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7. The next dispute is against the disallowance of depreciation on the cost of electric meters and transformers purchased during the relevant previous year from Andhra Pradesh State Electricity Board (hereinafter referred to as the APSEB) and leased out to them. The assessee acquired certain meters worth Rs. 15,08,93,634 and transformers worth Rs. 4,91,06,482 and claimed depreciation at 100 per cent on the cost of the meters and Rs. 61,38,3 10 on power transformers. The assessing officer noticed that electric meters were originally purchased by APSEB during 1985 to 1989 and the written down value in their hands was nil. They were transferred to the assessee at the original cost of APSEB. There was no physical transfer of these assets to the assessee and, in fact, there was no possibility of their actual transfer as these meters were expected to be installed in the premises of hundreds or thousands consumers of APSEB. These assets were never got valued by the assessee nor by APSEB which gave an impression that the price paid was actually finance provided by the assessee to APSEB. There was no physical inspection of these assets by the assessee, nor was it ever possible being installed throughout the State of Andhra Pradesh. There was no possibility of the assessee recovering its dues from APSEB in case of payment default by sale of these assets. From the above facts and circumstances, the assessing officer held that real purpose of the payment. to APSEB was not towards the cost of acquisition of these assets but a purely financial deal wherein finance has been provided to APSEB in the garb of a leasing arrangement. He, therefore, disallowed the claim of the aggregate depreciation of Rs. 15,70,31,944.

"(a) Vendee purchasing assets even without taking care to value it; (b) Vendee purchasing assets without inspecting it; (c) vendor. remaining, in possession of the assets although possession is professedly transferred; (a) extent of avoidance of tax etc. It is an admitted fact in the present case that appellant did not take care to value the assets nor did he inspect it before purchase. it is also an admitted fact that assets continued to remain in the possession of APSEB. Over the same assets APSEB got 100 per cent depreciation in respect of meters and normal depreciation on transformers and appellant is now claiming identical depreciation resulting in huge tax avoidance. Only to curb this malpractice Explanation 4A to section 43(1) has been inserted with effect from 1-10-1996. From a perusal of the deeds of conveyance whereby APSEB transferred all rights etc. in equipments to appellant and agreements of lease of the same equipments by the lessor i.e., appellant to lessee i.e., APSEB, vide deed of conveyance dated 31-1-1994, 19 transformers & 694009 meters were transferred to appellant which were leased back to APSEB vide lease agreements dated 1-2-1991, 2-2-1994 & 3-2-1994, However, by lease agreement dated 21-3-1994, appellant leased out 6 transformers and 267500 meters to APSEB though appellant did not have any such asset as on 21-3-1994. There is a conveyance deed dated 21-3-1994 for transfer from APSEB of 6 transformers and 235467 meters but that conveyance deed was to come into effect only from 25-3-1994. Thus vide lease dated 21-3-1994, appellant leased out assets which it did not possess. Appellant's undertaking that he is the absolute owner of the equipments in para 2 of page 3 of the lease deed was thus a false undertaking. This is an indication of the shamness of the whole transaction. Vide para 4 at page 6 of the lease deeds the lessee declared that the lessee had taken prior inspection of the equipments and that the lessee had obtained all consents, approvals, etc. as are necessary for/or in connection with the enforceability, validity and extension of the agreements. The very short duration between the deeds of conveyance and the lease agreements suggest that inspection of over 9 lakh meters, and obtaining consents, approvals etc. could not have been made by the lessee unless such job was undertaken long before the first transfer of the assets to appellant. Thus it is apparent that transfer of asset to appellant and subsequent leasing out of the assets again to APSEB were not isolated events that happened naturally but was part of a colourable device for tax avoidance conceived much earlier. Mc.Dowell's case reported in 154 ITR 148 is about such colourable device and it is to be held that the transaction between appellant and APSEB were sham transactions and what was really done was advance of finance to APSEB in the garb of purchase of assets and subsequent leasing out of assets. As much has been admitted by the appellant when it made the alternate suggestion that in case benefit of depreciation is denied then capital component of the receipt of lease rent of the assets should not be taxed. This is an acceptable proposition as only interest accruing from advancement of loan can be taxed as a revenue receipt and not the capital component of repayment. In view of what has been discussed above, I have no hesitation in holding that payments made to APSEB was not towards cost of acquisition of meters and transformers but was for advancing finance to APSEB, that depreciation claimed on these assets to the tune of Rs. 15,70,31,944 is not allowable and that alternate proposition of the appellant for not taxing capital component of alleged lease rent is acceptable. The ground is disposed of as above."

9. The learned counsel of the assessee submitted that the fact that no physical delivery is taken is not a ground for rejecting the claim of the assessee as the delivery was by agreement. As regards valuation and Nil W.D.V. in the hands of APSEB, he submitted that Explanation 3 is not invoked and the value is raised at cost plus tax to APSEB. Explanation 4A could be applicable in such cases that came into being with effect from 1-10-1966. which allows depreciation only on W.D.V. to the original owner. The alternate plea of the assessee is that the department has assessed the entire rental as income and if the depreciation is to be disallowed, it should have been assessed at the rental minus cost recovery included in such rental. The learned departmental Representative, on the other hand, supporting the orders of the revenue authorities submitted that in absence of physical delivery, the meters and transformers can only form the asset of the assessee and, consequently, no depreciation could be allowed thereon.