," "
INCOME TAX APPELLATE TRIBUNAL, MUMBAI- `D' BENCH.
. , ,
Before S/Sh.D.Manmohan, Vice-President& Rajendra, Accountant Member
/.ITA No.4109/Mum/2001,/Assessment Year-1996-97
ICICI Ltd. Addl. CIT, Special Range-28
ICICI Towers,BKC Vs. Aayakar Bhavan
Bandra (E),Mumbai-400 051. Mumbai-400 020.
PAN: AAACT 1398 K
/ Assessee by : Ms. Aarti Vissanji (AR)
/Revenue by : Shri A.K. Srivastava-CIT-DR
/ Date of Hearing : 19/08/2015
/ Date of Pronouncement : 09/09/2015
, 1961 254(1)
Order u/s.254 (1) of the Income-tax Act 1961(Act)
Per Rajendra,AM :
Challenging the order dated 28.3.2001 of the CIT(A)-VII, Mumbai the assessee has raised the
following grounds of appeal:
[1] Being aggrieved by the order bearing No. CIT(A)-VII/JCSR -28/15/99-2000 dated
February 6, 2001 issued by The Commissioner of Income-tax (Appeals) VII, Mumbai
[hereinafter called the CIT(A}] issued under section 250 of the Income-tax Act, 1961
[hereinafter called The Act] and communicated to the Appellant on April 20, 2001 the
Appellant appeals against and on the following amongst other grounds which are without
prejudice to each other.
(A) Re: Disallowance of depreciation under section 37(4) for transit accommodation -
Rs.6,64,883
[2] On the facts and circumstances of the case and in law the CIT(A) erred in upholding the
disallowance made by the Assessing Officer under section 37(4) of Rs.6,64,883 being
expenditure incurred on depreciation and maintenance of guest house on the ground that the
same has to be considered under that section.
RE: disallowance of guest house expenses u/s.37(4) of Rs.6,64,883/-
12. The facts, in respect of the above dispute, emerge that, as per the tax audit report, the
expenditure incurred on depreciation and the maintenance of guest house amounted to
Rs.6,64,883/-. As such, the Assessing Officer has disallowed the same on the basis of the
observation made in the assessment order for earlier assessment years.
13. I find that similar disallowance made in the past had been confirmed by me in the
assessment year 94-95 as per the decision of the jurisdictional High Court in the case of
Ocean Carriers Pvt. Ltd. 211 ITR 352 and also taking into account the decision in the case of
b ........... since the facts and circumstances are identical, the disallowance of rs.6,64,883/- is,
hereby confirmed.
(B) Re Disallowance of Depreciation as per revised return - Rs.1,07,88,30,748
RE: Disallowance of depreciation as per revised return Rs.1,07,88,30,748/-
17.The facts of the case, in respect of the above dispute are that the Assessing Officer, found
that as per the original return, the depreciation had been claimed at Rs.3,54,74,35,354/- .In
course of the assessment proceedings, the appellant revised its computation of depreciation
allowance and claimed it at Rs.4,62,62,66,102/-. It has been submitted before the Assessing
Officer that certain additions were made by the Revenue in the preceding assessment years
and these additions were confirmed/pending in appeal before the learned CIT(A)'s/ITAT.
Although the additions made are still in dispute , the appellant had revised the statement on
the basis of the addition made in the earlier years. The Assessing Officer did not accept the
revised computation of depreciation on the ground that until and unless, the appellant
company withdraws the appeal before the ITAT, no revisions can be allowed on this score.
Accordingly, the revised claim of depreciation was not acceptable to the AO.
ITA-4109/M/01-ICICI
18. Before me, it has been contended by the ld. Counsel that the AO failed to appreciate that
the depreciation claim was revised in conformity with the Written Down Value as per the
completed assessment in the previous years.
19.I find that similar point had been decided against the appellant company by the ld.
Commissioner of Income tax(Appeals) in appeal No.CIT(A)XXXIII/SR.28/97/98-99 dated
22/4/99.Similar issue had also been decided against the appellant company in the assessment
year 94-95 also. Since the facts and circumstances are identical, I decline to interfere on this
point during the year under consideration also.
[3] On the facts and circumstances of the case and in law the CIT(A) erred in not allowing
depreciation at Rs.4,62,62,66,102/- arrived at after modifying the "Opening Written Down
Value" as per depreciation allowed in earlier assessment years in accordance with completed
assessments.
(C) Re : Additions of write backs previously sought to be taxed - Rs. 76,87 ,54,375
20.I find that similar point had cropped up in the A.Y. 94-95 and also on the preceding
assessment year wherein the claim of the appellant had been rejected, keeping in view the
decision of the Bombay High Court in the case of Benett Coleman Ltd. (201 ITR 101). Since
the facts and circumstances are identical, the stand of the Revenue in making the
disallowance of Rs.76,87,54,375/- is, hereby, upheld. In other words, the contentions raised
by the ld. Counsel on this score are, hereby rejected.
[4] The CIT(A) erred in not deleting himself the additions on account of write backs
previously sought to be taxed amounting to Rs.7,91,40,337 on the ground that these amounts
written off in earlier years have been allowed by various Appellate Authorities.
[5] Without prejudice, the CIT(A) ought to have excluded the sum of Rs.16,17,97,000 as the
same had not been actually recovered during the year.
(D) Re: Disallowance of expenses incurred for earning dividend - Rs.50,29,662
21.I find that similar point of dispute had cropped up before me during the A.Y. 94-95 and as
per my order dated 14/2/2000, the disallowance made had been confirmed. Since the facts
and circumstances are identical, the disallowance of Rs.50,29,662/- on this score, is, hereby
confirmed. In other words, the contentions raised by the ld. Counsel, being devoid of merits
are hereby rejected.
[6] On the facts and circumstances of the case and in law, the CIT{A) erred in confirming
deduction under Section 80M at Rs.29,87,61,925 by adopting the figure of Rs.50,29,662 as
expenditure incurred by the Appellant for earning dividend, viz. @ 1 % of the gross dividend
income of the year.
(E) Re : Deduction under Section 36( 1 )(viii)
26.In this ground of appeal, it has been contended that the AO has erred on facts and
circumstances of the case and also in law in restricting the deduction u/s. 36(1)(viii) of the
Act at Rs.85,00,00,000/- being the amount appropriated in accounts.
27. I find that the similar point of dispute had cropped up in the A.Y. 94-95 and as per my
order referred to above, I had sustained the stand of the Revenue following the order of my
learned predecessor on this very point. As such, not interference is called for in respect of this
ground of appeal.
[7] The CIT(A) ought to have allowed the full deduction available at 40% of the total income,
as laid down under Section 36(1)(viii), after considering the excess amounts carried by the
Appellant to the Special Reserve Account in the preceding assessment years as well as the
succeeding assessment years.
(F) Re : Non Addition of book depreciation on assets leased during the year
28.I find that similar ground of appeal had been adjudicated in the past and had been decided
against the appellant company during the A.Y. 94-95 and 95-96. Since the facts and
circumstances for the year under consideration are identical, this ground of appeal merits
rejection.Acordingly, this ground of appeal is dismissed.
[8] On the facts and circumstances of the case and in law, the CIT(A) erred in not directing
the Assessing Officer to exclude the book depreciation on assets leased during the year as tax
depreciation under section 32 of the Act on them was disallowed by the Assessing Officer on
the ground they were loan transactions.
(G) Re: Disallowance of depreciation on assets leased to RSEB - Rs.31,50,00,000
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ITA-4109/M/01-ICICI
29. The facts of the case, in respect of the above dispute, stand out that during the year under
consideration, the appellant company had leased an asset i.e. Specialised High efficiency
Boiler to Rajasthan State Electricity Board (RSEB) and had claimed depreciation to the tune
of Rs.31,50,00,000/-. The Assessing Officer, as per detailed reasonings given in the
assessment order for the assessment year 95-96 and for the reasons mentioned on page-7
onwards of the assessment order, has disallowed the said claim of depreciation after coming
to the considered conclusion that the entire transaction was out and out finance transaction
instead of genuine leasing transaction.
30. before me, it has been contended that the AO failed to appreciate the factual as well as
legal position objectively and dispassionately. It has been contended by the ld.
