TaxTMI 
TaxTMI 
2009 (10) TMI 620
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....nd on facts in passing the orders without properly appreciating the fact and that he further erred in grossly ignoring various submissions, explanations and information submitted by the assessee from time to time which ought to have been considered before passing the impugned order. That the disallowance of depreciation by invoking Expln. 3 to s. 43 of the Act is bad and illegal because the alleged approval granted by Jt. CIT is vitiated in law firstly because the assessee was not heard before any such approval and secondly because the same has been granted mechanically. This action of both the authorities is in clear breach of law and principles of natural justice and therefore deserves to be quashed. (d) The learned CIT (A) has erred in law and on facts in confirming the action of AO in charging interest under ss. 234B and 234C of the Act. (e) The learned CIT(A) has erred in law and on facts in confirming the action of AO in initiating penalty under s. 271 (1)(c) of the Act without recording mandatory satisfaction as contemplated under the Act." 2. Briefly stated the facts are that: (a) A firm namely Chitra Publicity Co. which was in the outdoor advertising business h....
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....asst. yr. 2004-05. He further held that in this case, the main purpose of the transfer of assets at enhanced value is the reduction of the liability to income-tax by claiming deprecation with respect to an enhanced cost. Hence, he was entitled to invoke the provisions of Expln. 3 to s. 43(1) of the Act and recompute the actual cost of the assets transferred. The issue involved and the contentions of the assessee for asst. yr. 2005-06 are identical with that of asst. yr. 2004-05. (f) The assessee during the appeal proceedings before the CIT(A) for asst. yr. 2004-05 and asst. yr. 2005-06, challenged the adoption by the AO of the WDV as on 31st March, 2003 as 'actual cost' on the ground that the valuation of assets was not ad hoc or arbitrary, it was based on a registered valuer's, namely Mr. Induprasad C. Patel, valuation report determining the value of the hoardings as on 1st April, 2003. It further argued that the predecessor firm had not claimed any depreciation on the asset. The value of these hoardings in the books of the firm was nil and hence, it was not possible for it to claim any depreciation, whatsoever. The tax saving was only incidental to the transaction and not the ....
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.... income-tax and therefore the AO was right in invoking Expln. 3 to s. 43(1) for determining the actual cost of hoardings etc. (i) The assessee is in appeal before us against the above orders of the CIT(A). 3. Before resolving the dispute, we feel it appropriate to note here the relevant provisions of the IT Act, 1961: "32. Depreciation-(1) In respect of depreciation of- (i) buildings, machinery, plant, or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed- ......... (ii) in the case of any block of assets, such percentage on the WDV thereof as may be prescribed: Explanation 2: For the purposes of this sub-section 'WDV of the block of assets' shall have the same meaning as in c1. (c) of sub-s. (6) of s. 43. 43. Definitions of certain terms relevant to income from profits and gains of business or profession.-In ss. 28 to 41 and in this....
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....1978, the firm got various assets valued by one Shri R.M. Sheth, a registered valuer. (e) On 5th Aug., 1978, all the shares held by Thakkar Group of the assessee-company were transferred to one Patel Group and Thakkar Group gave up the control and management of the applicant. (f) On 6th Aug., 1978, the partners of the firm entered into a dissolution deed which was made effective from 31st July, 1978 and the company belonging to the Patel Group received the business of the erstwhile firm on dissolution. (g) Thereafter, the assessee-company filed a return of income on 30th June, 1980, showing loss of Rs. 21,45,604 for asst. yr. 1980-81. In the return of income filed by the assessee company, depreciation was claimed on the enhanced value of factory building, residential building and plant and machinery, as according to the assessee company that was the actual cost incurred by the assessee for acquiring the said assets. The ITO held that the dissolution of the firm which had taken place during, the accounting period was just a method to defraud the Revenue by transferring all assets of the firm to the assessee company and this device was adopted for the purpose of claiming hig....
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....hands of the AO but speaks of determination of actual cost by the AO with prior approval of the IAC having regard to all the circumstances of the case. In the present case, crux of the matter thus boils down to as to whether the transaction was entered into by the assessee to reduce its tax liability viz., whether the dissolution had been effected with the main purpose of reducing liability to income-tax by virtue of the said transaction.......... The question then arises is : Expln. 3 to s. 43(1) of the Act only talks of assets which were used by any other person for the purpose of business prior to date of acquisition and are transferred and the main purpose of transfer of such assets is reduction of tax liability by claiming depreciation on the enhanced costs: the assessee having acquired only assets can the provision not become applicable? First of all, we do not have any finding recorded by any authority to the effect that the main purpose of the transfer was for claiming depreciation at an enhanced cost. Though the ITO has stated that dissolution had been effected to defraud the Revenue by transfer of assets of the firm to the company what is more material and necessary....
