TaxTMI 
TaxTMI 
2015 (3) TMI 319
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.... by making following additions/ disallowances: - a) disallowance of depreciation of Rs. 11,53,53,162/- on differential amount of fixed assets between purchases consideration for Rs. 235 cores - w.d.v. as per Income-tax Act at Rs. 88.66 crores. b) disallowance of non-processing charges Rs. 21,50,367/- 3. The assessee preferred appeal before ld. CIT(A) who while partly allowing the appeal, deleted the disallowances on account of depreciation. As regards loan processing fee, while upholding the assessee's contention that the expenditure was revenue in nature allowed the deduction to the extent of Rs. 21,50,367/- instead of Rs. 2,43,70,830/- as claimed by assessee. 4. Being aggrieved with the order of ld. CIT(A), both assessee and department are in appeal before us. 5. First we take up the Department's appeal vide ITA No. 4276/Del/2010. 6. The Department has taken following grounds of appeal: - 1. "The ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 11,53,53,162/- ....
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.... 564,338,000 70415000 Bhigwan 1394309000 55446000 Shreegopal 644906000 67119000 Sewa 319150000 42867000 Total 2922703000 235847000 Grant Total 3158550000 8. The AO further noticed that there was another valuation dated 04/01/2006 of Plant and Machinery and Building by JMR Consultants, Chennai which valued these at Rs. 240.85 crores. He has further pointed out that this valuation did not find mention in the Scheme of Arrangement and Demerger presented before the Hon'ble High Court. This valuation was as under: - Description Appraised value of present assets in Rs. Lakhs Plants & Machinery Civil Works Total Value Ballarpur unit 4,136,05 704.16 4,840.21 Bhigwan unit 10,500.40 554.46 11,054.86 Shree Gopal Unit 4,785.24 671.19 5,429.43 SEWA unit 233.83 428.67 2,760.50 Total 21,726.52 2,358.48 24,085.00 9. The AO further observed that while approving the Scheme of Arrangement and Demerger on 25th May, 2006, the Hon'ble High Court of Delhi observed that, merely because consideration was being paid to the transferor c....
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.... of Sec. 2(19AA) of the Act as the assessee company has not satisfied the conditions laid down in Sec. 2(19AA) of the Act. These conditions remaining unsatisfied are: a. The property of Power Division being transferred by BILT at consideration of Rs. 235 crores is not at value appearing in the books of account immediately before the demerger. Thus, condition of clause (iii) of sec. 2(19AA) is not satisfied. b. Assessee Company has not issued any shares in consideration of demerger to shareholders of BILT. Thus, condition of clause (iv) of sec. 2(19AA) is not satisfied. c. Shareholders of BILT have not held ¾ in value of shares in Assessee Company; however, as on June 30, 2006 Assessee Company has allotted 26% shares to BILT. Thus, condition of clause (v) of sec. 2(19AA) is not satisfied. d. BILT has transferred Power Division to the assessee company at lumpsum consideration of Rs. 235 crores on sump sale basis and has paid long t....
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....h are not there in the Act cannot be inserted/ added by the Assessing Officer. (vii) Thus actual means the actual cost of the assets paid by the assessee i.e. sec. 235 crores. Since the value of Rs. 315 crores and Rs. 240.85 crores has been determined by independent valuers, therefore, it is reasonable to believe that consideration was paid for acquisition of the capital assets at Rs. 235 crores." 13. As regards WDV of the assets in the books of transferor i.e. BILT as on the date of transfer, the AO issued notice u/s 133(6) of the Act to BILT which submitted its reply, giving the value of assets transferred to APIL, as under: - Assets Transferred Power Division (Amount Rs.) Building 13,17,66,409 Less: Accumulated Depreciation 3,22,55,781 9,95,10,628 P&M 3,68,93,07,593 Less: Accumulated Depreciation 1,64,72,10,288 2,04,20,97,305 2,14,16,07,933 He observed that the above value of the assets transferred was as per the books value and not as per the Tax Audit Report. He, therefore, again issued notice u/s 133(6) to BILT asking specifically to....
