TMI Blog2009 (10) TMI 620X X X X Extracts X X X X X X X X Extracts X X X X ..... d that goodwill is an important asset of business which is acquired over a period of time - Merely because goodwill acquired by the firm was not shown as an asset or was shown at slightly less figure and no depreciation was claimed by the firm, its value was taken at nil - In these days of high inflation, value of immovable properties like land and buildings have jumped several fold and there is no comparison between the value/worth of a building and its WDV in books Tribunal in the case of Unimed Technologies Ltd. vs. Dy. CIT (1999 -TMI - 55267 - ITAT AHMEDABAD-A) is also considered relevant as in above case, valuation report furnished by the assessee in support of cost of the assets acquired was accepted by the Tribunal, as AO did not appoint his own valuer nor thought it necessary to examine assessee's valuer - Appeal is dismissed - - - - - Dated:- 26-10-2009 - Member(s) : VIMAL GANDHI., T. K. SHARMA., A. N. PAHUJA. ORDER-T.K. SHARMA, J.M.: These two appeals have been filed by the assessee for the asst. yrs. 2004-05 and 2005-06, directed against the respective orders of the CIT(A)-I, Baroda for these asst. yrs. 2004-05 and 2005-06. These two appeals involving i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o acquire greater acceptability in commercial circles and amongst the multinational clients. (c) The transfer of the entire business of M/s Chitra Publicity Co. to the assessee was done through a memorandum recording transfer of the entire business, which was signed on 1st April, 2003, as per which the running business along with all the assets, rights, obligations and liabilities were transferred for a consideration of Rs. 8 crores. The sale consideration of Rs. 8 crores was discharged by issue of 50 lakhs equity shares of Rs. 10 paid-up value at a premium of Rs. 6 per share. For working out this sale consideration, value of hoardings was taken at Rs. 4,77,96,000 out of the total net value of assets of the partnership firm at Rs. 8,25,01,768. The assessee claimed depreciation on the enhanced value of the assets of the firm, on "trade name" and also on hoarding boards which were not part of the fixed assets, of the firm. (d) During the course of assessment, the AO invoked the provisions of Expln. 3 to s. 43(1) in this case, after being satisfied that the main purpose of the transfer of assets was reduction of liability to income-tax by claiming depreciation with reference to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed valuer. The CIT(A) held that while the memorandum was signed on 1st April, 2003, the registered valuer's report determining the value of hoardings as on 1st April, 2003 was dt. 3rd Oct., 2004. The CIT(A) observed that how could the assessee adopt identical value of the hoardings at the time of signing of memorandum of transfer on 1st April, 2003, when the registered valuer determined this value on 3rd Oct., 2004 is not clear. According to him, there was no way that the assessee or the erstwhile firm could have known the identical value on 1st April, 2003, which the registered valuer determined only on 3rd Oct., 2004. The only reasonable inference could be that the registered valuer's report was got prepared to suit assessee's own requirements. Thus, the CIT(A) held that the transfer of assets was not at arm's length and was mainly to reduce the liability to the income-tax by claiming depreciation with reference to an enhanced cost and is a "colourable device". (h) The CIT(A) also held that the partners of the erstwhile firm themselves became the sole directors of the assessee company and thus the ownership of the business remained effectively in the same hands after its transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the AO may, with the previous approval of the Jt. CIT, determine having regard to all the circumstances of the case." Thus, the crux of the issue which arises for our consideration is that whether the Expln. 3 to s. 43(1) of the Act is attracted to the present case. The Explanation is applicable when assets which were used by any other person for the purpose of business prior to date of acquisition are transferred to another person and the main purpose of such a transfer of such assets is the reduction of tax liability of the other person by enabling him to claim depreciation on the enhanced cost of acquisition. If the AO is satisfied that such circumstances exist, then the actual cost shall be such amount as he may determine. 4. The learned Authorised Representative argued before us that the case of the assessee is covered by a decision of the Gujarat High Court in Ashwin Vanaspati Industries vs. CIT (2002) 174 CTR (Guj) 90 : (2002) 255 ITR 26 (Guj). The facts of this case were as follows: (a) Certain members of Thakkar family entered into a partnership on 28th Oct., 1961, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to transfer. (iv) All the partners who were interested in the firm were interested in the company. (h) The IAC further placed reliance on Expln. 6 to s. 43 of the Act and applying the analogy of the said provision confirmed the view of the ITO that the assessee was entitled to depreciation only on the WDV of the assets and not on the enhanced value as claimed by the assessee. 4.1 Hon'ble Gujarat High Court upheld the claim of the assessee and allowed depreciation on the enhanced value. It held as under: ".........Hence, it is crystal clear that the AO is obliged to record a satisfaction that the assets were transferred for reducing the liability to pay income-tax and for this purpose an appellate authority cannot substitute its opinion to sustain the applicability of the said Expln. 