AI Drafter 
TaxTMI 
TaxTMI 
2019 (11) TMI 1021
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....tion the assessee claimed Rs. 1,17,32,950/- 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....
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.... as deduction in the return of income. Only actual lease rent paid was claimed as deduction. 4.2 The ld. AR further submitted 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....
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....out 70% of the cost. There was thus no enhancement of cost at all. Thus two essential ingredients of expl. 3 are absent. CARE is also not a related party as 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 dispropor....
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....r present fair value of equipment. 9. In so far as the objection raised by the Revenue that some of the trustees of CARE were the Directors of holding company of assessee and hence, provisions 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 ye....
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....ould be attracted only in cases where, before the date of acquisition by theassessee, the assets were at any time used by any other person for the purposes of his business and the ITO is satisfied that the main 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 whil....
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.... purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Income-tax Officer 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, ex....