TMI Blog2017 (6) TMI 1123X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the place of actual cost paid by the assessee, adopted the WDV of the asset - invoking Explanation 3 to subsection (1) of section 43 - Held that:- Once the Assessing Officer was of the opinion that the assessee has purchased the second hand windmill at a higher cost, then the burden to prove the fair market value is on the Assessing Officer. In this case, estimation of fair market value by the Chartered Engineer and Registered Valuer is very much available before the Assessing Officer. Moreover, the authorities below have not made any exercise to determine the fair market value of the windmill and they have simply adopted the WDV of the windmill in the hands of Shri K.N. Muthaiah as the cost of the windmill for the purpose of calculating depreciation. We are of the considered opinion that the Explanation 3 to section 43(1) of the Act is applicable if the assessee claims enhanced cot as the actual cost and the Assessing Officer is able to show that the cost claimed by the assessee is more than the market value of the asset. Thus, the Assessing Officer has no reason to invoke the Explanation 3 to section 43(1) of the Act. There is no prohibition or connected parties to carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h eligible unit of the industrial undertaking has to be considered as if such eligible business where the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year upto the period prescribed under the Act for the benefit of section 80IA of the Act. ii) That the initial assessment year referred to section 80-IA(5) of the Act would mean the year in which the assessee opts in selecting the year of claiming relief under section 80-IA of the Act. iii) That the unabsorbed depreciation and carry forward losses of the earlier years which had already been set off against the other income cannot be notionally carry forward and taken into consideration for the purpose of computation of deduction under section 80-IA of the Act. 5. Before us, by relying on the assessment order the ld. DR submitted that the Assessing Officer had arrived at this decision out of abundant caution, because the Revenue has carried the matter before the Hon ble Apex Court and the matter was pending. The ld. A.R. on the other hand, relied on the decision of the Hon ble jurisdictional High Court in the case of Velayudhaswamy Sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to claim depreciation @ 80% i.e., ₹.9,702/-. Thus, the claim of the assessee of depreciation at ₹.2,07,13,600/- has been restricted to ₹.9,702/- under section 43(6) of the Act. 8. The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee, the ld. CIT(A) has observed and held as under: 5.1.4 Moreover, he assessee s claim that the primary intention of purchase of windmill in a year when there was an acute shortage of power in the State and not reduction of tax liability has considerable force. To prove that primary intention is reduction of tax liability, there has to be corroborative circumstantial evidence which does not emerge from the reasons for disallowance in the assessment order. In view of the reasons stated above, there is no basis for invoking Explanation 3 to sub section (1) of section 43 for reducing the actual cost to the WDV of the previous owner which cannot be stated to be the price which the asset will fetch in the open market. On the other hand the claim is supported by the expert opinion of the registered valuer. The addition made by restricting the claim of depreciation is not su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly because of an accelerated depreciation @ 80% available for windmill in a year and the entire cost of purchase is claimed as depreciation within 3 to 4 financial years from the year of purchase. Thereafter, the asset was sold at some irrational and unreasonable sale value by the persons after availing full depreciation. The above general reason assigned for invoking Explanation 3 to sub section (1) of section 43 of the Act cannot be held as valid reason, which is contrary to intention of Legislation allowing depreciation @ 80% to the windmill. The Assessing Officer has not disputed with regard to the shortage of electric power during the financial year 2010- 11. To run the business of manufacture of cotton yarn, uninterrupted power supply is very much essential. The supplier of second hand wind mill to the assessee is not in dispute since the seller has furnished his PAN, etc. The Assessing Officer has determined the WDV available in the hands of the seller at ₹.12,128/-. It is beyond imagination that at the cost of ₹.12,128/- anybody can get second hand windmill and if it is so, there would not be electric power cut in the State of Tamil Nadu and no industry would h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnected and related parties if fixed bonafidely as per market conditions. There is no prohibition or connected parties to carry arms' length transactions where real value of them transferred is paid. Law frowns on fraudulent transaction carried to hoodwink the Revenue. Having held that the assessee has shown enhanced cost of assets, the Assessing Officer under Explanation 3 to section 43(1) of the Act has to determine the actual cost to assessee which can only mean arm's length value or real value or worth of assets transferred. 15. Under similar facts and circumstances, by following various case law, the Pune Benches of the Tribunal in the case of Navlakha Translines v. ITO(supra) has observed and held as under: 16. Provisions of Explanation 3 to section 43(1) authorises the AO to adopt actual cost for the purposes of depreciation differently from what is shown as the cost of the assessee. It confers the authority to the AO to estimate the value of any used asset, if the AO is satisfied that the main purpose of transfer of such assets directly or indirectly to the assessee is promoted by the object of claiming higher depreciation on such enhanced cost. In the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... around ₹ 2.70 Crores during F.Y. 2003-04, therefore, the market value of the second hand wind mills of 2 to 3 years old cannot be ₹ 9 to 10 lakhs as adopted by the AO being the WDV of the wind mills in the hands of the Snowcem India Ltd. especially when the rate of depreciation is 80% on wind mills. 17. We find the Ahmedabad Bench of the Tribunal in the case of Chitra publicity Company Pvt. Ltd. Vs. ACIT reported in (2010) 127 TTJ (Ahd.) (TM) at Paras 14 to 18.2 of the order has held as under : 14. I have carefully examined above circumstances/reasons, arguments and case law in support of application of Expln. 