3 only because the assets which are transferred were used by any other person before the date of acquisition. The duty cast upon the AO by the provision is to determine the actual cost and not to substitute a valuer's opinion. At the same time, merely because a document in the nature of contract of purchase is entered into denoting certain price the same would not conclusively establish c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner whatsoever. Once there is a report by the registered valuer it is incumbent upon an authority to dislodge the same by bringing adequate material on record in the form of Departmental valuation report, because in absence of the same a technical expert's opinion (registered valuer's report) cannot be dislodged by any authority by merely ignoring the same. In the present case that is what has happened. Neither the AO nor the Tribunal have even attempted to state that the valuation report and the values put on the assets are incorrect in any manner whatsoever. They have simply ignored the valuation report. The assessee having made a claim for depreciation on enhanced cost, which is actual cost in its hands, it was necessary for the authority who wanted to determine the 'actual cost' (as required by Expln. 3 to s. 43 of the Act) to place some evidence on record. It could not have substituted its opinion and adopted book value or the WDV in hands of the assessee-company. As can be seen from the Expln. 3 to s. 43(1) of the Act, the ITO is required to determine actual cost to the assessee having regard to all the circumstances of the case and if in his opinion the WDV was the actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, the AO has not discharged his obligation because he has not explained why according to him, Expln. 3 is attracted and what are his reasons for recording such a satisfaction. All that he mentioned is that a colourable device has been adopted to reduce the tax liability of the assessee. (b) As in the above case, in the case of the assessee other than a remark to the effect that the Revenue has been defrauded by the transfer of assets, there is no finding to the effect that the enhanced cost was for tax avoidance. (c) As in the above case, in this case also, the assessee has not revalued all its assets but only those assets which were not reflected in its books, i.e., the hoardings. It has retained the actual cost of all other assets. Further, the enhanced cost is confirmed by a valuation report. (d) As in the above case, the valuation report obtained by the assessee is from a registered valuer. Neither the assessment order nor the CIT(A)'s order explains why the valuation report by the registered valuer is incorrect in any manner whatsoever. As held by the Gujarat High Court, once there is a report by the registered valuer it is incumbent upon the authority to dislodge the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book value or the WDV in hands of the assessee. The AO did not determine the actual cost having regard to all the circumstances of the case and did not support the same by placing sufficient evidence so as to dislodge the valuation report of the registered valuer. (f) Thus, on all cases, the above-mentioned decision of the Gujarat High Court is squarely applicable to the facts and circumstances of the assessee. 4.3 The learned Authorised Representative also vehemently argued before us that the decision of the Gujarat High Court in the case of Ashwin Vanaspati is binding in the State of Gujarat since it has territorial jurisdiction in the State of Gujarat as held by the Supreme Court in the case of CIT vs. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC). Further, the decisions of a High Court are binding on all the Tribunals situated within its territorial jurisdiction as held in several cases, such as, Taylor Instrument Co. (India) Ltd. vs. CIT (1999) 153 CTR (Del) 295 : (1998) 232 ITR 771 (Del). Thus, unless a decision of a jurisdictional High Court can be distinguished from the case in question, the Tribunal which falls within that jurisdiction is bound to follow the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transfer is to convey for consideration the rights of the firm in the machinery to the company. The Supreme Court laid down the ratio that in taxing a receipt to income-tax, the authorities while probing the substance of the transaction cannot displace its legal effect. This decision has been reaffirmed by the Supreme Court in its decision in the case of CIT vs. Artex Manufacturing Co. (1997) 141 CTR (SC) 290 : (1997) 227 ITR 260 (SC). (b) Macniven (HM Inspector of Taxes) vs. Westmoreland Investments Ltd. (2002) 255 ITR 612 (HL) In this decision, the House of Lords of England, reiterated the principle that the Courts cannot disregard the legal effect of what was done and give effect to the underlying substance. The House of Lords held that this was a cardinal principle which was upheld by various Courts since the decision in the case of IRC vs. Duke of Westminster (1936) AC 1. If the payments were in law good contractual payments then the Courts are not entitled to disregard their legal effect and treat them as something else. This decision in the case of Macniven was followed by the Supreme Court in the case of Azadi Bachao Andolan. (c) Union of India vs. Azadi Bachao A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, then with the previous approval of the IAC, the ITO could substitute the fair market value for the capital gains computation. The Court held that s. 52(2) can be invoked only where the consideration for the transfer has been understated. Further, the Supreme Court held that the burden of proving such understatement or concealment always lies on the Revenue. Similarly, in this case, the onus of proving the tax avoidance by the assessee in this case, lay on the Revenue, which it has failed to discharge. 5. The learned Departmental Representative, on the other hand, supported the order of the AO and the CIT(A). 6. We have carefully considered the facts and circumstances of the case as well as the rival submissions made before us. We have also gone through the rulings and precedents cited before us on behalf of the assessee. 