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TMI Blog2015 (12) TMI 1737X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the assessee's case in upholding that the assets of Deltron Ltd. were acquired by the assessee at a higher price with a view to reduce the liability of income tax by claiming higher depreciation with reference to enhanced cost, on wholly erroneous and illegal grounds. (c) On the facts and in the circumstances of the case, it may be held that the Plant & Machinery, Building etc. were purchased on the basis of valuation of the Govt. approved valuers, who were experts, and as such invoking of the provision of Explanation 3 to section 43(1) was uncalled for and unjustified. (d) That the Hon'ble DRP as well as learned AO have failed to appreciate that the written down value as per Income Tax Rules, of Deltron Ltd. of various assets was low, as cost of acquisition of Plant & Machinery, Building etc. in the R&D Unit of Deltron Ltd. had been allowed to the Deltron Ltd. as scientific research expenditure u/s 35(1) of the Income Tax Act, and as such the same could not be said to be the market value of these assets. 5. That each ground is independent of and without prejudice to the other grounds raised herein. 6. That the penalty proceedings initiated by relyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el/2011, 5656/Del/2010 and 316/Del/2013 respectively, copy of the said order dated 16.10.2015 was furnished during the course of hearing which is placed on record and the relevant findings have been given in paras 8 to 20 of the said order which read as under: "8. We have heard both the parties and have perused the records. We find that the assessee company, a private limited company, has acquired electronic business from a public limited company known as M/s Deltron Limited as a going concern vide agreement dated 27.9.2004 for a consideration of Rs. 7.54 crore. We find that in the assessment order, the AO has observed that the aforesaid fact of purchase of fixed assets was disclosed by the AR only after the probe by him during the assessment proceedings and no such details have been furnished in any manner in the audit report papers enclosed with the return of income. He has also noticed that both the companies deal in electronic business and have same address at C-120, Naraina Industrial Area and run under the same management as the directors/shareholders are also common. We further find that, the AO observes that M/s Deltron Limited for A.Y. 2005-06 has shown net current loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly. 9. Section 43(1) reads as under: "43. In sections 28 to 41 and in this section, unless the context otherwise requires-- (1) "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority: [Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, [but before the 1st day of March, 1975,] and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty-five thousand rupees.] Explanation 1.--Where an asset is used in the business after it ceases to be used for scientific research related to that business and a deduction has to be made under [clause (ii) of sub-section (1)] of section 32 in respect of that asset, the actual cost of the asset to the assessee shall be the actual cost to the assessee as reduced by the amount of any deduction allowed under clause (iv) of sub-section (1) of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was for the reduction of a liability of income tax by claiming deprecation with reference to an enhanced cost. Then only, the AO can invoke Explanation 3 to fix the actual cost. So, therefore, the requirement of law is that the main purpose of the transfer of assets was for the reduction of a liability to income tax without satisfying the same, the AO cannot invoke Explanation 3 to section 43(1). 12. Here, in this case, we firstly notice that the AO's observation that neither in the audit report or in the papers filed alongwith the return the acquisition was not mentioned, is not correct. We find that in the Director's report, it has reported that the assessee had acquired business of Deltron Limited as a going concern (paper book page 2). Similarly, we find that in schedule T of balance sheet being notes on accounts as Note 10, assessee company has disclosed that it has purchased electronic business of M/s Deltron Ltd. at a net consideration of Rs. 7.54 Crores (Paper book Page 22). Thus, we find that the observation of the AO that the assessee did not disclose the transaction is factually incorrect. 13. We further notice that the appellant company and M/s Deltron Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... empted by claiming depreciation at an enhanced cost. We have already stated above that here was a case of transfer by a public limited company and the purpose stated in the agreement is not a matter of dispute. The Assessing Officer in the order has opined that the assets as reflected in the books of Deltron Ltd as on 1.4.2004 at Rs. 66,95,884/- were transferred for a consideration of Rs. 1,76,84,338/- though the appellant claims that such a finding is incorrect. It has been pointed out that Deltron Ltd. is a public limited company and had been allowed 100% deduction under section 35(1)(iv)/35(2) of the Act as expenditure and as such, there was certain assets which appeared at Nil cost in the