased assets would be transferred back to it by the assessee-company. It should be remembered that GEB is a party to the transaction. It has also referred to the offer letters received from the leasing companies which contained a stipulation to the effect that the leased assets would be transferred back to GEB. The AG has stated that this stipulation did not find a place in the final agreement. However, since GEB has committed itself by making a clear statement in the notes to the accounts, we are inclined to believe that there may have been a collateral understanding between the assessee and GEB that the leased assets would be transferred back to GEB at the end of the lease period. In contrast to GEB s statement made in the notes to the accounts, the affidavit of one Rajendra M. Desai dated August 16, 1996, on behalf of the assessee-company, a copy of which is at page 116 of the paperbook, says that in the leasing arrangements entered into by it with various lessees including the lease of equipment to GEB by the agreement dated January 29, 1993, there is no understanding explicit or implicit to sell the equipment to the lessees after the expiry of the period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility that GEB could keep on extending the lease arrangement at a very nominal lease rental, which in effect would deny the rights of ownership of the assessee over the equipment and place GEB as practically the owners of the asset. In the light of this letter, we are unable to accept the averment made by Rajendra M. Desai, on behalf of the assessee, to the effect that there was no explicit or implicit understanding to sell the equipment to GEB after the expiry of the period of lease. The averment is guardedly worded. Of course, there is no understanding, explicit or implicit, to sell the boilers to GEB after the period of lease, but if one looks at the letter dated September 26, 1996, written by GEB to Mr. Desai, it will be seen (as already noted) that GEB has an option to review the lease arrangement at a prefixed rate of lease rental. Thus, technically the averment made in the affidavit is correct, but in substance, the lease could be continued indefinitely at a very nominal rental, as per the letter of GEB. The comment made by the AG is also technically correct because there is no stipulation in the final lease agreement for transferring the equipment back to GEB. But in the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice, not open to the charge of being inflated. It may even be true to say that in the opinion of the assessee, a separate valuation report under the above circumstances was not necessary to justify the price paid. However, in the view we have taken of the transaction, viz., that the property in the boilers did not pass to the assessee, the amount paid by the assessee cannot be considered to be the price paid for the boilers. In that case, the question of valuation or furnishing a valuation report before the income-tax authorities pales into insignificance. The amount is only money lent by the assessee to GEB. (F) Notifications dated February 1, 1993 We have expressed our view with regard to similar notifications issued by the Government of Rajasthan, in the appeal of Mid East Portfolio Management Ltd. The notifications issued by the State Government of Gujarat are in substance, the same. They were relied upon by the assessee to contend that there was no need to issue them if there was no sale of the boilers by GEB to the assessee. In our opinion, the notifications cannot advance the case of the assessee if in truth and reality, there was no sale of the boilers. If in truth and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c an approach. In our opinion, the fact that in the assessment of GEB the lease rentals were allowed as a deduction cannot bind the Assessing Officer assessing the assessee-company, more so because of the complexity of the issue involved. In our opinion, it is not a serious flaw and is not fatal to the stand taken by the income-tax authorities in the assessee s case. Further, it is seen that the assessment was made on GEB on a total loss of Rs. 29,99,54,915. The lease rent was no doubt allowed as a deduction there, but even as interest paid on monies borrowed from the assessee-company, GEB was eligible for a deduction. These aspects have also to be kept in view. In view of these, the transaction might not have attracted the scrutiny which it has attracted in the case of the assessee-company, which has been assessed on a total income of Rs. 1,64,50,10,330. The depreciation claim itself amounts to Rs. 25 crores. Therefore, it is that the transaction has been scrutinized in detail in the assessee s case and a different stand has been taken there by the income-tax authorities. Inconsistencies should generally be avoided, but in a case such as this, perhaps they cannot be helped. At any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument of Mr. Dastur, learned counsel for ICICI Ltd. ,that since the reaction of the Legislature or the tool with which it proposed to deal with SLB transactions was the insertion of Explanation 4A and therefore all that can be done by the income-tax authorities is only to regulate the value of the asset and the amount of depreciation (and not disallow depreciation altogether) cannot