6.1 We find no merits in the CIT(A)'s observations on the valuation report submitted by the assessee. Although the report is dt. 3rd Oct., 2004, what is essential to note is not the date of the report, but the date as on which it has been prepared and the basis adopted for the valuation. The report states that it is as on 1st April, 2003, i.e., the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approach and should not reach his conclusion merely on his whims and fancies. The onus was on the AO to disprove the contention of the assessee, which onus he has failed to discharge. The Supreme Court in the case of K.P. Varghese while examining an analogous provision has emphasised that the onus is on the Revenue. 6.5 Since we have not been shown any reason why the decision of the Gujarat High Court in the case of Ashwin Vanaspati is not applicable to this case, we are inclined to follow this decision. 6.6 In the light of above discussion, the assessee's appeals for asst. yr. 2004-05 and for asst. yr. 2005-06 are allowed regarding its claim for depreciation. Accordingly, the depreciation claim of the assessee for asst. yr. 2004-05 of Rs. 1,97,16,739 and the claim for asst. yr. 2005-06 of Rs. 1,47,81,753 should be allowed. 7. The next issue relates to charging of interest under ss. 234B and 234C of the Act, which is consequential and therefore, it needs no specific adjudication. 8. The next issue relates to initiation of penalty under s. 271(1)(c) of the Act. This ground is dismissed as not entertainable as there is no provision for filing appeal against initiation of pen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in their computation of depreciation as reproduced on p. 2 of the assessment order had shown WDV of various assets as on 1st April, 2003 as nil while showing addition of Rs. 4,77,96,000 as on 1st April, 2003 on account of hoardings under the head plant and machinery. In the light of these facts, the AO show caused the assessee as to why closing WDV of various assets for the financial year 2002-03 in the case of the firm be not adopted as the opening WDV of various assets in the company since the main purpose of transfer of assets at enhanced value was nothing but reduction in liability of income-tax by claiming depreciation on enhanced cost. In response, the assessee submitted that the company acquired all the assets and liabilities of the erstwhile firm i.e., it was a case of succession of business with all the assets and liabilities. The assets were acquired at the prevailing fair market value, the partnership firm having obtained valuation report from the registered valuers. The insurance policy taken by the assessee company in October, 2004 reflected value of hoardings at Rs. 5.20 crores. It was also pointed out that WDV of the predecessor cannot be taken as actual cost since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncern basis covered by provisions of s. 47(xiii) of the Act. In view of the foregoing, the AO concluded that the assessee adopted a colourable device to reduce its income-tax liability by claiming higher depreciation with reference to enhanced cost of assets. The company created and valued an asset which was claimed entirely as revenue expenditure by the firm. Accordingly, having recourse to Expln. 3 to s. 43(1) of the Act and relying upon the decision in the case of McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), the AO adopted WDV of assets of the company as on 1st April, 2003 same as in the case of firm as on 31st March, 2003, ignoring the arbitrarily valuation made by the assessee and the firm during the financial year 2002-03 Therefore, claim of depreciation was restricted to Rs. 14,11,910 as against claim of Rs. 2,11,28,649 made by the assessee in the asst. yr. 2004-05. Similarly in the asst. yr. 2005-06, claim of depreciation was restricted to Rs. 15,77,576 as against claim of Rs. 1,63,59,329 made by the assessee. 3. On appeal, the learned CIT(A) in his order for the asst. yr. 2004-05 concluded that: "I have considered the rival submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view that the main purpose of transfer of assets was to reduce the liability to income-tax by claiming higher depreciation. The appellant has argued that the transfer of asset was purely a commercial transaction and the reduction of tax liability was incidental to such transaction and therefore it could not be said that the reduction of tax liability was the main purpose of transfer. The appellant has explained as to how in the changing economic scenario it took a pure commercial decision to bring into existence a corporate entity for greater acceptability, reliability and transparency. It has shown how the total turnover in the hands of firm at Rs. 8.17 crores for the year ending 31st March, 2003 increased to Rs. 11.20 crores, Rs. 13.35 crores and Rs. 13.87 crores progressively in three years in the hands of the company. The appellant has taken pains to point out that it has not adopted the enhanced value of the asset but fair market value of these assets as backed by the valuation report from the registered valuer. In short, the appellant has denied that behind the transfer of assets, the main purpose was reduction of tax liability by way of higher depreciation claim. It has th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be determined with reference to the attendant material. In this behalf, the Madras High Court had observed in the case of CIT vs. Harveys Ltd. (1940) 8 ITR 307 (Mad) that the mere production of documentary evidence showing that a contract was made for purchase of assets at a certain price does not conclusively establish the correctness of claim made by the assessee particularly where the AO is of the opinion that the deal was a colourable device to avoid tax. Under such circumstances the Andhra Pradesh High Court in the case of Kungundi Industrial Works (P) Ltd. vs. CIT (1965) 57 ITR 540 (AP) and the Calcutta High Court in the case of CIT vs. Jogta Coal Co. Ltd. (1965) 55 ITR 89 (Cal) and the Supreme Court in the case of Guzdar Kajora Coal Mines Ltd. vs. CIT (1972) 1972 CTR (SC) (SC) 281 : (1972) 85 ITR 599 (SC) have upheld the action of the AO in going behind the contract and ascertain the actual cost for the purposes of correct ascertainment of income-tax liability. It is further observed that Expln. 