COMMISSIONER OF INCOME TAX vs. COSMO FILMS LTD

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Page No.3 of 21 taken place and that, as the assessee was carrying on the business of leasing also, apart from other businesses, it was entitled to the claim of depreciation and consequently the appeal was allowed insofar as the claim of depreciation was concerned.

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Page No.4 of 21 allowed the claim of depreciation in the cases of sale and lease back transactions involving the State Electricity Boards. The Tribunal also took note of the fact that the decision of the Karnataka High Court in the case of Avasarala Automation Limited v. The Joint Commissioner of Income Tax: 266 ITR 178 (Kar), which had been relied upon by the department, had been considered in the Bombay High Court decision as well as in the decision rendered by the Rajasthan High Court and had been distinguished by the said High Courts.

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Page No.5 of 21 Government of Haryana, Irrigation and Power Department, Civil Secretariat, Haryana where, it is stated that the transaction was entered into by the HSEB as a means of raising finance. She also placed strong reliance on the decision of the Karnataka High Court in the case of Avasarala Automation Ltd (supra) as also on the decision of the Supreme Court in the case of Asea Brown Boveri Ltd v. Industrial Finance Corporation of India: AIR 2005 SC 17 to submit that the transaction in the present case was not of a sale and lease back, but merely one of a financial lease, where all the risks and rewards incident to the ownership of an asset are transferred to the lessee. Consequently, she submitted that the respondent / assessee was not entitled to claim depreciation in respect of the equipment in question and that the Assessing Officer had taken the correct view in the matter. She, therefore, submitted that the question be answered in favour of the revenue and the appeal be allowed.

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Page No.6 of 21 between the respondent / assessee and HSEB was not genuine or was a sham transaction. He also submitted that both the Commissioner of Income-tax (Appeals) and the tribunal, which is the final fact finding authority, have clearly held the transaction to be genuine. In fact, Mr Vohra submitted before the Tribunal, as recorded in the impugned order itself, it has been noted that the representative for the revenue could not bring any fact to the notice of the tribunal from which it could come to a conclusion that the sale and lease back transaction between the assessee and HSEB was not a genuine transaction. He further submitted that on going through the documents, which include the sale deed dated 28.09.1995 and lease agreement dated 29.09.1995, it would be apparent that the ownership of the equipment was with the lessor (respondent / assessee) and that the erstwhile owner (HSEB) acknowledged the ownership of the new owner (i.e., the respondent / assessee). He also submitted that there is nothing on record to show that the respondent / assessee was entering into a financial transaction. He submitted that the title in the equipment had passed on to the assessee and for this purpose, reliance was placed on Sections 19 and 33 of the Sale of Goods Act, 1930. The learned counsel submitted that what is to be seen in the present case is – whether the equipment in question came into the ownership of the respondent / assessee ? If it were to be so, then the

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Page No.7 of 21 respondent / assessee would certainly be entitled to claim depreciation in respect thereof because leasing was also a part of its business. He submitted that, therefore, the entire question hinges on the factual determination of whether the transaction was genuine or not. The tribunal, being the final fact finding authority, has held it to be genuine and the revenue has not been able to point out any perversity in such conclusion. In fact, Mr Vohra submitted that no question of law has been framed on the issue of perversity. Therefore, on the facts as on record, the question framed in the present appeal has to be decided in favour of the assessee and against the revenue and the revenue‟s appeal is liable to be dismissed. Mr Vohra placed reliance on the following decisions:- 1) Industrial Development Corporation of Orissa Limited v. Commissioner of Income-tax and Others: 268 ITR 130 (Ori);

2) Commissioner of Income-tax v. Rajasthan State Electricity Board: (2006) 204 CTR 415 (Raj);

3) Commissioner of Income-tax v. Gujarat Gas Company Limited: (2009) 308 ITR 243 (Guj);

4) SBI Home Finance Limited v. Commissioner of Income-tax: 280 ITR 6 (Cal);

5) Commissioner of Income-tax v. Zuari Finance Limited and Another: 271 ITR 538;

6) Commissioner of Income-tax v. George Williamson (Assam) Limited: 265 ITR 626 (Gau).

