TaxTMI 
TaxTMI 
2010 (1) TMI 875
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....been rendered by M/s Meerut Agro Chemicals Ltd., as the said company was engaged in the manufacturing and sale of pesticides only. 3. In the facts and in the circumstances of the case, the learned CIT(A) has erred in law in holding that the interest income received on redemption of IDBI bonds will have to be taxed under the head "Income from other sources" instead of Rs.9,07,100 as assessed by the AO by ignoring the facts as narrated by the AO in his assessment order. 4. In the facts and circumstances of the case the order of the learned CIT(A) may be set aside and that of the AO restored." Asst. yr. 2002-03 "1. In the facts and circumstances of the case, the learned CIT(A) has erred in law in allowing business expenditure of Rs.20,00,000 incurred by the assessee on maintenance and supervision of hired assets at Okhla by ignoring the facts that no service has been rendered by M/s Shivaya Lamination as the recipient company as it was not capable of doing any maintenance of generator, air conditioners and lifts, etc. being engaged in the manufacturing and sale of Topmica brand of decorative and industrial lamination. 2. In the facts and circumstances of the case the learned CIT(....
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....air conditioned unit, generator, OTIS elevators and fire fighting equipments were fitted in that building and for those facilities the assessee was to get rent of Rs.47,08,530 per annum i.e., equal to the amount of rent earned by M/s Civic Traders. It is also mentioned in Annex. 'J' that though the cost of purchase paid by the assessee was stated to be Rs.75 lacs, but after deducting hire charges received from M/s Minerva Holdings Ltd. for gestation period, a sum of Rs.11,70,132, the balance payment was made of Rs.63,22,868. The Annex. 'J' is reproduced in its entirety: "Annexure-J The AO has pointed out that the cost of purchase of equipment from M/s Baba Buildwell shown = 75,00,000 Less: Hire charges reduced from M/s Minerva Holdings Ltd. for gestation period = 11,77,132 = 63,22,868 The said equipment as per delivery note consists of: (a) Central air conditioning packed unit of Blue Star with original bills 3083 of 30th July, 1999 and 3084 of 30th July, 1999. (b) Generator-320 KVA with original bill No.594, dt. 18th Aug., 1999 comprising of Engine make CIL model KT 1150 M/s No.25244339 and alternator make Stamford Model 320 KVA M/c No.99050114 with other acces....
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....id arrangement is nothing but a colourable device to bifurcate the total payments from M/s Minerva Holdings (P) Ltd. in the manner that suits the group concern/persons of the group. (ii) Equipment hire rent be assessed in the hands of Mr. J.K. Gupta -on protective basis This is the opinion of the undersigned. AO is not bound by this opinion nor the same should be continued as a finding/direction under s. 144A. He should make an independent opinion/finding. The scope of reference is limited to the purchase cost of equipment from M/s Baba Buildwell. (a) M/s Baba Buildwell has failed to produce the proof of purchase cost (photocopy of bills/payments made to purchase the equipment by M/s Baba Buildwell). (b) Assessee has also failed to discharge its burden to prove the purchase cost by M/s Baba Buildwell as no original bill of purchase by M/s Buildwell has been produced by assessee even though mentioned in delivery note to Mr. J.K. Gupta. In view of these facts-estimated inflated cost may be taken by Rs.20,00,000 (Rupees twenty lacs)." 5. The AO has taken the cost of Rs.20 lacs as determined in the aforementioned order and the AO also Included the other cost of generator and s....
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....een held that as there was recorded no finding by any authority to the effect that the main purpose of the transfer was for claiming depreciation at an enhanced cost; the Tribunal was not right in law in holding that the assessee was not entitled to claim depreciation on the enhanced value of the assets. That it is most respectfully submitted that in the case of the appellant the learned AO has nowhere recorded his satisfaction that the assets were transferred for reducing the liability to pay income-tax neither on the assessment order nor anywhere on the order-sheet in the entire assessment proceedings, so the stand taken by the learned AO that the directions of Addl. CIT, Range-I, Meerut, were obtained under s. 43(1) Expln. 3 are against the spirit of this s. 43(1) Expln. 3. Moreover, in this situation the cost is to be determined by the learned AO (of course, with the previous approval of the Addl. CIT) but in the case of the appellant the cost has not been determined by the learned AO but it was dictated by the Hon'ble Addl. CIT, Range-1, Meerut and that too in the following words: 'estimated inflated cost may be taken by Rs.20,00,000 (Rupees twenty lacs).' These words do no....
