CIT vs. Cosmo Films Ltd (Delhi High Court)

Despite Tax Avoidance, 100% Depreciation on Sale & Lease Back Allowable

The assessee purchased equipment from the Haryana State Electricity Board (“HSEB”) which was already installed at the Board’s Thermal Power Station at Faridabad and immediately leased the equipment back to the HSEB. The assessee claimed 100% depreciation on the said equipment. The AO relied on McDowell 154 ITR 148 (SC) and disallowed depreciation on the ground that the transaction was not one of purchase and lease but was a pure financial and loan transaction. However, the CIT(A) & Tribunal upheld the claim on the ground that it was a genuine transaction of purchase and lease back. The department filed an appeal before the High Court where it relied on Asea Brown Boveri Ltd v. Industrial Finance Corporation of India AIR 2005 SC 17 and claimed that as risks and rewards incident to the ownership of an asset were transferred to the lessee, the transaction was a loan. HELD dismissing the appeal:

(i) The real intention of the parties in entering into the sale and lease agreement has to be gathered from the words in the agreement in a tangible and in an objective manner and not upon a hypothetical assessment of the supposed motive of the assessee to avoid tax.The lease agreement and invoice show that the ownership of the equipment was that of the assessee. There was a transfer of title. The fact that the transaction was entered into by HSEB in order to raise finance for its day-to-day needs and that HSEB decided to go in for tapping the system of sale and lease back assets as a mode of raising finance at a lower cost does not bind the assessee. HSEB’s intention in going in for the transaction cannot be transposed onto the assessee (Industrial Development Corporation of Orissa 268 ITR 130 (Ori), Rajasthan State Electricity Board 204 CTR 415 (Raj) and Gujarat Gas Company 308 ITR 243 (Guj) followed);

(ii) In order to deny the claim of depreciation, it would have to be held that the transaction was not genuine and that the same was a subterfuge. Merely because an assessee gets a commercial advantage because of the factoring in of a tax benefit, it cannot be said that the transaction is not genuine. There is no finding or evidence to indicate that the transaction was not genuine. The observations of Chinappa Reddy, J in McDowell is not good law in view of UOI vs. Azadi Bachao Andolan 263 ITR 706 (SC) where it was held that “tax planning may be legitimate provided it is within the framework of law”;

(iii) The observations in Asea Brown Boveri Ltd with regard to the nature of a financial lease are not of much use to the revenue in view of the factual backdrop that the transaction has been found to be genuine. Once it is established that the ownership of the equipment is that of the assessee, it is clear that the assessee is entitled to claim depreciation.