TMI Blog2005 (3) TMI 769X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer to grant depreciation (as against the depreciation allowed of ₹ 53,50,277 after giving effect to the order of the ld. CIT(A) for the assessment year 1995-96 wherein relief was granted to the assessee, without appreciating the fact that the depreciation was claimed on overvalued assets purchased by assessee from M/s. Mahindra Mahindra Ltd. in which assessee has substantial shareholding. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of ₹ 4,37,915 made to the value of closing stock on account of MODVAT . (iii)For the assessment year 1997-98 the ground raised is as follows : On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the Assessing Officer to allow depreciation on plant and machinery and other assets on the basis of the WDV of the assets as determined after giving effect to the CIT(A) s order for assessment year 1996-97 which is pending in appeal before ITAT. 2. It was observed as per the assessment order that the assessee company was incorporated on 30th September, 1984. The assessee company had acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer has observed in respect of invoking Explanation 3 section 43(1) as follows : In short the assets which were purchased second hand in 1984 and depreciated over the year have been sold at more than their original price in 1994 to the assessee to enable it to claim depreciation on the enhanced cost. The transferor company in the process has also claimed capital loss of ₹ 2.9 crores on the transaction. Explanation 3 to section 43(1) clearly states that where before the date of acquisition by the assessee, the assets were used by any other person and the assess- ing officer is satisfied that the main purpose of the transfer of such assets was the induction of a liability to income tax (by claiming depreciation with an enhance cost) the actual cost to the assessee shall be such an amount as the Assessing Officer may determine having regard to the circumstances of the case. In the instant case, it is clearly evident that the price of the assets have been substantially inflated in order to charge higher depreciation. M M Ltd. being a person which substantial interest in the company would certainly benefit from the higher depreciation allowance in future years while at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s reproduced verbatim the written submissions of the assessee. According to him the transfer of assets was based upon sound business consideration and claim of depreciation was not alone the main motivation of the said bona fide business transaction. He has opined that the primary condition for invoking Explanation 3 to section 43(1) was not fulfilled because the main purpose of the transfer was not the reduction of tax liability. As regards valuation of the assets his finding was as follows : As regards valuation of assets under consideration the valuation was done by M/s. Universal Surveyors and Adjustors who were appointed by IL FS who were consultants for the entire restructuring exercise of M M Ltd. It is submitted by the Assessing Officer that M M Ltd. played no role in their appointment or determining the terms and conditions because the same was done by IL FS being the consultants of M M Ltd. The A.R. was asked to file the valuation of the assets in question based on the undertakings since the original cost by applying the indexation as notified under the Income-tax Act, 1961 (section 48) upto the financial year 1994-95 and the value has been arrived at ₹ 16. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. ₹ 14,31,37,237 as per IT Rules. Against this said relief granted by ld. CIT(A) now the revenue is in appeal in all the three years. 5. On behalf of the Revenue ld. D.R., Shri D.K. Rao appeared and after narrating the background of the case as already reproduced in above para, at first he has argued that the provisions of section 40A(2) were applicable in the present case as mentioned by the Assessing Officer because the transferor and transferee both belong to the same group of concerns. In this regard he has relied upon the observation of Assessing Officer made in respect of share holding by the said companies. He has mentioned that Shri A.G. Mahindra is the common Chairman of group concerns and M M Ltd. has substantial shareholding, therefore, rightly treated as a person having substantial interest in the assessee company. The next plank of his argument was that the transferor M M Ltd. has acquired the assets in the year 1984 for a sum of ₹ 3.7 crores. In the past depreciation has already been allowed in those assets and certain additions have been made and the WDV as on 31-3-1994 was at ₹ 4.71 crores just before the transfer. Now these assets have been re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stamp duty of ₹ 29.53 lakhs as well. The Assessing Officer has wrongly restricted the claim of depreciation to ₹ 22.81 lakhs as against ₹ 146.19 lakhs claimed by the assessee. The issue is thus that whether the provisions of Explanation 3 to section 43(1) were rightly invoked by Assessing Officer. She has stressed that the transfer of the undertaking was for cogent business consideration because M M Ltd. was desirous of an exit from its non core activities. With this object M M Ltd. appointed Infrastructure Leasing Financial Services (IL FS) as its consultant for divesture of the said unit. M/s. IL FS has located a joint venture partner namely Sona Steering System Ltd. (Sona) who have brought in share capital along with Japanese manufacturing technique. A shareholder s agreement was made according to which the Managing Director could be appointed by Sona. So the assessee company was benefited by this arrangement having strong market opportunity and brand equity of promoters. The assessee company has entered into this agreement keeping an eye on the turnover expected to increase under the management of Sona. In this manner ld. A.R. tried to establish that it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price then the amount of capital loss would be even larger. It is a general practice that transferor always tries to get the best price of his goods and the consideration in this regard was actually paid by the transferee i.e. the assessee company and no doubt had been casted by Assessing Officer about the payment of consideration. In support of all her arguments certain case laws were cited as follows:- 1.R.B. Bansilal Abirchand Spg. Wvg. Mills Ltd. v. CIT [1970] 75 ITR 260 (Bom.). 