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TMI Blog2013 (8) TMI 408X X X X Extracts X X X X X X X X Extracts X X X X ..... thelease whether claimed to be operative or financial, the depreciation or the deduction or relief under the Income Tax act is to be allowed or disallowed. In each of the authorities as mentioned above, it is only after considering the facts and the evidence on the file, the various courts have given finding in the respective authorities to the effect that transactions in question were genuine transactions or sham transactions - Whether a transaction or the agreement etc. is genuine or sham cannot be a question of law but the question of fact only - No straight jacket formula can be adopted to say that every case of sale and lease back transactions is sham or genuine - For the purpose of deciding whether a particular transaction is a lease or not, the question of intentions of the parties is to be determined and the intention has to be inferred from the circumstances of each case. In the case in hand the sole motive or object of the agreement in question is to defeat the provisions of Income Tax Act,1961 so as to enable the assessee to claim depreciation @ 100% on the value of goods worth Rs.49972800.00 to which it otherwise is not entitled to and, further, to get mutual benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2406/Mum/2001, ITA No. 7317/Mum/2002, ITA No. 7318/Mum/2002, ITA No. 103/Mum/2005, ITA No. 734/Mum/2005, ITA No. 735/Mum/2005, ITA No. 5085/Mum/2005 - - - Dated:- 7-8-2013 - Shri P. M. Jagtap And Shri Sanjay Garg,JJ. For the Petitioner : Shri Percy J Pardiwala, NirajSheth, Harish Shah For the Respondent : Shri O. P. Singh ORDER Per Sanjay Garg, JM:- These appeals by the revenue and the assessee include cross-appeals for A.Y. 1994-95 and six other appeals by the revenue against separate orders of the CIT(A) for Assessment years as captioned above. As common issues are involved in all these appeals, they were heard together and are disposed off by this common order for the sake of convenience. ITA No. 4069/Mum/2001 Assessment Year : 1994-95 2. The grievance raised in ground nos. 1 to 7 pertain to disallowance of depreciation claim of Rs. 4,99,72,800/- in respect of electric meters acquired from Gujarat State Electricity Board (GEB) leased back to GEB: 3. The facts of the case are that the appellant purchased 1,43,600 energy meters of different makes for measuring electrical energy as per sales invoice dated 23rdMarch, 1994 for a consideration of Rs. 499728 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said notice u/s 142(1), there was no physical delivery of the assets, identification and exact location of the assets was not specified, the sale value of the assets has been fixed on lump-sum basis without ascertaining the value of each item and apparently, it was a paper transaction. C) The appellant has not assumed any risk of ownership of the asset which is contrary to the provisions of Section 26 of Sale of Goods Act. D) GEB has been made liable to the lessor for any loss or damage occurring to the asset during transportation, delivery, use or its failure to perform or operate, etc. E) In the event of irreparable loss or damage to the asset as a whole for whatever reasons, the lessor would be entitled to recover from the lessee all the lease rentals for the fixed period of the lease, including the lease rentals for the unexpired portion of the fixed period. F) The clause of the lease bring out the reality of the terms of lease transaction which was in the nature of a finance transaction only. G) The lessee has been made liable to obtain all consents/licences/approvals, etc. for import, storage, installation, use, operation of the asset during the currency of the leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounting the lessor in respect of finance leases should not claim themselves as the owner of the leased assets, but should disclose the amount receivable (loan advanced) from the lessee as asset in the balance sheet. For the purpose of disclosure of profit the lessor should bifurcate the lease rental in two parts namely finance income (interest) and repayment of loan and should only disclose as income from the finance income reflecting return at a constant periodic rate (interest rate implicit in the lease) on the outstanding investment following reducing balance method. N) The guidance note issued by the Institute of Chartered Accountants of India also adopts substantially the same criteria to distinguish between 'finance lease' and 'operating lease' and in the matter of accounting of lease income in the hands of the lessor in case of a 'finance lease', agrees in substance with the view expressed in the International Accounting Standard 17 that the lessor should only recognize from year to year the interest component of the lease rentals received as income in consonance with the inherent nature of a 'finance lease'. The guidance note also suggests that one can also follow the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in avoiding the incidence and payment of income-tax by claiming huge depreciation against a small rental income offered to tax." 4. In view of the various reasons given in the assessment order, it was held by the Assessing Officer that the intention of the assessee was to enter into a transaction of loan or finance and the assets were held in the name of the assessee only for the purpose of security of the loan given which could be seized in case of default by the lessee and the assessee had never intended to be the real owner of the assets. It was thus, concluded that the alleged lease transaction was in reality a transaction of finance/loan only and the assessee was never the real and legal owner of the assets in as much as it was not in a position to exercise rights of a lawful owner of the assets. Accordingly, the claim of depreciation on the assets of Rs.4,99,72,800/- was disallowed. However, since the transaction was held to be a finance transaction, capital component of payment comprised in lease rental as worked out by the appellant at Rs. 3,16,000/- was deducted as a consequence of the treatment accorded to the transaction subject to rectification. 