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Navlakha Translines Versus Income-Tax Officer Ward 3 (2) Pune

ITA No. 78/PN/2009 - Dated:- 27-9-2012 - Shailendra Kumar Yadav (Judicial Member) And R. K. Panda (Accountant Member) For the Appellant : Sunil Pathak For the Respondent : Navrath and Mukesh Verma ORDER R. K. Panda (Accountant Member) This appeal filed by the assessee is directed against the order dated 13-11-2008 of the CIT(A)-II, Pune relating to Assessment Year 2004-05. 2. Facts of the case, in brief, are that the assessee is in the business of Transportation of Gases and Chemicals and Genera .....

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end of the 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 d .....

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nd 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 wind mill was in working condition and generating power and was in use before 31-03-2004 and hence was eligible for depreciation as claimed. 4. However the AO noted that M/s. Snowcem purchased 9 windmills from Vestas between March 1999 to March 2002 for a price of ₹ 10,22,51,113/- whi .....

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e assessee had paid ₹ 6,69,85,000/-. No tax has been paid by Snowcem on the Short Term Capital Gain on the sale of windmills. He noted that Snowcem had actually sold 8 windmills out of which five windmills were sold for ₹ 2,09,50,000/- only at an average rate of ₹ 41,90,000/-. As against this the assessee purchased 3 old windmills for ₹ 6,69,85,000/- at an average rate of ₹ 2,23,28,333/-. The assessee, therefore, evidently purchased the three old windmills at the en .....

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sold these windmills to the assessee at an enhanced cost in the disguise of selling new wind mills was intentional and was undertaken to reduce the liability of tax by claiming depreciation on the enhanced cost. The Assessing Officer therefore applied the provisions of Explanation 3 to Section 43(1) of the Income Tax Act, 1961 and allowed depreciation on the W.D.V. of the three windmills in the hands of M/s. Snowcem. The plea of the assessee that the transaction was genuine and that Explanation .....

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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, wit .....

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mentioned that windmills were old windmills. Besides, assessee also did not inform on its own that these windmills were old windmills. It is only when the question of allowability of depreciation on the windmills purchased in this accounting year was raised that the assessee informed that those were old working windmills. (ii) The bills issued by Vestas RRB Ltd. Satara Division also show that in the entire year only two bills have been issued by that branch and that too, to this assessee only. .....

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by the assessee directly from Vestas RRB India Ltd. Chennai as new windmills. (iv) It was noticed that Snowcem offered ₹ 8,76,21,900/- in its return of Income for A.Y. 2004-05, but not a single penny as tax has been paid by it because the net result of the computation of income was loss of ₹ 75,54,375/-. Therefore, as a result of this routed transaction only revenue is at loss. M/s. Snowcem India Ltd. Mumbai has not paid any tax on the short term capital gain arising as a result of t .....

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llowing judicial pronouncements : I. CIT v. Harveys Ltd. [1940] 8 ITR 307 (Mad.) II. Ginners & Pressers (P.) Ltd. v. CIT [1978] 113 ITR 616 (Bom.) III. CIT v. Sekhar Offset Press [1995] 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 ₹ 1 .....

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estas 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 for information from Vestas RRB India Ltd. Snowcem India Ltd., MSEB, the Assessing Officer of Snowcem and the ban .....

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owable u/s. 32 of the Act. 6.1 It was argued that the land on which these windmills are erected have been transferred in the name of the assessee by registered agreements. The income from these windmills have been offered for taxation, the details of which are as under : A.Y. Gross Income Net Income offered for taxation 2004-05 91,06,895 91,06,895 2005-06 3,41,68,030 3,40,94,300 2006-07 1,66,38,531 1,66,38,531 TOTAL 6,02,70,712 5,98,39,726 6.2 Narrating the facts and provisions of Explanation 3 .....

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m Vestas RRB India Ltd. The amount paid to Vestas for purchase of these three windmills is only ₹ 6,69,85,000/- as against ₹ 10,22,51,113/- due from Snowcem India Ltd. The book value of these windmills in the books of Snowcem India Ltd. was less than ₹ 79,00,000/-. 6.3 It was further submitted that the assessee purchased the said windmills from Vestas RRB India Ltd. for which regular invoices have been issued by Vestas in the name of the assessee. The total amount of the bills .....

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itted 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, .....

