Commissioner Of Income-Tax vs M/S Cosmo Films Limited
2011 Latest Caselaw 3379 Del

           THE HIGH COURT OF DELHI AT NEW DELHI
%                                  Judgment delivered on: 18.07.2011

+            ITA 1404/2008

COMMISSIONER OF INCOME-TAX                                ... Appellant


                                    Versus


M/S COSMO FILMS LIMITED                                   ... Respondent

Advocates who appeared in this case:

For the Appellant     : Ms Suruchi Aggarwal
For the Respondent    : Mr Ajay Vohra with Ms Kavita Jha, Mr Sriram Krishna
                        and Ms Akansha Aggarwal

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE V.K. JAIN

1. Whether Reporters of local papers may be allowed to see the judgment? Yes

2. To be referred to the Reporter or not? Yes

3. Whether the judgment should be reported in Digest? Yes

BADAR DURREZ AHMED, J

1. This appeal under Section 260-A of the Income-tax Act, 1961

(hereinafter referred to as „the said Act‟) has been preferred by the

revenue being aggrieved by the judgment and / or order dated 22.02.2008

passed by the Income-tax Appellate Tribunal in revenue‟s appeal being

ITA No.4516/Del/2003 pertaining to the assessment year 1996-97,

inasmuch as the Income-tax Appellate Tribunal had dismissed the appeal

of the revenue on the ground that the Commissioner of Income-tax

(Appeals) had erred in deleting the addition of ` 2,30,40,000/- made on

account of depreciation. The Assessing Officer by virtue of his

assessment order dated 29.03.2001 had disallowed the claim of the

respondent / assessee with regard to 100% depreciation on the equipment

purchased by it from the Haryana State Electricity Board (hereinafter

referred to as „HSEB‟), which was already installed at the said Board‟s

Thermal Power Station at Faridabad and immediately thereupon leasing

the said equipment back to the HSEB on certain terms and conditions.

The assessing officer had placed reliance on the Supreme Court decision

in the case of McDowell and Company Limited v. Commercial Tax

Officer: 1985 (154) ITR 148. The Assessing Officer came to the

conclusion that the transaction was not a case of purchase and lease back

of equipment, but was a pure financial and loan transaction and,

accordingly, the claim of 100% depreciation to the tune of `

2,30,40,000/- claimed by the respondent / assessee was disallowed. The

Commissioner of Income-tax (Appeals) by virtue of his order dated

31.07.2003, placed reliance on the decision of the Income-tax Appellate

Tribunal in the case of Consortium Finance Limited v. JCITD: 82 ITD

808 and held that a genuine transaction of purchase and lease back had

taken place and that, as the assessee was carrying on the business of

leasing also, apart from other businesses, it was entitled to the claim of

depreciation and consequently the appeal was allowed insofar as the

claim of depreciation was concerned.

2. As indicated above, the revenue, being aggrieved by the order

passed by the Commissioner of Income-tax (Appeals), New Delhi filed

an appeal (ITA No.4516/Del/2003) on the following grounds:-

"On the facts and in circumstances of the case the learned CIT (A) has erred in deleting the addition of Rs 2,30,40,000/- made on account of depreciation."

3. The Income-tax Appellate Tribunal by virtue of the impugned

order dated 22.02.2008 dismissed the revenue‟s appeal after observing

that the departmental representative of the revenue could not bring to the

notice of the Tribunal any fact from which the tribunal could come to the

conclusion that the sale and lease back transaction between the assessee

and the HSEB was not a genuine transaction. Relying upon the decision

of the High Court of Bombay in the case of Commissioner of Income-

tax v. Zuari Finance Ltd and Another: 271 ITR 538 and on the decision

of the Rajasthan High Court in the case of Commissioner of Income-tax

v. Rajasthan State Electricity Board: 2006 (204) CTR (Raj) 415, the

Tribunal held that in similar circumstances the said High Courts had

allowed the claim of depreciation in the cases of sale and lease back

transactions involving the State Electricity Boards. The Tribunal also

took note of the fact that the decision of the Karnataka High Court in the

case of Avasarala Automation Limited v. The Joint Commissioner of

Income Tax: 266 ITR 178 (Kar), which had been relied upon by the

department, had been considered in the Bombay High Court decision as

well as in the decision rendered by the Rajasthan High Court and had

been distinguished by the said High Courts.