Representatives that the appellant company had genuinely entered into lease transaction and
as such, the depreciation disallowed merited allowance. The ld. Representaties have also
drawn my attention to a recent Circular date 9.2.2001 and has urged that the disallowance of
depreciation merited deletion.
31. I have given careful and anxious consideration to the submission made by the ld. Counsel
and I find that in the backdrop of the similar set of circumstances, my ld. Predecessor in
appeal no.CIT(A)XVI/SR.36/34/96-97 vide order dated 26/2/97 had sustained the findings
and conclusion reached by the AO for the A.Y. 93-94.It was categorically held by my ld.
Predecessor in the A.y.93-94 as per order referred to above that the entire transaction rested
in the realm of finance transaction. I further find that similar disallowance of depreciation
had been confirmed by CIT(A) XXXIII also for the A.Y. 95-96 and even for A.Y. 94-95, similar
disallowance of depreciation had been confirmed by the first appellate authority. Since the
facts and circumstances are identical, I find no justification for taking a different stand during
the year in question. Even the Board's circular as referred to above, will not be of much held
to the appellant company in view of the detailed findings given by Assessing Officer in his
assessment order and also taking into account the findings given by the first appellate
authorities. It has clearly been established by the revenue as well as the first appellant
authority that the entire transactions rested in the realm of finance transaction. As such, the
disallowance of depreciation as referred to above, is, hereby upheld. In other words, this
ground of appeal is rejected, being devoid of merits.
[9] On the facts and circumstances of the case and in law, the CIT(A) erred in upholding the
disallowance of depreciation claimed by the Appellant in respect of assets leased to
Rajasthan State Electricity Board (RSEB) amounting to Rs.31,50,00,000.
(H) Re: Disallowance of Depreciation claimed on assets leased during the year - Rs.
2,57,88,11,541
32. I find that similar point of dispute had been confirmed by the first appellate authority in
all the preceding assessment years. Since the facts and circumstances are identical, this
ground of appeal being devoid of merits, is, hereby, rejected.
[10] The CIT(A) erred upholding the disallowance of the total depreciation on all those
assets which were purchased and leased during the previous year after excluding the
principle component of the lease rentals.
[11] The order of the CIT(A) should be suitably modified by granting the aforesaid proper
and consequential reliefs to the Appellant.
[12] The Appellant craves leave and reserves its right to vary, amend, alter and/or add to the
grounds of appeal and to produce such oral and documentary evidence and file such
compilation of documents as may be necessary at the time of hearing of the appeal.
During the course of hearing before us,the Authorised Representative(AR) of the assessee
stated that assessee-company was not interested in pursuing Ground B, E and F.Hence, these
three grounds stand dismissed as not pressed.
Assessee-company,engaged in the business of project financing comprising of foreign
currency loan,Rupee loan, leasing etc.,filed its return of income on 30.11.1996,declaring total
income of Rs.5.59 crores.During the assessment proceedings,a revised working was filed on
07.10.1998,declaring a loss of Rs.1,93, 85,59,880/-.The AO completed the assessment u/s.
143(3)of the Act,on 19.03.99,determining the income of the assessee at Rs.1,93,68,46,050/-.
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ITA-4109/M/01-ICICI
2.Ground A deals with disallowance of depreciation u/s.37(4) for the transit accommodation
amounting to Rs.6,64,880/-.During the course of hearing before us,the AR fairly conceded
that issue stands covered against the assessee as per the order of the Tribunal delivered for
the AY 1995-96. We find that in the case of Britannia Industries Ltd.(278ITR546)the Hon'ble
Supreme Court has held as under :
"While the expression "premises and buildings" in sections 30 and 32 of the Income-tax Act,
1961, and the expression "residential accommodation including any accommodation in the
nature of guest house" in sub-sections (3), (4) and (5) of section 37 can be similarly
interpreted, a distinction has been sought to be introduced for the purpose of section 37 by
specifying the nature of the building to be a guest house. The intention of the Legislature is
clear and unambiguous : the intention was to exclude from deduction the expenses towards
rents, repairs and also maintenance of premises/accommodation used for the purpose of a
guest house of the nature indicated in sub-section (4) of section 37. If the Legislature had
intended that deduction would be allowable in respect of all types of
buildings/accommodation used for the purpose of the business or profession, then the
Legislature would not have felt the need to amend the provisions of section 37 so as to make a
definite distinction with regard to buildings used as guest houses as defined in section 37(5)
and the provisions of sections 31 and 32 would have been sufficient for that purpose."
Respectfully,following the above,we decide Ground A against the assessee.
3.Ground C is about additions of write backs previously sought to be taxed amounting to
Rs.76.87crores.During the assessment proceedings,the AO found that the assessee had
claimed deduction of write-back of bad debts of Rs.76,87,54,375/-.Before him it was stated
that though the debts were written back in the books of account the recovery had not become
final it was being contested in further legal proceedings, that out the of the said amount an
amount of Rs.16.17 crores was never recovered the same was debited to P&L A/c. by way of
write back of debts.Referring to section 41(4) of the Act it was stated that amount of Rs.16,
17,97,000/-was not includible having not actually been received.However, the AO did not
accept the claim made by the assessee and held that in the earlier year identical claim was
rejected and it was held that same was to be treated as an item to be taxed by the AO and/or
appellate authorities.The AO held that the claim made by the assessee that the amount of
Rs.16.17 crores should be excluded was also not acceptable.
3.1.Aggrieved by the order of the AO the assessee preferred an appeal before the First
Appellate Authority (FAA). Before him,it was stated that the AO should have excluded a sum
of Rs.16.17crores from the taxable income as the same had not been actually recovered
during the year under appeal.After considering the assessment order and the submission of
the assessee,the FAA held that identical issue was rejected for the year 1994-95.Referring to
the decision of Machine Tool Corporation of India Ltd. (201 ITR 101), the FAA upheld the
action of the AO.
3.2.Before us the AR stated that issue stands covered in favour of the assessee by the order of
the Tribunal for the AY.1997-98.She referred to the judgment of United Provinces Electricity
SupplyCo.(110Taxmann134).Departmental Representative(DR)left the issue to the discretion
of the Bench.
3.3.We have heard the rival submissions and perused the material on record. We find that
while deciding the identical issue for the AY.1987-88(ITA/8958/Bom/90,dated.16.05.2001)
the Tribunal has dealt the issue as under :
"We find that for the AY.1986-87 also similar issue came up before the CIT(A) and he had set
aside the matter to the file of the AO with similar direction. When the matter came before the
Tribunal, the Tribunal, vide its order in ITA No.1224/Bom/90, sustained the direction of the
CIT(A).However, for the year under consideration,at the time of hearing before us, the
learned counsel for the assessee made an additional argument that since the amount is not
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ITA-4109/M/01-ICICI
actually received by the assessee,it cannot be charged as profit u/s. 41. In support of this
contention, she relied upon the decision of Hon'ble Apex Court in the case of United
Provinces Electric supply Co.(supra).However, as this claim was not made before the
Assessing Officer, he had not examine this aspect, i.e., whether the money is actually received
by the assessee.As the matter has already been set aside by the CIT(A) back to the file of
Assessing Officer, in our opinion the assessee should raise this plea before the AO . We
accordingly, while upholding the setting aside of this matter back to the file of AO, direct him
to examine the assessee's claim in the light of the decision of Hon'ble Apex Court in the case
of United Province Electric Supply Co.(supra). He will also allow opportunity of being heard
to the assessee .
Respectfully following the above,we direct the AO to decide the issue following the decision
of the Hon'ble Supreme Court delivered in the case of United Provinces Electricity Supply
Co.(supra).Ground no.C is decided in favour of the assessee,in part.
4.Ground D deals with disallowance of expenses incurred for earning dividend amounting to
Rs.50.92 lacs. During the assessment proceedings the AO found that the assessee had claimed
deduction u/s. 80M amounting to Rs.50,29,66,205/- on the gross dividend which meant that
the assessee had not deducted any expenses attributable to earn the dividend income.
Referring to the orders of the earlier years the AO held that 1% of the gross dividend had to
be considered as a fair estimate of expenses for earning such dividend. Accordingly, a
disallowance of Rs.50,29,662/- was made.In the appellate proceeding, the FAA confirmed the
order of the AO,following the orders for the earlier years.
