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TMI Blog2019 (11) TMI 1021X X X X Extracts X X X X X X X X Extracts X X X X ..... lease rent paid for Da Vinci System and claimed the same as revenue expenditure. The Assessing Officer disallowed assessee‟s claim of lease rent for Da Vinci Surgical System for the following reasons : i. As per the terms of lease agreement asset was to be transferred to the assessee. Hence, alleged lease rents are in fact installments for acquiring a capital asset. ii. Since, two trustees of CARE are the Directors of Quality Care India Ltd., the company having substantial interest in the assessee company, the provisions of section 40A(2)(b) are attracted. iii. The value of the asset is glaringly disproportionate to the written down value calculated as per Act. The assessee filed appeal against the assessment order dated 20-03-2014 passed u/s. 143(3) of the Act. Before the Commissioner of Income Tax (Appeals), the assessee remained unsuccessful, hence, the present appeal. 3. The assessee in appeal has assailed the findings of Commissioner of Income Tax (Appeals) by raising following grounds : "1. a) The learned CIT(A) erred on facts and in law in upholding disallowance of lease charges of Rs. 1,17,32,950/- on Da-Vinci Surgical system. b) The learned CIT (A) erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that two trustees of CARE i.e. Dr. B. Soma Raju and Dr. N. Krishna Reddy are also the Directors of Quality Care India Ltd. The said company holds 76% shares in the assessee company. One of the reasons for rejecting assessee‟s claim is that the trustees of CARE are the Directors of holding company of assessee and hence, the provisions of section 40A(2)(b) get attracted. The ld. AR controverting the findings of authorities below submitted that section 40A(2)(b) does not apply on the trust and that to a public charitable trust registered u/s. 12A of the Act. In support of his submissions the ld. AR placed reliance on the decision of Hon‟ble Delhi High Court in the case of Shanker Trading (P) Ltd. Vs. Commissioner of Income Tax reported as 208 Taxman 526. 4.3 The ld. AR further submitted that merely for the reasons lease agreement provides for transfer of asset at the end of lease period does not mean that the lease rent partake the character of payment of installment towards the cost of asset. To support of his contentions the ld. AR placed reliance on the decision of Hon‟ble Jharkhand High Court in the case of Commissioner of Income Tax Vs. Tata Robins Fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by Delhi HC in Shankar Trading's case (254 CTR 44). We asserts that the CIT(A)'s finding that CARE has claimed depreciation is factually incorrect. * The CIT(A) has not at all adjudicated on the issue of interest claim." 5. On the other hand Shri Sanjeev Ghei representing the Department vehemently defended the order of Commissioner of Income Tax (Appeals) and prayed for dismissing the appeal of assessee. 6. We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. The assessee acquired Da Vinci Surgical System from CARE on lease. The assessment year under appeal is the first year of assessee‟s claim of deduction of lease rentals for the equipment. The authorities below disallowed assessee‟s claim of lease payment as revenue expenditure primarily on the ground that at the end of lease period, the asset would be transferred to the assessee and the value of asset at which it is transferred to the assessee is disproportionate to the written down value computed under the provisions of the Act. Another objection that has been raised by the Revenue for disallowing assessee‟s claim is that the two tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 40A(2)(b) are attracted, we do not find merit in rejecting assessee‟s claim of this ground. A bare perusal of provisions of section 40A(2) would show that there is no mention of trust in the list of persons mentioned in clause (b) of sub-section (2). The Hon‟ble Delhi High Court in the case of Shanker Trading (P) Ltd. Vs. Commissioner of Income Tax (supra) has held that the provisions of section 40A(2) are not attracted in the case of trust. 10. Be that as it may, after examining the lease agreement we are of considered view that it is a case of purchase of asset by the assessee from CARE in the garb of lease agreement. Accordingly, ground No. 1 of the appeal by assessee is dismissed. 11. In ground No. 2 of the appeal, the assessee has made an alternate prayer of allowing depreciation and interest on the full value of asset as agreed between the parties. As per terms and conditions of agreement, the assessee was to pay Rs. 7.56 crores over the period of four years to CARE. The equipment was valued at Rs. 5.75 crores for arriving at the lease rentals and the balance is towards interest @ 11%. The authorities below have denied alternate claim of assessee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of the transfer of such assets, directly or indirectly to the assessee, was for the reduction of the liability to income- tax. There is no other circumstance under which this Explanation can be invoked. The first requirement that the assets would be used by any other person is satisfied in the instant case, inasmuch as the assets were of a dissolved firm, which was paying income-tax. The second and the main requirement that the transfer should be mainly for reducing the liability is not at all established in the instant case. The facts of the case, however, indicate that after the death of the father, the sons could not carry on business together and happily. There were serious differences among them which needed the help of three other important persons of the locality for an amicable settlement. It is the admitted case that at the intervention of three persons of the locality, the firm was dissolved and the assets distributed. It is true that while distributing the assets, they were revalued, based on their existing market value. But that by itself would not lead to the conclusion that it was so done for reducing the tax liability. Indeed, the question of liability t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer may, with the previous approval of the Inspecting Assistant Commissioner, determine having regard to all the circumstances of the case." 14. Therefore, clause (1) of section 43 lays down that actual cost in the hands of an assessee means the actual cost of the assets as reduced by that portion of the cost which may have been met directly or indirectly by any other person. Explanation 3 to the said sub-section stipulates that: (i)The assets which are acquired by the assessee were used by any other person before the date of acquisition. (ii)The ITO arrives at objective satisfaction that such assets were transferred with the main purpose of reducing tax liability by claiming depreciation with reference to enhanced cost. (iii)Then the ITO is empowered to determine the actual cost having regard to all the circumstances of the case. Thus, the Explanation, in fact, extends the meaning of the term 'actual cost' in certain circumstances and grants power to the ITO to determine the actual cost in hands of the assessee. 15.Hence, it is crystal clear that the Assessing Officer is obliged to record a satisfaction that the assets were transferred for reducing the liability to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n unambiguous terms held that for invoking the provisions of Section 43(1) and Explanation 3two conditions have to be satisfied viz: i. It is not the written down value or market value that has to be adopted, it is the "actual cost" of the underlining asset that has to be determined by the AO in accordance with the provisions of the section; ii. The AO is under obligation to record satisfaction that the asset has been transferred for reducing the tax liability 14. In the instant case we observe that the Assessing Officer in the assessment order has failed to satisfy both the conditions. Neither "actual cost‟ as envisaged under section 43(1) was determined by the Assessing Officer, nor satisfaction was recorded by the Assessing Officer to the effect that the transfer of asset at a rate higher than the written down value was with ulterior motive of reducing tax liability by claiming depreciation on enhanced cost. Since, the conditions set out for invoking the provisions of Section 43(1) and Explanation 3 are not fulfilled, the department cannot take support of the said provisions for rejecting assessee‟s claim. Hence, the value of underlying asset/equipment as set ou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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