sale and leaseback

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.

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

CIT vs. High Energy Batteries (India) Ltd (Madras High Court) The assessee purchased an igni-fluid boiler from its sister concern and on the same day leased it back. The AO & CIT(A) relied on McDowell 154 ITR 148 and held the sale and lease back arrangement to be a sham & camouflage for a loan by the assessee to the sister concern and rejected the assessee’s claim for depreciation. However, the Tribunal allowed the claim on the ground that the transaction was not a “sham”. On appeal by the department, HELD dismissing the appeal:  

Sale & Lease Back transactions are not “sham” transactions