Galaxy Care Laparoscopy Institute Pvt. Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 1579/PUN/2015

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 0967 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-09-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 11-06-2019
• Assessment Year: 2011-2012
• Appeal Filed On: 03-12-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJEEV GHEI
• Keywords: Capital asset; Depreciation; Charitable institution; Valuation report; Revenue expenditure
• Section: 28; 143(3); 12A; 208

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUNE . , , , BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO . 1579 /PUN/201 5 / ASSESSMENT YEAR : 20 1 1 - 12 GALAXY CARE LAPAROSCOPY INSTITUTE PVT. LTD., 29, RENUKA, PATVARDHAN BAG, PUNE 411004 PAN : AACCG2845E ....... / APPELLANT / V/S. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 11, PUNE / RESPONDENT ASSESSEE BY : SHRI C.H. NANIWADEKAR REVENUE BY : SHRI SANJEEV GHEI / DATE OF HEARING : 1 1 - 06 - 2019 / DATE OF PRONOUNCEMENT : 03 - 0 9 - 2019 / ORDER PER VIKAS AWASTHY, JM : TH IS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - 1, PUNE DATED 29 - 09 - 2015 FOR THE ASSESSMENT YEAR 2011 - 12. 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM THE RECORDS ARE : THE ASSESSEE COMPANY IS RUNNING A HOSPITAL. THE ASSESSEE TOOK ON LEASE A 2 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 SURGICAL ROBOT SYSTEM CALLED DA VINC I SURGICAL SYSTEM FROM CARDIAC RESEARCH & CARE FOUNDATION (IN SHORT CARE). CARE IS A CHARITABLE TRUST REGISTERED U/S. 12A O F THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). AS PER THE TERMS OF LEASE THE ASSESSEE WAS REQUIRED TO PAY LEASE RENTAL AGGREGATING TO RS.7.56 CRORES SPREAD OVER A PERIOD OF FOUR YEARS STARTING FROM FINANCIAL YEAR 2010 - 11. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE CLAIMED RS. 1,17,32,950/ - LEAS E RENT PAID FOR DA VINCI SYSTEM AND CLAIMED THE SAME AS REVENUE EXPENDITURE. THE ASSESSING OFFICER DISALLOWED ASSESSEES CLAIM OF LEASE RENT FOR DA VINC I SURGICAL SYSTEM FOR THE FOLLOWING REASONS : I . AS PER THE TERMS OF LEASE AGREEMENT A SSET WAS TO BE TRANS FERRED 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 PROVI SIONS 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. BEF ORE 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 CI T(A) ERRED ON FACTS AND IN LAW IN UPHOLDING DISALLOWANCE OF LEASE CHARGES OF RS.1,17,32,950/ - ON DA - VINCI SURGICAL SYSTEM. 3 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 B) THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN UPHOLDING THAT THE SAID LEASE TRANSACTION IS NOT LEASE TRANSACTION, BUT IS A TRANSACTION FOR PURCHASE OF A CAPITAL ASSET. HE FURTHER ERRED IN OBSERVING THAT THERE IS NO TRANSPARENCY IN THE TRANSACTION. THE R EASONS ASSIGNED ARE UNTENABLE AND WHOLLY IRRELEVANT. 