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.... the cost shown by the assessee on hired assets at Okhla Industrial Estate, Phase-III, New Delhi, which, according to the assessee was Rs.89,10,245. After examining the facts, it is observed by the AO that the cost in the hands of the assessee could not be proved with the help of evidences and it is also mentioned that the matter was referred to Addl. CIT for determination of actual cost. Thus, the observations of the AO clearly show that he was satisfied that the assets before the date of acquisition by the assessee were used by other person for the purpose of his business or profession and the main purpose of the transfer of such assets directly or indirectly to the assessee was the reduction of the liability of income-tax (by claiming depreciation with reference to enhanced cost) and, thus it is a clear case where the AO has invoked Expln. 3 to s. 43(1). 10.3 From Annex. 'J' enclosed to assessment order, it is clear that the assets on which the depreciation has been claimed by the assessee were installed at 225, Okhla Industrial Estate, Phase-III, New Delhi. It is also mentioned that the said premises was purchased by the group concern of the assessee, namely, M/s Civic Traders....
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....Buildwell as no original bills for purchase by M/s Baba Buildwell have been produced by the assessee even though mentioned in delivery notes given to the assessee and after referring all these facts, the value has been determined by Addl. CIT by a sum of Rs.20 lacs. 10.4 From the assessment order and from the estimation made by Addl. CIT, it is clear that provisions of Expln. 3 to s. 43(1) have been invoked and actual cost has been determined accordingly. 10.5 The first question we have to determine is that whether or not the AO was right in determining the actual cost of the assets on which the depreciation has been claimed by the assessee. The relevant portions of provisions of s. 43(1) and Expln. 3 are reproduced below for the sake of convenience: "43. In ss. 28 to 41 and in this section, unless the context otherwise requires- (1) 'actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority: 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....
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....ciation on cost of asset of a sum of Rs.7,70,000. The Tribunal held in favour of the assessee by observing that the term "actual cost" as mentioned in s. 43(1) of the Act suggests two aspects; firstly, what may be called the aspect of actual and, secondly, what may be called the aspect of cost of the asset to the assessee. The former, it was noted would denote the reality or genuineness of the payment. The second aspect would indicate what exactly the assessee had to surrender or give to acquire the asset. By referring to Expln. 3 to s. 43, it was pointed out that in cases covered by the specific Explanation IT authority could datermine the actual cost having regard to all the circumstances; apart from this situation, no other case of inflated cost, would justify substitution by the ITO of a figure of actual cost different from the actual cost paid by the assessee. It was observed that such a case of sale even though completed in the circumstances which would suggest collusion, would not entitle the IT authorities to substitute their own figure to the actual cost. The Department went in appeal against that. It was held by Hon'ble High Court that from the facts it is clear that tota....
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.... as exhaustive or to otherwise limit the vide scope which the provision of law may embrace incorporation of some of these Explanations by itself shows that the legislature envisage interference in given circumstances in the amount of purported actual cost. Thus, it was held that the Tribunal was not justified in restricting the operation of the actuality of the cost to cases where part of that consideration was not paid or ploughed back or covered some other items. In those cases the cost would be what is in fact paid. What was not paid or was returned would never be considered as cost and this will be independent of the provisions contained in IT Act. The provisions of IT Act have not been introduced for that purpose. They have rather a special objective and are directed towards nullifying the malpractices (that) came in some quarters by disproportionately inflating the capital cost in order to earn higher depreciation and pass on in collusion substantial amount to sister concern or closely connected parties to whom those amounts may have little or negligible bearing on the instance of taxation. The actual added towards cost was held to be emphasizing on the reality and genuinenes....
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....ed to be paid by him with regard to these assets to M/s Baba Buildwell which apparently is abnormally high. It is even more than double of the cost of such new assets if they are to be installed freshly. If it is so then, it can be said that there were existence of circumstances in which the cost shown by the assessee of these assets could raise doubt in the minds of IT authorities which is natural. It is in these circumstances the AO has doubted the cost shown by the assessee with regard to these assets and the assessee was required to prove the cost. The assessee could not produce any justification for payment of such a huge cost of the assets which were already put to use and has already depreciated to some extent by the previous use. One of the arguments of the assessee is that such assets were yielding high rent. Therefore, the cost of these assets to the assessee was not high if the amount of rent earned is kept in mind. Here also, there are some missing gaps. No material has been brought on record to show that these assets earlier were also fetching so much rent from the user of these assets. The rent received by the assessee with regard to these assets in itself is doubtful....