2.CIT v. Dalmia Dadri Cement Ltd. [1980] 125 ITR 5104 (Delhi). 3.Ashwin Vanaspati Industries v. CIT [2002] 255 ITR 265 (Guj.). 4.CIT v. Sekar Offset Press [1995] 214 ITR 5166 (Mad.). 5.Bombay Household Industrial Plastics Mfg. Co. (P.) Ltd. v. ITO [1982] 1 ITD 152 (Bom.). 6.Karam Chand Thaper Bros. v. Dy. CIT [1998] 66 ITD 39 (Cal.). 7. Parties heard at length in the light of the orders of the authorities below as well as the compilation filed. We have also examined the issue involved after considering the case laws cited from both the sides and the relevant provisions of IT Act. The issue raised before us revolve around the applicability of Explanation 3 to sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o facilitate both the parties of the agreement. Further, the facts as narrated by ld A.R. that M M Ltd. preferred to restrict its involvement as investor and to induct a new partner to actively manage and promote the auto components manufacturing business has inducted Sona Steering System Ltd. as partner to enable the new company, i.e. assessee to get the benefit of the latest technology. This fact thus indicates that the M M Ltd. had important role to play in the business of the assessee-company. The documents placed before us also indicate the same. Commercial expediency in such cases is a question of fact to be determined with reference to the evidence and the materials. The mere production of documentary evidence simply showing that contract was made for purchase of the assets at certain price does not conclusively establish the correctness of the claim made by the assessee specially when the other surrounding circumstances indicated that the deal was not made at arms length. In this regard we have examined the case laws cited from the side of the respondent assessee. In the case of CIT v. Sekar Offset Press [1995] 214 ITR 5167 (Mad.) the facts were that there was dispute among ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost. In this regard, before we proceed further it is necessary to examine whether the Assessing Officer has noted his satisfaction and have found the recording of Assessing Officer as, therefore this is the situation which clearly falls under the ambit of Explanation 3 to section 43(1) . It is a tax planning device to reduce tax burden on the company by charging excess depreciation. After this observation the Assessing Officer has adopted the WDV of the assets which were in the books of M/s. M M Ltd. and allowed depre- ciation of ₹ 22,81,367, as per the tabulation chart produced in the assessment order itself. Considering the intention of the Legislature, words incorporated in the language of the section and totality of the circumstances under which the assets were transferred, our first reaction is that the provisions of Explanation 3 to section 43(1) have rightly been invoked. Since right now we are dealing about the first question whether the transfer was for business and commercial consideration, as discussed supra, we are of the view that the entire transaction was made keeping in mind the one purchaser i.e., the appellant in whose business the transferor i.e., M M Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of most of the machi-nery was done in round figures. On careful examination we have found that the basis for adoption of current replacement value has not been indicated. In other words the valuation report is silent on the present available replacement value of the machi-nery and no comparable instances have been cited. In our humble opinion a current replacement value can be arrived at only after ascertaining the current market price of a machinery. So before arriving at the replacement value first step in this direction had to be to gather the information in respect of the current market price. Apparently this exercise has not been down and ad hoc value have been adopted. In this regard the Assessing Officer has also made an observation reproduced hereinbelow. The valuation has not been down only with regard to the fair market value of the assets but the business of the undertaking as a whole. In such a valuation, a number of other considerations would come in such as the skill and experience of the employees, the nature of orders or contracts in hand, the goodwill enjoyed by a running concern etc. It is mentioned in the valuation report that valuation takes into account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion report by producing the sale bills or any like manner independent evidence. Rather hypothetical depreciated value termed as replacement value was taken into account by the valuer instead of ascertaining actual cost as referred in the section itself. Moreover, the word cost is not synonymous with price because the cost taken in other components of expenditure such as freight, transportation insurance etc. There is no independent material on record to show that the valuation done by the valuer was pari