TaxTMI 
TaxTMI 
2006 (7) TMI 303
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....erprises Ltd., holding 26 per cent, 24 per cent, 25 per cent, 20 per cent and 5 per cent of the subscribed capital, respectively. The assessee company took over Waluj undertaking belonging to Ceat Ltd. and started operations in September, 1994. The purchase consideration of the plant was tentatively fixed at Rs. 5.15 crores, subject to the price determined in the due diligence report to be prepared by M/s A.F. Ferguson & Co., M/s A.F. Ferguson & Co. fixed the value of various assets of the undertaking to be transferred to the assessee at about Rs. 41.84 crores. The consideration paid for the assets taken over by the assessee from Ceat Ltd. was taken at Rs. 41,84,00,330. The book value of these assets in the hands of the Ceat Ltd. was Rs. 25,44,35,362. Thus, the purchase consideration of the assessee was more than the WDV of the assets in the hands of Ceat Ltd. by an amount of Rs. 16,39,64,968. The AO has mentioned that the WDV of assets, whose values are in dispute, in the hands of Ceat Ltd. and their values determined by M/s A.S. Ferguson & Co. and adopted by the assessee as under: &....
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....income-tax records maintained by the Ceat Ltd. However, annual accounts of Ceat Ltd. were available in public domain, which were filed and perused by the AO. It was found that the assessee owed an amount of about Rs. 23.625 crores to Ceat Ltd. as on 30th Sept., 1994, being the closing date of accounts of Ceat Ltd., comprising of 15 months from 1st July, 1993 to 30th Sept., 1994. From the aforesaid balance sheet, the AO also noted that in addition to transfer of the aforesaid assets of the undertaking by Ceat Ltd. to the assessee, the latter also took over stores and spares and some advances. It was also noted by the AO that the radial tyre manufacturing facility was sold to the assessee for a consideration of Rs. 24.7385 crores by the Ceat Ltd. and latter company earned a profit of Rs. 7.4024 crores in the transaction. 2.2 The case of the AO was that Ceat Ltd. had interest in the assessee company through other group companies, namely, Ceat Finance Ltd., Ceat Holdings Ltd. and EPG Enterprises Ltd. The agreed price for transfer of assets was more than the book value of the assets by an amount of Rs. 16,39,64,969. The transfer was done with a view to make profit whenever possible, ....
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....fore the learned CIT(A) that the AO did not invoke the provision contained in Expln. 3 below s. 43 and, therefore, the calculation of depreciation allowance was based upon irrelevant considerations. The learned CIT(A) discussed the valuation report in brief. He found that the method of valuation adopted by the valuer involved the determination of the market value, ascertainment of the replacement cost, estimated useful life and salvage value at the end of useful life. Replacement value was ascertained by obtaining quotations from the market, making enquiries and resorting to estimates. This included cost of machine, equipment, etc., taxes, etc., handling charges, transportation, transit insurance and installation costs. Wherever quotations pertained to the year 1992, an addition of 10 per cent was made to the quoted price to take care of the inflation. Overhead costs were placed at about 40 per cent of the quoted price. 2.6 The learned CIT(A) requested the assessee to list out such machines whose market price and the value taken by the assessee was identical. It was also requested to pick up any item of plant or machinery and establish that its installation cost was 40 per cent ....
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....uipment. The AO had worked out the deduction at 50 per cent of the cost for the reason that the equipment was used for less than 180 days. The learned CIT(A) upheld this action of the AO also. Thus, the appeal of the assessee in this behalf was dismissed. 2.10 Aggrieved by this order, the assessee is in appeal before us. The appeal for asst. yr. 1995-96 (ITA No. 132/Pune/2003) involves major issues of determination of costs and deduction of depreciation. Appeals for subsequent years on this issue aw consequential in nature as the WDVs for those years will depend upon the costs determined in this year. The assessee has taken up three substantive grounds of appeal. The first ground is against reduction of claim of depreciation by an amount of Rs. 4,06,40,740, out of Rs. 8,81,27,084. There are number of sub-grounds in this ground, which are in the nature of arguments, which will be discussed at an appropriate place. This ground also contains averment to the effect that denial of depreciation to the extent of 100 per cent on air pollution equipments, etc. and restricting it to 50 per cent was incorrect. Ground No. 2 is against the disallowance of a sum of Rs. 5,17,645 on account of ....
