Madras H.C : The Tribunal was right in upholding the disallowance of depreciation on the sale and lease back transaction with the TNEB even though the appellant had satisfied all the conditions laid down in section 32

High Court Of Madras

First Leasing Co. Of India Ltd. vs. ACIT

Assessment Year : 2001-02

Section : 32

F.M. Ibrahim Kalifulla And N. Kirubakaran, JJ.

Tax Case Appeal Nos. 1071 Of 2007 & 589 Of 2008

February 21, 2010

JUDGMENT

F. M. Ibrahim Kalifulla, J. – The following substantial questions of law have been raised for consideration in T. C. A. No. 1071 of 2007 :

“(i) Whether the Tribunal was right in upholding the disallowance of depreciation on the sale and lease back transaction with the TNEB even though the appellant had satisfied all the conditions laid down in section 32 of the Income-tax Act, 1961 ?

(ii) Whether the Tribunal was right in law in holding that since the assessee had not offered lease rental income, the claim of depreciation cannot be allowed ?

(iii) Whether the Tribunal was right in holding that the depreciation claim is not available on the assets forming part of the block of asset since the lease period had expired and so, the asset cannot be said to be put to use ?”

2. The substantial questions of law that have been raised for consideration in T. C. A. No. 589 of 2008 are as under :

“(i) Whether the Tribunal was right in upholding the disallowance of depreciation on the sale and lease back transaction with the TNEB even though the appellant had satisfied all the conditions laid down in section 32 of the Income-tax Act, 1961 ?

(ii) Whether the Tribunal was right in law in following its own earlier order for the assessment year 2001-02 even though there are certain changes on facts, namely, that the assessee had offered lease rentals income and that the Sales Tax Department had issued taxing the transactions to lease tax at 40 per cent. ?

(iii) Whether the Tribunal was right in holding that the depreciation claim is not available on the assets forming part of the block of asset since the lease period had expired and so the asset cannot be said to be put to use ?”

3. The brief facts which are required to be stated are that the appellant is a leasing company. It entered into a sale and lease back (SLB) agreement in respect of certain assets, namely, meters, shunt capacitor banks and outdoor circuit breakers with the Tamil Nadu Electricity Board (TNEB). As per the SLB agreement, the appellant purchased certain assets from the TNEB and leased them back to it. The total value of such assets came to Rs.39,44,27,137. The assets were eligible for 100 per cent. depreciation. As they were not used for more than 182 days, the appellant restricted the claim of depreciation to 50 per cent., which worked out to Rs. 19,72,13,568. The Assessing Officer disallowed the claim for such depreciation treating those SLB transactions as loan transactions. Apart from the above, in respect of four other leases with M/s. Kedia Distilleries, Prakash Industries Ltd., Prestige Corporation Ltd. and Suckchain Cements Ltd., the lease period was over and as per the lease agreements, the appellant had to take back the leased assets. The appellant did not take back the assets, but claimed depreciation. According to the appellant, as per the agreement, if the leased assets were not returned to the lessor, it would be presumed that the lessee would be a monthly tenant. The Assessing Officer, however, took the view that when the asset was returned or re-possessed, it cannot be said to have been put to use in the leasing business of the appellant on the footing that once there was no valid lease agreement and the asset was not returned to the lessee, the assets originally leased ceased to be leased assets and, therefore, no depreciation can be allowed. The Assessing Officer calculated the depreciation on the equipment leased to those four parties in a sum of Rs. 51,46,787 and disallowed the same. In the view of the Assessing Officer, the depreciation on those leased assets on the pretext that the said assets have not been put to use, even though the block in respect of those assets continued to exist.

4. The appellant filed an appeal before the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) held that the appellant satisfied all the conditions for claiming depreciation and allowed the 50 per cent. depreciation claimed to the tune of Rs. 19,72,13,568. As far as the four other leases are concerned, the Commissioner of Income-tax (Appeals) accepted the case of the appellant and held that the appellant was not able to collect any lease rent and was also not able to take possession of the leased assets and since the assets continued to remain with the lessees, it will have to be presumed that the equipment were used in the business of the appellant. On that footing, the Commissioner of Income-tax (Appeals) directed the Assessing Officer to allow the claim of Rs. 51,46,787.

