Commissioner Of Income Taxchennai v. M/S. Sundaram Finance Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 08.02.2016 Coram: The Hon'ble Mr.Justice V.RAMASUBRAMANand The Hon'ble Mr.Justice N.KIRUBAKARAN Tax Case Appeal Nos.506 to 508 of 2008 Commissioner of Income TaxChennai....Appellant Versus M/s. Sundaram Finance Ltd., 21, Patullos Road, Chennai - 600 002. ...Respondent Tax Case Appeal filed under Section 260-A of the Income Tax Act, 1961, against the Order dated 4.5.2007 passed by the Income tax Appellate Tribunal, Madras 'C' Bench in ITA Nos.441/Mds./2005, 1536/Mds./2004 and 1537/Mds.2004. For Appellant:Mrs.Varthini Karthik for Mr.T.Ravikumar, Standing CounselFor Respondent:Mr.R.Vijayaraghavan for M/s.Subbaraya Aiyar. V.RAMASUBRAMANIAN, J COMMON JUDGMENT These Tax Case Appeals filed by the Revenue, were admitted on 2.7.2008 on the following substantial question of law:- "Whether in the facts and circumstances of the case, the Tribunal was right in allowing depreciation on a sale and lease back transaction relating to wind electric generators, where the assessee itself is not the owner of the land on which the generators have been installed, and hence cannot be treated as owner of the windmills?" 2. We have heard Mrs.Varthini Karthik, learned counsel representing for Mr.T.Ravikumar, learned Standing Counsel for the Department and Mr.R.Vijayaraghavan, learned counsel appearing for the assessee. 3. The assessee is a Non-banking Finance Company. The assessee filed a Return of income for the Assessment Year 1996-97 on 26.11.1996. They also filed Returns of income for the Assessment Years 1997-98 and 1998-99 on 27.11.1996. 4. The Returns were processed under Section 143(1)(a) and 43(1) of the Income Tax Act, and the Assessments was taken up for scrutiny. It was found that during these three Assessment Years, the assessee purchased windmills and leased out the same to different parties to enable those parties to instal those windmills and generate power. For the Assessment Year 1996-97, the assessee claimed 100% depreciation in respect of some items and 50% depreciation in respect of other items. For the subsequent Assessment Years, the assessee claimed 50% depreciation per year. 5. The Assessing Officer disallowed the claim for depreciation on the sole ground that the assessee was not the owner of the land on which the windmills were installed. The Assessing Officer recorded a finding that the ownership of the land is a primary requirement for erecting the windmill machinery at the site. 6. The First Appellate Authority reversed the opinion of the Assessing Officer on the ground that once the genuineness of the purchase, existence of the machinery and the installation thereof have been proved by the assessee, it is not correct to disallow the depreciation. The Commissioner of Income Tax (Appeals) also held that the ownership of the land is not a principal requisite for allowing depreciation. 7. The Revenue filed three appeals in ITA Nos. 1536, 1537 of 2004 and 441 of 2005 as against the order of the Appellate Commissioner. The Tribunal dismissed all the three appeals and restored the order of the Appellate Commissioner. Therefore, the Revenue is on appeal. 8. Admittedly, the assessee is in the business of hire purchase finance, leasing and allied activities and it is a non-banking finance company. The owner of the land on which the windmills were erected and installed wanted to set up a wind power generation unit. The owner approached the respondent/assessee for finance. 9. There are two options available to a finance company under such circumstances. One option is to allow the borrower to purchase the machinery and install it in his own land and pay the cost of the machinery on condition that the amount financed for the purchase of the machinery is repaid together with interest in equal monthly instalments. 10. The second option available to a financier is to buy the plant and 8. Admittedly, the assessee is in the business of hire purchase finance, leasing and allied activities and it is a non-banking finance company. The owner of the land on which the windmills were erected and installed wanted to set up a wind power generation unit. The owner approached the respondent/assessee for finance. 9. There are two options available to a finance company under such circumstances. One option is to allow the borrower to purchase the machinery and install it in his own land and pay the cost of the machinery on condition that the amount financed for the purchase of the machinery is repaid together with interest in equal monthly instalments. 10. The second option available to a financier is to buy the plant and machinery in their own name and lease it out to the borrower. 11. If the first option is exercised, the land owner gets title to the plant and machinery and the interest component of the equated monthly instalments is treated as revenue income for the financier. But the owner will claim depreciation on the machinery. 12. If the second option is exercised, the financier claims depreciation, but treats the lease rentals as revenue income and pays tax. 13. Therefore, in either of the two options the borrower and financier are placed on different sides of the same table. In such circumstances, the question of the revenue losing something does not arise. 14. As rightly pointed out by the Commissioner of Income Tax (Appeals), the question of ownership of the land has nothing to do with the claim for depreciation. Depreciation is claimed in respect of the plant and machinery installed on the land. 15. Unfortunately, the Assessing Officer was misguided by the fact that the Electricity Authority granted permission only to the land owner to run the windmills. It is not the case of the Department or the respondent herein that the respondent was in the business of generating power through windmills. There is no restriction by the Electricity Board that unless the applicant for the generation of wind power also owns the plant and machinery he would not be entitled to a license. 16. In other words, the Assessing Officer as well as the Tribunal misdirected themselves to the actual issue on hand, without realizing what is the income either from the land owner or from the financier depending each side of the table as per the terms of the financing agreement. The Revenue cannot claim revenue from both. Therefore, the question of law is answered against the Revenue and the appeals are dismissed. (V.R.S., J) (N.K.K., J)08.02.2016 Index : Yes or NoInternet : Yes or No To Income tax Appellate Tribunal, Madras 'C' Bench, Chennai. V.RAMASUBRAMAN, J ANDN.KIRUBAKARAN, J gr T.C.(A) Nos.506 to 508 of 2008