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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य, राजे�� राजे�� केकेकेके अनुसार अनुसार/ PER Rajendra A.M.- लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the orders of the CIT (A)-Central-6,Mumbai, the Assessing Officers(AO.s)and the assessee have filed cross appeals for the above-mentioned two Assessment Years (AY.s). The AO has also challenged the order passed by the CIT (A) u/s.154 of the Act for the AY. 1998-99.Assessee-company is engaged in the business of investments, leasing and publishing of magazine.The details of this of filing of returns of income, returned incomes, assessment dates etc. can be summarised as under: A.Y. ROI filed on Returned Income Assessment dt. Assessed Income CIT(A) order dt. 1998-99 30/11/98 Rs.(-)50.89lakhs 23.02.2001 Rs.6.91 lakhs 22.07.2003 1999-00 31/12/99 Rs.(-)10.61crores 27.03.2002 Rs.(-)9.40 Crores 22.07.2003 ITA/6011/Mum/2003,AY.1998-99: 2.First ground of appeal,raised by the assessee, is about making addition of notional amount in respect of Lease Equalisation Reserve(LER),amounting to Rs. 87.49 lakhs, u/s.115 JA of the Act.During the assessment proceedings, the AO found that the assessee had credited lease equalisation income of Rs. 87,49, 268/-,that in the computation of income the reserve was reduced from the total income.He issued a notice to the assessee to explain as to why deduction claim LER should not be disallowed.Vide its letter dated 14/09/2000 the assessee made it submission.After considering the same, the AO held that accounts as on 31/03/1998 6011/M/03;6531/M/03;6532/M/03;6012/M/03&7026/M/04- M/s.Hathway Investment P.Ltd.
had been prepared as per the provisions of the Companies Act,that the assessee was supposed to follow certain accounting standards, that it had followed the method of accounting for lease assets as prescribed by ICAI, that there was no need for making a deviation from the normal accounting practice especially for the purpose of computing taxable profit unless provided in the Act, that there was no provision in the Act to exclude such income, that the amount credited to LER was an appropriation of profit and not an expenditure, that assessee’s contention to exclude the disputed amount was not tenable, that the total income of an assessee was to be computed as per the method employed by it as per the provisions of section 145 of the Act, that there was no express provision u/s.145 to make such adjustment to the net profit computed as per normal principles of accounting. Finally, he included an amount of Rs. 87.49 lakhs to the income of the assessee. 2.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA) and argued that lease rental income had been considered as per the terms of agreement entered into by the assessee with the lessee,that as per the method of accounting for leased assets,as prescribed by the Institution of Chartered Accountant,it had transfer the amount of Rs. 87.49 lakhs to lease equalisation reserve,that it was a notional credit entry, that such notional income could not be considered for purpose of taxation and four computing profit u/s.115 JA of the Act,that for computing taxable income it had been ignoring such notional entries that were in the nature of debit entries in some years and credit entries in other years. After considering the assessment order and the submissions of the assessee, the FAA held that the profit and loss account of the assessee was prepared in accordance with the provisions of part 2 and 3 of the Schedule-VI of the Companies Act, that the book profit as per subsection (2) of section 115 JA would be Rs. 1.73 crores, that under clauses (i)to (ix) of the explanation to the section amount represented by LER was covered, that it was not possible under the law to permit any deduction from the book profits on account of LER,that the nature of adjustments by way of increase/decrease,were specifically laid down is the expl -anation,that unless a particular amount years was covered by any of the clauses no adjustment by way of an increase/ deduction was allowable,that the assessee could not establish that amount in question fell under any of the clauses.Finally, upholding the order of the AO,he dismissed the ground raised by the assessee. 2.2.During the course of hearing before us, the Authorised Representative (AR) contended that the assessee had created a result in the initial years,that there was reduction in the reserve during the year under consideration, that necessary entries were made in the P&L account. He 2 6011/M/03;6531/M/03;6532/M/03;6012/M/03&7026/M/04- M/s.Hathway Investment P.Ltd. relied upon the case of Weizmann Homes Ltd. (357 ITR 74) of the Hon’ble Karnataka High Court.The Departmental Representative(DR) supported the order of the FAA. 2.3.We have heard the rival submissions and perused the material before us. We find that the AO/FAA were of the opinion that LER could not be adjusted for computing the book profit as adjusted by the assessee in its books of accounts,that they had not considered clause (g)introduced retrospectively,while deciding the issue. We would like to mention that issue before us has been dealt with by the Hon’ble Karnataka High Court in the matter of Weizmann Homes Ltd.