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) is applied to the facts of this case, then it is the duty of the AO to determine the Actual cost for the purpose of this section. The AO simply took the WDV in the books of Snowcem India Ltd for the purpose of allowing depreciation to the assessee. The AO ought to have considered the following facts for determining the actual cost : (i) The said windmills were not very old and before the assessee acquired the same, they were in use just for about 3 years. (ii) The cost of the same capacity new .....

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ed the said windmills at utmost competitive price. 6.5 It was further pointed out that another reason stated by the AO for application of this Explanation 3 to Section 43(1) is that according to him this transaction was entered into with the motive of reduction of income-tax and this idea he has derived from the fact that no tax has been paid by Snowcem India Ltd. and the assessee himself. It was argued that the AO failed to appreciate that when a transaction is otherwise valid in law and result .....

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y but according to the information given by the AO the said company has in its return of income disclosed ₹ 8,76,21,900/- by way of short term capital gains on transfer of these 3 windmills. The question to be asked here is the tax liability and not the actual payment of tax. The tax liability is a legal fiction and payment of tax is a fiscal fact. The Assessing Officer relied on some of the case laws in his assessment order, which in assessee's opinion supports the case of the assesse .....

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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 portio .....

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the respective cases. 3.1 Explanation 3 to section 43(1) expressly provides that in cases where, before the date of acquisition by the assessee, that assets were, at any time, used by another person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets directly or indirectly to the assessee was the reduction of a liability to income-tax by claiming depreciation with reference to an enhanced cost, the actual cos .....

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Officer found as a fact that the three windmills purchased by the assessee were old being used by Snowcem and the W.D.V. in the hands of Snowcem was ₹ 26,50,000/- against which the assessee had paid ₹ 6,69,85,000/-. The Assessing Officer also noted that Snowcem had sold 5 windmills @ ₹ 41,90,000/- each totalling ₹ 2,09,50,000/- to other parties while the three windmills sold to the appellant were @ ₹ 2,23,28,333/- totalling ₹ 6,69,85,000/-. All the three wind .....

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ncome 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, .....

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ave assessed the income shown from those windmills and also would not have allowed the depreciation even at the reduced cost. The contention of the Assessing Officer that the windmills were still in the name of M/s. Snowcem in the records of M.S.E.B. is, therefore, treated as only an observation without there being any effect on the assessment of the appellant. 3.4 Further, the contention of the Assessing Officer that no short term capital gains were shown by Snowcem in the return is also not co .....

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as shown by Snowcem, as Snowcem did show short term capital gains but it is another matter that because of depreciation and other losses such gains were set off. 3.5 The Assessing Officer's contention that no tax was paid by both the parties is not relevant on the facts of the case. The computation of income in the case of Snowcem has already been discussed above. In the case of the appellant if the purchase value is taken at ₹ 6,69,85,000/- no tax would be payable because there is no .....

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further as to why a circuitous route was resorted to for making the purchase from Snowcem when the bills were being issued by Vestas the manufacturer of the windmills. Regarding the route taken by the appellant to purchase the windmills, it was stated by the appellant that Vestas had sold these windmills to Snowcem and that Snowcem was not able to make the payments to Vestas. The appellant was approached for purchase of the windmills and a tripartite agreement was entered wherein the windmills p .....

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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 incl .....

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y Vestas from Snowcem. It was reiterated that there was no reduction of tax liability as the assessee had actually paid the total amount of purchase value on which depreciation had been claimed. 3.9 The Assessing Officer and the assessee relied upon and distinguished the decision given by each other. It is seen that the facts of the cases relied upon by the assessee were entirely different from the facts of the case under consideration. It has been a well-settled view that the ratio of any decis .....

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198 ITR 297 (SC) (Page 320) wherein it was observed as under : "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its .....

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. An inferential finding of fact is the inference which the judge draws from the direct or perceptible facts: (ii) statement of the principle 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 rende .....

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nt 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 previous owner was. The language of Explanation 3 to section 43(1) requires that the Assessing Officer must be satisfied with the previous approval of the Jt. C.I.T. t .....

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ership firm by revaluing them at a very high figure, the Assessing Officer was justified in invoking Explanation 3 to section 43(1) and fixing the actual cost accordingly. It was held that the prefixing of the word 'actual' to the word "cost" is obviously intended to make emphasis on the reality and genuineness thereof. The fixation of 'actual cost' arises only when the Assessing Officer is satisfied that the main purpose of the transfer of the assets which was used by .....

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of the dissolution of the firm was made bonafide for adjustment of the mutual rights of the firm is not sustainable. This is not a case where there is no written down value, which means, in the case of assets acquired in the previous year, the actual cost to the assessee and in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the Act as defined under s.43(6). Sec 43(1) with Explanations thereof supersedes th .....

