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25. Our attention was drawn to the decisions of the Supreme Court and High Courts rendered after the judgment in McDowell. We may first refer to Arvind Narottam (173 ITR 538)(SC) where the Supreme Court refused to apply McDowell to a case where the deeds were clearly worded and admitted of no ambiguity. But in this case there was no suggestion that the deeds did not intend to convey what they professed. The McDowell rule was canvassed by the Revenue before the Supreme Court without any evidence to show that the documents were a subterfuge, an artifice or embodied colourable transactions. In M.V. Valilappan (170 ITR 238) the amendment made to the Income-tax Act to enable the assessing authority to refuse to recognize partial partitions of Hindu Undivided Families was challenged and the Revenue relied on McDowell before the Madras High Court. McDowell could not be invoked by the AO in that case because the orders were all passed by him in 1983 and 1984, before McDowell was decided (in 1985). While recognising that the rule would not apply to a genuine transaction or arrangement in which the assessee really and in fact parts with a part of his property, just because there is a reduction of tax liability, it was held that honest and bona fide transactions cannot be hit by the McDowell approach merely because there is a reduction in the tax liability. The Madras High Court did not understand the McDowell rule as holding that all transactions, irrespective of their genuineness, which resulted in a reduction of tax liability would be hit by a rule. In Banyan & Berry (supra), the Gujarat High Court confirmed the right of freedom of business and to enter into commercial transactions and confined the applicability of the rule in McDowell to a case where a colourable device or a subterfuge is adopted to evade the tax liability. The applicability of the approach in McDowell should be confined to a case where the sole motive of the parties to the transaction is the avoidance of tax and for this purpose the courts are bound to enquire into the reality. Union of India & Ors. v. Playworld Electronics Pvt. Ltd.& Anr. (184ITR 308)(SC) is a case where it was reiterated that tax planning may be legitimate provided it is within the framework of the law. It was stated that colourable devices cannot be part of tax planning. It was also observed that one must find out the true nature of the transaction. In the light of these cases in which McDowell has been considered, it seems to us that the proper way to understand the observations in McDowell regarding tax evasion, read as a whole and in perspective, is to hold that all commercial arrangements and documents or transactions have to be given effect to even though they result in a reduction of the tax liability, provided that the, are genuine, bona fide and not colourable transactions.

29. We must admit that these English decisions constitute high authority having a persuasive value, but we are bound to apply the McDowell approach in India. Perhaps, there is a change in the approach of the courts in England as is evident from the cases cited above; that may be attributed to different social and economic conditions existing there. It may also be conceded that Macniven seems to have gone very far and away from Ramsay, but we must also advert to the fact that in that case though the aim was to mitigate the tax liability the means adopted were straightforward. A company which wanted to pay an interest and get an allowance therefore, but it did not have sufficient finances, borrowed from its creditor to whom it already owed huge sums, and paid the interest. The creditor being a pension scheme was exempt from tax and so the tax deducted from the interest paid by the company was finally reclaimed. The House of Lords could find no valid objection to the arrangement through which the taxpayer -company achieved its aim. There was no requirement, according to the House of Lords, that the taxpayer should use its own funds to pay interest in order to obtain the allowance. Since the means adopted were not objectionable, and the only objection being that it resulted in tax mitigation, the House of Lords held that the arrangement must be given effect to. It thus appears to us that where the means adopted are bona fide and a subterfuge and the series of transactions which are followed as the means are not colourable devices or dubious methods, the mere fact that there is tax mitigation does not attract the approach in McDowell. As Mr. Dastur put it you would apply the McDowell approach to a case where prima facie the transaction is not what it purports to be, an approach which was adopted by the Mumbai Bench of the tribunal in Kantilal Manilal (82 ITD 354) (Mum), or to a "fake" transaction.

41. It was thus pointed out by Mr. Patil that the income-tax department and the judiciary have accepted a finance lease to be essentially a lease and not a mere money-lending transaction, and if so, the assessee is entitled to depreciation on the assets leased out.

(C) Is Mcdowell applicable?

