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2015 (9) TMI 893 - ITAT PUNE

2015 (9) TMI 893 - ITAT PUNE - TMI - Disallowance on account of depreciation on plant & machinery purchased from the sister concerns - CIT(A) allowed claim - applicability of Explanation 3 to section 43(1) of the Act on the given set of facts - Held that:- The phraseology of the Explanation is plain and simple. It is the “main purpose” and not secondary purpose or some incidental benefits arising from such transaction which can trigger Explanation 3 to S. 43(1). Once the overwhelming commercial .....

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sing 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 .....

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he 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 assessee after affording proper opportunity of hearing to the assessee. Decided in favour of assessee for statistical purposes. - ITA No.712/PN/2010 - Dated:- 31-8-2015 - MS. SUSHM .....

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sessee. The Revenue moved Miscellaneous Application in MA No.123/PN/2013 pursuant to which the Tribunal recalled its earlier order for fresh adjudication on merits, hence this appeal. 3. The Revenue has raised the following grounds of appeal 1. Whether on the facts and circumstances of the case, and in law, the Ld. CIT(A) was justified in deleting the disallowance of ₹ 1,01,09,779/- made by the AO on account of depreciation on plant & machinery purchased from the sister concerns when t .....

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by the provisions of Explanation 3 to Sec 43(1) of the I. T. Act 1961?" 3. "Whether on the facts and circumstances of the case, and in law, the Ld. CIT(A) was justified in deleting the disallowance of ₹ 43,86,417/- made by the AO, on account of payment made by the assessee to its sister concern viz. M/s Kinetic Engg. Ltd. for acquisition of tool room?" 4. "Whether on the facts and circumstances of the case, and in law, the Ld. CIT(A) was justified in deleting the disall .....

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erning 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 & mac .....

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at the Written Down Value (WDV) of the capital goods in the books of the supplier/transferor is NIL for tax purposes. 4.3 The Assessing Officer questioned the transfer of capital goods by the sister concerns after availing the full tax benefits by way of depreciation allowance at substantial considerations as noted above. He observed that in the instant case the primary motive of transfer/sale of capital goods, etc. by the sister concerns to the assessee is to structure the transaction with a vi .....

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ty will arise in their hands, even if extra profits are shown in the relevant years. In the light of aforesaid observations, the Assessing Officer invoked the provisions of Explanation 3 to section 43(1) of the Act. The Assessing Officer observed that the assets purchased from M/s KEL were the assets in respect of which the seller company had been claiming depreciation consequent to which the WDV in their hands had been reduced to Rs.NIL. The Assessing Officer concluded that in view of the provi .....

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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 .....

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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 said report for the purposes of aforesaid transactions. The assessee further contended that while in the case of M/s KEL, the WDV was ₹ 47,58,848/- yet the Assessing Officer has wrongly adopted NIL value without assigning any reasons. The CIT(A) after appreciation of facts and law observed that Explana .....

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s not justified in mechanically adopting the value of the assets as NIL where the machinery and know-how so acquired by the assessee has generated sales to the tune of ₹ 132.93 crores and therefore must have commanded some price in the market. He accordingly deleted the disallowance of depreciation made by the Assessing Officer on this score. 7. The Revenue is in appeal against the aforesaid deletion of disallowance of depreciation as per Ground Nos.1 & 2 of its appeal. 8. Before us, t .....

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er of the Assessing Officer. 9. Per contra, the Ld. Authorized Representative for the assessee observed that the observations of the CIT(A) are clear and self-evident. The parties to the transactions are widely held companies listed on the stock exchanges and are subjected to strict corporate governance. The acquisition of the tool room facilities from these parties was a strict business decision as a measure of backward integration to its existing business. The technical know-how agreement was .....

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t 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. I .....

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uation for the purpose of acquisition of the assets is supported by Valuation Report, which has not been contradicted by the Revenue. He, therefore, pleaded that Explanation 3 is not attracted at all and therefore no interference with the order of the CIT(A) is called for. The Ld. AR relied on the decision of the Tribunal in the case of Chitra Publicity Company (P) Ltd. vs. ACIT reported in (2009) 32 DTR 227 (TM) (Copy in file) and Unimed Technologies Ltd. vs. DCIT reported in (2000) 73 ITD 150 .....

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chnical know-how was to promote the business by way of backward integration of the existing facility, which has resulted in commercial profits. These facts have not been disputed by the Revenue. 11. In order to appreciate the Explanation 3 to section 43(1) of the Act, the relevant clause is reproduced as under 43. In sections 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 cos .....

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to an enhanced cost), the actual cost to the assessee shall be such an amount as the [Assessing] Officer may, with the previous approval of the [Joint Commissioner], 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 c .....

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er 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 after application of mind. Once, it is established that the main purpose was to circumvent the income-tax liability, the Assessing Officer will .....

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roval of the superior authority. 13. We find that firstly, the Assessing Officer could not discharge its onus that the main objective of the transfer of assets was reduction of the tax liability. On the other hand, the Assessee has been able to demonstrate that the objective of such acquisition in question was with a view to augment its business capabilities by way of backward integration of existing facilities. The stand of the Assessee that the impugned assets and technical know-how so acquire .....

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r Explanation 3 to S. 43(1). Once the overwhelming commercial advantage from the transaction is displayed, which is done in the instant case, the other considerations fade into insignificance. Thus, while the assessee has clearly demonstrated its bona-fide, the Revenue could not contradict any averment of the assessee. 14. Secondly, having arrived at the finding that the main purpose is taken advantage from such acquisition, the second obligation cast on the revenue is to determine the fair valu .....

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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 Va .....

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to disallowance of ₹ 43,86,417/- made by the Assessing Officer on account of payment made by the assessee to its sister concern, namely, M/s Kinetic Engineering Ltd. (M/s KEL) for expenses concerning tool room acquired. 17. The relevant facts concerning the issue are that the Assessee by way of revised return, inter-alia, claimed expenditure of ₹ 43,86,417/- on the basis of debit notes raised by M/s KEL after finalization of accounts for the relevant year. The claim of expenditure wa .....

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