TMI Blog2012 (9) TMI 1102X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,27,45,000/- Total 3 6,69,85,000/- From the above, the AO noted that one wind mill was purchased on 30-03-2004, i.e. just one day before the 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 3 to Section 43(1) can only be made applicable in case of transaction between related concerns and that the 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 CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 43(1) was squarely applicable. 5. The Assessing Officer also relied on the following 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 ₹ 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ills 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 have actually been paid by the assessee to Vestas RRB India Ltd. through banking channels only. Vestas, it's Directors or officers of the Company are not related with the assessee in any way except this normal transaction of sale and purchase of the windmills. It 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to the transactions were different from what has been incorporated in the actual sale/purchase transactions. According to the assessee, the company Snowcem India Ltd. is not related with the assessee in any way 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 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 materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile the three windmills sold to the appellant were @ ₹ 2,23,28,333/- totalling ₹ 6,69,85,000/-. All the three windmills were still in the name of Snowcem in the records of Maharastra State Electricity Board. Further, the purchase of these windmills were not directly made from Snowcem which could have given a clue about the W.D.V. in the hand of Snowcem but was routed through Vestas, the manufacturer of the windmills, and in the bills issued by Vestas it was not written that the windmills were being resold. According to the Assessing Officer, the indirect route 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 grie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee windmills in the hands of the appellant and 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 purchased in the earlier years by Snowcem 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 Ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision... . Further, in State of Orissa Ors. v. M.D. Illyas, (2006) 1 S.C.C. 275 the Supreme has held that a decision is a precedent on its own facts and that for a judgment to be a precedent it must contain the three basic postulates. A finding of material facts, direct and inferential. 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the general rule of law governing partnership, its assets and dissolution etc. The definition of 'actual cost' contained in s. 43(1) read with Explanations thereof affords a mechanism by which the actual cost is reduced to a figure 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the new similar windmills and accordingly, the charge of the A.O. that the appellant had paid a higher purchase price for the windmills is not justified. (c) The other windmills sold by Snowcem were not comparable with the windmills purchased by the assessee in any manner and therefore, 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. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernment 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 submitted that during the year 2002 Vestas India Ltd. has sold these wind mills to Snowcem India Ltd. at ₹ 7.95 Crores, i.e. roughly ₹ 2.65 Crores per wind mill. However, the assessee purchased the second hand wind mills from Vestas India Ltd. at a cost of ₹ 2.23 Crores each. He submitted that cost of a new wind mill would have been ₹ 2.70 Crores during 2003-04 as against which 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose decisions are distinguishable and not applicable to the facts of the present case. In all those cases the transactions were 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 Mathen (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 TT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the CIT(A). He submitted that the assessee has acquired the wind mills in the month of September but paid the cost in the later months and therefore this was a tax planning. He submitted that the sales by Satara office of Vestas show that they have sold the wind mills during the year only to the assessee and there is no other sales. Further the MOU copy between Vestas and Snowcem placed at Page 42 to 46 of the Paper Book has not been signed by both the parties. Therefore, this indicates that this was a tax planning device. He 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 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, 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 case where the principle of tax avoidance can be applied and depreciation disallowed. 12. So far as the various decisions relied on by the learned DR he submitted that in all those cases the issue was that the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about the WDV of the windmills. Instead, it was routed through M/s. Vestas, the manufacturers of the windmills and in the bills raised by Vestas, it is not mentioned that the windmills are being resold. Therefore, the AO was of the opinion that the indirect route was resorted to for reducing the tax liability by claiming higher depreciation 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 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 that the main purpose of transfer of such assets directly or indirectly to the assessee is promoted by the object of claiming higher depreciation on such enhanced cost. In the instant case, although the WDV of the wind mills in the books of Snowcem India Ltd. have been shown at ₹ 26,50,000/- as on 31-03-2003 we find the assessee had argued before the lower authorities that Snowcem India Ltd. had returned 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red assets in the hands of the assessee. Yet the main purpose of Expln.3, in my view, is to empower the AO to determine actual cost of assets 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, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended on behalf of the Revenue that actual cost is not market value but is WDV of assets in the hands of the transferee, particularly on the facts of the case when value of hoarding and of goodwill/trade name was nil in the books of the erstwhile firm. The assessee company, after acquisition claimed depreciation on cost of assets which was arbitrarily fixed without any basis. Reliance, as noted above, has been placed on proviso (c) to s. 47 (xiii), s. 32(1) and s. 43(6) of 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. These deemed provisions cannot be read in the Expln. 3. 17.2 The plain language of the provision [Expln.3 to s.43(1)] leaves no amount of doubt that it is AO who has to record satisfaction relating 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 referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and on reasons which are totally unsustainable. In support of value (cost of hoardings at ₹ 4,77,96,000/- and of goodwill at ₹ 3 crores), the reports of the registered valuer were placed before the AO. The 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 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability to income-tax by claiming depreciation with reference to enhanced cost. However, the same is not applicable to the facts of the present case. In the instant case, Snocem India Ltd. has not transferred the wind mills to the assessee and the assessee has purchased the wind mills at a cost of ₹ 6,69,85,000/- from Vestas RRB India Ltd. and payment has been paid by cheque. It has also been demonstrated by the assessee that it is not related to either Snowcem India Ltd or Vestas 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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