5. The respondent filed its appeal before the Income-tax Appellate Tribunal, and the Tribunal affirmed the view of the Assessing Officer and held that the SLB agreement was not a genuine transaction and it was under the garb of a loan transaction. The Tribunal took the view that the machinery and equipment were never individually identified, the written down value could not be ascertained and the market value of the assets without value or assessment also could not be ascertained. It was held that there was no actual delivery of handing over of possession of the machinery/equipment by the TNEB to the assessee on completion of the sale and there was also no redelivery or handing over of possession of the equipment by the assessee to the Board. The Tribunal, therefore, held that it was purely a finance transaction and, therefore, no depreciation can be allowed. The Tribunal, by the orders impugned in these appeals dated May 25, 2007 (since Asstt. CIT v. First Leasing Co. of India Ltd. [2009] 117 ITD 185 (Chennai), and March 4, 2008, respectively, allowed the Revenue’s appeals and restored the orders of the Assessing Officer.

6. We heard Mr. Arvind P. Datar, learned senior counsel appearing for Mr. V. S. Jayakumar, learned counsel for the appellant and Mr. K. Subramaniam, learned senior standing counsel for the Central Government for the respondent.

7. Mr. Arvind Datar, in the course of his submissions, contended that having regard to the fact that the assets covered by the SLB agreement were the one classified in Appendix I (3E) of rule 5, the said assets being new, were entitled for 100 per cent. depreciation. According to the learned senior counsel, under section 32 of the Income-tax Act and its second proviso, and having regard to the dictum of the honourable Supreme Court reported in CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308/97 Taxman 435, the assets having been formed part of the business of leasing of the appellant, it was entitled to claim depreciation under the said section. The learned senior counsel also contended that by virtue of section 43 Explanation 4A, the second mentioned person, viz., the TNEB had the use of the assets for the purpose of its business and the same had been acquired on lease by it under the SLB agreement from the appellant. The actual cost of such assets as reflected in the various invoices which formed part of the SLB agreement was the value to be adopted for the purpose of claiming the depreciation. The learned senior counsel, by drawing our attention to the relevant agreements, its terms and the various invoices by which the assets were acquired earlier by the TNEB, which were all new assets purchased by it immediately prior to the SLB agreement, submitted that there was no need for any further valuation to be made. The learned senior counsel further contended that as per the SLB agreement, since the usage of it was for a period less than 182 days, it was entitled for 50 per cent. of the value by way of depreciation and when the appellant satisfied all the conditions, the claim for such depreciation and the disallowance of the same by the Assessing Officer as confirmed by the Tribunal was not justified. The learned senior counsel pointed out that unlike other cases, in the case on hand, the terms of the SLB agreement stipulate that the ownership continued to remain with the appellant even after the initial period of lease charges, inasmuch as after the seventh year, the appellant would be charging Re. 1 by way of lease rent. According to the learned senior counsel, the appellant having fully satisfied the condition to claim depreciation, namely, ownership and use of the leased assets before the end of the accounting year by the lessee, the appellant was eligible for the depreciation to the extent of 50 per cent. The learned senior counsel further pointed out that the genuineness was not the basis for rejecting the SLB agreement by the Assessing Officer or by the Tribunal. The learned senior counsel further contended that the case of the appellant was clearly distinguishable to the cases covered by the decision of the Karnataka Full Bench Tribunal and on the other hand, the relevant principles laid down in the said decision were fully satisfied by the appellant and, therefore, the disallowance was not justified.

8. As against the above submissions, Mr. K. Subramaniam, learned senior standing counsel for the respondent, after taking us through the Full Bench decision of the Karnataka Tribunal at length, contended that there is considerable doubt about the execution of the SLB agreement. According to the learned senior standing counsel, the xerox copies of the lease agreement placed before the court do not contain any date of issuance of the stamp paper and, therefore, the doubt gets strengthened. The learned senior standing counsel, by referring to section 17 of the Stamp Act, contended that in such a situation, the document itself would be invalid as there was every scope for creating such a document by ante-dating it. By referring to the dates contained in the invoices which were between January, 2001, and March 30, 2001, the learned senior standing counsel contended that the invoice price cannot be of the same value as on the date of the SLB agreement and, therefore, no valuation was necessary. The learned senior standing counsel contended that at least the assets which were purchased by the TNEB in March, 2000, should have been valued. The learned senior standing counsel contended that when the assets were numerous, in the absence of proof of identification of the assets, the sale as claimed in the SLB transaction cannot be accepted.