3 does not speak of determination of market value of such assets by the AO. The AO is required to determine the actual cost for the said purpose. It is particularly noted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, he took the view that Expln. 3 to s. 43(1) should be adopted. Accordingly the AO disallowed the claim for depreciation on Rs. 1,97,16,739 in the asst. yr. 2004-05. Likewise depreciation of Rs. 1,47,81,753 was disallowed in the asst. yr. 2005-06. The said Expln. 3 to s. 43(1) reads as follows: "43. Definitions of certain terms relevant to income from profits and gains of business or profession.-In ss. 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 AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such amount as the AO may, with the previous approval o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income-tax by claiming depreciation with reference to enhanced cost and the first proviso to s. 10(5)(a) would apply. The ITO had power to determine the actual cost of the assets with the previous approval of the IAC." 5.3 In the case under consideration, as is evident from the memorandum executed on 1st April, 2003, recording the transfer of entire business, the firm M/s Chitra Publicity Co. decided to sell their business as a going concern and the board of directors of the company in their meeting held on 25th March, 2003 discussed the feasibility of taking over the business as a going concern along with all the assets and liabilities as on 31st March, 2003 as per Sch. 1 attached to the memorandum. The said Sch. 1, has not been placed before us nor the details of liabilities taken over by the assessee company. It is further mentioned in the aforesaid memorandum that the assessee agreed to takeover all the liabilities whether or not recorded in the books i.e., all the assets and liabilities as on 1st April, 2003 and incurred before the date of sale. The relevant clauses on p. 4 of the said memorandum read as under: "Whereas the assignor has transferred to the assignee and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of Rs. 10 per share at a premium of Rs. 6 per share to the assessee company. Though the memorandum specifies the Sch. 1 mentioning goodwill/trade-marks, trade names, know-how and all the assets, rights, obligation and liabilities in India, the said schedule or the basis of amount of Rs. 8 crores or even the basis of valuation of offices and trade-mark, have not been placed before us. The said memorandum was signed by Shri Bakulesh Mehta and Shri Atul Mehta both on behalf of the firm as well as the company. As is apparent from the memorandum and facts narrated before us, the partners of the firm constituted themselves into a private limited company. The shareholders of the company were the old partners. Only after the purchase of the business of the firm, the company ascertained the fair market value of the hoardings received from the firm at Rs. 4,77,96,000 as on 1st April, 2003 as per report dt. 3rd Oct., 2004 of the approved valuer while their WDV in the hands of the firm was nil, the entire expenditure having been claimed as revenue expenditure. The firm considered the prospects and advisability of continuing to carry on business and for various unspecified reasons for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her reasons also but the main purpose should be the reduction of liability to income-tax directly or indirectly by claiming depreciation on enhanced value. Before us, the learned Authorised Representative on behalf of the assessee vehemently argued that main purpose of transfer of assets was commercial and not reduction in tax liability and further stated that on purchase of assets by the company, turnover had increased substantially. The reasons for increase in turnover may be manifold and neither the assessee placed any material before the lower authorities for ascertaining the reasons for increase in turnover nor the lower authorities have gone into this aspect. Even before us, no such material has been placed. The corporatisation of the firm may also be a reason, as contended by the learned Authorised Representative but the facts in the case under consideration relating to claim of depreciation on the enhanced value of hoardings, which did not even appear in the balance sheet of the firm or in the memorandum of transfer, point out that main purpose was nothing but reduction in tax liability. It is not understood as to when the aforesaid two persons while being partners in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------- Deposits (asset) (") 86,26,182.57 --------------------------------------------------------------- Bank a/c (") 11,11,477.01 --------------------------------------------------------------- Sundry debtors(") 3,87,53,168.49 --------------------------------------------------------------- Loans and advances (assets) (") 1,05,13,270.09 --------------------------------------------------------------- Net liabilities (") 6,24,38,345.70 --------------------------------------------------------------- Cash (") 82,800.08 --------------------------------------------------------------- Chitra Publicity Co. (P) Ltd. (as per narration of firm) 8,00,00,000.00 --------------------------------------------------------------- Cr. Bakuleshbhai K. Mehta Atulbhai K. Mehta (") 4,52,94,231.46 --------------------------------------------------------------- Total 14,24,38,345.70 14,24,38,345.70 --------------------------------------------------------------- There is no menti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Rs. 8 crores nor Sch. 1 referred to in the memorandum has been placed before us. Why would a company pay Rs. 4,77,96,000 (determined only on 3rd Oct., 2004) for hoardings whose cost is nil in the balance sheet of the firm as on 31st March, 2003 the entire expenditure having already been claimed as revenue expenditure. There is no apparent reason except to claim depreciation on such hoardings and to reduce their tax liability. 5.5 Ginners Pressers (P) Ltd. vs. CIT 1978 CTR (Bom) 235 : (1978) 113 ITR 616 (Bom), was a case where s. 10(5)(a) of the 1922 Act corresponding to Expln. 