Mumbai ITAT lays down tests for determining whether sale & leaseback is a sham transaction!


DCIT v Prithvi Prakashan (P.) Ltd. IT Appeal NO. 5189 (MUM.) OF 2006 (Mumbai ITAT)

Background:

The assessee had purchased 17 Iron Rolls used in Steel Industries from M/s. Indore Steel & Iron Mills Ltd. (ISIM) for a sum of Rs. 34,97,500/- on 25.3.1993. These rolls had been purchased by ISIM for a sum of Rs. 36,88,540/- in 1991. The assessee vide lease agreement dated 27.3.1993 had leased these rolls to ISIM for a period of three years commencing from 27.3.1993.

At the time of original assessment dated, the AO noted that there was no physical movement of iron rolls which remained with ISIM. No physical possession was handed over by ISIM to the assessee. Further, prior to the purchase by the assessee these were heavily depreciated due to use by ISIM. The assessee had claimed depreciation of Rs. 17,48,750/- @ 50% of the normal rate for 100% of depreciation The AO held that it was a case of simple loan transaction which had been given the colour of lease transaction to reduce tax liability of the assessee.

In appeal, the CIT(A) allowed claim of depreciation in order dated 28.6.1996. In further appeal, the Tribunal in the order dated 30.1.2004 in ITA No. 5840/Mum/2006 noted that the authorities below did not examine as to what happened to the leased assets on expiry of lease period and therefore, set aside the order of CIT(A) and restored the matter to the file of AO for passing a fresh order.

Tax Authority’s arguments:

  • After purchase by the assessee, physical possession of iron rolls were not handed over by ISIM to the assessee and even after expiry of lease agreement the iron rolls were still lying with ISIM and had not been taken over by the assessee till date.
  • ISIM had claimed 100% depreciation on the iron rolls and thereafter assessee also claimed depreciation on the same assets.
  • The copy of certificate from the chartered engineer was produced but the assessee failed to produce supporting documents on the basis of the chartered engineer had quantified the values of these rolls at Rs. 35,00,000.
  • The assessee was in the business of publishing news papers and buying of goods and leasing them out on rent was not normal business of the assessee

Assessee’s contentions:

  • The assessee furnished copy of lease agreement, bills of purchase of iron rolls from ISIM, confirmation from ISIM, receipt of payment from ISIM, certificate from ISIM regarding cost of purchase of iron roll, details of purchase of iron roll by ISIM and certificate the chartered engineer regarding valuation of iron rolls
  • Purchase and lease back was a normal business transaction and it was not necessary to take over assets by the assessee physically when it was being leased simultaneously based on ruling of Special Bench of the Tribunal in the case of Mid East Portfolio Management Ltd. v. Dy. CIT (Mumbai)(SB) (87 ITD 537) .

HELD:

  • The transactions can not be considered as genuine merely on the ground that the same are supported by bills and agreements.
  • It is a settled legal position that it is substance and not the form of transaction which is relevant. Further, for a transaction to be a colourable device, it is not necessary that there should be pre-existing relationship between parties.
  • The relevant factors in this case would be
    Valuation of the asset purchased by the assessee,
    Conduct of the assessee in dealing with the asset purchased,
    Whether the assessee has dealt with the asset as an owner after expiry of the lease period
    – Evasion of tax etc.
  • In case of genuine purchase, assessee is expected to take back the asset and use it either for own purpose or lease it to some other party.
  • In case the rolls have not been received by the assessee after the lease period, it would be a strong case of advancing of money which has been received back with principal and some interest over a period of three years

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