3 to s.43(1) in this case. I have already commented upon circumstance (1) and on satisfaction of the AO that main purpose of transaction was to claim higher depreciation on transferred assets in the hands of the assessee. Yet the main purpose of Expln.3, in my view, is to empower the AO to determine actual cost of assets where the assessee is wrongfully claiming depreciation on enhanced cost of such assets. What is actual cost ? How is it to be determined ? Actual cost of an asset to the assessee is always question of fact governed and depending up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... What is the meaning of actual cost ? Actual cost is to be determined by the AO having regard to all the circumstances of the case. In other words, facts and material on record is to be considered in the process of determination of actual cost. Such cost cannot be any fancy or imaginary figure. This is clear from use of strong words like determine and check in the provision on arbitrary exercise of power by the AO. The AO is required to determine the actual cost with the previous approval of the Jt. CIT. Therefore, the AO has to satisfy Jt. CIT that exercise of determination of cost has been carried in a reasonable and proper manner. The provision of approval by the Jt. CIT is for the benefit of the Revenue and the assessee. It is to prevent the AO from taking any amount as actual cost . 16. It has been contended on behalf of the Revenue that actual cost is not market value but is WDV of assets in the hands of the transferee, particularly on the facts of the case when value of hoarding and of goodwill/trade name was nil in the books of the erstwhile firm. The assessee company, after acquisition claimed depreciation on cost of assets which was arbitrarily fixed without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, not possible to totally reject the concept of market value of the assets transferred as not relevant for determining actual cost . The provision requires consideration of all the circumstances including cost in the hands of the transferor, WDV, inflationary trends, conditions and life of assets transferred etc. in the exercise of determination of cost of assets. It is true that cost shown in the transfer is primarily the cost to the transferee and such cost therefore, is a piece of good evidence. But cost shown is not final and AO is empowered under Explanation to revalue the asset and determine its actual cost. He has to determine the cost on some good and acceptable basis. In the present case, actual cost of hoardings and of goodwill has been taken at nil merely because such assets were not shown as an asset in the accounts of the erstwhile firm and no depreciation was claimed. This action of the AO endorsed by higher authorities and in the proposed order of learned AM, in my view has no legal support. As already discussed, provisions of s.47(xiii) or of s.43(6) are not attracted here as these provisions have very different purposes to serve. These deemed provisions c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances, it would always be open to the AO to go behind the contract and ascertain the actual cost so as to determine the correct liability to tax . 18.2 Inspite of the clear observations of the jurisdictional High Court, fully supported by other authorities and clear language that AO is obliged , duty cast on AO to determine actual cost of assets to the assessee, in the present case, the burden has been placed on the assessee to prove that actual cost of asset was the value it had claimed for the purpose of the depreciation. No attempt whatsoever was made by the AO or by the CIT who approved of his action or by CIT(A) to collect any material or to take any steps to determine the actual cost of the assets. The evidence produced by the assessee before the AO in the shape of valuation report was wrongly rejected and on reasons which are totally unsustainable. In support of value (cost of hoardings at ₹ 4,77,96,000/- and of goodwill at ₹ 3 crores), the reports of the registered valuer were placed before the AO. The AO did not consider above reports, although it was incumbent upon him to dislodge them. The learned CIT(A) in the order for asst. yr. 2005-06 rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justified in disallowing the claim of the assessee for depreciation or in reducing the claim of depreciation by invoking Expln. 2 to s. 43(1). - Union of India Vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) and Dy. CIT Vs. Mahendra M. Mehta (2004) 89 TTJ (Mumbai) 1 relied on . 19. Various decisions relied on by the learned DR are not applicable to the facts of the present case. In the case of JCIT Vs. Mahindra Sona Ltd. reported in 96 ITD 303 it has been held that wherein an asset was already in use in a business in hands of one person and its WDV has been ascertained by the AO and that person transfers assets to another person for a price exceeding this WDV, it is open to AO to refuse to accept the sale price as actual cost to purchaser in purchaser's assessment if he is satisfied that main purpose of transfer was reduction of liability to income-tax by claiming depreciation with reference to enhanced cost. However, the same is not applicable to the facts of the present case. In the instant case, Snocem India Ltd. has not transferred the wind mills to the assessee and the assessee has purchased the wind mills at a cost of ₹ 6,69,85,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. or Snowcem are related to the assessee or they are related to each other. 22. The various other decisions relied on by the AO and CIT(A) are also distinguishable and not applicable to the facts of the present case because in those cases the transactions have taken place between related parties. In this view of the matter and relying on the decision of the Third Member (Ahmedabad Bench) of the Tribunal in the case of Chitra Publicity Company Pvt. Ltd.(Supra) and the decision of the Mumbai Bench of the Tribunal in the case of Western Maharastra Flourine Chemical Industries (Supra) we hold that the actual cost paid by the assessee at ₹ 6,69,85,000/- to Vestas RRB India Ltd. being cost of 3 wind mills should be considered as cost price for allowing the depreciation to the assessee. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed. 16. Under the above facts and circumstances and in view of the above judicial pronouncements, we find no reason to interfere with the order passed by the ld. CIT(A) on this issue and accordingly, the ground raised by the Revenue is dismissed. 17. In the result, the appeal filed by the Revenue is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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