2017 (2) TMI 544 - AT - Income Tax

Tribunal Upholds Revenue's Appeal on Windmill Acquisition

Smt. V. Sabithamani, C/o Pioneer Corporation Versus The Assistant Commissioner of Income Tax, Circle II, Coimbatore And Vice-Versa

Smt. V. Sabithamani, C/o Pioneer Corporation Versus The Assistant Commissioner of Income Tax, Circle II, Coimbatore And Vice-Versa - TMI Issues Involved:1. Justification of the Commissioner of Income Tax (Appeals) in holding the cost of acquisition of the windmill.2. Estimation of the cost of acquisition of the second-hand windmill.3. Applicability of Explanation 3 to Section 43(1) of the Income Tax Act.4. Legality of the reopening of assessment to reduce depreciation claim.5. Valuation method adopted by the Assessing Officer and CIT(A).6. Main purpose behind the acquisition of the second-hand windmill.Detailed Analysis:1. Justification of the Commissioner of Income Tax (Appeals) in holding the cost of acquisition of the windmill:The Commissioner of Income Tax (Appeals) held that the assessee acceded to the actual cost determination of Rs. 1,50,00,000 by implication, which the assessee contested, arguing that the filing of a cross-objection is equivalent to filing an appeal and should not be used against them.2. Estimation of the cost of acquisition of the second-hand windmill:The Commissioner of Income Tax (Appeals) estimated the cost of acquisition of the second-hand windmill at Rs. 1,50,00,000, contrary to the actual cost of Rs. 2,36,10,000 claimed by the assessee. The assessee argued that the valuation was certified by a registered valuer and supported by a bank loan valuation.3. Applicability of Explanation 3 to Section 43(1) of the Income Tax Act:The Assessing Officer invoked Explanation 3 to Section 43(1), asserting that the main purpose of acquiring the windmill was to reduce tax liability by claiming depreciation on an enhanced cost. The assessee contended that the transaction was genuine and not intended to reduce tax liability, emphasizing that the parties were unrelated and the transaction was a business decision.4. Legality of the reopening of assessment to reduce depreciation claim:The reopening of the assessment was challenged by the assessee, arguing that it was not legal to reduce the depreciation claim from Rs. 98,21,273 to Rs. 94,44,000. However, no arguments were advanced by the assessee on this point during the hearing.5. Valuation method adopted by the Assessing Officer and CIT(A):The Assessing Officer did not accept the valuation report provided by the assessee, which was prepared for availing a bank loan. The A.O. determined the actual cost of the windmill as Rs. 43,28,388 and allowed depreciation on this amount. The CIT(A) found deficiencies in the valuation report and adopted a valuation method suggested by the Tamilnadu Industrial Investment Corporation, setting the value at Rs. 1,50,00,000. The Tribunal found the A.O.'s method of multiplying the average generation per year with the per-unit cost of electricity generated to be fair and reinstated the A.O.'s order.6. Main purpose behind the acquisition of the second-hand windmill:The Tribunal agreed with the A.O. that the main purpose of the transfer was to reduce tax liability, as the cumulative depreciation claimed by the previous owner and the assessee exceeded the original cost of the windmill. The Tribunal emphasized the need to look beyond the form of the transaction to its substance, concluding that the acquisition at an excessive cost was motivated by tax reduction.Conclusion:The Tribunal dismissed the appeal of the assessee and allowed the appeal of the Revenue, reinstating the order of the Assessing Officer. The Tribunal found that the conditions for invoking Explanation 3 to Section 43(1) were satisfied and that the A.O.'s method of valuation was justified. The order was pronounced on 3rd February 2017 at Chennai.