be accepted for two reasons. The first is that the Explanation came into effect from October 1, 1996 i.e., it applied to SLB transactions entered into on or after that date. It cannot be said that the Legislature was not concerned with the genuineness of the SLBs at all which were entered into on or after that date. A non-genuine transaction can be dealt with even de hors the Explanation. Secondly, if the Legislature did not distinguish between genuine and non-genuine transactions and it is assumed that they were prepared to allow depreciation in a regulated or controlled manner under the Explanation, even in respect of non-genuine transactions with effect from October 1, 1996, it follows by inference that there was no provision to deal with a non-genuine SLB prior to that date, with the result that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but are only to be regulated by the assessing authorities. He had also criticised the circular issued on February 9, 2001, which had suggested that in cases of SLB without any alteration in the situation of the assets and its working, the denial of depreciation has to be considered on the principles laid down in McDowell [1985] 154 ITR 148 (SC), on the ground that there is no basis for this view because by definition a SLB transaction does not involve a change in the situation of the assets. The further contention was that since the circular refuses to recognize one of the basic features of a SLB transaction, it can have no effect in the assessment. The circulars issued by the Central Board of Direct Taxes can be given effect to if they are beneficial to the assessee, even if they deviate from the provisions of the Act. The circulars now under consideration are not of this type. But, they serve as guides to the background of the legislation. They throw light on the evils sought to be remedied by the amendment. They also contain guidelines to the Assessing Officer regarding the investigation to be carried out in cases of SLB transactions. It is true that the circular dated Februa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the property was itself only a paper transaction, without any intention that the property should in fact pass, the lease would have no effect since the lessor would derive title only under the sale. (C) Delivery of the assets Arguments were advanced before us on the question whether there should be actual or physical delivery of the assets sold prior to the lease arrangement or it is sufficient that there was symbolic or constructive delivery. The argument of the assessees in both the cases was that there was a symbolic or constructive delivery without any physical movement of the assets or change in location and this was sufficient for the validity of the sale. Section 33 of the Sale of Goods Act says that delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorized to hold them on his behalf. A symbolic or constructive delivery as opposed to a physical or manual movement of the goods from the seller to the purchaser, also falls under the section. The absence of physical delivery may not be decisive since even in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g circumstances into consideration without giving undue weight to a single fact or circumstance. In the cases before us, the assets are part of an electricity supply undertaking. They constitute vital parts of the undertaking. We have earlier repeatedly referred to the fact that it cannot be imagined that a public utility undertaking can think of selling the assets to anybody for raising money. The assets cannot be severed from their location and handed over to the assessees. Physical delivery was therefore inconceivable, if not impossible. In the case of Mid East Portfolio Management Ltd., the negotiations held during the pre-documentation stages to which we have already referred disclose the real intention of the parties. In the case of ICICI Ltd. also, we have already held that there was no intention on the part of GEB to convey the property in the assets to ICICI. Therefore, the argument that there was constructive delivery of the asset may be seen only as an argument of convenience. In fact, in the earlier part of our order, we have touched upon this aspect of the matter. In our opinion, therefore, the argument that there was constructive delivery of the assets does not adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akash Industries Ltd. have all been compiled between pages 524 and 556 of the paper book filed by ICICI Ltd. These judgments have also been compiled in pages 136 to 167 of the paper book No. IV filed by Mid East Portfolio Management Ltd. The brief facts in this case may be noticed. Under the lease agreement dated September 27, 1995, the Development Credit Bank Ltd. (hereinafter referred to as the bank ) leased four wind electric generators and certain rolling mills rolls to Prakash Industries Ltd. (hereinafter referred to as the company ) and another. A suit was filed against the company which guaranteed the repayment of the amount since the Prakash Industries Ltd. was referred to the BIFR. A notice of motion was taken out by the bank seeking appointment of court receiver in respect of the equipment given on lease including the power to take possession. The equipment had been purchased by the bank