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come-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 .....

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essing Officer had not acted unreasonably or arbitrarily in adopting Explanation 3 to section 43(1) of the Act and fixing the actual cost accordingly. 3.12 As there is no decision of the jurisdictional High Court directly on this issue, the decision of the Kerala High Court is a binding precedent unless a contrary decision is given by any other competent High court. Reliance in this regard is placed on the decision of ACIT v. Aurangabad Holiday Resorts Pvt. Ltd., (ITAT, Pune 'A' Bench) r .....

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and the provisions of explanation 3 to Section 43(1) were applicable to the facts of the case. 2. The learned CIT(A) was not justified in holding that the transaction was arranged by Snowcem for sale of windmills to the assessee for the purposes of claiming higher depreciation for the assessee. 3. The learned CIT(A) failed to appreciate that : (a) The appellant had purchased these windmills from Vestas RRB Ltd. and not from Snowcem India Ltd. (b) Because Snowcem had defaulted in making the payme .....

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fore, their sale price could not be compared with the price paid by the assessee for the windmills. (d) The fact that the assessee generated sufficient income from these windmills itself indicated that the price paid for the windmills by the assessee was not higher than their fair market value. (e) Snowcem or Vestas 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. ( .....

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ted 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 mill .....

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ls. He submitted that after Snowcem India Ltd returned the wind mills to Vestas India Ltd. for ₹ 10,23,50,575/- they offered short term capital gain on the difference between the sale price and the WDV. He submitted that Snowcem did not pay any tax because it had huge losses in its business. He submitted that the assessee company had paid an amount of ₹ 6,69,85,000/- by cheque to Vestas India Ltd. towards cost of the wind mills. Therefore, the cost must be considered as whatever pric .....

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tas India Ltd. against the assessee towards the sale of the wind mills. Referring to Page Nos. 48 to 51 of the Paper Book he drew the attention of the Bench to the Power of Attorney issued by Snowcem India Ltd. in favour of the assessee to deal with the Electricity department, Government agencies, Sales tax department etc. The power of attorney also mentions the surrendering and return back of 3 wind mills each of 500 KW capacity located at Chalvedi Village, District, Satara to the suppliers. He .....

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e 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 .....

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estas India Ltd. are not related to each other, therefore, it cannot be said that the transferor has already taken the benefit of higher depreciation and transferred the asset to a related party at a high price so as to get higher depreciation again in the hands of the related party. Further, the assessee is buying second hand wind mills from the manufacturer, i.e. Vestas India Ltd. There is no law that the fair market value of a second hand asset is the WDV in the books of the earlier user only .....

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tted that if the AO wanted to invoke this explanation the burden was on him to show that the WDV is the fair market value. 9.3 As regards the allegation of the AO that Snowcem India Ltd. had sold the other 5 old wind mills for ₹ 2,09,50,000/- for which the cost per wind mill was ₹ 41,90,000/- and as against this the assessee has paid higher price, he submitted that all those wind mills were of 225 KW capacity whereas the 3 wind mills purchased by the assessee are of 500 KW capacity e .....

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between related parties whereas in the instant case no relationship exists between the assessee and Vestas India Ltd. or Snowcem India Ltd. He submitted that the income offered by the assessee has been taxed in the hands of the assessee. The AO has accepted the income of the wind mills. Further the whole order/tenor of the order passed by the CIT(A) is in favour of the assessee. However, he has basically relied on the decision of the Hon'ble Kerala High Court in the case of CIT v. Poulose &a .....

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ion 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 .....

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ly states that the same is applicable if the assessee claims enhanced cost as the actual cost. This means that the AO must show that the cost claimed by the assessee is more than the market value of the asset. The stress is on the word 'enhanced'. In this case, the assessee has justified the cost by comparing it with the market price of a new windmill. The AO on the other hand, simply holds the WDV in the books of Snowcem as the market value. Hence, the AO has not shown that the assessee .....

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v. Metalising Equipment Co. Ltd. [1996] 54 TTJ (JP) 620 and the decisions in Western Maharashtra Flourine Chemical Industries (supra), Sekhar Offset Press (supra). 9.6 He accordingly submitted that the order of the CIT(A) should be set aside and the assessee should be allowed depreciation on the amount of ₹ 6,69,85,000/- being the cost of the mind mills purchased by the assessee from Vestas. 10. The learned DR on the other hand heavily relied on the order of the CIT(A). He submitted that .....

