The Delhi High Court in case of Teletube Electronics Ltd Vs CIT held that there has to be an extinguishment of ownership rights in order that a Lease transaction can be said to be a ‘sale’. The leasehold right is only for a period of ten years and at the end of that period the leased facilities revert to the owner. Consequently, the Court is unable to agree with the conclusion of the ITAT that in the present case there was a ‘sale” of leasehold rights by virtue of the lease agreement in question.
Facts of the case
- The Assessee had two divisions i.e. a picture tube and a glass bulb division for manufacturing glass shells/bulbs for domestic use. The said glass bulb division, which had three lines i.e. Line-I, Line-II and Line-III, became operational during the AY 1984-85. The land on which bulb division was situated was given on lease to the Assessee by the Rajasthan Industrial Development and Investment Corporation Limited (RIICO) under a lease deed.
- All three lines of the glass bulb division were leased by the Assessee to Samcor Glass Limited, Kota („SGL‟), a joint venture of Samtel India Limited („SIL‟) and Corning Inc. of USA („Corning‟). SGL was in the process of setting up manufacturing facilities for “glass panels, funnels and neck” which constitute the basic components for manufacture of black and white television picture tubes. A lease agreement was entered into between the Assessee and the SGL whereby the ”facilities” defined as the “plant and machinery and land and buildings” of the glass bulb division at Bhiwadi, Rajasthan was leased to SGL for a period of 10 years with effect from that date.
- The AO issued a show cause notice requiring the Assessee to explain why the lease agreement should not be treated as a transaction in the nature of sale of the movable/depreciable assets and capital gain not be charged under Section 45 read with Section 50. The Assessee replied on 25th March 1997 contending that the lease could not be treated as “transfer”. The AO rejected the plea of assesse and held the lease agreement was in effect a transfer within the meaning of Section 45 read with Section 2 (47).
- A survey carried out by the Income Tax Department (ITD) on 28th January 1997 showed that the Assessee had not parted with possession of either the land or the building and had only shifted the plant and machinery (barring a few items) to the plant of SGL at Kota. There was no evidence of any use of the land and building by the SGL. The use by it of the land and building in Bhiwadi on a few occasions was like the use by any other group company of SGL. This made it appear that the land and building was in fact not leased.
HELD by CIT(A)
The CIT (A) affirmed the factual findings of the AO and concluded that the fact of the use of the Bhiwadi premises by other parties; the shifting of Line-II before the date of the lease; the prohibition on the Appellant carrying on a competing business and other terms of the lease made the transaction of the lease a colourable device.
HELD by ITAT