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....fer of such assets was for claiming depreciation with reference to enhanced cost. The Tribunal has in para 13 of its order referred to various figures of carried forward business loss, carried forward unabsorbed depreciation and investment allowance, etc. in support of its conclusion but it has lost sight of the fact that these are all incidents or effects of the transaction and not the purpose. As can be seen from the assessment order for asst. yr. 1980-81, the ITO himself has allowed the unabsorbed depreciation and business loss as well as investment allowance to be carried forward. Similarly, for asst. yr. 1981-82 the ITO himself has deducted the aforesaid items which remained unabsorbed in the preceding assessment year to be set off against the income from business computed for asst. yr. 1981-82. Therefore, the AO has never considered that the transaction was entered into with a view to reduce tax liability by claiming set off of unabsorbed depreciation, carried forward business loss and investment allowance, and rightly so in our view, as section does not stipulate that the main purpose of the transfer of assets is to reduce income-tax liability by setting off various items of....
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....n prepared to suit the assessee's own requirements. It was explained to the CIT(A), by the assessee, that the value of Rs. 4,77,96,000 as on 1st April, 2003, which was the value on the date of the transfer, was arrived at by it on the basis of the cost of construction prevailing in the State of Gujarat for erecting outdoor hoardings. The assessee explained that it has been in this business in Gujarat for over 70 years and hence, has a firsthand experience of the valuation of the hoardings. Hence, this was the basis for arriving at the transfer amount. Subsequently, the assessee got this valuation reconfirmed by Mr. Induprasad Patel. He also adopted the same valuation basis, i.e., the cost of the hoardings basis, which is a very scientific and objective method of valuing hoardings. Hoardings are not a marketable commodity and hence, one has to value them on such basis only. Although the report is dt. 3rd Oct., 2004, what is essential to note is not the date of the report, but the date as on which it has been prepared. The report states that it is as on 1st April, 2003, i.e., the date of the transfer and it reconfirms the valuation adopted by the assessee. Once the basis of valuation....
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....ed cost. In this case the fair market value of the assets had been certified to be Rs. 2,92,00,000 by a registered valuer who had inspected the property and prepared a report. The AO had not appointed his own valuer for the valuation of the disputed assets and he had not thought it necessary to examine the said valuer before arriving at his own conclusion as to the value of the assets. The Tribunal held that in the absence of any other valuation report prepared by any agency and there being no other evidence to show that the report is not reliable, the valuation report filed by the assessee could not be ignored. 4.5 The learned Authorised Representative argued that what s. 47(xiii) of the Act requires continuity of partners as shareholders. It also envisages that the transfer would be at above the cost and that is why the question of exemption comes in play. This section has been enacted recognising the need for corporatisation of firms. The learned Authorised Representative also pointed out that various Indian and English decisions have laid down the principle that in taxing statutes, the Courts while probing the substance of the transaction cannot displace the legal effect of ....
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....ts in the hands of the transferor is taken as the WDV to the transferee, as per the express provisions in the Act. This is regardless of whether or not the parties are from the same group. However, in the case covered by Expln. 3 to s. 43(1), a discretion is given to the AO lo ascertain the actual cost, if and only if, he is satisfied that the transfer was done for tax avoidance. A further safeguard is provided for the assessee by requiring a prior approval of the Jt. CIT. Thus, the powers conferred upon the AO are wide in nature and have all the trappings of a judicial power. However, this power is not an arbitrary which can be exercised as per his whims and fancy. He must act according to the rules of reason and justice, not according to private opinion; according to law and not humour. His discretion cannot be vague and fanciful but must be legal and regular. He must consider the contention raised on merits. His power is a power coupled with a duty to exercise it in the interest of justice to both the parties. The AO cannot merely state that the purpose of the transfer was for tax avoidance. He must demonstrate the same with facts and figures. Reliable evidence should be prod....
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....es, if the AO does not disprove the assessee's valuation report, then the same cannot be ignored. The CIT(A) too has not examined or attacked the valuation or explained why, according to him, the method of valuation adopted by the valuer is incorrect. 6.2 As held by the Hon'ble Gujarat High Court we do not see any express findings recorded by any authority to the effect that the main purpose of the transfer was for claiming depreciation at an enhanced cost. Though the CIT(A) has stated that the transfer had been effected to defraud the Revenue by transfer of assets of the firm to the company, what is more material and necessary is that there should be a finding to the effect that the enhanced cost was incurred with the main purpose of reduction of liability to income-tax by claiming depreciation on the enhanced cost. A mere statement to this effect is not necessary. It must be backed up by a concrete finding. It was necessary for the AO who wanted to determine the 'actual cost' to place some evidence on record. He ought to have supported the same by placing sufficient evidence so as to dislodge the valuation report of the registered valuer. 6.3 We agree with the assessee's co....
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....e firm M/s Chitra Publicity Co. comprising two partners, Shri Atul K. Mehta and Shri Bakuleshbhai K. Mehta sold their entire business as a going concern to the assessee company w.e.f. 1st April, 2003, wherein the aforesaid two partners became directors. The memorandum of sale by the firm to the company is signed only by these two persons on behalf of the two entities. The AO noticed from the depreciation chart annexed with the tax audit report for the financial year ending 31st March, 2003 that the said firm claimed depreciation of only Rs. 3,68,585 on their assets. The relevant details of various assets are reflected on p. 3 of the assessment order. In the balance sheet of the firm as on 31st March, 2003 the assessee valued/revalued the following assets: -------------------------------------------------------------- Name of the Opening Addition Depreciation Closing Asset balance &nbs....
