TaxTMI 
TaxTMI 
2006 (1) TMI 451
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....ound No. 3 Not allowing depreciation on TG & QQ equipment : The amount of depreciation disallowed are : Assessment year 1996-97 : Rs. 41,17,241 Assessment year 1997-98 : Rs. 31,16,805 Assessment year 1998-99 : Rs. 23,37,604 Now we deal with each ground as under :- Treatment of Interest Income under "Other Sources" 2. Particulars of interest earned for assessment years 1996-97 to 1998-99 are : Assessment year Corporate deposit (Rs.) Bank deposit (Rs.) Car deposit (Rs.) Total (Rs.) 1996-97 54,34,247 1,76,589 5,223 56,15,053 1997-98 From the above sources together 62,00,541 1998-99 From the above sources together 1,11,26,007 It is claimed by the assessee that above interest income is from business as it is intimately connected with carrying on of business. The memorandum of association of the assessee-company empowers it to carry on the business of lending money and therefore, interest earned on inter-corporate deposit is nothing but the business income. It was further submitted before the Assessing Officer that assessee-company has paid aggregate interest of Rs. 2,71,53,427 (assessment year 1998-99) and ....
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....terference is called for in the order of CIT(A) on this issue. In the assessment year 1995-96, the Tribunal in assessee's own case held as under :- "6. The second issue by the assessee in its appeal relates to the consideration of interest of Rs. 46,11,474 under section 80-IA and 80-I, whether it is to be treated as business income or Income from other sources. The contention of the assessee is that it has invested its surplus funds with another company and the interest earned thereon is nothing but business income and it is to be treated accordingly. The department disallowed the said contention of the assessee holding that as this interest income was not derived by the assessee during its course of business and as such it should be treated only as Income from other sources. Therefore, accordingly it taxed under the Act. The assessee contends that in its memorandum of association there is a clause to carry out money lending business also. Basing on this clause in its memorandum of association, assessee claims that since amounts were given to another company and the interest is derived on the said deposits, taking them as nothing, but lending, claims as business receipt. The lea....
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....n. Thus, the order of CIT(A) is also confirmed on this issue. This ground of the assessee is, therefore, also rejected. Regarding claim of depreciation 9. The dispute and related facts are as under : The assessee-company purchased certain GG & TG equipment, whose description are as under (as per Assessing Officer) : A 2 Triple Gob (TG) equipments - 21/8 Version. B 3 Triple Gob (TG) equipments - 27/8 Version. C 4 Quadruble Gob (QG) equipment with accessories. These equipments were purchased from a sister concern viz. M/s. Vazir Glass Works Ltd. (in short 'VGWL'). The total consideration paid by assessee-company (NGAIL) was a sum of Rs. 1,70,06,600, on which it claimed depreciation as mentioned in the grounds of appeal above. According to Assessing Officer, the WDV in the hands of VGWL was Rs. 5,30,078. The Assessing Officer invoked the provisions of Explanation 3 to section 43(1) and rejected the cost paid by NGAL to VGWL and adopted WDV in the hands of VGWL as the cost for the purposes of allowing depreciation to NGAIL. 10. According to the Assessing Officer, cost of various equipments to VGWL purchased by NGAIL are as under : (i)Equipment at A f....
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.... come in the market. (4)The production figure up to September 1995 was Rs. 26.33 crores, which has increased to Rs. 31.50 crores in second half of the year. It does not justify high cost paid for these equipments. (5)There is no technological or bona fide basis behind purchases of these equipments at a sum of Rs. 170.06 lakhs. (6)In a similar case, the Pune Bench of ITAT in the case of Finolex Plastics (P.) Ltd. v. IAC [1993] 47 ITD 333 has held that provisions of Explanation 3 to section 43(1) would be applicable. Thus, the Assessing Officer rejected the claim of actual cost of the equipments at Rs. 170.06 lakhs and adopted WDV in the hands of VGWL as the actual cost in the hands of NGAIL with the previous approval of JCIT and allowed depreciation in the assessment year 1996-97 and subsequent year accordingly. 12. Before the CIT(A), the assessee submitted that :- "The second issue raised by the assessee in its appeal relates to the consideration of interest of Rs. 46,11,474 under sections 80-IA and 80-I, whether it is to be treated as business income or income from other sources. The contention of the assessee is that it has invested its surplus funds with anothe....
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....s of the authorities below and that we specifically requested the learned departmental representative whether it is suggested that such was the case, he has not suggested that such was the case nor has he brought to our notice any material to show that such was the case." On the other hand, in the case of the appellant the Assessing Officer has not accepted the valuation of the machinery as per valuation report and it has been held that the consideration paid more than the market value of the machinery. During the course of the hearing it was also admitted that Vazir Glass is a loss making company with accumulated business loss. With this background also it becomes clear as to how the tax liability is sought to be reduced by claiming depreciation in the hands of the appellant-company on hiked purchase value of the machinery and in the case of Vazir Glass, the profit on sale of machinery would get absorbed in setting off the unabsorbed loss. 3.5 Coming to the second issue i.e., reliance placed on Bombay Household, as mentioned in the preceding para even as per the observation made in that case, the above provision of Explanation (3) to section 43(1) applicable. Even though in bot....