4. The present appeal was admitted on 06.07.2009, when the

following question of law had been framed for adjudication:-

"Whether the Tribunal was justified in law in allowing depreciation on the assets for which the Assessing Officer had treated the transaction as that of finance and not of leasing ?"

5. Ms Suruchi Aggarwal, the learned counsel appearing on

behalf of the revenue, contended that the transaction in question was a

pure lease finance transaction and, therefore, the assessee was not

entitled to claim depreciation in respect of the equipment in question.

The learned counsel placed strong reliance on a letter dated 26.09.1995

written by the Chief Accounts Officer, Haryana State Electricity Board,

Panchkula to the Financial Commissioner and Secretary to the

Government of Haryana, Irrigation and Power Department, Civil

Secretariat, Haryana where, it is stated that the transaction was entered

into by the HSEB as a means of raising finance. She also placed strong

reliance on the decision of the Karnataka High Court in the case of

Avasarala Automation Ltd (supra) as also on the decision of the

Supreme Court in the case of Asea Brown Boveri Ltd v. Industrial

Finance Corporation of India: AIR 2005 SC 17 to submit that the

transaction in the present case was not of a sale and lease back, but

merely one of a financial lease, where all the risks and rewards incident

to the ownership of an asset are transferred to the lessee. Consequently,

she submitted that the respondent / assessee was not entitled to claim

depreciation in respect of the equipment in question and that the

Assessing Officer had taken the correct view in the matter. She,

therefore, submitted that the question be answered in favour of the

revenue and the appeal be allowed.

6. On the other hand, Mr Ajay Vohra, appearing on behalf of the

respondent / assessee, submitted that this was a clear case of purchase

and lease back of assets and as the respondent / assessee was the owner

of the said equipment, it was entitled to claim depreciation thereon. He

submitted that there is no evidence on record to show that the transaction

between the respondent / assessee and HSEB was not genuine or was a

sham transaction. He also submitted that both the Commissioner of

Income-tax (Appeals) and the tribunal, which is the final fact finding

authority, have clearly held the transaction to be genuine. In fact, Mr

Vohra submitted before the Tribunal, as recorded in the impugned order

itself, it has been noted that the representative for the revenue could not

bring any fact to the notice of the tribunal from which it could come to a

conclusion that the sale and lease back transaction between the assessee

and HSEB was not a genuine transaction. He further submitted that on

going through the documents, which include the sale deed dated

28.09.1995 and lease agreement dated 29.09.1995, it would be apparent

that the ownership of the equipment was with the lessor (respondent /

assessee) and that the erstwhile owner (HSEB) acknowledged the

ownership of the new owner (i.e., the respondent / assessee). He also

submitted that there is nothing on record to show that the respondent /

assessee was entering into a financial transaction. He submitted that the

title in the equipment had passed on to the assessee and for this purpose,

reliance was placed on Sections 19 and 33 of the Sale of Goods Act,

1930. The learned counsel submitted that what is to be seen in the

present case is - whether the equipment in question came into the

ownership of the respondent / assessee ? If it were to be so, then the

respondent / assessee would certainly be entitled to claim depreciation in

respect thereof because leasing was also a part of its business. He

submitted that, therefore, the entire question hinges on the factual

determination of whether the transaction was genuine or not. The

tribunal, being the final fact finding authority, has held it to be genuine

and the revenue has not been able to point out any perversity in such

conclusion. In fact, Mr Vohra submitted that no question of law has been

framed on the issue of perversity. Therefore, on the facts as on record,

the question framed in the present appeal has to be decided in favour of

the assessee and against the revenue and the revenue‟s appeal is liable to

be dismissed. Mr Vohra placed reliance on the following decisions:-

1) Industrial Development Corporation of Orissa Limited v. Commissioner of Income-tax and Others: 268 ITR 130 (Ori);