directly from the manufacturers. The bank was thus the owner of the equipment. Under the lease deed, the bank agreed to lease to the company the equipment for a lease rent. The company committed a breach of the obligations under the lease agreement. The bank therefore became entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which the lessor remains the owner of the leased equipment throughout. It was also held that the court was entitled to go behind the terms and conditions of the lease agreement and that ultimately the decision will depend on the facts of each case. It was noticed that the bank was entitled to charge rent even for the period after the lease agreement stood terminated on the ground of default in the payment of rent. This clause, according to the High Court, clearly showed that Sundaram Finance Ltd. [1966] 17 STC 489 (SC) was not applicable to the case and that the bank was the owner of the equipment. It was also observed that it was important to note that the benefit of depreciation was given to the bank. The warranties were also in favour of the bank. It was further noticed that the invoices and the delivery challans showed that the purchase price has been paid by the bank. On the basis of all the clauses in the lease deed, it was held that the bank was the owner of the leased assets. It was ultimately held that it was a valid lease and cannot be construed to be a loan agreement. Therefore, the court receiver was appointed as prayed for by the bank. The company appealed to the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion, the superficial similarity between the clauses in the lease agreement in the cited decision and the clauses of the lease agreement in the case of ICICI Ltd. is not necessarily decisive of the question as to whether the document in the present case constitutes a valid lease, enabling ICICI Ltd. to claim 100 per cent. depreciation. The judgment of the hon ble High Court was only a limited issue as to the interpretation of the lease agreement. There were no other facts similar to the facts present in the cases before us. The transaction itself was not doubted in the case before the hon ble High Court whereas in the cases before us, the genuineness of the entire transaction itself is under challenge. In the case before the High Court, it was nobody s case that the lease agreement was a make believe or sham. In the cases before us, the basis of the Department s stand is that the entire SLB transaction is a make-believe or subterfuge or a colourable device to evade taxes. The complexion of the present cases being different from the case before the hon ble High Court, the similarity between some of the clauses in the lease agreement in the cited case and the lease agreements in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for income-tax purposes as owner. That is only because there was no doubt regarding the genuineness of the transaction and therefore the allowance of depreciation in the hands of the lessor for incometax purposes was considered to be one of the points in favour of the construction of the document as a lease document. The position before us is not the same. We have a case where the very genuineness of the SLB arrangement is under challenge. The very question before us is whether the assessees are entitled to depreciation in respect of the leased equipment. The real controversy is therefore different from the controversy before the High Court. Therefore the similarity between the clauses of the lease agreements cannot advance the case of the assessees. In this view of the matter, we are of the opinion that the judgment does not further the cause of the assessees. (G) Are the assets movable or immovable assets ? On this aspect also, there were considerable arguments. Several authorities were also relied upon by both the sides on the question. We find that the cases have proceeded all along on the footing that the assets/equipment are only movable items. That is the reason why ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action, which can be of universal application. Nor can any such norms be exhaustive. However, very broadly and without limiting ourselves to what has been stated in our order, the following may be considered to be relevant factors to be kept in view : (a) Was there an intention to pass the property in the equipment to the assessee ? (b) Was the equipment identified/ascertained with reasonable clarity ? (c) Was the equipment valued, and if so, whether it was a bona fide valuation ? Was the value inflated ? How credible is the report of the valuer, if there is one ? (d) What are the terms of the lease ? Is the document more of an arrangement for security for the loan and less of a lease ? (e) Is there any parallel or collateral documentation or correspondence or an understanding between the parties which throws doubt on their intention professed by the principal documentation ? (f) What is the conduct of the parties ? How transparent has it been ? (g) If the lessee is a public utility undertaking, whether the sale of the equipment would be in conformity with the rationale for its existence and whether it would have an adverse impact on its working ? These are only som ..... X X X X Extracts X X X X X X X X Extracts X X X X
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