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

DATE: (Date of pronouncement)
DATE: May 25, 2012 (Date of publication)

Click here to download the judgement (High_Energy_Batteries_sale_lease_back_sham_vodafone.pdf)

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.

See also Cosmo Films Ltd 338 ITR 266 (Del) & Punjab State Electricity Board 320 ITR 469 (P&H). Contrast with The Instalment Supply Ltd (Del) & IndusInd Bank (ITAT Mum)(SB)

2 comments on “CIT vs. High Energy Batteries (India) Ltd (Madras High Court)
  1. vswami says:

    “…..there was nothing on record to indicate that the Assessing Officer had consciously applied his mind on the issue of allowability of depreciation and consciously took a decision to allow depreciation on the same.”

    Even adopting a basically common sense approach, the quoted observation in para 5 is patently bereft of any ‘logic’, much less sane and sound reasoning. For, after all, any provision of law must be taken to be founded on ‘logic’. It is commonly believed that, while common sense is the foundation of logic, logic is the corner stone of law.
    The assesse has admittedly made a proper ‘disclosure’;asc such, the very fact that in the original assessment the AO saw no reason for not rejecting but allowed the claim under issue could only be regarded to have done so after consciously applying his mind, as was expected of him. The fallacy in the observation is its implied suggrestion -besides making a ‘disclosure’ , assessee must also tell/caution the AO that he should not allow the claim without consciously applying his mind.
    What is all the more puzzling is that even any such non-issue continues to travel, under the pretext of ‘question of law’ , to the stage of high court.
    So far as reliance on SC in voda is concerned, it is rather vexing to observe that doing so by either side has lately become almost an obsession; a matter of simple routine, with no rhyme or reason.
    One shudders to think, though may be to the lawyers’ delight, of what possibly is in store if and when the DTC Bill comes to be enacted.

  2. vswami says:

    In line 9 from bottom, to read- reason for rejecting..

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