2) Commissioner of Income-tax v. Rajasthan State Electricity Board: (2006) 204 CTR 415 (Raj);

           3)        Commissioner of Income-tax v. Gujarat Gas
                     Company Limited: (2009) 308 ITR 243 (Guj);

           4)        SBI Home Finance Limited v. Commissioner of
                     Income-tax: 280 ITR 6 (Cal);

           5)        Commissioner of Income-tax v. Zuari Finance
                     Limited and Another: 271 ITR 538;

           6)        Commissioner of Income-tax v. George
                     Williamson (Assam) Limited: 265 ITR 626 (Gau).

7. Mr Vohra also referred to the decision of the Income-tax

Appellate Tribunal, Mumbai (A) Bench in the case of West Coast Paper

Mills Limited v. Joint Commissioner of Income Tax: (2006) 100 TTJ

833 (Mumbai) where, in an identical case, which also partly involved

the Haryana State Electricity Board, was considered and decided in

favour of the assessee by allowing the assessee therein the benefit of

100% claim of depreciation. Mr Vohra pointed out that the said decision

of the Mumbai Bench of the tribunal was taken in appeal before the

Bombay High Court in Income-tax Appeal No.389/2008, which came up

for hearing before the said High Court on 16.10.2008. The said High

Court observed that the case of the revenue before the Tribunal was that

the transactions of buy back of lease equipments and granting lease of

that equipment to various boards were sham transactions entered into

only for the purposes of claiming benefits of 100% depreciation. The

High Court further observed that the tribunal had considered that aspect

of the matter in the light of the material on record and had recorded a

finding that it was not a sham and bogus transaction. It was also

observed that one of the grounds considered for recording that finding

was that when the other party was a statutory body, the question of

evasion of tax does not arise and, therefore, according to the tribunal, the

inference of collusion could not be drawn. The Bombay High Court, in

these circumstances, took the view that no question of law arose for its

consideration. Being aggrieved by the said order passed by the Bombay

High Court, the revenue took the matter further by filing a special leave

petition before the Supreme Court, which was dismissed in limine by

virtue of an order dated 09.10.2009. Of course, Ms Suruchi Aggarwal,

appearing on behalf of the revenue, rightly contended, on the strength of

the decision of the Supreme Court in the case of Y. Satyanarayan Reddy

v. The Mandal Revenue Officer, A.P.: 2009 (9) SCC 447 that the

dismissal of an SLP in limine by the Supreme Court does not amount to

the merger of the order of the High Court with that of the Supreme Court

and does not entail a decision on the question of law by the Supreme

Court.