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Page No.8 of 21 7. Mr Vohra also referred to the decision of the Income-tax Appellate Tribunal, Mumbai (A) Bench in the case of West Coast Paper Mills Limited v. Joint Commissioner of Income Tax: (2006) 100 TTJ 833 (Mumbai) where, in an identical case, which also partly involved the Haryana State Electricity Board, was considered and decided in favour of the assessee by allowing the assessee therein the benefit of 100% claim of depreciation. Mr Vohra pointed out that the said decision of the Mumbai Bench of the tribunal was taken in appeal before the Bombay High Court in Income-tax Appeal No.389/2008, which came up for hearing before the said High Court on 16.10.2008. The said High Court observed that the case of the revenue before the Tribunal was that the transactions of buy back of lease equipments and granting lease of that equipment to various boards were sham transactions entered into only for the purposes of claiming benefits of 100% depreciation. The High Court further observed that the tribunal had considered that aspect of the matter in the light of the material on record and had recorded a finding that it was not a sham and bogus transaction. It was also observed that one of the grounds considered for recording that finding was that when the other party was a statutory body, the question of evasion of tax does not arise and, therefore, according to the tribunal, the inference of collusion could not be drawn. The Bombay High Court, in

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Page No.9 of 21 these circumstances, took the view that no question of law arose for its consideration. Being aggrieved by the said order passed by the Bombay High Court, the revenue took the matter further by filing a special leave petition before the Supreme Court, which was dismissed in limine by virtue of an order dated 09.10.2009. Of course, Ms Suruchi Aggarwal, appearing on behalf of the revenue, rightly contended, on the strength of the decision of the Supreme Court in the case of Y. Satyanarayan Reddy v. The Mandal Revenue Officer, A.P.: 2009 (9) SCC 447 that the dismissal of an SLP in limine by the Supreme Court does not amount to the merger of the order of the High Court with that of the Supreme Court and does not entail a decision on the question of law by the Supreme Court.

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Page No.10 of 21 2,30,40,000/-. The description given in the invoice-cum-delivery challan dated 28.09.1995 is – Instrumentation and Monitoring System for Monitoring Energy Flows – Automatic Electrical Load Monitoring System at Thermal Power Station Faridabad. A valuation certificate dated 23.09.1995 had been obtained by the respondent / assessee through Virtuous Finance Limited Bombay, who had facilitated the transaction with HSEB, from M/s M. Chaudhary and Associates, Registered Valuers and Chartered Engineers, New Delhi, which gave the replacement value of the said equipment as on 15.09.1995 to be at ` 2,30,40,000/-. On the purchase of the said equipment, the respondent / assesse entered into an agreement for lease of the same with HSEB on 29.09.1995, whereby the entire said equipment was leased back to HSEB for a period of 72 months w.e.f. 29.09.1995. A sum of ` 1,38,24,000/- was paid by the respondent / assessee to HSEB by cheques dated 30.09.1995 with regard to the purchase of the said equipments. The respondent/assessee also retained a sum of ` 92,16,900/- as interest free security deposit for the leased equipments. Thus, the sum of ` 1,38,24,000/- paid by the respondent / assessee to HSEB and the sum of ` 92,16,000/- retained by the respondent / assessee as and by way of interest free security deposit represented the total sale consideration of ` 2,30,40,000/-. The total lease rentals for the said lease period in respect of the said equipment,

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Page No.11 of 21 which was to be paid by HSEB to the respondent / assessee, was ` 1,55,38,176/- and the same was to be paid on a monthly basis as per Annexure – A to the First Schedule of the said lease agreement dated 29.09.1995.

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Page No.12 of 21 would have all the rights of owner, including the right to mortgage the same with the owners, bankers / financiers without prejudice to the rights of the lessee under the said lease. Clause 8(a) specifically provided as under:- “Notwithstanding the grant of lease of the said Equipment, the lessor shall continue to be the sole owner thereof (as a Hire Purchase Hirer) and the Lessee would not, merely by reason of grant of this lease, have or claim any right, title or interest in any of the said equipments except as the Lessee thereof in accordance with the terms and conditions of this Lease Agreement.”

The lease also provided that the lessee (HSEB) shall not part with the possession of the equipment, nor shall the lessee (HSEB) sub-lease the equipment without prior approval of the lessor (the respondent / assessee).

