By TIOL News Service

CHANDIGARH, JULY 30, 2009: THE assessee is Punjab State Electricity Board, who sold energy saving devices on which 100% depreciation was permitted under Section 32 of the Act read with rule 5 of the Income Tax Rules, 1962 (for short, “the rules) and the same assets were taken on lease and deduction was sought for lease money. This deduction was disallowed on the ground that the transactions entered into by the assessee were sham transactions. The CIT (A) dismissed the appeal but the Tribunal upheld the plea of the assessee. The relevant observations are:-

“It cannot be said that any and every attempt of tax planning is illegal/illegitimate or that every transaction or arrangement which is perfectly permissible under the law, having the effect of reducing the tax burden on the assessee cannot simply be discarded because it is the businessman/assessee who is to take a decision in view of its business expediency. As far as the reliance by the learned Sr. DR on the decision of the Hon'ble Apex Court in the case of Mc Dowell & co Ltd. Vs. CTO (2002-TIOL-40-SC-CT), wherein it was held that the tax planning may be legitimate provided it is within the frame work of law and colourable device cannot be part of tax planning, we are of the humble opinion, that the facts of the aforesaid judicial pronouncements may not help the Revenue because in the present appeal, no colourable device has been adopted by the assessee and even the learned Assessing Officer has not brought on record any evince even to suggest that the tax planning of the assessee is not within the permissible limit or any colourable device has been adopted by the assessee. In such a situation, the decision of the Hon'ble Gauhati High Court in the case of CIT Vs. George Williamsons (Assam) Ltd. clear supports the case of the assessee wherein various judicial pronouncements has been considered including the case of Mc Dowells (supra). In the light of aforesaid facts and judicial pronouncements, we have not found any infirmity in the impugned order, consequently all these six appeal of the Revenue are having no merit, consequently dismissed.”

The revenue is in appeal before the High Court proposing the following substantial question of law:-

“Whether on the facts and in the circumstances of the case, the ITAT is legally correct in holding that in the present case, no colourable device has been adopted by the assessee, even when the intention of the assessee behind drafting the agreements between the assessee and the financial institution was to reduce the tax liability artificially of both the parties and as such the ratio of the decision of the Hon'ble Apex Court in the case of Mc Dowell Ltd. Vs. CTO has wrongly been interpreted”.

Only contention raised by the counsel for the revenue is that the machinery was integral part of the boilers and the same continued to be with the assessee inspite of sale.

The High Court observed,

The fact remains that the sale consideration was received by the assessee and lease rental was paid by the assessee. Merely because tax liability was reduced could not be conclusive of arrangement being sham of a device. As regards observations of the Hon'ble Supreme Court in Mc Dowel, supra, the matter has been explained in subsequent judgments including in UOI Vs Azadi Bachao Andolan (2003-TIOL-13-SC-IT). The view that the assessee was entitled to arrange his affairs to reduce tax liability, without violating the law, was reiterated.

“Tax Planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.”

But in view of the finding recorded by the Tribunal in the facts of this case, the High Court held that no substantial question of law arises.

(See 2009-TIOL-380-HC-P&H-IT in 'Income Tax')