2. IN ANY CASE THE LEARNED CIT(A) ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEPRECIATION ON FULL VALUE CONTRACTED BETWEEN THE ASSESSE E AND THE LESSOR/SELLER AND ERRED IN RESTRICTING IT ON THE BASIS OF RE - CALCULATED WRITTEN DOWN VALUE. HE ALSO ERRED IN NOT ALLOWING THE INTEREST EXPENSE THEREON WHICH STANDS DEBITED TO PROFIT AND LOSS ACCOUNT. 3. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, DELETE OR SUBSTITUTE ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL. 4 . SHRI C.H. NANIWADEKAR APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE EQUIPMENT DA VINC I SURGICAL SYSTEM WAS PURCHASED B Y CARE IN THE YEAR 2003 FOR RS.1 CRORE. THE SAID EQUIPMENT WAS NOT USED BY CARE, HENCE, IT WAS VIRTUALLY A NEW EQUIPMENT . CARE CHARGED DEPRECIATION ON THE SAID EQUIPMENT ON STRAIGHT LINE METHOD IN ITS BOOKS OF ACCOUNT. HOWEVER, CARE NEITHER CLAIMED DEPRECIATION AS DEDUCTION FROM ITS INCOME NOR CLAIMED IT AS APPLICATION OF INCOME WHILE COMPUTING INCOME IN THE TAX RETURNS. THE WRITTEN DOWN VALUE OF DA VINC I SURGICAL SYSTEM IN THE BOOKS OF CARE WAS RS.5,45,11,506/ - AS ON 31 - 03 - 2011. THE ASSESSEE COMPANY TOOK THE EQUIPMENT ON LEASE ON MUTUALLY AGREED LEASE AGREEMENT DATED 14 - 10 - 2010. THE SAME IS AT PAGES 9 TO 13 OF THE PAPER BOOK. AS PER THE TERMS OF THE LEASE AGREEMENT , THE VALUE OF MACHINE WAS RS.5.75 CRORES AND THE LEASE RENTS WERE FIXED AS UNDER : ASSESSMENT YEAR AMOUNT 2011 - 12 RS.1.44 CRORES 2012 - 13 RS.1.80 CRORES 2012 - 13 RS.2.16 CRORES 2013 - 14 RS.2.16 CORES TOTAL RS.7.56 CRORES 4 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 4 .1 AS PER THE TERMS OF LEASE AGREEMENT THE EQUIPMENT WAS TO BE TRANSFERRED TO THE ASSESSEE AT NIL VALUE. THE ASSESSEE CLAIMED RS.1,17,32,950/ - BEING ACTUAL LEASE RENT PAID AS DEDUCTION. THE ASSESSEE IS FOLLOWING ACCOUN TING STANDARD 19 AND HENCE, CAPITALIZED THE VALUE OF EQUIPMENT OF AT RS.5.75 CRORES. THE ASSESSEE FURTHER CALCULATED DEPRECIATION AND INTEREST THEREON AS REQUIRED UNDER AS 19. HOWEVER, THE DEPRECIATION AND INTEREST WAS ADDED BACK TO THE TOTAL INCOME AND WAS NOT CLAIMED 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 IND IA LTD. THE SAID COMPANY HOLDS 76% SHARES IN THE ASSESSEE COMPANY. ONE OF THE REASONS FOR REJECTING ASSESSEES 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 ATTRACTE D. 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 T HE DECISION OF HONBLE 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 HONBLE JHARKHAND HIGH COURT IN THE CASE OF COMMI SSIONER OF INCOME TAX VS. TATA ROBINS FRASER LIMITED REPORTED AS 5 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 253 ITR 227 AND THE DECISION OF DELHI BENCH TRIBUNAL IN THE CASE OF SAHARA AIRLINES LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX REPORTED AS 83 ITD 11. 