CIT vs. High Energy Batteries (India) Ltd (Madras High Court)

Sale & Lease Back transactions are not “sham” transactions

The assessee purchased an igni-fluid boiler from its sister concern and on the same day leased it back. The AO & CIT(A) relied on McDowell 154 ITR 148 and held the sale and lease back arrangement to be a sham & camouflage for a loan by the assessee to the sister concern and rejected the assessee’s claim for depreciation. However, the Tribunal allowed the claim on the ground that the transaction was not a “sham”. On appeal by the department, HELD dismissing the appeal:

(i) Though the machinery was embedded and was in possession of the seller, the assessee took constructive delivery of the machinery. As the law recognises constructive delivery as an acceptable mode of delivery and possession, physical possession is not necessary. Thus there is no material on record to show that the sale was a sham transaction and so its genuineness cannot be questioned. As regards the lease, the fact that some part of the funding came from Wipro Finance & that the lessee paid directly to Wipro in satisfaction of the assessee’s obligation does not make the agreement a sham because it is a matter of pure commercial understanding between the parties as to the modalities of lease rental payment. Given the freedom to enter into agreements with parties and guided by commercial considerations, even to invoke the theory of tax evasion, the Revenue must have sufficient material to draw an inference of what had been shown as an understanding on an agreement between the parties, is not, in fact, so.

(ii) In Vodafone International Holdings 341 ITR 1 (SC), McDowell was considered extensively and it was held that there is no conflict between McDowell and Azadi Bachao Andolan 263 ITR 706 (SC) & Mathuram Agarwal 8 SCC 667. It was pointed out that the task of the Revenue/Court is to ascertain the legal nature of the transaction and while doing so, it has to look at the entire transaction as a whole and not to adopt a dissecting approach. It was pointed out that “the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the “look at” test to ascertain its true legal nature. Genuine strategic tax planning has not been abandoned by any decision of the English courts till date.” It was held that while colourable devices cannot be a part of tax planning, it cannot be said that all tax planning is illegal/ impermissible. Applying this ratio, the mere fact that what had been purchased had been leased out to the vendor or that vendor had undertaken to pay the hire charges on behalf of the assessee to the hire purchase company does not per se lead to a conclusion that the transaction is a sham one.