TaxTMI 
TaxTMI 
2016 (1) TMI 163
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....en though asset in respect of Deltron Unit was acquired and put to use on 1.10.2004; because the assessee had itself claimed depreciation on assets other than building at half of the normal rates. 2 On the facts and in the circumstances of the case, the assessee was statutorily entitled to full depreciation at normal rates as per law as the assets acquired from Deltron Ltd. were put to use admittedly on 1.10.2004 for 180 days and more during the year ending 31st March 2005 [1.10.2004 to 31.3.2005] 3 That the learned CIT(A) has further erred in upholding that the assets of Deltron Ltd. were acquired by the assessee at higher price with a view to reduce liability to income tax by claiming higher depreciation with reference to enhance cost, on wholly erroneous and illegal grounds 4 On the facts and in the circumstances of the case, it may be held that the assets like Building & Machinery were purchased on the basis of valuation of the Govt. approved valuers, who were experts; and as such, the invoking of the provision of Explanation 3 to section 43(1) was uncalled for an unjustified. 5 On the facts and in the circumstances of the case, the learned C....
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....ember, 2004 that both the assessee and M/s Deltron Ltd. have the same address i.e. C-120, Naraina Indl. Area, New Delhi-110 028 and that both were engaged in the same electronics business. The AO therefore observed that it was necessary to look into the relationship of management of the two concerns and accordingly, asked the assessee to furnish the names of common directors/shareholders and their share holdings in the two companies. The assessee on 30.11.2007 furnished the requisite details. From the details, the AO observed that the concerns were running under common management, the directors were also common and they were operating from the same address. The AO further observed that the facts of purchase of fixed assets of M/s Deltron Ltd. as a going concern was disclosed by the assessee only after the probe during assessment proceedings and no such details had been furnished in any manner in the audit report or papers enclosed with the return of income. 4.1 Therefore the AO observed that it was necessary to verify whether the fixed assets of M/s Deltron Ltd. had been accounted for on written down value or not. Accordingly, the AO asked the assessee to submit the copy of comp....
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....ess deprecation claimed by the assessee was worked out by the AO as under: Block WDV as on 1.4.2004 in the case of M/s Deltron Ltd. Cost of acquisition as inflated by the assessee company Depreciation claimed by the asessee company on inflated cost Depreciation allowable on the WDV Difference Building 7,098 66,00,000 6,60,000 355 6,59,645 Plant and Machinery 59,94,066 89,66,000 11,20,750 7,49,258 3,71,492 Computers 30,533 2,88,399 86,519 9,160 77,359 Furniture and Fixtures 2,72,216 3,46,484 25,986 20,416 5,570 Vehicles 3,91,971 14,83,455 1,48,346 39,197 1,09,149 Total 66,95,884 1,76,84,338 20,41,601 8,18,386 12,23,215 The AO observed that the deprecation on building is claimed by the assessee at full rate, whereas it was admissible for half rate as all assets of the acquired plant were claimed to have been put to use is less than 180 days. He therefore observed that there would be corresponding excess claim in subsequent years for full years. 4.3 The AO observed that it was clear from the aforesaid table that the assessee had used this device....
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....3 to section 43(1) of the Act. However, the AO was directed to take the correct figures of all the assets taken over from M/s Deltron Limited as per records and to recalculate the differences. The CIT further specifically held that the Assessing Officer was justified in allowing depreciation for half of the year and not for the entire year in respect of the assets acquired by the assessee company from M/s. Deltron Ltd. 6 The assessee, being aggrieved, is in appeal before us. 7 The ld. AR submitted the written synopsis which reads as under: "This addition needs to be examined and split into two aspect as under:- 1 Depreciation on building allowed at half rates. 2 Explanation 3 to section 43(1) invoked by the AO to determine the actual cost The main grounds on which the AO/CIT(A) has made/confirmed the addition are as under: 1 Both the concerns i.e. assessee and M/s Deltrono Ltd management and the directors are common. 2 The fact that fixed assets were purchased by assessee from M/s Deltron Ltd. after the probe during the assessment proceedings and no such details were furnished in audit report or papers enclosed with the re....
