AI Drafter 
TaxTMI 
TaxTMI 
2015 (12) TMI 1737
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....9;ble DRP as well as learned AO has erred in law, on facts and in the circumstances of the assessee's case in upholding that the assets of Deltron Ltd. were acquired by the assessee at a higher price with a view to reduce the liability of income tax by claiming higher depreciation with reference to enhanced cost, on wholly erroneous and illegal grounds. (c) On the facts and in the circumstances of the case, it may be held that the Plant & Machinery, Building etc. were purchased on the basis of valuation of the Govt. approved valuers, who were experts, and as such invoking of the provision of Explanation 3 to section 43(1) was uncalled for and unjustified. (d) That the Hon'ble DRP as well as learned AO have failed to appreciate that the written down value as per Income Tax Rules, of Deltron Ltd. of various assets was low, as cost of acquisition of Plant & Machinery, Building etc. in the R&D Unit of Deltron Ltd. had been allowed to the Deltron Ltd. as scientific research expenditure u/s 35(1) of the Income Tax Act, and as such the same could not be said to be the market value of these assets. 5. That each ground is independent of and without prejudi....
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....e for the preceding assessment years 2005-06 to 2007-08 and the succeeding year 2009-10 in ITA Nos. 134/Del/2009, 1319/Del/2011, 5656/Del/2010 and 316/Del/2013 respectively, copy of the said order dated 16.10.2015 was furnished during the course of hearing which is placed on record and the relevant findings have been given in paras 8 to 20 of the said order which read as under: "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/shareholde....
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....s of assets taken over from M/s. 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 twenty-five 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 t....
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....umstances of the case. 11. So from a perusal of the aforesaid provision, we find that the AO 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 b....
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....nd common office is a relevant consideration but the same is not of conclusive nature. The prime 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....
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....e companies knew that there was no market for the old plant and machinery except for the opinion that the assets of one company doing the same business were used by the other. It will be thus seen that the Assessing Officer has not found any specific defect vis-à-vis valuation adopted by the appellant on the basis of registered valuer'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 th....
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....the provision, viz., the condition of the assets having been used by another person before the date of acquisition stands fulfilled the provision cannot be applied." 17. Further reference at this juncture is also made to the decision of the Tribunal in the case of Nirma Industries (P.) Ltd. 148 ITD 126 (Ahd) wherein it has been held as under: "3.4 We 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 t....
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...., such a valuation cannot be substituted where there is no intent to reduce the tax liability. In the instant case, as stated above, the assets as held by M/s. Deltron Ltd. and transferred to the appellant as part of transfer of electronic business on going concern basis cannot be said to be in any manner with an intent to reduce the tax liability. Certainly, 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 o....
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.... the cumulative lands and other assets together with machinery belonging to Guzdar Kajora Coal Mines Ltd. for a consideration of Rs. 6,00,000/-. In the said case, the ITO on directions of the Tribunal had carried out valuation which proved that vendor company was making good profits but no provision had been made for the goodwill of the company in the business, which 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 ....