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....chase and acquire for the consideration and upon the terms and conditions hereinafter set out, the undertaking of Ceat Ltd. at Aurangabad. On p. 83, the word 'undertaking' has been defined to mean land, hereditaments, premises, buildings, and structures; plant, machinery, equipment (excluding machinery and equipment relating solely to production of 2 and 3 wheelers), vehicles and other articles and effects and movable property of tyre manufacturing facility located thereat; assets such as raw materials, processed stock, goods, stock-in-trade, packing materials, engineering and sundry stores, packed stock of finished products belonging to or pertaining to such tyre manufacturing facility; and the workers engaged at such tyre manufacturing facility. On p. 85, it is mentioned that without limiting the generality of the foregoing, the assets shall include; A. the land. B. the improvements on the land. C. all plants, buildings, structures, erections, improvements, appurtenances, and fixtures situate on or forming part of the land, other machinery and equipment referred to in s. 2.1 D through I. D. all fixed machinery and fixed equipment situate on or forming part of the land....
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....han the value taken in conveyance deed at Rs. 1,20,77,830. The assessee had also paid stamp duty of Rs. 57,57,920 on execution of the conveyance deed and it is not known how this value has been treated in the books of the assessee for valuation of land and buildings. The total value of land and buildings amounted to about Rs. 14,39,47,832 and the payment details have been given on p. 397. A sum of Rs. 14,01,90,000 was paid on 14th Dec., 1994 by way of cheque No. 539351 and the balance amount of Rs. 37,57,830 was stated to have been paid by the assessee to MIDC on behalf of the Ceat Ltd. 3.4 The learned counsel referred to the accounts of Ceat Ltd., placed in the paper book on pp. 492 to 565. Page 496, being the report of the board of directors, discloses that the Aurangabad unit was transferred to the assessee and that production from the joint venture will be shared equally between the Goodyear India Ltd. and Ceat Ltd. Page 507, being P&L a/c, shows miscellaneous income of Rs. 97.18.18 (in thousands), the details of which are given in Sch. 8 on p. 511. This schedule shows profit on sale of the division at Rs. 13,84,41 (in thousands). Schedule 4 at p. 509 shows total deductions ....
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....f unaudited trial balance of Waluj plant as on 30th June, 1993. It is further mentioned that the valuation of land, buildings, plant and machinery being a technical matter, has been taken on the basis of valuers appointed by Ceat Ltd. It is also mentioned that furniture and fixtures, office equipment, and vehicles have not been considered for revaluation. It was specifically pointed out that the remarks made by the AO in the assessment order are quite contrary to the report of M/s A.F. Ferguson & Co. on this issue. Pages 169 to 171 furnish the details of fixed assets, capital commitments, and capital advances, revaluation of fixed assets, assets not revalued and basis of revaluation. Page 170 shows that furniture, fixtures, office equipments, and vehicles were not revalued and their values were shown in the column 'net value after revaluation' at Rs. 85.90 lakhs. The basis of revaluation of land, buildings and plant and machinery was mentioned on p. 171. Page 176 shows the WDVs and values after revaluation of land, buildings, plant and machinery, furniture and fixtures, and vehicles. This page also shows that while additions were made to the values of land at Rs. 82.60 lakhs, build....
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.... the purpose of allocating the cost of various assets in their books of account, which cannot constitute the basis for computation of profits of the assessee seller. On the basis of these observations, it was pointed out that treatment of sale and purchase consideration has to be different in the case of seller and the buyer and, therefore, the insistence of the AO in calling for the income-tax records maintained by the Ceat Ltd. was misplaced. In any case, return and details, etc. filed by that assessee could have been requisitioned by the AO from the corresponding AO, if at all required by him, particularly when it was pointed to him that the seller is not parting with the information. 3.8 He further referred to the decision of Hon'ble Punjab and Haryana High Court in the case of Shreyans Industries Ltd. vs. Jt. CIT (2006) 200 CTR (P&H) 609 : (2005) 277 ITR 443 (P&H). At p. 446, it was mentioned that the assessee had paid a consideration of Rs. 14.75 crores for purchasing the paper division from M/s Zenith Ltd. and the Tribunal found that only sum of about Rs. 10.18 crores could be allocated towards cost of fixed assets including plant and machinery. It is not in dispute that ....
