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TMI Blog2014 (6) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... )-II, Indore, wherein the transaction in question was confirmed – thus, the assessee is eligible for 100% depreciation on the COPS – Decided in favour of Assessee. - I.T.A. No. 2083/Mum/1999 - - - Dated:- 25-10-2013 - Shri Vijay Pal Rao, JM And Shri N. K. Billaiya, Billaiya, AM,JJ. For the Petitioner : Shri R. K. Sahu For the Respondent : Shri Rajiv Khandelwal ORDER Per : Vijay Pal Rao, JM. This appeal by the assessee is directed against the order dated 14.12.1998 of Commissioner of Income Tax(Appeals) for the assessment year 1995-96. 2. The assessee has raised the following grounds in this appeal: 1. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in confirming the order passed by the learned Assessing Officer holding the lease agreement as Sham transaction. Reasons assigned by her for doing the same are wrong and insufficient. 2. On the facts and in the circumstances of the case and in law the learned CIT(A) has further erred in confirming the order passed by the Assessing Officer denying the depreciation at the rate of 100% claimed by the appellant on leased assets of Rs. 50 lacs in respect of purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has further erred in rejecting the alternative contention of the appellant regarding the allowance of normal depreciation on the cops purchased. Reasons assigned by her for doing the same are wrong and insufficient. 10. Alternatively, it is contended that the authorities below, having considered the transaction as a finance transaction, have erred in holding lease rentals as tantamounting to interest received. Instead of taxing the lease rentals as the income the authorities below ought to have included in the income the probable rate of interest in lieu of lease rentals having regard to the facts and the circumstances of the case. 11. She has further erred in rejecting the ground with regard to the charge of interest u/s 234B and 234C. Reasons assigned by her for doing the same are wrong and insufficient. 3. The first issue arises is regarding disallowance of depreciation @ 100% claimed by the assessee on leased out assets. The brief facts of the case emerge from record are that the assessee company is engaged in the business of leasing of equipment, dealing in shares and merchant banking. During the year under consideration the assessee has inter alia entered into a sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 3 to section 43(1) even normal depreciation is not allowable. 5. Before us the Ld. AR of the assessee has submitted that the assessee is in the business of lease of assets. Out of several transaction of lease only one is treated as Sham transaction by the AO because of 100%depreciation was claimed by the assessee. He has further submitted that the assessee got the valuation of the COPS through a Government Approved Charter Engineer and as per the valuation report dated 8.3.1995 COPS have been valued at a price of 50 each. After the necessary verification and internal discussion as well as considering the valuation report, the assessee company informed the SSL of its intention to buy 1,00,000/- COPS for its business of leasing. The Ld. AR has pointed out that the deal was finalised on 24.3.1995 and accordingly SSL raised an invoice dated 24.3.1995 in respect of 1,00,000/- number of COPS at a price of Rs. 50 each. One of the directors of the assessee company Shri Ram Ratan Kanoongo alongwith Mr. Samir Shah, Assistant Vice-President and Mr. B. L. Agarwal went to the plant of SSL for completing the deal of purchase of 1,00,000/- COPS as well as to finalise the lease proposal of SS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble Jurisdiction High Court in case of Famous Cine Lab 121 ITR 648 whereas in the case of the assessee the value of the asset has not been doubted and the AO has not given any finding that the valuation report of the government approved Charter Engineer is not correct. He has further submitted that in the case of the assessee it is a permissible transaction though it may be an efficient tax planning exercise. The Ld. AR has relied upon the decision of Hon ble Supreme Court in case of ICDS Ltd. Vs CIT 350 ITR 527 and submitted that the asset must be owned wholly or partly by the assessee and used for the purpose of business for a claim of depreciation u/s 32. The Ld. AR has submitted that the assessee has established the fact that the assessee has purchased the asset in question against consideration and proper invoice issued by the seller and thereafter leased back the asset to the seller and therefore, the assets has been used by the assessee for its business of leasing of asset. The Ld. AR has forcefully contended that once the twin condition of ownership and uses for business are satisfied then the claim of depreciation cannot be denied. He has referred the documents of purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the