TMI Blog2006 (7) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... cent and 5 per cent of the subscribed capital, respectively. The assessee company took over Waluj undertaking belonging to Ceat Ltd. and started operations in September, 1994. The purchase consideration of the plant was tentatively fixed at Rs. 5.15 crores, subject to the price determined in the due diligence report to be prepared by M/s A.F. Ferguson Co., M/s A.F. Ferguson Co. fixed the value of various assets of the undertaking to be transferred to the assessee at about Rs. 41.84 crores. The consideration paid for the assets taken over by the assessee from Ceat Ltd. was taken at Rs. 41,84,00,330. The book value of these assets in the hands of the Ceat Ltd. was Rs. 25,44,35,362. Thus, the purchase consideration of the assessee was more than the WDV of the assets in the hands of Ceat Ltd. by an amount of Rs. 16,39,64,968. The AO has mentioned that the WDV of assets, whose values are in dispute, in the hands of Ceat Ltd. and their values determined by M/s A.S. Ferguson Co. and adopted by the assessee as under: (Amounts in Rs.) ------------------------------------------------------------ S. Name of asset Purchase/book value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w to make profit whenever possible, using the assessee as a tool. The AO further pointed out that it was not clarified how due diligence test was carried out. The detailed working of the due diligence test group was not furnished. Item-wise values have also not been furnished. Coming to the facts of the case, it was pointed out that valuation of cars with the WDV of Rs. 47,208 taken at Rs. 50,05,589 was completely unbelievable. The valuation of furniture and fixtures of the WDV of Rs. 20,35,366 at Rs. 83,64,031 was also not believable. The value of buildings was also shown to be higher than the WDV by a margin of about 32 per cent of the WDV, while there was addition of about 15 per cent under this head from 1st April, 1994 to 29th Sept., 1994. If this amount is ignored, then, overvaluation is about 40 per cent. The opening WDV of plant and machinery was Rs. 16,84,45,554, which has been valued in the hands of the assessee at Rs. 26,04,34,912. Thus, excess valuation is about 35 per cent of the WDV. The AO also pointed out that Waluj undertaking was commissioned in the previous year relevant to asst. yr. 1992-93 and it is not very old. In view thereof, there should not have been much ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stallation cost was 40 per cent of the purchase price. None of the aforesaid could be established by the assessee. Therefore, he came to the conclusion that the basis adopted for valuation of the assets by the assessee was not correct. 2.7 It was mentioned by him that the transfer of assets was not at the WDV, but it was at an enhanced value. In the course of assessment, a chart of cost of acquisition of assets as on 20th Sept., 1994, and WDV in the hands of Ceat Ltd., as on 29th Sept., 1994, was filed. The agreement regarding transfer of assets of Waluj undertaking by Ceat Ltd. to the assessee was also filed, in which it was mentioned that land, buildings, certain plant and machinery and furnitures are being transferred for a consideration of Rs. 51.5 crores, the price being subject to due diligence report. The total WDV of the assets on 29th Sept., 1994 in the hands of Ceat Ltd. were Rs. 25,44,35,362. These assets were taken over by the assessee at Rs. 41,84,00,330, the difference between purchase price and WDV amounted to Rs. 16,39,64,968. The learned CIT(A) pointed out that instead of establishing fair market value of the assets, the assessee merely supplied a copy of sale ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 5,17,645 on account of contribution towards PF and family pension fund. Ground No. 3 is against the disallowance of expenditure of Rs. 85,641 out of miscellaneous expenses. 3.1 Before us, the learned counsel pointed out that the assessee company is a joint venture between Goodyear, USA and Ceat India groups, each group holding 50 per cent shares. Both the groups were engaged in the business of production of tyres. The joint venture was conceived with a view to produce higher quality radial tyres for four-wheelers. It was decided that for this purpose the assessee will buy the Waluj plant of Ceat Ltd. as a going concern. The tentative purchase price was fixed at Rs. 51.5 crores, subject to due diligence by M/s A.F. Ferguson Co. Their report placed the value of various assets of the plant at Rs. 45.44 crores. In the purchase agreement, values were not assigned specifically to various assets as it was a case of slump sale by Ceat Ltd. The factum that the instant case was a case of slump sale by Ceat Ltd. was not disputed by the AO. The assessee, after purchasing the unit as a going concern for Rs. 45.40 crores, had to place values on various assets including each block of assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng part of the land and all other machinery and equipment and all tools, handling equipment and accessories other than the assets referred to in s. 2.1 E through I. J. the leases that are material contracts and subject to s. 2.5, the full benefits of all other leases of machinery and equipment of which Ceat is lessee relating to the undertaking including, without limiting the generality of the foregoing, the