8. Before we examine the rival contentions raised by the learned

counsel for the parties, it would be appropriate to set out the facts. By a

sale deed executed on 28.09.1995, the HSEB, a statutory corporation

constituted under Section 5 of the Electricity (Supply) Act, 1948 and

having its head office at Shakti Bhawan, Sector-6, Panchkula, Haryana -

134108, sold the equipments installed at its Thermal Power Station at

Faridabad and described in the invoice No.CAO/95-96/13 dated

28.09.1995 to the respondent / assessee for a consideration of `

2,30,40,000/-. The description given in the invoice-cum-delivery challan

dated 28.09.1995 is - Instrumentation and Monitoring System for

Monitoring Energy Flows - Automatic Electrical Load Monitoring

System at Thermal Power Station Faridabad. A valuation certificate

dated 23.09.1995 had been obtained by the respondent / assessee through

Virtuous Finance Limited Bombay, who had facilitated the transaction

with HSEB, from M/s M. Chaudhary and Associates, Registered Valuers

and Chartered Engineers, New Delhi, which gave the replacement value

of the said equipment as on 15.09.1995 to be at ` 2,30,40,000/-. On the

purchase of the said equipment, the respondent / assesse entered into an

agreement for lease of the same with HSEB on 29.09.1995, whereby the

entire said equipment was leased back to HSEB for a period of 72

months w.e.f. 29.09.1995. A sum of ` 1,38,24,000/- was paid by the

respondent / assessee to HSEB by cheques dated 30.09.1995 with regard

to the purchase of the said equipments. The respondent/assessee also

retained a sum of ` 92,16,900/- as interest free security deposit for the

leased equipments. Thus, the sum of ` 1,38,24,000/- paid by the

respondent / assessee to HSEB and the sum of ` 92,16,000/- retained by

the respondent / assessee as and by way of interest free security deposit

represented the total sale consideration of ` 2,30,40,000/-. The total

lease rentals for the said lease period in respect of the said equipment,

which was to be paid by HSEB to the respondent / assessee, was `

1,55,38,176/- and the same was to be paid on a monthly basis as per

Annexure - A to the First Schedule of the said lease agreement dated

29.09.1995.

9. In clause 2(c) of the lease agreement, the lessee (HSEB)

confirmed that it had received possession of the said equipment in good

order and condition. The lessee‟s covenants were set out in clause 4 of

the lease. Sub-clause (k) of the said lease stipulated that the lessee shall

not transfer / create any charge or otherwise dispose of the lessee‟s

interest in the said equipment in favour of any person in any manner

whatsoever and to hold the equipment as trustee and bailee of the lessor.

Clause 4(m) of the lease further provided that the lessee covenanted to

affix a name plate or other distinguishing mark on the equipment

identifying the sole and exclusive ownership thereof of the lessor and not

to allow or permit the same to be removed or defaced. By virtue of

clause 5(a) of the lease, the lessee declared that it shall not create any

encumbrances or charge or lien of any nature whatsoever in favour of

any person in relation to the said equipment. Again, in clause 6(f) of the

lease, the lessee declared that the equipment would always remain free

from any charge, lien or encumbrance of any type and that the lessor

would have all the rights of owner, including the right to mortgage the

same with the owners, bankers / financiers without prejudice to the rights

of the lessee under the said lease. Clause 8(a) specifically provided as

under:-

"Notwithstanding the grant of lease of the said Equipment, the lessor shall continue to be the sole owner thereof (as a Hire Purchase Hirer) and the Lessee would not, merely by reason of grant of this lease, have or claim any right, title or interest in any of the said equipments except as the Lessee thereof in accordance with the terms and conditions of this Lease Agreement."

The lease also provided that the lessee (HSEB) shall not part with the

possession of the equipment, nor shall the lessee (HSEB) sub-lease the

equipment without prior approval of the lessor (the respondent /

assessee).

10. From a plain reading of the sale deed, the invoice-cum-

delivery challan and the lease agreement, we are inclined to agree with

the submission made by the learned counsel for the respondent / assessee

that the ownership of the equipment in question was that of the

respondent / assessee. The sale of the equipment by HSEB to the

respondent / assessee resulted in the transfer of title from HSEB to the

assessee. The lease evidences the fact that the right of purchase and use

of the equipment in question was transferred from the respondent /

assessee to the lessee (HSEB), for which purpose, a security deposit was

taken and the lessee (HSEB) had covenanted to pay the lease rentals as

per the schedule totaling to ` 1,55,38,176/- for the duration of the lease.

When the lease agreement was entered into, while the possession of and

the right to use the equipment was transferred to the lessee, the lessor

(respondent / assessee) retained its title and ownership over the said

equipment as also the right of reversion of possession at the end of the

lease period.