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....ew of this, it was submitted that the Revenue cannot have tax benefit at both the places, namely, in the hands of the parent company and at the hands of the assessee. It was thus submitted that there is no evasion of tax. Hon'ble High Court observed that in view of Explanation 6, the Assessing Officer as well as the Tribunal have rightly rejected the contention of the assessee and have rightly held that the actual cost once determined u/s 43(1) read with Explanation 6 will remain the same for that assessee. The explanation 6 referred in the para though does not apply to the case of the assessee, it is the principle that 'mere payment of capital gains tax by the seller company' will not entitle depreciation to the purchaser taking purchase price as WDV, which has been elucidated." 15.1 He, therefore, concluded that the assessee's claim is to be examined with reference to Explanation 3 to sec. 43(1). 16. After considering the ingredients of Explanation 3 he examined the facts of the present case and observed as under: - "The Explanation has following limbs; i) Before the date of acquisition by....
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....ement with BILT in favour of ICICI Bank. Escrow of receivables fromBILT. It was thus a case where the demerged company instead of taking loans directly is in fact parting with the assets, against which assessee company obtains loan for further payment to BILT. c. Another amount of Rs. 18.20 crores is mobilized by way of issue of share capital Ballarpur Industries Ltd. It is same company which was demerged and its Power Division was transferred to assessee company. Here again BILT is making payment by way of share capital to APIL which is received back by BILT at later date, now as part of sale consideration of assets. Assessee has thus got back its money but parted with the shares. d. Another amount of Rs. 51.75 crores is mobilized by way of issue of share capital BILT Paper Holding Ltd. This is group company of the BILT and holds 37.08% of its shares. Here it is substantial shareholder of BILT who is contributing 51.75 crores for share capital of APIL which in turn is received back by the demerged company now as consideration for sale of assets. The funds could have otherwise been received by BILT from BILT Paper Holdin Ltd. without parting with the assets. BILT ....
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....ansferee with apparent purpose of claiming enhanced depreciation and to reduce the tax liability. Conclusion: In these circumstances, it is thus clear that the funds have been raised from the bank on security of assets etc. acquired by the assessee company as part of the Scheme of Arrangement and Demerger. Additionally the capital has been acquired from demerged company i.e. BILT and BILT Papers Holdings Limited which has 37.08% shares of BILT. The funds, thus, paid as part of sale consideration are generating from the demerging company, the company substantially interested in the demerged company and against the security of assets acquired by way of demerger of demerged company. The transactions are thus circular in nature in order to enhance the value of asset in the hands of assessee company for the claim of higher depreciation. In view of above, I am satisfied that the main purpose of transfer of the assets discussed above, by way of demerger is to reduce liability of Income tax by claiming depreciation with reference to an enhanced cost. Third condition is that the AO with the previous approval of the joint Commissioner will determine the WDV having regard to all the ....
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.... not sight any good ground for not accepting the cost of the assets in question as valued by registered value. The AO did not make any attempt to undertake the exercise of finding out the actual cost of the said assets acquired by assessee, as because main purpose of Explanation 3 is not recording the satisfaction but to determine the actual cost. The AO lacked technical competency to value the plant and machinery transferred from transferor company to transferee company. Though there were three valuers giving the reports but finally since it was approved by Hon'ble High Court of Delhi and Bombay, there could not be any doubt on valuation of assets. When there is transfer of old assets, valuation of such assets on transfer may arise due to escalation of present value of such assets on transfer. ii) it was not a case of transfer of assets by a Holding Company to its Subsidiary as was in the case of M/s Dalmia Ceramic Industries Ltd. vs. CIT, 277 ITR 219. iii) Arrangement of fund and furnishing security thereof to the lending bank do not fortify the case of the assessee for the purpose of applicability of Explanation 3 of sec. 43(1) of the Act. iv) price paid by the assessee....
