TaxTMI 
TaxTMI 
2009 (10) TMI 620
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.... 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 has been succeeded by the assessee company on 1st ....
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.... 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 main purpose of the transaction. The whole transaction was ....
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....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 section, unless the context otherwise requires- (1) 'actual cost' means the actual ....
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.... 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 higher depreciation. The reasons which weighed with the IT (authorities) for arriving at this conclusion were- ....
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....e 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 is that there is no finding to the effect that the enhanced cost was incurred with the main purpose of reduction of liability ....
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.... 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 brought forward loss, etc. The Tribunal was, therefore, not right in law in holding that the assessee was not entitled to claim d....
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....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 is the same and since it considers the costs of labour, material, colour, RCC, etc., prevailing as on 1st April, 2003, then it is not a matter o....
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....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 a transaction. Some of the decisions relevant in this respect are as follows: (a) CIT vs. B.M. Kharwar (1969) 72 ITR 603 (SC) In this case, the Revenue a....
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....m 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 produced to substantiate his claim. Such a conclusion by the AO requires a more careful examination of the facts and circumstances of the case, and he cannot simply invoke the p....
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.... 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 contention on s. 47(xiii). As observed by the Supreme Court in the case of B.M. Kharwar a firm and a company are two separate legal entities and a transfer between them is valid even if all....
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....ein 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 balance -------------------------------------------------------------- Land account 1,38,660 19,76,340 0&....
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....DV 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. (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....
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....er 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 asset whose opening value was nil but which was revalued during the year at Rs. 3 crores so that on 31st March, 2003 the value was shown at Rs. 3 crores, implying that the firm had not claimed any depreciation on this asset w.e.f. 1st April, 2003, the a....
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.... 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 depreciation and reduction of tax liability was only incidental and not the main purpose is turned around to say that the commercial interest was only an intelligent facade to cover up the main purpose of gaining excess depreciation claim to the tune of Rs. 1,9....
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....ginal 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 gross value of assets as on 1st April, 2002 i.e., before revaluation/valuation by the firm, was about Rs. 47.04 lacs, which after valuation/revaluation becomes Rs. 3.80 crores as on 31st March, 2003. There were two partners in the said firm. Shri Atul K. M....
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.... 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 vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC), while considering a case of transfer of assets within the terms of s. 45 of the Act, laid down the scope of the powers of the AO and said: "he is entitled to penetrate the veil covering it and ascertain the tru....
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....bilities 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 more particularly specified in the balance sheet as at 31st March, 2003 prepared by it without derogating from the generality of the foregoing in particular- (a) All the rights to the business and to continue to carry on such business including and together with the goodwill of th....
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.... 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 company in their computation of depreciation, as reproduced on p. 2 of the assessment order, had addition of Rs. 4,77,96,000 as on 1st April, 2003 on account of hoardings under the head plant and machinery. These hoardings do not find place either in the memorandum of transfer of assets p....
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....nditure, 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 main purpose of the transfer of hoardings was, therefore, the reduction of liability to income-tax by claiming depreciation with reference to enhanced value and the Expln. 3 to s. 43(1) of the Act would apply. 5.4 Moreover, the depreciation under s. 32 of the Act is calculated either on ....
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....------------------------------------------------ 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 14,24,38,345.70 14,24,38,345.70 --------------------------------------------------------------- There is no mention of hoardings in the fixed assets nor any evidence that any amount has been paid toward acquisition of hoardings. No doubt the firm and partner....
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....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 parent company. These assets were taken over by the assessee company at a cost of Rs. 13,50,000. Their WDV for the parent company was only Rs. 2,21,412 while their original purchase cost to the parent company was Rs. 5,52,475. The assessee paid for the assets by issuing fully paid-up shares of that value. The ITO applied the proviso to s. 10(5)(a) and, ....
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....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 enjoyed or borne by its members. But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard the economic realities behind the legal facade." 5.6.1 In CIT vs. B.M. Kharwar, the Hon'ble Supreme Court has held that the taxing authority is entitled, and is indeed bound, to determine the true legal relation r....