lease agreement and submitted that upon expiration or earlier termination of lease, the lessee shall deliver to the lessor the equipment in question which shows that the ownership of the asset remains with the assessee. In case of default the lessee has to return all the equipments to the lessor at its own risk and expenses. Therefore, the ownership right of the asset vested with the assessee. Thus, the Ld. AR has submitted that the COPS under lease agreement are the property of the assessee and after expiry of lease period the assessee is entitled to get them back. He has pointed out that at the end of the lease period the assessee sold the COPS to the lessee against consideration which established that the COPS were the property of the assessee. Hence, the Ld. AR has submitted that the assessee is entitled for 100% depreciation as the individual caused of COPS is less than Rs. 5,000/-. 6. On the other hand, the Ld. DR has submitted that the transaction of sale and lease back is a Sham transaction with the motive to provide the Finance to the SSL and further to avoid to tax liability by claiming 100% depreciation. The Ld. DR has referred the submissions/reply of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n there is no identifiable asset then how it is possible to inspect the asset in terms of the agreement. There is no description of size or age of the COPS whether new or old either invoice or in the lease agreement or in the valuation report and the maximum price of the new COP is Rs. 50/- each then the valuation of the COPS which are not identified @ Rs. 50/- each itself is not correct. Thus, the valuation report is not giving the correct valuation and the same is a vague report. Even otherwise the price is determined by the lessee and not by the assessee. The rate of Rs. 50 per COP is not a fair market price because as per the report of the ADIT(Inv.)-II, Indore. He has relied upon the orders of the Assessing Officer and CIT(A) and submitted that the COPS are inseparable part of the machine and no separate depreciation is allowable. The Ld. DR has relied upon the decision of Special Bench of this Tribunal in case of Mid East Port Folio Management Ltd. Vs DCIT 87 ITD 537 as well as decision of Hon ble Karnataka High Court in case of Avasarala Automation Ltd. Vs JCIT 266 ITR 178. The Ld. DR has also relied upon the decision of this Tribunal in case of DCIT Vs Prithvi Prakashan (P) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sale and lease back transactions with Shri Synthetics Ltd., Ujjain. A report in this regard has been received by Fax on 16.3.1998. The relevant points are reproduced hereunder:- 1. The company is carrying on business of manufacture of Synthetic Yarn. The finished product i.e. Yarn is wrapped on COPS. On verification of assets as per aforesaid inventory, it is noticed that they are not shown as assets (depreciation) in block of assets. As such statement of Shri R. S. Toshniwal, Manager (Accounts) as also Shri Ashok Mehta, Asstt. Manager, COPS section of the company were taken. They have explained the function and necessity of COPS. It is explained that COPS are made of aluminium/steel of different size viz. 340mm, 380mm and 420mm. These are of cylinder shape. Both the ends of these COPS are fitted with plastic adopters and a plastic sleeve is wrapped on it. It is stated that COPS are part of machinery which are very essential for wrapping final product (Yarn) on it. The COPS are sold alongwith yarn to other parties under the condition that blank COPS are to be returned back to the company. The cost of COPS is not included in the sale of yarn. Some security amount is also kept b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 has been made. Sale proceeds of Rs. 50 lakhs has been received by the company through cheques. The sale proceeds of COPS is shown under the head Misc. Sale A/c . In the books of shri Synthetics Ltd., Ujjain. The sale proceed has been taken as profit on sale of COPS shown as other income, since the initial cost of COPS has already been charged to P L A/c. 7. As per the lease agreement executed between both companies the right of claiming depreciation vested with lesser as per para (G), page-3 of agreement. After verifying all these facts, it is opined that COPS are useable items again again after making some minor repair/replacements of sleeves and adopters. The life of COPS is longer one as these are made of Aluminium/Steel (metal) folded with plastic sleeves and plastic adopters (both sides). The COPS is being purchased in numbers. Since its involvement in manufacturing section, wrapping section, warehouse which the parties are very huge. The COPS is not containing any details like make/distinctive numbers etc. The COPS is an item which is in circulation of business, i.e. under use of machine, in transit on sale, lying with the purchaser parties, lying in COPS section f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Engineer appears to be