Dr. Harinder Mittra ... v. Asstt. Commr. Of Inc...

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"1. That the CIT(A) was not justified in sustaining the disallowance of Rs. 67,52,250/- made by the AO out of depreciation of Rs. 90,00,000/- claimed by the assessee on Surgical Laser purchased by the assessee. Both the CIT(A) and AO while making/sustaining this disallowance relied upon a very narrow definition of computers and thereby reducing the rate of depreciation from 60 to 15%.

2. That without prejudice to the ground no. 1, both the AO and the CIT(A) failed to appreciation that as per prescribed rates of depreciation the rate prescribed is 40% on Surgical Lasers and not 15% adopted by AO on general plant & machinery.

3. That the CIT(A) while sustaining this disallowance not only ignored the written submissions of the assessee but also exceeded his jurisdiction by sustaining the finding of the AO that surgical laser used for eye surgery is not life saving device, therefore depreciation @ 40% is not allowable.

4. That the CIT(A) was not justified in sustaining the action of the AO in relying upon the statement of one Mr. Sanjay Babbar without confronting the same to the assessee. This action of the CIT(A) and AO is against the natural justice.

5. That the CIT(A) was not justified in sustaining the disallowance of Rs. 20,50,539/- made by the AO out of depreciation of Rs.32,80,862/- claimed by the assessee on two surgical lasers purchase in his earlier years and depreciation allowed @ 40% by the AO in those years. The CIT(A)wrongly upheld the finding of the AO that depreciation should have been allowed @ 15% against 40% claimed by the assessee and thereby unsettled the previous history of the case.

6. That the CIT(A) has wrongly sustained the disallowance of Rs. 41,16,236/- out of depreciation of Rs. 5,54,981/- claimed by the assessee on computers purchased in earlier years. The reduction of depreciation from 60% to 15% clearly amounted to change of opinion and is against the facts of the case and legal provisions.

7. That the CIT(A) has wrongly sustained the addition of Rs. 1,00,000/- made by the AO u/s 69C on clear presumptions and assumptions."

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2. The facts of the case are that the assessee is a Doctor by Profession, an Eye Specialist and running his own hospital in the name of Mitra Eye Hospital at Phagwara. The AO, while finalizing the assessment for the assessment year 2012-13, under section 143(3) of the Income Tax Act, 1961 made additions on account of disallowance of depreciation amounting to Rs.67,52,250/- on the new Computerized Laser Machine purchased and installed by the assessee during the year. Further, the AO made an addition of Rs.20,50,539/- by reducing the rate of depreciation from 40%, as claimed by the assessee in earlier years, to 15% and also a disallowance of Rs.4,16,236/-, again out of depreciation by reducing the rate from 60% to 15%, as claimed in the earlier years. The addition of Rs.1 lac was also made on account of unexplained expenditure u/s 69C of the Act.

3. Apropos Ground nos. 1 to 4, the facts are that the assessee purchased a Laser, namely, IL SE FS COMPUTER SYSTEM-2IEX CAP, 220V during the year from M/s. Abbott Medical Optics (P) Ltd., vide Invoice no. P-18042011-1 dated 18.04.2011 for Rs.1.50 crores. The assessee claimed depreciation @ 60% on this machine, on the basis that this entire machine is basically a computer system which is used to carry out eye surgery.

4. Before the AO, the assessee submitted that the machine was immediately put to use after its purchase; that it was a full-fledged

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computerized system to undertake initial processing before surgery; that it was a computer system used in association with Lasik Laser Machine and other surgeries; that this computer system helps in getting better results of Laser and surgery; that in fact, it is a full-fledged computerized system to undertake processing before surgery; that the process of this computer system can be explained by taking the example of laser surgery; that in laser, initially, the full measurement of the eye is to be divided into parts; that if the top 20% portion is to be kept intact, then, using the laser machine, this 20% portion is peeled off; that this is called making of flap; that then, laser treatment is undertaken on the balance 80% portion of the eye; that the computer system of the assessee is used to measure the precise 20% portion of the eye; that it undertakes only the measurement part and rest everything is done by the Laser machine; that the term 'computer' is not defined in the Act; that as per the Merriam - Webster online dictionary, Computer means one that computes; that as per Wikipedia, a computer is a general purpose device that can be programmed to carry out a set of arithmetic or logical operations automatically; that since a sequence of operations can be readily changed, the computer can solve more than one kind of problems; that conventionally, a computer consists of at least one processing element, typically a central processing unit (CPU) and some form of memory; that computers can be of various types, like weather forecasting computers, defense application computers,

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Space/Astronauts usable computers, as well as medical use computers etc.; that all these features are there in the machine of the assessee; that this machine measures the exact thickness of the flap, i.e., it computes, or it performs arithmetic or logical operation; that it has its own internal memory as well as DVD Drive, Floppy drive, etc., for external memory; that further, computation is the integral part of this machine; that use of this machine is in calculation of exact thickness in terms of percentage of the total eye; that the Flap is lifted manually by some other machinery; that then, surgical operation is conducted using laser; that as such, it is a computer system and depreciation @ 60% had rightly been claimed thereon.