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....uch 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 (iv) No such valuation of hoardings observed that: was done before or at the time of "we do not have any finding sale of various assets. In this recorded by any authority to case, a clear finding has been the effect that the main recorded by the AO and the CIT(A) purpose of the ....
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....ability by claiming depreciation on the enhanced cost. There is no material that this amount was actual cost of hoardings to the assessee. ------------------------------------------------------------------- (v) The assessee having made (v) No material has been placed a claim for depreciation on before us suggesting that amount of enhanced cost, which is the Rs. 4,77,96,000 the actual cost actual cost in its hands,&n....
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....er 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 Appeal No. 386 of 2002): "6. Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of Courts are neither to be read as Euclid's, theorems nor as provisions of the statute and that too taken out of their context. These observations must be read in the context in which they appear to have been stated judgments of Courts are not to be construed as statutes. To interpret words, phrases and provisions of a statute, it may become necessary for Judges to embark into lengthy discussions b....
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....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 trade-mark, dismissed the claim of the assessee, invoking the provisions of Expln. 3 to s. 43(1) of the Act. I am of the opinion that impugned order of the learned CIT(A) is not a speaking order on this aspect. Before us though the learned Authorised Representative referred to their submissions on p. 42 of the paper book wherein report of some registered valuer is referred to, a copy of the said report though referred to in the said submissions has not been placed either in the paper book nor submitted before us. Even the basis of valuation is neither evident from the impugned orders of the AO or the learned CIT(A) nor the lea....
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....e 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 on account of valuation by the firm of- (i) Rajkot office Rs. 3,99,317 (ii) Surat office Rs. 10,95,462 VIMAL GANDHI, PRESIDENT (AS THIRD MEMBER): 26th Oct., 2009 On account of difference between the learned Members of Ahmedabad 'B' Bench of Tribunal, the following questions have been referred, under s. 255(4) of the IT Act: "(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....
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....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 was made. On the same basis in the next year 2005-06, a sum of Rs. 1.47 crores was disallowed. 4. The assessee being aggrieved, challenged above action of the AO in appeal before the CIT(A) but remained unsuccessful. The learned CIT(A), after detailed discussion, upheld the action of the AO. The assessee, therefore, approached the Tribunal in appeal. 5. After hearing submissions of the learned representatives, the Members of the Bench could not arrive at an agreed conclusion and expressed dissenting views in their proposed orders. The learned JM, in his order, accepted the claim made by the assessee which was allowed. The learned AM, on the other hand, held that Expln. 3 to s. 43(1)....
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....uch 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: 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." 7.1 It is clear from above that the above Explanation, stipulates the following circumstances be satisfied and steps taken: (i) Before the date o....
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....rity 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 turnover. He drew my attention to increase in figure of turnover of the assessee in the subsequent years. Accordingly it was contended that purpose of taking over of business by the corporation was to run it more effectively and efficiently, which was clear from the results shown in the subsequent years. 10. I have carefully considered above submissions. It appears to me that objection on satisfaction raised by the learned counsel for the assessee have been met by the Revenue authorities and in the proposed order by the learned AM. However in the light of the views taken hereinafter, I do not feel it necessary to record any final finding on this aspect. I 'presume' that satisfaction as envisaged by the Expln. 3 abo....
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....rtain 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 order to reduce their tax liability. (iv) Even though the firm valued the trade name at Rs. 3 crores during the financial year 2002-03 the schedule of fixed assets revealed opening balance of goodwill of Rs. 25,38,000 in the period relevant to asst. yr. 2003-04. The firm never claimed depreciation on trade name while the assessee company claimed depreciation @ 25 per cent considering the trade name as trade-mark. The assessee company claimed depreciation on trade name which is not at all a depreciable asset. There is no wear and tear of goodwill and trade name. (v) the assessee has not given any basis for valuation/revaluation of assets by the firm or by the company. (vi) the assessee claimed that it is a case of succes....