9. As regards the four leases, the learned senior standing counsel contended that the Tribunal was perfectly justified in its conclusion and the same does not call for any interference.

10. According to the learned senior standing counsel, the facts involved in this case and the facts relating to the case decided by the Karnataka Full Bench Tribunal are identical and the Assessing Officer as well as the Tribunal were fully justified in placing reliance thereon. The learned senior standing counsel then contended that when the payment of lease rental was assured by the TNEB’s mandate to the Indian Bank by making payment of lease instalments on the due dates from the current consumption charges calculated, which was also supported by the State Government’s guarantee, it was more or less like an escrow account, which would only support the stand of the respondent that it was in reality a loan transaction and not a sale and lease back agreement. The learned senior standing counsel also contended that when the SLB agreement came to be made exclusively for such of those items for which 100 per cent. depreciation could be claimed, it is one other factor to show that the SLB agreement was only a ruse and not real and that in reality, it was only a loan transaction. The learned senior standing counsel relied upon the decision in Mc Dowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 (SC) in support of his above stand. The learned senior standing counsel contended that having regard to the volume of assets owned by the TNEB, which is a State owned organisation, it was impossible to accept the stand that it came forward to sell its assets to the appellant by entering into a transaction for a lease back and that the said circumstance by itself would throw considerable doubt as to the sale-cum-lease back agreement as claimed by the appellant. The learned senior standing counsel pointed out clause 15(a) in the agreement, where it is stated that it was for the lessor to purchase the machinery selected by the lessee from the supplier identified by the lessee, which never happened in the present case on hand, where the assets were already purchased by the TNEB. The learned senior standing counsel would, therefore, contend that the agreement was a farce and not real. The learned senior standing counsel then pointed out that in the absence of proper valuation of the assets as on March 31, 2001, which is the date of the SLB agreement, considered in the light of the letter of the Financial Controller of the TNEB dated February 12, 2001, that a number of meters were purchased on March 1, 2000, and had been commissioned and utilised in various divisions and certain other assets were also purchased and utilised in the months of January and February, 2001, the invoice value could be taken as the proper sale value for the alleged sale made by the TNEB to the assessee. According to the learned senior standing counsel, to the extent the used assets have been shown as sold at the invoice value, there was clear inflation of the sale price to benefit the appellant and, therefore, in the absence of proper valuation of the used assets, it will have to be held that the transaction itself was not a genuine one. The learned senior standing counsel thereafter pointed out that the approval of the TNEB was made only on May 19, 2001, and, therefore, it reveals that the Board did not sanction the arrangement before the transaction. According to the learned senior standing counsel, when the various assets which were transferred were thousands in number and that too, located in different parts of the State, without proper identification, there could not have been a real sale transaction and, therefore, on this ground as well, the conclusion of the Assessing Officer and the Tribunal cannot be interfered with. The learned senior standing counsel countered the argument of the learned senior counsel for the appellant based on the levy of sales tax on lease rentals by stating that it cannot be a ground to prevent the income-tax authorities from finding the genuineness of the transaction. According to the learned senior standing counsel, the sale transaction claimed by the appellant and the claim of 100 per cent. depreciation was based on an illusory ownership with artificial agreements containing clauses impossible of performance and were never really intended to be actually implemented.

11. Having heard the learned counsel for the respective parties and having perused the order of the Assessing Officer, the Commissioner of Income-tax (Appeals) as well as that of the Income-tax Appellate Tribunal, the first question that arises for consideration is, whether the sale-cum-lease back transaction of the appellant with the TNEB can be held to be a genuine one in order to hold that the appellant was entitled for 100 per cent. depreciation claimed under section 32 of the Income-tax Act.

12. In order to support its claim, the appellant relied upon the various sale cum-lease back agreements entered into on March 30, 2001, and March 31, 2001. In clause 3 of the lease agreement relating to delivery and installation of machinery/equipment, it is stated that the machinery/equipment have been delivered directly to the lessee by the manufacturer/supplier and installed at the locations stated in schedule I. The lease rentals are set out in schedule II. All the original sale-cum-lease back agreements were placed before the Assessing Officer. On the backside of the stamp paper, the date of issue of the stamp paper has been mentioned. By relying upon the decision of the honourable Supreme Court in Shaan Finance (P.) Ltd. (supra), the appellant would contend that the business of the appellant being investments and leasing, and the transaction entered into with the TNEB was as part of its business, it was fully governed by section 32 of the Income-tax Act in order to claim 100 per cent. depreciation, as provided under rule 5 read along with Appendix I(3)(E). One other contention was that the initial period of repayment of the lease amount was by way of instalments spread over a period of seven years, and after completion of the repayment of the lease amount, the appellant does not cease to be the owner of the assets, since, thereafter, the TNEB was bound to pay Re. 1 by way of lease amount per annum.

