TaxTMI 
TaxTMI 
2007 (1) TMI 278
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.... the assets. 2. The CIT(A) erred in upholding the disallowance of loss of Rs. 1,29,20,068 arising out of construction contract. The appellant submit that based on the recognized principles of accounting for losses, the loss on uncompleted project should have been fully allowed. The assessee-company initially filed its return of income on 31-12-1993 declaring a loss of Rs. 20,58,88,430. The return was subsequently revised [on account of inclusion of receipts of cancellation of foreign exchange contracts as taxable] on 12-1-1994 returning the revised loss of Rs. 11,96,63,050. During the assessment proceedings under section 143(3) of the Income-tax Act, Assessing Officer noticed that the assessee-company has taken over Energy and Offshore Division of M/s. Essar Gujarat Ltd. w.e.f. 31-5-1992 as a going concern for a gross consideration of Rs. 215 crores which was divided into two categories i.e., Rs. 130.52 crores towards fixed assets and Rs. 84.48 crores towards current assets. The assessee assigned the above value on the basis of the market value of fixed assets and the realizable value of the current assets. The book value of the total assets taken over by....
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.... Ltd. as the cost of acquisition and thereafter allowed depreciation upon the same. 3. Aggrieved, assessee filed an appeal before the CIT(A), who held that Explanation 2 to section 43(6) would apply where the whole block of assets is transferred by the holding company to the subsidiary or vice versa and as the Essar Gujarat Ltd. has transferred assets belonging to a division and it did have large number of assets of the same block in other division and therefore where an asset out of the block is transferred, the WDV in the hands of the transferee will be the actual cost in the hands of the transferor company and further directed the Assessing Officer to recompute the depreciation by taking the WDV at Rs. 101,10,88,873. Both the parties are aggrieved by the order of the CIT(A). 4. Aggrieved by the direction to take the WDV at Rs. 101,10,88,873 instead of Rs. 130.50 crores at which the assessee acquired the fixed assets, the assessee is in appeal before us. 5. Aggrieved by the finding of the CIT(A) that the WDV in the hands of the transferee is the actual cost of acquisition in the hands of the transferee company the revenue is in appeal before us. 6. The above issue is ....
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....the cost of acquisition of such asset to the transferee company shall be the cost for which such asset was acquired by it. Thus, as the assessee ceased to be the wholly owned subsidiary of its holding company, the provisions cease to apply to the assessee and the provisions of section 49(3) will apply. He further submitted that the assessee had acquired not a block of assets, but had acquired two divisions, lock stock and barrel and therefore each division is an asset and the cost of acquisition of the divisions should be considered for allowing the claim of depreciation thereon. Thus, according to him, clause (c) of sub-section (6) to section 43 is not applicable to his case. 8. In support of his contentions he relied upon the decision of the Third Member, Ahmedabad Bench in the case of Essar Steel Ltd. v. Dy. CIT [2005] 97 ITD 125 wherein it was held that the transfer of the business undertaking as a whole by itself is a property within the meaning of section 2(47) of the Act and the capital gains is to be determined on the basis of the consideration received for the transfer of the undertaking as reduced by the book value or WDV as shown in the accounts maintained by the asse....
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....n assets to such subsidiary company even for a price or consideration higher than the WDV, the capital gains on such transfer has been exempted under section 47(iv). The reason being the identity of the ownership of the companies precluded its being considered as involving any gain to the transferor company. As capital gain was exempt in the hands of the transferor company and in order to ensure that the transferee company does not claim depreciation on a higher cost, it was provided by the insertion of Explanation (6) to sub-section (1) of section 43 of the Act, that in such cases the WDV in the hands of the transferor company, shall be the cost of Acquisition in the hands of the transferee company. The Assessing Officer's action is right as far as the situation as on the date of transfer is concerned. But by 30-9-1994, the assessee-company ceased to be the subsidiary of the transferor holding company. Section 47 grants exemption from section 45 while section 47A withdraws the exemption granted under section 47 on the occurrence of the events mentioned therein. Section 47 reads as under :- "47. Nothing contained in section 45 shall apply to the following transfers: (i)....