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....idity of the equipment but it does not prove the case of the appellant and that the price paid for the machineries was justified. 4. Therefore, for the reasons given above and in the assessment order, the claim of the appellant for allowing depreciation at 25 per cent of total cost of Rs. 1,70,06,000 cannot be accepted. The Assessing Officer has rightly allowed depreciation to the appellant on the WDV Rs. 5,37,038. The disallowance made out of depreciation is, therefore, upheld. However, the Assessing Officer may verify the submission of the appellant that the correct figure of disallowed depreciation is Rs. 41,55,731 and make the necessary rectification." 14. The main reasons rejecting the appeal of the assessee by CIT(A) are :- 1.The consideration paid is more than market value. 2.VGWL is loss making company with accumulated losses. The price is paid to set off the loss against profit arising on sale of equipments to NGAIL. 3.The decision in Bombay Household & Industrial Plastics Mfg. Co. (P.) Ltd.'s case (supra) is not applicable as facts are distinguishable whereas the facts in the case of Finolex Plastics (P.) Ltd. (supra) are similar to the facts of the present....
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....98 and 1998-99 were passed on 16-3-1999, 28-1-2000 and 3-7-2000 respectively. The CIT(A) had passed the orders prior to receipt of DVO's report. In any case, the decision of the Assessing Officer about applicability of Explanation 3 to section 43(1) can only be in conformity with the DVO's report. (2)Distinguishing Pune case - Finolex Plastics (P.) Ltd. (supra), the learned AR submitted that there was no DVO's report in that case hence the case is distinguishable. (3)On the question as to whether case can be set aside to consider the DVO's report, the learned AR submitted that no useful purpose would be served as the Assessing Officer has no option but to take decision in accordance with DVO's report. And if this is so, then Tribunal can also take the same decision, which should be in conformity with DVO's report. (4)The department has not found any fault with approved valuer report and has also criticised the DVO's report. The learned DR is not an expert in valuation unlike the approved valuer/DVO who had physically verified the machinery. The Explanation 3 to section 43(1) is deeming provision, which restricts the actual cost of an asset. It cannot be invoked unless ther....
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....e instances of these machines in any of these periods so as to justify the price at which, the valuation is made. The DVO could have obtained or asked the Assessing Officer to obtain the price list of these equipments from original manufacturers. (2) There is no basis for the AVO to work out the future working life of these equipments at 15 years. Whereas AVO has pointed out that it is only 6 to 8 years. The learned AR submitted that reference under section 131(1)(d) cannot be made in view of the decision of Hon'ble Supreme Court in Smt. Amiya Bala Paul v. CIT [2003] 262 ITR 407 . At best it could be only a reference under section 55A. Such references are only advisory in nature. These are not binding on the Assessing Officer. Even though, reference under section 55A is covered under Chapter IV but there is a further division. Sub-Chapter D deals with Profit and Loss from business or profession. Sub-Chapter E deals with capital gains. Even though section 55A refers to reference made for the purpose of this chapter (i.e. Chapter IV) but this reference is for determining FMV of 'capital asset', that is for the purposes of working out capital gains. So far as section 32 is concerne....
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.... to believe that the group of machinery which costed only Rs. 107.40 lakhs in 1981-1986 would be costing Rs. 170 lakhs in 1995 after substantial use and wear and tear on account thereof. The reasons for enhancing the cost of some machinery is quite vague. On this point, the EVO observed as under :- (5) These equipments were imported by M/s. Vazir Glass Works Ltd. in March/April 1981 from M/s. Vidros Ltd., Sao Paulo, Brasil in US $. The cost of these equipments as intimated by the assessee-company was Rs. 12,65,642 and Rs. 7,43,644. The purchase cost of these equipments mentioned above does not appear to be justified because all the three equipments are identical and were purchased at the same time. The cost of similar equipment TG 21/8 purchased in 1981 was Rs. 9.11 lakhs and it comes to Rs. 13.2 lakhs by applying the cost index issued by the Ministry of Commerce and Industries (Office of the Economic Advisor), New Delhi during that period. The cost of QG equipment which is also similar and was purchased during the same year was Rs. 12.11 lakhs. (6) The reasons for such enhancement are vague and fanciful. Once original cost of equipment is available then, the DVO could not en....
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....a reference is made by the Assessing Officer to the DVO then, the value estimated by the DVO is binding on the Assessing Officer. We do not accept this proposition. A reference under section 55A is made clearly for the purpose of determining the FMV of a capital asset which is transferred for the purposes of capital gains. The "capital asset" and the "asset" on which depreciation is claimed or allowable for the purposes of capital gains are not same thing. Even though section 55A refers to "reference under Chapter IV", its operation has to be considered with reference to further words used in that section. Section 55A reads as under :- "55A. With a view to ascertaining the fair market value of a capital asset for the purposes of this Chapter, the Assessing Officer may refer the valuation of capital asset to a Valuation Officer- (a )in a case where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer, if the Assessing Officer is of opinion that the value so claimed is less than its fair market value; (b)in any other case, if the Assessing Officer is of opinion- (i )that the fair market value of the asset exceeds....
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....hen, the Assessing Officer should then take into consideration and examine it as to whether such report can form the basis for determining the amount to be substituted for purchase price for the purposes of depreciation. Such report alone will not be the deciding factor in our view, but "all the circumstances of the case" including the reports will have to be considered. In other words, if there are other factors and circumstances, which are available before the Assessing Officer which may be gathered by the Assessing Officer by enquiry or investigation, then they will also be considered for determination of amount "as the cost for purpose of depreciation". Thus, we reject the contention that reports of the AVO/DVO are binding on the Assessing Officer when he invoked the Explanation 3 to section 43(1). Further, we also reject the contention of the learned counsel for assessee that no useful purpose will be served if the matter is sent to the Assessing Officer as he has to only apply the DVO report and in such circumstances, Tribunal can do the same. No DVO/AVO report is binding on the Tribunal. The Tribunal has to examine all the facts including the basis on which the valuers have ....