13. At the very outset, when we examine section 32 of the Income-tax Act, it is clear that in order to claim the benefit of depreciation, among others in respect of tangible assets, the main criteria is ownership, wholly or partly, by the assessee and used for the purposes of the business. In this respect, when we refer to the decision relied upon by the appellant in Shaan Finance (P.) Ltd. (supra), which related to the appellant itself, the honourable Supreme Court, while examining the grant of investment allowance under section 32A of the Income-tax Act, wherein also the criteria laid down is ownership by the assessee and is wholly used for the purposes of the business carried on by it, the honourable Supreme Court examined the effect of section 32A(2)(b) of the Act and posed a question as under (page 312) :

“We have already set out the three requirements of section 32A(1) which entitle an assessee to claim investment allowance. One of the requirements is that the machinery must be wholly used for the purpose of such assessee’s business. When the business of the assessee is leasing of such machines, the machines so leased out are being used for the purpose of the assessee’s business. The income by way of hire charges which the assessee receives is also taxed as business income of the assessee . . . These items are, ship, aircraft or machinery or plant of certain kinds specified in that sub-section. In respect of a new ship or a new aircraft, section 32A(2)(a) expressly prescribes that the new ship or the new aircraft should be acquired by an assessee which is itself engaged in the business of operation of ships or aircraft. Under sub-section (2)(b), however, any such express requirement that the assessee must himself use the plant or machinery is absent. Section 32A(2)(b) merely describes the new plant or machinery which is covered by section 32A. The plant or machinery is described with reference to its purpose. For example, sub-section (2)(b)(i) prescribes ‘the purposes of business of generation or distribution of electricity or any other form of power’. Sub-section (2)(b)(ii) refers to small scale industrial undertakings which may use the machinery for the business of manufacture or production of any article, and sub-section (2)(b)(iii) refers to the business of construction, manufacture or production of any article or thing other than that specified in the Eleventh Schedule. Sub-section 2(b), therefore, refers to the uses to which the machinery can be put. It does not specify that the assessee himself should use the machinery for these purposes. In the present case, the person to whom the machinery is hired does use the machinery for specified purposes under section 32A(2)(b)(iii). That person, however, is not the owner of the machinery. The High Courts of Karnataka and Madras have held that looking to the requirements specified in section 32A the assessees, in the present case, fulfil all the requirements of that section, namely, (1) the machinery is owned by the assessee ; (2) the machinery is used for the purpose of assessees business and ; (3) the machinery is as specified in sub-section (2). We are inclined to agree with this reasoning of the High Courts of Karnataka and Madras.”

14. Therefore, by reading together the prescription contained in section 32A(1) and (2), the honourable Supreme Court made it clear that even a leasing company owning such tangible assets can be held to use the said assets for the purpose of its business when such assets were leased out, which is its business, that such assets are put into use as stipulated in the relevant sub-clauses and thereby, fulfil the requirement for claiming the benefits of the investment allowance. Therefore, there is no difficulty in holding that as part of its business venture, if the appellant leases out the assets owned by it, it can be held that it fully satisfies the ingredients of section 32 of the Income-tax Act in order to claim depreciation.

15. With the understanding of the above requirement of law under section 32 of the Income-tax Act providing for depreciation, when we examine the case on hand, in order to answer the questions of law raised in these appeals, the following factors have to be necessarily kept in mind :

(1) All the SLBs were entered on March 30, 2001, and the leases were all created on March 31, 2001.

(2) Out of 25 such SLBs, two of the assets were purchased by the TNEB on November 7, 2000, and December 16, 2000, and the rest of the assets were all purchased between January 18, 2001, and March 14, 2001.

(3) All the assets sold and leased back were entitled for 100 per cent. depreciation.

(4) There was no actual delivery on sale by the TNEB to the appellant nor was there redelivery pursuant to the lease.

(5) The written down value of the assets was not made.

(6) As per the lease back agreement, the ownership always remained with the appellant.