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....preciation. She submitted that ld.CIT(Appeals) findings that AO had not made any attempt to undertake the exercise of finding out the actual cost of the assets, is contrary to the facts on record. She submitted that during the course of assessment proceedings, the AO raised various queries with regard to the determination of actual cost of the said assets. The AO made efforts to ascertain the value of the said assets in the books of the transferor company. For this purpose the AO had issued summons also u/s 133(6) to the transferor company. As regards, the approval given by Hon'ble High Court of Delhi & Bombay, ld. DR submitted that merely because the transaction was approved by Hon'ble High Court, it could not be claimed that the assessee company would be entitled for higher depreciation. She submitted that depreciation is to be allowed as per the specific provisions of sec. 32 read with section 43(1) of the Act. She submitted that as far as approval of the Hon'ble High Court to the scheme of arrangement and demerger u/s 391 & 394 of the Companies Act was concerned, the same did not address the specific issues and provisions of the Income Tax Act. At the time of approval of the sc....
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....tingencies and in that view wide powers are conferred on the AO. In the instant case, in fact the assessee did it successfully obviating all collusive device ineffecting the transaction though it could not reasonably be said to be as the sole purpose of the transaction. There may be mutual adjustment of rights between the partners on the dissolution of the firm. But that did not mean the AO was debarred from ascertaining the 'actual cost' of the assets in view of the provisions contained in Explanation 3 to section43(1). The purpose to be served under this provision is totally different. The effectiveness of the provisions could not be defeated in any manner, even if there was adjustment between the partners of the dissolved firm. * The Tribunal's view that the revaluation of the assets on the eve of the dissolution of the firm was made bona fide for adjustment of the mutual rights of the firm could not be agreed to. This was not a case where there was no written down value, which means, in the case of assets acquired in the previous year, the actual cost to the assessee and in the case of assets acquired before the previous year, the actual cost to the assessee less all depreci....
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.... to the ld. CIT(Appeals) observation that when there is a transfer of old asset, valuation of such asset may arise due to escalation of present value of such asset on transfer and submitted that this observation is not supported by any conclusive evidence. In this regard, she pointed out that as per the balance sheet of the assessee company as on 31/03/2007, the total issued share capital of the assessee company was Rs. 70 crores out of which Rs. 69.95 crores belonged to transferor company viz. Ballarpur Industries Ltd. (Rs. 18.20 crores) and BILT Paper Holding Ltd. (Rs. 51.75 crores). She, therefore, submitted that the same person who enjoyed the benefits of the ownership of assets and its uses prior to transfer, continued to re-benefits even after the assets were transferred. She further submitted that the assets which had been transferred were in the nature of plant and machinery, furniture & fixture, etc. They were old assets and had already depreciated substantially over the years and their WDV in the books of transferor company was 88.66 crores. Therefore, there was no reason to take the value of those assets at Rs. 235 crores. She submitted that since the transfer was betwee....
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....ra Sona Limited, 96 ITD 303 (Mum.), in this case, it was, inter-alia, held that the word "actual" prefixed to the word "cost" in Explanation 3 to section 43(1) lays emphasis on the reality and genuineness of the cost so as to exclude inflation or deflation cost. iii) ACIT vs. Jitendra Kumar Gupta, 130 TTJ 328 (Del.) ITAT, in this case, it was held that where assessee could not produce any justification for payment of a huge cost of assets, which were already put to use and had already depreciated to some extent by previous use, the AO was justified in applying provisions of Explanation 3 to section 43(1) to work out actual cost of such assets. iv) CIT vs. Dalmia Dadri Cement Ltd., 125 ITR 510 (Del), in this case, it was, inter-alia, held that if expenses exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purpose, it is upon to the Income-tax authorities to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual cost was. v) Ginners & Pressers P. Ltd. vs. CIT, 113 ITR 616 (Bom.), in this case....
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....t was, inter-alia, held that AO was justified in invoking the Explanation 3 to section 43(1) because the same persons who enjoyed the benefits of the ownership of the assets and its uses continued to have such benefits even after transfer. 20. Ld. Sr. Counsel, Sh. S.D. Kapilla submitted that Ballarpur Industries Ltd., the transferor company, was incorporated in 1945 under the Indian Companies Act, 1930. The registered office is in Nagpur. It has been engaged in business of manufacturing and sale of paper. It is a public listed company on the stock exchanges. Its main business, as set out in its memorandum of an association, is of manufacturing and sale of paper and paper products, chemicals, glass, fly ash, bricks, etc. In view of persistent power shortage because of power cuttings and/or power tripping during the period prior to 1980, BILT had established the power plants at 3 places for its captive use for the purpose of manufacturing of paper at various locations as under: - Name of the Paper Manufacturing Unite Location 1. Ballarpur Chandrapur, Maharashtra 2. Bhighwan Maharashtra 3. Shreegopal Yamunanagar, Haryana 4. Sewa Jeypura, Orissa &nbs....
