9911796707
TMI Blog2012 (9) TMI 1102X X X X Extracts X X X X X X X X Extracts X X X X ..... e accounting year. Besides he doubted the credibility of the above transactions. He noted that the bills have been issued by the Satara office of Vestas RRB India Ltd. Chennai, therefore, it is highly abnormal that Satara Branch of Vestas RRB India Ltd. had undertaken only two business transactions in the entire year, that too with the assessee only. Further according to him, it was not possible to install and commission the machinery, i.e. wind mill which was purchased by Bill No. 2 dated 30-03-2004 before the end of the previous year, i.e. 31-03-2004. In view of the above peculiar features the AO confronted the same to the assessee and asked him to explain as to why the depreciation claimed in respect of wind mills purchased on 30-03-2004 should not be disallowed as it was not possible to install and commission the wind mill in one days time. 3. It was submitted by the assessee that all the 3 wind mills purchased by the assessee from Vestas RRB India Ltd. Chennai are old wind mills which were sold by Vestas RRB India Ltd. Chennai to M/s. Swowcem India Ltd. Mumbai and were commissioned on 30-03-2001 by the original owner M/s. Snowcem India Ltd., Mumbai. It was submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost meant actual cost to the assessee as per bills was rejected by the AO. While doing so, the AO relied on the decision of the Hon'ble Andhra Pradesh High Court in the case of Kungundi Industrial Works (P.) Ltd. v. CIT [1965] 57 ITR 540. He further noted that for the purpose of application of Explanation 3 to Section 43(1) the following two conditions are required to be fulfilled : (a) The asset, prior to the date of acquisition by the assessee must have been used by another person for the purpose of his business. (b) The AO must be satisfied that the main purpose of the transfer of such assets directly or indirectly, to the assessee was reduction of a liability of income tax by claiming depreciation with reference to enhanced cost. 4.1 If above two conditions are satisfied, the AO has the power to determine the actual cost of transferred asset at such amount as he may, with the previous approval of the Joint CIT, determine having regard to all the circumstances of the case. In assessee's case the first condition is satisfied beyond doubt as the assets, i.e. the three windmills have been previously used by Snowcem for the purpose of its business. As far as the second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 214 ITR 516 IV. Nagammal Cotton Mills (P.) Ltd. v. CIT [2002] 258 ITR 390 6. Before CIT(A) it was submitted that the assessee is in the business of production of wind power since 1999 and purchased various windmills from time to time. Till 31st March 2004 the total amount of Windmills purchased were ₹ 15.49 Crores including the cost of 3 windmills at ₹ 6,69,85,000/- which is the subject matter of this appeal. Subsequently also till 31st March 2006, the total cost of purchases of windmills at ₹ 23.65 Crores shows that this is the regular business of the assessee. During the year under consideration, the assessee has purchased three windmills from Vestas RRB India Ltd. for ₹ 6,69,85,000/-. There is no dispute in respect of the acquisition of windmills and the payments made to Vestas RRB India Ltd. The invoices and the details of payments and other required details have been furnished to the AO from time to time. Even the AO has independently verified these details by his personal visits to the site and office of Vestas RRB India Ltd. It has also come to the knowledge of the assessee that the AO has also verified the details of these transactions by calling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was submitted that the AO failed to give any reason as to why a company like Vestas will associate with the assessee to route this transaction. The only intention of Vestas was to recover the dues from Snowcem India Ltd. It was submitted that the story narrated by the AO that this transaction is a colourable transaction is nothing but a figment of imagination, which is based on surmises. It was emphasized that this is a genuine and normal business transaction only and that the AO failed to prove that the amounts mentioned in the bills are fictitious and not the actual cost. According to the assessee the AO failed to understand that to apply the provisions of Explanation 3 to Section 43(1) the transactions should be bogus, sham and entered into with fraud, collision and inflates or deflates the values with ulterior motives. The AO has not given any reason as to why the two renowned companies, who are apparently strangers to the assessee and not related at all with each other will associate with the assessee for assessee's benefit. Therefore, this theory of the Assessing Officer was not justified. 