5 The ld. CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remain with the lessee only and it would not be really necessary for the assessee to take possession of the asset and then give it back to the lessee. He has further submitted that the claim of depreciation in not dependent on the fact whether the asset leaves the possession of the lessee. The transaction was with a State Government and it would be highly improper to impute any collusiveness or colourable nature of the transaction without any concrete evidence. The fact that GEB may have already claimed depreciation on the said assets or its W.D.V. in the books of lessee is nil is in no way relevant and does not affect the claim of the assessee for depreciation. The decision to purchase the asset and lease it back to the seller was purely a business decision to earn income by way lease rental. In the process, if assessee gets tax benefits to which it was entitled under the law, it cannot be described as a colourable device. It is stated that while striking a business deal, tax aspect will always be considered, because it directly affects the fund flow and cash flow situation of the business. It has been elaborated that to claim depreciation on assets, two conditions need to be fulf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a business of running it on hire for tourists ; or ii)outside India in his business or profession in another country ; and (b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42 Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub- section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) [or clause (iia)], as the case may be." (Emphasis supplied) 10. Depreciation is the monetary equivalent of the wear and tear suffered by a capital asset that is set aside to facilitate its replacement when the asset becomes dysfunctional. In P.K. Badiani Vs. Commissioner of Income Tax, Bombay[2], this Court has observed that allowance for depreciation is to replace the value of an asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to claim depreciation on the assets/meters? 10. It is pertinent to mention here that in this case, the transaction in dispute is relating to sale and lease back of the assets i.e. of electric meters in question. The assessee has claimed that after purchasing the meter in question from GEB, it has become owner of the meters and, thus, is entitled to claim depreciation being the owner of the assets. On the other hand, the case of the revenue is that the sale transaction in question was a Sham transaction. In fact, it was a transaction of finance given by the assessee to the GEB to earn interest on the financed amount. It is also the case of the revenue that the lease deed relied upon by the assessee is 'sham' and even in no event can be said to be an 'operating lease deed', but at the most a 'finance lease deed', in which case, it is the lessee, who is the owner of the assets. It is pertinent to mention here that there is no definition given either of operating lease or of the finance lease either under the Income Tax Act or under the Transfer of Property Act so as to make a distinction between the two. However the term lease has been defined under Section 105 of the Transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inash Bhosale v. Union of India Ors' [(2010) 322 ITR 381 (Bom)] has drawn the following broad features of a finance lease:- "5.14 Thus it is apparent that the broader guidelines laid down by the Hon'ble Supreme Court in the case of ABB Ltd have been reiterated in the latter case of Association of Leasing Financial Services Companies v. Union of India Ors. On a fair reading of the aforenoted two judgments rendered by the Hon'ble Supreme Court in the light of the Guidance Note and the AS 19, we can draw the following broad features of finance lease :- - Such a lease is non-cancellable and there is a fixed obligation on the lessee for payment of lease money. In case lease is terminated prematurely by the lessee, the lessor is entitled to recover his investment with expected interest. - Such a lease is always for a fixed period, which period is decided by taking into consideration the economic life of the asset. - The initial lease period is settled in such a way so as to fully recover the investment of the lessor together with interest thereon. - Lessor is always interested in the recoupment of his investment with interest in the shape of rentals over the period of lease a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted upon, but is only used as a cloak to conceal a different transaction" or where "it is intended to give to third parties the appearance of creating between the parties legal rights and obligations which are different from the actual legal rights and obligations which the parties intend to create". The question before us is whether the 'sale and lease back' transactions in question in the case in hand is a genuine transaction or a Sham transaction done with the object to defeat the provisions of Income Tax Act and to facilitate the benefits of deduction/depreciation to a person who otherwise is not eligible to claim the same.In the case in hand, the GEB allegedly sold143600 meters to the assessee vide sale invoice dated 23.3.1994. To decide whether the said sale transaction is a genuine sale transaction or a sham transaction, we think it proper to firstly discuss the relevant provisions of 'Sales of Goods Act,1930, as to what constitutes a valid sale. The term sale has been defined under Section 4 of the sales of the Goods Act, 1930 as under:- "4. Sale and Agreement to sell- (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof." It is now well settled that even in case of sale of portion of a specific larger stock, till the portion is identified and appropriated to the contract, the property does not passes to the buyer as per Section 23 of the Sale of Goods Act. "23. Sale of unascertained goods and appropriation.