(supra).We find that after mentioning the basic facts of the case,the Hon’ble Court took notice of the proceedings before the appellate authorities and framed the following substantial questions of law : 2.Whether the provision for doubtful debts/advance made by the assessee cannot be added back to the book profit of the company as per the Explanation to section 115JA of the Act for the purpose of computing the incomes u/s.115JA of the Act ?" Deciding the appeal,the Hon’ble Court held as follows: 11. Section 115JA of the Act reads as under : XXXXX 12. This provision applies to only companies. If the total income of the company has computed under the provisions of this Act is less than 30 per cent. of book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30 per cent. of such book profit. The Explanation to the section states for the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section (2) as increased by the amount mentioned in the Explanation. One such amount which we are concerned is in sub-clause (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. By the Finance (No. 2) Act of 2009, with effect from April 1, 1998, the present clause (g) has been substituted by including the amount or amounts set aside as provision for diminution in the value of any asset. The said provision is applied to the facts of this case. In the instant case Rs. 12,30,220 has been set apart to meet the contingencies. The said amount has not been included in the book profit. It was unascertained liability. Even this amount is earmarked as provision for diminution in the value of any asset for the purpose of arriving at the book profit for the purpose of section 115JA which ought to have been included. Respectfully following the above,we decide first ground of appeal in favour of the assessee.
3.Second ground deals with treating the business profit of Rs. 1.60 crores as deemed specula - tion income.During the assessment proceedings,the AO found that the assessee had derived profit on trading activities of sale and purchase of shares of Rs.1.60 crores, that it had incurred a loss of Rs.42.49 lakhs from the same activities in the year 97-98, that in that year the loss was treated as deemed speculation loss in light of the Expl.to Section 73 of the Act.The profit on sale of shares of Rs.160,14,117/- was treated as deemed speculation profit under Expl.to section 73 of the Act.The AO adjusted brought forward speculation loss of Rs.42.29 lakhs against the speculation profit for the year under appeal.
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3.1.In the appellate proceedings the FAA referred to order of his predecessor AY 1997-98 and confirmed the order of the AO. 3.2.Before us, the AR argued that the assessee was covered by exception clause of Expl. Section 73,that the gross total income of the assessee consisted of income from house property income from other sources, that the FAA had simply followed the order of the earlier year without considering the exception clause, that the only income chargeable is income from capital gains. He referred to statement of facts.DR supported the order of the FAA. 3.3.We have heard the rival submissions we find that the assessee had taken a specific ground about applicability of exception to Expl. to section73 of the Act,that there was a loss under the head profit and gains of business, that the income under the head capital gain amounted to Rs.4.02 crores,that income from other sources returned by assessee was of Rs. 24.95 lakhs.Clearly the income,for the year under consideration, comprised of capital gain and income from other sources. Thus the case falls within the first exception to the Expl. to Section 73 of the Act.Otherwise also the AO himself has admitted that assessee was engaged in the business of granting of loans and advances. Therefore, it would also be covered by the second exception to the Expl.to section 73 of the Act.We find that in the case of HSBC Securities & Capital Markets India (P.) Ltd.the Hon’ble Bombay High Court has held (208 taxman 439)that Expl.to Section 73 would not operate in respect of a co. whose gross total income consisted mainly of income that was chargeable under the heads interest on securities, income from house property,capital gains and income from other sources. Respectfully following the above case,we decide Ground No.2 in favour of the assessee,as the facts of both the cases are similar.
ITA/6531/Mum/2003,AY.1998-99:
4.First Ground of appeal
,filed by the AO,is about allowing depreciation of Rs. 12.80 lakhs in respect of land of the office and residential premises.During the assessment proceedings the AO found that the assessee had claimed depreciation on office and residential premises to the tune of Rs.41.71 lakhs.He observed that the assessee had claimed depreciation on the entire cost of acquisition, that depreciation could be allowed on the cost of super structure only.He relied upon the case of Alps Theatres (65ITR377) and referred to the order for the AY 1994-
95. He rejected the claim of depreciatio on cost of land/FSI made by the assessee. He further observed that as per order for AY 1997-98 w.d.v. of official premises and residence was 6011/M/03;6531/M/03;6532/M/03;6012/M/03&7026/M/04- M/s.Hathway Investment P.Ltd.
