TMI Blog2006 (1) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... wing depreciation on TG QQ equipment : The amount of depreciation disallowed are : Assessment year 1996-97 : Rs. 41,17,241 Assessment year 1997-98 : Rs. 31,16,805 Assessment year 1998-99 : Rs. 23,37,604 Now we deal with each ground as under : Treatment of Interest Income under "Other Sources" 2. Particulars of interest earned for assessment years 1996-97 to 1998-99 are : Assessment year Corporate deposit (Rs.) Bank deposit (Rs.) Car deposit (Rs.) Total (Rs.) 1996-97 54,34,247 1,76,589 5,223 56,15,053 1997-98 From the above sources together 62,00,541 1998-99 From the above sources together 1,11,26,007 It is claimed by the assessee that above interest income is from business as it is intimately connected with carrying on of business. The memorandum of association of the assessee-company empowers it to carry on the business of lending money and therefore, interest earned on inter-corporate deposit is nothing but the business income. It was further submitted before the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heard the rival submissions and considered the facts and material on record. In our considered view, no interference is called for in the order of CIT(A) on this issue. In the assessment year 1995-96, the Tribunal in assessee s own case held as under : "6. The second issue by the assessee in its appeal relates to the consideration of interest of Rs. 46,11,474 under section 80-IA and 80-I, whether it is to be treated as business income or Income from other sources. The contention of the assessee is that it has invested its surplus funds with another company and the interest earned thereon is nothing but business income and it is to be treated accordingly. The department disallowed the said contention of the assessee holding that as this interest income was not derived by the assessee during its course of business and as such it should be treated only as Income from other sources. Therefore, accordingly it taxed under the Act. The assessee contends that in its memorandum of association there is a clause to carry out money lending business also. Basing on this clause in its memorandum of association, assessee claims that since amounts were given to another company and the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen it will be excluded from the computation of business profit and consequentially the deduction under section 80-I will go down. Thus, the order of CIT(A) is also confirmed on this issue. This ground of the assessee is, therefore, also rejected. Regarding claim of depreciation 9. The dispute and related facts are as under : The assessee-company purchased certain GG TG equipment, whose description are as under (as per Assessing Officer) : A 2 Triple Gob (TG) equipments - 21/8 Version. B 3 Triple Gob (TG) equipments - 27/8 Version. C 4 Quadruble Gob (QG) equipment with accessories. These equipments were purchased from a sister concern viz. M/s. Vazir Glass Works Ltd. (in short VGWL ). The total consideration paid by assessee-company (NGAIL) was a sum of Rs. 1,70,06,600, on which it claimed depreciation as mentioned in the grounds of appeal above. According to Assessing Officer, the WDV in the hands of VGWL was Rs. 5,30,078. The Assessing Officer invoked the provisions of Explanation 3 to section 43(1) and rejected the cost paid by NGAL to VGWL and adopted WDV in the hands of VGWL as the cost for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparative production cost." Thus, high production cost was one of the reasons to stop production of vials by VGWL. (3)The technology needed for vial making as contained in these equipments had become old and machines with better technology had come in the market. (4)The production figure up to September 1995 was Rs. 26.33 crores, which has increased to Rs. 31.50 crores in second half of the year. It does not justify high cost paid for these equipments. (5)There is no technological or bona fide basis behind purchases of these equipments at a sum of Rs. 170.06 lakhs. (6)In a similar case, the Pune Bench of ITAT in the case of Finolex Plastics (P.) Ltd. v. IAC [1993] 47 ITD 333 has held that provisions of Explanation 3 to section 43(1) would be applicable. Thus, the Assessing Officer rejected the claim of actual cost of the equipments at Rs. 170.06 lakhs and adopted WDV in the hands of VGWL as the actual cost in the hands of NGAIL with the previous approval of JCIT and allowed depreciation in the assessment year 1996-97 and subsequent year accordingly. 12. Before the CIT(A), the assessee submitted that : "The second issue raised by the assessee in its appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial Plastics Mfg. Co. (P.) Ltd. v. ITO [1982] 1 ITD 152 speaking on the applicability of the aforesaid provision inter alia observed that "it may be another matter if the consideration was more than the market value itself but this is not alleged in the orders of the authorities below and that we specifically requested the learned departmental representative whether it is suggested that such was the case, he has not suggested that such was the case nor has he brought to our notice any material to show that such was the case." On the other hand, in the case of the appellant the Assessing Officer has not accepted the valuation of the machinery as per valuation report and it has been held that the consideration paid more than the market value of the machinery. During the course of the hearing it was also admitted that Vazir Glass is a loss making company with accumulated business loss. With this background also it becomes clear as to how the tax liability is sought to be reduced by claiming depreciation in the hands of the appellant-company on hiked purchase value of the machinery and in the case of Vazir Glass, the profit on sale of machinery would get absorbed in setting off t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely. For these reasons the valuer s report in this case cannot be accepted as reflecting the true market of the machineries. 3.9 Though it was also argued that the production of the appellant had increased in the second half of the year which proved that the utility and validity of the equipment but it does not prove the case of the appellant and that the price paid for the machineries was justified. 4. Therefore, for the reasons given above and in the assessment order, the claim of the appellant for allowing depreciation at 25 per cent of total cost of Rs. 1,70,06,000 cannot be accepted. The Assessing Officer has rightly allowed depreciation to the appellant on the WDV Rs. 5,37,038. The disallowance made out of depreciation is, therefore, upheld. However, the Assessing Officer may verify the submission of the appellant that the correct figure of disallowed depreciation is Rs. 41,55,731 and make the necessary rectification." 