6.4 In the alternate, it was argued that even if it is assumed that the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer relied on some of the case laws in his assessment order, which in assessee's opinion supports the case of the assessee. 6.6 Relying on various case laws it was argued that the claim of the assessee regarding depreciation on windmills be allowed. It was further argued that the various decisions relied on by the AO are distinguishable and not applicable to the facts of the present case. 7. However, the CIT(A) was not convinced with the arguments advanced by the assessee and upheld the order of the AO by holding as under : "3. I have gone through the facts of the case and perused the material on record. The issue at stake is the application of Explanation 3 to section 43(1) of the Income Tax Act to the transaction entered into by the appellant purchasing three windmills for ₹ 6,69,85,000/- against the W.D.V. of ₹ 26,50,000/- only. The determination of actual cost of depreciable assets is required to be made in accordance with section 43(1) of the Income Tax Act which defines the expression 'actual cost' to mean the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oute was resorted to for reducing the liability of income tax by claiming higher depreciation as no tax was paid by either Snowcem as it already had huge carry forward losses against which the capital gains arising from the sale of three wind mills was set off or by the appellant for the depreciation was claimed at enhanced cost of ₹ 6,69,85,000/- which wiped out the income shown. 3.3 In so far as the Assessing Officer's contention that the windmills were still in the name of Snowcem in the records of Maharastra State Electricity Board, the Assessing Officer in my considered opinion cannot have any grievance in this regard. It is not in dispute that the entire income from the sale of electricity was shown in the hands of the appellant and not Snowcem. The Assessing Officer has assessed such income in the hands of the appellant. Further, depreciation was ultimately allowed to the appellant by the Assessing Officer at a lower figure than claimed. Had the appellant not been owner of the windmills the Assessing Officer could not have assessed the income shown from those windmills and also would not have allowed the depreciation even at the reduced cost. The contention of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were surrendered to Vestas and, therefore, Vestas issued Bill Nos. 1 & 2 to the appellant. It was stated that the entire amount of ₹ 6,69,85,000/- was paid by cheque to M/s. Vestas only. 3.7 Irrespective of the fact that the payment for purchase of these windmills was made to Vestas, this deal was not available in the assessment records as claimed by the appellant. Further, Snowcem had purchased 8 windmills from Vestas against which till March, 2002 an amount of ₹ 10,22,51,113/- was due including interest and maintenance, etc. However, it is not correct to state that the amount paid to Vestas for purchase of 3 windmills was only ₹ 6,69,85,000/- as against ₹ 10,22,51,113/- for the purchase price paid by Snowcem from Vestas originally was never produced either before the Assessing Officer or in the appellate proceedings. In any case the amount of ₹ 10,22,51,113/- was due on overall purchase of 8 windmills and included interest and maintenance, etc. also and not with respect to these 3 windmills. 3.8 According to the appellant, the Assessing Officer has not established that the transaction was bogus, sham or entered into with the object otherwise tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple of law applicable to the legal problems disclosed by the facts; and (iii) judgment based on the individual effect of the above. In Municipal Corporation of Delhi v. Gurnam Kaur (1999) 1 C.C. 101 the Supreme Court has set out the tests of finding the principle which is binding. In my considered view, the principles enunciated in the cited cases do not render any help to the appellant in the facts and circumstances of the present case because the appellant's case is held to be distinguishable on facts. 3.10 The appellant has not produced any revaluation of the three windmills done by any approved valuer either before the Assessing Officer or in the appellate proceedings. The Assessing Officer has also not got the valuation of machinery done by any valuer. The correct figure of value at which the depreciable asset could be brought by the appellant from any other previous owner, therefore, is not precisely known. The question whether the object of the transfer was only to claim higher depreciation in the hands of the buyer and thereby take undue advantage to avoid legitimate tax payable is required to be examined with regard to the value of the asset regardless of who the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igure which is anything but real. When the asset was formally used by any other person for the purpose of his business and the main purpose of the transfer of the asset to the assessee is to claim a higher depreciation allowance so as to reduce the liability to pay income-tax, the 'actual cost' shall be determined by the Assessing Officer in the exercise of the power conferred on him as prescribed in Expln. 