TMI Blog2016 (1) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee claimed foreign and travelling expenses of ₹ 20,33,758/-. The Assessing Officer has noted that during the assessment proceedings, the assessee could not furnish bills and vouchers in respect of boarding and lodging expenses aggregating to ₹ 6,32,295/- and as such, disallowed 50% of the expenditure and computed the disallowance at ₹ 3,66,148/-. It is thus apparent that Assessing Officer has not disputed the genuineness of the expenditure on an individual specific level. The travelling expenses have also been allowed in entirety other than above disallowance of boarding and lodging disallowance in an adhoc manner on the ground that supporting explanation were not furnished. We do not find merit in such a manner and the method of the disallowance. The Assessing Officer neither having identified, highlighted the specific items in respect of which, disallowance has been made by him, the adhoc disallowance so made is deleted - Decided in favour of assessee - ITA No.134/Del./2009, ITA No.1319/Del./2011, ITA No.5656/Del./2010, ITA No.316/Del./2013 - - - Dated:- 16-10-2015 - SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER For The Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 6 That the learned CIT(A) was not justified in upholding the disallowance of 50% of boarding and lodging expenses in respect of foreign travelling 3. Ground Nos.1 to 4 in all the appeals and Ground No. 5 in ITA No. 134/D/2009 are common. Apropos these grounds, brief facts relating to these grounds are as follows: 4. The assessee company is engaged in the business of manufacturing of electronic components. The return of income was filed on 28.10.2005 declaring an income of ₹ 7,04,54,286/- which was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter the Act ) on 30.10.2006 at the returned income filed by the assessee. The case was selected under scrutiny and statutory notice u/s 143(2) dated 2.8.2006 was issued to the assessee, fixing the hearing on 17.8.2006. In response to the notice, the Authorised Representative appeared before the AO. The AO directed the assessee to furnish item-wise listing of additions to fixed assets in each block giving date of acquisition and date put to use with proof of acquision/delivery and use in respect of additions to assets for value exceeding ₹ 5,00,000/- and vide letter dated 14.9.2007, the assessee submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the Act as on 1.4.2004. 4.2 According to the AO, in the light of the Explanation 3 of section 43(1) defining the actual cost for the purpose of bloc of assets, he observed that it was, therefore, necessary to look into whether the main purpose of the transfer of assets directly or indirectly to the assessee was for the reduction of liability to Income tax (by claiming depreciation with reference to an enhanced cost) or not. The AO revealed that the said company had shown net current loss of ₹ 3,39,17,585/- and it had brought forward deprecation of ₹ 4,65,36,201/-. However, the AO further observed that by way of increasing the sale consideration of transfer of assets to any limits, there was not going to be any tax incidence on M/s Deltron Ltd. as any short term capital gain would get absorbed in the current s well as brought forward losses and deprecation. The AO further observed that M/s Deltron Ltd. had evidently shown short term capital gain of ₹ 2,16,17,776/- on transfer of land, building and plant and machinery to the assessee company, which had been totally observed in the business losses and return with total income of Nil had been filed by M/s Deltr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding excess claim in subsequent years for full years. 4.3 The AO observed that it was clear from the aforesaid table that the assessee had used this device to inflate the cost of building from as low as ₹ 7,098/- (WDV) to ₹ 66,00,000/- being the cost as per the agreement with the company to show cause as to why not the depreciation be computed taking WDV as on 31.3.2004 in the case of M/s Deltron Ltd. instead of inflated purchase consideration at which cost had been shown in the books and the attention was invited to the provision of Explanation 3 of section 43(1). In reply the assessee relied on the valuation report of the building and land as obtained by it from registered valuer. The AO further noted that both the companies were engaged in the same kind of electronic business and plant and machinery used by them was unique and they were not ordinarily marketable commodities, so as to have any valuation of their market price. He further observed that both the companies knew that there was no market for the old plant and machinery except for the opinion that the assets of one company doing the same business were used by the other. The AO, therefore, rejected the val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. after the probe during the assessment proceedings and no such details were furnished in audit report or papers enclosed with the return. 3 The WDV as per Income Tax Act in the books of accounts of the seller company was very less and assessee purchased these assets at higher value only to get higher amount of depreciation. 