4 .4 IN RESPECT OF THIRD OBJECTION OF THE ASSESSING OFFICER THAT THE COST OF ASSET IS ABNORMALLY DISPROPORTIONATE TO THE WRITTEN DOWN VALUE , THE LD. AR SUBMITTED THAT CARE DID NOT CLAIM DEPRECIATION AS DEDUCTION OR APPLICATION OF INCOME IN ITS RETURN OF INCOME. THE EQUIPMENT WAS PRACTICALLY N EW AS IT WAS NOT USED BY CARE. THE ASSET THAT WAS PURCHASED BY THE TRUST AT RS.8.16 CRORES WAS OBTAINED BY THE ASSESSEE AT ALMOST 70% OF ITS ORIGINAL VALUE UNDER LEASE AGREEMENT. AFTER INSTALLING THE EQUIPMENT, THE TURNOVER OF ASSESSEE INCREASE D FROM RS. 7.25 CROERS IN ASSESSMENT YEAR 2010 - 11 TO RS.13.58 CRORES IN ASSESSMENT YEAR 2013 - 14. THUS, THERE WAS ALMOST 90% INCREASE IN THE TURNOVER OF ASSESSEE IN SHORT SPAN OF FOUR YEARS. THUS, THE CONTENTIONS OF THE AUTHORITIES BELOW THAT NO BENEFIT HAS ACCRUED TO THE ASSESSEE ARE FACTUALLY INCORRECT. 4.5 THE LD. AR MADE AN ALTERNATE SUBMISSION THAT IF TRANSACTION IS HELD TO BE PURCHASE OF ASSET THEN THE ASSESSEE S CLAIM OF DEPRECIATION AND INTEREST SHOULD BE ALLOWED. THE LD. AR IN SUPPORT OF HIS ALTERNATE CLAI M FURNISHED WRITTEN SUBMISSIONS AS UNDER : EXPL. 3 TO SEC. 43(1) CAN BE INVOKED ONLY IF THE A.O. RECORDS HIS SPECIFIC SATISFACTION THAT THE TRANSACTION WAS ENTERED INTO WITH INTENTION OF REDUCING TAX LIABILITY AND THE APPELLATE AUTHORITY CANNOT SUBSTITUTE ITS OPINION TO SUSTAIN SUCH APPLICABILITY (ASHWIN VANASPATI INDUSTRIES 255 ITR 26 [GUJ], SEKAR OFFSET PRESS 214 ITR 516 [MAD]. IN OUR CASE THERE IS NO SUCH RECORDING AND HENCE REVISITING THE COST IS UNTENABLE. EVEN OTHERWISE, THE EXPLANATION IS APPLICABLE ONLY IF THE ASSET WAS PREVIOUSLY U SED BY ANY OTHER PERSON FOR THE PURPOSES OF BUSINESS AND THAT THE INTENTION BEHIND THE TRANSFER WAS TO REDUCE TAX LIABILITY BY CLAIMING DEPRECIATION WITH REFERENCE TO ENHANCED COST. IN OUR CASE CARE WAS USING THE ASSET NOT FOR THE PURPOSES OF BUSINESS BUT FOR THEIR CHARITABLE ACTIVITIES. ALSO CARE WAS NOT CLAIMING DEPRECIATION FOR TAX PURPOSES AND THUS COST REMAINED AT RS.8.16 CRS AND WAS TAKEN BY THE ASSESSEE AT RS.5.75 CRS. I.E. 6 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 AT ABOUT 70% OF THE COST. THERE WAS THUS NO ENHANCEMENT OF COST AT ALL. T HUS TWO ESSENTIAL INGREDIENTS OF EXPL. 3 ARE ABSENT. CARE IS ALSO NOT A RELATED PARTY AS HELD BY DELHI HC IN SHANKAR TRADINGS 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. W E 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 ASSESSEES CLAIM OF DEDUCTION OF LEASE RENTALS FOR THE EQUIPMENT. THE AUTHORITIES BELOW DISALLOWED ASSESSEES 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 TH E 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 ASSESSEES CLAIM IS THAT THE TWO TRUS TEES OF CARE ARE THE DIRECTORS OF HOLDING COMPANY OF ASSESSEE COMPANY. THUS, PROVISIONS OF SECTION 40A(2)(B) ARE ATTRACTED. 