This appeal has been filed by the assessee against the order dated 21-6-2004 of Commissioner (Appeals)-XXI, Mumbai. The grounds of appeal raised by the assessee may be reproduced below : (i) On the facts and circumstances of the case, the learned Commissioner (Appeals) erred in confirming the disallowance of depreciation of Rs. 1,27,65,447 on plant and machinery which were leased out, as operating lease.
(ii) The learned Commissioner (Appeals) erred in confirming the disallowance of depreciation of Rs. 1,27,65,447 on leased assets, particularly when the appellant's main business is leasing of assets.
(iii) The learned Commissioner (Appeals) erred in confirming the disallowance of depreciation of Rs. 22,44,853 which has been included in Rs. 1,27,65,447 being 50 per cent depreciation in respect of machinery purchased in the assessment year 2000-01 particularly when 50 per cent depreciation was allowed in the said assessment year.
From the above, it may be seen that the only issue in dispute is the disallowance of depreciation on plant and machinery claimed to have been leased out by the assessee. It also appears from the grounds of appeal that the depreciation of Rs. 1,27,65,447 which has been disallowed is inclusive of a sum of Rs. 22,44,853 being 50 per cent of the depreciation in respect of plant and machinery which was leased out in the preceding assessment year and on which 50 per cent depreciation was allowed as the plant and machinery was used for a period less than 180 days during that year.
The facts may be stated briefly. During the course of assessment proceedings, the assessing officer found that the assessee claimed 100 per cent depreciation on assets leased to M/s. Asian Electronics Ltd. (AEL). The assets comprised of automatic load monitoring systems of the value of Rs 1,05,98,000 manufactured by the aforesaid AEL, which is a sister concern of the assessee-company. The assessee-company purchased the relevant assets on 30-6-2000 and leased back the same to AEL on 1-7-2000. In its turn, the relevant assets were sub-leased by AEL to the Transmission Corporation (TC) of the A.P. State Electricity Board.
The assessing officer was of the view that the sale and lease back (SLB) transaction between the assessee-company and the AEL was not a genuine transaction. The assessing officer referred to the Supreme Court decision in the case of McDowell & Co. Ltd v. CTO (1985) 154 ITR 148 (SC) as also the ITAT, Mumbai Special Bench decision in the case of Mid East Portfolio Management Ltd (MEPML) v. Dy. CIT (2003) 87 ITD 537 (Mum). The assessing officer was of the view that the SLB transaction between the two sister concerns was only a financial arrangement. He, therefore, disallowed the entire depreciation including 50 per cent depreciation in respect of the assets leased out in the preceding assessment year. The assessing officer also observed that in the case of AEL, there were huge losses during the assessment years 2000-01. and 2001-02 and thus the intention of the SLB transaction was to avoid payment of legitimate tax by the assessee-company, which reduced its taxable income by claiming 100 per cent depreciation on leased assets, When the matter came tip before the learned Commissioner (Appeals), it was contended that the assets were brand new assets manufactured by AEL and never used by them. It was contended that these assets did not form part of the block of assets in the case of AEL and no depreciation was claimed by the AEL. The new plant and machinery was purchased by the assessee-company from AEL at the prevailing market price. It was, therefore, contended that it was a genuine SLB transaction. The learned Commissioner (Appeals) examined the ' issue in detail and noted that as per the sale invoice dated 30-6-2000, the sale price was stated to be Rs. 1,05,98,000, whereas the excisable value as per the invoice for removal of excisable goods from the factory aggregated Rs. 64,96,000 only. The learned Commissioner (Appeals), therefore, concluded that the assets were not purchased by the assessee-company at the prevailing market price. The learned Commissioner (Appeals) noted that these assets were sub-leased by AEL on 10-10-2001 to TC. The learned Commissioner (Appeals) has reproduced at para 5 of his order certain clauses from the agreement between AEL and the TC. He has also reproduced at page 6 of his order certain relevant clauses from lease agreement dated 1-7-2000 between the assessee-company and AEL. The learned Commissioner (Appeals) observed that surrender of the leased assets by the AEL to the assessee-company was not possible in view of para 5(b) of the agreement dated 10- 10-2001 since AEL has no rights to terminate the agreement and had no right to move or shift the' equipments. It was specifically provided for that the lease shall continue till it is terminated by TC. The learned Commissioner (Appeals) also observed that the relevant goods were directly moved from the premises of AEL at Sylvassa to Andhra Pradesh and thus the property in the equipment was never transferred to the assessee- company. The learned Commissioner (Appeals) ultimately confirmed the disallowance of depreciation on the leased assets. He also confirmed the disallowance of 50 per cent depreciation in respect of assets leased out in the preceding assessment year.