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e submitted that mere production of some documentary evidence to show the contract at a certain price does 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 ca .....

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eference 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 in his rejoinder submitted that the bills of Vestas during this year were only for the sales effected to the assessee because Vestas, Satara Branch had sold the windmills for that area and they we .....

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cost of an asset which is outstanding at the end of the year if the asset is used for business. Hence, depreciation was correctly allowable to the assessee. He submitted that the AO himself has allowed depreciation on the windmills. The only dispute is regarding the actual cost to be adopted. Hence, if the AO himself has allowed the depreciation, that point cannot be agitated at this stage. Referring to the decision of the Tribunal in the case of Raj Kumar Jain v. Asstt. CIT [1994] 50 ITD 1 (Al .....

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ee if the same is a colourable device to avoid or evade tax. However, in the present case it is not so. 11. Referring to the decision of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 and the decision of Hon'ble Gujarat High Court in the case of Banyan & Berry v. CIT [1996] 222 ITR 831 he submitted that if the arrangement is perfectly legal the same cannot be rejected merely because it results in tax saving. Therefore, it is not a c .....

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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 .....

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had no interest in the reduction of tax liability of the assessee and it has already been shown that what was paid as the cost of the assessee was reasonable considering the market price for a new windmill. Hence, this decision has no applicability. He accordingly submitted that the depreciation as claimed by the assessee should be allowed. 13. We have heard the rival submissions made by both the sides, perused the orders of the AO and CIT(A) and the Paper Book filed on behalf of the assessee. W .....

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he provision of Explanation 3 to section 43(1) and calculated the depreciation at the applicable rate on ₹ 26,50,000/- which was the WDV of the wind mills in the hands of Snowcem India Ltd., the original owner. While doing so he noted that Snowcem had sold 5 wind mills @ ₹ 41,90,000/- each totalling to ₹ 2,09,50,000/- to other parties while the 3 windmills sold to the assessee were @ ₹ 2,23,28,333/- each totalling to ₹ 6,69,85,000/-. Further, all the 3 windmills wer .....

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iation on enhanced cost. Further, no tax was paid by Snowcem because the short term capital gain declared by it has been set off against huge carry forward loss and no tax was paid by the assessee because of depreciation on the enhanced cost. 14. We find in appeal the learned CIT(A) upheld the action of the 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 th .....

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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 Vesta .....

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f the AO that Snowcem India Ltd. had sold 5 wind mills @ ₹ 41,90,000/- each totalling to ₹ 2,05,50,000/- to other parties while the 3 wind mills sold to the assessee were @ ₹ 2,23,25,333/- each totalling to ₹ 6,69,85,000/- and therefore the assessee has taken indirect route for purchase of the windmills at enhanced cost to claim higher depreciation is incorrect since the 5 windmills sold by Snowcem are of 225 KW capacity and are very old whereas the 3 wind mills purchase .....

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e submission of the learned counsel for the assessee that WVD as per Income Tax Act cannot reflect the market value of a particular asset. We find merit in the above submissions of the learned counsel for the assessee. 16. Provisions of Explanation 3 to section 43(1) authorises the AO to adopt actual cost for the purposes of depreciation differently from what is shown as the cost of the assessee. It confers the authority to the AO to estimate the value of any used asset, if the AO is satisfied t .....

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unt 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 .....

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8377; 41,90,000/- are very old and are of capacity of 225KW whereas the 3 wind mills purchased by the assessee from Vestas RRB India Ltd. at ₹ 6.69 Crores are hardly of 2 to 3 years old and are of the capacity of 500 KW and therefore those 5 wind mills cannot be compared with the 3 wind mills purchased by the assessee from Vestas RRB India Ltd. cannot be compared also could not be controverted by the learned DR. We find in the instant case no other exercise has been done either by the AO o .....

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value of the asset. Since the cost of a new wind mill has been claimed to be around ₹ 2.70 Crores during F.Y. 2003-04, therefore, the market value of the second hand wind mills of 2 to 3 years old cannot be ₹ 9 to 10 lakhs as adopted by the AO being the WDV of the wind mills in the hands of the Snowcem India Ltd. especially when the rate of depreciation is 80% on wind mills. 17. We find the Ahmedabad Bench of the Tribunal in the case of Chitra Publicity Co. (P.) Ltd. (supra) at Para .....

