2019 (11) TMI 1021 - AT - Income Tax

Deduction of lease rentals for the equipment - Disallowance of 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 - Revenue for disallowing assessee‟s claim is that the two trustees of CARE are the Directors of holding company of assessee company. Thus, provisions of section 40A(2)(b) are attracted - HELD THAT - In the instant case, as we have pointed earlier, lessee has no option of refusal to own leased asset. We further observe that lease rentals agreed between the parties were so crafted that they substantially cover present fair value of equipment. 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 2012 (7) TMI 282 - DELHI HIGH COURT has held that the provisions of section 40A(2) are not attracted in the case of trust. 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. Alternate prayer of allowing depreciation and interest on the full value of asset as agreed between the parties - value of asset mutually agreed as per the terms of agreement - HELD THAT -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 out in the agreement should be accepted for the purpose of determining depreciation in the hands of assessee. Assessee is eligible for depreciation on the value of asset mutually agreed as per the terms of agreement dated 14-10-2010. In so far as interest component in lease rentals is concerned, the same is allowable under the provisions of Section 36(1)(iii) of the Act. The ground No.2 of the appeal is allowed

Summary

Issues Involved:
1. Disallowance of lease charges on Da Vinci Surgical System.
2. Non-allowance of depreciation on full value contracted and interest expense.

Detailed Analysis:

1. Disallowance of Lease Charges on Da Vinci Surgical System
The assessee, a hospital, leased a surgical robot system from CARE, a charitable trust. The lease agreement stipulated the transfer of the asset to the assessee at the end of the lease period without any additional cost. The Assessing Officer (AO) disallowed the lease rent claimed by the assessee, arguing that the lease payments were essentially installments for acquiring a capital asset. Additionally, the AO invoked Section 40A(2)(b) due to the relationship between the trustees of CARE and the directors of the assessee's holding company. The AO also noted that the asset's value was disproportionate to its written down value.

The Tribunal examined the lease agreement and concluded that the terms indicated a finance lease rather than an operating lease. The lease payments covered the fair value of the asset, and the lessee bore the maintenance and insurance costs, implying operational control and financial liability. Thus, the Tribunal upheld the AO's view that the lease payments were in the nature of capital expenditure.

2. Non-Allowance of Depreciation on Full Value Contracted and Interest Expense
The assessee argued that if the transaction was considered a purchase, depreciation and interest on the full value of the asset should be allowed. The Tribunal noted that the AO and the Commissioner of Income Tax (Appeals) (CIT(A)) had denied this claim based on the written down value of the asset as per the Income Tax Act. However, the Tribunal observed that CARE, being a charitable trust, did not claim depreciation, and the asset was practically new. The Tribunal also noted that the AO did not record any satisfaction that the transfer was intended to reduce tax liability, a mandatory condition for invoking Explanation 3 to Section 43(1).

The Tribunal referred to judgments from the Hon'ble Madras High Court and the Hon'ble Gujarat High Court, emphasizing that the AO must determine the actual cost and record satisfaction regarding the intent to reduce tax liability. Since these conditions were not met, the Tribunal held that the value of the asset as per the agreement should be accepted for depreciation purposes. The interest component in the lease rentals was also deemed allowable under Section 36(1)(iii).

Conclusion
The Tribunal dismissed the assessee's claim for lease charges as revenue expenditure but allowed the alternate claim for depreciation and interest on the full value of the asset. The appeal was partly allowed, with the Tribunal emphasizing the need for the AO to follow statutory requirements when invoking specific provisions of the Income Tax Act.