Sale and Lease Transactions by Banks are Valid and eligible for depreciation

By TG Team Income Tax Judiciary September 18, 2013

TaxGuru Citation: 2013 taxguru.in 1062
Case Name: UTI Bank Limited Vs Assistant Commissioner of Income Tax (ITAT Ahmedabad)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Courts: All ITAT, ITAT Ahmedabad

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It is an undisputed fact that the income from lease has been considered by Assessee as income. It is also an undisputed fact that the AO has considered the lease entered by the Assessee to be a Finance lease to arrive at the conclusion that the assessee is not entitled to depreciation. On identical facts, in the Assessee’s own case for AY 2002-03 (in ITA No. 2572/Ahd/2006 order dated 25.09.2006 the issue has been decided in favor of Assessee by holding as under:

25. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the income from lease has been considered by Assessee as income it is an undisputed fact that the A.O. has considered the lease entered by the Assessee to be a Finance lease to arrive at the conclusion that the Assessee is not entitled to depreciation. We find that the issue of depreciation on leased assets has been decided by Honorable Apex Court in the case of ICDS Ltd (supra). One of the question before the Hon. Supreme Court was “whether the Assessee is entitled to depreciation vehicles finance by it which is neither owned nor used by the Assessee by virtue of the business” the Hon. Supreme Court held as under:

“The provision on depreciation in the Income-tax Act, 1961, reads that the asset must be “owned, wholly or partly, by the assessee and used for the purposes of the business”. Therefore, it imposes a twin requirement of “ownership” and “usage for business” for a successful claim under section 32 of the Act.

The section requires that the assessee must use the asset for the “purpose, of business”. It does not mandate usage of the asset by the assessee itself. As long as the asset is utilized for the purpose of business of the assessee, the requirement of section 32 will stand satisfied, notwithstanding non-usage of the asset itself by the assessee.

The definitions of “ownership” essentially make ownership a function of legal right or title against the rest of the world. However, it is “nomen genera¬lissimum”, and its meaning is to be gathered from the connection in which it is used, and from the subject-matter to which it is applied. As long as the assessee has a right to retain the legal title against the rest of the world, it would be the owner of the asset in the eyes of law.

Held, affirming the decision of the Tribunal, (i) that the assessee was a leasing company which leased out the trucks that it purchased. Therefore, on a combined reading of section 2(13) and (24) of the Act the income derived from leasing of the trucks would be business income, or income derived in the course of business, and had been so assessed. Hence, it fulfilled the requirement of section 32 of the Act, that the asset must be used in the course of business. The assessee did use the vehicles in the course of its leasing business. The fact that the trucks themselves were not used by the assessee was irrelevant for the purpose of the section.

INCOME TAX APPELLATE TRIBUNAL “ A ” BENCH, AHMEDABAD

(BEFORE SHRI G.C.GUPTA VICE PRESIDENT & SHRI ANIL CHATURVEDI, A.M.)

I.T. A. Nos. 2572/AHD/2006, 4386,4388/AHD/2007 & 790/AHD/2012

(Assessment Year: 2004-05,2002-03,2004-05 & 07-08)

UTI Bank Limited

Vs.

The ACIT Circle 8,Ahmedabad

ITA Nos. 2737/AHD/2006, 236 & 238/AHD/2008

(Assessment Years: 2004-05, 2002-03 & 2004-05)

ACIT Vs. UTI Bank Limited

ORDER

Date of hearing : 23-08-2013

Date of Pronouncement : 10-09-2013

PER SHRI ANIL CHATURVEDI,A.M.

1. These are seven appeals out of which four appeals are filed by Assessee namely ITA NO. 2572/Ahd/2006 (for A.Y. 2004-05), ITA No. 4386/Ahd/2007 (for A.Y. 2002-03), ITA No. 4388/Ahd/2007 (for A.Y. 2004-05) & ITA No. 790/Ahd/201 2 (for A.Y. 2007-08) against the order of CIT(A) dated 25.09.2006, 05.10.2007, 05.10.2007 & 05.01.2012 respectively. The three appeals of Revenue namely in ITA No. 2737/Ahd/2006 (for A.Y. 2004-05), ITA No. 236/Ahd/2008 (for A.Y. 2004-05) & ITA No. 239/Ahd/2012 (for A.Y. 2007-08) are against the order of CIT(A) dated 25.09.2006, 05.10,2007 & 5.10.2007 respectively. We proceed to dispose of all these appeals by way of consolidated order for the sake of convenience.