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.... High Court sanctioned the scheme and as regards, the consideration paid by assessee company to the transferor company of Rs. 235 crores, inter-alia, observed that merely because consideration was being paid to the transferor company, it could not be presumed that the scheme as such was contrary to public interest or against the interest of shareholders of the transferors company. The Hon'ble High Court further observed that the sale consideration, as fixed, was based upon independent judgment of two valuers. In this regard, Hon'ble High Court further observed that the Regional Director who had raised objection in this regard, nowhere stated or even contended that the sale consideration, so fixed, was inadequate and did not represent the market value of transferred undertaking. He, therefore, submitted that it could not be pleaded that the price paid by the assessee was, in any manner, fictitious price. Ld. Counsel submitted that it was not a case of demerger as contemplated u/s 2(19AA) of the Income-tax Act. He, therefore, submitted that Explanation 7A to section 43(1) and Explanation 2B to section 43(6)(c) was not applicable to the assessee company. Ld. Counsel further submitted ....
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....ib). He further submitted that AO had only recorded his dissatisfaction over the valuation adopted by the assessee without recording any reason for the same. He referred to the decision of Hon'ble Delhi High Court in the case of CIT vs. Pepsico India Holding Pvt. Ltd., 334 ITR 404, wherein it was held that the AO must justify or provide the reason to reject the valuation adopted by the assessee. Ld. Sr. Counsel further submitted that AO has brought on record no evidence to doubt the genuineness of valuation report submitted by the assessee. Ld. Sr. Counsel further submitted that section 32 and 43 are parts of chapter IV and, therefore, section 43 is applicable to section 28 to 41 only. The definition of actual cost therefore, does not apply to capital gain. He submitted that for invoking Explanation 3, the AO should have material to satisfy himself that the main purpose of the transfer of 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). He submitted that after recording his satisfaction to this effect he has to determine the actual cost as contemplated under Explanation 3 to....
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....her peace of evidence placed before him. In this regard he pointed out that Hon'ble High Court of Bombay (Nagpur Bench and Delhi) after considering the Government's objection to the purchase price endorsed purchase price of Rs. 235 crores. They also held that the scheme was in the public interest and approved it. As regards the AO's allegation that the assessee company had mobilized funds aggregating Rs. 70 crores from the group companies, ld. Sr. Counsel submitted that this was a normal business transaction and not circular in nature as observed by AO. In this regard ld. Counsel referred to the decision of Hon'ble SC in the case of CIT vs. Ram Krishna Pillai 66 ITR 725, which reads as under: - "A transaction by which a person carrying on business transfers the assets of that business to another assessable entity may take different forms and may have different legal effects. The assets of a business may be sold at a fixed price to a company promoted by a person who carried on the business: if the price paid for or attributable to an asset exceeds the written down value of the asset, proviso (ii) to se....
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....lained to the AO that these buildings were situated on industrial lands which were not free hold lands. Thus, the transferor company, itself being a leaseholder of the lands on which power plant were situated, could not have transferred the lands. It could only sublease the lands with the prior approval of the lessor authorities. As regards the AO's doubt about the purchase price on the ground that lease rent payable by the assessee was inadequate, ld. Sr. Counsel submitted that rent is revenue expenditure. Therefore, payment of lower rent does not reduce the tax liability of the assessee because the payment of higher rent could only reduce the assessee's total income. Ld. Counsel referred to the decision of Hon'ble Supreme Court in the case of Simon Carves Ltd., 105 ITR 212, wherein it was, inter-alia, observed that the taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax which is legitimately due from an assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that scales are weighted against the assessee. 30. ....
