Whether in case of sale and lease-back deal where sales tax was paid, depreciation can be diallowed merely because Central Excise papers treat machinery as 'not for sale' - NO: HC

THE issues before the Bench are - Whether in a case of sale and lease-back deal where sales tax was paid, depreciation can be diallowed merely because the Central Excise papers treat the machinery as 'not for sale' and Whether the rental income earned from leasing of such assets is to be treated as business income. And the verdict goes in favour of the assessee.

Facts of the case

The assessee, a finance company, had entered into an Sale and Lease back agreement with the manufacturer of a machinery, to acquire ownership of machinery for consideration and thereafter lease the said machinery to the same company. The machinery was manufactured by that company and sold to the assessee and on the transaction, sales tax was levied and collected from the assessee and paid out to the Government. On the leased out machinery, assessee had received rental income and it was disclosed in the return as business income of the assessee. The AO had also accepted the lease amount as business income of the assessee. The assessee in this case claimed depreciation on the machinery so leased out, but the same was disallowed by the AO primarily relying upon the Central Excise document, where it was shown that the machinery was "not for sale".

On appeal, the CIT(A) was of the view that the words "not for sale" used in the central excise document was more to indicate that the machinery was not for sale to any third party, that was to say that it was not transferable to any other person than the manufacturer, who had sold it to the assessee and retained the machinery inside the premises under the terms of the lease agreement. It was also held that once it was admitted by the AO that sales tax leviable on such transaction had been levied and paid out to the Government and the lease rental in respect of machinery was assessed as business income of the assessee, it was evident that the assessee was treated as the owner of the machinery in question and the manufacturer was only a lessee and, therefore, allowed the claim of depreciation made by the assessee.

On further appeal, the Tribunal affirmed the view of the CIT(A) on the undisputed facts and held that the assessee was the owner of the machinery in question and the said machinery was used for its leasing business in the assessment year under consideration and, therefore, they were eligible for depreciation. Tribunal had placed reliance on the case of CIT v. High Energy Batteries (India) Ltd., 2012-TIOL-376-HC-MAD-IT.

Held that,

++ the facts narrated above are not disputed by the Standing Counsel for the Revenue. In the case on hand, we find that the sale was on payment of sales tax and the assessee has received the lease amount and disclosed the same as business income. Therefore, there cannot be any dispute that the assessee is the owner of the goods. It is another matter that the Central Excise document does not disclose sale. The excise duty is payable on manufacture. That is not the issue in the present case. That apart, there is no material produced by the Revenue to show that the transaction of sale and lease back was not genuine or was bogus, warranting interference with the concurrent findings arrived at both by the Commissioner of Income Tax (Appeals) as well as by the Tribunal;

++ for the foregoing reasons, on the above stated facts, no substantial question of law arises for our consideration and we find no reason to differ with the concurrent findings rendered by the Commissioner of Income Tax (Appeals) and the Tribunal. In the result, this appeal is dismissed.