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sets where the assessee is wrongfully claiming depreciation on enhanced cost of such assets. What is actual cost ? How is it to be determined ? Actual cost of an asset to the assessee is always question of fact governed and depending upon the circumstances of the case. However, application of principles for the determination of actual cost is a question of law [see decision of Supreme Court in the case of Jogta Coal Co. Ltd. v. CIT (supra) cited above]. The actual cost normally means real cost, .....

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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 argue .....

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ion, there is sufficient power with the AO to disregard the cost of assets taken by the transferee and determine the actual cost of the assets. He can make a disallowance, provided circumstances envisaged in the provision are satisfied. The Revenue authorities and the learned AM in the proposed order have made out a good case that the main purpose of transfer of asset was reduction of liability to income-tax (by claiming depreciation on enhanced cost). However, as already noted, recording of abo .....

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of strong words like "determine" and check in the provision on arbitrary exercise of power by the AO. The AO is required to determine the actual cost with the previous approval of the Jt. CIT. Therefore, the AO has to satisfy Jt. CIT that exercise of determination of cost has been carried in a reasonable and proper manner. The provision of approval by the Jt. CIT is for the benefit of the Revenue and the assessee. It is to prevent the AO from taking any amount as "actual cost&quo .....

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f the IT Act. 17. After careful consideration of above provisions and facts and circumstances of the 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 .....

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y. 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. Law frowns on fraudulent transaction carried to hoodwink the Revenue. Having held that the assessee has shown enhanced cost of assets, the AO under Expln. 3 to s.43(1) has to determine the "actual .....

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rence under the proviso to s. 10(5)(1) of the Act cannot be drawn. But it is not as if the taxing authorities as well as the Tribunal have not dealt with this aspect of the matter at all while deciding the question of applicability of the proviso to s. 10(5)(1) to the facts of the present case". 17.1 It is, therefore, not possible to totally reject the concept of market value of the assets transferred as not relevant for determining "actual cost". The provision requires considerat .....

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d acceptable basis. In the present case, actual cost of hoardings and of goodwill has been taken at nil merely because such assets were not shown as an asset in the accounts of the erstwhile firm and no depreciation was claimed. This action of the AO endorsed by higher authorities and in the proposed order of learned AM, in my view has no legal support. As already discussed, provisions of s.47(xiii) or of s.43(6) are not attracted here as these provisions have very different purposes to serve. T .....

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o 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 L .....

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ged to record a satisfaction that the assets were transferred for reducing the liability to pay income-tax and for this purpose an appellate authority cannot substitute its opinion to sustain the applicability of the said Expln. 3 only because the assets which are transferred were used by any other person before the date of acquisition. The duty cast upon the AO by the provision is to determine the actual cost and not to substitute a valuer's opinion. At the same time, merely because a docum .....

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ct and ascertain the actual cost so as to determine the correct liability to tax". 18.2 Inspite of the clear observations of the jurisdictional High Court, fully supported by other authorities and clear language that "AO is obliged", "duty cast on AO" to determine actual cost of assets to the assessee, in the present case, the burden has been placed on the assessee to prove that actual cost of asset was the value it had claimed for the purpose of the depreciation. No att .....

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e AO did not consider above reports, although it was incumbent upon him to dislodge them. The learned CIT(A) in the order for asst. yr. 2005-06 rejected the report of valuation of hoardings as on Ist April, 2003 as the report was dt. 3rd Oct., 2004 and held it to be got prepared to suit 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 t .....

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is 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 claiming depreciati .....

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assets and not on the basis of WDV as per IT Act. For extra depreciation allowed to the vendor as per IT Act as an incentive, the vendor has to be assessed for capital gains on sale of assets by reducing the WDV as per IT Act from sale proceeds of the assets. But in the hands of the assessee, the actual cost paid by the assessee for the assets should be considered for allowing depreciation to the assessee, particularly so, when the conditions required for invoking Expln. 3 to s. 43(1) are not be .....

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that wherein an asset was already in use in a business in hands of one person and its WDV has been ascertained by the AO and that person transfers assets to another person for a price exceeding this WDV, it is open to AO to refuse to accept the sale price as "actual cost" to purchaser in purchaser's 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. However, the same is not .....

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y 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 .....

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at ₹ 2.25 Crores approximately cannot be held as unreasonable which is the submission made by the assessee before the lower authorities and not controverted by the Revenue. Therefore, the decision relied on by the CIT(A) and the learned DR, in our opinion, cannot be applicable to the facts of the present case. 21. So far as the reliance of the decision of Hon'ble Delhi High Court in the case of Dalmia Dadri Cement Ltd. (supra) we find it was held in the above case that when the assesse .....

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