leases described in Sch. 2.1 J. K. the material contracts and subject to s. 2.5, the full benefit of all other written contracts or commitments which are listed on Schs. 1.1 N and 2.1 J, to which Ceat is entitled in connection with the undertaking. L. the material permits and subject to s. 2.5, the full benefit of all other licenses, registrations, and permits in respect of the undertaking. M. all existing supplier lists of or used in connection with the undertaking. N. all books, documents, records and files, including without limitation, all financial, local tax, accounting, personnel files and records and computer programs used with respect to or relating to the assets or the undertaking excluding copies prepared and retained by Ceat for corporate record purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eductions from fixed assets at Rs. 50,13,92 (in thousands), consisting of various deductions from land, buildings, plant, machinery, furniture and fixtures, and vehicles. Note (4 c) on p. 515 mentions that the entire undertaking of Waluj factory, except relating to debenture liability, certain machinery for production of 2 and three-wheeler tyres and certain other current assets, has been transferred to the assessee w.e.f. 29th Sept., 1994 for a consideration of Rs. 45.0981 crores, resulting in profit of Rs. 10.8614 crores. On p. 524, it is mentioned that miscellaneous income includes extraordinary and non-recurring gains arising from sale of plain paper copier division as a going concern-Rs. 2.9827 crores; sale of tyro manufacturing plant at Waluj as a going concern-Rs. 10.8614 crores; sale of investments acquired by the company from its wholly-owned subsidiaries-Rs. 27.2587 crores; and sale of certain plant and machinery on sale and lease back, etc. 3.5 The learned counsel drew our attention to p. 62 of the paper book being letter dt. 11th Feb., 1998 addressed by Ceat Ltd. to the assessee inter alia pointing out that-(i) a statement of Waluj unit showing income-tax depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at Rs. 2.508 crores, plant and machinery at Rs. 9.702 crores; nothing was added to the values of furnitures, fixtures, office equipment and vehicles. Page 305 contains the valuation of land and buildings, made by Shri J.M. Rathod. 3.7 Coming to the legal issues, the learned counsel pointed out that the assessee was not a 100 per cent subsidiary company of Ceat Ltd., but it was a joint venture between Goodyear and Ceat groups. Therefore, there could have been no question of overvaluation of any asset with a view to claim higher depreciation, especially in view of the fact that the consideration was fixed initially at Rs. 51.50 crores, subject to the due diligence report, and on obtaining due diligence report, the consideration was revised to a lower figure of Rs. 45.40 crores. Thereafter, he referred to the provisions contained in Expln. 3 below s. 43(1), under which the AO can substitute WDVs in place of purchase consideration where the assets were used previously by any other person for his business and he is satisfied that main purpose of transfer of the assets, directly or indirectly, to the assessee, was to reduce liability of income-tax by claiming deduction under s. 32 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aper division was sold as a going concern. Therefore, the consideration included not only cost of fixed assets but also other benefits like licences, permits, entitlements, and quota rights, etc. The assessee has not given bifurcation allocating cost towards each asset taken over by it. However, a report from M/s S.R. Botilboi Consultants (P) Ltd. was furnished, in which the value of fixed assets was determined at about Rs. 10.18 crores. In these circumstances, actual cost under s. 43(1) of the Act of these capital assets was fairly taken at about Rs. 10.18 crores by the assessee. This finding of the Tribunal was approved by the Hon'ble Court. 3.9 He also relied on the decision of Hon'ble Tribunal, Ahmedabad Bench "A", in the case of Unimed Technologies Ltd. vs. Dy. CIT (2000) 69 TTJ (Ahd) 25 : (2000) 73 ITD 150 (Ahd). In that case, the applicability of the Expln. 3 to s. 43(1) came for discussion in the context of facts that the fair market value of the assets have been certified by the registered valuer. The AO had not appointed his own valuer for such valuation. He did not think it fit to examine the valuer. It was held that the value determined by the valuer appointed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... number of assets such as 'goodwill' etc. are also transferred, on which some value will have to be placed. Coming to the issue that tax treatment in the case of Ceat Ltd. is not material in deciding the case of the assessee, references were made to the discussion on pp. 233 and 235 of that order. At p. 233, it was inter alia mentioned that slump sale agreement is contractual in nature. The only condition in the case of slump sale is that the sale should be for a lump sum price. Therefore, in such a sale, there is transfer of entire business activity for a fixed price. Thus, sale price is not attributed to individual items of assets. At p. 235, it was inter alia mentioned that the AO has to allocate the total amount of Rs 210 crores not only to land, building, plant and machinery but to all other assets also and only then the computation of capital gains could be said to be correct. Thus, in a nutshell, his argument was that tax treatment given to the transaction by Ceat Ltd. was material and price paid by the assessee was for all the assets received by it. Only thereafter, the AO can decide the matter regarding grant of depreciation. 