4.1.Before us,the AR stated that similar issue had arisen and was decided in favour of the
assessee by the Tribunal while adjudicating the appeal for AY.1995-96(115ITD25).The DR
stated that the Hon'ble Court had followed the judgment of Emerald Co.Ltd.(284ITR 586),
that the subsequent decisions with regard to section 14A were not available at that time,that
later developments should be considered.
4.2.We find that the Tribunal has dealt the issue,while deciding the appeal for the AY.1995-
96(supra)in following manner:
"18.Ground No. 9-I is against disallowance of expenses while computing deduction under section
80M at Rs. 32,70,717.
19. The Assessing Officer held that deduction under section 80M is to be allowed on net dividend
income after reducing estimated expenses for earning dividend i.e. at the rate of 1 per cent of
gross dividend as per past years. The CIT(A) held that proportionate management expenses to be
deducted from gross dividend as per Supreme Court decision in the case of United General Trust
Ltd. Thus expenses estimated at the rate of 1 per cent of gross dividend made by the Assessing
Officer were upheld by the CIT(A).
20. Similar disallowances were made by the Assessing Officer for assessment years 1989-90 and
1990-91. The Tribunal while deciding the appeal for assessment years 1989-90 held that 1 per
cent of the salary only be considered as expenses for earning dividend. However, while deciding
the appeal for assessment year 1990-91, the Tribunal upheld the expenses estimated at 1 per cent
for earning dividend. Now, it was submitted by the ld. counsel of the assessee that Bombay High
Court has held that no disallowance can be made while computing the deduction under section
80M. This decision was rendered by the Bombay High Court in the case of CIT v. Emerald Co.
Ltd. (2006) 284 ITR 586 . Further reliance on the decision of Bombay High Court in the case of
CIT v. General Insurance Corpn. of India (No. 1) (2002) 254 ITR 203 and in the case of State
Bank of Indore v. CIT (2005) 275 ITR 23 (MP). On the other hand, the ld. DR placed reliance on
the orders of the authorities below.
21. After considering the submissions and perusing the material on record we find that this issue
is covered by the decision of the Bombay High Court in the ease of Emerald Co. Ltd. (supra)
wherein it has been held :
"that the interest on the overdraft and the expenses were related to the business of trading in
shares and ought to be allowed as computed income under the head "business". The said expenses
could not once again be deducted from the dividend income for the limited purpose of computing
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ITA-4109/M/01-ICICI
the deduction under section 80M of the Act. There was no statutory provision requiring the
Assessing Officer to deduct the same expenses under the different heads of income. Since the
income by way of dividend included in the gross total income was Rs. 1,34,984 the deduction
under section 80M had to be granted with reference to the said amount of Rs. 1,34,984."
22. In view of the decision of the Bombay High Court, we are of the view that no disallowance on
account of expenses can be made while computing deduction under section 80M. We have seen
the order of the Tribunal also in the case of the assessee itself and found that the decision of the
Bombay High Court was not cited, therefore, the same could not be taken into consideration. With
utmost respect and in view of the decision of the Bombay High Court, we are taking this view that
no disallowance can be made under section 80M. We order accordingly."
Respectfully following the above,ground D is decide in favour of the assessee.Here,we would
like to mention that that the judgment of Emerald Co.Ltd.(supra)has not been reversed by any
later judgment and that the later decisions dealing with disallowance to be made u/s.14A will
have to be applied to that section and that we have decided the issue relating to section 80M
of the Act.
5.Ground G is with respect to disallowance of depreciation on asssets leased to Rajasthan
State Electricity Board(RSEB)and the amount involved is Rs.30.05 Crores.During the
assessment proceedings,the AO found that the assessee had leased out a boiler costing Rs.63
crores to the RSEB during the last assessment year,it had claimed depreciation @ 100% on
the boiler,that the assets were used after Sept. 1994, the depreciation had been claimed at
Rs.31.50crores only,that the balance depreciation was claimed for the year under appeal.
Referring to the order of the preceding AY the AO disallowed the depreciation of Rs.31,50,
00,000/- for the year under consideration also. An appeal filed by the assessee ,before FAA in
that regard was rejected.
5.1.Before us, the AR stated that issue stands covered by the order of the Tribunal delivered
in its own case for the AY.1995-96(115 ITD 25).The DR fairly conceded that the issue is
covered in favour of the assessee by the above mentioned order of the Tribunal.We would
like to reproduce the relevant portion of the order dealing with the assets leased to RSEB and
same reads as under :
"27. The remaining grounds i.e. ground Nos. 13M and 14N, which relates to disallowance of
depreciation on sale and lease back of assets (SLB) to Gujarat Electricity Board (GEB) and
Rajasthan State Electricity Board (RSEB) and on other assets leased during the year under
consideration respectively.
28. Since both these grounds are inter-linked, therefore, for the sake of convenience, they are
disposed of together.
29. Briefly stated facts of the case are that during the course of assessment proceeding, the
Assessing Officer noticed that the assessee has claimed depreciation of Rs. 2,78,46,90,877 by
filing return of income. In the revised statement, depreciation claimed was at Rs.
2,78,99,16,523. The reason for revising the depreciation claim was given by the assessee that
certain additions were made in assessment year 1993-94. Thus, these additions were
confirmed by the CIT(A). Although the additions still being disputed before the Tribunal, it
has revised the statement on the basis of addition made in the earlier years. This contention of
the assessee was not accepted by the Assessing Officer. Therefore, depreciation claimed in
the original return was only taken into consideration by the Assessing Officer for the purpose
of allowability of the same. The Assessing Officer further noted that in earlier year, the
assessee has claimed depreciation on boiler plant auxiliaries worth Rs. 175 crores purchased
from GEB and, same were leased back to GEB. The Assessing Officer further noticed that
similarly the assessee has purchased the assets from RSEB in earlier year i.e. assessment
year 1994-95 and they were leased back to RSEB. The case was examined in earlier year in
detail and the claim of the assessee of 100 per cent depreciation was negated by holding that
the transactions were of loan transaction. The Assessing Officer further noticed that in
similar manner, the claim of the assessee was negated for assessment year 1993-94 also. In
view of the past history, the Assessing Officer disallowed the depreciation claim of 100 per
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cent on the assets purchased from two Boards i.e. GEB and RSEB. Since the claim of the
assessee was disallowed by the Assessing Officer on account of assets leased out to these
Electricity Boards were excluded from the total income of the assessee because the Assessing
Officer has treated the transaction as loan transaction and interest component on these
transactions was taxed only by the Assessing Officer. The total depreciation disallowed on
account of allegedly leased to GEB and RSEB was at Rs. 106.50 crores. The CIT(A) upheld
the order of the Assessing Officer on the ground that sale and leased back transaction with
GEB and RSEB are in fact loan transactions. By further observing that the assessee-company
was not an owner of the assets and hence it was not entitled to depreciation, the order of the
Assessing Officer denying depreciation at Rs. 106.50 crores was upheld. Thereafter, the
CIT(A) examined the issue in regard to the remaining claim of depreciation i.e. on other items
leased out during the year under consideration. After considering the details and
submissions, the CIT(A) found that the assessee is not entitled to any depreciation under
section 32 as the assets are not owned by it but was for the purpose of security against loan
given to parties in the course of financing transactions. Accordingly, the Assessing Officer
was directed to disallow the claim of depreciation on other items claimed during the year
under consideration.
XXXXXXXX
31. We have heard rival submissions and considering them carefully. We have also perused
all the relevant material on which our attention were drawn by the respective parties along
with various case laws relied upon.
32. The ld. Departmental representative has strongly stated that the issue has already been
decided by the Special Bench in which the assessee was one of the intervener. The Special
Bench in case of Mid-East Portfolio Management Ltd. (supra) has held that the transactions
of lease buy-back were not genuine and the ratio of the decision in case of McDowell & Co.
Ltd. (supra) is applicable. We find that the decision of the Special Bench in case of Mid-East
Portfolio Management Ltd. (supra) have been considered by Hon';ble Rajasthan High Court
in case of Rajasthan State Electricity Board (supra) and held that the transaction entered into
between RSEB and ICICI (the assessee) are genuine. The lease rent paid by RSEB was
allowed as deduction by the Hon';ble Rajasthan High Court. In that case Assessing Officer
held that the sale of lease back transaction were sham in the light of the McDowell & Co.