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....e of cost of acquisition in its hands ? The answer lies in section 49(3). Section 49(3) reads as under :- "49(3) - Notwithstanding anything contained in sub-section (1) where the capital gain arising from the transfer of a capital asset referred to in clause (iv) or, as the case may be, clause (v) of section 47 is deemed to be income chargeable under the head "Capital gains" by virtue of the provisions contained in section 47A, the cost of acquisition of such asset to the transferee-company shall be the cost for which such asset was acquired by it." Sub-section (3) provides that in the hands of the transferee, the valuation/cost of the asset regarding which the exemption granted under section 47(iv) has been withdrawn under section 47A of the Act, it shall be the cost for which such asset was acquired by it. Thus, in the present case, the cost for which the assessee has acquired the asset should be the cost of acquisition for the purpose of computation of depreciation. 11. Next comes the question whether it is the transfer of a block of assets or individual assets. This issue is covered by the decision of the Third Member [Ahmedabad] in the case of Essar Steel Ltd. r....
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....e booked on the basis of percentage of work completed. Thus, he applied the proviso to section 145(1) to the assessee and allowed the loss of Rs. 3,14,69,712 only for the year and added the balance amount of Rs. 1,29,20,068 to the income of the assessee. Aggrieved, assessee filed an appeal before the CIT(A) who confirmed the order of the Assessing Officer. Aggrieved, assessee is in second appeal before us. 14. The learned Senior Counsel Shri S.E. Dastur, submitted that the assessee had entered into a contract for laying of pipe-lines and only 2/3rd of the contract was completed during the relevant year. He submitted that the assessee was following the percentage completion method as per the Accounting Standard No. 7, which deals with accounting for construction contracts in the financial statement of contractors. Under this accounting standard two methods of accounting for contracts commonly followed by the contractors are given as the percentage of completion method and the completed contract method. Under both methods, provision is made for losses for the stage of completion reached on the contract and in addition, provision is usually made for losses on the remainder of the c....
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....n record." 18. Brief facts relating to the issue are that the assessee had taken over certain fixed assets from its parent company M/s. Essar Gujarat Ltd. along with certain long-term loans outstanding on account of foreign currency. These loans were allegedly obtained for purchase of the fixed assets and they were hedged by entering into forward exchange contracts by the parent company with the bank. These contracts were also periodically rolled over by the said parent company. On taking over, the assessee cancelled the forward contracts for purchase of foreign exchange and received from the bank a sum of Rs. 8,62,25,383. The assessee included the aforesaid receipt as income in its profit & loss account for the relevant previous year. However, during the course of assessment proceedings the assessee contended that this receipt was not the income but was a capital receipt as the foreign exchange was utilized for acquisition of plant and machinery. The Assessing Officer held that the gain on the foreign exchange fluctuation is to be shown as deduction from the block of assets and consequent adjustment to the depreciation allowable under section 43(1) is to be made. He thus made t....
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....sum of Rs. 8,62,25,388 consequent thereto. Thus, according to him, this amount had to be reduced from the cost of plant and machinery in the computation of its business income. He relied upon the decision of the Special Bench of the Delhi Tribunal in the case of Apollo Tyres Ltd. v. Asstt. CIT [2004] 89 ITD 235, wherein it was held that the gains earned on cancellation of foreign exchange forward contract, connected with foreign loan raised for purchase of machinery, should be reduced from the cost of plant and machinery. 20. The learned senior counsel for the assessee, on the other hand, supported the order of the CIT(A) and submitted that the Assessing Officer has erroneously applied the provisions of section 43(1) of the Act. The ld. counsel submitted that the Special Bench decision in the case of Apollo Tyres Ltd. (supra) relied upon by the ld. DR is not applicable to the case on hand because therein the Special Bench had not considered the decision of the Bombay High Court in the case of Bharat Forge Co. Ltd. (supra). 21. Having heard both the parties and having considered their rival contentions and the material on record, we find that the CIT(A) has relied upon the dec....