3 to s. 43(1) of the present Act came up for discussion. The facts of that case narrated hereunder are more or less similar to the facts on hand. The assessee, a private limited company, was a subsidiary of another private limited company. The object of formation of the assessee company was to takeover some oil and ginning mills, factories and land belonging to and used in its business by the parent company. These assets were taken over by the assessee company at a cost of Rs. 13,50,000. Their WDV for the parent company was only Rs. 2,21,412 while their original purchase cost to the parent company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the actual cost of the transferred assets with the approval of the IAC it will be difficult to say that the method adopted was unreasonable or irrational." 5.6 It is well-settled position that the Courts/ITOs are entitled to lift the veil of the corporate entity and pay regard to the realities. They have power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation, [Firestone Tyre Rubber Co. Ltd. vs. Lewellin (Inspector of Taxes) (1958) 33 ITR 741 (HL) : (1957) 1 WLR 464 (HL)]. In CIT vs. Sri Meenakshi Mills Ltd. (1967) 63 ITR 609 (SC), the Hon'ble Supreme Court said that the IT authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction, it further said: "It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard the economic realities behind the legal facade." 5.6.1 In CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween a "running business" and a "running concern". A business in its sweep takes in all the assets, liabilities, various outstandings by way of debts incurred and debts due. In the 'case of the assessee; the entire business is split up into the assets and liabilities and on dissolution the assessee company takes over only assets leaving the liabilities to be discharged by the erstwhile partners, viz., other than the assessee-company. Thus, payment in question is only for acquisition of the assets. ------------------------------------------------------------------- (iv) Hon'ble High Court (iv) No such valuation of hoardings observed that: was done before or at the time of "we do not have any finding sale of various assets. In this recorded by any authority to case, a clear finding has been the effect that the main recorded by the AO and the CIT(A) purpose of the transfer was that the main purpose of the for claiming depreciation at transfer was for claiming an enhanced cost. There is depreciation at an enhanced cost. no finding to the effect that There is nothing to suggest that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was also in respect of towards acquisition of various goodwill, tenancy rights, assets mentioned in the etc. In short, the Tribunal memorandum. Even the details considered that the entire referred to in para 5.4 above do transaction and payment was not include the hoardings. for acquisition of the running concern of the erstwhile firm. ------------------------------------------------------------------- (vii) Considering the matter (vii) In the case under from another angle, the ITO consideration, the AO and the has merely stated that the learned CIT(A) concluded that the dissolution was a method main purpose of transfer of such adopted to defraud the assets was for claiming Revenue but nowhere is it depreciation with reference to stated that the main purpose enhanced cost. of transfer of such assets was for claiming depreciation with reference to enhanced cost. ------------------------------------------------------------------- In the light of aforesaid distinguishing features and due regards to the decision of Hon'ble jurisdictional High Court. I am of the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust cut the dead wood and trim off the side branches else you will find yourself lost in thickets and branches. My plea is to keep the path to justice clear of obstructions which could impede it'." 6.3 In the light of aforesaid observations of the Hon'ble apex Court, I am of the view that reliance on the aforesaid decisions in the case of Ashwin Vanaspati Industries, Sekar Offset Press and Unimed Technologies Ltd., rendered on a different set of facts, is totally misplaced. 7. In view of the foregoing, it cannot be said that the AO or the learned CIT(A) have acted unreasonably or arbitrarily in adopting Expln. 3 to s. 43(1) of the Act and denying the depreciation on the hoardings valued by the assessee accordingly. Therefore, grounds raised by the assessee in respect of their claim for depreciation on hoardings in these two assessment years, are dismissed. 8. As regards claim of depreciation on trade name valued by the firm at Rs. 3 crores. AO found that even though firm valued the trade name at Rs. 3 crores, it did not claim depreciation. There is nothing in the impugned orders suggesting the basis for valuation of trade name by the firm nor the assessee placed before us the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts or basis of valuation by the firm have been placed before us in my view, the order of the learned CIT(A) speaking order on this issue. In the absence of specific findings by the learned CIT(A) on the claim for depreciation on enhanced value of buildings at Rajkot and Surat and in the absence of basis of valuation of the said buildings, especially when the assessee did not place relevant Sch. 1 to the memorandum before us. I consider it fair and proper to restore the matter to the file of the learned CIT(A) with the directions to readjudicate the claim of depreciation on the enhanced value of the aforesaid buildings, in accordance with law after allowing sufficient opportunity to the both parties and keeping in view my aforesaid observations. 10. Subject to aforesaid directions in relation to claim of depreciation on the amount attributed to trade-mark and enhanced value of the buildings, grounds relating to claim of depreciation on the hoardings valued by the assessee, are dismissed. 11. In the result, both these appeals are partly allowed for statistical purposes. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 3rd Aug., 2009 As there is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo partners namely Shri Atul K. Mehta and Shri Bakuleshbhai K. Mehta, having equal shares, was carrying on advertisement business for several decades. Above running business was taken over by the assessee company w.e.f. 1st April, 2003 as per memorandum of even date for a total consideration of Rs. 8 crores. Two erstwhile partners became sole shareholders of the assessee company. As per the assessee, out of the consideration, the assessee paid specified sums for the following assets: (1) Goodwill and business name : Rs. 3,00,00,000 (2) Hoardings : Rs. 4,77,96,000 (3) Building (a) Rajkot office : Rs. 33,99,317 (b) Surat office : Rs. 10,95,462 3.1 In its return, assessee claimed depreciation on various assets including 3 assets with value (cost) referred to above. Total depreciation was claimed at Rs. 1,97,16,739 for the asst. yr. 2004-05 in the first year of assessment of the assessee company. The AO held that the depreciation was claimed on enhanced cost of above assets and therefore, in the light of provisions of Expln. 3 to s. 43(1) of the Act, which he invoked, actual cost of two assets in the hands of the assessee was taken at 'nil'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislative policies are incorporated in different sections of the IT Act and unless there is explicit or clearly implied intent, policy of one section is not to be read or applied in the other section. For example as per the policy, provisions of capital gains are attracted on "transfer" of a capital asset. However, under s. 47(xiii) of the Act, change of ownership of capital asset is not treated as 'transfer' for purposes of capital gain. But it cannot follow that for all other provisions of the Act, such change of ownership is to be ignored by reading s. 47 (xiii) in those sections. Legislative intent, purpose, language of each section is to be kept in mind while considering its applicability. Again under Expln. 2 to s. 43(6)(c) of the Act, in case of transfer of assets on amalgamation of companies, the WDV of the transferred assets is to be carried forward and depreciation is to be allowed on such WDV and not on cost. However, application of above provision is to be restricted to the cases stated in the provision. General and unauthorized application of above provision is not permissible. Likewise purpose of Expln. 3 to s. 43(1) is clear from its plain language and there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been rightly recorded. It was also highlighted by Shri Gehlot, during the course of the hearing. Shri Soparkar, the learned senior counsel for the assessee, on the other hand, contended that apart from getting higher depreciation, the takeover of the business by the corporate body was a measure of commercial expediency. It was argued that in the light of globalization and industrialization, many foreign concerns were approaching Indian concerns to have a joint venture. These foreign concerns were not prepared to have any business or joint venture with a firm. Only a corporate body could have a foreign collaboration. He referred to Circular No. 772, dt. 23rd Dec., 1998 [(1999) 151 CTR (St) 9] of CBDT wherein incorporation of limited companies has been encouraged by the Government. He also drew my attention to an offer from News Outdoor Group dt. 28th July, 2006, a foreign company interested in acquiring majority interest in the assessee company. It was accordingly contended that AO, in the present case, could not record his satisfaction or hold that the main purpose of transfer of assets in question was reduction of liability to income-tax. Benefit of higher depreciation was only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove was disallowed. 10.2 The reason for disallowance of depreciation and-justification for the substitution of nil cost or the WDV of assets as actual cost in the orders of Revenue authorities and in the proposed order of learned AM as also in the submissions of the learned Departmental Representative, may be summarized as under: (a) AO's reasonings as summaried by the learned AM in his proposed order are as under: "(i) before revaluation/valuation, the firm was having assets of Rs. 47.04 lacs as on 1st April, 2002 which on revaluation became Rs. 3.80 crores as on 31st March, 2003 and after the acquisition by the company these assets were valued at Rs. 9 crores including hoardings of Rs. 4.77 crores, which were valued by the assessee company and not the firm. (ii) Though the firm is in business for a considerable number of years, it was only in the year prior to acquisition by the assessee company that certain assets were revalued arbitrarily and shown as addition to block of assets and the revalued amount was not actual cost to the firm. (iii) hoarding boards never appeared in the schedule of fixed assets of the assessee firm nor these were treated as assets by the firm. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name during the asst. yr. 2003-04. The assessee company had claimed depreciation @ 25 per cent taking opening WDV at Rs. 3 crores including the value of trademark. As per AO, no depreciation under s. 32 is permissible on trade name or goodwill. The trade name was an appreciable asset whereas assessee has claimed depreciation in respect of the trade name. (f) Under proviso (c) to s. 47(xiii), the partner of firm does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company. However, assessee company has arbitrarily valued and revalued assets. The firm has not been taxed in view of s. 47(xiii) while assessee has claimed depreciation with reference to arbitrarily enhanced cost of assets. (g) The closing WDV of the erstwhile firm is taken as actual cost, in place of arbitrary valuation/revaluation fixed by the erstwhile partnership firm during the financial year 2002-03 and the assessee were ignored. (h) The claim of depreciation on such revalued asset by the firm was also against actual cost concept. The trade name and goodwill are like land and are not