Ltd.';s case (supra). The CIT(A) upheld the decision of the Assessing Officer. However,
Tribunal allowed the appeal of the RSEB. The Hon';ble High Court observed that the
transaction of the sale took place between the parties as Arm';s
length. The Hon';ble High Court has also observed that Explanation 4A to the section 43(1)
which was introduced by the Legislature with effect from 1-10-1996 in order to curb the claim
of higher depreciation in cases where the assets had been sold and acquired by the assessee
by way of hire, lease or otherwise. The Hon';ble Rajasthan High Court has taken into
consideration the decision of the Hon';ble Karnataka High Court in case of Avasarala
Automation Ltd. (supra) relied upon by the ld. DR. The decision of the Special Bench in case
of Tej International (P.) Ltd. v. Dy. CIT (2000) 69 TTJ (Delhi) 650 was also taken into
consideration by the Hon';ble Rajasthan High Court wherein it has been observed that
"once the authority higher than the Tribunal has expressed an opinion on the issue before the
Tribunal, it is not permissible for it to rely upon the contrary decision by the Tribunal
included by a Special Bench. The fact that the judgment was rendered by High Court other
than the jurisdictional High Court does not alter the position".
32.1 Therefore, now the circumstances has been changed as the decision of the Special Bench
in case of Mid-East Portfolio Management Ltd. (supra) has already been distinguished and
considered by the Hon';ble High Court, therefore, we are not inclined to consider that
decision at this point of time.
32.2 In case of CIT v. George Williamson (Assam) Ltd. (2004) 265 ITR 626, it has been held
by the Hon';ble Guwahati High Court that actual delivery does not mean physical possession
of the assets. The symbolic delivery has taken place as per the agreement. It is a valid
delivery/sale as per that the definition of the delivery of goods in section 33 of Sale of Goods
Act, 1930. After observing these observations, the Hon';ble High Court has held that the
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assessee';s Board and lessor with various companies had entered into a genuine agreement.
Accordingly, the claim of the assessee was allowed by the Hon';ble High Court.
32.3 The ld. counsel has rightly placed reliance on Explanation 4A(2) section 43(1) of the
Act, Board circular No. 762 dated 18-2-1998 reported in 230 ITR 12, 31 ST that this
Explanation was introduced in order to curb the higher claim of depreciation by the lessor. In
order to curb such transaction, an amendment had been made to deal with a case where the
assets had been sold and acquired by any assessee by way of hire, lease or otherwise. In such
a case the actual cost for the purpose of deduction of depreciation allowance shall be taken to
the written down value at the time of transaction of the assets in the hands of the seller but
subsequently acquired the assets by the way of hire, lease or otherwise. The Explanation 4A
section 43(1) support the case of the assessee. The Legislature is well aware of such type of
transaction and to curb the higher depreciation, this Explanation was introduced to section
43(1) with effect from 1-10-1996, therefore, it cannot be said in any way that the sale of lease
back transactions are not genuine transactions.
32.4 The Hon';ble Orissa High Court in case of Industrial Development Corpn. of Orissa Ltd.
v. CIT (2004) 268 ITR 130has allowed depreciation under section 32 of the Act on account of
purchase and lease back of assets. While allowing the claim of depreciation under section 32
the Hon';ble High Court has observed that there was no evidence which suggested that the
transactions were not genuine. In that case also the lessor entered into a purchase-cum lease
agreement with Orissa State Electricity Board for generation, distribution and supply of
Electricity and there was no finding, evidence or material that the findings of the Tribunal
was based only on conjecture, suspicion and surmises and was otherwise perverse.
Accordingly the transaction of sale and lease back were held as genuine and depreciation
was allowed. The decision of the Hon';ble Orissa High Court has been further fortified by the
Hon';ble Guwahati High Court in case of George Williamson (Assam) Ltd. (supra). In the
said judgment, the decision of the Hon';ble High Court, in case of Azadi Bachao Andolan
(supra) by which the decision of the Hon';ble Madras High Court in case of M.V. Valiappan
v. ITO (1988) 170 ITR 238was approved.
32.5 In case of M.V. Valiappan (supra) the Hon';ble Madras High Court had held that the
decision in case of McDowell & Co. Ltd. (supra) cannot be read as laying down that every
attempt at tax planning is illegitimate and must be ignored or with every transaction or
arrangement, which is perfectly permissible under law, which has the effect of reducing the
tax burden or the assessee must be looked upon with disfavour. In view of the aforesaid legal
principle laid down by the Hon';ble Supreme Court, it is clear that the principle laid down by
the IRC v. Duke of Westminster (1936) AC 1 (HL) are still applicable in this country and it is
open to assessee to arrange their affairs in such a manner that it would not attract the tax
liability, if it cannot be managed within the permissible liability of law. As stated above, in
this decision the decision in case of McDowell & Co. Ltd. (supra) have considered.
Thereafter in case of Azadi Bachao Andolan (supra) the Hon';ble Supreme Court has
approved the decision of the Madras High Court. Therefore, with utmost respect regarding
the decision of the McDowell & Co. Ltd.';s case (supra), we are of the considered view that in
each and every case it cannot be said that the transactions are malafidely and are not
genuine, therefore, the depreciation should not be allowed to the assessee. In the present case
the transactions were entered into with Electricity Boards and these Boards are Government
bodies, therefore, there cannot be any scope for collusion.
32.6 The Hon';ble Calcutta High Court in case of Competent Authority v. Smt. Bani Roy
Chowdhury (1981) 131 ITR 578has held that :
"where the transferor or transferee is the Government or a statutory body, there cannot be
any scope for such collusion between the parties. The untrue statement about the agreed
consideration is made only for the purpose of the evasion of tax. When the Government or
statutory body is a party to the transfer, the question of evasion of tax does not arise. If the
presumption under clause (b) of section 269C(2) is applied, it will mean that the untrue
statement regarding the agreed consideration is made also at the instance of the Government
or the statutory body which is absurd."
32.7 In case of S.B.I. Home Finance Ltd. v. CIT (2006) 280 ITR 6 the Hon';ble Calcutta High
Court has held that the transactions were genuine. In this case the Finance Company had
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entered into lease agreement, which was not accepted by the Departmental Authority as
genuine transaction and the claim of the depreciation was negative. The Hon';ble High Court
has held that even though the premises of the lease given to 3rd party an option to purchase
the property the right to such option does not affect the ownership of lessor and the lessor
was, accordingly, entitled to depreciation.
32.8 We have also seen the decision of the Bombay High Court in case of Developmental
Credit Bank Ltd. (supra) wherein, the Hon';ble Bombay High Court after examining the
clauses of the lease agreement had come to the conclusion that the lessor bank and purchased
the machinery as owner of the asset and was leased to the lessee based on terms and
conditions which was to be returned to the lessor bank on the expiry of the lease. The lessee
do not have any ownership rights in respect of the lease equipments and the Hon';ble Bombay
High Court has held that the lessor is the owner and, therefore, is entitled for depreciation.
Though, this decision of the Hon';ble Bombay High Court was taken into consideration by the
Special Bench in case of Mid-East Portfolio Management Ltd. (supra) and after observing
that the facts before the Hon';ble Bombay High Court were that in that case the transaction
itself was not doubted but in case of Mid-East Portfolio Management Ltd. (supra) the
genuineness of the transaction itself was challenged by the department. With all respect with
the observations of the Special Bench in case of Mid-East Portfolio Management Ltd. (supra),
we find that this is the stand of the department that the transactions are not genuine but the
assessee is objecting from the day one that all the transactions were genuine as this is regular
business of the assessee for last so many years and department has itself accepted the
transaction as genuine in past and had allowed the depreciation claimed by the assessee.
32.9 Without bringing any material on record regarding a specific item that the transaction is
not genuine, in our considered view formation of a general opinion at the end of Assessing
Officer and again at the end of the ld. CIT(A) that the transactions are not genuine either on
the facts of the present case or in the eyes of the law, in our considered view that the
formation of general opinion cannot be approved.
32.10 The ld. counsel of the assessee has invited our attention on some of the clauses of the
agreements, which were similar to the clause of the agreement before the Hon';ble Bombay
High Court in case of Developmental Credit Bank Ltd. (supra). We have seen these clauses
and found that these are similar clauses in case of Developmental Credit Bank Ltd. (supra).
Therefore, we are of the considered view that both the lower authorities were not justified in
rejecting these agreements and holding that there was colourable device to claim higher
depreciation.