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....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 increased without any reflection on the profitability of the firm. He referred to proviso (c) to s. 47(xiii) of the Act. OJ As against nil value of hoarding board, the appellant has adopted a phenomenal higher value though labeled it as 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 a real value-the net effect is that it is an enhanced value/enhance cost. On account of enhanced cost and has claimed depreciation with reference to such enhanced cost, which has resulted in reduction of liability to pay income-tax. (k) The appellant's plea of higher turnover in support of transfer of assts as a pure commercial decision fails as a convincing argument. 11. In the appell....
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.... 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 for ascertaining the reason for increase in turnover nor the lower authorities have gone into this aspect. No material has been placed before us (Tribunal). (r) It is not understood as to when the aforesaid two persons (partners) 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. What can be the purpose, if not reduction in tax liability. (s) Apparently the increase in the value of hoarding is substantial and out of proportion to their WDV in the hands of the firm. (t) There is no mention of these hoardings at all in the memorandum of transfer nor ....
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....ra 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 consideration or the cost paid for the purchase of an asset by the assessee would be a piece of evidence and prima facie the statements or figures given, therein would show how much the cost of the asset to the assessee is. But, if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the assessee and there has been inflation or deflation of value for ulterior purposes it is open to the IT authorities to refuse to accept the price mentioned or allocation given in the deed or alleged by the assessee and to ascertain what the actual cost was or to determine the allocation between depreciable and non-depreciable assets. It is, therefore, open to the IT authorities to determine and to the assessee to show whether the goodwil....
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....o 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 market value being determined by the AO. So it is erroneously inferred that the decision is an authority for the proposition that actual cost is not the market value. However, if a reference is made to the judgment, it is found that their Lordships have observed as under: "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......... the correct market value of the assets transferred might have been lower than the consideration f....
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....ions 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 was competent to go behind the conveyance and fix a valuation of his own in the way he has done?' Question No. I was not allowed by us to be argued because the matter was not taken in the statement of case on behalf of the appellant and the only question which survives for consideration is the second one, i.e., No. 7, and this question, as it is or with modifications, should have been referred to the High Court. We therefore direct that the question with the necessary modifications, if any, be referred and the case stated in accordance with s. 66(1) of the IT Act. As to costs, in the event of the case being decided in favour of the appellant it will be entitled to the costs incurred in this Court but if it fails in the High Court it will have to pay the costs of the CIT in this Court. The case is therefore remitted wi....
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.... 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 - 2,00,000 (iii) Plant and machinery - 3,50,000 The applicant went in appeal to the AAC, who also accepted the estimate made by the ITO and dismissed the appeal. The matter was then taken up to the Tribunal, and in its order the Tribunal revised the estimated values on the assets which were taken over by the assessee. The cost price of the various assets, it held in the circumstances, has necessarily to be estimated with reference to the prevailing market conditions. The estimates were as under: (a) Land and buildings - 9,20,000 (b) Shafts and inclines - 80,000 (c) Buildings &n....
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....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 any other question of fact depends upon the evidence produced to prove it." 14. I have carefully examined above circumstances/reasons, arguments and case law in support of application of Expln. 3 to s. 43(1) in this case. I have already commented upon circumstance (i) and on "satisfaction" of the AO that main purpose of transaction was to claim higher depreciation on transferred assets in the hands of the assessee. Yet the main purpose of Expln. 3, in my view, is to empower the AO to determine actual cost of assets where the assessee is wrongfully claiming depreciation on enhanced cost of such assets. What is actual cost? How is it to be determined? Actual cost of an asset to the assessee is always question of fact governed and depending upon the circumstances of the case. However, application of principles for the determination of actual cost is a question of law. The actual cost normally m....
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....st 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 Jt. CIT that exercise of determination of cost has been carried in a reasonable and proper manner. The provision of approval by the Jt. CIT is for the benefit of the Revenue and the assessee. It is to prevent the AO from taking any amount as "actual cost". 16. It has been contended on behalf of the Revenue that actual cost is not market value but is WDV of assets in the hands of the transferee, particularly on the facts of the case when value of hoarding and of goodwill/trade name was nil in the books of the erstwhile firm. The assessee company, after acquisition claimed depreciation on cost of assets which was arbitrarily fixed without any basis. Reliance, as noted above, has been placed on proviso (c) to s. 47(xiii), s. 32(1) and s. 43(6) of the IT Act. 17. After careful consideration of above provisions and facts and circumstances of the case, I am unable to accept the stand of the Revenue....