3 to s.43(1) no matter what the general law prescribes for determining the costs of the assets on dissolution of partnership firms and transfer of its assets. It is a settled position that the Court has power to disregard the corporate entity if it is used for tax evasion or two circumvent tax obligation. In this premise it cannot be said that the AO has acted unreasonably or arbitrarily in adopting Expln. 3 to s. 43(1) and fixing the 'actual cost' accordingly. The assessee is not entitled to claim depreciation on the assets taken over from the partnership firm at the revalued figure. Applying the decision in the case of CIT v. Meenakshi Mills reported in 63 ITR 609, it was held that the Income Tax authorities are entitled to pierce the veil of corporate entity a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stas were not related to the assessee in any manner and the purchase transaction was at arm's length. (f) Explanation 3 to Section 43(1) was not applicable to the facts of the case. (g) Correspondingly, Snowcem had shown substantial profit on sale of these windmills and just because there was no tax liability in this year on that company, the transaction would not be considered as the one arranged for claiming higher depreciation for the assessee. (h) The case laws which are relied upon by him in support of his decision were not applicable to the facts of this case particularly on the ground that in those cases, the purchases were made by the assessee concerned from the related parties. 9. The learned counsel for the assessee reiterated the same submissions as made before the AO and the CIT(A) and further submitted that the business of the assessee is that of power production from wind mills. He submitted that the assessee had some wind mills and during this year the assessee purchased 3 wind mills from M/s. Vestas for a sum of ₹ 6,69,85,000/- on which depreciation has been claimed as per law. He submitted that Vestas India Ltd. had earlier sold the wind mills to S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has paid price of ₹ 2.23 Crores approximately for a windmill. Therefore, the assessee was benefitted by paying a lesser price for the second hand wind mills which are 2 to 3 years old since the average life of a wind mill is about 20 years. Therefore, under the facts and circumstances of the case the price paid by the assessee for the second hand wind mills was most reasonable considering the market price for a new wind mill. 9.2 He submitted that it had been categorically stated before the lower authorities that assessee is not related to Vestas India Ltd. or Snowcem India Ltd. and therefore they had no interest in the saving of tax. Referring to the provisions of Explanation 3 to Section 43(1) he submitted that same is applicable if the purpose of transfer of an old asset to the assessee is the reduction of liability of Income Tax by claiming depreciation with reference to an enhanced cost. In that case the AO can determine the actual cost to the assessee having regard to the circumstances of the case. However, since the assessee and Snowcem India Ltd. or Vestas India Ltd. are not related to each other, therefore, it cannot be said that the transferor has alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then (P.) Ltd.[1999] 236 ITR 416. In that case, the assessee took over the assets of the firm in which it was a partner at a very high value. This valuation could not be justified by the assessee and being a related party to the transferor, explanation 3 of section 43(1) was applied. Accordingly, the depreciation on the enhanced value was disallowed. However, this case has no application to the facts of the present case. On the other hand, the assessee places reliance on Third Member decision in the case of Chitra Publicity Co. (P.) Ltd. v. Asstt. CIT[2010] 127 TTJ (Ahd.)(TM) 1 ITAT Ahmedabad wherein it has been held that the burden to prove the fair market value and that the assessee has paid a higher price is on the AO and if it is not discharged, explanation 3 to section 43(1) cannot be invoked. He submitted that in this case also, the AO has not discharged the burden cast on him and he had invoked explanation 3 of section 43(1) only on presumptions and surmises. Secondly, the AO holds that the earlier company, i.e. Snowcem has not paid tax on the short term capital gains u/s.50 on return of windmills to Vestas. He submitted that if Snowcem was in losses, the assessee was not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not conclusively establish the correctness of the price paid and if the AO is of the opinion that the assessee has resorted to a device to avoid tax he can go beyond the contract and ascertain the actual cost of the asset for the purpose of allowing depreciation. 