TMI Blog2015 (9) TMI 893X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets by the Valuation Report of the Registered Valuer and in absence of onus being discharged by the Assessing Officer, the applicability of Explanation 3 to section 43(1) of the Act by the Assessing Officer is not justifiable in the facts of the case. The assessee is entitled to claim of depreciation on the acquisition of assets and technical know-how, we uphold the order of the CIT(A). - Decided in favour of assessee. disallowance of expenses concerning tool room acquired made to its sister concern - Held that:- Considering Revenue submission that it is not clear as to why the expenses were not claimed in the original return and claimed only by way of revised return and whether these debit notes were available before the Assessing Officer for necessary enquiry or not and assessee submission that the debit notes are dated 30th September, 2005 i.e. after the finalization of account pertaining to the relevant assessment year and therefore the claim has been made by way of filing the revised return to take cognizance of the legitimate expenses incurred by M/s KEL on behalf of the assessee we remit the issue back to the file of the Assessing Officer to decide the claim of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be vacated and that of the AO be restored. 6. The appellant craves leave to add, amend or alter any of the above grounds of appeal. 4. The grounds of appeal No.1 2 relates to question of applicability of Explanation 3 to section 43(1) of the Act on the given set of facts. The relevant facts concerning the issue are as follows. 4.1 During the relevant year, the assessee has purchased plant machinery for its tool room division from sister concerns, namely, M/s Kinetic Engineering Ltd. (M/s KEL) and M/s Kinetic Motor Ltd. (M/s KML) for an aggregate consideration of ₹ 9,34,68,813/-. Moreover, the assessee has also acquired technical know-how for its aforesaid tool room division from M/s KEL for a consideration of ₹ 1,10,20,000/-. The details of purchase of plant machinery and acquisition of technical know-how are as under :- Sr.No. Name of the entity Nature of transaction Amount (Rs.) 1 M/s Kinetic Engg. Ltd Purchase of capital goods 7,78,35,813/- 2 Kinetic Motor Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of ₹ 13,23,750/- on the technical know-how was also disallowed and added back to the total income of the assessee. 5. Aggrieved by the order of the Assessing Officer, the assessee preferred appeal before the CIT(A). 6. Before the CIT(A), the assessee submitted that in response to rapidly expanding automotive market and also considering global requirements, the assessee decided to venture into manufacture of moulds, dies and tools as a backward integration to its capital machine building activity and to position itself as a total solution provider. It was further submitted by the assessee that Greenfield project would have taken a much longer time and therefore, it was decided that the existing ready facilities of M/s KEL be purchased by the assessee. Further, since it was a new line of activity, the assessee parallely entered into a technical know-how agreement whereby drawings designs of moulds dies, testing procedures quality control specifications were made available to the assessee to execute the order in hand. It was also contended by the assessee that the company has obtained Valuation Report from an approved valuer and has adopted the prices as per the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uality control specifications to facilitate the assessee to execute the order. The Ld. Authorized Representative for the assessee further observed that the sales of the tool room division for the financial year 2004-05 amounting to ₹ 132.39 lakhs which increased upto ₹ 540.58 lakhs for the financial year 2006-07, the profits derived from which has been duly subjected to tax. Therefore, it cannot be the case of the Revenue that the transaction of the impugned acquisition of capital goods and know-how are non-existent and sham. He finally contended that Explanation 3 to section 43(1) of the Act is not applicable to the facts of the case at all. He observed that aforesaid Explanation 3 is triggered only in cases where two conditions exists. Firstly, the main purpose of transfer of such assets was reduction of tax liability by claiming depreciation with reference to enhance cost. In the instant case, the main purpose is clearly demonstrated to be on account of commercially expediency i.e. backward integration of the existing plan, which has resulted in substantial commercial advantage to the assessee. Secondly, the Explanation only enables the Assessing Officer to ignore th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ], determine having regard to all the circumstances of the case. 12. From a bare reading it is evident that the impugned Explanation has three ingredients (i) the assets acquired should be second hand asset; (ii) the main purpose of transaction should be to reduce the tax liability by claiming depreciation with reference to enhanced costs; and, (iii) the Assessing Officer may displace the actual cost of the Assessee and determine for himself the adjusted actual cost in the event of second eventuality. Hence, the Assessing Officer is entitled to determine the actual cost of the assets acquired at arm's length value or real value or worth of the assets notwithstanding the amount paid by the assessee for the acquisition of impugned assets. Nonetheless, the Assessing Officer is to be satisfied that main purpose of the transfer of such assets was the reduction of liability to income tax by claiming depreciation with reference to enhanced cost. The Burden to determine the replaced or adjusted actual cost in accordance with law is on the Assessing Officer and not on the assessee. The Assessing Officer has to show that he has gathered relevant material and determine actual cost a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowable on the actual cost as determined by the Assessing Officer. The learned Assessing Officer has adopted NIL value of the cost of acquisition and denied the depreciation completely only on the premise that depreciation has been already availed by the previous owner. This action is totally contrary to the plain language of the Explanation and is thus vitiated in law. There is no material in possession of the Assessing Officer to enable him to displace the cost of acquisition declared by the Assessee. Further, the WDV of assets in the case of M/s KEL was ₹ 47,58,848/-, which was taken at NIL by Assessing Officer. There is no rationale for such action. The Assessee on the other hand has supported the valuation of the assets by the Valuation Report of the Registered Valuer and in absence of onus being discharged by the Assessing Officer, the applicability of Explanation 3 to section 43(1) of the Act by the Assessing Officer is not justifiable in the facts of the case. The assessee is entitled to claim of depreciation on the acquisition of assets and technical know-how, we uphold the order of the CIT(A). 15. In the result, the Ground Nos.1 and 2 of the Revenue s appeal ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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