(7) Pursuant to the SLB, the appellant was entitled for only 50 per cent. of depreciation in that assessment year as the use of the assets did not exceed 182 days.

(8) Though there were no dates in the stamp papers, they did contain a date on the reverse, where the date seal has been affixed.

(9) Apart from the lease back agreement which provided for payment of the instalments from the collection of current consumption charges by way of priority, it was also supported by the State Government guarantee.

(10) The assets covered by the SLB were all meters, shunt capacitor banks and outdoor circuit breakers numbering several thousands.

(11) The assets were not physically identified as it was impossible of identification at the time when the sale was said to have been created and the lease back agreement was entered into.

(12) While all the assets were already owned by the TNEB at the time of the SLB, clause 15(a) of the agreement stipulated that the appellant as lessor was to purchase the machinery/equipment selected by the lessee/TNEB from the supplier designated by the TNEB.

(13) The transaction, namely, the lease back agreement, was treated as sale and the liability to sales tax was to be borne by the TNEB.

(14) The lease agreement provided for repayment of the lease amount by way of 14 instalments in a period of seven years.

(15) Under clause 19, the TNEB is provided with an option to renew the lease at the rate of Re. 1 per annum for a secondary period of 20 years, meaning thereby that the ownership continued to remain with the lessor, the appellant.

16. Keeping the above factors in mind, when we analyze the respective contentions of the parties, since we have held that the appellant in the course of its business activity of leasing, is entitled to enter into a sale-cum-lease back agreement and thereby avail of the benefit of depreciation provided under section 32 of the Income-tax Act, the only question to be examined is, whether, in the case on hand, the sale-cum-lease back agreement as claimed by the appellant can be accepted and the benefit of depreciation can be allowed to the appellant.

17. While, according to the appellant, the SLB entered into with the TNEB was genuine and the appellant is entitled for the depreciation as claimed, according to the respondent/Department, the transaction was not genuine owing to various pitfalls in the transaction, and applying the principles laid down in the judgment rendered by the Karnataka Full Bench Tribunal, which also related to two other electricity boards, viz., Rajasthan and Gujarat, the sale-cum-lease back agreement in the case on hand was rightly rejected by the Assessing Officer and confirmed by the Tribunal.

18. When we examine the various factors pointed out at the instance of the respondent to reject the present claim of SLB made by the appellant, the factors are that the sale executed by the TNEB in favour of the appellant cannot be accepted inasmuch as there was considerable doubt as to the execution of the sale-cum-lease back agreements on the respective dates on which they were said to have been executed. In support of the said contention, the learned senior standing counsel for the respondent pointed out that the documents placed before the court did not contain any date on the stamp paper and, therefore, there was every possibility of the document having been created subsequently by ante-dating it. Reliance was also placed upon some of the provisions of the Stamp Act in support of the said contention. Though the said contention raised on behalf of the respondent looks very sound, but yet, at the instance of the appellant, all the original deeds related to the SLBs were placed before us, and on the reverse of the respective stamp papers, there was a date seal affixed on it and, therefore, we are not persuaded to accept the said submission as putforth by the learned senior standing counsel for the respondent. In fact, this submission appeared to have been not made before the lower forums and we do not find any reference to the same in the orders impugned in these appeals. However, since it has been brought to our notice that the respective stamp papers did contain a date with the seal, we are not inclined to probe further into the said submission. Therefore, the said submission of the learned senior standing counsel for the respondent has to be necessarily rejected.

19. As far as the other deficiencies pointed out are concerned, at the foremost, it was contended that while the assets consisted of meters, shunt capacitor banks and outdoor circuit breakers, which were already fixed by the TNEB in different locations throughout the State of Tamil Nadu, there was no scope for identifying the assets at the time when they were said to have been sold to the appellant and also at the time when the lease agreement was signed by the parties. It is also not the case of the appellant that any such identification of the assets was made either at the time of the sale or at the time of the lease agreements. On the other hand, indisputably, the assets were all purchased by the TNEB earlier and were already put in place in different parts of the State and were never identified at the time of the sale or at the time of the signing of the lease agreement. In fact, the learned senior standing counsel for the respondent brought to our notice that before the Tribunal also, it was submitted by the counsel appearing for the appellant that it was not humanly possible to identify individually all the assets involved in this case. The learned senior counsel appearing for the appellant, however, submitted that the said statement cannot be taken to mean that the assets said to have been sold in favour of the appellant can never be retrieved in the event of any breach of the lease agreement taking place. Whatever be the stand of the appellant on that score, the fact remains that having regard to the nature of the assets dealt with by the appellant and the TNEB, which were all small electrical equipment/ machinery, namely, meters, shunt capacitor banks and outdoor circuit breakers, identification of the assets at the time of the sale as well as the lease back agreement was impossible of compliance. When we were examining the allegation of the genuineness of the so-called sale of the assets, certainly the non-identification of the assets at the time of the sale was a relevant factor to be considered.