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.... assessee shall be such an amount as the ITO may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case. After that he has discussed the issue elaborately and in the end in para 2.12, he has given a chart which shows that the WDV as per the assessee's books was Rs. 2349999832/-. He, then, has replaced this WDV by a figure of 88.66 crores for the purpose of calculating depreciation. If the order is read as a whole, the objection of the ld. AR is not sustainable. As regards the ld. AR's objection that WDV cannot be taken as actual cost and it is not reflective of market price, ld. DR submitted that the assets in question are the old assets which have very nominal resale value. The nature of assets is also such which will not get appreciated over the years. She submitted that even the assessee does not have the exact market price of these assets and this fact is strengthened by the multiplicity of valuations. In fact the assessee company is the only buyer and the transaction is made to facilitate both the parties. Therefore, the AO was very reasonable in adopting WDV as actual cost and his action was supported by the judgmen....
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.... it necessary to examine the observations of AO, and ld. CIT(A) and the submissions of both the parties on this count as it would only be of academic interest. This is evident from the fact that AO has invoked Explanation 3 to sec. 43(1) and not Explanation 7A to sec. 43(1). Further the contention of assessee that transferor company had also paid long term capital gain tax on the sale consideration is also not of much significance because tax liability is to be determined qua assessee. Therefore, the main issue for our consideration is whether AO was justified in invoking Explanation 3 to sec.43(1) by holding that the entire purpose of this scheme was reduction of tax liability by claiming higher depreciation in respect of those assets which were earlier used by transferor company by escalating the cost of the assets. Explanation 3 has been incorporated in sec. 43(1) to counter the attempts of assessee to claim higher depreciation by purporting to purchase assets at more than their true or real cost. It is fundamental principle that department cannot question the wisdom of assessee in carrying out its business operations. Department cannot dictate as to how the assessee should cond....
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....sive, inflated, deflated or fictitious cost. As already pointed out that the AO is required to judiciously acquire the necessary satisfaction regarding the object of transfer. It is not to be understood that every case wherever assessee acquires a used asset from other person then the object would only be reduction of tax liability. There may be genuine cases also where the asset has appreciated in value since its original purchase and consequently, the market value on the date of the sale is greater than written down value in the AO's chart. In the absence of any finding, that the main purpose of the transfer is to reduce the tax liability with reference to enhanced cost, it is not permissible to the AO to reject the cost paid for the transfer. The AO cannot substitute his own estimate of the value rejecting the assessee's estimate as was held in by Hon'ble Supreme Court in Joyta Coal Company Ltd. vs. CIT, 36 ITR 521. Thus, where at the time of partition of a family, as was the case in Kalu Ram Govind Ram vs. CIT, 57 ITR 335, the assets were allotted among the members at a valuation arrived at in a reasonable manner, there being no allegation of inflated cost by reason of fraud, c....
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....09 and the assessee company obtained the loan against the assets acquired by it from bank in June, 2006. Further there is no quarrel with the proposition of ld. DR that in certain circumstances WDV of assets may constitute actual cost to the assessee. Having considered these aspects, now we proceed to decide the main issue which is what was the actual cost to the assessee and consequently whether AO was justified in invoking the Explanation 3 to sec. 43(1). In this context we have to find out the real value of assets acquired by the assessee. In this regard the first aspect to be taken into consideration is the approval of the Hon'ble High Court to the scheme of arrangement and demerger u/s 391 to 394 of the Companies Act. Section 391 of the Companies Act empowers the court to sanction the scheme. Section 392 empowers the court to supervise the carrying out of the scheme or to modify the same as it deems fit. Section 3(94) empowers the court either through the order sanctioning the scheme or by a subsequent order to make provisions for certain matters including incidental, consequential and supplemental matters as necessary to secure that the reconstruction or amalgamation is fully....
