Lease transaction if found to be sham, depreciation cannot
be allowed — Alternative argument that only interest component be treated as
income rejected.
[M. Corpn. Global P. Ltd. v. CIT, (2009) 309 ITR 434
(SC)]
During the relevant assessment year 1991-92, the assessee
carried on the business of trading in lamination machines and binding and
punching machines. In addition, it was engaged in the leasing business. During
the year in question, the assessee had bought 5,46,000 soft drink bottles from
M/s. Glass and Ceramic Decorators worth Rs.19,54,953. The bottles were
directly supplied to M/s. Coolade Beverages Pvt. Ltd. (‘M/s. Coolade’ for
short) in terms of lease dated February 15, 1991. Vide assessment order dated
March 28, 1994, the Assessing Officer found that M/s. Coolade had received
only 42,000 bottles out of the total of 5,46,000 bottles receivable by them
from the assessee and that the remaining bottles stood received after March
31, 1991, i.e., between the period April 3, 1991, and April 18, 1991,
and, consequently, the Assessing Officer restricted the depreciation only to
42,000 bottles and consequently disallowed the depreciation of Rs.18,04,572.
In appeal the Commissioner of Income-tax (Appeals) after formulating the ‘user
test’ remanded the matter to the Assessing Officer who on remand held that all
5,46,000 bottles stood paid for and dispatched before March 31, 1991, and
therefore, the assessee was entitled to 100% depreciation on all 5,46,000
bottles. This finding was given when the appeal was pending before the Income
Tax Appellate Tribunal. The said finding of the Assessing Officer (on remand)
was not challenged. However, when the appeal came before the Tribunal, it was
held that since the lease was not renewed and since the bottles were not
returned on expiry the transaction in question was only a financial
arrangement and not a lease, hence, the Income Tax Appellate Tribunal
disallowed the depreciation claim of the assessee which finding stood
confirmed by the High Court.
On an appeal, the Supreme Court held that in the case of
Hukumchand Mills Ltd. v. CIT, reported in (1967) 63 ITR 232 it had held
that u/s.33(4) of the Income-tax Act, 1922 (equivalent to S. 254(1) of the
1961 Act), the Tribunal was not authorised to take back the benefit granted to
the assessee by the Assessing Officer. The Tribunal has no power to enhance
the assessment. Applying the ratio of the said judgment to the present case,
the Supreme Court was of the view that, in this case, the Assessing Officer
had granted depreciation in respect of 42,000 bottles out of the total number
of bottles (5,46,000). By reason of the impugned judgment of the High Court
that benefit was sought to be taken away by the Department, which was not
permissible in law. This was the infirmity in the impugned judgment of the
High Court and the Tribunal. There was one more aspect which attracted the
attention of the Supreme Court. It observed that, according to the impugned
judgment of the High Court and the Tribunal, the transaction dated February
15, 1991, was a financial transaction and not a lease. If depreciation is to
be granted for 42,000 bottles under the transaction dated February 15, 1991,
then it cannot be said that 42,000 bottles came within the lease dated
February 15, 1991, and the balance came within the so-called financial
arrangement. In the circumstances, the Supreme Court held that the benefit of
depreciation given to the assessee by the Assessing Officer in respect of
42,000 bottles out of 5,46,000 bottles could not be withdrawn by the
Department and for that reason alone the assessee should succeed in the civil
appeal. The Supreme Court further observed that, in this case the Commissioner
of Income-tax (Appeals) had remitted the matter to the Assessing Officer who
on remand came to the conclusion that all 5,46,000 bottles stood sold before
March 31, 1991. This finding of fact had become final. It had not been
challenged. Hence, the Department had erred in disallowing the depreciation of
Rs.18,04,572.
Another lease transaction was also the subject matter of
the appeal. On March 15, 1991, lease was executed between the assessee as
lessor and M/s. Aravali Leasing as lessee whereas there was a sub-lease
between M/s. Aravali Leasing and M/s. Unikol Bottles dated March 8, 1991. The
Assessing Officer came to the conclusion that the transaction dated March 15,
1991, was not proved. It was a sham. Accordingly, the Assessing Officer
disallowed the depreciation amounting to Rs.30,17,122. This finding has been
accepted by the Tribunal and the High Court. The Supreme Court found no
infirmity in the concurrent findings of fact recorded by the authorities
below. The Supreme Court also rejected the alternative submission made on
behalf of the assessee that, if the said transaction was a financial
arrangement, as held by the Department even then the assessee could be taxed
only on interest embedded in the amount of lease rental received from the
lessee on the ground that the transaction was not proved by the assessee.