7. THE ASSESSEE HAS FILED COPY OF LEASE AGREEMENT AT PAGE 9 OF THE PAPER BOOK. A PERUSAL OF TERMS AND CONDITIONS OF LEASE AGREE MENT REVEAL THAT AT THE END OF LEASE PERIOD THE LESSOR (CARE) WOULD TRANSFER THE EQUIPMENT TO THE LESSEE (ASSESSEE) FREE OF COST. THUS, AT THE BEGINNING OF LEASE IT WAS MUTUALLY DECIDED BETWEEN BOTH THE PARTIES (I.E. LESSOR AND LESSEE) THAT THE 7 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 OWNERSHIP OF EQUIPMENT SHALL BE TRANSFERRED TO THE LESSEE AT THE END OF LEASE TERM. THE OPTION TO OWN OR TO REFUSE TRANSFER OF OWNERSHIP OF EQUIPMENT AT THE END OF LEASE PERIOD WAS NOT AVAILABLE TO THE ASSESSEE. FURTHER, THE LEASE PAYMENTS FIXED MATCHES/EXCEEDS TH E FAIR VALUE OF THE ASSET. APART FROM LEASE RENTALS, THE LESSEE HAD TO PAY FOR MAINTENANCE AND INSURANCE OF THE ASSET. THUS, THE LESSEE IS NOT ONLY HAVING OPERATIONAL CONTROL OVER THE ASSET BUT IS ALSO EXPOSED TO FINANCIAL LIABILITY OF MAINTAINING THE AS SET. THUS, THE TERMS AND CONDITIONS OF THE AGREEMENT HAVE TRAPPINGS OF FINANCE LEASE UNDER WHICH THE OWNERSHIP OF ASSET IS ULTIMATELY TRANSFERRED TO LESSEE AT THE END OF LEASE TERM. 8. THE ASSESSEE /APPELLANT HAS PLACED RELIANCE ON THE DECISION OF HON BLE JHARKHAND HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. TATA ROBINS FRASER LIMITED (SUPRA) TO CONTEND THAT MERE MENTIONING OF CLAUSE FOR TRANSFER OF ASSET WOULD NOT MEAN THAT THE LEASE RENTALS ARE IN THE NATURE OF PAYMENT OF ASSET OR INSTALLMENTS TOWARDS THE COST OF ASSET . THERE IS NO DISPUTE THAT THERE IS DIFFERENCE BETWEEN LEASE AGREEMENT AND HIRE PURCHASE AGREEMENT . THE OPTION IN THE LEASE AGREEMENT TO PURCHASE THE ASSET WOULD NOT MAKE IT HIRE PURCHASE AGREEMENT. HOWEVER, MERE ME NTIONING OF LEASE AGREEMENT OR HIRE PURCHASE AGREEMENT ON THE TILE WOULD NOT DETERMINE THE NATURE OF AGREEMENT . IT IS THE TERMS AND CONDITIONS AND COVENANTS OF AGREEMENT THAT REALLY DETERMINES THE NATURE OF AGREEMENT. IN THE INSTANT CASE, AS WE HAVE POIN TED 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. 9. IN SO FAR AS THE OBJECTION RAISED BY TH E REVENUE THAT SOME OF THE TRUSTEES OF CARE WERE THE DIRECTORS OF HOLDING COMPANY OF ASSESSEE AND 8 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 HENCE , PROVISIONS OF SECTION 40A(2)(B) ARE ATTRACTED, WE DO NOT FIND MERIT IN REJECTING ASSESSEES CLAIM OF THIS GROUND. A BARE PERUSAL OF PROVISIONS OF SECT ION 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 HONBLE DELHI HIGH COURT IN THE CASE OF SHANKER TRADING (P) LTD. VS. COMMISSIONER OF INCOME TAX (SUPRA) HAS HELD THAT THE PROVIS IONS 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 VALUE D 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 WELL ON THE GROUND THAT THE WRITTEN DOWN VALUE OF ASSET ON THE DATE OF TRANSFER AS PER THE INCOME TAX ACT IS RS. 30,48,137/ - . UNDISPUTEDLY, THE ASSET WAS PURCHASED BY CARE IN THE