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TMI Blog2010 (2) TMI 691X X X X Extracts X X X X X X X X Extracts X X X X ..... ing part of the block of asset since the lease period had expired and so, the asset cannot be said to be put to use? The substantial questions of law that have been raised for consideration in T.C.A. No.589 of 2008 are as under :- (i) Whether the Tribunal was right in upholding the disallowance of depreciation on the sale and lease back transaction with TNEB even though the appellant had satisfied all the conditions laid down in Section 32 of the Income Tax Act, 1961? (ii) Whether the Tribunal was right in law in following its own earlier order for A.Y. 2001-2002 even though there are certain changes on facts, namely that the assessee had offered lease rentals income and that the Sales Tax Department had issued taxing the transactions to lease tax at 40%? (iii) Whether the Tribunal was right in holding that the depreciation claim is not available on the assets forming part of the block of asset since the lease period had expired and so the asset cannot be said to be put to use? 2. The brief facts which are required to be stated are that, the appellant is a leasing company. It entered into a Sale and Lease Back (SLB) Agreement in respect of certain as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets continued to remain with the lessors, it will have to be presumed that the equipments were used in the business of the appellant. On that footing, the Commissioner of Income Tax (Appeals) directed the Assessing Officer to allow the claim of Rs.51,46,787/-. 4. The respondent filed its appeal before the Income Tax Appellate Tribunal, and the Tribunal affirmed the view of the Assessing Officer and held that the SLB Agreement was not a genuine transaction and it was under the garb of a loan transaction. The Tribunal took the view that the Machinery and equipment were never individually identified, the written down value could not be ascertained and the market value of the assets without value or assessment also could not be ascertained. It was held that there was no actual delivery of handing over of possession of the machinery/equipment by the TNEB to the assessee on completion of the sale and there was also no re-delivery or handing over of possession of the equipment by the assessee to the Board. The Tribunal, therefore, held that it was purely a finance transaction and therefore, no depreciation can be allowed. The Tribunal, by the orders impugned in these appeals da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges, inasmuch as after the seventh year, the appellant would be charging Rs.1/- by way of lease rent. According to the learned senior counsel, the appellant having fully satisfied the condition to claim depreciation, namely ownership and use of the leased assets before the end of the accounting year by the lessee, the appellant was eligible for the depreciation to the extent of 50%. The learned senior counsel further pointed out that the genuineness was not the basis for rejecting the SLB Agreement by the Assessing Officer or by the Tribunal. The learned senior counsel further contended that the case of the appellant was clearly distinguishable to the cases covered by the decision of the Karnataka Full Bench Tribunal and on the other hand, the relevant principles laid down in the said decision were fully satisfied by the appellant and therefore, the disallowance was not justified. 7. As against the above submissions, Mr. K. Subramaniam, learned senior standing counsel for the respondent, after taking us through the Full Bench decision of the Karnataka Tribunal at length, contended that there is considerable doubt about the execution of the SLB Agreement. According to the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1985) 154 I.T.R. 148 [McDowell & Co. Ltd. vs. C.T.O.] in support of his above stand. The learned senior standing counsel contended that having regard to the volume of assets owned by the TNEB, which is a State owned organisation, it was impossible to accept the stand that it came forward to sell its assets to the appellant by entering into a transaction for a lease back and that the said circumstance by itself would throw considerable doubt as to the sale-cum-lease back agreement as claimed by the appellant. The learned senior standing counsel pointed out Clause 15(a) in the agreement, where it is stated that it was for the lessor to purchase the machinery selected by the lessee from the supplier identified by the lessee, which never happened in the present case on hand, where the assets were already purchased by the TNEB. The learned senior standing counsel would, therefore, contend that the agreement was a farce and not real. The learned senior standing counsel then pointed out that in the absence of proper valuation of the assets as on 31.3.2001, which is the date of the SLB Agreement, considered in the light of the letter of the Financial Controller of the TNEB dated 12.2.2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the various sale-cum-lease back agreements entered into on 30.3.2001 and 31.3.2001. In Clause 3 of the lease agreement relating to delivery and installation of machinery/equipment, it is stated that machinery/equipment have been delivered directly to the lessee by the manufacturer/supplier and installed at the locations stated in Schedule-I. The lease