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....n Schedule T of Balance sheet being notes on accounts as note no. 10 assessee company has disclosed that it has purchased Electronic Business of M/s Deltron at a net consideration of Rs. 7.54 crores-PB page 22 Thus, the basic assumption of AO that assessee did not disclose the transaction is factually incorrect. The balance sheet was filed with return of income filed on 28.10.2005 4 There is not even an iota of evidence that something more or less has been paid or passed than the actual consideration stated in the government based on a valuation of assets by a government approved valauer. The findings of the AO are just surmises and conjectures not supported by any evidence. Valuation report of the government approved valuer is available at pages 54 to 68 5 While reducing the deprecation on building the AO has also alleged that there is no evidence when the building was occupied. It is respectfully submitted that such an observation is totally erroneous. The existing business was purchased as a going concern alongwith building. There was no special formalities required for taking over building: The building was already housing all other assets i.....
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....) as on 1.4.2004 relied upon by the AO, for holding that the value at which the sale has taken place is higher than the WDV as on 1.4.2004. The assessee had also raised certain other issues connected to the determination of actual cost for the purpose of Explanation 3 to section 43(1), which were reproduce in the appellate order as part of submissions of the assessee, but there was no discussion or decision thereon as well by the CIT(A). CIT(A) has restricted herself to Explanation 3 to section 43(1) of the I.T. Act. Following issues arise for consideration:- 1) Whether the assets in respect of which 100% write off has been allowed to Deltron Ltd. u/s 35(1)(iv)/35(2) the actual cost of which was therefore Nil in view of Explanation 1 to section 43(1), the actual cost to the buyer will still be Nil in view of Explanation 3 to section 43(1), as the AO has just gone by the WDV of the assets as per Income Tax Rules as on 31.3.2004 I the case of Deltroon Ltd. These assets, though existing and do not appear in the depreciation chart as per Income Tax Rules, although these assets do appear in the schedule of deprecation chart of Deltron Ltd. under the companies Act. (see balance ....
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....ially different. M/s Deltron Ltd. had been allowed 100% deduction as expenditure under the special provisions in respect of its cost of assets valued at Rs. 6 crores approximately. These assets, therefore, could not appear in the deprecation chart as per Income Tax Rules. But it does not mean it has no value. (7) The assessee had filed a deprecation chart as on 31.3.2004 (fixed assets schedule) forming part of audited balance sheet under the Companies Act for comparison with the value at which the assets were purchased by the assessee. Thus, fixed assets schedule includes the assets on which 100% deduction has been earlier allowed under section 35(1)(iv)/35(2) as deduction in respect of (R&D). It was submitted that this schedule clearly shows that the price at which the assets were purchased were reasonable and could not be brushed aside without any comment. Fixed asset schedule and the purchase value is reproduced again-PB-A4 Particulars WDV as on 31.3.2004 (under Companies Act) Value at which taken over by assessee Building 74,25,264 66,00,000 Plant & Machinery 3,71,66,624 89,66,000 Computers 82,020 69,499 Furniture & Fixture 3,7....
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.... 3,58,164 Industrial Installation -------- 615 Total 4,71,20,059 2,16,06,346 1,79,16,664 It is requested that the above aspects of the case which had remained unconsidered may be examined and your honour give finding/decision thereon." On the other hand, ld. DR relied on the orders of the lower authorities below. 8 We have heard both the parties and have perused the records. We find that the assessee company, a private limited company, has acquired electronic business from a public limited company known as M/s Deltron Limited as a going concern vide agreement dated 27.9.2004 for a consideration of Rs. 7.54 crore. We find that in the assessment order, the AO has observed that the aforesaid fact of purchase of fixed assets was disclosed by the AR only after the probe by him during the assessment proceedings and no such details have been furnished in any manner in the audit report papers enclosed with the return of income. He has also noticed that both the companies deal in electronic business and have same address at C-120, Naraina Industrial Area and run under the same management as the directors/shareholders are also common. We further ....
