S. 32: Lease transactions by Banks are in the nature of loans/ advances. Transaction of sale & lease back of railway assets cannot be treated as genuine
The assessee, a Bank, entered into a sale and lease back transaction with Konkan Railway Corporation pursuant to which it bought assets like railway tracks, rails, sleepers etc for a consideration of Rs. 25 crore and leased it back for a period of 84 months for a monthly lease rental. The AO & CIT(A) disallowed the claim for depreciation on the ground that the sale and lease back transaction was in the nature of a financial transaction and that it was given the shape of a lease transaction only in order to enable the assessee-bank to claim depreciation and reduce its taxable income. On appeal by the assessee to the Tribunal HELD dismissing the appeal:
The real object of the entering into the sale and lease back transaction so far as Konkan Railway is concerned is to raise funds. The transaction of sale of the asset to the assessee bank and its lease back to Konkan Railway cannot be separated. It was not possible for Konkan Railway to sell out the railway system. Thus, the sale transaction was merely on paper and to facilitate the financial arrangement by the assessee to Konkan Railway without involving any real intention of transfer of the assets. The terms of the lease agreement are only to secure the interest of the bank till the recovery of the full amount along with the interest. The assessee cannot exercise the real and actual ownership over the asset keeping in view the facts and circumstances and nature of the asset in question. Further, under the Banking Regulation Act, 1949 read with RBI circular dated 19.2.1994, banking companies can undertake the activities of equipment leasing but these are required to be treated on par with loans and advances. Therefore, the activity of equipment leasing permitted by the RBI is only in the nature of finance lease. The terms and conditions specified by the RBI for income recognition of lease transactions are also on par with the manner in which a loan transaction is treated. In view of the said circular, there is no scope for treating the instant lease agreement as that of an operating lease (IndusInd Bank 135 ITD 165 (Mum) (SB) followed; ICDS 350 ITR 527 (SC) distinguished on the basis that the lease there was not by a Bank but by a NBFC).