5. However, the aforesaid submissions of the assessee were rejected by the AO, observing, inter-alia, in para 5.1.18 of the assessment order, that the brochure / literature relevant to the machine of the assessee, as provided by the supplier, i.e., M/s. Abbott Medical Optics Pvt. Ltd., ('AMO', for short), clearly establishes certain crucial facts, i.e., the IntraLase FS and IFS Laser System of ophthalmic surgical lasers indicated for use in patients undergoing surgery or treatment requiring the initial lamellar resection of the cornea; that the U.S. Federal law restricts this device to sale, distribution and use by, or on the order of, a physician or other licensed eye-care practitioner; that the special features of the machine are like Greater Biomechanical Stability, smoother Stromal Beds, Faster Vishal Recovery, Enhanced Safety with

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Unparallel Uniformity and Precision; that the iLASIK Solution, available exclusively from AMO, is the combination of IntraLase and Advanced CustoVue Technologies; that the Laser assisted in-situ keratomileusis (LASIK) can only be performed by a trained ophthalmologist and for specified reduction or elimination of myopia, hypermetropia, and astigmatism, as indicated within the product labeling.

6. The AO observed that the above facts were contrary to the assessee's claim that he had purchased a Computer System; that the copy of the purchase bill of the machine, as produced by the assessee, described the machine as "ILSE-COMPUTER SYSTEM2,IEK CAP, 220V; that this description of the machinery was contrary to the assessee's claim; that Sh. Sanjay Babbar, Senior Executive of Abbott Medical Optics Pvt. Ltd. informed that the Abbott Group is not in the manufacturing of computers; that for determining classification as well as the rate of depreciation allowable, the test is the functional test; that these days, devices are invariably controlled by integrated circuits (IC)/Microprocessors; that the mere fact that these are present in various devices will not convert the device into a computer; that for instance, a car engine is controlled by micro- processors but a car cannot be treated as computer; that a vehicle will retain its character as a vehicle because of the functional test, i.e., the function it performs; that a machine which has microprocessors in it and is used by doctors to assist in surgery, will retain its character as a medical machine and it

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cannot be described as a computer; that the depreciation chart contained in Appendix-1 also supports these observations; that under the head "Life Savings Medical Equipments", the rate of depreciation of various medical equipments is provided; that the list also includes MRI system which, again, is a machine where the magnetic resonance is converted into visible images in 3D, using microprocessors in the machine; that if these items were to be treated as a computer, a separate rate would not have been provided in the depreciation schedule; that by applying the functional test to the machine of the assessee, it was held to be a Medical Machine and not a computer system, as claimed by the assessee; and that as evident from the literature of the machinery, the machine is an Ophthalmic surgical laser, indicated for use in patients undergoing surgery or treatment requiring the initial lamellar resection of the cornea.

7. It was in this manner that the claim of the assessee for depreciation @ 60% was negated by the AO.

8. By virtue of the impugned order, the ld. CIT(A) affirmed the aforesaid action of the Assessing Officer. It was observed in paras 5.4 &

5.5 of the order, that the ld. CIT(A) was also of the opinion, like the AO, that the plant and machinery on which depreciation had been claimed by the assessee @ 60%, could neither be treated as a computer, nor as a life saving machine; that the machine of the assessee could not cure any life

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threat to any patient and it can only be termed as a medical equipment for treatment of some eye diseases; that the AO had brought sufficient material on record to support his point of view; that this material had been collected from the company from which the plant and machinery had been purchased by the assessee, in order to know the various functions performed by the machine, as the assessee had not supplied this information as and when asked for during the course of assessment proceedings; that the AO had duly confronted the material in his possession to the assessee before coming to his conclusion; that the assessee had never asked for cross-examination of the official of the company from which the machine had been purchased; that the plea now being taken, i.e., before the ld. CIT(A), was just an afterthought; that moreover, it would not solve any problem as it had been proved on record that the Plant and Machinery purchased by the assessee is neither a computer system, nor a life saving equipment, but only a medical equipment for treatment of eye patients; that if the definition provided by the assessee were accepted, then every medical equipment/machine, such as MRI machines, C.T. Scan, Ultrasound or otherwise, are to be treated as a computer system or life saving equipment; that thus, the definition being provided by the assessee to 'computer system', or 'life saving equipment' is vague and cannot be accepted; that the arguments put forth by the assessee during the appellate proceedings were, more or less, the same as those advanced

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during the assessment proceedings; that each and every argument taken by the assessee was stated to have been rebutted during the assessment proceedings; that the judicial pronouncements relied on by the assessee had altogether different facts and were not applicable; and that as such, no interference was called for with the action of the AO in disallowing excess depreciation claimed by the assessee.