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Page No.13 of 21 of the equipment in question was transferred from the respondent / assessee to the lessee (HSEB), for which purpose, a security deposit was taken and the lessee (HSEB) had covenanted to pay the lease rentals as per the schedule totaling to ` 1,55,38,176/- for the duration of the lease. When the lease agreement was entered into, while the possession of and the right to use the equipment was transferred to the lessee, the lessor (respondent / assessee) retained its title and ownership over the said equipment as also the right of reversion of possession at the end of the lease period.

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Page No.14 of 21 the buyers. A plain reading of the sale deed makes it clear that the property in the said equipment passed on to the assessee / respondent on 28.09.1995 itself as the documents themselves indicate that the vendor (HSEB) conveyed and transferred its title, interest rights and privileges in the equipments sold completely and irrevocably in favour of the purchaser (respondent / assessee). The lease, as indicated above, clearly mentions in clause 2(c) that the lessee (HSEB) confirmed that it had received possession of the said equipment in good order and condition. Thus, this is an acknowledgement from HSEB that it had received the equipment pursuant to the lease in its favour from the respondent / assessee. All these circumstances point in the direction that the ownership of the equipment was of the respondent / assessee and this fact had also been acknowledge by the HSEB which was the erstwhile owner of the same.

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Page No.15 of 21 lease back assets as a mode of raising finance at a lower cost. But, this does not bind the respondent / assessee. What was the intention of HSEB in going in for the transaction in question cannot be transposed onto the respondent / assessee.

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Page No.16 of 21 14. The decision of the Karnataka High Court in the case of Avasarala (supra) is clearly distinguishable because in that case, there was a clear finding of fact, which had been conclusively arrived at by the lower authorities, including the Income-tax Appellate Tribunal, that the transaction in question was not genuine. Reliance placed by the Assessing Officer as also the learned counsel for the revenue on the observations of O. Chinappa Reddy, J in the case of McDowell and Company Limited (supra) needs to be considered in the light of the subsequent decisions of the Supreme Court. We may note that in Inland Revenue Commissioners v. Duke of Westminster: 1936 (AC-1), Lord Tomlin had expressed the following view:- “Every man is entitled if he can to order his affairs so that the tax attaching under the Appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow tax payers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

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Page No.17 of 21 Westminster (supra). The remarks of O. Chinnappa Reddy, J were as under:- “We think that time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere.”

O. Chinnappa Reddy, J further observed in McDowell and Company Ltd (supra) as under:- “In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord approval to it.”

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Page No.18 of 21 Westminster‟s case [1936 (AC-1)] is very much alive and kicking in the country of its birth. And as far as this country is concerned, the observations of Shah, J, in Commissioner of Income-tax v. Raman: 1968 (67) ITR 11 (SC) are very much relevant even today.”

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Page No.19 of 21 discard the said sale and lease back agreement on the ground that the underlying motive of the assessee to enter into the said transaction was to reduce its income-tax liability. The Orissa High Court observed that the revenue could, however, discard the said transaction only if there were materials or evidence before it to show that the intentions of the parties were different from what had been incorporated in the sale and lease back agreements and that the transaction was really a sham and dubious transaction and was a colourable device. We are in complete agreement with these observations of the Orissa High Court in the case of Industrial Development Corporation of Orissa Limited (supra). We are also in agreement with the conclusion of the said High Court that in such cases, the court would have to find out as to what was the real intention of the parties in entering into the sale and lease agreement and that such intention has to be gathered from the words in the said agreement in a tangible and in an objective manner and not upon a hypothetical assessment of the supposed motive of the assessee to avoid tax. We have already indicated that the intention gathered from the documents on record shows that the ownership and title of the said equipment had been transferred to the respondent / assessee and that after the said transfer, the lease was entered into and the said equipment was leased back to the HSEB. It has not at all been established on the basis of evidence on

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Page No.20 of 21 record that the transaction was a colourable device entered into by and between the HSEB and the respondent / assessee.

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Page No.21 of 21 21. In these circumstances, we answer the question in the affirmative and against the revenue. The appeal is dismissed. There shall be no order as to costs.

BADAR DURREZ AHMED, J

V.K. JAIN, J

JULY 18, 2011 dutt