YEAR 2002 - 03 AT RS.8,16,65,178/ - . IN T HE BOOKS OF CARE THE VALUE OF ASSET AS ON 31 - 03 - 2011 AFTER COMPUTING DEPRECIATION ON STRAIGHT LINE METHOD WAS RS.5,45,11,506/ - . THE FACT THAT CARE BEING PUBLIC CHARITABLE TRUST NEVER CLAIM ED BENEFIT OF DEPRECIATION ON THE SAID EQUIPMENT NOR DEPRECIATION W AS CLAIMED AS UTILIZATION OF FUNDS HAS NOT BEEN REBUTTED BY THE DEPARTMENT. SINCE, THE BENEFIT OF DEPRECIATION WAS NOT CLAIMED BY 9 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 CARE THE METHOD OF COMPUTING DEPRECIATION BY CARE WOULD NOT HAVE ANY IMPLICATION ON TAX INCIDENCE OF THE TRUST. THE TRANSACTI ON BETWEEN ASSESS E E AND CARE IS AT ARMS LENGTH. WE HAVE ALREADY REJECTED THE REASONING GIVEN BY ASSESSING OFFICER FOR INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. 12. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS INVOKED THE PROVISIONS OF SEC TION 43(1) EXPLANATION 3 TO REJECT THE VALUE OF EQUIPMENT AT WHICH IT HAS BEEN ACQUIRED BY THE ASSESSEE. IT WOULD BE RELEVANT TO RECORD HERE THAT THE ASSESSING OFFICER DURING ASSESSMENT PROCEEDINGS HAS NOWHERE OBSERVED THAT THE TRANSFER OF ASSET WAS FOR RE DUCING THE TAX LIABILITY. THE MANDATORY CONDITION FOR INVOKING EXPLANATION TO SECTION 43(1) IS THAT THE ASSESSING OFFICER SHOULD RECORD SATISFACTION THAT THE MAIN PURPOSE OF TRANSFER OF ASSET DIRECTLY OR INDIRECTLY IS TO REDUCE LIABILITY OF INCOME TAX BY C LAIMING DEPRECIATION ON HIGHER VALUE. WE OBSERVE THAT SATISFACTION AS ENVISAGED UNDER EXPLANATION 3 TO SECTION 43(1) IS MISSING IN THE INSTANT CASE. IN THE ABSENCE OF SUCH SATISFACTION EXPLANATION 3 CANNOT BE INVOKED. THE HONBLE MADRAS HIGH COURT IN THE C ASE OF COMMISSIONER OF INCOME TAX VS. SEKAR OFFSET PRESS (SUPRA) HAS HELD THAT EXPLANATION 3 TO SECTION 43(1) WOULD BE ATTRACTED ONLY IN CASES WHERE THE ASSESSING OFFICER IS SATISFIED THAT THE MAIN PURPOSE OF TRANSFER OF SUCH ASSETS, DIRECTLY OR INDIRECTLY , TO THE ASSESSEE WAS FOR REDUCTION OF LIABILITY TO INCOME - TAX. THE RELEVANT EXTRACT OF THE JUDGMENT IS REPRODUCED HEREIN IN UNDER: 4. EXPLANATION 3 TO SECTION 43(7) WOULD 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 10 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 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 B USINESS 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, TH E 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 TO PAY INCOME - TAX AT THE TIME OF TRANSFER WOULD NOT HAVE BEEN IN THE MIND OF ANY ONE AT ALL. BE THAT AS IT MAY, THE ITO IS OBLIGED TO RECORD HIS SATISFACTION THAT THE TRANSFER OF THE ASSETS WAS FOR REDUCING THE LIABILITY TO PAY INCOME - TAX. BUT, IN THIS CASE, THE ITO HAS NOT RECORDED ANY SUCH SATISFACTION. UNDER THE CIRCUMSTANCES, IT WAS OPEN TO THE APPELLATE AUTHORITIES TO CONSIDER THE MATTER TO ASCERTAIN WHETHER EXPLANATION 3 TO SECTION 43(7) WAS ATTRACTED. CONSIDERING T HE FACTS AND CIRCUMSTANCES OF THE CASE, THE DEPARTMENT COULD NOT HOPE TO SATISFY THE APPELLATE AUTHORITIES THAT THE TRANSFER WAS FOR REDUCING THE TAX LIABILITY. THE FACTS, AS THEY ARE, COULD NOT LEAD TO THE SAID CONCLUSION. UNDER THE CIRCUMSTANCES, EXPLANA TION 3 TO SECTION 43(7) WAS CLEARLY NOT ATTRACTED. THERE IS, THEREFORE, NO ILLEGALITY IN THE FINDING OF THE TRIBUNAL . 