9. Before us, the ld. counsel for the assessee has reiterated the stand taken before the Taxing Authorities, whereas the ld. DR has placed strong reliance on the impugned order.

10. In this regard, it is seen that it is the self-admitted case of the assessee that in the earlier assessment years, i.e., A.Ys. 2005-06 to 2009-10, the depreciation was allowed to the assessee @ 40% under sub clause (j) of clause (ea) of item No.3 of Head III, i.e., machinery and plant, as contained in the table of rates at which depreciation is admissible under Rule 5 of the I.T. Rules, such table being contained in Appendix-I to the I.T. Rules. This is also what has been stated by the assessee in his written submissions filed before the ld. CIT(A), i.e., written submissions dated 24.08.2015 (APB 1 to 8), written submissions dated 7.9.2015 (APB

9) and rejoinder to the comments of the AO on the written submission of the assessee, which were forwarded by the ld. CIT(A) to the AP (APB 17-

19).

11. The facts for the year under consideration have not been shown to have undergone any change from those present in the earlier year, i.e.,

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assessment years, 2005-06 to 2007-08 and the subsequent years, i.e., assessment year 2009-10.

12. Therefore, for the year under consideration also, depreciation @ 40% on the surgical laser is allowed to the assessee.

13. This takes care of Ground nos. 1 to 4.

14. So far as regards Ground no.5, the AO made a disallowance of Rs.20,50,539/- out of depreciation of Rs.32,80,862/- claimed by the assessee on two surgical lasers purchased by the assessee in the earlier years. Here also, depreciation was allowed @ 15%, as against that of 40% allowed in the earlier years.

15. The ld. CIT(A) confirmed the action of the Assessing Officer.

16. Our above findings with regard to Ground nos. 1 to 4 are squarely applicable to this issue also and in accordance therewith, on these two surgical lasers also, depreciation @ 40% is allowed to the assessee.

17. Ground no. 5 is, thus, accepted.

18. Coming to Ground no.6, the AO made disallowance of Rs.4,16,236/- out of depreciation of Rs.5,54,981/- claimed by the assessee on computers purchased in earlier years. The AO applied a rate of 15%.

19. The ld. CIT(A) upheld the action of the AO applying a rate of 15%.

20. The assessee had claimed depreciation amounting to Rs.5,54,981/- @ 60% on the written down value (brought forward

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balance) as on 01.04.2011, Rs. 9,24,969/- on account of RT-VUE-100- 3D. On query by the AO, the assessee submitted that the machine RT VUE-100 3D was imported in F.Y. 2010-11 for Rs.23,12,423/- and was put to use around the second week of August, 2010; that this is a computer, as mentioned in the purchase bill of the machine; that it consists of hardware and software; that the hardware includes computer unit and monitor and the software includes Windows and Proprietary Softwares; that the rate of depreciation specified thereon is 60%; and that the machine is a computer system with monitor, Key Board, CPU, Mouse, etc.; that it is a specific medical use computer with specific software installed in it; that it is an independent system used to measure the thickness of the cornea and other parts of the eye; that it measures the filtration angle in glaucoma; and that it measures the ratinal nerve fibre thickness in glaucoma.

21. The AO rejected the assessee's aforesaid stand, observing, inter- alia, that a machine which has a micro processor in it and is used by a Doctor to assist in Lasik laser and surgery, will retain its character as a medical machine and it cannot be described as a computer.

22. The assessee maintains that in the earlier years,s depreciation @ 60% has been allowed on this particular block of assets, as a computer. This is also what has been stated by the assessee in his written

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submissions dated 24.08.2015 (supra) before the ld. CIT(A) (APB-4, Ground no. 6):

"Ground no.6: The written submissions stated above in ground no.5 may also be considered for Ground no.6 because in this particular block of assets depreciation @ 60% had been allowed in the earlier years, therefore, the depreciation on this block of assets could not have been reduced from 60% to 15%."

23. This has not been disputed before us. Accordingly, this contentioin is accepted and depreciation @ 60% is allowed to the assessee on the principle of consistency, subject to verification by the AO with regard to the assessee's claim of having been granted depreciation @ 60% on this block of assets in the earlier years.

24. So far as regards Ground no.7, the assessee, during the assessment proceedings, stated that in the Financial Year 2011-12, relevant to the year under consideration, his elder son, Akshay Mittra had been a student of M.B.B.S. at Adesh Institute of Medical Sciences, Bathinda; that a total annual fee of Rs.3,00,000/- was remitted on 07.04.2011, through his savings bank account; that since he was staying at the house of a family friend, namely, Dr. Raj Kumar Garga at Bathinda, no additional expenses towards education of Akshay Mittra were incurred by the assessee. A confirmatory letter in this regard from Dr. Raj Kumar Garga was filed.

25. The AO, however, made the addition of Rs.1,00,000/- on account of unexplained expenditure, observing as follows in para 5.3.2 of the assessment order:

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"5.3.2. Contentions putforth by the assessee have been considered. Without doubting the authenticity of assessee's above claims, Element of expenditure on (a) books/study material, (b) Pocket expenses, (c) Clothings and (d) Miscellaneous expenses of a M.B.B.S. student is not ruled out and same is estimated at Rs.1,00,000/- for which assessee could not prove the source. Addition of Rs.1,00,000/-, on account of assessee's unexplained expenditure vis-à-vis MBBS study of his elder son, u/s 69C."

26. The ld. CIT(A), confirming the addition, held as follows:

"9.4. I have considered the observations of the Assessing Officer as made by him in the assessment order as well as remand report. I have also considered the written submissions filed by the assessee vide letter dated 24.08.2015 as well as his counter comments on the report of the A.O. on the issue under reference. I have further considered various judicial pronouncements relied upon by the assessee as well as the A.O. I have again considered other material brought by the assessee on record. On careful contentions, I am also of the opinion that apart from boarding and lodging expenses of the son of the assessee who was pursuing MBBS in a private college there must be some other expenses on clothes, books, transportation and other day to day needs. It is not the case of the assessee that these expenses have also been incurred by the friend of the assessee with whom his son was staying. It is also not the case of the assessee that his son has not incurred any expenses on transportation, cloths, books and other day to day needs. Under such circumstances, the action of the A.O. in making addition on account of unexplained expenses of the son of the assessee by invoking the provisions of section 69C of the Act cannot be said to be unjustified. I am also of the opinion that the judicial pronouncements relied upon by the assessee have distinguishable facts from the facts of the case of the assessee and have no application in the case of the assessee.

9.5. In view of the above stated facts and in the circumstances of the case, I am of the opinion that the AO is fully justified in making addition on account of unexplained expenses of the son of the assessee by invoking provisions of section 69C of the Act. The addition of Rs.1,00,000/- made by the AO in this case on account of unexplained expenses of the son of the assessee by invoking the provisions of section 69C of the Act is upheld. In the result, the ground no.8 of appeal taken by the assessee is dismissed."

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27. The ld. counsel for the assessee has contended that section 69C of the Act provides that where in any financial year an assessee had incurred any expenditure and he offers no explanation about the source of such expenditure, or the explanation, if any, offered by him is not, in the opinion of the AO, satisfactory, the amount covered by such expenditure shall be deemed to be the income of the assessee for such financial year. It has been submitted that the case of the assessee has been that no such expenditure, as found by the authorities below, has been incurred by the assessee. It has further been submitted that moreover, the son of the assessee is a major and as such, no addition is called for in the hands of the assessee. Reliance has been placed on 'J.J. Enterprises vs. CIT', 254 ITR 216 (SC) and 'Umacharan Shaw & Bros. vs. CIT', 37 ITR 271 (SC).

28. As opposed to this, the ld. DR, again, has relied on the impugned order.

29. The very case of the assessee himself is that the son of the assessee was an MBBS student at Bathinda. In his reply before the AO, the assessee submitted that his son was staying at the house of a family friend and that as such, no additional expenses towards his education were incurred by the assessee. The total annual fee of Rs.3,00,000/- was stated to have been remitted. However, this does not explain away the observations made by the ld. CIT(A). It has not been the case of the assessee that the annual fee remitted included the

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expenses of books, clothes, transportation and other day to day requirements. The AO had specifically asked the assessee to explain the boarding and lodging expenses and other related expenses and the source thereof. The explanation offered by the assessee was only with regard to boarding and lodging. However, no basis has been given by either of the authorities below to arrive at an estimate of Rs.1,00,000/- in this regard. This estimate appears to be far-fetched, particularly in view of the fact that the education of the assessee was at Bathinda in Punjab. As such, we deem it appropriate to restrict this addition to Rs.50,000/-.

30. Ground No.7 is, accordingly, partly accepted.

31. As regards the Stay Application filed by the assessee, the same is dismissed as infructuous since we have disposed of the appeal itself, as above.

31. In the result, the appeal is partly allowed. Order pronounced in the open court on 15/06/ 2016. Sd/- Sd/-

(T.S. KAPOOR) (A.D. JAIN)

ACCOUNTANT MEMBER JUDICIAL MEMBER

/SKR/

Dated: 15/06/2016

Copy of the order forwarded to:

1. The Assessee:Dr. Harinder Mittra, Phagwara

2. The ACIT, Phagwara.

3. The CIT(A), Jalandhar.

4. The CIT, Jalandhar.

5. The SR DR, ITAT, Amritsar. True copy

By order