Friday, 15 November 2013

Madras HC accepts a novel sale and lease back transaction; allows lessor to claim depreciation on let out asset

Where there was a tacit agreement in form of offer and acceptance for sale of assets and existence of such assets could not be doubted, said sale and its lease back could not be rejected for purpose of allowing depreciation
a) The assessee, a leasing company, entered into a sale and leaseback (SLB) agreement in respect of certain assets with Tamil Nadu Electricity Board (Electricity Board);
b) It purchased certain assets from Electricity Board and leased them back to Board. The Assessing Officer, however, disallowed depreciation on such assets to assessee treating those SLB transactions as loan transactions;
c) On appeal, the CIT (A) allowed the depreciation on such assets. Further, the Tribunal held that it was purely a finance transaction and, therefore, no depreciation could be allowed. Aggrieved-assessee filed the instant appeal.
The High Court held in favour of assessee as under:
1) Merely because terms of SLB agreement provided for deduction of lease installments from current consumption charges by way of priority, same could not be form basis to hold that transaction was not a SLB but a mere loan transaction;
2) The provision for repayment of the lease amount by way of installments from the current consumption charges was one mode of repayment in order to ensure that there was no default in paying the installments. There was no flaw in such a provision made in the agreement for repayment;
3) Merely because the assets were all eligible for 100 per cent depreciation, it could not be held that the entire transaction would become doubtful. So long as the sale-cum-lease back agreement was real as between the parties and the transaction was carried out in accordance with law, in the absence of any flaw in the said agreement, one could not doubt the whole transaction;
4) The fact that sale was accepted as between assessee and Electricity Board and after settlement of lease amount, assessee would continue to retain its ownership in no uncertain terms stipulated in agreement, and when such a transaction was not against law, there was no reason to doubt such transaction;
5) As far as the conduct of the parties was concerned, there were no clandestine dealings involved. Every correspondence between the parties was disclosed and placed before the Assessing Officer. Therefore, depreciation claimed by assessee was to be allowed - FIRST LEASING CO. OF INDIA LTD. V. ACIT (2013) 38 213 (Madras)

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