13. THE HONBLE GUJRAT HIGH COURT IN THE CASE OF ASHWANI VANASPATI INDUSTRIES (SUPRA) W H ERE THE ASSESSEE COMPANY ACQUIRED ASSETS ON DISS OLUTION OF A FIRM AFTER REVALUATION AT A COST HIGHER THAN THE WRITTEN DOWN VALUE OF ASSETS, THE ASSESSING OFFICER INVOKED THE PROVISIONS OF EXPLANATION 3 TO SEC. 43(1) OF THE ACT, THE TRIBUNAL UPHELD THE FINDINGS OF ASSESSING OFFICER. ON APPEAL BY THE ASS ESSEE, THE HONBLE HIGH COURT REFERRING TO THE PROVISIONS OF SECTION 43(1) AND EXPLANATION 3 HELD: 13. PROVISION OF SECTION 43(1) AND EXPLANATION 3 TO THE SAID SECTION AS ARE NECESSARY FOR THE PURPOSE OF DECIDING THE CONTROVERSY AT HAND READ AS UNDER : '43. DEFINITIONS OF CERTAIN TERMS RELEVANT TO INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION. IN SECTIONS 28 TO 41 AND IN THIS SECTION, UNLESS THE CONTEXT OTHERWISE REQUIRES ( 1 ) ACTUAL COST MEANS THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE, REDUC ED BY THAT PORTION OF THE COST THEREOF, IF ANY, AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY : ****** EXPLANATION 3. WHERE, BEFORE THE DATE OF ACQUISITION BY THE ASSESSEE, THE ASSETS WERE AT ANY TIME USED BY ANY OTHER PERSON FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION AND THE INCOME - TAX OFFICER IS SATISFIED THAT THE 11 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 MAIN 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 REDUCI NG 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 ACTU AL 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 PAY INCOME - TAX AND FOR THIS PURPOSE AN APPELLATE AUTHORITY CANNOT SUBSTITUTE ITS OPINION TO SUSTAIN THE APPLICABILITY OF THE SAID EXPLANATION 3 ONLY BECAUSE THE ASSETS WHICH ARE TRANSFERRED WERE USED BY ANY OTHER PERSON BEFORE THE DATE OF ACQUISITION. THE DUTY CAST UPON THE ASSESSING OFFICER BY THE PROVISION IS TO DETERMINE THE ACTUAL COST AND NOT TO SUBSTITUTE A VALUERS OPINION. AT THE SAME TIME, MERELY BECAUSE A DOCUMENT IN THE NATURE OF CONTRACT OF PURCHASE IS ENTERED INTO DENOTING CERTAIN PRICE, THE SAME WOULD NOT CONCLUSIVELY ESTABLISH CORRECTNESS OF THE CLAIM MADE BY AN ASSESSEE IF THE ASSESSING OFFICER IS OF THE OPINION THA T THE TRANSACTION IS BY WAY OF SUBTERFUGE OR DEVICE IN ORDER TO AVOID TAX WHICH THE ASSESSEE IS OTHERWISE LIABLE TO PAY OR THAT THE TRANSACTION IS ILLUSORY OR COLOURABLE OR THAT THE ASSESSEE HAS ACTED FRAUDULENTLY. IN SUCH CIRCUMSTANCES, IT WOULD ALWAYS BE OPEN TO THE