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2001 (12) TMI 12 - HC - Income TaxDepreciation - Actual Cost - Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the provision of Explanation 3 to section 43(1) applied to the facts of the case and that the assessee is not entitled to depreciation on the book value of assets of the earlier firm but only on the value as fixed by the Income-tax Officer under Explanation 3 to section 43(1) of the Income-tax Act 1961? - Here the firm was dissolved within about 13 months of its formation. The two partners besides the assessee-company were also the only two shareholders and directors of the company. The reality before and after the dissolution was the same. The same person who enjoyed the benefits of the ownership of the assets and its uses continue to have such benefits the two partners indirectly and the assessee itself directly. The findings recorded by the Tribunal in this background cannot be faulted. The question referred to us is therefore answered in favour of the Revenue and against the assessee.
Issues:
1. Interpretation of Explanation 3 to section 43(1) of the Income Tax Act, 1961. 2. Determination of the actual cost of assets transferred to the assessee. 3. Claiming depreciation based on the market value of assets taken over from a dissolved firm. 4. Application of legal precedents in determining the value of assets. Interpretation of Explanation 3 to section 43(1) of the Income Tax Act, 1961: The judgment dealt with the application of Explanation 3 to section 43(1) of the Income Tax Act, 1961. The Assessing Officer invoked this provision to determine the actual cost of assets transferred to the assessee. The provision allows the Assessing Officer to determine the cost of assets based on the circumstances of the case if the transfer of assets was primarily for the reduction of income tax liability. In this case, the Assessing Officer found discrepancies in the valuation of assets taken over by the assessee, leading to the disallowance of a portion of claimed depreciation. Determination of the actual cost of assets transferred to the assessee: The Assessing Officer determined the cost of assets taken over by the assessee at the written down value for income tax purposes as on the date of the takeover of the firm. This determination was made after obtaining the previous approval of the Inspecting Assistant Commissioner. The Assessing Officer then proceeded to disallow a specific amount from the depreciation claimed by the assessee based on the revised cost of assets. The Commissioner and the Tribunal upheld this decision, leading to a reference before the High Court. Claiming depreciation based on the market value of assets taken over from a dissolved firm: The assessee claimed depreciation based on the market value of assets taken over from a dissolved firm, which was significantly higher than the written down value. The court analyzed the circumstances surrounding the transfer of assets and found that the main purpose of the transfer was to enable the assessee to gain higher depreciation by taking a higher figure as its cost at the time of transfer. The court held that the invocation of Explanation 3 to section 43(1) was justified in this case, and the assessee was not entitled to depreciation on the book value of assets but only on the value fixed by the Income-tax Officer under the provision. Application of legal precedents in determining the value of assets: The counsel for the assessee referred to legal precedents to support the valuation of assets at market value during the dissolution of the firm. However, the court found no material on record to substantiate the claim that the formation of the company was solely due to the insistence of lenders. The court emphasized that the adoption of market value, even when higher than the written down value, could be a basis for invoking Explanation 3 to section 43(1) if the circumstances indicate that the transfer was primarily for gaining higher depreciation benefits. The court upheld the findings of the Tribunal in this regard and ruled in favor of the Revenue against the assessee.
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