Hathway Investments Pvt. Ltd vs. ACIT (ITAT Mumbai)
S. 32: A finance lease designed as a sale-and-lease back has to be treated as a sham transaction
The
assessee, an investment company, bought electric meters from the
Gujarat State Electricity Board (GSEB) which were leased back to GSEB
simultaneously. The assessee claimed 100% depreciation on the purchase
cost of the meters. The AO and CIT(A) rejected the claim on the ground
that the circumstances
like no physical possession of the meters given
etc showed that the transaction of `sale and lease-back' was a "sham"
and that it was one merely of giving finance and that the assets were
held as a security for the finance given. On appeal by the assessee to
the Tribunal HELD:
A distinction between an `operating lease' and a
`finance lease' has been made by the Special Bench in IndusInd Bank 135
ITD 165 (Mum) (SB) on the basis of which it can be said that a `finance
lease' is a `sale' which is given the colour of a `lease' by the parties
for their mutual benefit and to avoid tax. In such transactions, it has
to be seen whether the sale transaction is a real transaction or a sham
transaction with the object of enabling the alleged purchaser to claim
himself as the owner of the goods, which are further claimed to be
leased back to the original owner of the goods. In a sham transaction of
sale and lease back the ownership of the goods is not transferred to
the alleged lessor, but is shown to be done, so as to enable the
purchaser to claim ownership for the goods for the purpose of tax
relief. On facts, the `sale and lease back' transaction is a sham
transaction done with the object to facilitate the benefits of
depreciation to a person who otherwise is not eligible to claim the
same. The intention of the parties was not that of sale or lease but was
a loan transaction. The rates of interest/ rental have been fixed
taking into consideration that the equipments are eligible for 100%
depreciation and it is provided that if the claim of depreciation is
changed, the rental in the shape of interest will accordingly change.
Such clauses cannot be a part of any lease agreement but finance
agreement only because in a normal lease agreement, the lessee is not
concerned as to what benefits are available to the owner/ lessor under
the Income-tax Act. The contention that as the transaction is with a
State Government undertaking, it would be highly improper to impute any
collusiveness or colourable nature of the transaction is misconceived.
The argument that there is no bar for the assessee for making tax
planning so as to reduce its taxes, provided it is within the framework
of the law, is also not acceptable as u/s 23 of the Indian Contract Act,
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. Engaging in sham transactions with the object of reducing tax
liability cannot be said to be a case of tax avoidance but is one of tax
evasion (ICDS 350 ITR 527 (SC), IndusInd Bank 135 ITD 165 (Mum)(SB)
& Development Credit Bank referred)
Contrast with ICDS 350 ITR
527 (SC) where it was held that even a "financier" satisfies the
"ownership" & "user" test for depreciation and with Development
Credit Bank (ITAT Mumbai) (the AM was common) where it was held that
IndusInd Bank 135 ITD 165 (Mum)(SB) is no longer good law