4 The AO/CIT(A) has relied upon few cases to justify the addition as per the respective orders. ASSESSEE S SUBMISSIONS: 1 Firstly, it is clarified that M/s Deltron Ltd. is a listed public ltd. company. All the necessary approvals of shareholders and approval of SEBI for selling any business has been obtained. All necessary disclosures as were required under law were made in the audited accounts of Deltron Ltd. as would be seen from its balance sheet in particular at page 29, 30 and 43 of the Paper Book Therefore, any allegation that assessee (as a closely held company) will overpay to a public ltd. company is beyond payment is made by a public ltd. company to a closely held company, the allegation could have smelled foul play. No prudent person would get into a transaction where he had to over pay from his personal account, i.e. closely he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilding: The building was already housing all other assets i.e. plant and machinery etc. So, the allegation is totally out of context. 6 Explanation 3 of section 43(1) requires the AO to determine the actual cost at such an amount as the AO may determine having regard to all the circumstances of the case. The AO has adopted WDV of the previous owner, i.e. Deltron Ltd., which is highly arbitrary. It was explained to AO/CIT(A) that the assets transferred by Deltron Ltd. belonged to a unit which was entitled to 100% deduction u/s 35(1)(iv) of the Act, i.e. the cost in the hands of Deltron was most negligible or zero. The moot question is would Deltron had sold it at the same price on unrelated party at the same cost? The answer is yes because Deltron Ltd. had got the valuation of these assets done from a Government approved valauer. Deltron Ltd., as already clarified, is a pubic limited listed company, and whereas the assessee is a closely held company. Its actions were accountable and subject to scrutiny of various agencies including it spublic shareholders. The AO has not done any exercise worth invoking the provisions of Explanation 3 of section 43(1) of the Act. He has merely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on 31.3.2004 I the case of Deltroon Ltd. These assets, though existing and do not appear in the depreciation chart as per Income Tax Rules, although these assets do appear in the schedule of deprecation chart of Deltron Ltd. under the companies Act. (see balance sheet as on 31.3.2004).-P.B 39 2) The assessee in its submissions specifically pointed out that ₹ 7,098/- is the value of lease hold improvements of the property and it is not the WDV of the building B-96, Phase-III, Industrial Area, Mohali as held by the AO-PB-A3 3) The assessee had purchased building B-96, Phase-III Industrial Area, Mohali having a covered area of 14346 sq.ft. at a value of ₹ 66 lakhs, which had Nil cost on account of deduction allowed to Deltron Ltd. u/s 35(i)(iv)(35)(2).-PBA-3 4) Explanation 3 to section 43(1) specifically provides that the Assessing Officer shall determine the actual cost having regard to the circumstances of the case, where the Assessing Officer is of the view that the sale at the higher value was shown to enable the assessee to claim higher depreciation. The WDV of the assets cannot by any stretch of imagination be the actual cost for the purpose of Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars WDV as on 31.3.2004 (under Companies Act) Value at which taken over by assessee Building 74,25,264 66,00,000 Plant Machinery 3,71,66,624 89,66,000 Computers 82,020 69,499 Furniture Fixture 3,76,317 3,46,484 Vehicles 5,95,569 5,11,566 Office and Other equipments 14,74,265 14,23,115 Total 4,71,20,059 1,79,16,664 8) The assessee is also filing statement of deprecation chart as per Income Tax Rules ignoring the special deduction u/s 35(1)(iv)/35(2), as if such deduction was not allowed for determining the comparative figures of WDV as on 1.4.2004 in the hands of Deltron Ltd. with the value at which all the assets including those which had Nil value, which have been purchased by the assessee to reconsider as to whether the provisions of Explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vehicles 5,95,569 3,91,971 5,11,566 Electrical Installation -------- 95,852 14,23,115 Water Cool -------- 29 Other equipments 14,74,265 3,58,164 Industrial Installation -------- 615 Total 4,71,20,059 2,16,06,346 1,79,16,664 It is requested that the above aspects of the case which had remained unconsidered may be examined and your honour give finding/decision thereon. On the other hand, ld. DR relied on the orders of the lower authorities below. 8 We have heard both the parties and have perused the records. We find that the assessee company, a private limited company, has acquired electronic business from a public limited company known as M/s Deltron Limited as a going concern vide agreement dated 27.9.2004 for a consideration of ₹ 7.54 crore. We find that in the assessment order, the AO has observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets acquired by the appellant company were to be used for less than 180 days and therefore, the assessee was entitled to depreciation for only half o the year and not for the entire year. However, we find that before the CIT(A), the AR had pointed out certain differences in the figures in the chart of AO, which according to him, do not tally with the consideration stated in the agreement dated 27.9.2004. The ld. CIT(A) had directed the AO take the correct figures of assets taken over from M/s. Deltron Ltd. as per records and recalculate the differences, and, recomputed the disallowance accordingly. 