Rs.1.10crores and Rs.52.48 lakhs respectively, that consequential depreciation had to be disallowed on land/FSI. He worked out disallowance to Rs.12,80,640/-. 4.1.It was brought to our notice that identical issue was dealt by the Tribunal while deciding the appeals filed by AO for AY 1994-95- 1996-97 and 2000-01 to 2002-03.(ITA.s/ 4069/ Mum/2001-AY 1994-95 and Ors.dt.07.08.2013). We would like to reproduce paragraphs 43 to 49 of the order for AY.1994-95 of the Tribunal (supra) and same read as under: “43. Disallowance on depreciation on official and residential premises This appeal by the revenue is against the deletion of the disallowance of Rs.18.74,110/- by the CIT(A) being the depreciation on office premises and residential premises.
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 of construction of super class construction in the year 1993-94. On the aforesaid basis the cost of super structure was worked out at Rs. 75,36,000/- and entitlement of depreciation was worked out at Rs. 4,04,700/- against the claim of depreciation of Rs. 22,81,810/-. Thus, he disallowed depreciation to the extent of Rs. 18,74,110/-. While doing so, the Assessing Officer observed that the cost of the premises includes the cost of Landas well as cost of super structure. He referred to the judgment of Hon’ble Supreme Court in the case of Alps Theatre-65 ITR 317 as per which depreciation is admissible in respect of the cost of super structure only and not in respect of the cost of land.
On appeal the ld. CIT(A) deleted the said disallowance observing that the cost of land in comparison to the cost of flat might be very nominal and it was not possible to separately calculate the same, hence was liable to be ignored. 46 . The ld. DR before us has relied upon the Assessment order. He has further submitted that Assessee by becoming the member of the society gets his undivided share in the land owned by the society. On the other hand, the ld. AR has submitted that its claim for depreciation is fully allowable. It is stated that it has purchased flats and it did not purchase any land in any of the aforesaid premises. It also did not become the owner of the land which always belonged to the co-operative society managing the buildings. the learned AR has further relied upon the Third Member decision of the co-ordinate Bench of this Tribunal in “Shri Mahesh R Jethmalani vs. ITO”-ITA No. 42 & 7488/Bom/95 for A.Ys. 1991-92 & 1992-93 decided on 25.10.2004.
We have considered the rival contentions of the counsel for the parties and also gone through the above said decision relied upon by the AR. It may be observed that the facts of the said case before the Hon’ble Third Member were different. In that case it had been observed that the assessee acquired right to occupy and use the flat by virtue of becoming share holder in the Co-operative Society. The society was the owner of the super structureonly, however, the land over which the super structure had been built vested with the municipal corporation. There was also no lease executed in favour of the society. It was held that in fact the said society was just a licensee on the land over which the super structure 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.
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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.
It may be observed that the assessee itself before the CIT(A) has submitted the estimated cost of super structure valuation report obtained by it from the government approved valuer, which fact can be observed from para 5.3 of the CIT(A)’s order. Under such circumstances, the assessee is bound by the working of the cost/value of the land of super structure submitted by itself. The said valuation according to the assessee has been done by the government approved valuer. In our view, the estimation of the value of land by the Assessing Officer himself cannot be sustained in the presence of the report of the government approved valuer. Accordingly, we direct that the value of the land be taken as per the valuation report given by the assessee and the claim of depreciation of the super structure be allowed accordingly.
The appeal of the revenue on this issue, subject to our above observations, is hereby allowed.” We find that in the subsequent years,the Tribunal had followed the order for AY.1994- 95.Respectfully following the same,the AO is directed to follow the directions of the Tribunal at paragraph No.48 of the order.Subject to the said instructions,we allow the appeal filed by the AO.
