Sale & Leaseback is a Tax Planning arrangement – Madras HC – Vodafone ruling followed

CIT v High Energy Batteries (India) Ltd. T.C. [(APPEAL) NOS. 579 TO 581 OF 2005] (Mad HC)

Facts of the case

  • The assessee had purchased the machinery on 10.03.1995 from its sister concern M/s. Ponni Sugars and Chemicals Limited, a sister concern of the assessee herein at a cost of Rs.250 lakhs.
  • The minutes of the Board meeting of M/s. Ponni Sugars and Chemicals states that the sale of boilers is to meet the cash loss and other financial commitments.
  • The total consideration of the purchase of the material was Rs.250 lakhs, for which the assessee had paid a sum of Rs.50 lakhs and the balance of Rs. 200 lakhs was financed through a hire purchase agreement by M/s. Wipro Finance Limited.
  • The assessee entered into a lease agreement for leasing the boilers to the seller i.e. M/s. Ponni Sugars and Chemicals Limited.
  • The Assessing Authority viewed the sale and lease back arrangement as a camouflaged one and held that the assessee was not entitled to the claim of depreciation

Tax Authority’s arguments

  • The asset shown never moved out of the possession of the seller namely, M/s. Ponni Sugars and Chemicals Limited and continued to be the asset of the lessee.
  • The alleged purchase was only a financial accommodation to a sister concern as evidenced from the minutes of the meeting of the Board of Directors of M/s. Ponni Sugars and Chemicals Limited.
  • By entering into a lease agreement with its sister concern, the assessee had stayed away from taking the risk of transactions with the hire purchase company.
  • It was neither a finance lease nor an operational lease. Essentially, it was financing by M/s. Wipro Finance Limited to Ponni Sugars and Chemicals Limited. Thus the transaction by finance and leasing was only a sham and nominal transaction.
  • There was no real commercial significance other than the purchase of depreciation of Rs. 2.5 crores by paying Rs.50.88 lakhs. Applying the decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 (SC), the assessment was confirmed.


  •  The assessee took constructive delivery of the machinery which were there with M/s. Ponni Sugars and Chemicals Ltd. Given the fact that law recognises constructive delivery as an acceptable mode of delivery and possession, the fact that the assessee had not taken physical possession, per se, does not pronounce anything against the sale that took place between the assessee and M/s. Ponni Sugars.
  • There are no material on record to show that the sale between the assessee and M/s. Ponni Sugars was a sham transaction.
  • The monthly payment by the assessee to M/s. Wipro Finance Limited was to be met by the rental dues payable by M/s. Ponni Sugars and Chemicals Ltd. to M/s. Wipro Finance Limited
  • There is no material to say that the lessee M/s. Ponni Sugars had undertaken under the said agreement the responsibility of meeting the liabilities of the assessee company to M/s. Wipro Finance Limited.
  • Apex Court in Vodafone International Holdings B.V. v. Union of India [2012] 341 ITR 1(SC), the Apex Court considered the decision in McDowell & Co. Ltd. extensively and held that there is no conflict between the decision in McDowell & Co. Ltd.’s case and Union of India v. Azadi Bachao Andolan [2003] 132 Taxman 373 (SC). The Apex Court pointed out that the task of the Revenue is to ascertain the legal nature of the transaction and while doing so, it has to look at the entire transaction as a whole and not to adopt a dissecting approach.
  • Applying the rationale of this decision to the case on hand, in the absence of any material to pronounce on the genuineness of the transaction herein, the mere fact that what had been purchased had been leased out to the vendor or that vendor had undertaken to pay the hire charges on behalf of the assessee to the hire purchase company, per se, cannot lead to a conclusion that the transaction is a sham one.


This decision reiterates the principle laid down by the Supreme Court ruling in the case of Vodafone for adopting a “look at” approach on the transactions and the tax authorities cannot dissect a transaction. Genuine strategic tax planning cannot be inferred as “tax avoidance”.

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