The learned counsel, Shri V.H. Patil and Shri Satish Mody, appearing on behalf of the assessee-company forcefully argued before us that the revenue authorities had no basis whatsoever for holding that the SLB transaction was not genuine or was not intended to be acted upon. It is submitted that the entire transaction is absolutely within the four corners of the law. It is pointed out that the assessee-company purchased the equipments from AEL in view of the fact that it wanted to expand its already existing business of leasing. The ass essee- company is engaged in the business of leasing during the preceding five years and lease income forms the major portion of the assessee's total income. It is contended that the learned Commissioner (Appeals) has wrongly assumed that the equipment was purchased by the assessee-company at the price which is much higher than the prevailing market price of the equipment. Inviting our attention to the material compiled in the paper book, it is submitted that AEL had sold similar equipments at the same price to outside parties. The difference noted by the learned Commissioner (Appeals) is on account of the fact that various other charges like Excise Duty payable, transportation, installation charges etc. are not included in the value of Rs. 64,96,000 reflected in the invoice in respect of excisable goods. It is vehemently contended that the transactions are legal and genuine and the same have been entered into by the assessee-company only on account of commercial expediency. The learned counsels for the assessee relied on the following judgments : (ii) Industrial Development Corporation of Orissa Ltd. v. CIT (2004) 268 ITR 130 (Ori.) In the case of Zuari Finance Ltd., (supra) it was held by the Bombay High Court that once a transaction of purchase and lease back is found to be genuine, the assessee is entitled to depreciation. Similar finding was recorded in the case of Industrial Development Corporation of Orissa Ltd. (supra). The learned counsels for the assessee also drew strong support from certain observations made by the Supreme Court in the case of Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC). It is pointed out that in this case the Supreme Court has made it very clear that an act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests. In other words, if a transaction is otherwise valid in law and results in reduction of tax liability of the assessee, the same cannot be discarded merely on the ground that the underlying motive of entering into the transaction by the assessee was to reduce its tax liability. It is argued that the effect of the Supreme Court decision in the case of McDowell & Co. Ltd (supra) stands substantially diluted by the subsequent decision of the Supreme Court in the case of Azadi Bachao Andolan (supra). The learned Counsel referred to the ITAT Special Bench decision in the case of MEPML (supra) and invited our attention to Para 155 of the order, which may be reproduced below : "Both sides relied on several orders of various Benches of the Tribunal in support of their respective stands. In our opinion, there can only be superficial similarity between those cases and the facts of the cases before us. Each case has to be decided on its own merits and on the basis of the peculiar facts obtaining in that case, mere so when the question of genuineness is involved. There can be no pigeon-holing of the facts in the sense that it cannot always be held that if the facts follow a particular pattern, then the conclusion must be the same. Genuinenessof a transaction is something which is to be linked to the soul; the facts merely constitute the body and similarity between the bodies does not ipso facto mean that the souls are also identical.
We have perused the orders of the various Benches of the Tribunal cited before us and we generally find that in each of those cases the Bench was satisfied with the genuineness of otherwise of the SLB transaction, whatever may be their reasons, We would resist the temptation to generalize or to lay down norms in such cases. Norms may be laid down only if it is absolutely necessary to do so. In fact, there can be no common rules for finding out the 'genuineness of a particular SLB transaction, which can be of universal application. Nor can any such norms be exhaustive. However, very broadly and without limiting ourselves to what has been stated in our order, the following may be considered to be relevant factors to be kept in view : (a) Was there an intention to pass the property in the equipment to the assessee? (c) Was the equipment valued, and if so, whether it was a bona fide valuation Was the value inflated? How credible is the report of the valuer, if there is one? (d) What are the terms of the lease? Is the document more of an arrangement for security for the loan and less of a lease (e) Is there any parallel or collateral documentation or correspondence or an understanding between the parties which throw doubt on their intention professed by the principle documentation (g) If the lessee is a public utility undertaking, whether the sale of the equipment would be in conformity with the rationale for its existence and whether it would have an adverse impact on the working These are only some of the factors that one is expected to keep in view, in dealing with such cases. They are by no means exhaustive. Any other fact or circumstances which one consider relevant for reaching the soul of the matter must necessarily be taken into account.
Ultimately, it is the inference to be drawn on a cumulative consideration of all the facts and circumstances of the case which is material." It is forcefully argued before us that the assessee-company fulfills the various tests of genuineness laid down by the ITAT Special Bench as mentioned above.
The learned Commissioner Departmental Representative, Shri R.K. Rai strongly supported the orders of the revenue authorities and contended that cogent material has been brought on record to establish beyond any doubt that the SLB transaction between the assessee-company and its sister concern AEL was neither genuine nor intended to be acted upon.