appreciable assets; that is why no depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC), the learned AM quotes that "AO is entitled to penetrate the veil covering it and ascertain the true value". The transaction of transfer is genuine or sham is required to be examined. (m) The assessee has not placed before the Tribunal Sch. 1 to the memorandum dt. 1st April, 2003 nor the details of liabilities taken over have been furnished. However, in the memorandum, it is stated that all the assets and liabilities as on 1st April, 2003 are agreed to be taken over. (n) The assessee appellant has not furnished basis of amount of Rs. 8 crores or even the basis of valuation of offices and trade-mark before the Tribunal. (o) Only after the purchase of business of the firm as a going concern, the company ascertained the fair market value of the hoardings received from the firm at Rs. 4,77,96,000 as on 1st April, 2003 as per report dt. 3rd Oct., 2004 of the approved valuer, while their WDV in the hands of the firm was nil. The entire expenditure having been claimed as revenue expenditure. (p) Besides reduction of liability to income-tax by claiming that depreciation on enhanced cost, there may be other reasons also but main purpose wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the facts as in that case, liabilities of business were not taken over by the company. Contextual interpretation is required to be applied. In respect of depreciation on buildings at Rajkot and Surat. The learned Departmental Representative placed reliance on the order of AO/CIT(A) to justify adoption of WDV claimed as a correct method. It was argued that in the case of Ashwin Vanaspati Industries, it has been held that Expln. 3 to s. 43(1) does not require determination of market value by the AO but actual cost. 11.2 In the valuation report, the registered valuer determined market value and not actual cost. Therefore, report of the registered valuer could not be relied upon. 12. Before adverting to application of Expln. 3 to s. 43(1) and above mentioned circumstances, I may refer to case law referred to in the impugned orders of the Revenue authorities and considered by the learned AM. These are as under: 12.1 in the case of Guzdar Kajora Coal Mines Ltd. vs. CIT 1972 CTR (SC) 231 : (1972) 85 ITR 599 (SC), their Lordships of Supreme Court on a similar provision under old Act of 1922 held as under: "The original cost to the assessee of a particular asset is a question o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment as per balance sheet of the vendor-company, Rs. 2,48,323, (c) stores and stock Rs. 60,744; and worked out the value of other depreciable assets at Rs. 33,973. The Tribunal rejected the assessee's claim holding, inter alia, that the allocation in the deed of conveyance was arbitrary. On a reference of the question whether the ITO was competent to go beyond the conveyance and fix a valuation of the assets on his own, the High Court answered the question in the affirmative. On appeal to the Supreme Court: Held, on the facts, that there was no error or infirmity that would justify interference by the Supreme Court." 13. In the case of Ginners Pressers (P) Ltd. vs. CIT 1978 CTR (Bom) 235 : (1978) 113 ITR 616 (Bom), assets of the firm were taken over at cost of Rs. 13,50,000 while their WDV in the hands of the parent company was only Rs. 2,21,412 while original purchase cost to the parent company was Rs. 5,52,475. The AO after applying proviso to s. 10(5)(a) and with the previous approval of the IAC, took the actual cost to the assessee at their WDV plus the balancing charges arising under s. 10(2)(vii). 13.1 It is to be noted that in cited case, WDV was not taken as "actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... option of value of "goodwill" as under: "We do not think that there is any doubt on the wordings of the section or on the interpretation that has been put upon those words that the cost to be calculated for the purpose of depreciation allowance is the cost to the assessee and not to the person who makes the sale but still the question remains whether the Tribunal has the jurisdiction to hold that what the appellant has actually paid as the price of a particular asset is not its real price and the price paid includes the price of some other asset which must have been purchased." 13.4 Their Lordships of Supreme Court ultimately held as under: "Whether the law applicable should be as laid down in the English cases or in the cases decided by the Lahore High Court it is not necessary to decide because we think that the following two questions of law arise out of the order of the Tribunal and a reference should have been made to the High Court. These two questions were sought to be raised by the appellant under s. 66(1) of the Act and again before the High Court under s. 66(2) of the Act: '(1) Whether on the interpretation of the sale deed it can be said that any goodwill was pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery were very much inflated by the applicant. The ITO further held that in the allocation, the assessee company had entirely lost sight of the question of goodwill. He thereupon valued the goodwill by resorting to the method of taking the average profit of three to five years and made an estimate of goodwill at Rs. 7,50,000. Thereafter he allocated the balance sum of Rs. 15,50,000 as follows: (i) Land, inclusive of shafts and inclines - 10,00,000 (ii) Buildings - 2,00,000 (iii) Plant and machinery - 3,50,000 The applicant went in appeal to the AAC, who also accepted the estimate made by the ITO and dismissed the appeal. The matter was then taken up to the Tribunal, and in its order the Tribunal revised the estimated values on the assets which were taken over by the assessee. The cost price of the various assets, it held in the circumstances, has necessarily to be estimated with reference to the prevailing market conditions. The estimates were as under: (a) Land and buildings - 9,20,000 (b) Shafts and inclines - 80,000 (c) Buildings - 3,00,000 (d) Plant and machinery - 6,00,000 (e) Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ......... As observed in CIT vs. Harveys Ltd., the original cost of any particular asset is entirely a question of fact, and like any other question of fact depends upon the evidence produced to prove it." 