42. Apart from the general arguments regarding McDowell, which we have already adverted to Mr. Patil contended that on the facts of the present case, there was no scope for applying the rule. He contended that the SLB transaction in the present case was thought of because of the genuine need for finance felt by RSEB. The resolution and the decision taken by the Board of RSEB on the basis of the detailed agenda note placed before the Board on 6.1.1995 showed that there was an acute need for finance by RSEB which forced them to approach the leasing companies for finance. newspaper advertisements were given by RSEB seeking finance. All these are referred to in the documentation. Thus, the very genesis of the SLB transaction in the present case was the genuine need for finance felt by RSEB. The negotiations started in January, 1995 itself with the publication of the advertisements in the newspapers. They culminated in the SLB transaction on 27.3.1995. Therefore, it was not as if the transactions all of a sudden materialized towards the end of the accounting year. The assessee company intended to engage itself in the leasing business in October, 1993 and made a public issue of shares in November, 1993. According to the prospectus issued by assessee company the company was going to undertake leasing, hire purchase and bill discounting activities for which it had the necessary authority in the Memorandum of Association. A special resolution was also passed at the extraordinary general meeting held on 22.6.1993. Pursuant to this object, the assessee company responded to the advertisement issued by RSEB. The assessee was part of a syndicate formed to finance RSEB. The advantage of entering into an SLB transaction was that the assessee was better secured in respect of its monies since it became the owner of the asset. In case there were difficulties in recovering the monies, the assessee need not go to a court of law for enforcement of the security, but can sell the equipment, being the owner thereof, and realize the monies. It was because of this advantage that the parties thought of the SLB arrangement. Therefore, it was a well considered decision taken not merely to obtain a tax benefit, which was only incidental, but mainly to have a better security for the loan. The assessee had two options before it -a simple loan for interest with security or an SLB transaction which will afford a better security to the assessee and also incidentally confer some tax benefit. If two options are open to achieve the same business result, it is open to the assessee to chose the one with a reduced tax liability without attracting McDowell. This is only a tax planning or tax mitigation effort and not tax evasion or tax avoidance. Mr. Patil contended that the assessee was merely taking the benefit of tax advantage given by the law itself and therefore there is nothing colourable or dubious about it. The very essence of an SLB transaction is that there would be a sale first to the would be lessor and thereafter a lease back to the erstwhile owner of the asset and it was this form which the parties chose to adopt with all sincerity and genuineness, the tax benefit by way of depreciation allowance to the assessee being only an incidental consideration.

(9) PKF Finance Ltd. v. JCIT (ITA No. 5331ASR11999 - Amritsar Bench) This is not a case of a sale and lease back transaction at all. The facts are completely different and therefore the order is not applicable.

(10) Braithwhite & Co. Ltd. v. CIT (111 ITR 642 at 560-661) (Cal) Contentions of the Department

78. Mr. Girish Dave, the id. CIT(DR), put forth the following contentions:-

(A) Applicability of McDowell

79. Mr. Dave submitted that the income-tax authorities, contrary to what was contended on behalf of the assessee, have not attempted to rewrite the lease agreement for the parties. According to him, they have only attempted to examine the genuineness of the SLB transaction, which was well within their right. He filed a statement to show that all the assets of GEB were leased out in the subsequent year and wanted us to look at this aspect of the matter as a whole, which according to him, would reveal "a deeper malady" which is to be curbed. Of course, Mr. Dastur, the Id. counsel for the assessee objected to the statement being filed. Mr. Dave drew our attention in this behalf to the judgment of the Gujarat High Court in Wood Polymer Ltd. (109 ITR 177)(Guj), particularly the observations at page 182 and 184 to show that a scheme of compromise was rejected by the court on grounds of tax avoidance despite there being no objection from anybody and that the court refused to accord its sanction to a subterfuse adopted by the parties as it was against public interest to do so. Mr. Dave appealed to us to keep this spirit behind this judgment in view while deciding the present case and submitted that if it is found that the parties before us had adopted a subterfuge or colourable device aimed at tax evasion, the same should be curbed strongly. Countering the argument of the assessee, he pointed out that the observations of the Supreme Court in McDowell regarding tax avoidance are not obiter, but they were guidelines to be followed by all the subordinate courts and Tribunals, wherever the question of tax evasion arises. Reliance was placed on the order of the Mumbai Bench of the Tribunal in DCWT v. Ashwin Shah and connected cases 1264 ITR (AT) 90 at 103)(Mum)] where it was held that even the obiter of the Supreme Court was binding on the ITAT. He submitted that the observations made in McDowell were not confined to a preordained series of transactions, but were applicable generally to cases where a subterfuge or colourable device or dubious methods are practiced for the purpose of tax evasion.