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
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
Contention of Revenue
HELD by HIGH COURT
The Court discussed following points:
Was there a ‘sale’ of leasehold rights?
This brings to question whether a transaction pertaining to land and building or of plant and machinery could be treated as sale of either the leasehold rights in respect of the land or the sale of the plant and machinery itself? There seems to be a contradiction in the order of the ITAT where in para 46 it states that in the present case the land is not a depreciable asset and that as far as the building and plant and machinery were concerned, the ownership thereof remained in the Assessee and, therefore, it could not be said that either the asset itself have been sold or the block of assets ceased to be in existence.” The ITAT appears to acknowledge that the ownership of the assets continued with the Assessee. However, the ITAT proceeded to hold that the “leasehold rights” and “not the asset itself” was sold. It is not understood how the ITAT has arrived at the concept of sale of leasehold rights because a sale connotes absolute transfer of rights with no reversion of any part thereof to the original owner. There has to be an extinguishment of ownership rights in order that a transaction can be said to be a ‘sale’. Here, as noted earlier, the lessee does not even have the right of sub-letting the facilities. 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.
What appears to have weighed with the ITAT is the valuation of the business as a going concern and the said valuation forming the basis for determining the consideration for the grant of the lease and fixing of the yearly lease rentals. The explanation offered by the Assessee that the fact that it was not going to be in control of the assets or use them for its business, that there was going to be a loss of business opportunity which, therefore, had to be compensated and this weighed with the CAs in fixing the valuation appears to be a plausible one. While there is a non-compete in the agreement between the TEL and SGL, that by itself does not lead to the conclusion that the transaction of lease was in fact one of sale.
In any event this whole hypothesis stands disproved by the fact that on the expiry of the lease period, the land, building and plant and machinery reverted to the Assessee. The land and the building were sold by the Assessee to an unrelated third party. The said transactions formed the subject matter of the Assessment order for the AY 2006-07. The order of the CIT (A) dated 30th August 2011 has been perused by the Court. It holds that the sale of the land by the Assessee to an unrelated third party, M/s. Blossom Automotives, for a consideration of Rs. 4.01 crores took place on 8th September 2005 and after accepting the Assessee’s valuation of the said land the CIT (A) has directed that the Assessee be taxed on long term capital gains arising out of the said sale of the land. The said order also shows that for the building, which was also sold as part of the sale of land, the Assessee has continued to claim depreciation till the date of such sale. The fact that the Assessee continued to claim depreciation on the plant and machinery and building is another indication that the Assessee continued to assert ownership of the assets in question during the relevant AYs. The above order of the CIT (A) forms part of the records of the Department and has naturally not been disputed by it. Although this development could not have been anticipated at the time the AO or the CIT (A) decided the issue in the present case, it completely vindicates the Assessee’s stand in relation to the nature of the transaction forming the subject matter of the lease agreement.
Consequently, there are several factors in favour of the Assessee that persuade the Court to hold, with reference to question that the ITAT was not right in holding that the transaction of lease of the facilities was a sale of leasehold rights and that there was in any event a sale of the plant and machinery. The Court answers question in favour of the Assessee and against the Revenue.
Was there a capital gain under Section 45?
The last question that requires to be addressed whether there could be said to be any capital gains under Section 45 of the Act? In light of the above discussion, the question will have to be answered in favour of the Assessee and against the Revenue. The Court is of the view that the transaction in question was nothing more than a transaction of lease and has been acted upon by the parties as such. This was not a device adopted by the Assessee for tax avoidance.
. The question is accordingly answered in favour of the Assessee and against the Revenue. It is held that the ITAT erred in holding that the transaction in question was chargeable to capital gain under Section 45 . There was no occasion for the ITAT to remand the matter to the AO for re-computation of the capital gains.
The impugned order of the ITAT to the above extent is set aside and the appeal of the Assessee is allowed. The Revenue‟s appeal is dismissed