5.Next Ground deals with allowing claim of deduction of the principal amount of Rs.85.67 lakhs and Rs.1.10 crores received from Rajasthan State Electricity Board(RESB)and Gujarat State Electricity Board(GSEB)respectively. 5.1.It was brought to our notice that identical issue was decided against the assessee by the Tribunal while adjudicating the appeal for the AY.1994-95(ITA/4069/Mum/2001 dtd.07. 08. 2013).We are reproducing the relevant portion of the said order of the Tribunal and it reads as under:- 8. We have carefully considered the rival submissions made on behalf of the parties and have also minutely gone through the record. Our findings in respect of the matter are as under: There is no doubt about the legal provisions that an assessee being the owner of the assets is entitled to claim the depreciation on assets under Section 32 of the Income Tax Act. The meaning of the word ‘depreciation’ as well the requirements of Section 32 to be eligible to claim such depreciation of assets has been discussed by the Hon’ble Supreme Court in ‘M/S I.C.D.S. Ltd v Commissioner of Income Tax, Mysore and another’ (Civil Appeal No. 3282/2008 decided on 14.01.2013) as under:- XXXX 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 asset to the extent it has depreciated during the period of accounting relevant to the assessment year and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes place.
Black’s Law Dictionary (5th Edn.) defines ‘depreciation’ to mean, inter alia:“A fall in value; reduction of worth. The deterioration or the loss or lessening in value, arising from age, use, and improvements, due to better methods. A decline in value of property caused by wear or obsolescence and is usually measured by a set formula which reflects these elements over a given period of useful life of property.... Consistent gradual process of estimating and 6011/M/03;6531/M/03;6532/M/03;6012/M/03&7026/M/04- M/s.Hathway Investment P.Ltd.
allocating cost of capital investments over estimated useful life of asset in order to match cost against earnings...” XXXX 13. The provision on depreciation in the Act reads that the asset must be “owned, wholly or partly, by the assessee and used for the purposes of the business”. Therefore, it imposes a twin requirement of ‘ownership’ and ‘usage for business’ for a successful claim under Section 32 of the Act.” So as held by the Hon’ble Supreme Court, the section 32 of the Income Tax Act imposes two conditions to be eligible for assessee to claim depreciation i.e. the assessee must be owner of the assets either wholly or partly and secondly the assets must be used for the business of the assessee.
Now in view of above parameters, as laid down by the Hon’ble Supreme Court in M/S I.C.D.S. (supra), we will have to see whether in the case in hand, the assessee satisfies the requirements of the above mentioned twin conditions to be eligible 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. XXXX 11. The issue relating to definition and meaning of operating and finance lease came into consideration before the Special Bench of the ITAT in ‘M/s. IndusInd Bank Limited’ (ITA No. 6566/M/2002) decided on 14.03.2012. The Special Bench of the Tribunal, in the said authority, after carefully considering the guidance note of Accounting Standard (AS) 19, the law laid down by the Hon’ble Supreme Court in ‘Asea Brown Boveri Limited v. Industrial Finance Corporation of India’ [(2006) 154 Taxman 512 (SC)],and further in ‘Association of Leasing & Financial Services Companies v. Union of India &Ors.’ [2010-(SC2)-GJX- 0838-SC] and also by the Hon’ble Bombay High Court in ‘Avinash Bhosale v. Union of India &Ors’ [(2010) 322 ITR 381 (Bom)] has drawn the following broad features of a finance lease:- XXXX 12 . From the perusal of the above said features drawn by the ‘Hon’ble Special Bench’ of the ITAT, it can be gathered that in fact a ‘finance lease’ can be said to be a ‘sale’ which is given the colour of the ‘lease’ by the parties for their mutual benefit and to avoid the consequences pertaining to tax liability or otherwise. In case of sale and lease back transactions, the asset is sold by the first person to the second person and thereafter is taken back on lease from buyer by the seller. In such type of transactions, it is to be seen whether the sale transaction is the real transaction or is a sham transaction with the object of enabling the alleged purchaser/second person to claim himself as the owner of the goods, which are further claimed to be leased back to the first person i.e. seller or the original owner of the goods. In a Sham transaction of sale and lease back, in fact, the ownership of the goods is not transferred to the alleged lessor, but is shown to be done, so as to enable the second person/purchaser to claim ownership for the goods for the purpose of claiming relief, deduction or allowances under the taxation statutes or otherwise. While defining the term ‘sham transaction’; the The Kolkata Bench of the Income Tax Appellate Tribunal in the case of Maersk Line UK Limited (ITA No. 2150/Kol/2009) has observed as under : XXXX 6011/M/03;6531/M/03;6532/M/03;6012/M/03&7026/M/04- M/s.Hathway Investment P.Ltd.
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. XXXX 14. In the case in hand, the alleged sale has been made by GEB to the assessee for a price of Rs. 49972800/-.However, though the assessee has claimed that the property in the goods has transferred to it, but, the revenue claims that the property in goods has never transferred to the assessee. XXXX So even in case of sale of unascertained goods or future goods by description, the goods of that description in deliverable state should be unconditionally appropriated to the contract and both the buyer and seller must have given their ascent to it. The very essential for passing of the property in goods is that the goods must be ascertained and the same should be in a deliverable state and further should be appropriated to the contract and both the parties to the contract must have assented to the said apportionment.
Now coming to the case in hand, the goods were allegedly owned by the GEB. The same are allegedly purchased by the assessee vide sale invoice dated 23.03.1994. A perusal of the said sale invoice, copy of which has been placed in the file as Annexure-A, reveals that it is a general sale invoice regarding sale of 1,43,600 ISI marked AC single phase 2.5/10 and 5/20 240 volts energy meters of different make. The specific description of the meters have not been mentioned in the sale invoice. The fact of nonmention of specific details like meter numbers, make/manufacture etc. is very much important in the case because the possession of the meter/goods in question was never delivered by the GEB to the assessee. The seller i.e. GEB may be the owner of so many meters as it is in the business of supplying the electricity to the consumers in the State of Gujarat and so many meters must have already been installed by the GEB in the premises of its consumer even before the sale transaction in question and even after the sale transaction in question. The goods were not delivered practically to the purchase in this case. Under such circumstances, which ascertained goods were actually the subject matter of the sale transaction cannot be gathered from the perusal of the sale invoice.
Now coming to the lease agreement in question, clause 1.3, of the said lease deed relates to the description of the ‘equipment’ ,which for the sake of convenience is reproduced as under:- XXXX 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 question cannot be said to be a “Sale” being falling short of the requirements of the provisions of the “Sale of Goods Act, 1930”, the assessee cannot be said to be the owner of the goods and as such the subsequent lease back of the goods automatically gets invalidated.
The learned AR before us, has relied upon a certificate issued by GEB dated 22.03.1994 vide which, it has been certified that 1,43,600 of meters sold to assessee vide sale invoice dated 23.3.1994 have been installed in the premises of various customers located in the State of Gujarat and have been put to use. Even this certificate also does not reveal the identity as to which specifically ascertained meters were actually purchased by the assessee from the GEB.
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Another fact which can be noted here is that the sale invoice is dated 23.03.1994, whereas, the certificate in which reference has been made to the sale invoice dated 23.03.1994 has been surprisingly issued by the GEB on 22.03.1994 i.e. one day prior to the date of sale of invoice.
Further the lease deed which is claimed to have been executed after the transaction of sale of the meters by the GEB to the assessee is dated 21.03.1994 whereas the sale invoice of meters is dated 23.03.94 i.e. two days after the date of lease deed. Even there is no mention in the lease deed that the equipments in question i.e. the electric meters has been or would be purchased by the assessee for GEB and thereafter be further leased out to GEB. Rather the entire context of the lease deed gives inference that new equipments would be purchased/ordered by the assessee from the manufacturer and the same would be the subject matter of lease and further that the rental would start from the moment the order is placed to manufacturer or from the date of advance, if any paid by the assessee to the manufacturer. It is nowhere mentioned that it is a case of sale and lease back as has been alleged by the assessee. 20. Further the perusal of the lease agreement as a whole reveals that the said lease agreement is a sham transaction. Given the colour of the lease, virtually, the same is a finance agreement. The intention of the parties to the transaction was not that of sale or lease, rather the same was a loan transaction given the colourof the ‘lease’, only to defeat the provisions of the Income Tax Act, so as to give undue benefit of claim of depreciation 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 of the agreement itself reveals that interest on the loan amount starts on the day as and when the financer pays money for the purchase of equipment and not when the lessor has delivered the goods to the lessee i.e.GEB. 21 (III) As per clause 2.4 of the said lease agreement, whenever, the lessor will place order(s) on the manufacturer of the goods at the request of the lessee and if the lessor makes any advance for other payments towards the purchase of the equipment, but the manufacturer fails to deliver the equipment to the lessor by the stipulated date, the lessee shall make payment to the lessor of the advance along with costs, charges, expenses and even interest on the amount paid by the lessor to the manufacturer. This type of clause is strange to a lease agreement. Further it has been provided that the lessee agrees to indemnify the lessor against all type of losses and damages, the lessor may suffer on account of non delivery by the manufacturer. We are unable to understand as if the equipment will not be delivered by the manufacturer to the lessor, which in turn, is to be leased to the lessee, how can the lessee be liable to pay any loss or damage even before its delivery by the manufacturer to the lessor. The clause stipulates that the lessee is not only liable to pay rent, but the cost and expenditure of the equipment to the lessor even before the start of the lease period. (IV) As per clause 2.5, even in case of any advance or other payments made by the lessor for the purchase of equipment which are to be further leased out to the lessee after its purchase from the manufacturer by the lessor, the lessee will pay interest at the rate of 19% p.a. from the date of such advance or payment made by the lessor for the purchase of the said equipments from the manufacturer. (V) Under clause 3.3, it has been provided that the lessee is entitled to import the equipment as if the lessee had bought the equipment and was using and operating the same as owner thereof. (VI) Clause 3.4 of the lease agreement is important which for the sake of conveyance is reproduced as under:- “3.4 Under the applicable provisions of the Income Tax Act, 1961 and the rules made thereunder and the relevant Finance Act as prevailing at present, the Lessee would have been entitled to and could have claimed depreciation at the rate(s) 22 9 6011/M/03;6531/M/03;6532/M/03;6012/M/03&7026/M/04- M/s.Hathway Investment P.Ltd.