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..... Deltron Ltd. as per records and recalculate the differences, and, recomputed the disallowance accordingly. 9 Section 43(1) reads as under: "43. In sections 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: [Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, [but before the 1st day of March, 1975,] and is used otherwise than in a business of running it on hire for tourists, exceeds twentyfive thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty-five thousand rupees.] Explanation 1.-Where an asset is used in the business after it ceases to be used for scientific research related to that business and a deduction has to be made under [clause (ii) of sub-section (1)] of section 32 in respect of that asset, the actual cost of the asset to the assessee shall be the actu....
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.... needs to satisfy that the main purpose of the transfer of such assets directly or indirectly to the assessee was for the reduction of a liability of income tax by claiming deprecation with reference to an enhanced cost. Then only, the AO can invoke Explanation 3 to fix the actual cost. So, therefore, the requirement of law is that the main purpose of the transfer of assets was for the reduction of a liability to income tax without satisfying the same, the AO cannot invoke Explanation 3 to section 43(1). 12 Here, in this case, we firstly notice that the AO's observation that neither in the audit report or in the papers filed alongwith the return the acquisition was not mentioned, is not correct. We find that in the Director's report, it has reported that the assessee had acquired business of Deltron Limited as a going concern (paper book page 2). Similarly, we find that in schedule T of balance sheet being notes on accounts as Note 10, assessee company has disclosed that it has purchased electronic business of M/s Deltron Ltd. at a net consideration of Rs. 7.54 Crores (Paper book Page 22). Thus, we find that the observation of the AO that the assessee did not disclose the transa....
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....requirement under Explanation to section 43(1) of the Act is that the transfer of a going concern has been effected to defraud the revenue and such defraud had been attempted by claiming depreciation at an enhanced cost. We have already stated above that here was a case of transfer by a public limited company and the purpose stated in the agreement is not a matter of dispute. The Assessing Officer in the order has opined that the assets as reflected in the books of Deltron Ltd as on 1.4.2004 at Rs. 66,95,884/- were transferred for a consideration of Rs. 1,76,84,338/- though the appellant claims that such a finding is incorrect. It has been pointed out that Deltron Ltd. is a public limited company and had been allowed 100% deduction under section 35(1)(iv)/35(2) of the Act as expenditure and as such, there was certain assets which appeared at Nil cost in the books of Deltron Ltd. It was however stated that such assets were appearing in the balance sheet prepared under the Companies Act as on 31.3.2004 at Rs. 4,71,20,059/- and if the deduction under section 35(1)(iv)/35(2) is ignored, WDV of such assets as on 31.3.2004 would stand at Rs. 2,16,06,346/-. The cumulative position which e....
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....s report. IT could not be said that an asset though having Nil value under the Income Tax Act would be transferred also Nil value to a third party more particularly when the transfer is not of an asset but of a business on a going concern basis. The transfer of the business is not in dispute. The genuineness of the transfer of the business is also not in dispute. The purpose behind the transfer is also not in dispute. All what has been disputed by the Assessing Officer and upheld by the CIT(A) is valuation of the assets adopted for the purpose of transfer. In such circumstances, we find force in the claim made before us that it is not a case of valuation having been adopted by a higher price more particularly when the transaction is between the closely held company and public limited company and price is paid to public limited company by the closely held company. It is also not a case where price as stated in the agreement has not been paid by the assessee. The valuation is supported by registered valuer's report which valuation has not been shown to either fantastic or imaginary or irrational by any cogent evidence. On the contrary, having regard to the book value of the assets st....
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....find that in the present case, the entire case of the A.O. is based on Explanation (3) to Section 43(1) as reproduced above. As per this explanation, we are of the considered opinion that the A.O. can determine the original cost of the assets for allowing depreciation to the assessee only if he is satisfied that the main purpose of transfer of such asset, directly or indirectly to the assessee, was the reduction of liability to income tax by claiming extra depreciation with reference to an enhanced cost. It is not sufficient that one of the main purposes was this. Hence, in our humble opinion, this is the first prerequisite that the A.O. has to establish that the main purpose of transfer of such asset was the reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish this, it has to be established that apart from claiming additional deprecation on enhanced cost, there is no other main purpose for acquiring the asset in question. In the present case, the A.O. is only disputing the valuation of intangible asset i.e. the trademark acquired by the assessee from related parties without even making an allegation that such acquisition of as....
