Issue Involved

Whether sale and lease back transaction are permissible as a part of tax planning?

Facts of the Case

The assessee had claimed lease rent as revenue expenditure. The AO disallowed the same as being a colourable device adopted by the assessee as the same has not been well substantiated by the assessee with supporting evidence.

Arguments of the Appellant (Assessee)

1. The sale of lease back transaction entered into by the assessee was duly registered with department of telecommunication and hence cannot be termed as a non-genuine transaction.
2. The assessee can manage its tax affairs to attract a lesser tax as permitted by law and where the assets have been sold and leased back the same cannot be categorized as a colourable device, where the assessee has got substantial benefit by selling and leasing.

Decision of the Court

1. It cannot be read that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour.
2. It is open for the assessee to arrange their tax affairs in such a manner that it would not attract the tax liabilities, so far, it can be managed within the permissible limit of law. The assessee can very well manage their tax affairs so that the tax attracted in the transaction is less. The tax management is permissible, if the law authorises so.
3. The transactions were genuine and validly entered into since the revenue has not established the same to be a fraudulent for the purpose of evading tax by cogent evidence and that the assets were sold and leased back purely on business considerations and there is no question of any colourable device because in the said transaction and there was no motive on the part of the assessee to defraud the Revenue. This has been done to minimize the tax liability, which in our opinion, is permissible under the law.

Significant takeaways from judgment

Substance over Form: Tax authorities will prioritize the real economic substance of the transaction over its legal form. This means the arrangement should be compelled by business realities and tax-independent considerations, not primarily for tax avoidance.