materia with the prevailing replacement cost of such machineries. In this regard one more argument was advanced by ld. A.R. that the consideration which had genuinely been passed between the parties could not be doubted. She has emphasized that the consideration of the fixed asset was actually paid by the assessee-company to M M Ltd. She has also vehemently stated that the portion of the consideration was also financed by a financial institution namely IFCI. This loan was granted by IFCI subsequently for the acquisition of fixed assets which were taken as security. For that purpose IFCI has also scrutinized the value of the assets and accepted the same. So ld. A.R. has argue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities was precluded from going behind the agreement of purchase in determining the purchase price and fix their own valuation. However, the court has also observed that cost of the assets had to be ascertained by price that could be paid in the prevailing market condition because there was no material on record to show that the valuation by the experts was either exaggerated or incorporated. On the other hand, on appreciation of the facts of the present appeal, it appears that there was an element of collusion between the purchaser and the seller and the said transaction appears to be with the purpose of reduction of tax liability. In such cases when the transaction is not at arms length and the deal is made to subterfuge to avoid tax then in a number of decisions it has been held that the Assessing Officer can go behind the contract and ascertain the actual cost for the purposes of correct ascertainment of Income-tax liability of the assessee. Few of them as cited by ld. D.R. are Kungundi Industrial Works (P.) Ltd. v. CIT [1965] 57 ITR 540 (AP) and CIT v. Jogta Coal Co. Ltd. [1965] 55 ITR 89 (Cal.). In our humble opinion since the assessee has not objectively satisfied that the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as the application of Explanation 3 is concerned. It is open to the Assessing Officer to refuse to accept that price if in his opinion the purpose is of reduction of tax liability. Though it is not open for the department to dictate an assessee of the method he should adopt in conducting his business, all that the department is concerned with is the tax which is due under law. To tax an assessee, revenue authorities has been empowered to lift the veil. Here in this case it was found by the Assessing Officer and is an accepted position that M M Ltd. has 37.50 per cent share holding. So according to revenue though both the parties are separate entities but having common interest. In the case of CIT v. Dalmia Dadri Cement Ltd. [1980] 125 ITR 5108 as cited by the parties above, Hon ble Delhi High Court has opined that there was considerable element of collusion in the entire affair which could not be treated as the result of normal commer- cial consideration. The Hon ble Court has held that the capital cost has no doubt been inflated in the hands of the assessee to enable it to claim higher depreciation. It was observed that if circum- stances indicate that a fictitious price has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation 3 of section 43(1). It must be borne in mind that for the application of this section the change over or transfer of asset need not be the only reason but the main purpose should be the reduction of liability of income-tax. Of course, several reasons have been shown for the said change over by ld. A.R. namely the efficient working of the concern, purely a commercial consideration, and future prospects of the units. But if these reasons were the only guiding motive, then what was the reason that the same assets were given a higher value even when in fact, though not in law, the assets did not change the hand, being shareholders having common substantial interest in both the entities. It is this consideration that weighed with the Income-tax Authorities. That being the case it was inevitable not to attract the said provision. In support of above discussion we reply upon Kungundi Industrial Works (P.) Ltd. v. CIT [1965] 57 ITR 540 (AP). (d)So far from the above discussion we have arrived at a conclusion that the transaction was not arms length but still before we conclude it is still pertinent to examine whether the Assessing Officer has rightly invoked the section. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they were transferred to the assessee company. The Hon ble Jurisdictional High Court has also held that the Tribunal was justified in rejecting the valuation report and drawing a diverse inference against the assessee. It was held that the proviso was properly applicable and the basis adopted by the department in fixing the actual cost of the transfer of assets to the assessee company was not unreasonable or erroneous and was in accordance with the requirement of law. The ratio laid down by the Hon ble Bombay High Court is directly applicable in the instant appeal now before us and binding upon us hence we hereby respectfully follow the same. There are few decisions cited from the side of the assessee namely, Karam Chand Thapar Bros. v. Dy. CIT [1998] 66 ITD 39 (Cal.) and the issue was disallowance of depreciation in case of purchase and lease back transaction. The issue being different before the Tribunal from the instant appeal hence presently not relevant. There is one more case of the Tribunal namely, Bombay Household Industrial Plastics Mfg. Co. (P.) Ltd. v. ITO [1982] 1 ITD 152 (Bom.), wherein the finding of the Tribunal was that there was no other material to suggest that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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