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....e aforementioned aspects. We find that Hon'ble Delhi High Court while sanctioning the scheme has observed as under: - "Department of Company Affairs, Noida, on behalf of Central Government whereby he raised three objections: The first objection is that by the proposed scheme of arrangement/demerger, the Transferee Company is liable to pay Rs. 235 crores as consideration for transfer of "transferred undertaking" of the Transferor Company. He submitted that shares should have been allotted to the shareholders of the Transferor Company, instead of paying consideration of Rs. 235 crores to the Transferor Company and this is prima facie against the interest of shareholders of the Transferor Company. The Court observed that merely because consideration is being paid to the Transferor Company, it cannot be presumed that the scheme as such is contrary to public interest or against the interest of shareholders of the Transferor Company. Under normal circumstances, the Transferor Company could have always transferred/sold any of its assets for consideration to the third party. The Court further observed that the sale consideration as fixed is based upon independent judgment of two valu....
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....ould undertake larger power projects. The company's plans were to expand their generation capacity and development efforts in order to capitalize on the prevailing and foreceable future and meet balance deficit between electricity demand and supply in India. It was pointed out by the assessee before ld. CIT(A) that demerger of the power section has resulted in the following benefit: - a) Policy to venture into power sector as a business proposition; b) Better focus on the power generation as a profit centre; c) Independent units could be bench marked against peers; d) Better utilization of the capacity since the units has the flexibility to service other entities The company had two pronged business model: To manage and expand the existing captive power plant (CPP) capacities for supporting the group's requirements as well as for tapping the opportunities available in the broader market in the form of other companies captive power requirements; and To spearhead the power sector initiatives of the group by undertaking super critical and sub-critical power projects under the independent power project (IPP) model. e) These objectives clearly spelled out the ....
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.... cannot be denied that it was very material evidence. 43. The AO has observed that the assessee company had just obtained easementary rights of land having the plant and machinery and buildings at very nominal rents for a period of 15 years. The AO after taking into consideration the nominal rent fixed for this purpose observed that the obvious reason was that the land would never have been subject matter of depreciation. We find that assessee has clarified this aspect by stating that since BILT itself was leaseholder therefore, it could not transfer the land. We are unable to discern anything wrong in this explanation, as the facts are on record. 44. In view of above facts, we are of the opinion that ld. CIT(A) has rightly held that the actual cost of the assets was Rs. 235 crores and not the written down value as per Income-tax assessments. 45. There is one more important aspect which fortifies our view upholding the ld. CIT(A)'s findings. It is pertinent to note that two WDV's were available before the AO one as per the books of the assessee and second as per the Income-tax computation. 46. Admittedly, as per the books of account of the BILT, the WDV was Rs. 214.16 c....
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...."loans and advances". The AO disallowed the assessee's claim holding the amount paid being capital in nature. He observed that loan processing charges were covered by the definition of interest as mentioned in section 2(28A) and since this was paid for acquisition of assets therefore, it was not allowable as deduction u/s 36(1)(iii). He, inter-alia, observed that the loan in question was taken to acquire asset i.e. power plant from M/s BILT, which fact was not disputed by the assessee. He further observed that loan processing charges was a pre-condition for sanctioned disbursement of loan and had to be incurred. Therefore, even if payment of loan processing charges was made after the asset i.e. power plant was first put to use, the instance of loan processing charges accrued earlier i.e. before asset was actually acquired as payment was a pre-condition or at least simultaneously event of ownership for any purchase made in lieu of consideration. He, therefore, made an addition of Rs. 21,50,367/-. 50. Before ld. CIT(A) it was submitted that in the accounts the loan processing charges were booked in the following manner: a) Rs. 21,50,367/- was charged to profit and loss account.....
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....use since assessee company is following mercantile system of accounting." 52. Ld. DR submitted that in view of the decision of Hon'ble SC in the case of Goetz India Ltd. 284 ITR 323, the assessee's claim is not legally maintainable because the same had not been claimed in the return of income filed by the assessee. She further submitted that proviso to section 36(1)(iii) prohibits allowability of interest for capital borrowed and deployed for the acquisition of the asset till the time it is put to use. Further the expenditure had been incurred prior to the sanction of loan and since the assessee was following mercantile system of accounting, the same was not allowable. Ld. Counsel for the assessee submitted that the expenditure was incurred after assets had been first put to use in business by the assessee. Ld. counsel further submitted that it is not a case of new business but take over of going concern. 53. We have considered the rival submissions and have perused the record of the case. The facts are not disputed. As per section 2(28A) interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit claim or other simila....