We first take up Assessee’s appeal (in ITA No. 2572/Ahd/2006 for AY 2004-05)

2. The facts as culled out from the order of lower authorities are as under:

3. Assessee is a company engaged in the business of banking. It filed its return of income for A.Y. 2004-05 declaring income of Rs. 465,59,74,060/-. The case was selected for scrutiny and thereafter the assessment was framed u/s 143(3) vide order dated 31.01.2006 and the total income was determined at Rs. 664,36,99,320/-. Aggrieved by the order of Assessing Officer (AO), Assessee carried the matter before CIT(A). CIT(A) vide order dated 25.09.2006 granted partial relief to the Assessee. Aggrieved by the aforesaid order of CIT(A) both the Assessee as well as Revenue are in appeal before us.

Ground no 1 and its sub grounds are with respect to depreciation on windmills.

4. During the course of assessment proceedings, AO noticed that Assessee had shown purchase of windmills amounting to Rs. 27,54,00,000/- and the same was shown as put to use on 19.03.2004 and Assessee had also claimed depreciation at 80% amounting to Rs. 11,01,60,000/-. The Assessee was asked to justify its claim. The submissions made by the Assessee was not found acceptable to the AO as he was of the view that the Assessee is a Banking institution governed by Banking Regulation Act, 1949 and it cannot engage in any other business other than banking. The AO was further of the view that the depreciation at higher rate is available to an Assessee who is engaged in generation and distribution of electricity and since the assessee was a banking company, it cannot said to be engaged in the generation of electricity. He further noted that the lease rentals were fixed on the basis of interest on advances and other charges receivable by the Assessee as a financier but the same was not co-related to the projected income on the capacity of each wind energy generator, the Assessee was not entitled for surplus income on excess generation of power, Assessee was not to suffer any loss owing to lesser production or any other contingencies, the return of the Assessee on financing was granted by taking Interest Free Deposit, Assessee was not taking the responsibility of labour, repairs, taxes etc in running of the project. He also noted that the normal life of to wind energy generator was 20 years and the lease period adopted by the Assessee was only 10 years. He also disallowed the claim of the Assessee for the reason that the purchase of wind energy generators was in its name without land and power purchase agreement in its name with the concerned Electricity Board. He accordingly held that income from operation is shown as lease rental and not as income from generation of electricity. He therefore treated the entire transaction as financing and therefore disallowed the claim of depreciation of Rs. 11,01,60,000/-. Aggrieved by the order of AO, Assessee carried the matter before CIT(A). CIT(A) noted that the facts in the present year were similar to assessment year 2002-03 and thereafter upheld the order of AO by holding as under:-

3.4 Facts of the case for this assessment year is very similar to facts for A. Y. 02-03. The WEGs in question were manufactured by NEPC Ltd. The appellant has advanced money to the said company, but unable to recover the same. In that year for recovering the amount, the lease arrangement was done through WESCARE INDIA LTD., whereas in this year the same has been entered with new developer Sundaram Clayton Ltd.. The main objective of the appellant was only to recover outstanding dues from NEPC Ltd., and for this purpose M/s. WESCARE INDIA LTD., was assured a commission of Rs. 2,00,000/- per WEG. However, due to backing out of Sundaram Clayton Ltd., there was delay in completion of the project and hence the payment of commission was resented. On similar facts in A. Y. 2002-03 and on similar submission made by the assessee in that year, the issue was decided by CIT(A) vide order dt: 18/11/2005. The main findings were as under:-

“iv) From the contents of the tripartite agreement dt:22-9-2000, the statement of Shri V.R. Raghunathan and papers found in survey which are discussed in detail by the AO in the asst. order and in brief reproduced in para 7.1 above, it is evident that actually M/s. Wescare India Ltd.(WIL) approached UT1 Bank for financing their business in which tax saving benefit was to be passed on to UTI Bank. Thereafter, the tripartite agreement was signed. The tripartite lease agreement suggests that the payment for assets has been made by UTI Bank in the capacity of financier and not real owner. The lessee and W1L is required to suffer the losses arising out of purchase of assets and they are only amenable to all risks attached to purchase of assets.”

“v) The appellant is engaged in banking business under the Banking Regulations Act. The appellant cannot engaged in generation of electricity, as it is not permissible under the Banking Regulations Act. Hence, the appellant was not permitted to purchase Windmill for generation of power in the normal course of business in the first instant.”