33. We have also taken into consideration various decisions of the Tribunal i.e. in case of
West Coast Paper Mill Ltd. v. Jt. CIT [IT Appeal No. 2154 (B) of 1999 (Mum.)], in case of
Invest Well Publishers (P.) Ltd. (supra), and in case of Investment Trust of India Ltd. (supra)
and found that the ratio of these decisions are squarely applicable on the present case. In
these cases also the depreciation on Sale of Lease Back (SLB) transaction were denied and
after taking into consideration the various cases including the Special Bench in case of Mid-
East Portfolio Management Ltd. (supra), the various Benches of the Tribunal has taken a
view that the transactions were genuine and the respective assessees were entitled for
depreciation.
33.1 We have also seen the Board Instruction No. 1978, dated 31-12-1999 issued by CBDT
suggesting guidelines for investigation in the case of finance lease agreement. These
instructions issued by the Board show that SLB transaction as such are not to be disapproved
but are only to be regulated by the assessing authority. We have also seen circular No. 2 of
2001 issued on 9-2-2001 which states that the accounting standards on lease issued by the
Institute of the Chartered Accountants of India, which required the lessee to capitalize the
assets in case of financial lease will have no implication on the allowance of the depreciation
on assets. From the instructions of Board and from the Circular issued by Board, it is clear
that nowhere it is suggested that lease back transactions are doubtful transactions or
depreciation is not allowable, however, it has been suggested to the departmental authority
that they should be regulated. The regulated word does not mean that assessee is not entitled
for depreciation.
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34. We have also taken into consideration the decision in case of Dy. CIT v. Housing
Development and Finance Corpn. Ltd. (2006) 98 ITD 319 (Mum.) on which the reliance was
placed by ld. DR. The Tribunal has held that the lease agreement between the parties was
financing arrangements, which has been given the colour of lease transaction by adopting a
device. This decision of the Tribunal has been considered in case of Invest Well Publishers
Private Ltd. (supra) wherein, the depreciation claimed by assessee was allowed on similar
transactions. We further noted that in case of Housing Development & Finance Corpn.
(supra) the assessee was not in the business of leasing whereas, the present assessee carrying
on business of leasing since 1983 and the claim of the assessee had been allowed up to the
assessment year 1992-93, therefore, with utmost respect, we are not inclined to follow the
decision in case of Housing Development & Finance Corporation (supra) but inclined to
follow the decision in case of Invest Well Publisher (P.) Ltd. (supra), whereby the decision in
case of H.D.F.C. (supra) has been considered.
35. In a recent decision in case of Dy. CIT v. Global Tele System Ltd. [IT Appeal No. 1085
(Mum.) of 1998 vide order dated 30-11-2006] has allowed the claim of the assessee by
dismissing the appeal of the Department. In that case also the assessee claimed depreciation
of Rs. 3.42 crores on Surface Banking Oven. These assets were sold by Tata Engineering and
Locomotives Company to M/s. Classic Finance Services Enterprises for a consideration of
Rs. 3.42 crore. M/s. Classic Finance Services made full payment of Rs. 3.42 crores to M/s.
Telco and sold the same assets to M/s. Global Tele System under Hire & Purchase agreement
dated 20-6-1993. M/s. Global Tele System gave assets on lease to Telco under an agreement
dated 27-9-1993. The assessee claimed depreciation at the rate of 100 per cent, however,
Assessing Officer denied the claim of depreciation by holding that all these transactions are
colourable to reduce the tax burden. The CIT(A) allowed the claim of the assessee. On further
appeal, the Tribunal discussing the issue at great length and after considering the decision of
the Mid-East Portfolio Management Ltd.';s case (supra) and the decision of the Chennai
Bench in Investment Trust of India Ltd.';s case (supra) whereby the decision of the Mid-East
Portfolio Management Ltd.';s case (supra) was considered and distinguished, allowed claim
of the assessee. Other cases were also taken into consideration along with the decision of the
Hon';ble Rajasthan High Court in case of Rajasthan Electricity Board (supra) and the
decision of Sharyans Resources Ltd. v. Jt. CIT (2002) 83 ITD 340(Mum.) and in case of Dy.
CIT v. Sony Capital Market Ltd. (sic) and also the decision of the Jodhpur Bench in case of
Shree Rajasthan Syntex Ltd. v. Asstt. CIT (2005) 93 ITD 78then allowed the claim of the
assessee.
36. We have also taken into consideration the decision of the CIT(A) and found that the ld.
CIT(A) has gone on the basis of general presumption that the assets were leased out to the
bank just to secure the amount given on loan otherwise there was no occasion to sale and
lease back transaction with the bank. The CIT(A) has considered various aspects and
confirmed the findings of the Assessing Officer that the transactions were non-genuine as they
were colourable just to reduce the tax burden by claiming higher depreciation. The CIT(A)
has not taken into consideration the aspect that the assessee is in regular leasing business
and about 7000 transactions had been entered into by the assessee with various parties for
sale and lease back. The assessee who is a banking corporation was maintaining all the
records in regard to each and every item, proper Profit & Loss A/c is maintained. All the
details were furnished and not a single was detected by the Assessing Officer that these are
genuine or are only paper transactions.
36.1 The lease rental is received regularly and has been shown in the Profit & Loss A/c. The
other parties who are paying lease rentals to the assessee have shown lease rental paid to the
assessee. The department has not brought a single case on record that the parties who had
paid lease rental has not shown/claimed the deduction on account of lease rental but has
claimed deduction of interest paid to assessee bank. In one case i.e. in the case of R.S.E.B.
(supra) the lease rental paid was claimed as deduction. However, department treated this
payment as interest on lease. The Jaipur Bench of the Tribunal allowed the claim of RSEB.
The High Court has confirmed the view of the Tribunal in R.S.E.B.';s case (supra). Assets are
shown in the block of assets. Whenever these assets were taken back they were shown as
taken back and whenever these assets were sold they were shown as sold. Insurance cover in
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ITA-4109/M/01-ICICI
respect of the items involved in these transactions is in the name of assessee. Any liability on
account of insurance premium or on account of theft, damage etc. is on account of assessee.
Therefore, merely on suspicion or conjectures, doubting that the transactions are entered into
for claiming higher depreciation, in our considered view were not justified either at the end of
the Assessing Officer or at the end of ld. CIT(A), who enhanced the disallowance on the entire
transactions entered into in the year under consideration. In view of the above facts and the
circumstances, we set aside the orders of the authorities below and direct the Assessing
Officer to allow the claim of depreciation on all items claimed by the assessee. We order
accordingly."
Respectfully following the above,we decide ground G in favour of the assessee and direct the
AO to allow depreciation on the asset leased out to RESB during last AY.
6.Last ground of appeal is about disallowance of depreciation claimed on assets leased during
the year under appeal,amounting to Rs.2,57,88,11,541/-.During the assessment proceedings,
the AO found that the assessee had given distribution transformers amounting to Rs.300
crores on 15th Sept.RSEB and had claimed depreciation @ 25%, that it had purchased assets
from third parties in certain cases and has leased them, that in other cases assets had been
purchased and leased back to same parties,that it had claimed total depreciation Rs.4,62,62,
66,102/-,that the assessee had bifurcated the assets under two heads namely own assets and
the leased assets, that the written down value of the leased assets was shown at Rs.395.42
crores.On 12.2.1999,the AO issued a show cause notice to the assessee to furnish details of
assets leased out during the year under appeal and depreciation claimed thereon and also to
explain as to why the depreciation should not be disallowed by treating the leased
transactions as finance transactions.He also directed the assessee to furnish the details of
capital component and rental component comprised in lease rentals credited to the P&L
Account.After considering the submission of the assessee,dt.5.3.99,the AO observed that the
assessee had entered into 181 lease transactions of new equipments of the value of Rs.189.30
crores and 16 transaction of value of 340.74 crores for sale and lease back of used/old
equipments respectively,that depreciation in respect of new equipment was claimed at
Rs.146.29 crores,that rent in respect of the leased transactions amounted to Rs.16.33
crores,that depreciation on used/old assets was claimed at Rs.91.68 crores, that the rent for
the used/old assets was credited at Rs.24.31 crores, that the total equipment/assets given on
lease were of Rs.536.64 crores, that only 8% assets related to used/old equipments, that it had
claimed depreciation to the extent of 39% with regard to such assets.referring to the
judgment of the Bombay Tribunal delivered in the case of C.M.I.E (ITA 3820/B/90 dt.29.4.
