S. 32: Banks Cannot Enter Into Operational Leases: ITAT Mumbai

State Bank of India vs. DCIT (ITAT
Mumbai)<http://itatonline.org/archives/?p=7182>

*S. 32: Lease transactions by Banks are in the nature of loans/ advances.
Transaction of sale & lease back of railway assets cannot be treated as
genuine*

The assessee, a Bank, entered into a sale and lease back transaction with
Konkan Railway Corporation pursuant to which it bought assets like railway
tracks, rails, sleepers etc for a consideration of Rs. 25 crore and leased
it back for a period of 84 months for a monthly lease rental. The AO &
CIT(A) disallowed the claim for depreciation on the ground that the sale
and lease back transaction was in the nature of a financial transaction and
that it was given the shape of a lease transaction only in order to enable
the assessee-bank to claim depreciation and reduce its taxable income. On
appeal by the assessee to the Tribunal HELD dismissing the appeal:

The real object of the entering into the sale and lease back transaction so
far as Konkan Railway is concerned is to raise funds. The transaction of
sale of the asset to the assessee bank and its lease back to Konkan Railway
cannot be separated. It was not possible for Konkan Railway to sell out the
railway system. Thus, the sale transaction was merely on paper and to
facilitate the financial arrangement by the assessee to Konkan Railway
without involving any real intention of transfer of the assets. The terms
of the lease agreement are only to secure the interest of the bank till the
recovery of the full amount along with the interest. The assessee cannot
exercise the real and actual ownership over the asset keeping in view the
facts and circumstances and nature of the asset in question. Further, under
the Banking Regulation Act, 1949 read with RBI circular dated 19.2.1994,
banking companies can undertake the activities of equipment leasing but
these are required to be treated on par with loans and advances. Therefore,
the activity of equipment leasing permitted by the RBI is only in the
nature of finance lease. The terms and conditions specified by the RBI for
income recognition of lease transactions are also on par with the manner in
which a loan transaction is treated. In view of the said circular, there is
no scope for treating the instant lease agreement as that of an operating
lease (*IndusInd
Bank<http://itatonline.org/archives/index.php/indusind-bank-ltd-vs-acit-itat-mumbai-special-bench-difference-between-finance-lease-operating-lease-explained/>
* 135 ITD 165 (Mum) (SB) followed;
*ICDS<http://itatonline.org/archives/index.php/i-c-d-s-ltd-vs-cit-supreme-court-s-32-a-financier-satisfies-the-ownership-user-test-for-depreciation/>
* 350 ITR 527 (SC) distinguished on the basis that the lease there was not
by a Bank but by a NBFC).

See also *Hathway
Investments<http://itatonline.org/archives/index.php/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/>
* (ITAT Mumbai) where a similar view was taken. But also see *Development
Credit Bank<http://itatonline.org/archives/index.php/development-credit-bank-ltd-vs-dcit-itat-mumbai-s-32-special-bench-verdicts-on-sale-lease-back-lease-finance-are-not-good-law/>
* (ITAT Mum) where a contrary view was taken and it was held that *IndusInd
Bank<http://itatonline.org/archives/index.php/indusind-bank-ltd-vs-acit-itat-mumbai-special-bench-difference-between-finance-lease-operating-lease-explained/>
* 135 ITD 165 (Mum)(SB) is no longer good law following *Cosmo
Films<http://itatonline.org/archives/index.php/cit-vs-cosmo-films-ltd-delhi-high-court-despite-tax-avoidance-100-depreciation-on-sale-lease-back-allowable/>
* 338 ITR 266 (Del)


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