prescribed thereunder, if it had bought the 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 on its own judgment and not on the statements or representations if any, made by the Lessor or its agents or servants.” “6.2 The Lessor is not the manufacturer or dealer of the Equipment and that the essential function of the Lessor in this Lease is to purchase the Equipment selected by the Lessee from the Manufacturer designated by the Lessee.” “8.2.2. Without prejudice to and in addition in the Lessor’s rights provided in Clause 8.2.1 hereinabove, the Lessor shall also be entitled to recover from the Lessee and the Lessee shall be bound to pay to the Lessor the following amounts, viz: (a) the entire amount of the rental for the fixed period of the Lease computed in the manner set out in the Schedule on the footing and as if the Agreement had not been terminated to the end and intent that the Lessee shall pay to the Lessor not only arrears of installments of rental upto the date of termination of the Agreement but also such further installment for the then unexpired residue of the term which the Lessee would have been bound to pay to the Lessor had the Agreement continued. 23 (b) the cost of all repairs and maintenance of the Equipment to render and maintain it in good working order and condition and all costs charges and expenses incurred by the Lessor pursuant to the Agreement and in repossessing the Equipment and in enforcing its remedies howsoever occasioned. (c) all other sums payable by the Lessee under or pursuant to this Agreement.” (VIII) The various clauses of the lease agreement reveal beyond doubt that the transaction in question is a loan or finance transaction. The moment, the assessee would part with his money either for the purchase of equipment or for making any advance, the interest (which has been named here as rental) on the said amount would start to run. Even the so called rental is liable to be paid by the GEB, in case the goods are not delivered, destroyed or even if the lease agreement is terminated. Even the lessee has to pay interest for any loss, expenditure, transport expenses etc. incurred by the assessee whether or not the goods are delivered to or used by the lessee. The construction of the said lease agreement is as simple as it can be that the assessee will be entitled to refund along with interest on each and every payment made by him for or on behalf of the GEB and the interest start to run, the moment the payment 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 is very important to note that the lease can be renewed indefinitely at the sole discretion of GEB on a year to year basis on payment of a token lease rental @ Rs. 1/- per Rs. 1,000/- of the cost of the asset. This would mean that though the assessee on paper had become the owner of the electric meters but in reality it could never take possession of those 10 6011/M/03;6531/M/03;6532/M/03;6012/M/03&7026/M/04- M/s.Hathway Investment P.Ltd. assets. In fact, the lease rentals appeared to have been fixed at such a rate that the investment of the assessee together with the interest would be recoverable over the lease period and thereafter the assessee was to receive token lease rental only. Another important condition which is there in the lease agreement is that even in the event of irreparable loss or damage to the asset as a whole for whatever reason, the lessor would be entitled to recover from GEB the entire amount of rental in the fixed period including the rental for the unexpired portion of the fixed period as if the lease has not been terminated and all other costs incurred by the lessor. According to this strange condition, even after the asset is no longer in existence the lessee has to pay the lease rental even for the unexpired portion of the lease period. The inference is clear that the assessee as lessor had provided finance to GEB and in turn it was interested only in getting back its investment along with interest. In the case in hand, all the facts and circumstances show that it was in fact the agreement of loan between the two parties and there was no intention to actually sell the electric meters by the State Electricity Board to the assessee. It may also be considered that even if the State Electricity Board allowed the assessee to remove the electric meters on expiry of lease period which particular electric meters could be removed by him as no location at all of the meters has been given. (XI) Now coming to the most important part of the agreement, as to what is the lease amount or rent settled in the lease agreement in question. As per the schedule, the lease deed is fixed and non-cancellable for the period of 60 months. The working of the rental has been made as under: “For Equipment eligible for depreciation@100% per annum as per the Income tax Act:- Profile Rate (per Rs.1000 of acquisition cost/month/per meter Number of instalments of rentals Interval Fixed period Rs. 21.75 60 1 Thus the monthly rental per meter 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.
