Interesting case beyond Normal Provision : Lease rentals agreed between the parties were so crafted that they substantially cover present fair value of equipment & cannot be allowed as Revenue expenditure
Deduction of lease rentals for the equipment – lease rentals agreed between the parties were so crafted that they substantially cover present fair value of equipment – it is a case of purchase of asset by the assessee from CARE in the garb of lease agreement – Cannot be allowed as Revenue expenditure – However, depreciation to be allowed.
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
GALAXY CARE LAPAROSCOPY INSTITUTE PVT. LTD. VERSUS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE – 11, PUNE