books of Deltron Ltd. It was however stated that such assets were appearing in the balance sheet prepared under the Companies Act as on 31.3.2004 at Rs. 4,71,20,059/- and if the deduction under section 35(1)(iv)/35(2) is ignored, WDV of such assets as on 31.3.2004 would stand at Rs. 2,16,06,346/-. The cumulative position which emerges is as under: Particulars WDV as per Companies Act as on 31.3.2004 WDV as on 31.3.2004 (under IT without taking Act into consideration 100% dep. As (R&D) Valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set though having Nil value under the Income Tax Act would be transferred also Nil value to a third party more particularly when the transfer is not of an asset but of a business on a going concern basis. The transfer of the business is not in dispute. The genuineness of the transfer of the business is also not in dispute. The purpose behind the transfer is also not in dispute. All what has been disputed by the Assessing Officer and upheld by the CIT(A) is valuation of the assets adopted for the purpose of transfer. In such circumstances, we find force in the claim made before us that it is not a case of valuation having been adopted by a higher price more particularly when the transaction is between the closely held company and public limited company and price is paid to public limited company by the closely held company. It is also not a case where price as stated in the agreement has not been paid by the assessee. The valuation is supported by registered valuer's report which valuation has not been shown to either fantastic or imaginary or irrational by any cogent evidence. On the contrary, having regard to the book value of the assets standing under the Companies Act, the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of the A.O. is based on Explanation (3) to Section 43(1) as reproduced above. As per this explanation, we are of the considered opinion that the A.O. can determine the original cost of the assets for allowing depreciation to the assessee only if he is satisfied that the main purpose of transfer of such asset, directly or indirectly to the assessee, was the reduction of liability to income tax by claiming extra depreciation with reference to an enhanced cost. It is not sufficient that one of the main purposes was this. Hence, in our humble opinion, this is the first prerequisite that the A.O. has to establish that the main purpose of transfer of such asset was the reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish this, it has to be established that apart from claiming additional deprecation on enhanced cost, there is no other main purpose for acquiring the asset in question. In the present case, the A.O. is only disputing the valuation of intangible asset i.e. the trademark acquired by the assessee from related parties without even making an allegation that such acquisition of assets was not having any main purpose exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e gain declared by M/s. Deltron Ltd. was set off against the losses in its computation yet that fact cannot undetermine the genuineness of the transaction and in any case empower the Assessing Officer to substitute the valuation as determined in the registered valuer's report which has not been found to be incorrect by any other technical valuation. Hence, we do not subscribe to the conclusion of the authorities below. 19. The Assessing Officer has referred to the judgment of the Kerala High Court in the case of CIT vs Poulose and Mathen (Pvt.) Ltd. 236 ITR 416. In the said case, the assessee was a partner in a partnership firm consisting of nine partners. The partnership firm was dissolved on February 25, 1985 and as per the books of accounts of the firm the written down value of the assets of the firm was Rs. 3,16,110/-. However the assessee company had taken over the assets of the firm after its dissolution and, the assets were revalued at Rs. 22,30,795/- and accordingly, claimed depreciation on the value of Rs. 22,30,795/- as per the revised valuation. On such facts, the High Court held that the Explanation 3 to section 43(1) of the Act correspondents to section 10(5)(a) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n such circumstances, it was held that if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purposes it is open to the income tax authorities to refuse to accept the price mentioned in the deed or alleged by the assessee ad to ascertain what was the actual original was. It was thus held that it was open to the income tax authorities to determine and to the assessee to show whether the goodwill of the business is or is not included in the consideration or the price paid for the acquisition of the asset. Thus having regard to the above, in such circumstances, it was held that if circumstances exist for going behind the valuation as also the allocation given in the deed of conveyance, it was and is open to the income tax authorities to determine the valuation as well as the allocation between depreciable and non- depreciable assets. There is no dispute to the above conclusion of the Hon'ble Apex Court. However, on the said facts as is the case of the assessee company, such an interference is not warranted as there is nothing o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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