- (1) Where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may be express or implied, and may be given either before or after the appropriation is made. (2) Delivery to carrier. Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the Purpose of transmission to the buyer, and does not reserve th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and all alterations, replacements and/or additions to the Equipment or any item or part thereof during the period of this Agreement." In the schedule to the lease agreement, the description of the lease agreement has been mentioned as under:- "1. Description of the equipment: ISI Marked AC Single Phase 2.5/10 and 5/20 240 vots energy meters of different makes. Total quantity 1,43,600 nos. 2. Equipment to be used at: In the State of Gujarat" So, neither from the sale invoice nor from the lease agreement, it is revealed that which specific ascertained goods were sold by the GEB to the assessee. What has been mentioned is that 'single phase meters of different make which were to be used in the State of Gujarat'. Out of so many meters used and installed in the premises of the consumers by the GEB which specific 1,43,600 meters were sold by the GEB to the assessee and further leased out by the assessee to the GEB cannot be ascertained. Hence it can be safely observed that the property in the goods never passed to the alleged buyer and thus the alleged contract of sale is hit by the provisions of the sale of Goods Act 1930. Once it has been found that the transaction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation on the assets to the assessee and in return benefit of lesser rate of interest on the loan amount to the GEB. To be more elaborate, we here under discuss some of the clauses of the said lease agreement: (I) which specific equipment/meter have been leased back by the assessee to the GEB cannot be gathered from the lease agreement (II) in clause 1.2 of the lease agreement, it has been mentioned that the commencement of date of rental shall be the earliest of : (i) the date of last payment made by the Lessor to the manufacturer. (ii) the date of delivery of the Equipment; or (iii) the date which comes seven days after the date on which intimation has been given by the manufacturer to the lessor that the equipment is ready for delivery (iv) the date on which the equipment is put to use. In a normal lease agreement, the lessee is liable to pay the rental only when the leased goods are delivered or possessed by him for use, but, in the case in hand, the moment, the assessee makes payment to the manufacturer for purchase of the goods ,the rental would start, irrespective of the fact, whether or not the goods are delivered for the use of the lessee. The first clause o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Equipment and was using and operating the same as the owner thereof." (VII) The following clauses of the lease agreement are further reproduced hereunder for the sake of convenience: "5.2 In the event that the Lessee shall refuse or be unable for any reason to accept delivery and installation of the Equipment, the Lessor shall be entitled to terminate this Agreement within one month thereafter, by a notice in writing to the Lessee and the Lessee shall, on demand, pay to Lessor all costs of the Equipment together with interest thereon and all costs and expenses incurred by the Lessor for insuring, transporting, storing and maintaining the Equipment and for its disposal and/or lease to third party or in any other manner whatsoever, without prejudice to the Lessor's remedies for damages for breach of contract." '6.1 The Lessee alone, as an agent of the Lessor, is responsible for obtaining timely delivery of the Equipment and also for obtaining all the necessary clearances, statutory or otherwise required for obtaining such delivery. The Equipment is of the required size, design, capacity and manufacture, suitable for its purpose and is selected by the Lessee relying entirely o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is made, what else can be the definition of a finance agreement? (IX) It can be gathered from the facts and circumstances of this case that it was never the intention of the assessee to repossess the assets on the expiry of the lease period, assets were neither inspected before the purchase nor identifiable, the GEB had not described the exact location of these assets, there was neither physical nor constructive delivery of the assets, the general property in the assets never passed to the appellant and as such the sale transaction in question falls short of the requirements of a "Sale" as prescribed in the Sales of Goods Act. (X) In its Annual Report these assets were shown as owned by GEB. The lease transaction was a transaction for finance given by the assessee without any intention of ever possessing the asset or exploiting the same for profit in the capacity of the owner. The transaction in question was a collusive arrangement for avoiding incidence and payment of income-tax by claiming huge depreciation against a small rental income offered to tax from the alleged leased transaction. The lease was non-cancelable by the two parties except as provided in the agreement. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is Rs.7.569 and the aggregate monthly rental for 143600 meters is Rs. 1086908/- Secondary Rs.1.00 open 1" In clause 2 of the schedule it has been provided that in the event of upward revision in the minimum lending rate of commercial banks, the lease rental at the discretion of the lessor will be increased accordingly in accordance with the terms/rates as mentioned in the said clause. In clause 7(i), it has been mentioned that the lease rentals have been worked out taking into consideration the depreciation on assets presently available to lessor. In clause 7(ii), it has been provided that if for any reason, what so ever, the eligibility of the lessor to claim depreciation is increased or decreased, or the claim is disallowed, the rates of the rentals will be increased or decreased accordingly at the discretion of the lessor to the extent of the loss or gain to the lessor on account of such increase/decrease in the claim of depreciation. 21. So a perusal of the above mentioned schedule reveals beyond doubt that the agreement in question is a finance agreement. The rates of interest/ rental has been fixed taking into consideration that the equipments are eligible f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financer in proportion to the value of benefit availed by the financer, for which it otherwise was not entitled to. Though there is always a strong presumption of a valid transaction, in case, one of the parties to the transaction is a Govt. Undertaking, yet, the said presumption cannot be said to be absolute but rebuttable. In the case in hand though GEB is a State Govt. undertaking, but the facts on the file beyond any doubt speak that it has entered into a sham transaction to get mutual benefit out of the amount of tax sought to be evaded. It is a case of res ipsa loquitur i.e. where the facts speak itself. It may be observed that State Boards and Corporations some time have their own budgetary or financial constraints, and the fact that the collection of Income tax goes in the kitty of the central Govt. and not to the respective State Govt. and further not to the respective State Board or corporation, may be the relevant considerations for the State Govt. undertaking to enter intosuch transactions. However we are not supposed to go deep into the matter to search out the cause or the reason as to why the GEB has entered into such a transaction, but are concerned only to find out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in the sale and lease back transaction and the transaction involving the finance lease. What is, however, contemplated by the Special Bench of the Tribunal while making such distinction is the genuine sale and lease back transaction in which the asset is transferred to the lessor first and the seller of the asset becomes lessee subsequently. As already discussed by us, there was, however, no such genuine sale and lease back transaction in the present case and it was, in fact, a colourable device used by the parties to give colour to the finance transaction as sale and lease back. Incidentally, one of the questions before the Special Bench of the Tribunal in the case of Indus Ind Bank Ltd. (supra) was whether on the facts and in the circumstances of the case the lessor is entitled to depreciation on assets leased back in the event of the transaction being held as finance lease and the same was decided against the assessee by holding that only the lessee can be treated as owner of the asset in the case of finance lease and it is he who is entitled to claim depreciation as per law and not the lessor. The decision of the Special Bench of the Tribunal in the case of Indus Ind Bank Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well observed that in none of the authorities it has been held that each case of Sale and Lease back transaction or of thelease whether claimed to be operative or financial, the depreciation or the deduction or relief under the Income Tax act is to be allowed or disallowed. In each of the authorities as mentioned above, it is only after considering the facts and the evidence on the file, the various courts have given finding in the respective authorities to the effect that transactions in question were genuine transactions or sham transactions. Where from the facts and evidence on the file, it was found that the transaction was real or the genuine, the relief was granted and where it was found that the same was 'sham', the relief was denied. Whether a transaction or the agreement etc. is genuine or sham cannot be a question of law but the question of fact only. In our humble view, there is no doubt about the legal position as stated above that once the transaction is held to be genuine or the assessee is considered as the owner of the assets, he will be eligible to claim depreciation on the assets as per provisions of the act. However whether the transaction is genuine or not or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void." A perusal of above reproduced Section 23 of the Indian contract Act, 1872, reveals beyond doubt that even if, the consideration or object of an agreement may not be expressly forbidden by law, but if it is of such a nature that, if permitted, it would defeat the provisions of law, the same will not be lawful. Section 10 of the Contract