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....ssessee company in October, 2004 reflected value of hoardings at Rs. 5.20 crores. It was also pointed out that WDV of the predecessor cannot be taken as actual cost since under the Act, there is no such provision which deals with WDV of predecessor partnership firm as actual cost of the successor. The assessee while relying upon the decisions in the case of Kalooram Govindram vs. CIT (1965) 57 ITR 335 (SC) and Indian Iron & Steel Co. Ltd. vs. CIT (1943) 11 ITR 328 (PC), contended that the purpose of transfer of assets and liabilities was not to claim more depreciation and reduce income-tax liability. However, the AO did not accept these submissions on the ground that main purpose of transfer was 'transfer of assets at enhanced value' so as to claim higher depreciation and thereby reduction in tax liability inter alia, the AO concluded: (i) before revaluation/valuation the firm was having assets of Rs. 47.04 lacs as on 1st April, 2002 which on revaluation become Rs. 3.80 crores as on 31st March, 2003 and after the acquisition by the company these assets were valued at Rs. 9 crores, including hoardings of Rs. 4.77 crores, which were valued by the assessee company and not the firm.....
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....claim of Rs. 1,63,59,329 made by the assessee. 3. On appeal, the learned CIT(A) in his order for the asst. yr. 2004-05 concluded that: "I have considered the rival submissions. It is observed that the basic issue involved in this case is whether the AO was right in invoking the provisions of Expln. 3 to s. 43(1) and if he acted reasonably in fixing the 'actual cost' for the said purposes. In this regard Expln. 3 to s. 43(1) is extracted below- 'Explanation 3: Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the AO may, with the previous approval of the Jt. CIT, determine having regard to all the circumstances of the case.' The basic facts are that in the balance sheet of the erstwhile firm, the hoarding boards did not exist as one of the assets. However, the 'trade name' existed as an ....
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....istered valuer. In short, the appellant has denied that behind the transfer of assets, the main purpose was reduction of tax liability by way of higher depreciation claim. It has therefore, argued that Expln. 3 to s. 43(1) does not apply in its case. In this regard it is observed that there is no doubt that against the nil value of the hoarding boards, the appellant has adopted a phenomenally higher value though labeled is as the market value. In Expln. 3 there is no such distinction envisaged or even intended. Call it by any name-market value, a higher value or real value the net effect is that it is an enhanced value/enhanced cost. Under the circumstances, it is held that it is a matter of fact that the appellant has adopted enhanced cost and has claimed depreciation with reference to such enhanced cost. It is undeniable that it has resulted in reduction of liability to pay income-tax. This fact is beyond any doubt or dispute. Thus, with all other requisite conditions of Expln. 3 standing fulfilled, what remains to be seen is if the reduction of the tax liability was the main purpose behind the transfer of assets. What if the appellant's argument that the claim of higher deprecia....
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....n. 3 does not speak of determination of market value of such assets by the AO. The AO is required to determine the actual cost for the said purpose. It is particularly noted that the AO has determined the actual cost of assets in this case being the original WDV of the assets in the hands of the firm including the hoarding boards and trade-mark. It is noted that the AO has recorded his satisfaction to the effect that the transfer of asset was a colourable device intended to reduce the liability to pay income-tax by claiming higher depreciation with reference to the enhanced cost of assets adopted by the appellant. Under the circumstances, the action of the AO in disallowing the excess claim of depreciation of Rs. 1,97,16,739 is upheld." 4. Relying on the aforesaid order, the learned CIT(A) disallowed a similar claim in the asst. yr. 2005-06 also. 5. At the outset, let us examine as to how the AO has completed the assessment relating to the asst. yr. 2004-05 which contains all the material particulars for taking decision in these two appeals. While arriving at a loss of Rs. 1,90,30,664 the company claimed depreciation amounting to Rs. 2,11,28,649 for the asst. yr. 2004-05. The....
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.... a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such amount as the AO may, with the previous approval of the Jt. CIT, determine having regard to all the circumstances of the case." What is "actual cost" contemplated under s. 43? It means the actual cost of the assets to the assessee, reduced by that portion of the cost met by any other person or authority directly or indirectly. The prefix of the word actual to the word "cost" is obviously intended to make emphasis on the reality and genuineness thereof. The fixation of "actual cost" arises only when the AO is satisfied that the main purpose of the transfer of the assets which were used by any other person at any time for the purpose of his business or profession, directly or indirectly to the assessee was the reduction of a liability to income-tax by claiming depreciation with reference to an enhanced cost. When the AO is so satisfied, he has wide discretion to fix the "actual cost" having regard to all the circumstances of the case subject to the previous approval of the Jt. CIT. 5.1 The Hon'ble apex Court in the case of Sunil Siddharthbhai v....