9 Section 43(1) reads 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 cost thereof, if any, as has been met directly or indirectly by any other person or authority: [Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, [but before the 1st day of March, 1975,] and is used otherwise than in a business of running it on hire for tourists, exceeds twe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of acquisition; ii) The Income-tax officer arrives at objective satisfaction that such assets were transferred with the main purpose of reducing tax liability by claiming depreciation with reference to enchanced cost. iii) Then the Income- tax officer is empowered to determine the actual cost having regard to all the circumstances of the case. 11 So from a perusal of the aforesaid provision, we find that the AO needs to satisfy that the main purpose of the transfer of such assets directly or indirectly to the assessee was for the reduction of a liability of income tax by claiming deprecation with reference to an enhanced cost. Then only, the AO can invoke Explanation 3 to fix the actual cost. So, therefore, the requirement of law is that the main purpose of the transfer of assets was for the reduction of a liability to income tax without satisfying the same, the AO cannot invoke Explanation 3 to section 43(1). 12 Here, in this case, we firstly notice that the AO s observation that neither in the audit report or in the papers filed alongwith the return the acquisition was not mentioned, is not correct. We find that in the Director s report, it has reported that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties below. There is no material to dispute the assertion that M/s. Deltron Ltd., a public limited company had resources to invest heavily in R D or develop process capability to keep pace with the advancing technology. No doubt, the ground of common management and common office is a relevant consideration but the same is not of conclusive nature. The prime requirement under Explanation to section 43(1) of the Act is that the transfer of a going concern has been effected to defraud the revenue and such defraud had been attempted by claiming depreciation at an enhanced cost. We have already stated above that here was a case of transfer by a public limited company and the purpose stated in the agreement is not a matter of dispute. The Assessing Officer in the order has opined that the assets as reflected in the books of Deltron Ltd as on 1.4.2004 at ₹ 66,95,884/- were transferred for a consideration of ₹ 1,76,84,338/- though the appellant claims that such a finding is incorrect. It has been pointed out that Deltron Ltd. is a public limited company and had been allowed 100% deduction under section 35(1)(iv)/35(2) of the Act as expenditure and as such, there was certain ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 66,00,000/- and thus, likewise, it is not a case where plant and machinery of ₹ 59.94 lacs as noted by the Assessing Officer has been transferred for consideration of ₹ 89.66 lacs. On the contrary, plant and machinery having book value of ₹ 3,71,66,000/- has been transferred for consideration of ₹ 89,66,000/-. The above value are supported by a registered valuer s report and are not mere arbitrary valuations adopted by the assessee The Assessing Officer vis- -vis registered valuer s report has held that both the companies were engaged in the same kind of electronic business and plant and machinery used by them was unique and they were not ordinarily marketable commodities, so as to have any valuation of their market price. He further observed that both the companies knew that there was no market for the old plant and machinery except for the opinion that the assets of one company doing the same business were used by the other. It will be thus seen that the Assessing Officer has not found any specific defect vis- -vis valuation adopted by the appellant on the basis of registered valuer s report. IT could not be said that an asset though having Nil value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts hands, it was necessary for the authority who wanted to determine the actual cost (as required by Explanation 3 to section 43 of the Act) to place some evidence on record. It could not have substituted its opinion and adopted the book value or the written down value in the hands of the assesseecompany. As can be seen from explanation 3 to section 43(1) of the Act, the Income-tax Officer is required to determine the actual cost to the assessee having regard to all the circumstances of the case and if in his opinion the written down value was the actual cost, he ought to have supported the same by placing sufficient evidence so as to dislodge the valuation report of the registered valuer. On his having failed to do so, seen if the earlier portion of the provision, viz., the condition of the assets having been used by another person before the date of acquisition stands fulfilled the provision cannot be applied. 17 Further reference at this juncture is also made to the decision of the Tribunal in the case of Nirma Industries (P.) Ltd. 148 ITD 126 (Ahd) wherein it has been held as under: 3.4 We find that in the present case, the entire case of the A.O. is based on Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial as to whether the same is with goodwill or without goodwill. Hence, we have seen that even the valuation done by the A.O. is not proper and therefore, the action of the A.O. is not justified. 