Tuesday, December 3, 2013

No depreciations to owner on assets given on lease if loan transaction was disguised as sale and lease back transaction

Assessee was not entitled to claim depreciation on asset which was purchased from Gujarat State Electricity Board and same was immediately leased back to it, since the transaction was a sham transaction


a) The assessee had purchased energy meters of different makes for a consideration of Rs. 4.99 crores from Gujarat State Electricity Board [GEB] and these meters (assets) were then immediately leased back to GEB vide a lease agreement;

b) It accordingly claimed depreciation on the said meters under proviso to section 32(1). The Assessing Officer (‘AO’) disallowed the depreciation claim of assessee by holding that the alleged lease transaction was in reality a transaction of finance. On appeal, the CIT (A) upheld the order of AO.

The Tribunal held in favour of revenue as under:

1) The assessee’s contention that transaction was with a State Government and it would be highly improper to impute any collusiveness or colourable nature of the transaction without any concrete evidence was misconceived;

2) The facts on the file itself spoke that the transaction in question was a colourable device with the twin purposes of financing the GEB and at the same time making such an arrangement to enable the financer to claim depreciation on the assets and in lieu thereof to pay reduced rate of interest to the financer in proportion to the value of benefit availed by the financer, for which it otherwise was not entitled to;

3) A perusal of section 23 of the Indian Contract Act, 1872 reveals beyond doubt that even if the consideration or object of an agreement may not be expressly forbidden by law, but if it is of such a nature that, if permitted, it would defeat the provisions of law, the same will not be lawful;

4) It is always the goods or the assets itself which are the primary subject of a valid transfer, not the incidental benefits, which automatically pass on to the transferee with the transferred asset;

5) In the case in hand, only the incidental tax benefits were intended to be transferred without any intention to transfer the asset itself. Thus, whole of the effort had been made to transfer the right to claim depreciation on the assets to the assessee for the purpose of the Income-tax Act, but not the assets itself. Therefore, the Assessing Officer had rightly disallowed depreciation on electric meters - Hathway Investments (P.) Ltd. v. ACIT [2013] 38 taxmann.com 389 (Mumbai - Trib.)