2009 (10) TMI 620 - AT - Income Tax

Tribunal allows depreciation claims, emphasizes evidence requirement for asset cost determination. Consequential interest issues addressed. Penalty challenge dismissed.

The Tribunal allowed the assessee's appeals for the assessment years 2004-05 and 2005-06 regarding the depreciation claims. The Tribunal emphasized the ... Penalty - Depreciation on revalued assets and disallowed under s. 43(1) - It is well-known that registered valuers are experts and value and reliability of their opinion would depend upon the material contained in their reports - It was for the AO to point out and find defect in the value (cost shown) claimed and proceed to determine the actual cost - It is evident from above that burden of proof was placed on the assessee whereas it should have been otherwise as discussed above. This placing of the wrong burden sometimes vitiate the entire order - It has been taken at nil because it was not an asset with the erstwhile firm. In my considered opinion, there is no nexus between material on record and the conclusion of nil cost drawn in this case - Because hoardings were not shown as an asset by the erstwhile firm, their 'actual cost' was 'determined' at nil without denying the fact that assessee had paid Rs. 4,77,96,000 for the hoardings Proceeding to the question of actual cost of goodwill or trade name, it is well established that goodwill is an important asset of business which is acquired over a period of time - Merely because goodwill acquired by the firm was not shown as an asset or was shown at slightly less figure and no depreciation was claimed by the firm, its value was taken at nil - In these days of high inflation, value of immovable properties like land and buildings have jumped several fold and there is no comparison between the value/worth of a building and its WDV in books Tribunal in the case of Unimed Technologies Ltd. vs. Dy. CIT (1999 -TMI - 55267 - ITAT AHMEDABAD-A) is also considered relevant as in above case, valuation report furnished by the assessee in support of cost of the assets acquired was accepted by the Tribunal, as AO did not appoint his own valuer nor thought it necessary to examine assessee's valuer - Appeal is dismissed Issues Involved:1. Disallowance of depreciation claims for the assessment years 2004-05 and 2005-06.2. Adoption of Written Down Value (WDV) as actual cost by the Assessing Officer (AO).3. Charging of interest under sections 234B and 234C.4. Initiation of penalty under section 271(1)(c).Issue-Wise Detailed Analysis:1. Disallowance of Depreciation Claims:The primary issue was the disallowance of depreciation claims amounting to Rs. 1,97,16,739 for the assessment year 2004-05 and Rs. 1,47,81,753 for the assessment year 2005-06. The assessee claimed depreciation on the enhanced value of assets transferred from a partnership firm to a company. The AO invoked Explanation 3 to section 43(1) of the Income Tax Act, which allows the AO to determine the 'actual cost' of assets if the main purpose of the transfer is to reduce the tax liability by claiming depreciation on an enhanced cost. The AO, with the approval of the Additional Commissioner of Income Tax (Addl. CIT), determined the actual cost of the assets as their WDV as on 31st March 2003, in the hands of the partnership firm. The CIT(A) upheld the AO's decision, stating that the transfer was primarily for claiming higher depreciation and reducing tax liability.2. Adoption of WDV as Actual Cost:The assessee argued that the valuation of assets was based on a registered valuer's report and that the main purpose of the transfer was corporatization for greater commercial acceptability. The CIT(A) and the AO, however, held that the valuation was arbitrary and mainly aimed at claiming higher depreciation. The CIT(A) observed discrepancies in the valuation report's date and the date of the transfer, suggesting that the report was prepared to suit the assessee's requirements. The Tribunal, however, found no merit in the CIT(A)'s observations and held that the AO did not disprove the assessee's valuation report. The Tribunal emphasized that the AO should have supported his determination of actual cost with sufficient evidence and material, as laid down by the Gujarat High Court in Ashwin Vanaspati Industries vs. CIT.3. Charging of Interest under Sections 234B and 234C:This issue was considered consequential and did not require specific adjudication by the Tribunal. The Tribunal noted that the charging of interest under sections 234B and 234C would follow the outcome of the primary issue regarding the disallowance of depreciation.4. Initiation of Penalty under Section 271(1)(c):The assessee challenged the initiation of penalty under section 271(1)(c) on the grounds that the mandatory satisfaction required under the Act was not recorded. The Tribunal dismissed this ground, stating that there is no provision for filing an appeal against the initiation of penalty under section 271(1)(c).Separate Judgments Delivered by the Judges:The Tribunal's decision saw a difference of opinion between the Judicial Member (JM) and the Accountant Member (AM). The JM allowed the assessee's claims for depreciation, emphasizing the need for the AO to determine the actual cost based on sufficient evidence and material. The AM, however, upheld the AO's and CIT(A)'s decisions, stressing that the main purpose of the transfer was to claim higher depreciation and reduce tax liability. The matter was referred to a Third Member, who agreed with the JM's view, leading to the allowance of the assessee's appeals regarding the depreciation claims.Conclusion:The Tribunal allowed the assessee's appeals for the assessment years 2004-05 and 2005-06 concerning the depreciation claims. The Tribunal emphasized the need for the AO to determine the actual cost of assets based on sufficient evidence and material, as laid down by the Gujarat High Court in Ashwin Vanaspati Industries vs. CIT. The issues regarding interest under sections 234B and 234C were considered consequential, and the ground related to the initiation of penalty under section 271(1)(c) was dismissed as not entertainable.