based on the prevailing market price. The report of DIT(Inv.), Indore, points out the variation in cost of COPS as prevailing in different years. Therefore, the cost of COPS remains same in particular years irrespective of its size. Even otherwise the size has not been stated to be effecting the utility of the COPS. Thus, it appears that all COPS are identical and no difference in the utility due to the difference in size. The assessee has filed the relevant record to show that before entering into the transaction the COPS in question were inspected by the director and the other officers of the assessee, though at the place of SSL therefore, there is no occasion for delivery of the COPS to the place of the assessee because the transaction of sale and lease back is simultaneous. It is pertinent to note that when the assessee has purchased the COPS from SSL and with the intention to lease back to the SSL then there was no need to take the delivery of the COPS in question by transportation from the place of the SSL and then send back again to the place of SSL. Even otherwise the said exercise would not achieve anything but wastage of time and money. Even during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tood and accepted this fact that after the sale of the COPS by SSL to the assessee it became the property of the assessee and the SSL got the right to use under the lease agreement. Another crucial fact is the financial assistance taken by the assessee from the bank by pledging the COPS in question. The assessee has produced the relevant record showing the loan taken from bank against these COPS. This fact is again confirmed by the Insurance Policy taken on these COPS. As per the Insurance Policy the interest of bank of Madura Ltd. has been noted and a relevant endorsement has been made in this regard. The transaction of sale and lease back is permissible under the framework of law. Only because the assessee claim 100% depreciation on these COPS cannot ipso- facto render the transaction as non-genuine and abuse of law. It may be a transaction with pre-plan to reduce the tax liability but the same cannot be called as a device to avoid tax. This is because the entire transaction is Revenue neutral. It is manifest from the report of ADI(Inv.)- II, Indore, that the SSL has shown the sale proceeds of one lac COPS under the head miscellaneous sales account and taken as profit on sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the purpose of depreciation and not for determining the genuineness of the transaction. Once the assessee has established with supporting evidence that the transaction in question has been actually carried out then in the absence of any contrary material or facts brought on record, the action of the authorities below in holding the transaction as bogus is not sustainable. On the question of eligibility of depreciation on the lease out assets has been considered and decided by the Hon ble Supreme Court in case of ICDS Vs CIT 350 ITR 527. The Co-ordinate Bench of this Tribunal in case of M/s Larsen Toubro Ltd. in ITA No. 2200/M/2000 (supra) has been decided in para 28 as under: 28. The issue relating to the claim of depreciation vis-a-vis sale and lease back of assets has been considered by Mumbai Special Bench of the Tribunal in the case of IndusInd Bank Ltd. Vs ACIT 135 ITD 165. However, this entire controversy has been set at rest by the decision of the Hon ble Supreme Court in the case of I.C.D.S. Ltd. Vs CIT 350 ITR 527 wherein the Apex Court has allowed depreciation in the case of sale and leased back transaction. This decision of the Hon ble Supreme Court has been f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .) Ltd. (1980) 15 CTR (Raj.) 17 : (1980) 125 ITR 662 (Raj.). Commissioner v. National Air Products Ltd. (1980) 18 CTR (Delhi) 300: 126 ITR196 (Delhi). Therefore the expenditure to purchase the cops in the year under consideration is capital expenditure and the assessee is entitled to the development rebate on the cost of these cops. This view of ours finds support from the aforesaid decisions of the Tribunal in the case of the assessee for assessment year 1970-71 and 1971 -72 respectively dated 1st November, 1980 and 20th January, 1981 in Income-tax Appeal No.2193 (Delhi)/75- 76 and Income-tax Appeal No.1823 (Delhi) 1977-78 (supra). We, therefore, uphold the order of the Commissioner (Appeals) on this point also. 13. Therefore, the issue is squarely covered in favour of the assessee. Even otherwise the claim of 100% depreciation was otherwise allowed by the revenue on the COPS in the case of SSL other then the COPS in question. Therefore, the Revenue itself has allowed 100% claim on the COPS. The decisions relied upon by the Ld. DR are not applicable in the facts of the present case when there is no dispute regarding the actual payment of consideration, valuation made by the Gov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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