rentals are set out in Schedule-II. All the 14 original sale-cum-lease back agreements were placed before the Assessing Officer. On the backside of the stamp paper, the date of issue of the stamp paper has been mentioned. By relying upon the decision of the Honourable Supreme Court reported in 231 I.T.R. 308 (cited supra), the appellant would contend that the business of the appellant being investments and leasing, and the transaction entered into with the TNEB was as part of its business, it was fully governed by Section 32 of the Income Tax Act in order to claim 100% depreciation, as provided under Rule 5 read along with Appendix-I(3)(E). One other contention was that the initial period of re-payment of the lease amount was by way of instalments spread over a period of seven years, and after completion of the repayment of the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of any article, and sub-section (2)(b)(iii) refers to the business of construction, manufacture or production of any article or thing other than that specified in the Eleventh Schedule. Sub-section 2(b), therefore, refers to the uses to which the machinery can be put. It does not specify that the assessee himself should use the machinery for these purposes. In the present case, the person to whom the machinery is hired does use the machinery for specified purposes under Section 32A(2)(b)(iii). That person, however, is not the owner of the machinery. The High Courts of Karnataka and Madras have held that looking to the requirements specified in Section 32A the assessees, in the present case, fulfil all the requirements of that section, namely, (1) the machinery is owned by the assessee; (2) the machinery is used for the purpose of assessees business and; (3) the machinery is as specified in sub-sectoin (2). We are inclined to agree with this reasoning of the High Courts of Karnataka and Madras."(Underlining is ours) Therefore, by reading together the prescription contained in Section 32-A(1) and (2), the Honourable Supreme Court made it clear that even a leasing comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... While all the assets were already owned by the TNEB at the time of the SLB, Clause 15(a) of the agreement stipulated that the appellant as lessor was to purchase the machinery/equipment selected by the lessee/TNEB from the supplier designated by the TNEB. (13) The transaction, namely the lease back agreement, was treated as sale and the liability to sales tax was to be borne by the TNEB. (14) The lease agreement provided for repayment of the lease amount by way of 14 instalments in a period of seven years. (15) Under Clause 19, the TNEB is provided with an option to renew the lease at the rate of Rs.1/- per annum for a secondary period of 20 years, meaning thereby that the ownership continued to remain with the lessor, the appellant. Keeping the above factors in mind, when we analyze the respective contentions of the parties, since we have held that the appellant in the course of its business activity of leasing, is entitled to enter into a sale-cum-lease back agreement and thereby avail the benefit of depreciation provided under Section 32 of the Income Tax Act, the only question to be examined is, whether in the case on hand, the sale-cum-lease back agreement as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 16. As far as the other deficiencies pointed out are concerned, at the foremost, it was contended that while the assets consisted of meters, shunt capacitor banks and outdoor circuit breakers, which were already fixed by the TNEB in different locations throughout the State of Tamil Nadu, there was no scope for identifying the assets at the time when they were said to have been sold to the appellant and also at the time when the lease agreement was signed by the parties. It is also not the case of the appellant that any such identification of the assets was made either at the time of the sale or at the time of the lease agreements. On the other hand, indisputably, the assets were all purchased by the TNEB earlier and were already put in place in different parts of the State and were never identified at the time of the sale or at the time of the signing of the lease agreement. In fact, the learned senior standing counsel for the respondent brought to our notice that before the Tribunal also, it was submitted by the counsel appearing for the appellant that it was not humanly possible to identify individually all the assets involved in this case. The learned senior counsel appearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were entitled for 100% depreciation, acceptance of the invoice value provided for an inflated valuation of the assets which would have enabled the appellant to reap higher benefit than what it was entitled to. As far as the said contention is concerned, we find that except two of the invoices which were dated November and December, 2000, the rest of the invoices were all between January and March, 2001. We, therefore, do not find any serious lacuna in the said arrangement made between the parties, viz. the appellant on the one hand and the TNEB on the other, to hold that on that score, the whole transaction can be doubted. 