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2007 (1) TMI 278 - AT - Income TaxCapital gains - Nature of transfer u/s 47(v) or (vi) - computation of depreciation - CIT(A) held that WDV in the hands of the transferee is the actual cost of acquisition in the hands of the transferee company - HELD THAT - The fact that the assessee has ceased to be the subsidiary of the holding company on 30-9-1994 was brought to the notice of the Assessing Officer during the assessment proceedings but he rejected the same on the ground that the subsequent events will not have any material change with respect to changing of cost of acquisition of the capital assets acquired from the holding company. But, in our opinion, the Assessing Officer should have considered the subsequent events. In the case of the transferor company, the income is to be treated as the income of the year in which the transfer has taken place. This shows that the subsequent event has the effect of withdrawing the exemption granted u/s 47 and the income goes back to the date of transfer. Thus, provisions of section 47 are withdrawn on occurrence of the events mentioned u/s 47A and the transaction has to be treated as a transfer u/s 47(v) or (vi) of the Act as the case may be and the transferor company is liable to pay the capital gains tax. In the present case due to ceasure of the assessee-company being a subsidiary of the transferor company, the provisions of section 47(iv) have ceased to apply, and the transaction has to be considered as a transfer. Section 47A provides for the withdrawal of exemption and the resultant treatment to be given to the income in the hands of the transferor company. Sub-section (3) provides that in the hands of the transferee, the valuation/cost of the asset regarding which the exemption granted u/s 47(iv) has been withdrawn u/s 47A of the Act, it shall be the cost for which such asset was acquired by it. Thus, in the present case, the cost for which the assessee has acquired the asset should be the cost of acquisition for the purpose of computation of depreciation. Whether it is the transfer of a block of assets or individual assets - This issue is covered by the decision in the case of Essar Steel Ltd. 2005 (9) TMI 217 - ITAT AHMEDABAD-B relied upon by the ld. counsel for the assessee, wherein the transfer of a business undertaking as a whole was held to be a property within the meaning of section 2( 47 ) of the Act. When the division as a whole is to be treated as a property, then in our view, clause ( c ) of sub-section (6) of section 43 is not applicable. Section 49(3) provides that it shall be the cost at which the transferee company acquired the asset. Thus, the order of the CIT(A) is set aside and the Assessing Officer is directed to compute depreciation on the cost of the assets to the assessee. In the result, assessee s ground of appeal No. 1 is allowed. Disallowance of loss arising out of construction contract - System of accounting - HELD THAT - It is evident that under the percentage completion method the assessee is entitled to claim loss for the stage of completion reached and as the assessee had only completed 2/3rd of the contract, he was entitled to claim 2/3rd of the estimated loss only and not the entire loss as claimed by him. Thus, we are of the view that both the Assessing Officer and the CIT(A) were right in holding that future anticipated losses cannot be carried forward and allowing only 2/3rd of the estimated loss and making the addition of the balance to the income of the assessee. Hence, assessee s ground No. 2 is rejected. Payment towards import of machinery - HELD THAT - In the present case, it was the assessee who had cancelled the forward contract and the amount is not a compensation received for the cancellation of the forward contract but is on account of difference in the foreign exchange required for the purchase of plant machinery. Therefore, in our view, the CIT(A) has erroneously applied the decision of the Bombay High Court in the case of Bharat Forge Co. Ltd. 1993 (3) TMI 40 - BOMBAY HIGH COURT to the facts of the present case. On the other hand, the decision in the case of Apollo Tyres Ltd. 2004 (3) TMI 345 - ITAT DELHI-E , is very much applicable to the facts of the present case as the facts and circumstances are similar. In this view of the matter, the order of the CIT(A) is set aside and that of the Assessing Officer is restored. Ground No. 1 raised by the revenue is allowed. Ground No. 2 relates to the cost of acquisition for computing the depreciation in view of the reasons given by us in assessee s appeal in ground No. 1, this ground of appeal raised by the revenue is dismissed. In the result, both the appeals are partly allowed.
Issues Involved:
1. Determination of the actual cost for depreciation purposes. 2. Disallowance of loss arising from a construction contract. 3. Treatment of gain on cancellation of foreign exchange forward contracts. Detailed Analysis: Issue 1: Determination of the actual cost for depreciation purposes The primary issue was whether the actual cost for depreciation should be based on the amount paid by the transferee company (Rs. 130.52 crore) or the written down value (WDV) in the books of the transferor company (Rs. 101.10 crore). The assessee argued that the cost should be the amount paid, while the Revenue contended it should be the WDV. The tribunal noted that as of the transfer date, the assessee was a wholly owned subsidiary of the transferor company, invoking the provisions of section 47(iv) and Explanation 6 to section 43(1). However, the tribunal also considered the fact that the assessee ceased to be a wholly owned subsidiary within the stipulated period, thus invoking section 47A(ii), which withdraws the exemption granted under section 47(iv). The tribunal concluded that the provisions of section 47(iv) ceased to apply, and the cost of acquisition should be the amount actually paid by the assessee. The tribunal relied on section 49(3), which states that the cost of acquisition should be the cost for which the asset was acquired by the transferee company. Thus, the tribunal directed the Assessing Officer to compute depreciation based on the actual cost of Rs. 130.52 crore. Issue 2: Disallowance of loss arising from a construction contract The assessee claimed a loss of Rs. 1,29,20,068 for the RAVVA project, arguing that it should be fully allowed based on the percentage completion method as per Accounting Standard No. 7. The Assessing Officer, however, allowed only 2/3rd of the estimated loss, corresponding to the percentage of the project completed during the relevant year. The tribunal upheld the Assessing Officer's decision, noting that under the percentage completion method, the loss should be recognized proportionately to the stage of completion. Since only 2/3rd of the project was completed, only 2/3rd of the estimated loss could be claimed. The tribunal rejected the assessee's ground of appeal, affirming that future anticipated losses cannot be carried forward. Issue 3: Treatment of gain on cancellation of foreign exchange forward contracts The assessee received Rs. 8,62,25,383 from the cancellation of forward exchange contracts initially entered into by its parent company for purchasing fixed assets. The assessee argued that this receipt was a capital receipt and should not be deducted from the cost of the fixed assets. The tribunal examined the facts and found that the assessee had canceled the forward contracts and received the amount as a result. The tribunal distinguished this case from the Bombay High Court decision in Bharat Forge Co. Ltd., where the compensation was for breach of contract by the bank. Instead, the tribunal found the facts similar to the Special Bench decision in Apollo Tyres Ltd., where gains from the cancellation of forward contracts related to foreign loans for purchasing machinery were to be reduced from the cost of the machinery. The tribunal set aside the CIT(A)'s order and restored the Assessing Officer's decision to reduce the amount received from the cost of the fixed assets for depreciation purposes. Conclusion: The tribunal's judgment addressed the three primary issues by: 1. Allowing the assessee's appeal on the actual cost for depreciation, directing the computation based on the amount paid (Rs. 130.52 crore). 2. Upholding the disallowance of the full loss claimed for the construction contract, allowing only the proportionate loss based on the percentage completion method. 3. Reversing the CIT(A)'s decision on the treatment of gain from the cancellation of forward contracts, directing the reduction of the amount from the cost of fixed assets. Both appeals were partly allowed, with specific directions provided for each issue.
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