20. The next important factor pointed out by the learned senior standing counsel was that, while the agreement was stated to be in respect of the assets which were already owned by the TNEB, clause 15(a) of the agreement stated that the lessor should arrange for the purchase of the assets selected by the TNEB from the supplier designated by it. The said clause does not quite fit into the claim of the appellant vis-a-vis the nature of the transaction said to have been entered into by it with the TNEB. When a claim of sale-cum-lease back agreement is based on an agreement reached between the parties and a clause in the agreement conveys a meaning that the machinery/equipment were to be purchased in future, while as a matter of fact, according to the appellant, it was not so, there was no valid explanation as to how such a clause, namely, clause 15(a) crept into the agreement, providing for a future purchase to be effected by the TNEB, backed by the appellant. Apparently, such an irrelevant clause contained in the agreement also throws considerable doubt as to the nature of the transaction said to have been entered into between the appellant and the TNEB.

21. One other contention raised on behalf of the respondent is that the assets were not valued. In other words, the written down value of the assets was not ascertained in respect of all the assets and no valuation was made with respect to the assets which came to be purchased by the TNEB in the year 2000. The said submission was so made to contend that since the assets were entitled for 100 per cent. depreciation, acceptance of the invoice value provided for an inflated valuation of the assets which would have enabled the appellant to reap higher benefit than what it was entitled to. As far as the said contention is concerned, we find that except two of the invoices which were dated November and December, 2000, the rest of the invoices were all between January and March, 2001. We, therefore, do not find any serious lacuna in the said arrangement made between the parties, viz. the appellant on the one hand and the TNEB on the other, to hold that on that score, the whole transaction can be doubted.

22. One other contention raised on behalf of the respondent was that the agreement provided for payment of the lease amount in instalments over a period of seven years and that such payment is to be made from the current consumption charges which are deposited in the Indian Bank and by giving priority to make such payments to the appellant. According to the respondent, apart from providing such priority, the repayment was also supported by a guarantee by the State Government, which put together, would virtually amount to the creation of an escrow account, which would only show that the transaction was not really a SLB, but a finance transaction. Here again, we are not impressed by the said contention raised on behalf of the respondent. Merely because the guarantee by the State Government was provided to support the SLB, it cannot be concluded that it will amount to the creation of an escrow account. Therefore, on that score too, the SLB transaction cannot be doubted.

23. It was then pointed out that while the sale-cum-lease back agreement was concluded by March 30, 2001, the TNEB ratified the transaction only on May 19, 2001. According to the learned senior standing counsel, the ratification by the Electricity Board on a later date, viz., after nearly two months, would only go to show that the sale itself was not real, but was a make-believe affair. When we consider the above submission, at the very outset, it will have to be stated that in order to ascertain the factum of any sale, what is required is the existence of the seller and the purchaser, the property concerned in the sale, the consideration and the conveyance of such a property on the conclusion of the sale. There is no dispute either at the instance of the appellant or the TNEB with regard to the sale claimed between them. The necessary documents in support of such a sale were existing and were exhibited before the Assessing Officer. We have already found that the doubt raised on behalf of the Department as to the relevant date of execution of the sale deed due to absence of the inscription of the date on the stamp paper was duly explained by showing the relevant date contained at the backside of the stamp paper with the required date seal. The Electricity Board never took the stand that there was no sale involved of its assets in favour of the appellant.

24. In this context, when we refer to section 32 of the Income-tax Act, which provides for depreciation, in section 32(1), it is specifically mentioned that the plant or machinery owned wholly or partly by the assessee and used for the purposes of the business is eligible for deduction by way of depreciation. The expression “owned wholly or partly by the assessee”, in our humble opinion, would also support the stand of the appellant in regard to the assets which were already in the possession of the Electricity Board, which the Board agreed to sell to the appellant and continued to use the same by way of the sale-cum-lease back agreement. Therefore, the ratification of the transaction by the Electricity Board in the month of May, 2001, only strengthens the claim of SLB and does not in any way vitiate the transaction.