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....d. or on the basis of the consideration charged by the Ceat Ltd. from the assessee. In this case, cost of various assets taken over by the assessee from Ceat Ltd. is fixed. He referred to the decision in the case of Unimed Technologies Ltd., wherein the question was about adoption of the value of an asset on the basis of its fair market value as certified by the registered valuer. The learned Departmental Representative pointed out that since the cost is fixed on the basis of consideration paid, the ratio of the aforesaid case is not applicable to the facts of the instant case. In the alternative, it was pointed out that the due diligence report prepared by M/s A.F. Ferguson & Co. was a qualified report and the value arrived at therein was dependent upon the technical report, which formed the basis of the valuation of assets. Such a report cannot be taken to be correct in toto. Thereafter, he referred to the decision of Hon'ble Bombay High Court in the case of Premier Automobiles Ltd., where the question was regarding computation of capital gains accruing to the seller in respect of a slump sale. In this order, it was inter alia held that when a concern is transferred as a going co....
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....h values. The Hon'ble Court held that original cost of an asset is entirely a question of fact. If on consideration of facts, it is found that the assessee arranged to put fictitious price on any asset, it was open to the IT authorities to refuse to accept that price. 3.14 In the light of aforesaid decisions, the learned Departmental Representative pointed out that in the course of assessment, the assessee was required to state about the treatment given by the transferor to the assets transferred to the assessee. However, that was not done on the plea that records of the transferor were not available with it. The learned Departmental Representative also tried to raise the issue that the instant case was probably not a case of slump sale by Ceat Ltd. because tyre manufacturing facility for two and three-wheelers cannot be separated from tyre manufacturing facility for four-wheelers. It was his case that tyre cutting presses were common machines used for manufacture of all kinds of tyres. He also drew our attention to the fact that the assessee could not explain before the learned CIT(A) its contention regarding value addition of 40 per cent by way of installation to the machinery....
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.... & Co., which gave a report fixing the price at lower amount than the tentatively agreed original amount. We are also of the view that the issue whether the tyre manufacturing facilities for two and three-wheelers and four-wheeler can be totally separated or not is not the real issue involved before us. Assuming that it cannot be so done, still, the fact remains that certain lands, buildings, plant and machinery, and other assets were transferred by Ceat Ltd. to the assessee on the basis of the report of M/s A.F. Ferguson & Co. What is required to be done is to allocate purchase consideration among various assets irrespective of whether all the assets of Waluj unit or only some assets were contracted to be transferred to the assessee. Thus, it is held that provisions of Expln. 3 are not applicable on the facts and in the circumstances of the instant case. 4.2 The second issue in this case is regarding placing of the values on different assets. The case of the learned counsel was that such values were placed on the basis of report of M/s A.F. Ferguson & Co., while the case of the learned Departmental Representative was that the word 'actual cost' has to be construed strictly. Sin....
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....s been enhanced, but the values of furniture, fixture and office equipments; and vehicles have not been enhanced. The values of furniture and fixture, and office equipment amounts to Rs. 83.60 lakhs and the value of vehicles amounts to Rs. 50.40 lakhs. As against the aforesaid, the value of plant and machinery has been taken at Rs. 26.518 crores. While the rates of depreciation for plant and machinery, furniture and fixture, etc. and vehicles are different, nonetheless, the value of plant and machinery is about 20 times the value of other assets taken together. Therefore, revaluation of these assets will not make much impact in the claim of depreciation of the assessee. Thus, we do not find that any useful purpose will be served by putting different values on such assets than the values put on them in the report of M/s A.F. Ferguson & Co. 4.5 In a nutshell, it is held that the value of land has been understated in the report by an amount of Rs. 37.60 lakhs, which shall be reduced from the value of plant and machinery. At this stage, it may also be mentioned that we are reducing the whole value of Rs. 37.60 lakhs from the value of plant and machinery and not from other assets on ....
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.... of the decision of Hon'ble Supreme Court in the case of Britannia Industries Ltd. vs. CIT (2005) 198 CTR (SC) 313 : (2005) 278 ITR 546 (SC). Thus, this ground is dismissed. 7. In result, the appeal is partly allowed. ITA No. 133/Pune/2003 for asst. yr. 1996-97 8. Ground No. 1 and its sub-grounds are similar to ground No. 1 of ITA No. 132/Pune/2003. In view of the decision in that appeal, it is directed that WDVs of various assets shall be found on the basis of deduction of depreciation in that year, and the depreciation for this year shall be deducted accordingly. Thus, this ground is partly allowed. 9. Second ground is against the confirmation of disallowance of Rs. 10 lakhs from various expenses. It is also mentioned that the learned CIT(A) erred in holding that the assessee agreed for disallowance of the aforesaid amount. On perusal of the ground of appeal before the learned CIT(A), it is seen that the assessee had challenged the aforesaid ad hoc disallowance on the ground, inter alia, that the expenses were fully verifiable and have been audited by statutory and tax auditors. The learned CIT(A) upheld the disallowance on the ground that the assessee had agreed to s....