96)held that transaction in respect of old and new assets were to be regarded as transactions
of finance only, that the portion relatable to finance charges in lease rent was only chargeable
/deductible in the hands of the lessor/lessee, that assessee was not entitled to depreciation on
equipments leased out during the year including the depreciation on sale and leased back
transaction,that the requisite condition of ownership of assets as envisaged in s.32(1) of the
Act was not satisfied.Finally,the AO worked the disallowance at Rs.2,05,30,36,918/-.The
disallowance included the depreciation on sale and lease back of asset to RSEB, depreciation
in respect to assets leased to Rajendra Steel and Rajendra Pipe and depreciation claimed for
assets leased to GEB.
6.1.During the appellate proceedings,before the FAA the assessee contended that the AO had
failed to appreciate the factual as well as legal position, that the assessee had genuinely
entered into lease transactions, that the assessee was entitled for the depreciation claimed by
it on all the assets whether old or new. The FAA referring to the order of his predecessor for
AY.93-94held that the transactions were in the nature of financial transactions.He also
referred to the order of the FAA for the year 95-96 where the claim of assessee for depreciati
-on was disallowed. Finally,he dismissed the claim of the assessee.
6.2.Before us,the AR stated that the issue is covered by the decision of the Tribunal delivered
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ITA-4109/M/01-ICICI
in assessee's own case for AY 95-96 (115 ITD 25).she also referred to the case of ICICI
Bank(40CCH 175),ICICI Ltd. ITA/1881 & Ors.(erstwhile SCICI Ltd.)/Mum/2000-A.Y.s.93-
94,95-96, 96-97, 97-98 ; dt. 25.7.2014, ICICI Bank Ltd. (ITA/3643-44/Mum/2001 A.Y96-97,
97-98 dt.2.5.2014, ICICI Bank Ltd. 2801/Mum/2004 A.Y.98-99 dated 5.12.2014, ICICI Bank
Ltd. ITA 4499/M/2006 A.Y.2001-02 dated 31/10/14 and I.C.D.S Ltd.(350 ITR 527).Dr left
the issue to the discretion of the Bench.
7.3.We have heard the rival submissions and perused the material before us.We find that
while deciding the appeal for the AY.1995-96 in assessee's own case the Tribunal has
deliberated upon and has decided the issue in following manner:
27. The remaining grounds i.e. ground Nos. 13M and 14N, which relates to disallowance of
depreciation on sale and lease back of assets (SLB) to Gujarat Electricity Board (GEB) and
Rajasthan State Electricity Board (RSEB) and on other assets leased during the year under
consideration respectively.
28. Since both these grounds are inter-linked, therefore, for the sake of convenience, they are
disposed of together.
29. Briefly stated facts of the case are that during the course of assessment proceeding, the
Assessing Officer noticed that the assessee has claimed depreciation of Rs. 2,78,46,90,877 by
filing return of income. In the revised statement, depreciation claimed was at Rs.
2,78,99,16,523. The reason for revising the depreciation claim was given by the assessee that
certain additions were made in assessment year 1993-94. Thus, these additions were
confirmed by the CIT(A). Although the additions still being disputed before the Tribunal, it
has revised the statement on the basis of addition made in the earlier years. This contention of
the assessee was not accepted by the Assessing Officer. Therefore, depreciation claimed in
the original return was only taken into consideration by the Assessing Officer for the purpose
of allowability of the same. The Assessing Officer further noted that in earlier year, the
assessee has claimed depreciation on boiler plant auxiliaries worth Rs. 175 crores purchased
from GEB and, same were leased back to GEB. The Assessing Officer further noticed that
similarly the assessee has purchased the assets from RSEB in earlier year i.e. assessment
year 1994-95 and they were leased back to RSEB. The case was examined in earlier year in
detail and the claim of the assessee of 100 per cent depreciation was negated by holding that
the transactions were of loan transaction. The Assessing Officer further noticed that in
similar manner, the claim of the assessee was negated for assessment year 1993-94 also. In
view of the past history, the Assessing Officer disallowed the depreciation claim of 100 per
cent on the assets purchased from two Boards i.e. GEB and RSEB. Since the claim of the
assessee was disallowed by the Assessing Officer on account of assets leased out to these
Electricity Boards were excluded from the total income of the assessee because the Assessing
Officer has treated the transaction as loan transaction and interest component on these
transactions was taxed only by the Assessing Officer. The total depreciation disallowed on
account of allegedly leased to GEB and RSEB was at Rs. 106.50 crores. The CIT(A) upheld
the order of the Assessing Officer on the ground that sale and leased back transaction with
GEB and RSEB are in fact loan transactions. By further observing that the assessee-company
was not an owner of the assets and hence it was not entitled to depreciation, the order of the
Assessing Officer denying depreciation at Rs. 106.50 crores was upheld. Thereafter, the
CIT(A) examined the issue in regard to the remaining claim of depreciation i.e. on other items
leased out during the year under consideration. After considering the details and
submissions, the CIT(A) found that the assessee is not entitled to any depreciation under
section 32 as the assets are not owned by it but was for the purpose of security against loan
given to parties in the course of financing transactions. Accordingly, the Assessing Officer
was directed to disallow the claim of depreciation on other items claimed during the year
under consideration.
XXXXXXXXXXXXXXX
31. We have heard rival submissions and considering them carefully. We have also perused
all the relevant material on which our attention were drawn by the respective parties along
with various case laws relied upon.
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32. The ld. Departmental representative has strongly stated that the issue has already been
decided by the Special Bench in which the assessee was one of the intervener. The Special
Bench in case of Mid-East Portfolio Management Ltd. (supra) has held that the transactions
of lease buy-back were not genuine and the ratio of the decision in case of McDowell & Co.
Ltd. (supra) is applicable.We find that the decision of the Special Bench in case of Mid-East
Portfolio Management Ltd. (supra) have been considered by Hon'ble Rajasthan High Court
in case of Rajasthan State Electricity Board (supra) and held that the transaction entered into
between RSEB and ICICI (the assessee) are genuine. The lease rent paid by RSEB was
allowed as deduction by the Hon'ble Rajasthan High Court. In that case Assessing Officer
held that the sale of lease back transaction were sham in the light of the McDowell & Co.
Ltd.';s case (supra). The CIT(A) upheld the decision of the Assessing Officer. However,
Tribunal allowed the appeal of the RSEB. The Hon'ble High Court observed that the
transaction of the sale took place between the parties as Arm';s
length. The Hon'ble High Court has also observed that Explanation 4A to the section 43(1)
which was introduced by the Legislature with effect from 1-10-1996 in order to curb the claim
of higher depreciation in cases where the assets had been sold and acquired by the assessee
by way of hire, lease or otherwise. The Hon'ble Rajasthan High Court has taken into
consideration the decision of the Hon'ble Karnataka High Court in case of Avasarala
Automation Ltd. (supra) relied upon by the ld. DR. The decision of the Special Bench in case
of Tej International (P.) Ltd. v. Dy. CIT (2000) 69 TTJ (Delhi) 650 was also taken into
consideration by the Hon'ble Rajasthan High Court wherein it has been observed that
"once the authority higher than the Tribunal has expressed an opinion on the issue before the
Tribunal, it is not permissible for it to rely upon the contrary decision by the Tribunal
included by a Special Bench. The fact that the judgment was rendered by High Court other
than the jurisdictional High Court does not alter the position".
32.1 Therefore, now the circumstances has been changed as the decision of the Special Bench
in case of Mid-East Portfolio Management Ltd. (supra) has already been distinguished and
considered by the Hon'ble High Court, therefore, we are not inclined to consider that
decision at this point of time.
32.2 In case of CIT v. George Williamson (Assam) Ltd. (2004) 265 ITR 626, it has been held
by the Hon'ble Guwahati High Court that actual delivery does not mean physical possession
of the assets. The symbolic delivery has taken place as per the agreement. It is a valid
delivery/sale as per that the definition of the delivery of goods in section 33 of Sale of Goods
Act, 1930. After observing these observations, the Hon'ble High Court has held that the
assessee';s Board and lessor with various companies had entered into a genuine agreement.
Accordingly, the claim of the assessee was allowed by the Hon'ble High Court.