18 The Assessing Officer has also laid emphasis on the fact that short term capital gain as declared by the transfer of company namely M/s. Deltron Ltd. has been set off against the losses in the books of the said company. Having regard to the peculiar facts and circumstances in the case of the assessee company as highlighted above, such a factor alone cannot be made a basis to invoke Explanation 3 to section 43(1) of the Act. Explanation 3 to section 43(1) of the Act is not an absolute rule. The Assessing Officer is empowered to substitute the value. However, such a valuation cannot be substituted where there is no intent to reduce the tax liability. In the instant case, as stated above, the assets as held by M/s. Deltron Ltd. and transferred to the appellant as part of transfer of electronic business on going concern basis cannot be said to be in any manner with an intent to reduce the tax liability. Certainly, the effect of the transaction was that the gain declared by M/s. Delt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Likewise, is the case of Kungundi Industrial Works Pvt. Ltd. vs. CIT 57 ITR 540 wherein too, it was a case of conversion of firm into company and not a transfer by the public limited company to the private limited company. It was noticed that the shares allotted in the same proportionate to the shareholders as the shares held by the partners in the partnership firm. It was thus held that both the entities are distinct and separate but it is not a case where price is actually paid by one person to another person. Thus the above judgment has also no application to the case of the appellant. In the case of Guzdar Kajora Coal Mines Ltd. vs. CIT, it is seen that the facts were that the assessee purchased through deed of conveyance dated 3.4.1996 all the cumulative lands and other assets together with machinery belonging to Guzdar Kajora Coal Mines Ltd. for a consideration of ₹ 6,00,000/-. In the said case, the ITO on directions of the Tribunal had carried out valuation which proved that vendor company was making good profits but no provision had been made for the goodwill of the company in the business, which was worked out to ₹ 2,56,960/-. In such circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o claim of depreciation for half of the year and not for the entire year. The CIT(A) has also confirmed the above conclusion and held as under: I have carefully considered the appelant s submission and have also gone through the assessment order. My observation on the issue are as under: i) On page 4 of the assessment order, a chart has been given by the Assessing Officer. Column 3 of the chart gives the cost of acquisition as shown by the assessee and column 4 of the chart shows the depreciation claimed by the assessee. As per the chart, except for depreciation on building, the assessee himself has claimed depreciation at half rate. ii) Second proviso to section 32 lays down as under. provided further that where an asset referred to in clause (i) or clause (ii){ or clause (iia)}, as the case may be, is acquired by the assessee during the previous year and is put to use for the purpose of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sun-section in respect of such asset shall be restricted to fifty percent of the amount calculated at the percentage prescribed for an asset under clause (i) or c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iv) As already discussed above, as per the legal requirement of section 32; date of acquisition and date on which asset is put to use are the determining factor for calculating the depreciation. However nothing has been produced to substantiate that the conditions are satisfied for claiming depreciation for more than 180 days. Moreover, as already pointed out, except for building, the assessee itself has claimed depreciation for half year. in view of the above, I find that the Assessing Officer was justified in allowing the depreciation at half rates and grounds of appeal 1,2, 7 are, therefore, dismissed. 22 Having regard to the above finding, we do not find any merit in the claim of the appellant that depreciation is to be allowed for the entire year particularly having regard to the fact that assessee itself had chosen to claim depreciation for half of the year for all assets other than the building. The assessee has also not placed on record any evidence to substantiate when was the building occupied/put to use by the appellant company. In such regard, the conclusion as drawn by both the Assessing Officer and CIT(A) is in order and therefore, it is directed that the depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record. In the instant case, the assessee claimed foreign and travelling expenses of ₹ 20,33,758/-. The Assessing Officer has noted that during the assessment proceedings, the assessee could not furnish bills and vouchers in respect of boarding and lodging expenses aggregating to ₹ 6,32,295/- and as such, disallowed 50% of the expenditure and computed the disallowance at ₹ 3,66,148/-. It is thus apparent that Assessing Officer has not disputed the genuineness of the expenditure on an individual specific level. The travelling expenses have also been allowed in entirety other than above disallowance of boarding and lodging disallowance in an adhoc manner on the ground that supporting explanation were not furnished. We do not find merit in such a manner and the method of the disallowance. The Assessing Officer neither having identified, highlighted the specific items in respect of which, disallowance has been made by him, the adhoc disallowance so made is deleted. The ground raised is thus allowed. 28 Since the facts and the grounds raised in the other three appeals (ITA Nos.1319/Del/2011, 5656/Del/2010 and 316/Del/2013) are similar, and so are dispos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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