10.1 The learned DR also relied on a number of decisions. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Jt. CIT v. Mahindra Sona Ltd.[2005] 96 ITD 303 he submitted that where an asset was already in use in a business in the hands of one person and its WDV has been ascertained by the AO and that person transfers the asset to another person for a price exceeding its WDV, then it is open to the AO to reduce the sales price as actual cost to purchaser in purchasers assessment if he is satisfied that main purpose of transfer was reduction of liability to Income Tax by claiming depreciation with reference to enhanced cost. He also relied on the decision of Hon'ble Kerala High Court in the case of Poulose & Methen (P.) Ltd. (supra) and the decision of Hon'ble Delhi High Court in the case of CIT v. Dalmia Dadri Cement Ltd. [1980] 125 ITR 510. 10.2 The learned Authorised Representative i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is resorting to a device to avoid tax fraudulently or the transaction was colourable, therefore, those decisions cannot be relied upon. So far as the decision of Hon'ble Kerala High Court in the case of Poulose & Methen (P.) Ltd. (supra) relied on by the learned CIT(A) and DR he submitted that this decision does not apply to the assessee's case. In that case, the facts were that the assessee company, as a partner, had taken over the assets of the partnership firm by revaluing them at a very high figure and therefore the Hon'ble Court held that the main purpose of the transfer of the assets to the assessee was to reduce the tax liability. Thus it was a case of transfer from a related party and the fair market value was enhanced deliberately by the assessee to claim higher depreciation. As regards the decision relied on by the learned DR in the case of Dalmia Dadri Cement Ltd. (supra) he submitted that in that case it was held that when the assessee has paid an excessive amount to a connected person in a collusive transaction, the dept. is entitled to ascertain the actual cost. However, this has no applicability to the instant case because the transaction is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO in calculating depreciation on the 3 wind mills on ₹ 26,50,000/- which was the WDV in the books of Snowcem in view of provisions of Explanation 3 to section 43(1). He however held that the AO should not have any grievance because of the windmills being in the name of MSEB since he has already assessed the income from such wind mills in the hands of the assessee. Further, he held that the contention of the AO that no short term capital gain were shown by Snowcem is incorrect. He also held that the AO's contention that no tax was paid by both the parties is not relevant on the facts of the case. We find the Revenue is not in appeal before us against the above observations of the CIT(A). 15. It is the submission of the learned counsel for the assessee that Snowcem India Ltd. being unable to pay the outstanding amount of ₹ 10,23,50,575/- due to Vestas RRB India Ltd. as on 31-03-2003 returned the windmills to Vestas RRB India Ltd. who in turn sold the 3 wind mills to the assessee at a cost of ₹ 6,69,85,000/- and it is a commercial transaction. It is also the submission of the learned counsel for the assessee that neither the assessee is related to Vestas RRB In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urned the wind mills to Vestas RRB India Ltd. at a cost of ₹ 10,23,50,575 being the amount outstanding as on 31-08-2003 and has offered short term capital gain on the difference between sale price and the WDV. This fact has not been disputed by the revenue. No doubt Snowcem India Ltd. had not paid any tax because of huge losses in its business, however, non payment of tax due to set-off of the income against business loss by Snowcem India Ltd. in our opinion cannot be the sole ground for refusing the depreciation in the hands of the assessee on the cost of the wind mills purchased from Vestas RRB India Ltd. and for which payments have been made by cheque. The submission of the assessee before the lower authorities that neither Snowcem India Ltd. or Vestas are related to each other nor the assessee is related to Vestas RRB India Ltd. or Snocem India Ltd. has not been proved to be false or untrue. The submission of the learned counsel for the assessee that the 5 wind mills sold by Snowcem India Ltd. for a cost of ₹ 2,09,50,000/- for which cost of one wind mill was ₹ 41,90,000/- are very old and are of capacity of 225KW whereas the 3 wind mills purchased by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cannot be cost to the transferee. No principle of general and universal application on "actual cost" is possible to lay down. However, in none of the authorities cited and noted above, WDV was taken as "actual cost". Something was added