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Before: SHRI S.V. MEHROTRA & MS. SUCHITRA KAMBLE
ORDER PER SUCHITRA KAMBLE, JM
This appeal is filed by the assessee against the order dated 31/1/2001 passed by Ld. CIT(A)’s III, Hyderabad. 2. The concise grounds of appeal filed by the assessee are as follows:-
“1. The Ld. CIT(A) has erred in upholding the disallowance of deprecation on assets purchased from Punjab State Electricity Board and leased back to them. The appellant contends that it is the owner of the said assets and has been used in the business of leasing and therefore entitle for claim of depreciation which should be allowed.
2. The Ld. CIT(A) has erred in confirming the addition of Rs.7,49,13,665/- being interest on Govt. Securities which has not fallen due. The appellant has been consistently offering interest on Govt. securities on the respective due dates to tax. Hence, the addition made is wrong and bad in law and has to be deleted.”
The assessee entered into a lease transaction with PSEB on 27/9/1996 wherein the total lease rental payable was fixed at Rs.23,24,54,200/- payable in quarterly installments between the month of Sep 1996 and 27/6/2006. The PSEB has given to the Bank a security deposit which is returnable immediately on the termination of the lease agreement. The bank has unconditional lien for any payments due or for any payment due under the lease agreement as well as towards the possible loss on account of damage to the equipment etc. Further they have referred to the valuation of the Regd. Valuer, Sri VK Grover, a Chartered Engineer who had given the value of the plant & machinery after proper inspection according to the assessee and the same was furnished before the Assessing Officer.
4. After physical inspection of the assets, the corporate banking dept. reported that the equipment was installed by the PSEB at Guru Gobind Super Power Thermal Station at Ropar and that the same was in a good working condition. The assessee submitted that they are the real owner of the assets. Reference was also drawn to the Memorandum of Understanding and Articles of Association where leasing has been termed as one of the main objective of the assessee. Prior to Feb. 1994, banks could not undertake para-banking activity like leasing, hire purchase etc. directly and after a review, they were now given an option to undertake Leasing as one of their main activities.
The A.O noticed that in the Balance Sheet of PSEB there was a heavy loss which it had planned to set off by pledging its assets. The clauses set out in the agreement between the assessee and the PSEB has been wrongly read in isolation. For example, the PSEB should not transfer the assets during the pendency of the lease as well as on the lessor not to assign the rights under the agreement which are interpreted to mean that there was no intention to transfer the subject matter of lease to the assessee.
6. Finally, the A.O concluded that it is a “financial lease” as against the assessee’s supposition to be an “operating lease”. The AO had referred to the International Accounting Standard No. 17 which recommends that lease be accounted for on the basis of substance and financial reality. Taking reference to the Supreme Court judgment in the case of McDowell’s, the AO held that it was a colourable device and therefore the assessee would not be entitled for the depreciation. In view of the various courts decisions, AO held that the assessee has not purchased and utilized the assets for the purpose of its business. The so called leasing transactions are held to be sham to reduce the tax liability which is in consonance with the Tax Planning mentioned by the Directors in their Annual Report of 1996-97. The above transaction was in the nature of advancing money in the guise of sale and lease back of assets of PSEB and since it was a financial transaction, no depreciation can be allowed u/s 32 of the Income Tax Act, 1961 as per the A.O. Accordingly Rs.39.25 Crore was disallowed on depreciation on leased assets by the Assessing Officer.
The Ld. AR submitted that the present appeal is related to Erstwhile Global Trust Bank Ltd. which has been amalgamated into Oriental Bank of Commerce, a public sector bank, w.e.f. 14/8/2004 u/s 45(7) of the Banking Regulation Act, 1949 by a Government of India notification. Therefore this appeal is prosecuted by Oriental Bank of Commerce. In this appeal by the assessee there are two grounds raised:-
Allow-ability of claim of depreciation assets purchased from Punjab State Electricity Board (PSEB) and leased back to them for use.
Deletion of Rs.7,49,13,665/- being interest on Government securities which has not fallen due.
5. The Ld. AR submits that both the grounds are covered in favour of the assessee. In respect of ground no. 1 the Ld. AR submits that it is also covered in favour of assessee by the following orders:
a). Judgment of Hon’ble Punjab and Haryana High Court in CIT vs. PSEB [2010] 320 ITR 469 (P &H). P. B pages 18 to 21 submitted on 5/3/2013. b). Order of Ld. CIT(A) Dated 12/12/2002 in assessee’s own case of assessment year 1996-97 copies at Page NO. 41 to 70 of the P.B see relevant page 52 and 53. c). Order of COD dated 25/2/2008 refusing permission to department for appeal to ITAT against above order of Ld. CIT(A). d). Order of Ld. CIT(A) dated 31/1/2002 in assessee’s own, for assessment year 1998-99. e). COD has refused permission to department to appeal before ITAT in 1998-99.
Apart from the above Judgments supporting the allowability of depreciation claim on assets purchased and leased PSEB, Ld. AR draws attention to the following:
1) Certificate from PSEB dated 11/12/98 certifying assets aggregating to valu Rs.39.25 crores sold to Global trust bank Ltd. (Page 39).