ASSESSING OFFICER TO GO BEHIND CONTRACT AND ASCERTAIN THE ACTUAL COST SO AS TO DETERMINE THE CORRECT LIABILITY TO TAX. BUT AT THE SAME TIME, IT NEEDS TO BE EMPHASIZED THAT THE EXPLANATION 3 DOES NOT REQUIRE DETERMINATION OF MARKET VALUE AT THE HANDS OF THE ASSESSING OFFICER BUT SPEAKS OF DETERMINATION OF ACTUAL COST BY THE ASSESSING OFFICER WITH PRIOR APPROVAL OF THE IAC HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. ********* ********* 21. THE ASSESSEE HAVING MADE A CLAIM FOR DEPRECIATI ON ON ENHANCED COST, WHICH IS ACTUAL COST IN ITS HANDS, IT WAS NECESSARY FOR THE AUTHORITY WHO WANTED TO DETERMINE THE ACTUAL COST [AS REQUIRED BY EXPLANATION 3 TO SECTION 43] TO PLACE SOME EVIDENCE ON RECORD. IT COULD NOT HAVE SUBSTITUTED ITS OPINION AN D ADOPTED BOOK VALUE OR THE WRITTEN DOWN 12 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 VALUE IN HANDS OF THE ASSESSEE - COMPANY. AS CAN BE SEEN FROM THE EXPLANATION 3 TO SECTION 43(1), THE ITO IS REQUIRED TO DETERMINE ACTUAL COST TO THE ASSESSEE HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE AND IF IN HIS OPINION THE WRITTEN DOWN VALUE WAS THE ACTUAL COST, HE OUGHT TO HAVE SUPPORTED THE SAME BY PLACING SUFFICIENT EVIDENCE SO AS TO DISLODGE THE VALUATION REPORT OF THE REGISTERED VALUER. ON HIS HAVING FAILED TO DO SO, EVEN IF THE EARLIER PORTION OF THE PROVISIONS, VIZ., THE CONDITION OF THE ASSETS HAVING BEEN USED BY ANOTHER PERSON BEFORE THE DATE OF ACQUISITION, STANDS FULFILLED, THE PROVISIONS CANNOT BE APPLIED. [EMPHASIZED BY US] THE HONBLE HIGH COURT IN AN 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 ACCOR DANCE 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 WRITT EN 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 O F THE SAID PROVISIONS FOR REJECTING ASSESSEES 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 ASSESSE E . 15. IN THE BACKDROP OF THE FACTS OF T HE CASE AND JUDGMENTS REFERRED ABOVE WE HOLD THAT THE ASSESSEE IS ELIGIBLE FOR DEPRECIATION ON THE VALUE OF ASSET MUTUALLY AGREED AS PER THE TERMS OF AGREEMENT DATED 14 - 10 - 2010. IN 13 ITA NO .1579/PUN/2015, A.Y. 2011 - 12 SO FAR AS INTEREST COMPONENT IN LEASE RENTALS IS CONCERNED, THE SAME IS ALL OWABLE UNDER THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT. THE GROUND NO.2 OF THE APPEAL IS ALLOWED, ACCORDINGLY. 16. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED IN THE TERMS AFORESAID. ORDER PRONOUNCED ON TUESDAY, THE 03 RD DAY OF SEPTEMBER, 2019. SD/ - SD/ - ( . /D. KARUNAKARA RAO ) ( / VIKAS AWASTHY) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE; / DATED : 03 RD SEPTEMBER, 2019 RK / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 1, PUNE 4. THE PR. COMMISSIONER OF INCOME TAX - 1, PUNE 5. , , , / DR, ITAT, A BENCH, PUNE. 6. / GUARD FILE. // // TRUE COPY// / BY ORDER, / PRIVATE SECRETARY, , / ITAT, PUNE