19. One other contention raised on behalf of the respondent was that the agreement provided for payment of the lease amount in instalments over a period of seven years and that such payment is to be made from the current consumption charges which are deposited in the Indian Bank and by giving priority to make such payments to the appellant. According to the respondent, apart from providing such priority, the repayment was also supported by a guarantee by the State Government, which put together, would virtually amount to the creation of an escrow account, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same by way of the sale-cum-lease back agreement. Therefore, the ratification of the transaction by the Electricity Board in the month of May, 2001 only strengthens the claim of SLB and does not in any way vitiate the transaction. 22. As far as the description of the properties were concerned, the relevant invoices relating to the purchase of those assets were part of the document of SLB, where the number of such equipments which were purchased by the Electricity Board and their respective locations where they have been put into use etc., have been clearly set out. As far as the contention that there was no physical delivery of the assets either at the time of the sale or at the time of the lease back is concerned, no legal prescription has been either brought to our notice or demonstrated before us to state that there must be such a physical delivery of any asset, for that matter, in order to accept the transaction of sale-cum-lease back agreement. In our considered opinion, when as parties to the transaction there was a tacit agreement in the form of offer and acceptance for the sale of the assets and the existence of such assets cannot be doubted and the parties to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntified by the lessee-Electricity Board. However, as a matter of fact, the assets were already purchased by the Electricity Board and were in existence at the time of the sale-cum-lease back agreement. According to the appellant, it used the regular agreement which was being entered into with its customers, and it was a mistake. The said clause finds a place in the agreement entered into between the parties. But the said clause does not in any way run counter to any of the other clauses contained in the agreement. At best, it can only be said to be a clause which is superfluous in nature, and certainly the availability of the said clause in the agreement does not conflict with the real transaction of sale-cum-lease back agreement entered into between the appellant and the Electricity Board. In other words, the existence of Clause 15(a) does not in any manner invalidate the terms of the agreement between the appellant and the Electricity Board. De hors the existence of the said clause in the agreement, the sale-cum-lease back transaction was valid and in the event of any breach of any of the other terms, the parties would be well within their rights to work out their remedies. To pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies had real intention to pass the property in the plant and machinery to the assessee. As far as the identification of such plant and equipment was concerned, as noted by us earlier, along with the SLB transaction agreement, the relevant invoices were annexed, in which the details of such assets transferred and the locations were duly found mentioned. As far as the valuation was concerned, since barring two of the invoices the rest of the invoices were all of the month of January, 2001, and being brand new equipments covered by the invoices, the credibility of which cannot be easily doubted, it will have to be held that there was a reasonable valuation of those assets. 26. As far as the terms of the sale-cum-lease back agreement are concerned,merely because the agreement provided for the deduction of the lease instalments from the current consumption charges by way of priority, it cannot be held that the transaction is not a SLB, but a mere loan transaction. The transaction is in the form of an agreement. The agreement as well as the deed of conveyance explicitly show that it was one by way of sale and thereafter, lease back. The provision for repayment of the lease amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 29. Therefore, even while testing the SLB Agreements involved in this case on the touchstone of the several factors enumerated by the Special Tribunal in 2004 (271) I.T.R. (AT) 87 (cited supra), we do not find any scope to doubt the transaction in order to hold that it was a sham or nominal transaction and lacked in bona fides. 30. As far as the four other leases with M/s. Kedia Distilleries, Prakash Industries Ltd., Prestige Corporation Ltd. and Suckchain Cements Ltd. are concerned, we fully concur with the view of the Commissioner of Income Tax (Appeals) that the appellant was not able to collect any l;ease rent and was also not able to take possession of those assets, but since the assets continued to remain with the lessors, viz. the appellant, it will have to be presumed that the equipments were used in the business of the appellant. Consequently, the appellant was entitled for the depreciation of Rs.51,46,787/-. 31. For all the above stated reasons, we are convinced that the appellant is entitled to succeed. The substantial questions of law framed for consideration in both the appeals are answered in favour of the assessee-appellant and the appeals are a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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