TMI Blog1998 (2) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... nation 3 to section 43(1) is attracted to the facts and circumstances of the case ?" The facts of the case are condensed thus : The assessee is a company known as "Poulose and Mathen Pvt. Ltd." engaged in the business of purchasing raw carbon dioxide and bottling it in cylinders after purification. The assessee was a partner in a partnership firm consisting of nine partners. The other eight partners were the shareholders of the assessee-company. The partnership firm was dissolved on February 25, 1985, and the assets and liabilities of the firm were taken over by the assessee-company. The written down value of the assets of the firm was Rs. 3,16,110. However, the assets were revalued at a figure of Rs. 22,30,795 and depreciation claimed on the aforesaid amount. However, the Assessing Officer did not allow depreciation on the enhanced value of assets for the years 1986-87 and 1987-88. For the assessment years 1988-89 and 1989-90 also, the Assessing Officer disallowed a similar claim for depreciation. The appeals were filed before the Commissioner of Income-tax (Appeals) as against the orders of the Assessing Officer. The Commissioner of Income-tax (Appeals) also disallowed the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a view bona fide done for the adjustment of mutual rights of the partners in the partnership firm' and is not the above finding wrong, baseless against the principles laid down in Meenakshi Mills' case [1967] 63 ITR 609 (SC) at page 616 and McDowell and also against reality, human conduct and commonsense ? 5. Whether, on the facts and in the circumstances of the case and also in the light of the principle laid down in Meenakshi Mills' case [1967] 63 ITR 609 (SC) at page 616, the reasoning and findings of the Tribunal in paragraph 11 of the order is correct and valid ? 6. Whether, on the facts and in the circumstances of the case and also on a consideration of the submissions of the Revenue noted in paragraphs 12 and 13 of the order and also on a consideration of the terms in the reconstituted deeds and the dissolution deed, the Tribunal is right in law and fact in holding that the transactions are bona fide and real and are not the findings against the dictum and procedure laid down in Meenakshi: 'But in certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade' ? 7. Whether, on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Traction Co.) militate against the view in paragraph 3 (dealing with Poulose and Mathen) ? 5. Whether, on the facts and in the circumstances of the case and after having found (in the case of Power Traction Company): 'Therefore, it cannot be said that the assessee just purchased the asset at a higher value for the purpose of claiming higher amount of depreciation and this attracted the provisions of Explanation 3 to section 43(1) of the Income-tax Act'--- should not the Tribunal have taken a contrary decision in paragraph 3 while dealing with Poulose and Mathen---'a case of just purchased' and is not the above finding bereft of any sanctity in view of the consistent finding on inconsistent and divergent facts ? 6. Whether, on the facts and in the circumstances of the case and in the light of Meenakshi, the assessee is entitled to depreciation on the enhanced value ? 7. Whether, on the facts and in the circumstances of the case did Explanation 3 to section 43(1) of the Income-tax Act, apply to the facts of the case ?" Since the Tribunal has rejected the reference applications the Revenue filed O. P. Nos. 3103 of 1994 and 17982 of 1993 before this court in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies to the company was only with a view to reduce the liability to income-tax by claiming depreciation with reference to the enhanced cost of the company. Therefore, he took the view that Explanation 3 to section 43(1) should be adopted. Accordingly, the Assessing Officer calculated depreciation on the basis of the total value of the assets, namely, Rs. 3,16,110 and disallowed the claim for depreciation on Rs. 22,30,795. Explanation 3 to section 43(1) is as follows: "43. Definitions of certain terms relevant to income from profits and gains of business or profession.---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 :... Explanation 3.---Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets was substantial and out of all proportion to the written down value in the hands of the previous assessee. The reasons advanced for the change-over did not justify the increase in value of assets. The main purpose of the change-over was therefore the reduction of liability to income-tax by claiming depreciation with reference to enhanced cost and the first proviso to section 10(5)(a) would apply. The Income-tax Officer had power to determine the actual cost of the assets with the previous approval of the Inspecting Assistant Commissioner." Counsel for the Revenue submitted that the principle laid down in the above decision would squarely apply to the present case inasmuch as the facts are more or less identical. There the partners of a firm constituted themselves into a private limited company. The shareholders of the company were the old partners and their nominees and shares in the company were allotted in the same proportion as shares held by the partners in the firm. At the time of the change-over the company valued assets received from the firm at Rs. 63,000 and Rs. 87,000 while their written down value in the hands of the firm was Rs. 3,994 and Rs. 13,210, respectively. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of the partnership agreement is made. It has been laid down judicially that, in the absence of contrary agreement, all assets and liabilities must be taken at a 'fair value' not merely a 'book value' basis, thus involving recording entries for both appreciation and depreciation of assets and liabilities. This rule is applicable, notwithstanding the omission of a particular item from the books, e.g., investments, goodwill (Cruikshank v. Sutherland [1922] 92 LJ Ch 136 (HL)). Obviously, the net effect of the revaluation will be a profit or loss divisible in the agreed profit or loss-sharing ratios." This is a well known principle of accountancy and we have no manner of dispute as to its applicability in taking accounts for purposes of dissolution. No doubt the firm and partners being commercial men would value the assets only on a real basis and not at cost or at their other value appearing in the books. Therefore, it is all the more certain that the real rights of the partners cannot be mutually adjusted on any other basis. But the question that faces the Assessing Officer is that the position being so strong as it appears to be, why did he not adopt Explanation 3 to section 43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent. The effectiveness of the provisions cannot be defeated in any manner, even if there is adjustment between the partners of the dissolved firm. We cannot agree with the conclusion of the Tribunal 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. This is not a case where there is 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 depreciation actually allowed to him under the Act as defined under section 43(6). Section 43(1) with the Explanations thereto supersedes the general rule of law governing partnership, its assets and dissolution, etc. The definition of "actual cost" contained in section 43(1) read with the Explanations thereto affords a mechanism by which to reduce the actual cost to a figure which is anything but real. When the asset was formerly used by any other person for the purposes of his business and the main purpose of the transfer of the asset to the assessee is to claim a higher depreciation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion is whether the Tribunal is justified in rejecting the valuation and drawing an adverse inference against the assessee. As far as the first question is concerned the court found that the condition for attracting the proviso to section 10(5)(a) was satisfied because the assets had been used by the parent company for their business before they were transferred to the assessee-company. On the second question the court found that the Tribunal was justified in rejecting the valuation report and drawing an adverse inference against the assessee. The first question alone is relevant in the present case and on that question the court said that the Income-tax Officer proceeded to fix or determine the actual cost (written down value) of the assets transferred by adopting the written down value of those assets transferred in the books of the transferor of the assessee-company as on the date of transfer and added to that figure the balancing charge arising under section 10(2)(vii) of the Act. The court further observed: "It cannot be disputed that this method, if adopted, would clearly give the actual cost of the assets transferred to the transferor-company as on the date of transfer, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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