14. The main reasons rejecting the appeal of the assessee by CIT(A) are : 1.The consideration paid is more than market value. 2.VGWL is loss making company with accumulated losses. The price is paid to set off the loss against profit arising on sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. After receipt of the DVO s report, the case was fixed. The learned AR, then, submitted that : (1)the DVO inspected the plant and machinery in question in response to reference made to him on 17-2-1999. Whereas the assessment order for the assessment years 1996-97, 1997-98 and 1998-99 were passed on 16-3-1999, 28-1-2000 and 3-7-2000 respectively. The CIT(A) had passed the orders prior to receipt of DVO s report. In any case, the decision of the Assessing Officer about applicability of Explanation 3 to section 43(1) can only be in conformity with the DVO s report. (2)Distinguishing Pune case - Finolex Plastics (P.) Ltd. ( supra ), the learned AR submitted that there was no DVO s report in that case hence the case is distinguishable. (3)On the question as to whether case can be set aside to consider the DVO s report, the learned AR submitted that no useful purpose would be served as the Assessing Officer has no option but to take decision in accordance with DVO s report. And if this is so, then Tribunal can also take the same decision, which should be in conformity with DVO s report. (4)The department has not found any fault with approved valuer report and has also c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the equipment; estimated it at higher figure and on that basis worked out reconstruction cost as on 24-3-1995. No sound basis has been given by DVO as to how, he has worked out re-construction cost as on 24-3-1995. It is only a wild estimate. There is no comparable sale or purchase instances of these machines in any of these periods so as to justify the price at which, the valuation is made. The DVO could have obtained or asked the Assessing Officer to obtain the price list of these equipments from original manufacturers. (2) There is no basis for the AVO to work out the future working life of these equipments at 15 years. Whereas AVO has pointed out that it is only 6 to 8 years. The learned AR submitted that reference under section 131(1)( d ) cannot be made in view of the decision of Hon ble Supreme Court in Smt. Amiya Bala Paul v. CIT [2003] 262 ITR 407 . At best it could be only a reference under section 55A. Such references are only advisory in nature. These are not binding on the Assessing Officer. Even though, reference under section 55A is covered under Chapter IV but there is a further division. Sub-Chapter D deals with Profit and Loss from business or profession. Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inery but did not evaluate their usefulness. He has also not made any attempt to procure comparable purchase price of such machineries either from the original manufacturers directly, or indirectly through Assessing Officer, or from the website or from other manufacturers. It is not possible to believe that the group of machinery which costed only Rs. 107.40 lakhs in 1981 1986 would be costing Rs. 170 lakhs in 1995 after substantial use and wear and tear on account thereof. The reasons for enhancing the cost of some machinery is quite vague. On this point, the EVO observed as under : (5) These equipments were imported by M/s. Vazir Glass Works Ltd. in March/April 1981 from M/s. Vidros Ltd., Sao Paulo, Brasil in US $. The cost of these equipments as intimated by the assessee-company was Rs. 12,65,642 and Rs. 7,43,644. The purchase cost of these equipments mentioned above does not appear to be justified because all the three equipments are identical and were purchased at the same time. The cost of similar equipment TG 21/8 purchased in 1981 was Rs. 9.11 lakhs and it comes to Rs. 13.2 lakhs by applying the cost index issued by the Ministry of Commerce and Industries (Office of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. But it was not available to the Assessing Officer or to the CIT(A) at the time when assessment/appeals were decided. Therefore, it is necessary that the Assessing Officer consider these reports and offer his comments. 22. One important legal question has been raised by the learned AR. Once a reference is made by the Assessing Officer to the DVO then, the value estimated by the DVO is binding on the Assessing Officer. We do not accept this proposition. A reference under section 55A is made clearly for the purpose of determining the FMV of a capital asset which is transferred for the purposes of capital gains. The "capital asset" and the "asset" on which depreciation is claimed or allowable for the purposes of capital gains are not same thing. Even though section 55A refers to "reference under Chapter IV", its operation has to be considered with reference to further words used in that section. Section 55A reads as under : "55A. With a view to ascertaining the fair market value of a capital asset for the purposes of this Chapter, the Assessing Officer may refer the valuation of capital asset to a Valuation Officer ( a )in a case where the value of the asset as claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set on which depreciation is to be claimed by the assessee is to reduce liability income tax then, actual cost of such asset to the assessee would be the amount which an Assessing Officer would determine having regard to all the circumstances of the case. This may only mean that once valuation report is available then, the Assessing Officer should then take into consideration and examine it as to whether such report can form the basis for determining the amount to be substituted for purchase price for the purposes of depreciation. Such report alone will not be the deciding factor in our view, but "all the circumstances of the case" including the reports will have to be considered. In other words, if there are other factors and circumstances, which are available before the Assessing Officer which may be gathered by the Assessing Officer by enquiry or investigation, then they will also be considered for determination of amount "as the cost for purpose of depreciation". Thus, we reject the contention that reports of the AVO/DVO are binding on the Assessing Officer when he invoked the Explanation 3 to section 43(1). Further, we also reject the contention of the learned counsel for as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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