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....as on 1st April, 2003 and incurred before the date of sale. The relevant clauses on p. 4 of the said memorandum read as under: "Whereas the assignor has transferred to the assignee and the assignee has taken over from the assignor as a going concern all the assets and liabilities of the assignor together with the stock-in-trade, equipment, furniture, fixtures fittings, outstandings, plant and machinery and vehicles of the business of the assignor as a going concern together with the goodwill, trade name trade-mark, know-how of the said business as registered in India for a consideration of Rs. 8,00,00,000 (rupees eight crores only) and Whereas the assignor has in pursuance of but prior to the execution of these presents delivered to the assignee all the said plant and machinery, furniture, stock-in-trade and other articles and things as are of the nature of movable property and capable of passing by manual delivery against payment of the price as determined by various assets payable by the assignee to the assignor; and Whereas the assignee has now requested the assignor to record the memorandum of transfer of all the assets and liabilities of the assignor, whatever and mor....
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....nil, the entire expenditure having been claimed as revenue expenditure. The firm considered the prospects and advisability of continuing to carry on business and for various unspecified reasons for the sale of their business as a going concern. The company claimed depreciation allowance on the hoardings on the basis of their enhanced value. In fact, as per depreciation chart annexed with the tax audit report for the financial year ending 31st March, 2003, the said firm claimed depreciation of only Rs. 3,68,585 on their assets. The relevant details of various assets are reflected on p. 3 of the assessment order. In the balance sheet of the firm as on 31st March, 2003. The said firm revalued some of the assets like land, Rajkot office, Surat office and also created another asset i.e., trade name of the value of Rs. 3 crores. In the schedule of fixed assets of the firm, the assessee reflected opening balance of Rs. 25,38,000 on account of goodwill, on which no depreciation had been claimed nor on the trade name. The firm had claimed entire expenditure on construction of hoardings as revenue expenditure and thus, hoardings were never shown as part of their fixed assets. However, the co....
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....firm or in the memorandum of transfer, point out that main purpose was nothing but reduction in tax liability. It is not understood as to when the aforesaid two persons while being partners in the firm thought it commercially prudent to claim the expenditure on hoardings as revenue expenditure, the same two persons while being fully aware that hoardings were not fixed assets of the firm, on becoming directors of the company, got valued these hoardings after about one and a half year of the purchase of business and claimed the same to be plant and machinery for claiming depreciation. In these circumstances, what can be the purpose if not reduction in tax liability by claiming depreciation on an enhanced value. Apparently, the increase in value of the hoardings is substantial and out of all proportion to their WDV in the hands of the firm. The reasons advanced for the transfer of hoardings do not justify the increase in their values. There is no separate mention of these hoardings at all in the memorandum of transfer nor it is known as to whether or not any amount had been received by the firm on account of these hoardings. In the light of these facts, I am of the opinion that the ma....
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....ets) (") 1,05,13,270.09 --------------------------------------------------------------- Net liabilities (") 6,24,38,345.70 --------------------------------------------------------------- Cash (") 82,800.08 --------------------------------------------------------------- Chitra Publicity Co. (P) Ltd. (as per narration of firm) 8,00,00,000.00 --------------------------------------------------------------- Cr. Bakuleshbhai K. Mehta & Atulbhai K. Mehta (") 4,52,94,231.46 --------------------------------------------------------------- Total ....
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....see company got these valued and their fair market value as on 1st April, 2003 was determined at Rs. 4,77,96,000. Is this actual cost to the assessee? There is no basis before us for fixing the consideration of Rs. 8 crores nor Sch. 1 referred to in the memorandum has been placed before us. Why would a company pay Rs. 4,77,96,000 (determined only on 3rd Oct., 2004) for hoardings whose cost is nil in the balance sheet of the firm as on 31st March, 2003 the entire expenditure having already been claimed as revenue expenditure. There is no apparent reason except to claim depreciation on such hoardings and to reduce their tax liability. 5.5 Ginners & Pressers (P) Ltd. vs. CIT 1978 CTR (Bom) 235 : (1978) 113 ITR 616 (Bom), was a case where s. 10(5)(a) of the 1922 Act corresponding to Expln. 3 to s. 43(1) of the present Act came up for discussion. The facts of that case narrated hereunder are more or less similar to the facts on hand. The assessee, a private limited company, was a subsidiary of another private limited company. The object of formation of the assessee company was to takeover some oil and ginning mills, factories and land belonging to and used in its business by the pare....
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.... why if the same value is taken to be the actual cost to the transferee company, as on the dale of transfer, the determination would be irrational or unreasonable. If the ITO adopted this method of determining the actual cost of the transferred assets with the approval of the IAC it will be difficult to say that the method adopted was unreasonable or irrational." 5.6 It is well-settled position that the Courts/ITOs are entitled to lift the veil of the corporate entity and pay regard to the realities. They have power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation, [Firestone Tyre & Rubber Co. Ltd. vs. Lewellin (Inspector of Taxes) (1958) 33 ITR 741 (HL) : (1957) 1 WLR 464 (HL)]. In CIT vs. Sri Meenakshi Mills Ltd. (1967) 63 ITR 609 (SC), the Hon'ble Supreme Court said that the IT authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction, it further said: "It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those ....