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 (i) 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 upon the circumstances of the case. However, application of principles for the determination of actual cost is a question of law. The actual cost normally means real cost, the real worth of the assets acquired by the assessee. Depending upon the facts of the case, it might be WDV in the hands of the transferor but ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 any basis. Reliance, as noted above, has been placed on proviso (c) to s. 47(xiii), s. 32(1) and s. 43(6) of the IT Act. 17. After careful consideration of above provisions and facts and circumstances of the case, I am unable to accept the stand of the Revenue. As noted above actual cost should ordinarily mean real cost or real worth of assets. If it is not market value, then what is it? Mechanism to take WDV as pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cannot be read in the Expln. 3. 17.2 The plain language of the provision [Expln. 3 to s. 43(1)] leaves no amount of doubt that it is AO who has to record satisfaction relating to main purpose of the transaction to the assessee (reduction of liability to income-tax). It is AO who has to determine "actual cost" of assets having regard to all the circumstances of the case and with the previous approval of the Jt. CIT. It should, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual 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 Rs. 4,77,96,000 and of goodwill at Rs. 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 rejected the report of valuation of hoardings as on 1st April, 2003 as the report was dt. 3rd Oct., 2004 and held it to be got prepared to suit the assessee's requirement. The learned AM in his proposed order, took a similar view and cast burden on the assessee with a general observation that assessee did not lead any supporting evidence to justify the cost claimed. The learned AM's views on the production of documents are factually incorrect. The learned JM in his prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77,96,000 and the same was actual cost of assets to the assessee. Is (Rs. 4,77,96,000) this actual cost to the assessee? There is no basis before us for fixing the consideration of Rs. 8 crores nor Sch. 1 referred in the memorandum has been placed before us. 20. It is evident from above that burden of proof was placed on the assessee whereas it should have been otherwise as discussed above. This placing of the wrong burden sometimes vitiate the entire order. I am further of the opinion that AM was not justified in drawing any adverse inference against the assessee or for copy of Sch. 1 to the memorandum not being part of Tribunal record. If learned AM was interested, he could have asked the assessee to furnish the copy. His observations that there is nothing on record to show that assessee paid Rs. 4,77,96,000 for hoardings do not appear to be correct. It is clear from the perusal of order of the AO and that of CIT(A) that Revenue authorities at no stage doubted correctness of consideration of Rs. 8 crores through the allotment of shares, nor did they question value shown on any of the three assets in dispute. In fact Revenue authorities fully accepted the figure of cost of 3 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Copy of valuation report is available at pp. 89 to 123 of the paper book. The situation and size of each hoarding is given in the said report. The rate applied for value of each hoarding is also given. Whether hoarding is fixed on ground or on a terrace is also mentioned. It was for the AO to see above details and then reach a conclusion on the facts and in the circumstances of the case whether such detail was reliable to what extent to determine the "actual cost". No exercise on above lines was undertaken by the AO. The registered valuer in its report has also given further basis of valuation by taking into account cost of labour, board, colour, RCC footing and miscellaneous expenses. Average working of cost of hoarding is also provided. All the above details could be examined and then rejected or accepted as warranted by the facts of the case. One wonders how cost of 2,100 hoardings purchased by the assessee can be nil. It has been taken at nil because it was not an asset with the erstwhile firm. In my considered opinion, there is no nexus between material on record and the conclusion of nil cost drawn in this case. One could have understood if it was held that hoarding had alre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down by the Supreme Court in the case of Jogta Coal Co. Ltd. vs. CIT. In the said case, it was held that having accepted the total cost for the transfer and where the actual cost of assets determined is less than the stated sale consideration, the differences would be taken towards goodwill of the business. Here the parties under agreement themselves determined the value of goodwill and stated the same in the memorandum of transfer which is further supported by an expert opinion. The AO, without considering relevant facts and circumstances of the case and for erroneous reasons, took actual cost of goodwill at nil. In my considered opinion, no basis whatsoever has been given for taking value of goodwill/trade name at nil. No fault has been found in the valuation report given in this case and, therefore, the same could not be rejected. Above aspects have not been noted by the learned AM in his proposed order. 24. Even in the case of buildings at Rajkot and Surat, actual cost of these buildings has been taken at the WDV found in the hands of the firm. In these days of high inflation, value of immovable properties like land and buildings have jumped several fold and there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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