“vi) Further, the UTI was not concerned with the operational aspect of equipment or loss or damages to the equipment. Here only W1L has taken all responsibilities for that. Even the land did not belong to the UTI Bank Ltd, but belong to WIL.”

“vii) The contention of assessee that in case of wind mills stop operation due to agitation or due to change in the wind velocity resulting in short generation of power the revenue would be drastically and critically affected is contrary to the evidence. WIL has agreed to pay for the shortage vide clause 6A(i) proviso. Non receipt of deposit from WIL and non action for the lapse is a serious breach of the agreement itself.”

The assessee has not followed the agreement in its true meaning as the assessee has not taken any action for non-observance of various conditions in the agreement.

Instead of taking action for the default in deposit by WIL as a violation of the agreement, the assessee is turning the same as a shield “that deposit is not received”.

“The owning of the WEG without the requisite land with abundant velocity of wind is of scrap value. This may be the reason for the alleged lessee B1L belonging to TVS group did not go for the purchase of the wind mills. On the contrary by joining in the agreement without any investment and/or responsibility BIL is getting the power at 60 Ps. less per unit.”

“viii) The decision in the case of Prakash Ind. Ltd. is not relevant for deciding the issue whether the assessee is entitled to depreciation or not. In that case the questions involved was of ownership between the company and bank. In the said lease agreement there was a stipulation that after the expiry of the lease period the machinery was to be returned to the Bank. The dispute was not under the Income tax Act and therefore not applicable. The decision of the ITA T in the case of Birla Chemicals and Traders (P) Ltd. is also not relevant for the issue at hand.”

“ix) Therefore, in view of the discussions made above and the finding brought out on record by the A. O. and discussed in details in the asst. order, which are produced above in earlier paras, it is evident that this was not a lease transaction, but only finance transaction. Hence, the depreciation is not allowable.”

“x) As per the decision of Hon. Supreme Court in the Case of McDowell & Co. Vs. CIT., 154 ITR 148, to ascertain the real nature of transaction, the veil has to be lifted. As per the decision of Hon. Karnataka High Court in the case of Avasarala Automation Ltd. Vs. JCIT 266 ITR 178, it has been held that while it is permissible for an assessee to have the tax planning, it is not permissible to prepare documents and to give the colour of real transactions on the basis of said documents, which would enable the assessee to evade the payment of tax. When an assessee makes a claim of depreciation on the ground allowed by law, it would always be open to the AO to pierce the veil of transactions put forward and find out as whether the transaction put forward for the purpose of claiming depreciation is genuine transaction or only a make believe, one intended to avoid payment of tax.”

As the facts here are similar in this assessment year also and on considering the facts of the case for this asst. year also as discussed in detail by the A.O. in the asst. order, it is evident that these are in fact loan transaction which are claimed by the appellant as lease transactions. The case laws relied upon by the appellant are not applicable to the facts of the present case. The so called operation of lease transaction is nothing but a colourful device and as per the Supreme Court’s decision in the case of McDowell & Co. Vs. CIT., 154 ITR 148, we have to find out the truth behind the fact and decide the case accordingly.

Therefore, it is held that transaction made was only loan transaction and not genuine lease transaction and the A. O. was justified in disallowing the depreciation and the action of the A. O. is hereby confirmed.”

5. Aggrieved by the order of CIT(A), the Assessee is now in appeal before us.

6. Before us, the learned A.R. at the outset submitted that the issue of depreciation on leased assets has now been settled and decided by Hon. Supreme Court in the case of ICDS Ltd vs. CIT & Anr (2013) 350 ITR 527 (SC). He also submitted the following the aforesaid decision of Hon. Apex Court, the Mumbai Tribunal on identical facts in the case of Development Credit Bank Ltd. vs. DCIT ITA No. 300/Ahd/2001 and 4892/Ahd/2003 has decided the issue in assessee’s favour. The learned A.R. further submitted that the Assessee had entered into lease transaction in the normal course of business as the same was permissible by the Banking Regulation Act. He further submitted that the lease income earned by the Assessee is also disclosed in its Profit and Loss account. He also urged that in Assessee’s own case for earlier assessment year the issue has been decided in its favour. He placed on record the order of the Tribunal. He thus urged that the addition made be the AO be deleted.

7. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the income from lease has been considered by Assessee as income. It is also an undisputed fact that the AO has considered the lease entered by the Assessee to be a Finance lease to arrive at the conclusion that the assessee is not entitled to depreciation. On identical facts, in the Assessee’s own case for AY 2002-03 (in ITA No. 2572/Ahd/2006 order dated 25.09.2006 the issue has been decided in favour of Assessee by holding as under:

26. In the case of Development Credit Bank Ltd. the issue before Mumbai Tribunal was with respect to depreciation on assets given on lease. The Co-ordinate Bench of Tribunal decided the issue in favour of Assessee by holding as under:

“28 We have heard the arguments of both the sides and we are of the view that cross appeals on the issue of allowance of depreciation in the current year have to be decided simultaneously. In so far as disallowance of depreciation on the assets involved in SLB transactions, the issue stands settled in favour of the assessee. From the synopsis filed by the AR, it is seen that the assessee provided the AO with all the information as was asked for, i.e. lease agreements, copies of bills for purchase of assets, inspection reports, copies of insurance cover etc., which, in our considered opinion, was identical circumstance, which was before the Hon’ble Delhi High Court in the case of Cosmo Films (supra), i.e. SLB transactions, revenue authorities applying McDowell’s case and arguing that it is a devise for lowering the tax effect and relying on the Board’s circular (supra), and more importantly, that, that case also pertained to assessment year 1996-97. The Hon’ble Delhi Court took the view that SLB transactions are genuine and cannot be considered to be sham.

29. On appreciation of the records, as produced before us, the decision of Hon’ble Delhi High Court in the case of Cosmo Films Ltd. (supra) has arguments of the assessee on the impugned issue, thereby, impliedly, reversed the ratio in the decisions of Mid East (supra) and Induslnd (supra). We find that tests laid down in Mid East case was primarily to ascertain the genuineness of the transaction entered by the assessee with its lessee, which was done by the CIT(A) in each case.

31. In any case, the issue of SLB transaction and in particular the issue of ownership of asset, also has been laid to rest by the Hon’ble Apex Court in the case of ICDS Ltd. Vs CIT, in CA No. 3286 to 3290 of 2008, wherein the question that was sought to be answered was whether the appellant (assessee) is the owner of the vehicles which are leased out by it to its customers”. The Hon. supreme Court of India, concluded, extracted from para 28, “From a perusal of the lease agreement and other related factors, as discussed above, we are satisfied of the assessee’s ownership of the trucks in question” (para28, page28).

32. Coming to the issue of finance lease, wherein the CIT(A) sustained the dis allowance because the usage of the equipment lease out could not be substantiated. On going through the decision of the jurisdictional High Court of Bombay, we find that the issue now is at rest, in so far as the lessor is concerned, because, while dealing the case of the lessor, i.e. the assessee in the instant case, the asset has left its corridors for being utilized, and in return, rent had been received by the assessee. The Hon. Bombay High Court in the case of Kotak Securities Ltd. has held that what is to be seen is that the asset has been given on lease and the lease rent has been received, given in that case, so far as lessor is concerned, the asset has been used.

34. After having examined all the transactions which have been impugned before us, we are of the opinion that the assessee is entitled to the claim of depreciation under all the three circumstances, i.e. sale lease back, genuineness of transaction and asset having being put to use. We, therefore, allow ground no. 1 the assessee ’s appeal and dismiss both the grounds of the department’s appeal.

27. In view of the aforesaid facts, we are of the view that in view of the decision of H’ble Apex Court in the case of ICDS (supra) and the decision of Mumbai Tribunal in the case of Development Credit Bank Ltd, Assessee is eligible for depreciation and we thus delete the addition made by the Assessing Officer.

Thus this ground of the Assessee is allowed.

9. Since the facts in the year under appeal are identical to that of earlier year, following the decision of the co-ordinate bench in the Assessee’s own case for AY 2002-03, the decision of H’ble Apex Court in the case of ICDS (supra) and the decision of Mumbai Tribunal in the case of Development Credit Bank Ltd, we decide the issue in favor of assessee. Thus this ground of the Assessee is allowed.

Ground No. 2 is with respect to dis allowance under 14A.

8. AO noticed that Assessee has claimed interest on tax free bonds and dividend on shares and mutual funds amounting to Rs. 24,76,97,844/- as exempt income. The assessee had also made suo motto dis allowance under Section 14A of Rs. 2,20,000,000/-. He further noted that on identical facts in A.Y. 2003-04, the claim of Assessee was rejected. He accordingly worked out the disallowance of interest and other expenditure by working out the disallowance of Rs. 30.78 Cr. by holding as under:

9. Aggrieved by the order of AO, Assessee carried the matter before CIT(A).

CIT(A) granted partial relief to the Assessee by holding as under: