2015 (9) TMI 893 - AT - Income Tax

Tribunal upholds CIT(A) on depreciation, remits payment issue to AO.

The Tribunal upheld the CIT(A)'s decision to delete disallowances for depreciation on plant & machinery and technical know-how, finding the AO's ... Disallowance on account of depreciation on plant & machinery purchased from the sister concerns - CIT(A) allowed claim - applicability of Explanation 3 to section 43(1) of the Act on the given set of facts - Held that:- The phraseology of the Explanation is plain and simple. It is the “main purpose” and not secondary purpose or some incidental benefits arising from such transaction which can trigger Explanation 3 to S. 43(1). Once the overwhelming commercial advantage from the transaction is displayed, which is done in the instant case, the other considerations fade into insignificance. Thus, while the assessee has clearly demonstrated its bona-fide, the Revenue could not contradict any averment of the assessee.There is no material in possession of the Assessing Officer to enable him to displace the cost of acquisition declared by the Assessee. Further, the WDV of assets in the case of M/s KEL was ₹ 47,58,848/-, which was taken at NIL by Assessing Officer. There is no rationale for such action. The Assessee on the other hand has supported the valuation of the assets by the Valuation Report of the Registered Valuer and in absence of onus being discharged by the Assessing Officer, the applicability of Explanation 3 to section 43(1) of the Act by the Assessing Officer is not justifiable in the facts of the case. The assessee is entitled to claim of depreciation on the acquisition of assets and technical know-how, we uphold the order of the CIT(A). - Decided in favour of assessee. disallowance of expenses concerning tool room acquired made to its sister concern - Held that:- Considering Revenue submission that it is not clear as to why the expenses were not claimed in the original return and claimed only by way of revised return and whether these debit notes were available before the Assessing Officer for necessary enquiry or not and assessee submission that the debit notes are dated 30th September, 2005 i.e. after the finalization of account pertaining to the relevant assessment year and therefore the claim has been made by way of filing the revised return to take cognizance of the legitimate expenses incurred by M/s KEL on behalf of the assessee we remit the issue back to the file of the Assessing Officer to decide the claim of assessee after affording proper opportunity of hearing to the assessee. Decided in favour of assessee for statistical purposes. Issues Involved:1. Deletion of disallowance of Rs. 1,01,09,779/- on account of depreciation on plant & machinery.2. Deletion of disallowance of Rs. 13,23,750/- on account of depreciation on technical know-how.3. Deletion of disallowance of Rs. 43,86,417/- on account of payment to sister concern for acquisition of tool room.4. Allegation of non-genuine and sham transaction related to the payment of Rs. 43,86,417/-.Issue-wise Detailed Analysis:1. Deletion of disallowance of Rs. 1,01,09,779/- on account of depreciation on plant & machinery:The assessee purchased plant and machinery for its tool room division from sister concerns, M/s Kinetic Engineering Ltd. (KEL) and M/s Kinetic Motor Ltd. (KML), for Rs. 9,34,68,813/-. The assets were second-hand and had a Written Down Value (WDV) of NIL in the books of the suppliers. The Assessing Officer (AO) invoked Explanation 3 to Section 43(1) of the Income-tax Act, 1961, and adopted the WDV of the assets at NIL, thereby denying the depreciation claim of Rs. 1,01,09,779/-.The CIT(A) observed that Explanation 3 to Section 43(1) applies only if the AO believes the fair market value is inflated to claim excess depreciation. The CIT(A) noted that the valuation was certified by a registered valuer, and the AO did not appoint his own valuer to contest this. The CIT(A) concluded that the AO was not justified in adopting a NIL value and deleted the disallowance.2. Deletion of disallowance of Rs. 13,23,750/- on account of depreciation on technical know-how:The assessee acquired technical know-how from KEL for Rs. 1,10,20,000/-. The AO treated the cost of acquisition of technical know-how as NIL under Explanation 3 to Section 43(1), and disallowed the depreciation claim of Rs. 13,23,750/-.The CIT(A) held that the AO did not justify the NIL valuation, especially since the technical know-how facilitated sales of Rs. 132.93 crores. The CIT(A) deleted the disallowance, emphasizing that the AO failed to prove the main purpose of the transaction was to reduce tax liability.3. Deletion of disallowance of Rs. 43,86,417/- on account of payment to sister concern for acquisition of tool room:The assessee claimed an expenditure of Rs. 43,86,417/- based on debit notes from KEL after finalizing accounts. These expenses were for salaries and other costs related to the tool room division acquired from KEL. The AO disallowed this claim, questioning the genuineness of the transaction.The CIT(A) found the expenses legitimate and related to the period after the tool room acquisition. However, the Tribunal remitted the issue back to the AO for reconsideration, emphasizing the need for proper enquiry and opportunity for the assessee to present their case.4. Allegation of non-genuine and sham transaction related to the payment of Rs. 43,86,417/-:The AO alleged the payment of Rs. 43,86,417/- to KEL for the tool room acquisition was non-genuine and a sham transaction. The Tribunal remitted the issue back to the AO to decide after affording the assessee proper opportunity for hearing.Conclusion:The Tribunal upheld the CIT(A)'s decision on the deletion of disallowances related to depreciation on plant & machinery and technical know-how, finding the AO's application of Explanation 3 to Section 43(1) unjustified. However, the issue of the Rs. 43,86,417/- payment was remitted back to the AO for further consideration. The appeal was thus partly allowed.