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 for 100% claim of depreciation for the purpose of Income Tax Act. If the banks’ minimum lending rate would increase, the rental rate would also increase. If for any reason, the claim of depreciation is increased, decreased or disallowed, the rate of rentals in the shape of interest will accordingly decrease or increase. In ordinary sense, these types of clauses cannot be a part of any lease agreement but finance agreement only. The only and only purpose or object of the assessee for this agreement is to earn interest on its capital together with timely refund of the invested capital. The object and purpose of the GEB is to wrongly transfer the right/ eligibility to claim depreciation@100% to the assessee and in lieu thereof to get the loan or finance at a reduced rate of interest in proportion to the gains which the assessee would avail by claiming depreciation. Otherwise, in a normal lease agreement, how can the lessee be concerned as to what benefits are available to the owner/ lessor under income tax act. The lessee may be concerned in the use or enjoyment of the leased property not about the tax benefits available to the owner. The rentals in certain cases of lease may be increased according to demand and supply of the type of goods leased out, even that type of increase is seldom found in cases of fixed lease period, however in this case, irrespective of any appreciation or depreciation in the value of the goods, or its availability in market, the rentals will increase, if the minimum lending rate of commercial banks is increased. After consideration of the clauses of the document in question, there leaves no doubt in our mind that it is essentially a finance agreement given the colour of ‘sale and lease back’ with wrongful object of passing the tax benefits to the assessee to which he otherwise is not eligible. 11 6011/M/03;6531/M/03;6532/M/03;6012/M/03&7026/M/04- M/s.Hathway Investment P.Ltd.
The contention of the ld. AR that transaction is with a State Government and it would be highly improper to impute any collusiveness or colourable nature of the transaction without any concrete evidence, in our view is misconceived. The facts on the file itself speak that the transaction in question was a colourable device with the twin purposes of financing GEB, and at the same time making such an arrangement so as to enable the financer to claim depreciation on the assets @100% and in lieu there off to pay reduced rate of interest to the 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 whether the said transaction was sham or a valid transaction for the purpose of claim of the assessee regarding depreciation on the assets under the Income Tax act. XXXX 27. Without separately discussing the facts of each of the case law mentioned above, it may be 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 31 ‘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 the assessee is the real owner of the assets or not is again a question of fact which can be determined from the perusal and consideration of the facts of each of the individual case and findings in this respect may differ from case to case. No straight jacket formula can be adopted to say that every case of sale and lease back transactions is sham or genuine. The finding in this respect can be given after appreciation of facts of each case separately. A perusal of the above mentioned authorities reveal that the judges of the Honb’le Apex Court as well Hon’ble High Courts are unanimous to hold that the true legal relation arising from a transaction determines the taxability of the receipt arising from the transaction under the Income Tax Act. In a case, where the terms of the transaction are embodied in a document, the true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In each case the court has, unless prohibited by the Statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of document. 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. 28. The next contention of the ld. AR that there is no bar for the assessee for making the tax planning so as to avoid or reduce its taxes, provided it is within the framework of the law. He has further submitted that the sale and lease back transactions made by it, even if it is assumed 12 6011/M/03;6531/M/03;6532/M/03;6012/M/03&7026/M/04- M/s.Hathway Investment P.Ltd.
that the same were for the purpose to avoid tax, have not been forbidden by law. 32 So far the contention of the ld. AR to the effect that such type of transactions, are not forbidden by law is concerned, in our view section 23 of the Indian Contract Act, 1872 is relevant in this respect which for the sake of convenience is reproduced as under: “23. What consideration and objects are lawful, and what not: The consideration or object of an agreement is lawful, unless - It is forbidden by law; or is of such nature that, if permitted it would defeat the provision of any law or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of 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 of the parties to the agreement in question was to directly or indirectly, enter into such transaction with a view to reduce the tax liability by claiming higher depreciation. We agree with the view of authorities below that we have to go by the true construction of the agreement between the two parties and not merely by the description given by the two parties.
