R.V. Easwar, J.M. - (1.) THESE two appeals were heard by the Special Bench as directed by the Hon'ble President, Tribunal. The events leading up to the reference may be briefly noticed.
(2.) The appeal of the assessee M/s Mid East Portfolio Management Ltd. before the Tribunal involved several issues, one of which was whether the assessee was entitled to the depreciation amounting to Rs. 97.50 lakhs on the air-pollution equipments purchased from Rajasthan State Electricity Board, (hereinafter referred to as "RSEB") and leased backed to it. In the course of the hearing of the appeal, the Bench felt that in view of the complexity of the issue and its general importance the question should be considered and decided by a larger Bench. In the course of the arguments, several orders of various Benches of the Tribunal were cited on behalf of the assessee where the view had been taken that depreciation was allowable, On behalf of the Department, the main contention was that the documentation had been so created as to give the transaction a touch of a genuine sale and lease-back arrangement and therefore, on the basis of the rule laid down by the Supreme Court in McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) the assessee should not be allowed depreciation. It was contended that the transaction in truth was a borrowing of monies by the RSEB on the security of the assets, but the documentation had been so prepared as if it was a sale and lease-back arrangement. If it is a simple borrowing on the security of the assets, the assessee would not be entitled to depreciation. The Division Bench, for reasons recorded in the referral order, took the view that the matter may require "deeper consideration not only because it affects many assessees who have adopted such sale and lease back transactions, but also because of the complexity of the issue". It observed that "the true effect of the documentation may need to be considered in deeper perspective because the Department is questioning the very stand of the assessee that the true effect of the documentation is that of a lease. In the opinion of the department, the documentation does not add anything to what the transaction really is--that it is nothing more than a mere finance transaction--and that the entire documentation is a smoke screen to create an illusion as if it is a lease." According to the Bench, "one very important aspect to be kept in view, which was not shown to have been considered in the orders of the Tribunal where the electricity boards of some of the States were involved, is that whether it can be postulated that the electricity boards could sell their assets." The Bench opined that "the real question would be whether the consideration moving from RSEB to the assessee represents compensation for the use of the monies (as in a finance lease) or represents compensation for the use of the assets (as in an operational lease).....The terms of the lease agreement will have to be considered in depth to find out the substance of the transactions. The real nature and effect of the transactions will have to be considered and a decision rendered, even if they are not sham." Accordingly, the following question was proposed by the Bench for the consideration of the Hon'ble President for being referred to a larger Bench : "On the facts and in the circumstances of the case, was the transaction entered into between the assessee and RSEB rightly treated by the Departmental authorities as one attracting the rule laid down by the Supreme Court in McDowell & Co. Ltd. v. CTO (1985) 154 TO 148 (SC) and consequently, were they right in disallowing the assessee's claim for depreciation ?" The Hon'ble President was pleased to constitute a Special Bench consisting of three Members to decide the appeal of Mid East Portfolio Management Ltd.
(3.) IN the meantime, ICICI Ltd., which was the appellant in ITA No. 3300/Mum/1999 sought to intervene in the matter since the identical issue had also arisen in its appeal in respect of assets purchased from and leased back to Gujarat State Electricity Board. INitially, permission was granted to it to intervene and subsequently, on its further application, the Hon'ble President was pleased to place the appeal of ICICI also before the Special Bench, acceding to its request that its status be converted from an intervener to an appellant before the Special Bench. Accordingly both Mid East Portfolio Management Ltd. and ICICI Ltd. were heard as appellants, through senior counsel Mr. V.H. Patil and Mr. S.E. Dastur respectively. West Coast Paper Mills Ltd. the intervener, was heard through Mr. Dastur. The IT Department was heard through Mr. Sahai, CIT (Departmental Representative) and Mr. Girish Dave, CIT (Departmental Representative) respectively. Since the matter is one of general importance for the taxpayers as well as the IT Department and also because of its complexity, we have bestowed upon it our careful and deep consideration to the best of our ability and grasp and by holding several rounds of discussions amongst us. We are indebted to the learned counsel who appeared for both the appellants and the learned CIT (Departmental Representatives) who appeared for the IT Department. Their incisive and intellectual analysis of the issue and assiduous and able presentation with the supporting documentation, laced with case-law, have been of enormous assistance to us in coming to a decision. Facts of Mid East Portfolio Management;