11. Section 19 of the Sale of Goods Act, 1930 also makes it clear

that when there is a contract for the sale of specific or ascertained goods,

such as the equipment in question in the present case, the property in

them is transferred to the buyer at such time as the parties to the contract

intended to be transferred. It is also made clear in Section 19(2) of the

Sale of Goods Act, 1930 that for the purposes of ascertaining the

intention of the parties, regard shall be had to the terms of the contract,

the conduct of the parties and the circumstances of the case and by virtue

of Section 19(3) thereof, unless a different intention appears, the rules

contained in Sections 20-24 are the rules for ascertaining the intention of

the parties as to the time at which the property in the goods is to pass to

the buyers. A plain reading of the sale deed makes it clear that the

property in the said equipment passed on to the assessee / respondent on

28.09.1995 itself as the documents themselves indicate that the vendor

(HSEB) conveyed and transferred its title, interest rights and privileges

in the equipments sold completely and irrevocably in favour of the

purchaser (respondent / assessee). The lease, as indicated above, clearly

mentions in clause 2(c) that the lessee (HSEB) confirmed that it had

received possession of the said equipment in good order and condition.

Thus, this is an acknowledgement from HSEB that it had received the

equipment pursuant to the lease in its favour from the respondent /

assessee. All these circumstances point in the direction that the

ownership of the equipment was of the respondent / assessee and this fact

had also been acknowledge by the HSEB which was the erstwhile owner

of the same.

12. It is true that the letter dated 26.09.1995, written by the Chief

Accounts Officer, HSEB, Panchkula to the Financial Commissioner and

Secretary to the Government of Haryana, which had been relied upon by

the learned counsel for the revenue, does indicate that the transaction was

entered into by HSEB in order to raise finance for its day-to-day needs

and that HSEB had decided to go in for tapping the system of sale and

lease back assets as a mode of raising finance at a lower cost. But, this

does not bind the respondent / assessee. What was the intention of

HSEB in going in for the transaction in question cannot be transposed

onto the respondent / assessee.

13. Insofar as the respondent / assessee is concerned, on the basis

of the factual position on record, it had purchased the equipment which

was already installed at HSEB‟s Thermal Power Plant at Haryana and

immediately thereafter, it had leased back the said equipment to HSEB

for a period of 72 months on condition of the payment of lease rentals as

well as an interest free security deposit. If, in doing so, it was attracted

by the prospect of availing 100% depreciation on the value of the

equipment (` 2,30,40,000/-), the respondent / assessee cannot be denied

the benefit merely because it did so. In order to deny the claim of

depreciation, it would have to be held that the transaction was not

genuine and that the same was a subterfuge. Merely because an assessee

gets a commercial advantage because of the factoring in of a tax benefit,

it cannot be said that the transaction is not genuine. There is no finding

in the present case or evidence to indicate that the transaction was not

genuine.

14. The decision of the Karnataka High Court in the case of

Avasarala (supra) is clearly distinguishable because in that case, there

was a clear finding of fact, which had been conclusively arrived at by the

lower authorities, including the Income-tax Appellate Tribunal, that the

transaction in question was not genuine. Reliance placed by the

Assessing Officer as also the learned counsel for the revenue on the

observations of O. Chinappa Reddy, J in the case of McDowell and

Company Limited (supra) needs to be considered in the light of the

subsequent decisions of the Supreme Court. We may note that in Inland

Revenue Commissioners v. Duke of Westminster: 1936 (AC-1), Lord

Tomlin had expressed the following view:-

"Every man is entitled if he can to order his affairs so that the tax attaching under the Appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow tax payers may be of his ingenuity, he cannot be compelled to pay an increased tax."

15. This view expressed in the case of Inland Revenue

Commissioners v. Duke of Westminster (supra) was remarked upon by

O. Chinnappa Reddy, J. The remarks were in connection with the

observation of J.C. Shah, J in Commissioner of Income-tax v. A. Raman

and Company: (1968) 67 ITR 11 (SC), which was based on Duke of

Westminster (supra). The remarks of O. Chinnappa Reddy, J were as

under:-

"We think that time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere."

O. Chinnappa Reddy, J further observed in McDowell and Company Ltd

(supra) as under:-

"In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord approval to it."

16. However, these observations as also the other decisions were

considered by the Supreme Court in Union of India and Another v.