3.13 The learned Departmental Representative r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not establish the costs taken by the assessee with reference to any machinery taken over by it. 4.1 We have considered the facts of the case and rival submissions. The first issue in this case is whether the main purpose of impugned transaction was to reduce tax liability by claiming depreciation with reference to an enhanced cost. The case of the learned counsel was that the assessee is joint venture between Goodyear and Ceat groups, each holding half share. The joint venture was undertaken for manufacturing of better quality tyres with the help of technology available with Goodyear. The purchase price was tentatively placed at Rs. 51.5 crores subject to due diligence report. On receipt of due diligence report, it was found that price was lower at Rs. 41.4 crores. Thus, it was contended that the transaction was undertaken in a transparent manner and its aim was to produce better quality tyres. There was nothing inherent in the transaction, which could lead to inference of collusion between Ceat Ltd. and the buyer. In any case, such a collusion would have harmed the interests of the Goodyear, who was holding 50 per cent shares of the assessee company and, therefore, they would no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is claiming depreciation, the onus is on it to establish costs of various assets. We have also described the cases cited by the learned Departmental Representative, the ratios of which are that-(i) the word 'cost' has to be construed strictly, and (ii) determination of cost is a question of fact, based upon the evidence produced. The assessee had produced certain evidence in the form of technical report and the report of M/s A.F. Ferguson Co., which according to us should form the basis for valuation of various assets. 4.3 In the aforesaid report, the market value of the land has been taken at Rs. 83.20 lakhs. The assessee has also filed conveyance deed, in which the value of the land for stamp duty purposes was taken at Rs. 1,20,77,830, say Rs. 120.80 lakhs. The learned counsel was required to state as to why the value of the land should not be adopted at Rs. 120.80 lakhs, as mentioned in the conveyance deed. The learned Departmental Representative accepted the proposition that the value adopted for stamp duty purposes represented picture of the market value more correctly than the value adopted in the report of M/s A.F. Ferguson Co., which was based upon a number of assu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis. The reason is that the assessee has enhanced the value of plant and machinery only. Therefore, reduction in the value of plant and machinery by an amount of Rs. 37.60 lakhs shall be equitable to both sides as values of furniture and fixture etc. and vehicles have not been enhanced. 4.6 The AO shall work out the deductible amount of depreciation on the aforesaid basis. Ground No. 1.9 was not really pressed by the learned counsel as machinery and equipment mentioned therein were used by the assessee for less than 180 days in relevant previous year. Therefore, no adjustment in the depreciation is required on this sub-ground. 4.7 In result, ground No. 1 is partly allowed. 5. Ground No. 2 is against the refusal of the learned CIT(A) in deducting a sum of Rs. 5,17,645, being assessee's contribution towards PF and family pension fund. On perusal of the order of the AO, it was found that the assessee had claimed deduction of Rs. 29,14,490, being miscellaneous expenses incurred by it. The AO pointed out that it constituted a PF trust and a superannuation trust, which were not recognized by the CIT, Nashik. Therefore, the expenditure in respect of the aforesaid contributions, amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO. Having considered the submissions before us, we think it proper to restore the matter to the file of the learned CIT(A) for considering the expenditure on merits and decide the matter afresh after hearing the assessee. 10. Ground No. 3 is against the refusal of the learned CIT(A) to admit a fresh ground of appeal against the disallowance of Rs. 6,98,889, being increase in liability of technical know-how fees on account of fluctuation in foreign exchange. Before us, it was pointed out that the assessee had moved the additional ground vide its letter dt. 11th Sept., 2002, submitted before the learned CIT(A) on the same day. The learned CIT(A) passed the order on 26th Sept., 2002 after submission of the additional ground of appeal. It appears that the learned CIT(A) did not consider this issue at all. In view thereof, it is held that the learned CIT(A) shall consider the admissibility of the ground. If the ground is admitted, he shall also decide the ground on merit after hearing the assessee. Thus, this ground is treated as allowed for statistical purposes. 11. In the result, the appeal of the assessee is partly allowed. ITA No. 134/Pune/2000 for asst. yr. 1997-98 12. G ..... X X X X Extracts X X X X X X X X Extracts X X X X
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