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....facts. ------------------------------------------------------------------- (iii) all machinery and assets (iii) Admittedly, entire business have been taken over as a has been taken over by the assessee running concern, the company and not merely the assets. assessment order nowhere states that the business as such was taken over by the assessee company. The Tribunal has lost sight of the distinction between a "running business" and a "running concern". A business in its sweep takes in all the assets, liabilities, various outstandings by way of debts incurred and debts due. In the 'case of the assessee; the entire business is split up into the assets and liabilities and on dissolution the assessee company takes over only assets leaving the liabilities to be discharged by the erstwhile partners, viz., other than the assessee-company. Thus, payment in question is only for acquisition of the assets. ------------------------------------------------------------------- (iv) Hon'ble High Court &n....
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....p; same to transfer of hoardings is nothing but a device to reduce the tax liability by claiming depreciation on the enhanced cost. There is no material that this amount was actual cost of hoardings ....
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....for claiming Revenue but nowhere is it depreciation with reference to stated that the main purpose enhanced cost. of transfer of such assets was for claiming depreciation with reference to enhanced cost. ------------------------------------------------------------------- In the light of aforesaid distinguishing features and due regards to the decision of Hon'ble jurisdictional High Court. I am of the opinion that the aforesaid decision relied upon by the assessee and the learned JM is not applicable to the facts of the case under consideration. 6.1 The other two decisions relied upon on behalf of the assessee in the case of CIT vs. Sekar Offset Press (1995) 214 ITR 516 (Mad) and Unimed Technologies Ltd. were rendered on their own peculiar facts. The learned Authorised Representative on behalf of the assessee has not demonstrated before us as to how these decisions are applicable to the facts of the case under consideration. 6.2 In this context Hon'ble Supreme Court cautioned in their recent decision dt. 6th March, 2009 in the case of State of Andhra Pradesh vs. M. Radha Krishna Murthy (Criminal Appe....
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....by the assessee accordingly. Therefore, grounds raised by the assessee in respect of their claim for depreciation on hoardings in these two assessment years, are dismissed. 8. As regards claim of depreciation on trade name valued by the firm at Rs. 3 crores. AO found that even though firm valued the trade name at Rs. 3 crores, it did not claim depreciation. There is nothing in the impugned orders suggesting the basis for valuation of trade name by the firm nor the assessee placed before us the relevant Sch. 1 referred to in the memorandum of the valuation report, so as to ascertain the actual cost to the assessee. We find that the AO treated the trade name as goodwill and disallowed the claim for depreciation. Though the assessee in their ground No. 2 of the appeal has raised an alternate ground that the differential amount may be treated as goodwill and depreciation allowed accordingly, in fact, this ground was not pressed before us and no submissions have been made as to how the amount can be treated as goodwill, entitled to depreciation. The learned CIT(A) without ascertaining either basis of valuation of trade name or as to whether or not it is of the nature of goodwill or t....
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....h parties and keeping in view my aforesaid observations. 10. Subject to aforesaid directions in relation to claim of depreciation on the amount attributed to trade-mark and enhanced value of the buildings, grounds relating to claim of depreciation on the hoardings valued by the assessee, are dismissed. 11. In the result, both these appeals are partly allowed for statistical purposes. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 3rd Aug., 2009 As there is a difference of opinion, the matter is being referred to the Hon'ble President. Tribunal, with a request that following questions may be referred to a Third Member or pass such order as the President may deem fit: "(1) Whether on the facts and circumstances of the case, the assessee is entitled to depreciation in the asst. yrs. 2004-05 and 2005-06 on the following assets- I. Hoardings valued by the assessee on 1st April, 2003 at Rs. 4,77,96,000, II. Trade name valued by the firm at Rs. 3,00,00,000 and III. Addition to the buildings ....
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.... the assessee, out of the consideration, the assessee paid specified sums for the following assets: (1) Goodwill and business name : Rs. 3,00,00,000 (2) Hoardings : Rs. 4,77,96,000 (3) Building (a) Rajkot office : Rs. 33,99,317 (b) Surat office : Rs. 10,95,462 3.1 In its return, assessee claimed depreciation on various assets including 3 assets with value (cost) referred to above. Total depreciation was claimed at Rs. 1,97,16,739 for the asst. yr. 2004-05 in the first year of assessment of the assessee company. The AO held that the depreciation was claimed on enhanced cost of above assets and therefore, in the light of provisions of Expln. 3 to s. 43(1) of the Act, which he invoked, actual cost of two assets in the hands of the assessee was taken at 'nil'. In the case of third asset 'buildings', WDV as reflected in the hands of the firm in the immediately preceding year was adopted as cost. Depreciation was accordingly worked out and disallowance of Rs. 1.97 crores ....
