No capital assets transfer on facilities lease out for less than 12 years

No "transfer" of capital asset takes place in the ordinary sense of the word 'transfer' or even within the extended meaning given to the term 'transfer in section 2(47)(vi) when the plant and machinery along with land and building is leased out for a limited period of 10 years giving limited right to the lessee to hold and possess the facilities leased to it with further restriction on sub-letting it or transferring any right or interest therein to anyone without the permission of the lessor and with the lease agreement making it explicit that at the end of the lease period the facilities leased would revert to the lessor-assessee. This is in view of Explanation1 to section 2(47) which incorporates reference to section 269UA(d) for which purposes 'transfer' has been defined to section 269UA(f)(i) to include lease for a period of not less than 10 years

• No "transfer" of capital asset takes place within the meaning of section 2(47) when the plant and machinery along with land and building is leased out for a limited period of 10 years giving limited right to the lessee to hold and possess the facilities leased to it with further restriction on sub-letting it or transferring any right or interest therein to anyone without the permission of the lessor and with the lease agreement making it explicit that at the end of the lease period the facilities leased would revert to the lessor-assessee.

• This is in view of Explanation1 to section 2(47) which incorporates reference to section 269UA(d) for which purposes 'transfer' has been defined to section 269UA(f)(i) to include lease for a period of not less than 10 years.

• This is especially so when assessee-lessor has claimed depreciation on plant and machinery leased out and the facilities indeed did revert back to assessee-lessor at the end of the 10 years lease period and assessee-lessor did indeed sell these facilities to another party and was assessed for long-term capital gains on such sale.

• The mere fact that the Assessee may have applied under Section 230A of the Act to seek permission of the Department cannot be held against it as far as the correct legal position is concerned. In other words the fact that certain columns in the concerned form were filled by the Assessee to imply that there was a transfer of leasehold/ownership rights cannot be read to constitute a waiver by the Assessee of the legal defences that flow from a correct interpretation of the clauses of the lease agreement and from a correct reading of Section 2 (47) with Section 45 of the Act.

• The lease agreement had to form the fundamental basis for understanding what the transaction in effect was. The relationship between the parties could not be re-configured on the basis of surmises and conjectures.

• The AO and CIT (A) appeared to have proceeded on the basic suspicion that the lease agreement was a tax avoidance device and this prevented them from objectively viewing the transaction for what it in effect was.

• There has to be an extinguishment of ownership rights in order that a transaction can be said to be a 'sale'. Here, the lessee does not even have the right of sub-letting the facilities. The leasehold right is only for a period of ten years and at the end of that period the leased facilities revert to the owner.
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