25. As far as the description of the properties were concerned, the relevant invoices relating to the purchase of those assets were part of the document of SLB, where the number of such equipment which were purchased by the Electricity Board and their respective locations where they have been put into use, etc., have been clearly set out. As far as the contention that there was no physical delivery of the assets either at the time of the sale or at the time of the lease back is concerned, no legal prescription has been either brought to our notice or demonstrated before us to state that there must be such a physical delivery of any asset, for that matter, in order to accept the transaction of sale-cum-lease back agreement. In our considered opinion, when as parties to the transaction there was a tacit agreement in the form of offer and acceptance for the sale of the assets and the existence of such assets cannot be doubted and the parties to the transaction were convinced about it, there is no reason why the said sale and its lease back should be rejected. One can understand if there was any inspection or investigation made at the instance of the Department which revealed any bogus purchase of assets and false sale of such assets effected not borne out by the relevant books of account or other records, then the Department can always reject any claim made based on such falsified records. In the absence of any such materials gathered by the respondent-Department, and when in the case on hand, the parties to the sale-cum-lease back agreement were an existing leasing company and a reputed State owned Electricity Board, in the absence of any material to the contrary, the claim made based on the sale-cum-lease back agreement before the respondent cannot be rejected. To put it differently, the claim of the initial sale and its lease back as between the appellant and the Electricity Board cannot be summarily rejected by stating that there was either considerable doubt relating to the ascertainment of the concerned assets or about the transaction itself. We are, therefore, convinced that in the case on hand, there were not enough materials available on record to hold that the transaction of sale-cum-lease back as between the appellant and the Electricity Board cannot be accepted.

26. As far as the ratification of the said transaction by the Electricity Board on May 19, 2001, is concerned, such later ratification by itself cannot be a ground to reject the sale-cum-lease back. The ratification by the Electricity Board, though it was made on a subsequent date, only confirmed that there was a sale-cum-lease back agreement and that it was factually true. Therefore, the ratification by the Electricity Board on a subsequent date cannot be put against the appellant in order to reject the whole sale-cum lease back agreement outright. Therefore, on that ground, there is no scope to reject the claim of sale-cum-lease back agreement.

27. As far as the contention of the learned senior standing counsel that clause 15(a) of the agreement does not fit into the nature of transaction as between the appellant and the Electricity Board is concerned, clause 15(a) as it stands, as is contended by the learned senior standing counsel. As per the said clause, the lessor-appellant agreed to purchase the assets to be identified by the lessee-Electricity Board. However, as a matter of fact, the assets were already purchased by the Electricity Board and were in existence at the time of the sale-cum-lease back agreement. According to the appellant, it used the regular agreement which was being entered into with its customers, and it was a mistake. The said clause finds a place in the agreement entered into between the parties. But the said clause does not in any way run counter to any of the other clauses contained in the agreement. At best, it can only be said to be a clause which is superfluous in nature, and certainly the availability of the said clause in the agreement does not conflict with the real transaction of the sale-cum-lease back agreement entered into between the appellant and the Electricity Board. In other words, the existence of clause 15(a) does not in any manner invalidate the terms of the agreement between the appellant and the Electricity Board. De hors the existence of the said clause in the agreement, the sale-cum-lease back transaction was valid and in the event of any breach of any of the other terms, the parties would be well within their rights to work out their remedies. To put it differently, though in regard to the assets with reference to which the SLB came into existence, there was a valid contract between the appellant and the Board, the existence of clause 15(a) would not in any way vitiate the real agreement entered into between the parties. Apart from the said clause being not in conflict with the SLB entered into between the appellant and the Electricity Board, the said clause could have been worked out by both the parties for any further creation of assets for the purpose of the sale-cum-lease back transaction. Therefore, going by the existence of that clause in the agreement, we are not in a position to hold that the whole agreement should be treated as sham or nominal.

28. The learned senior standing counsel for the respondent heavily relied upon the decision rendered by the Special Bench of the Income-tax Appellate Tribunal, Mumbai in the case of Mid East Portfolio Management Ltd. v. Dy. CIT [2003] 87 ITD 537. In the said decision, the Special Tribunal ultimately listed out certain relevant factors for testing the genuineness or otherwise of the SLB transaction. The said factors are stated hereinbelow (page 199 of 271 ITR (AT)) :

“(a) Was there an intention to pass the property in the equipment to the assessee ?