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....mple as per the policy, provisions of capital gains are attracted on "transfer" of a capital asset. However, under s. 47(xiii) of the Act, change of ownership of capital asset is not treated as 'transfer' for purposes of capital gain. But it cannot follow that for all other provisions of the Act, such change of ownership is to be ignored by reading s. 47 (xiii) in those sections. Legislative intent, purpose, language of each section is to be kept in mind while considering its applicability. Again under Expln. 2 to s. 43(6)(c) of the Act, in case of transfer of assets on amalgamation of companies, the WDV of the transferred assets is to be carried forward and depreciation is to be allowed on such WDV and not on cost. However, application of above provision is to be restricted to the cases stated in the provision. General and unauthorized application of above provision is not permissible. Likewise purpose of Expln. 3 to s. 43(1) is clear from its plain language and there is no need to engraft other provisions to achieve its purpose. The provision is complete and self-contained. 7. Explanation 3 to s. 43(1), which is subject-matter of controversy, is as under: "Explanation 3: Wh....
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.... getting higher depreciation, the takeover of the business by the corporate body was a measure of commercial expediency. It was argued that in the light of globalization and industrialization, many foreign concerns were approaching Indian concerns to have a joint venture. These foreign concerns were not prepared to have any business or joint venture with a firm. Only a corporate body could have a foreign collaboration. He referred to Circular No. 772, dt. 23rd Dec., 1998 [(1999) 151 CTR (St) 9] of CBDT wherein incorporation of limited companies has been encouraged by the Government. He also drew my attention to an offer from News Outdoor Group dt. 28th July, 2006, a foreign company interested in acquiring majority interest in the assessee company. It was accordingly contended that AO, in the present case, could not record his satisfaction or hold that the main purpose of transfer of assets in question was reduction of liability to income-tax. Benefit of higher depreciation was only incidental and not main purpose of acquisition of assets by the company. Shri Soparkar also argued that after the business was taken over by the assessee company, there was much improvement in the turnov....
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.... in the proposed order of learned AM as also in the submissions of the learned Departmental Representative, may be summarized as under: (a) AO's reasonings as summaried by the learned AM in his proposed order are as under: "(i) before revaluation/valuation, the firm was having assets of Rs. 47.04 lacs as on 1st April, 2002 which on revaluation became Rs. 3.80 crores as on 31st March, 2003 and after the acquisition by the company these assets were valued at Rs. 9 crores including hoardings of Rs. 4.77 crores, which were valued by the assessee company and not the firm. (ii) Though the firm is in business for a considerable number of years, it was only in the year prior to acquisition by the assessee company that certain assets were revalued arbitrarily and shown as addition to block of assets and the revalued amount was not actual cost to the firm. (iii) hoarding boards never appeared in the schedule of fixed assets of the assessee firm nor these were treated as assets by the firm. In fact entire expenditure on hoardings was claimed as revenue expenditure by the firm. It was only the assessee company that valued the hoardings at Rs. 4,77,96,000 and claimed depreciation in....
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....tion under s. 32 is permissible on trade name or goodwill. The trade name was an appreciable asset whereas assessee has claimed depreciation in respect of the trade name. (f) Under proviso (c) to s. 47(xiii), the partner of firm does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company. However, assessee company has arbitrarily valued and revalued assets. The firm has not been taxed in view of s. 47(xiii) while assessee has claimed depreciation with reference to arbitrarily enhanced cost of assets. (g) The closing WDV of the erstwhile firm is taken as actual cost, in place of arbitrary valuation/revaluation fixed by the erstwhile partnership firm during the financial year 2002-03 and the assessee were ignored. (h) The claim of depreciation on such revalued asset by the firm was also against actual cost concept. The trade name and goodwill are like land and are not appreciable assets; that is why no depreciation is allowable in respect of such assets. (i) The AO further observed that the assets of the firm have been revalued and corresponding capital of the partner has been increa....
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....sfer is genuine or sham is required to be examined. (m) The assessee has not placed before the Tribunal Sch. 1 to the memorandum dt. 1st April, 2003 nor the details of liabilities taken over have been furnished. However, in the memorandum, it is stated that all the assets and liabilities as on 1st April, 2003 are agreed to be taken over. (n) The assessee appellant has not furnished basis of amount of Rs. 8 crores or even the basis of valuation of offices and trade-mark before the Tribunal. (o) Only after the purchase of business of the firm as a going concern, the company ascertained the fair market value of the hoardings received from the firm at Rs. 4,77,96,000 as on 1st April, 2003 as per report dt. 3rd Oct., 2004 of the approved valuer, while their WDV in the hands of the firm was nil. The entire expenditure having been claimed as revenue expenditure. (p) Besides reduction of liability to income-tax by claiming that depreciation on enhanced cost, there may be other reasons also but main purpose was reduction of liability to income-tax. (q) The reasons for increase in turnover may be manifold and the assessee did not place any material before the lower authorities....
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....reciation on buildings at Rajkot and Surat. The learned Departmental Representative placed reliance on the order of AO/CIT(A) to justify adoption of WDV claimed as a correct method. It was argued that in the case of Ashwin Vanaspati Industries, it has been held that Expln. 3 to s. 43(1) does not require determination of market value by the AO but actual cost. 11.2 In the valuation report, the registered valuer determined market value and not actual cost. Therefore, report of the registered valuer could not be relied upon. 12. Before adverting to application of Expln. 3 to s. 43(1) and above mentioned circumstances, I may refer to case law referred to in the impugned orders of the Revenue authorities and considered by the learned AM. These are as under: 12.1 in the case of Guzdar Kajora Coal Mines Ltd. vs. CIT 1972 CTR (SC) 231 : (1972) 85 ITR 599 (SC), their Lordships of Supreme Court on a similar provision under old Act of 1922 held as under: "The original cost to the assessee of a particular asset is a question of fact which has to be determined on the evidence or material placed before or available to the IT authorities. Any document or formal deed mentioning the con....