to WDV depending upon the facts and circumstances of the case. In these days of high inflation, it is a matter of common knowledge that there is vast difference between market value of an asset and its WDV as reflected in record. Further, Courts while holding that actual cost is not the "price" paid, were concerned with question whether incidental expenses like freight, warehousing, insurance charges, legal charges incurred in connection with acquisition and interest incurred on capital contributed or borrowed to acquire assets should be added to the price. It was also rightly argued by Shri Soparkar that actual cost should be taken as a commercial concept and understood in the sense in which no commercial man would misunderstand it. 15. The Revenue authorities and learned AM, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 provided in expn.2 to s. 43(6) (c) is not available in Expln. 3 to s.43(1). Further, assets whose actual cost is to be determined under Expln. 3 are second hand and it is always difficult to find actual cost or value of such assets as compared to new assets. In the case of transfer of an asset between two unconnected parties price fixed is ALP governed by market condition. This ALP between two unconnected parties is nothing but market value of the asset. This ALP has to be taken as the "actual cost" for purposes of depreciation. There is no way to ignore it and it is not possible to record merely that the main purpose of transaction is the reduction of income-tax liability. Such ALP or market value cannot have a different meaning in case of a transaction between connected and related parties if fixed bonafidely as per market conditions. There is no prohibition or connected parties to carry arms' length transactions where real value of them transferred is paid. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, therefore, leave no doubt that burden to determine "actual cost" in accordance with law is on AO and not on the assessee. The AO has to show that he has gathered relevant material and determined actual cost after application of mind. His action is required to be approved by his superiors. 18. In the case of CIT v. Jogta Coal Co. Ltd. (supra), their Lordships at P. 99 of the report referred to the case of Craddock v. Zevo Finance Co. Ltd. (1946) 27 Tax Cases 267. Their Lordships have stated as under : "The learned Law Lords came to the conclusion that the Crown had failed to establish that the value of the investments was less than the nominal value of the consideration for which the respondent company had acquired them, namely, the liability to discharge the debentures and interest thereon and the allotment of the share capital as fully paid". 18.1 The jurisdictional High Court in case of Ashwin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 proposed order has rejected all the above reasons including the reason given by the learned CIT(A) in the appellate order". 18. We find the Mumbai Bench of the Tribunal in the case of Western Maharastra Flourine Chemical Industries (supra) has held as under (Short notes) : "Regarding the alternative plea of the AO for granting depreciation to the assessee on the basis of WDV as per IT Act in the hands of the vendor by invoking Expln. 3 to s.43(1), there is force in the arguments of the Authorised Representative of the assessee that there is no scope of any reduction in tax liability of the assessee in the present year because the returned income is loss and assessed income is also a loss and as per the Explanation, the AO should be satisfied that the main purpose of transfer of such assets was the reduction of liability to income-tax by cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stas RRB India Ltd. Similarly Vestas RRB India Ltd. and Snowcem India Ltd. are not related to each other. 20. Similarly the decision of the Hon'ble Kerala High Court in the case of Poulose & Mathen (P.) Ltd. (supra) is also not applicable to the facts of the present case. In that case the assessee company, as a partner, had taken over the assets of the partnership firm by revaluing them at a very high figure for which the High Court held that the main purpose of the transfer of the asset to the assessee was to reduce the tax liability. Thus, it was a case of a transfer from a related party and the fair market value was enhanced deliberately by the assessee to claim higher depreciation. However, in the instant case the wind mills are not purchased by the assessee from a related party. Further, the price paid by the assessee cannot be held unreasonable especially when the cost of a new wind mill of 500KW capacity would have been within a price range of ₹ 2.50 Crores to ₹ 2.70 Crores and the average life of a wind mill being 20 years the price paid for a wind mill of 2 to 3 years old at ₹ 2.25 Crores approximately cannot be held as unreasonable which is the subm ..... 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