The learned Commissioner Departmental Representative invited out attention to the contradictions between the two lease agreements as brought out by the learned Commissioner (Appeals) in his order. It is contended that the SLB transaction between the assessee-company and AEL is not capable of being acted upon on account of the binding stipulation in the agreement between AEL and the TC. It is contended that the SLB transaction is not a genuine commercial transaction, but is only a subterfuge to avoid payment of legitimate tax. It is reiterated by the learned Commissioner Departmental Representative that the relevant transaction of SLB falls under the prohibited category as explained by the ITAT Special Bench in the case of MEPML (supra). He relied on the Karnataka High Court decision in the case of Avasarala Automzation Ltd. v. Joint CIT (2004) 266 ITR 178 (Kar). In this case also, the transaction related to SLB and the Karnataka High Court observed that the assessing officer is entitled to go into the genuineness or otherwise of a transaction for the purpose of determining whether any attempt is made by the assessee to avoid payment of tax. The assessee who claims depreciation has to satisfy the revenue that he is entitled for grant of depreciation on items claimed by it. The burden of proof is on the assessee.
We have given a very careful consideration to the elaborate submissions made before us by both the sides and have considered the relevant factual position in the light of the precedents cited before us. The issue of grant of depreciation on assets forming part of SLB transaction has been considered in great detail by the ITAT Special Bench in the case of MEPML (supra). It was observed by the Special Bench that SLB transactions have been recognized and acted upon in the commercial world for quite some time. Undoubtedly, such transactions cannot be de-recognized or invalidated by a judicial decision. However, the judicial eye can certainly unearth a device or a smokescreen created to conceal the real intention of the parties and for this purpose can examine the genuineness of a particular transaction which is called in question. The observations contained at para 36 of the ITAT Special Bench order in the case of MEPML (supra) may be reproduced below : "We are therefore of the opinion that all SLB transactions as such cannot be considered to be dubious or colourable devices or subterfuges aimed at tax evasion. The enquiry which a court or Tribunal can make, when faced with an SLB transaction, is to find out the real intention of the parties and ascertain whether a simple loan transaction masquerades as an SLB transaction. Any transaction in which the professed intention and the intention gathered from the documentation are the same, viz., a sale and lease back, must be considered to be a genuine SLB transaction." If the Special Bench decision is carefully gone through and analysed, the principle which emerges is that each case must be and has to be decided on the basis of the peculiar facts and circumstances of that case. However, the important observation made by the Special Bench is that any transaction in which the professed intention and the intention gathered from the documentation are the same must be considered to be a genuine SLB transaction. In our view, various cases which have been cited before us lay down the undisputed rule that if an SLB transaction is genuine and legally correct, depreciation as claimed by the assessee cannot be disallowed. Thus, ultimately the question boils down to genuineness of the transaction. In our view, each case has to be judged and decided having regard to the peculiar factual position of that case while drawing support from the judicial and legal principles and guidelines which emerge from the various cases available. In our view,the Supreme Court decision in the case of Azadi Bachao Andolan (supra) cannot be interpreted in a way so as to conclude that depreciation has to be necessarily allowed even in respect of a transaction which is not genuine and which is not intended to be acted upon by the parties.
With this background, the facts of the assessee's case may be put to scrutiny. In our view, the relevant agreements executed between the parties are the most important material on the basis of which this issue is required to be resolved. In our view, the question as to whether the equipment was purchased by the assessee- company at the prevailing market price or not is of not much relevance. The learned Commissioner (Appeals) has, therefore, rightly referred to the relevant stipulations in the contractual agreements. The lease agreement dated 1-7-2000 between the assessee-company and AEL is for a period of six years commencing from the date of execution of the agreement. In this agreement, under the heading 'Surrender', following stipulation is incorporated : "Unless the lease is renewed as per the terms of this agreement, upon expiration on earlier termination of the lease, the lessee shall deliver the lessor the said equipment at the place at which it is located in good working order and condition, normal wear and tear resulting from the proper use of the equipment expected. Upon such surrender of the equipment, the lessor reserves the right to dispose off the asset in any manner as the lessor may deem fit, subject however to the fact that the lessor reserves the right to appoint the lessee as its agent for such disposal." Further, in this agreement, under the heading 'Events of default', certain clauses are enumerated which would be treated as events of default. Thereafter, under the heading 'Remedies', it is stipulated that upon occurrence of any event of default, the lessor, after giving notice to the lessee, may terminate this agreement. The lessor, upon occurrence of an), event of default, has been further authorized to take the following actions as per clauses (b) and (c) of the agreement, which are reproduced below : "(b) Demand that the lessee return all equipment to the lessor at its own risk and expense, in the same condition as delivered 14 days from the date of demand, enter upon premises where such equipment is located and take immediate possession of and remove the same, or take immediate possession of and remove the same all without liability to the lessor or its agents for such entry or for damage to property or otherwise, the lessor may detach and dismantle the equipment from any part of the freehold or process machinery to which it may be affixed without the written permission of the lessee.