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.... 33,973. The Tribunal rejected the assessee's claim holding, inter alia, that the allocation in the deed of conveyance was arbitrary. On a reference of the question whether the ITO was competent to go beyond the conveyance and fix a valuation of the assets on his own, the High Court answered the question in the affirmative. On appeal to the Supreme Court: Held, on the facts, that there was no error or infirmity that would justify interference by the Supreme Court." 13. In the case of Ginners & Pressers (P) Ltd. vs. CIT 1978 CTR (Bom) 235 : (1978) 113 ITR 616 (Bom), assets of the firm were taken over at cost of Rs. 13,50,000 while their WDV in the hands of the parent company was only Rs. 2,21,412 while original purchase cost to the parent company was Rs. 5,52,475. The AO after applying proviso to s. 10(5)(a) and with the previous approval of the IAC, took the actual cost to the assessee at their WDV plus the balancing charges arising under s. 10(2)(vii). 13.1 It is to be noted that in cited case, WDV was not taken as "actual cost' but it was WDV plus the balancing charges. The headnote of the report further suggests that the provision in question nowhere speaks of the marke....
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....een put upon those words that the cost to be calculated for the purpose of depreciation allowance is the cost to the assessee and not to the person who makes the sale but still the question remains whether the Tribunal has the jurisdiction to hold that what the appellant has actually paid as the price of a particular asset is not its real price and the price paid includes the price of some other asset which must have been purchased." 13.4 Their Lordships of Supreme Court ultimately held as under: "Whether the law applicable should be as laid down in the English cases or in the cases decided by the Lahore High Court it is not necessary to decide because we think that the following two questions of law arise out of the order of the Tribunal and a reference should have been made to the High Court. These two questions were sought to be raised by the appellant under s. 66(1) of the Act and again before the High Court under s. 66(2) of the Act: '(1) Whether on the interpretation of the sale deed it can be said that any goodwill was purchased by the assessee? (2) Whether in view of the said proviso to s. 10(5)(a) the ITO on the facts and circumstances arising out of this case ....
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....bsp; - 12,064 (iv) Furniture - 3,721 The ITO further referred to the WDVs as per the income-tax records and found as follows: (a) Building - 2,659 (b) Machinery - 19,056 Perusing all these figures, the ITO held that plant and machinery were very much inflated by the applicant. The ITO further held that in the allocation, the assessee company had entirely lost sight of the question of goodwill. He thereupon valued the goodwill by resorting to the method of taking the average profit of three to five years and made an estimate of goodwill at Rs. 7,50,000. Thereafter he allocated the balance sum of Rs. 15,50,000 as follows: (i) Land, inclusive of shafts and inclines - 10,00,000 (ii) Buildings &....
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..... 10(2) of the IT Act." 13.7 In the case of Kungundi Industrial Works (P) Ltd. vs. CIT (1965) 57 ITR 540 (AP), the firm constituted themselves to a private limited company and took over assets of the firm at Rs. 63,000 and Rs. 87,000 while their WDV in the hands of the firm was Rs. 3,994 and Rs. 13,210 respectively. The AO in terms of proviso to s. 10 (5)(a) took actual cost at the WDV. On appeal, the Tribunal fixed value of assets transferred at Rs. 25,000 in excess of the WDV of the two items. Their Lordships upheld above action as on facts they found that the increase in the value was substantial and out of all proportion to the WDV. The ITO was held to have power to go behind the contract and make his own estimate with the approval of the IAC. 13.8 Their Lordships also made the following observations: "It is the actual cost of the assets to the assessee that should determine the statutory allowance for depreciation. Ordinarily the contractual price will be deemed to be the actual cost. But in certain cases it may be palpably fictitious.......... As observed in CIT vs. Harveys Ltd., the original cost of any particular asset is entirely a question of fact, and like an....
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....here is sufficient power with the AO to disregard the cost of assets taken by the transferee and determine the actual cost of assets. He can make a disallowance, provided circumstances envisaged in the provision are satisfied. The Revenue authorities and the learned AM in the proposed order have made out a good case that the main purpose of transfer of asset was reduction of liability to income-tax (by claiming depreciation on enhanced cost). However, as already noted, recording of above satisfaction is not the main purpose of the Explanation. The real purpose of the provision is to authorize the AO to determine actual cost to the assessee. What is the meaning of the "actual cost"? "Actual cost" is to be determined by the AO having regard to all the circumstances of the case. In other words, facts and material on record is to be considered in the process of determination of actual cost. Such cost cannot be any fancy or imaginary figure. This is clear from use of strong words like "determine" and check in the provision on arbitrary exercise of power by the AO. The AO is required to determine the actual cost with the previous approval of the Jt. CIT. Therefore, the AO has to satisfy ....
