2004 (8) TMI 643 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of depreciation claimed by the assessee for assessment years 1992-93 and 1994-95.
2. Ownership of assets and the requirement of a registered conveyance deed for claiming depreciation.
3. Application of Explanation (3) to section 43(1) of the Income-tax Act, 1961.
4. Invoking the judgment of the Hon'ble Apex Court in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation:

The assessee claimed depreciation of Rs. 73,25,451 for the assessment year 1992-93 and Rs. 41,39,337 for the assessment year 1994-95 on assets purchased from M/s. Aegies Chemical Industries Ltd. The Assessing Officer (AO) disallowed the depreciation, asserting that the assessee had paid an inflated price for the assets to reduce tax liability, invoking the judgment in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148. The AO also applied Explanation (3) to section 43(1), allowing depreciation only on the written down value (WDV) in the hands of the vendor, resulting in a much lower depreciation allowance.

2. Ownership of Assets:

The AO denied depreciation on the grounds that the conveyance deed for the immovable property was not executed in favor of the assessee by 31-3-1992. The assessee argued that for the purpose of allowing depreciation, execution of the conveyance deed is not a pre-condition, citing the judgment in Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 (SC). The Tribunal agreed with the assessee, stating that since the income/loss from the industrial undertaking was included in the assessee's return and accepted by the AO, depreciation on the assets used in the undertaking should be allowed.

3. Application of Explanation (3) to Section 43(1):

The AO invoked Explanation (3) to section 43(1), suggesting that the main purpose of the asset transfer was to reduce tax liability by claiming depreciation on an enhanced cost. The assessee contended that since the returned and assessed income were both losses, there was no reduction in tax liability in the current year, and thus, the Explanation could not be invoked. The Tribunal found merit in this argument, noting that the AO did not consider the WDV as per the books, which was significantly higher than the WDV as per the Income-tax Act.

4. Invoking McDowell & Co. Ltd. Judgment:

The AO applied the McDowell & Co. Ltd. judgment, suggesting that the transaction was designed to reduce tax liability. The assessee argued that the transaction was genuine and supported by the valuation report. The Tribunal noted that the AO did not doubt the valuation report and that the assets were sold based on market value, not WDV as per the Income-tax Act. The Tribunal concluded that the AO's reliance on the McDowell judgment was misplaced, especially since the assessed income was a loss, indicating no tax avoidance motive.

Conclusion:

The Tribunal found that the AO was not justified in disallowing the depreciation claim or reducing it by invoking the McDowell judgment and Explanation (3) to section 43(1). The Tribunal directed the AO to allow the depreciation claims of Rs. 73,25,451 for the assessment year 1992-93 and Rs. 41,39,337 for the assessment year 1994-95 as originally claimed by the assessee.

Result:

Both appeals of the assessee were allowed.