2) In the same certificate it is also mentioned that the said assets henceforth are removed from the block of assets.
3) Copy of the letter of PSEB dated 30th September 1996 (page 32) certifying the original cost/WDV as per the books of accounts sold to Global Trust Bank. The letter also describes the assets and its location.
4) Copy of the valuation report dated 27th September 1996 valuing the plant and machinery. Pl. see page no. 29 wherein the residual life in years is certified by the approved valuer.
5) Copy of the office note submitted by the Executive Director of the bank dated 18th March 1998 of having visited the Guru Gobind Singh super thermal power station located at Ropar, Punjab and that leased assets are in good working condition (pages 23,24).
6) Assessing Officer’s order u/s 143(3) does not dispute the residual life of the assets leased.
7) Copy of the lease agreement dated 27th September 1996 ( pages 5 to 16) wherein the bank is the lesser and the owner of the assets and the asset has been leased for use to PSEB.
8) The Ld. CIT(A) for the A.Y 1996-97 has also dealt with Assessing Officer ’s order for assessment year 1997-98, and has referred to independent departments enquiry u/s 133(6) wherein PSEB has confirmed the sale of assets directly to department (see pages 52, 53 of the paper book). After detailed discussion at page 63,64 & 65 the Ld. CIT(A) has categorically held the lease to be an operational lease, assets are detachable and independent of user, assessee can exercise rights as an owner.
9) The order of Ld. CIT(A) dated 12/12/2002 for the assessment year 1996-97 is after the order of Ld. CIT(A) dated 31/1/2001 for A.Y 1997-98.
10) Assessee has given complete rebuttal to the Assessing Officer ’s doubts which are at pages 40 to 62, filed along with the appeal document to clear all apprehensions of the A.O.
With regard to the ground relating to allowability of claim of depreciation in respect of assets purchased from Punjab State Electricity Board (PSEB) and leased to them, the assessee clarifies the following:
i. In the Agreement for lease of equipment dated 27th Sept. 196 Global Trust Bank Ltd. is called the “Lessor and PSEB as the “Lessee”. ii. The lease deed is signed only by Global Trust Bank as the “Lessor” and PSEB as the “Lessee”. There is no 3rd party involved. iii. The Lessor is duly accounting for the lease rentals as its income and assessed as such as business income. iv. PSEB has raised invoice dated 27th Sept. 1996 in the name of Global Trust Bank Ltd. for sale of assets described therein as air pollution control equipment and energy saving devices for Rs.39.25 crores. (See paper book Vol. 4 dated 1st Aug. 2014). v. Upon the completion of the lease period in Sept. 2006 the present bank i.e. Oriental Bank of Commerce has sold the equipment for its residual value on 29th Sept. 2006 and has booked porift on sale of assets for a sum of Rs.15.70 crores and offered for tax. (Paper Book Vol. 3 filed on 5th Dec. 2014-pages 1 to 4). vi. Copy of the note relating to deposit of VAT on account of 4% VAT on the sale of the leased assets (Page 16 & 17 of the paper book-Vol. 4). vii. Photo copy of the voucher passed by the Regional Office, Patiala on 18/10/2006 showing the deposit of VAT of Rs.62,80,000/- by debiting suspense account. (Copy now enclosed).
From the above evidences placed on record, the Ld. AR submits that it will be clear that Global Trust Bank was the Lessor and the owner of the assets, the lease rentals was duly accounted for as its income and at the end of the leased period, the assets were sold after paying VAT. Thus the ownership and use for business of leasing having established, the claim of depreciation may be allowed.
The Ld. AR further submits that as relates to ground No. 2, the same is covered by the latest order of Hon’ble ITAT dated 24/5/2013 in 443, and 301/Del/2000 for assessment year 1996-97, 99-00 and 2000-01. The Ld. AR referred Pages 6, 7, 8 and Para 7 onwards of the order are the relevant paragraphs of the paper book. Reference is also made to earlier year’s orders in favour of assessee in the Assessment Order.
The Ld. DR submits that the assessee has not properly spelt out the lease agreement as to whether it is a financial lease or that of operational lease. This factual aspect needs to be verified. The Ld. DR further pointed out that it was not clear as to what is the role of WGF in respect of the lease agreement and the mandate dated 21/9/1996 given by lessee to WGF Securities Ltd.
We have perused all the records and proceedings and heard both the parties. Bare perusal of the earlier assessment orders and ITA will not help the assessee by saying that the issues are covered by various judgment. The facts are different and the same is pointed out by the Ld. DR from the records which needs to be looked into. From perusal of the Lease agreement, it can be seen that the same was not clear as to what is the role of WGF in respect of the lease agreement and the mandate dated 21/9/1996 given by lessee to WGF Securities Ltd. In light of this the Assessing Officer as well as the Ld. CIT (A) should have verified this fact. The Assessing Officer as well as the CIT(A) has not looked into the aspect of whether the agreement is a financial lease or operational lease. The same was not verified by the concerned authorities. In result, we remand back this matter to the Assessing Officer and to verify all the facts related to the lease agreement and give a fresh finding. Needless to say, the assessee may be given proper opportunity to be heard.
In result, the appeal is partly allowed for statistical purposes.
The order is pronounced in the open court on 28th of January, 2016.