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....rts. In the case of Ginners & Pressers (P) Ltd. vs. CIT, the decision of Bombay High Court strongly relied upon by the Revenue, their Lordships have made the following observations: "There is no doubt that, in the absence of fair market value of the assets transferred being known on the date of transfer, the requisite inference under the proviso to s. 10(5)(a) of the Act cannot be drawn. But it is not as if the taxing authorities as well as the Tribunal have not dealt with this aspect of the matter at all while deciding the question of applicability of the proviso to s. 10(5)(a) to the facts of the present case." 17.1 It is, therefore, not possible to totally reject the concept of market value of the assets transferred as not relevant for determining "actual cost". The provision requires consideration of all the circumstances including cost in the hands of the transferor, WDV, inflationary trends, conditions and life of assets transferred etc. in the exercise of determination of cost of assets. It is true that cost shown in the transfer is primarily the cost to the transferee and such cost therefore, is a piece of good evidence. But cost shown is not final and AO is empowered....
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....n before the date of acquisition. The duty cast upon the AO by the provision is to determine the actual cost and not to substitute a valuer's opinion. At the same time, merely because a document in the nature of contract of purchase is entered into denoting a certain price the same would not conclusively establish the correctness of the claim made by an assessee if the AO is of the opinion that the transaction is by way of subterfuge or device in order to avoid tax which the assessee is otherwise liable to pay or that the transaction is illusory or colourable or that the assessee has acted fraudulently. In such circumstances, it would always be open to the AO to go behind the contract and ascertain the actual cost so as to determine the correct liability to tax." 18.2 In spite of the clear observations of the jurisdictional High Court, fully supported by other authorities and clear language that "AO is obliged"; "duty cast on AO" to determine actual cost of assets to the assessee, in the present case, the burden has been placed on the assessee to prove that actual cost of asset was the value it had claimed for the purpose of the depreciation. No attempt whatsoever was made by th....
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....gs, life of hoarding at the time of transfer, increase in cost of making and erection of such hoardings etc, was to be seen. Whether cost (value) got depreciated on account of wear and tear was to be examined. The list of circumstances is by no means exhausted and there can be other relevant circumstances required to be considered in the exercise of determination of actual cost of the hoarding. 19. Another difficulty in the present case is the unnecessary burden placed on the assessee and unjustified adverse inference drawn against the assessee. As noted earlier, the learned AM has observed: (i) Schedule 1 to the sale deed not produced before the Tribunal and, therefore, basis of amount of Rs. 8 crores or even the basis of valuation of offices and trade-mark not raised before us. There is no separate mention of hoardings, other than in memorandum of transfer nor it is known as to whether or not any amount had been received by the firm on account of these hoardings. There is nothing before us to show that assessee had acquired hoardings for a sum of Rs. 4,77,96,000 and the same was actual cost of assets to the assessee. Is (Rs. 4,77,96,000) this actual cost to the assess....
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....report in support of the price paid by the assessee at Rs. 4,77,96,000, dt. 3rd Oct., 2004 has been placed. It is true that at the time of transfer i.e., on 1st April, 2003, aforesaid report was not available. But that could not prevent the shareholders or partners to fix the price or cost of the hoardings as on 1st April, 2003. Registered valuer was also fully competent in October, 2004 to give the valuation of hoardings as on 1st April, 2003. Valuation report could not be rejected on the ground that it related to a prior date. It was necessary and incumbent on the AO to consider the material or reasons given by the registered valuer in support of the valuation report as has been laid down by the jurisdictional High Court in the case of Ashwin Vanaspati Industries. The question was whether material and reasons given in the report were sound. The AO could have very well seen cost of hoardings shown by the erstwhile firm. Merely because cost of hoardings was claimed as a revenue deduction, it cannot follow that its value even in the hands of the transferee should be nil. Copy of valuation report is available at pp. 89 to 123 of the paper book. The situation and size of each hoarding....
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....firm and the company are available at p. 73 of the paper book. The turnover of the firm in the last year of its business i.e. in financial year 2002-03 is shown at Rs. 8,58,26,749. In the earlier two years also, it is more than Rs. 8 crores. It jumped upto Rs. 11,67,00,000 in the first year of company's business and thereafter it jumped to Rs. 14,38,00,000. These turnover figures are not in dispute. Based on above turnover figures, the registered valuer who without a doubt is an expert, determined the value of goodwill/trade name at Rs. 3 crores. Detailed calculations are given in the valuation report. It was open to the AO to examine those calculations and to arrive at its own conclusion. Such exercise was not undertaken. Merely because goodwill acquired by the firm was not shown as an asset or was shown at slightly less figure and no depreciation was claimed by the firm, its value was taken at nil. How could value of goodwill or trade name for a concern making high profit and in business for several years, be nil? What the AO has done is quite contrary to the principle laid down by the Supreme Court in the case of Jogta Coal Co. Ltd. vs. CIT. In the said case, it was held that ha....