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...., 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 under Explanation to revalue the asset and determine its actual cost. He has to determine the cost on some good and acceptable basis. In the present case, actual cost of hoardings and of goodwill has been taken at nil merely because such assets were not shown as an asset in the accounts of the erstwhile firm and no depreciation was claimed, This action of the AO endorsed by higher authorities and in the proposed order of learned AM, in my view has no legal support. As already discussed, provisions of s. 47(xiii) or of s, 43(6) are not attracted here as these provisions have very different purposes to serve, These deemed provisions cannot be read in the Expln. 3. 17.2 The plain language of the provision [Expln. 3 to s. 43(1)] leaves no amount of doubt that it is AO who has to record satisfaction relating to main purpose of the transaction to the assessee (reduction of liability to income-tax). It is A....
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....; "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 the AO or by the CIT who approved of his action or by CIT(A) to collect any material or to take any steps to determine the actual cost of the assets. The evidence produced by the assessee before the AO in the shape of valuation report was wrongly rejected and on reasons which are totally unsustainable. In support of value (cost of hoardings at Rs. 4,77,96,000 and of goodwill at Rs. 3 crores), the reports of the registered valuer were placed before the AO. The AO did not consider above reports, although it was incumbent upon him to dislodge them. The learned CIT(A) in the order for asst. yr. 2005-06 rejected the report of valuation of hoardings as on 1st April, 2003 as the report was dt. 3rd Oct., 2004 and held it to be got prepared to suit the assessee's requirement. The learned AM in his proposed order, took a similar view and cast burden on the assessee with a general observation that assessee did not lead any sup....
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....n 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 assessee? There is no basis before us for fixing the consideration of Rs. 8 crores nor Sch. 1 referred in the memorandum has been placed before us. 20. It is evident from above that burden of proof was placed on the assessee whereas it should have been otherwise as discussed above. This placing of the wrong burden sometimes vitiate the entire order. I am further of the opinion that AM was not justified in drawing any adverse inference against the assessee or for copy of Sch. 1 to the memorandum not being part of Tribunal record. If learned AM was interested, he could have asked the assessee to furnish the copy. His observations that there is nothing on record to show that assessee paid Rs. 4,77,96,000 for hoardings do not appear to be correct. It is clear from the perusal of order of the AO and that of CIT(A) that Revenue authorities at no stage doubted correctness of consideration of Rs. 8 crores through the allotment of shares....
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....ecause 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 is given in the said report. The rate applied for value of each hoarding is also given. Whether hoarding is fixed on ground or on a terrace is also mentioned. It was for the AO to see above details and then reach a conclusion on the facts and in the circumstances of the case whether such detail was reliable to what extent to determine the "actual cost". No exercise on above lines was undertaken by the AO. The registered valuer in its report has also given further basis of valuation by taking into account cost of labour, board, colour, RCC footing and miscellaneous expenses. Average working of cost of hoarding is also provided. All the above details could be examined and then rejected or accepted as warranted by the facts of the case. One wonders how cost of 2,100 hoardings purchased by the assessee can be nil. It has been taken at nil because it was not an asset with the erstwhile firm. In my considered opinion, there is no nexu....
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....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 having accepted the total cost for the transfer and where the actual cost of assets determined is less than the stated sale consideration, the differences would be taken towards goodwill of the business. Here the parties under agreement themselves determined the value of goodwill and stated the same in the memorandum of transfer which is further supported by an expert opinion. The AO, without considering relevant facts and circumstances of the case and for erroneous reasons, took actual cost of goodwill at nil. In my considered opinion, no basis whatsoever has been given for taking value of goodwill/trade name at nil. No fault has been found in the valuation report given in this case and, therefore, the same could not be rejected. Above aspects have not been noted by the learned AM in his proposed order. 24. Even in the case of buildings at Rajkot and Surat, actual cost of these buildings has been taken at the WDV found in the hands....