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....tainly, the effect of the transaction was that the gain declared by M/s. Deltron Ltd. was set off against the losses in its computation yet that fact cannot undetermine the genuineness of the transaction and in any case empower the Assessing Officer to substitute the valuation as determined in the registered valuer's report which has not been found to be incorrect by any other technical valuation. Hence, we do not subscribe to the conclusion of the authorities below. 19 The Assessing Officer has referred to the judgment of the Kerala High Court in the case of CIT vs Poulose and Mathen (Pvt.) Ltd. 236 ITR 416. In the said case, the assessee was a partner in a partnership firm consisting of nine partners. The partnership firm was dissolved on February 25, 1985 and as per the books of accounts of the firm the written down value of the assets of the firm was Rs. 3,16,110/-. However the assessee company had taken over the assets of the firm after its dissolution and, the assets were revalued at Rs. 22,30,795/- and accordingly, claimed depreciation on the value of Rs. 22,30,795/- as per the revised valuation. On such facts, the High Court held that the Explanation 3 to section 43(1) o....
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....ch was worked out to Rs. 2,56,960/-. In such circumstances, it was held that 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 vendee and there has been inflation or deflation of value for ulterior purposes it is open to the income tax authorities to refuse to accept the price mentioned in the deed or alleged by the assessee ad to ascertain what was the actual original was. It was thus held that it was open to the income tax authorities to determine and to the assessee to show whether the goodwill of the business is or is not included in the consideration or the price paid for the acquisition of the asset. Thus having regard to the above, in such circumstances, it was held that if circumstances exist for going behind the valuation as also the allocation given in the deed of conveyance, it was and is open to the income tax authorities to determine the valuation as well as the allocation between depreciable and non-depreciable assets. There is no dispute to the above conclusion of the Hon'ble Apex Court. However, on the said facts as is the case of the assessee company, such an interference is no....
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.... calculated at the percentage prescribed for an asset under clause (i) or clause (iia)}, as the case may be." A reading of the above proviso makes it clear that two primary condition for calculation of depreciation are - 'date of acquisition' and 'date on which the asset is put to use for the purposes of business or profession'. iii) During the proceedings before me, the learned AR was asked to give details of the additions made to fixed assets during the year under consideration. The relevant extracts of the chart given by the learned AR is reproduced are under: Addition on which depreciation is taken for full year Addition on which depreciation is taken for half year DELTRON DELTRON Building 6600000 - Plant & Machinery - 8966000 Plant & Machinery (Computer) - 288399 Officer Equipment - 1423115 Furniture & Fixture - 346484 vechicles - 511566 Electrical Installation - 11,535,564 It is clear from the chart above that the assessee himself has taken the deprecation for half year on addition to assets taken from Delton, except....
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....laimed the directors foreign travelling expenses of Rs. 20,33,758/-. During the assessment proceedings, the AO asked the assessee to the file the details of the same along with the bills and vouchers. The AO observed that although the details were filed but no bills and voucher with respect to the boarding and lodging were filed for an amount Rs. 6,32,295/-. Accordingly, the AO disallowed 50% of the amount. Before the CIT(A) also, the assessee did not produce bills and vouchers to the aforesaid expenses. Therefore, the CIT(A) held that the AO was justified and reasonable in disallowing 50% of the claim for which evidence was not produced. 26 Ld. AR for the assessee submitted that the AO had disallowed a sum of Rs. 3,66,148/- being 50 % of expenses on boarding and lodging for which the assessee could not produce the bills and vouchers. He submitted that the boarding and lodging expenses have been incurred out of foreign exchange @ 500 USD per day. He submitted that the AO stated that assessee filed details but did not furnish details of boarding & lodging. He submitted that the details of foreign traveling expenses are filed which were also filed before the A.O./ CIT(A). He there....