32.3 The ld. counsel has rightly placed reliance on Explanation 4A(2) section 43(1) of the
Act, Board circular No. 762 dated 18-2-1998 reported in 230 ITR 12, 31 ST that this
Explanation was introduced in order to curb the higher claim of depreciation by the lessor. In
order to curb such transaction, an amendment had been made to deal with a case where the
assets had been sold and acquired by any assessee by way of hire, lease or otherwise. In such
a case the actual cost for the purpose of deduction of depreciation allowance shall be taken to
the written down value at the time of transaction of the assets in the hands of the seller but
subsequently acquired the assets by the way of hire, lease or otherwise. The Explanation 4A
section 43(1) support the case of the assessee. The Legislature is well aware of such type of
transaction and to curb the higher depreciation, this Explanation was introduced to section
43(1) with effect from 1-10-1996, therefore, it cannot be said in any way that the sale of lease
back transactions are not genuine transactions.
32.4 The Hon'ble Orissa High Court in case of Industrial Development Corpn. of Orissa Ltd.
v. CIT (2004) 268 ITR 130has allowed depreciation under section 32 of the Act on account of
purchase and lease back of assets. While allowing the claim of depreciation under section 32
the Hon'ble High Court has observed that there was no evidence which suggested that the
transactions were not genuine. In that case also the lessor entered into a purchase-cum lease
agreement with Orissa State Electricity Board for generation, distribution and supply of
Electricity and there was no finding, evidence or material that the findings of the Tribunal
was based only on conjecture, suspicion and surmises and was otherwise perverse.
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Accordingly the transaction of sale and lease back were held as genuine and depreciation
was allowed. The decision of the Hon'ble Orissa High Court has been further fortified by the
Hon'ble Guwahati High Court in case of George Williamson (Assam) Ltd. (supra). In the said
judgment, the decision of the Hon'ble High Court, in case of Azadi Bachao Andolan (supra)
by which the decision of the Hon'ble Madras High Court in case of M.V. Valiappan v. ITO
(1988) 170 ITR 238was approved.
32.5 In case of M.V. Valiappan (supra) the Hon'ble Madras High Court had held that the
decision in case of McDowell & Co. Ltd. (supra) cannot be read as laying down that every
attempt at tax planning is illegitimate and must be ignored or with every transaction or
arrangement, which is perfectly permissible under law, which has the effect of reducing the
tax burden or the assessee must be looked upon with disfavour. In view of the aforesaid legal
principle laid down by the Hon'ble Supreme Court, it is clear that the principle laid down by
the IRC v. Duke of Westminster (1936) AC 1 (HL) are still applicable in this country and it is
open to assessee to arrange their affairs in such a manner that it would not attract the tax
liability, if it cannot be managed within the permissible liability of law. As stated above, in
this decision the decision in case of McDowell & Co. Ltd. (supra) have considered.
Thereafter in case of Azadi Bachao Andolan (supra) the Hon'ble Supreme Court has
approved the decision of the Madras High Court. Therefore, with utmost respect regarding
the decision of the McDowell & Co. Ltd.';s case (supra), we are of the considered view that in
each and every case it cannot be said that the transactions are malafidely and are not
genuine, therefore, the depreciation should not be allowed to the assessee. In the present case
the transactions were entered into with Electricity Boards and these Boards are Government
bodies, therefore, there cannot be any scope for collusion.
32.6 The Hon'ble Calcutta High Court in case of Competent Authority v. Smt. Bani Roy
Chowdhury (1981) 131 ITR 578has held that :
"where the transferor or transferee is the Government or a statutory body, there cannot be
any scope for such collusion between the parties. The untrue statement about the agreed
consideration is made only for the purpose of the evasion of tax. When the Government or
statutory body is a party to the transfer, the question of evasion of tax does not arise. If the
presumption under clause (b) of section 269C(2) is applied, it will mean that the untrue
statement regarding the agreed consideration is made also at the instance of the Government
or the statutory body which is absurd."
32.7 In case of S.B.I. Home Finance Ltd. v. CIT (2006) 280 ITR 6 the Hon'ble Calcutta High
Court has held that the transactions were genuine. In this case the Finance Company had
entered into lease agreement, which was not accepted by the Departmental Authority as
genuine transaction and the claim of the depreciation was negative. The Hon'ble High Court
has held that even though the premises of the lease given to 3rd party an option to purchase
the property the right to such option does not affect the ownership of lessor and the lessor
was, accordingly, entitled to depreciation.
32.8 We have also seen the decision of the Bombay High Court in case of Developmental
Credit Bank Ltd. (supra) wherein, the Hon'ble Bombay High Court after examining the
clauses of the lease agreement had come to the conclusion that the lessor bank and purchased
the machinery as owner of the asset and was leased to the lessee based on terms and
conditions which was to be returned to the lessor bank on the expiry of the lease. The lessee
do not have any ownership rights in respect of the lease equipments and the Hon'ble Bombay
High Court has held that the lessor is the owner and, therefore, is entitled for depreciation.
Though, this decision of the Hon'ble Bombay High Court was taken into consideration by the
Special Bench in case of Mid-East Portfolio Management Ltd. (supra) and after observing
that the facts before the Hon'ble Bombay High Court were that in that case the transaction
itself was not doubted but in case of Mid-East Portfolio Management Ltd. (supra) the
genuineness of the transaction itself was challenged by the department. With all respect with
the observations of the Special Bench in case of Mid-East Portfolio Management Ltd. (supra),
we find that this is the stand of the department that the transactions are not genuine but the
assessee is objecting from the day one that all the transactions were genuine as this is regular
business of the assessee for last so many years and department has itself accepted the
transaction as genuine in past and had allowed the depreciation claimed by the assessee.
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32.9 Without bringing any material on record regarding a specific item that the transaction is
not genuine, in our considered view formation of a general opinion at the end of Assessing
Officer and again at the end of the ld. CIT(A) that the transactions are not genuine either on
the facts of the present case or in the eyes of the law, in our considered view that the
formation of general opinion cannot be approved.
32.10 The ld. counsel of the assessee has invited our attention on some of the clauses of the
agreements, which were similar to the clause of the agreement before the Hon'ble Bombay
High Court in case of Developmental Credit Bank Ltd. (supra). We have seen these clauses
and found that these are similar clauses in case of Developmental Credit Bank Ltd. (supra).
Therefore, we are of the considered view that both the lower authorities were not justified in
rejecting these agreements and holding that there was colourable device to claim higher
depreciation.
33. We have also taken into consideration various decisions of the Tribunal i.e. in case of
West Coast Paper Mill Ltd. v. Jt. CIT [IT Appeal No. 2154 (B) of 1999 (Mum.)], in case of
Invest Well Publishers (P.) Ltd. (supra), and in case of Investment Trust of India Ltd. (supra)
and found that the ratio of these decisions are squarely applicable on the present case. In
these cases also the depreciation on Sale of Lease Back (SLB) transaction were denied and
after taking into consideration the various cases including the Special Bench in case of Mid-
East Portfolio Management Ltd. (supra), the various Benches of the Tribunal has taken a
view that the transactions were genuine and the respective assessees were entitled for
depreciation.
33.1 We have also seen the Board Instruction No. 1978, dated 31-12-1999 issued by CBDT
suggesting guidelines for investigation in the case of finance lease agreement. These
instructions issued by the Board show that SLB transaction as such are not to be disapproved
but are only to be regulated by the assessing authority. We have also seen circular No. 2 of
2001 issued on 9-2-2001 which states that the accounting standards on lease issued by the
Institute of the Chartered Accountants of India, which required the lessee to capitalize the
assets in case of financial lease will have no implication on the allowance of the depreciation
on assets. From the instructions of Board and from the Circular issued by Board, it is clear
that nowhere it is suggested that lease back transactions are doubtful transactions or
depreciation is not allowable, however, it has been suggested to the departmental authority
that they should be regulated. The regulated word does not mean that assessee is not entitled
for depreciation.
34. We have also taken into consideration the decision in case of Dy. CIT v. Housing
Development and Finance Corpn. Ltd. (2006) 98 ITD 319 (Mum.) on which the reliance was
placed by ld. DR. The Tribunal has held that the lease agreement between the parties was
financing arrangements, which has been given the colour of lease transaction by adopting a
device. This decision of the Tribunal has been considered in case of Invest Well Publishers
Private Ltd. (supra) wherein, the depreciation claimed by assessee was allowed on similar
transactions. We further noted that in case of Housing Development & Finance Corpn.