Azadi Bachao Andolan and Another: 2003 (263) ITR 706 (SC),

wherein the court observed that "tax planning may be legitimate

provided it is within the framework of law". Furthermore, the Supreme

Court concluded that:-

"With respect, therefore, we are unable to agree with the view that Duke of Westminster‟s case: 1936 (AC-1); is dead, or that its ghost has been exorcised in England. The House of Lords does not seem to think so, and we agree, with respect. In our view, the principle in Duke of

Westminster‟s case [1936 (AC-1)] is very much alive and kicking in the country of its birth. And as far as this country is concerned, the observations of Shah, J, in Commissioner of Income-tax v. Raman: 1968 (67) ITR 11 (SC) are very much relevant even today."

17. Thus, after the Supreme Court decision in the case of Azadi

Bachao Andolan (supra), the observations of O. Chinnappa Reddy, J, in

McDowell and Company (supra) would not hold good. This is also the

position taken by the Orissa High Court in the case of Industrial

Development Corporation of Orissa Limited (supra) as also the Gauhati

High Court in the case of Commissioner of Income-tax v. George

Williamson (supra). Clearly, therefore, the reliance placed by the

Assessing Officer on the said observations in McDowell and Company

Limited (supra) was misplaced.

18. We also note that in Industrial Development Corporation of

Orissa Limited (supra), the Orissa High Court was dealing with a case

which was similar to the one before us where, in place of the Haryana

State Electricity Board, it was the Orissa State Electricity Board (OSEB).

The said High Court observed that if the sale and lease back agreement

between the assessee and the OSEB indicate that the assessee had

purchased the plant and machinery from OSEB for a price and had leased

out the same to OSEB on lease rent, the revenue department cannot

discard the said sale and lease back agreement on the ground that the

underlying motive of the assessee to enter into the said transaction was to

reduce its income-tax liability. The Orissa High Court observed that the

revenue could, however, discard the said transaction only if there were

materials or evidence before it to show that the intentions of the parties

were different from what had been incorporated in the sale and lease

back agreements and that the transaction was really a sham and dubious

transaction and was a colourable device. We are in complete agreement

with these observations of the Orissa High Court in the case of Industrial

Development Corporation of Orissa Limited (supra). We are also in

agreement with the conclusion of the said High Court that in such cases,

the court would have to find out as to what was the real intention of the

parties in entering into the sale and lease agreement and that such

intention has to be gathered from the words in the said agreement in a

tangible and in an objective manner and not upon a hypothetical

assessment of the supposed motive of the assessee to avoid tax. We have

already indicated that the intention gathered from the documents on

record shows that the ownership and title of the said equipment had been

transferred to the respondent / assessee and that after the said transfer,

the lease was entered into and the said equipment was leased back to the

HSEB. It has not at all been established on the basis of evidence on

record that the transaction was a colourable device entered into by and

between the HSEB and the respondent / assessee.

19. We also note that a similar view has been taken by the

Rajasthan High Court in the case of Commissioner of Income-tax v.

Rajasthan State Electricity Board (supra) and the Gujarat High Court in

the case of Commissioner of Income-tax v. Gujarat Gas Company Ltd

(supra) which followed the decision of the Rajasthan High Court in the

case of Commissioner of Income-tax v. Rajasthan State Electricity

Board (supra).

20. We find that the observations of the Supreme Court in the

case of Asea Brown Boveri Ltd (supra) with regard to the nature of a

financial lease are not of much use to the case of the revenue in view of

the factual backdrop that, on facts, the transaction in question has been

found to be genuine. Once it is established that the ownership of the said

equipment is that of the assessee, then it is clear that the respondent /

assessee would be entitled to claim depreciation as allowed by the

Commissioner of Income-tax (Appeals) and the Income-tax Appellate

Tribunal.

21. In these circumstances, we answer the question in the

affirmative and against the revenue. The appeal is dismissed. There

shall be no order as to costs.

BADAR DURREZ AHMED, J

V.K. JAIN, J

JULY 18, 2011 dutt