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....e CIT(A) was wrong in holding that under Expln. 3 to s. 43, the AO is not authorized to take fair market value, instead, it was to be taken as actual cost which is incurred by the assessee. It has already been discussed that 'actual cost' as per decision of Hon'ble Delhi High Court in the case of CIT vs. Dalmia Dadri Cement Ltd. (supra) is not actual cost in the hands of the assessee particularly while construing Expln. 3 to s. 43 which is the cost in reality and genuineness which exclude collusive inflated, deflated or fictitious cost. It has already been discussed that the cost shown to have been incurred by the assessee is inflated and fictitious cost which has no reality. The assessee has not produced any material on record to show that the cost paid by him was genuine cost and the cost in reality. Therefore, we set aside the order of the CIT(A) in this regard and restore that of AO. Accordingly this issue is decided in favour of the Revenue. 11. The next issue raised in ITA No.3431/Del/2007 for asst. yr. 2001-02 reads as under: "In the facts and circumstances of the case, the learned CIT(A) has erred in law in allowing business expenditure of Rs.15,00,000 incurred by the ass....
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....ho was general manager, with the assessee company, was not produced. The AO has treated the whole arrangement as sham, but he has not brought anything on record to suggest that there was any relationship between the assessee and Meerut Agro Chemical Industries Ltd. and that no work has actually been carried out. I agree with the appellant that simply because the director of the assessee company did not have any knowledge about the civil work, airconditioning, electrical work etc., the arrangement cannot be considered as sham. It is not necessary to acquire knowledge of each and every discipline in which the assessee starts carrying on business activities. The assessee can always employ services of the experts and specialists and its directors have to do the management work only. As regards the absence of formal agreement, there is a record of such understanding through the minutes, which have been signed by someone on behalf of Shri J.K. Gupta and by the director of the Meerut Agro Chemicals Industries Ltd. As regards the production of Shri H.C. Arora, general manager of the Meerut Agro Chemical Industries Ltd., he could not be produced because he had left the services on 15th July....
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....loyee of M/s Shivaya Laminations Ltd., who has signed as attorney. Therefore AO held that agreement between the assessee for the supervision of maintenance work was sham. AO also noted that as per the details given by the assessee M/s Shivaya Laminations has raised four of Rs.5 lacs each dt. 10th June, 2001, 30th Sept., 2001, 31st Oct., 2001 and 31st March, 2002, but the payment of Rs.20 lacs was made on, 21st Jan., 2002 through one cheque. AO observed that M/s Shivaya Lamination has not fulfilled its obligation of visiting of directors every month. AO also referred to the investigation that persons involved did not have any technical knowledge required for the supervision and maintenance of equipments like generator, lift, air conditioning etc. AO also noted that M/s Shivaya Laminations is a Meerut based company which is engaged in the production of decorative lamination industrial sheds and has nothing to do with the equipments like air-conditioner and generators. However, this company has no skilled trained personnel in such equipments. AO further observed that "the company is located in Meerut and it does not have any establishment in Delhi. Though Shri Chandra Mohan in his sta....
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....cordingly. 11.8 We have heard both the counsel and perused the records. We find that AO has elaborately dealt with the issue from the angle that the payees of the supervision charges could not have done the work. Learned CIT(A) on the other hand is concluding that they could have done the job. We find that another aspect which was needed to be looked into in this regard, is whether actually any work has been done in this regard or not. If any work has been done whether the cost of the same would be the same as claimed by the assessee. Learned CIT(A) in his appellate order has also, mentioned this aspect that AO has not examined that whether the actual work has been done or not. It is a settled law that powers of the CIT(A) are co-terminous with that of AO. If AO has failed to examine this aspect learned CIT(A) should have examined the same. Moreover the cost of those assets and the related maintenance and supervision charges thereon will have to be considered in a cohesive manner. We have already confirmed the cost of these assets as estimated by the AO at Rs.20 lacs. The incurring of maintenance charges of Rs.15 lacs and Rs.20 lacs respectively in succeeding years on assets costi....