(supra) the assessee was not in the business of leasing whereas, the present assessee carrying
on business of leasing since 1983 and the claim of the assessee had been allowed up to the
assessment year 1992-93, therefore, with utmost respect, we are not inclined to follow the
decision in case of Housing Development & Finance Corporation (supra) but inclined to
follow the decision in case of Invest Well Publisher (P.) Ltd. (supra), whereby the decision in
case of H.D.F.C. (supra) has been considered.
35. In a recent decision in case of Dy. CIT v. Global Tele System Ltd. [IT Appeal No. 1085
(Mum.) of 1998 vide order dated 30-11-2006] has allowed the claim of the assessee by
dismissing the appeal of the Department. In that case also the assessee claimed depreciation
of Rs. 3.42 crores on Surface Banking Oven. These assets were sold by Tata Engineering and
Locomotives Company to M/s. Classic Finance Services Enterprises for a consideration of
Rs. 3.42 crore. M/s. Classic Finance Services made full payment of Rs. 3.42 crores to M/s.
Telco and sold the same assets to M/s. Global Tele System under Hire & Purchase agreement
dated 20-6-1993. M/s. Global Tele System gave assets on lease to Telco under an agreement
dated 27-9-1993. The assessee claimed depreciation at the rate of 100 per cent, however,
Assessing Officer denied the claim of depreciation by holding that all these transactions are
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colourable to reduce the tax burden. The CIT(A) allowed the claim of the assessee. On further
appeal, the Tribunal discussing the issue at great length and after considering the decision of
the Mid-East Portfolio Management Ltd.';s case (supra) and the decision of the Chennai
Bench in Investment Trust of India Ltd.';s case (supra) whereby the decision of the Mid-East
Portfolio Management Ltd.';s case (supra) was considered and distinguished, allowed claim
of the assessee. Other cases were also taken into consideration along with the decision of the
Hon'ble Rajasthan High Court in case of Rajasthan Electricity Board (supra) and the
decision of Sharyans Resources Ltd. v. Jt. CIT (2002) 83 ITD 340(Mum.) and in case of Dy.
CIT v. Sony Capital Market Ltd. (sic) and also the decision of the Jodhpur Bench in case of
Shree Rajasthan Syntex Ltd. v. Asstt. CIT (2005) 93 ITD 78then allowed the claim of the
assessee.
36. We have also taken into consideration the decision of the CIT(A) and found that the ld.
CIT(A) has gone on the basis of general presumption that the assets were leased out to the
bank just to secure the amount given on loan otherwise there was no occasion to sale and
lease back transaction with the bank. The CIT(A) has considered various aspects and
confirmed the findings of the Assessing Officer that the transactions were non-genuine as they
were colourable just to reduce the tax burden by claiming higher depreciation. The CIT(A)
has not taken into consideration the aspect that the assessee is in regular leasing business
and about 7000 transactions had been entered into by the assessee with various parties for
sale and lease back. The assessee who is a banking corporation was maintaining all the
records in regard to each and every item, proper Profit & Loss A/c is maintained. All the
details were furnished and not a single was detected by the Assessing Officer that these are
genuine or are only paper transactions.
36.1 The lease rental is received regularly and has been shown in the Profit & Loss A/c. The
other parties who are paying lease rentals to the assessee have shown lease rental paid to the
assessee. The department has not brought a single case on record that the parties who had
paid lease rental has not shown/claimed the deduction on account of lease rental but has
claimed deduction of interest paid to assessee bank. In one case i.e. in the case of R.S.E.B.
(supra) the lease rental paid was claimed as deduction. However, department treated this
payment as interest on lease. The Jaipur Bench of the Tribunal allowed the claim of RSEB.
The High Court has confirmed the view of the Tribunal in R.S.E.B.';s case (supra). Assets are
shown in the block of assets. Whenever these assets were taken back they were shown as
taken back and whenever these assets were sold they were shown as sold. Insurance cover in
respect of the items involved in these transactions is in the name of assessee. Any liability on
account of insurance premium or on account of theft, damage etc. is on account of assessee.
Therefore, merely on suspicion or conjectures, doubting that the transactions are entered into
for claiming higher depreciation, in our considered view were not justified either at the end of
the Assessing Officer or at the end of ld. CIT(A), who enhanced the disallowance on the entire
transactions entered into in the year under consideration. In view of the above facts and the
circumstances, we set aside the orders of the authorities below and direct the Assessing
Officer to allow the claim of depreciation on all items claimed by the assessee. We order
accordingly."(115ITD25)
We also find that in the case of ICICI Ltd.(erstwhile SCICI Ltd.),the Tribunal had,while
deciding the issue for the AY.1998-99,held as under,:-
"6. Before us, the Ld, Counsel for the assessee submitted that identical issues were there in
assessment years 1996-97 and 1997-98 and the Tribunal in ITA Nos. 3643 & 36441M12001
has considered similar grievance and while deciding the issue in favour of the assessee, the
Tribunal has followed the decision of the Hon'bIe Supreme Court in the case of ICDS Vs CIT
350 ITR 527, Delhi High Court in the case of CIT Vs Cosmos Films 338 ITR 266 and the
Tribunal Bombay Bench in the case of Development Credit Bank Ltd. in ITA Nos. 3006/M/01
& 4892/M/03 and also the decision of the Tribunal Bombay Bench in the case of Sicom Vs
DCIT in ITA Nos. 7901 & 7955/M/03 and in the case of L&T in ITA No. 2200 &
2803/M/2000 and 2890 &3533/M/01.
7. Per contra, the Ld, Departmental Representative supported the findings of the lower
authorities.
8. We have carefully perused the orders of the lower authorities and the relevant material
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evidences brought on record before us. We have also carefully gone through the decisions
relied upon by both the parties. In so far as the issue relating to the claim of depreciation on
leased transactions is concerned, we find force in the submission of the Ld. Sr. Counsel that
Hon'ble Supreme Court in the case of ICDS vs. CIT, 350 ITR 527 (supra), had the occasion
to consider the question -
"Whether the assessee is entitled to depreciation on vehicles financed by it which is
neither owned by the assessee nor used by the assessee".
The Hon'ble Supreme Court after perusing the lease agreement and other related factors held
that the lessor is the owner of the vehicles. As an owner, it used the assets in the course of its
business satisfying both the requirements of Sec. 32 of the Act and hence is entitled to claim
depreciation.
9.A similar view was taken by the Hon'ble Delhi High Court in the case of Cosmos Films
(supra) wherein the Hon'ble Delhi High Court has considered the implications of Sec. 19 of
Sale of Goods Act, 1930.
10. The Tribunal, Mumbai Bench in the case of Development Credit Bank Ltd. (supra) has
followed the decision of the Hon'ble Supreme Court in the case of ICDS (supra) and the
decision of Hon'ble Delhi High Court in the case of Cosmos Films (supra) and allowed the
claim of depreciation.
11. The Tribunal, Mumbai Bench, in the case of L&T (supra) has considered a similar issue
at para 27 of its order and at para 28 followed the findings of the Hon'ble Supreme Court in
the case of ICDS (supra) and also of the co-ordinate Bench in the case of Development Credit
Bank Ltd. (supra) and allowed the claim of depreciation on sale of lease back assets.
Respectfully following the decisions mentioned herein above, we direct the AO to allow
depreciation. Ground No. 1 is accordingly allowed."
Respectfully following the above decisions,ground No.H is decided in favour of the assessee.
As the result appeal filed by the assessee stands partly allowed.
.
Order pronounced in open court on 9th September, 2015.
9 ,2015
Sd/- Sd/-
(. , / D.MANMOHAN ) ( / RAJENDRA)
/ VICE PRESIDENT / ACCOUNTANT MEMBER
/Mumbai, /Date: 09.09.2015.
... Jv.Sr.PS.
/Copy of the Order forwarded to :
1.Appellant / 2. Respondent /
3.The concerned CIT(A)/ , 4.The concerned CIT /
5.DR Bench, ITAT, Mumbai / , ,.. .
6.Guard File/
//True Copy//
/ BY ORDER,
/ Dy./Asst. Registrar
, /ITAT, Mumbai.
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