(c) Sell any or all the equipments at a public or private sale with or without notice to the lessee or otherwise dispose of, hold, use, operate, lease to others or keep idle such equipment all free and clear of any rights to the lessee and without any duty to account to the lessee for such action or inaction or for any proceeds with respect thereto in the event that the lessor sells the leased equipment at a public or private sale, the sale proceeds (net and clear of all taxes and costs) shall be adjusted against the arrears of rentals including late payment charges and the balance lease rentals then remaining unpaid. Any excess/deficit of sales proceeds as compared to the outstanding rentals will be refunded to/recovered from the lessee." The above-mentioned provisions are clear, categorical and leave no doubt that on the expiry of lease period of six years, unless the lease is renewed, the equipment has to be delivered to the lessor ie., the assessee company. In the event of default, the assessee-company can take possession of the equipment and dispose it of in whatever way it likes.
A reference may now be made to the agreement of lease between AEL and TC. As per clause (a) of para 4.2, the lessor i.e., AEL undertakes to erect, transport, test and commission and maintain the equipment during the lease period at the locations approved by the lessee i.e., TC. The period of lease is six years. From the above clause, it may be seen that during the period of lease, AEL has to maintain the equipment.
Para 5(b) stipulates as under : "On completion of fixed lease period of six years, the lease shall continue without maintenance on a consolidated lease rental of Re. I per annum for all banks and lessor will have no right to terminate the agreement and the lessor shall not keep or create any encumbrance on the equipment and shall have no right to move or shift the equipment.
Lease shall continue till it is terminated by the lessee." "After the initial lease period of six years, the equipment should be free from all encumbrances and the equipment cannot be shifted/sold/ mortgaged without the concurrence of the lessee." From the above contractual stipulations, it is seen that on completion of the lease period of six years, the lease shall continue and AEL thereafter shall not maintain the equipment. The lease rent shall get reduced to a nominal sum of Re. I per annum. The lessor, ie., AEL will have no right to terminate the agreement and the lessor shall not keep or create any encumbrances on the equipment and shall have no right to move or shift. the equipment. Only lessee i.e., TC has been given the right to terminate the lease. In other words, the TC will continue to enjoy the usufruct of the lease in perpetuity on payment of lease rent of Re. I per annum. There is no doubt that for all practical purposes, the TC becomes the undisputed owner of the equipment after the expiration of lease period of six years and the lessor is divested of all rights and claims.
From the above, it is clear that there are glaring contradictions between the two agreements. As per the lease agreement between the assess ee-company and AEL, the lease is terminated after six years unless it is renewed by mutual agreement. If not renewed, the equipment has to be delivered back by AEL to the assessee-company. However, AEL will never be in a position to act upon the stipulations of this agreement for the simple reason that after six years, TC, for all practical purposes shall be the de facto owner of the equipment.
Apparently and decidedly, the lease agreement between the assessee- company and AEL is not intended to be acted upon by the parties. If the two agreements are read together, it would be clear that the agreement between the assessee-company and AEL, which is sister concern, cannot be said to be a genuine agreement inteaded to be acted upon. As a matter of fact, by virtue of the agreement between AEL and the TC, the assessee- company has practically lost all ownership rights over the relevant assets or equipments. Considering the entire facts and circumstances as mentioned above, we see no reason to interfere with the order of the learned Commissioner (Appeals) insofar as the disallowance of depreciation on the assets shown to have been purchased and leased back to AEL during the previous year relevant to the present assessment year is concerned.
Coming to the further disallowance of depreciation of Rs. 22,44,853 being 50 per cent of the depreciation in respect of plant and machinery put to use by the assessee in the preceding assessment year, in our view, there is hardly any basis for such a disallowance. The transaction originated in the preceding assessment year. During that year, the assessing officer allowed depreciation. However, such allowance was restricted to 50 per cent as the relevant assets were put to use for business purposes for a period of less than 180 days. The balance depreciation amounting to 50 per cent was claimed by the assessee during the present assessment year. From the above, it may be seen that the relevant transaction has been held to be genuine by the assessing officer and assessee's claim for depreciation has been duly considered and allowed in the preceding assessment year. That assessment, we are informed, has become final and no further action either under section 147 or under section 263 of the Income Tax Act has been taken to disturb that assessment. In our view, allowing the balance 50 per cent depreciation this year is only corollary to the allowance of 50 per cent in the preceding assessment year. Therefore, we direct that the depreciation to the extent of Rs. 22,44,853 may be allowed to the assessee in respect of the assets which were put to use during the preceding assessment year.