Act provides that for the formation of a valid contract, the agreement should be for a lawful consideration and with a lawful object. We have no doubt here to observe that in the case in hand the sole motive or object of the agreement in question is to defeat the provisions of Income Tax Act,1961 so as to enable the assessee to claim depreciation @ 100% on the value of goods worth Rs.49972800.00 to which it otherwise is not entitled to and, further, to get mutual benefit of this wrongful claim by making wrongful loss to the revenue. Moreover ,in our view, the provisions of Explanation 3 to Section 43(1) of the Income Tax Act, 1961 are also get attracted in this case because the sole intention o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the finding of the A.O. relating to levy of interest u/s 234 B of the act on the ground that since while passing intimation under section 143(1)(a) of the act, no interest was levied under section 234b of the act. While passing an order under section 143 read with section 147 of the act, the commissioner ought to have held that the interest under section 234B could not be levied. 36. The ld. AR has submitted that since as per the return, there was a loss and refund was due to appellant, no interest was payable u/s 234B once the effect to appeal order is given. Theld. AR has relied upon an authority of the ld. Co-ordinate bench of the Tribunal styled as Datamatics Ltd. Vs. ACIT 110 ITD 224(Mumbai) in this respect. On the other hand the ld. DR has relied upon the orders of the authorities below. 37. We have considered the rival submissions of the representatives of the parties. 38. The ratio of the law laid down in Datamatics Ltd.(supra), in our view, is not applicable to the case in hand. In the case of Datamatics (supra) the contention of the assessee was that additional liability had arisen consequent to the judicial decision subsequent to the filing of original return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest u/s 234B of the Act is mandatory and compensatory in nature and this controversy finally stood settled by the Five Judge Bench decision of the Hon'ble Apex Court in the case of CIT vs. Anjum Ghaswala and Ors. [2001] 252 ITR 1 (SC) wherein it was held that in appropriate cases only the Chief Commissioner has an authority to waive the interest. 42. In the result, the appeal No.4069 filed by the assessee is hereby dismissed. Appeal no. 2406/M/2001 forA.Y. 1994-95 43. Disallowance on depreciation on official and residential premises. This appeal by the revenue is against the deletion of the disallowance of Rs.1874110 by the CIT(A) being the depreciation on office premises and residential premises. 44. The assessee claimed depreciation on residential flats in a building known as Brindavan and office premises in Raheja Chambers. The Assessing Officer took a view that the amount paid by the assessee for the purchase of aforesaid premises will include the cost of land. He therefore, estimated the cost of super structure at Rs. 600/- per Sq. Ft. in respect of office premises and Rs. 400/- per Sq. ft. in respect of residential premises after taking into consideration the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture was built. It was in such circumstances held that since the land did not vest with the society, the assessee cannot be said to be owner of any part or share in the land. The society was also not paying any lease rent to the Municipal Corporation. It was further observed that normally the society is required to pay annual lease rent, which in turn is recovered from the flat owner in the society. In such circumstances, value of the land in the total consideration of the flat paid by the assessee can only be very nominal which can be ignored. However, in the case in hand the land does not vest with the Municipal Corporation but with the society itself. The assessee being a member-share holder of the said society can be considered as the part owner in the land in proportion to his share holding in the super structure over it. The learned AR has further submitted that even if the assessee is held to be proportionately owner of the land, the working out of the value of the land with regard to the share of the assessee will be very difficult and even such a value will be nominal and liable to be ignored. 48. It may be observed that the assessee itself before the CIT(A) has submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06/M/2001. ITA No. 735/M/05 A.Y. 201-2002 59. This appeal by the revenue is against the deletion of the disallowance of Rs.1061592/- by the CIT(A) being the depreciation on office premises and residential premises. 60. The issue under consideration in this appeal is identical to the issue involved in ITA No. 2406/M/2001relevant to the AY. 1994-95 61. In view of our findings given above in ITA. No. 2406/M/2001 for A.Y. 1994-95 , the appeal of the Revenue is allowed in terms of the order passed in ITA. No. 2406/M/2001 ITA No. 5085/M/05 A.Y. 2002-03 62. This appeal by the revenue is against the deletion of the disallowance of Rs.1061592/- by the CIT(A) being the depreciation on office premises and residential premises. 63. The issue under consideration in this appeal is identical to the issue involved inITA No. 2406/M/2001relevant to the AY. 1994-95 64. In view of our findings given above in ITA. No. 2406/M/2001 for A.Y. 1994-95 , the appeal of the Revenue is allowed in terms of the order passed in ITA. No. 2406/M/2001 ITA No. 103/Mum/2005 Assessment Year : 1996-97 65. In the above appeal, the revenue has raised the following grounds of appeal: "1. On the facts a ..... 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