It may be observed that tax avoidance by way of tax planning or structuring the transactions so as to reap the largest tax benefit may be permissible under law but fraudulent transfer of assets or income or engaging in sham transactions with the object of reducing the tax liability cannot be said to be a case of tax avoidance but of tax evasion. Any act or attempt to reduce the tax liability by deceit, subterfuge or concealment is not permissible under law.
In the case in hand, whole of the effort has been made to transfer the right to claim depreciation on the assets to the assessee for the purpose of the Income Tax Act, but not the assets itself. It is always the goods or the assets itself which are the primary subject of a valid transfer, not the incidental benefits, which automatically pass to the transferee with the transferred asset. In the case in hand, only the incidental tax benefits are intended to be transferred without any intention to transfer the asset itself.
For the year under consideration, there is another fact on the file which goes against the assessee. In Para 13 of the notes to the Annual Accounts of GEB for F.Y. 1993-94, as reproduced in para which has been reproduced in Para 3.(P) above, shows the true intentions of the parties. This para indicates that the real intention was to enter into transaction of loan/finance only and the assessee was never intended to be the real and legal owner of the assets.
For the reasons given above and in agreement with the authorities below, it is held that the Assessing Officer has rightly disallowed depreciation on electric meters. This issue is decided against the assessee.” In view of the above discussion,first Ground of appeal is decided in favour of the AO and against the assessee. ITA/7026/Mum/04,AY.1998-99: 6.Solitary ground of appeal filed by the AO in the above appeal is about allowing relief of Rs. 87.46 lakhs under the head LER.Facts of the case are that the FAA had decided the appeal on 22.07.2003,that the assessee filed an application u/s.154 of the Act and made a request to 6011/M/03;6531/M/03;6532/M/03;6012/M/03&7026/M/04- M/s.Hathway Investment P.Ltd. rectify his impugned order.It was argued before him that fourth ground of appeal dealt with making addition to income under the normal provisions of the Act of notional amount in respect of LER,that the assessee had objected to the treatment given to LER by the AO under the normal provisions as well as under MAT provisions,that while deciding the appeal issue was adjudicated with regard to book profit provisions,that issue raised by it regarding assessment under the normal provisions remained un-adjudicated. 6.1.Deciding the issue,the FAA held that identical issue was decided in favour of the assessee by his predecessor in the appeal filed for the AY.1997-98,that there was no justification in holding that LER was apportionment of profit.He directed the AO to delete the addition. Before us,the DR relied upon the order of the AO and the AR referred to the order of the FAA. 6.2.After considering the available material we are of the opinion that LER does not represent any income which had either accrued or had been received by the assessee,that what had accrued to it was the lease rentals payable in terms of lease agreement which had already been offered and taxed to tax,that lease equalisation amount was a book entry,that such notional entries should not be considered for taxability purposes.In thses circumstances,we do not want to interfere with the order of the FAA.Confirming his order,we decide the effective ground against the AO.
ITA 6012/Mum/03,AY-1999-2000 7.The only Ground of appeal raised by the assessee for the year under consideration is about treating business loss of Rs.1.60crores as deemed speculation loss by applying the provisions of Explanation to Section 73 of the Act. While deciding the appeal for the earlier year we had adjudicated the issue in favour of the assessee.Following the same first Ground of appeal is allowed.
ITA/6532/Mum/03 ,AY-1999-00: 8.Both the Grounds, raised by the AO, are covered by our order for the earlier AY.s. First Ground deals with allowing depreciation of Rs.11.65 lakhs in respect of land of office and residential premises.AO is directed to follow the direction of Tribunal .(para 48 of the order for AY 1995-96).Subject to the said direction,Ground raised by the AO stands allowed. 9.Next Ground is about claim of deduction with regard to the transaction of RSEB and GSEB. Following our order for earlier year and Tribunal order dtd. 07.08.2013 (supra), we decide second Ground in favour of the AO. 14 6011/M/03;6531/M/03;6532/M/03;6012/M/03&7026/M/04- M/s.Hathway Investment P.Ltd.