(b) Was the equipment identified/ascertained with reasonable clarity ?

(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 throws doubt on their intention professed by the principal documentation ?

(f) What is the conduct of the parties ? How transparent has it been ?

(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 its working ?”

29. When the said factors are applied to the case on hand, as held by us earlier, a reading of the sale-cum-lease back agreement along with the subsequent ratification by the Electricity Board discloses that the parties had real intention to pass the property in the plant and machinery to the assessee. As far as the identification of such plant and equipment was concerned, as noted by us earlier, along with the SLB transaction agreement, the relevant invoices were annexed, in which the details of such assets transferred and the locations were duly found mentioned. As far as the valuation was concerned, since barring two of the invoices the rest of the invoices were all of the month of January, 2001, and being brand new equipment covered by the invoices, the credibility of which cannot be easily doubted, it will have to be held that there was a reasonable valuation of those assets.

30. As far as the terms of the sale-cum-lease back agreement are concerned, merely because the agreement provided for the deduction of the lease instalments from the current consumption charges by way of priority, it cannot be held that the transaction is not a SLB, but a mere loan transaction. The transaction is in the form of an agreement. The agreement as well as the deed of conveyance explicitly show that it was one by way of sale and, thereafter, lease back. The provision for repayment of the lease amount by way of instalments from the current consumption charges is one mode of repayment in order to ensure that there is no default in paying the instalments. We do not find any flaw in such a provision made in the agreement for repayment. The guarantee offered by the State Government in addition to such a provision by itself cannot be equated to an escrow account. The guarantee offered by the State Government was only in addition to the repayment of lease amount to be made without any default. It is not quite uncommon to seek for such a guarantee in leasing business. So long as the terms of the agreement are not in violation of any statutory provision, there is no scope to hold that the transaction by itself cannot be held to be a make-believe affair or a farce in order to reject the agreement. Therefore, in respect of that test also, the appellant should succeed.

31. As far as the documentation or the correspondence or the understanding between the appellant and the Electricity Board is concerned, no situation in the transaction was pointed out by the Department to doubt the intention of the parties. Merely because the assets were all eligible for 100 per cent. depreciation, it cannot be held that the entire transaction would become doubtful. So long as the sale-cum-lease back agreement was real as between the parties and the transaction was carried out in accordance with law, in the absence of any flaw in the said agreement, we are not able to doubt the whole transaction.

32. As far as the conduct of the parties is concerned, there were no clandestine dealings involved. Every correspondence between the parties was disclosed and placed before the Assessing Officer. Therefore, it cannot be held that there was any suppression of facts or mala fide intention of the parties in order to come to the conclusion that the SLB was not genuine. It is true that the lease back agreement was between the appellant and a public utility service organisation, viz., the Electricity Board. Going by the nature of the transaction, the very fact that the sale was accepted as between the appellant and the respondent-Electricity Board and after the settlement of the lease amount, the appellant would continue to retain its ownership in no uncertain terms stipulated in the agreement, and when such a transaction was not against law, there was no reason to doubt the transaction.

33. Therefore, even while testing the SLB agreements involved in this case on the touchstone of the several factors enumerated by the Special Tribunal in Mid East Portfolio Management Ltd. (supra), we do not find any scope to doubt the transaction in order to hold that it was a sham or nominal transaction and lacked in bona fides.

34. As far as the four other leases with M/s. Kedia Distilleries, Prakash Industries Ltd., Prestige Corporation Ltd. and Suckchain Cements Ltd. are concerned, we fully concur with the view of the Commissioner of Income-tax (Appeals) that the appellant was not able to collect any lease rent and was also not able to take possession of those assets, but since the assets continued to remain with the lessors, viz., the appellant, it will have to be presumed that the equipment were used in the business of the appellant. Consequently, the appellant was entitled for the depreciation of Rs. 51,46,787.

35. For all the above stated reasons, we are convinced that the appellant is entitled to succeed. The substantial questions of law framed for consideration in both the appeals are answered in favour of the assessee-appellant and the appeals are accordingly allowed. The impugned order of the Income-tax Appellate Tribunal as well as that of the Assessing Officer is set aside and the order of the Commissioner of Income-tax (Appeals) stands restored. Consequently, the connected miscellaneous petitions in both the appeals are closed.

[Citation : 356 ITR 128]