TaxTMI 
TaxTMI 
2002 (1) TMI 40
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....nal? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that onus of establishing that the purpose of the transaction was to reduce the tax liability was discharged by the Department? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the original cost of the assets of the dissolved firm without ascertaining the market value of the assets on the date of dissolution?" However, the Income-tax Appellate Tribunal, Ahmedabad Bench "C", has raised and referred the following question, which in its opinion takes within its sweep all the aspects raised by the proposed question: "Whether, on the facts and circumstances of the case, and having regard to the relevant provisions of the Income-tax Act, 1961, the assessee was entitled to claim depreciation on the enhanced value of the assets?" The assessee is a private limited company carrying on business of manufacturing vegetable ghee and various types of oil. The assessment years are 1980-81 and 1981-82 and the relevant accounting periods are years ended on June 30, 1979, and June 30, 1980, respectively. The controve....
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....r acquiring assets on dissolution of the firm did not amount to transfer. (iv) All the partners who were interested in the firm were interested in the company. This stand adopted by the Income-tax Officer was approved by the Inspecting Assistant Commissioner, Baroda Range-I, Baroda, by stating that it was settled law that a partner acquiring assets on dissolution of a firm did not result in any transfer, and hence, it was not possible to adopt the fair market value of the assets at the time of the dissolution as there was no purchaser or seller. He further placed reliance on Explanation 6 to section 43 of the Act and applying the analogy of the said provision confirmed the view of the Income-tax Officer that the assessee was entitled to depreciation only on the written down value of the assets and not on the enhanced value as claimed by the assessee. For the next assessment year 1981-82 also the claim of depreciation was restricted on the written down value. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Baroda, who allowed the appeal holding that even if there was intention since inception that the assessee would take over the running bu....
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....sorbed depreciation and investment allowance in support of its aforesaid conclusion. Mr. Hemani, the learned advocate appearing on behalf of Mr. S.N. Soparkar for the applicant-assessee, assailed the order of the Tribunal stating that the Tribunal could not have suo motu invoked Explanation 3 to section 43(1) of the Act to uphold the assessment order. It was further submitted that the Tribunal had gone beyond the findings recorded by the Income-tax Officer and made out a new case altogether. That the Tribunal had erred in holding that change in the management/control would not make any difference to the transaction and this was an incorrect assumption in law. He also submitted that, even assuming that Explanation 3 to section 43(1) of the Act could be invoked, yet on the facts and in law the same would not be applicable because, firstly, the provision required that there was a transfer of assets from one person to another, while in the present case on dissolution there was no transfer. He further submitted that even if it was assumed that there was transfer of the assets, the provision required that the main purpose of the transfer must be reduction of tax liability and the sati....
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.... 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 Income-tax Officer may, with the previous approval of the Inspecting Assistant Commissioner, determine having regard to all the circumstances of the case." Therefore, sub-section (1) of section 43 of the Act lays down that actual cost in the hands of an assessee means the actual cost of the assets as reduced by that portion of the cost which may have been met directly or indirectly by any other person. Explanation 3 to the said sub-section stipulates that: (i) The assets which are acquired by the assessee were used by any other person before the date of acquisition. (ii) The Income-tax Officer arrives at objective satisfaction that such assets were transferred with the main purpose of reducing tax liability by claiming depreciation with reference to enhanced cost. (iii) Then the Income-tax Officer is empowered to determine the actual cost having regard to all the circumstances of the case. Thus, the Explanation, in fact, extends the meaning ....
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....----------- Sr. No.| Assets | Value in rupees | W. D. V. -------|-------------------------|------------------------|------------- | | | | 1. | Land | 1,00,000 | - | 2. | Factory building | 3,50,000 | 82,523 | 3. | Residential building | 1,50,000 | 35,367 | 4. | Plant and machinery | 33,68,026&nb....
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....he party of the first part in which the parties of the second to eighth part have no right title and interest and the party of the first part has received the possession of the same under the strength of this deed of dissolution and the parties of the second to eighth part stands retired from the said firm and its business... (5) As the assets and factory and the running business of Ashwin Industries together with land, building plant, machinery, etc., as mentioned here inabove have been allotted on the dissolution of the firm to the party of the first part, the party of the first part has paid and agreed to pay the above referred amount totalling to Rs.37,94,680 to the parties of the second to eighth part as mentioned hereinabove and it is further agreed between the parties that the parties of the second to eighth part shall pay all the debts and liabilities of the said firm of Ashwin Industries as shown in the balance-sheet, it is also agreed between the parties that parties of the second to eighth part shall be entitled to recover all dues from the debtors of the firm of Ashwin Industries as shown in the said balance-sheet... (6) As the firm of Ashwin Industries stands dis....
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....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. The question then arises: Explanation 3 to section 43(1) of the Act only talks of assets which were used by any other person for the purpose of business prior to the 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 Income-tax Officer has stated that the 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 to income-tax by daiming depreciation on the enhanced cost. In fact, the as has not claimed depreciation....