2005 (3) TMI 769 - AT - Income Tax

Summary

Issues Involved:
1. Depreciation on the cost of assets for the assessment years 1995-96, 1996-97, and 1997-98.
2. Addition to the value of closing stock on account of MODVAT for the assessment year 1996-97.

Detailed Analysis:

Issue 1: Depreciation on the Cost of Assets for the Assessment Year 1995-96
The primary issue was whether the CIT(A) erred in directing the Assessing Officer to allow depreciation on the cost of assets being the purchase price of Rs. 14,31,37,237 as per IT Rules. The Assessing Officer argued that the assets were revalued just before the transfer and that the main purpose of the transfer was to claim higher depreciation, invoking Explanation 3 to section 43(1) of the IT Act. The CIT(A) disagreed, stating that the transfer was based on sound business considerations and not solely for tax benefits. The Tribunal, however, sided with the Assessing Officer, concluding that the transaction was not at arm's length and was primarily aimed at reducing tax liability by claiming excessive depreciation.

Issue 2: Depreciation on Overvalued Assets and MODVAT for the Assessment Year 1996-97
The grounds raised included the CIT(A) directing the Assessing Officer to grant depreciation on overvalued assets purchased from M&M Ltd., where the assessee had substantial shareholding, and deleting the addition of Rs. 4,37,915 to the value of closing stock on account of MODVAT. The Tribunal found that the valuation of assets was not at arm's length and the main purpose was tax reduction. Regarding MODVAT, the CIT(A) had deleted the addition, but the Tribunal's decision on this specific point was not explicitly detailed in the provided text.

Issue 3: Depreciation on Plant and Machinery for the Assessment Year 1997-98
The issue was whether the CIT(A) erred in directing the Assessing Officer to allow depreciation on plant and machinery based on the WDV of assets as determined after giving effect to CIT(A)'s order for the assessment year 1996-97. The Tribunal upheld the Assessing Officer's view that the valuation was inflated and the transfer was not at arm's length, thereby supporting the reduced depreciation claim.

Conclusion:
The Tribunal concluded that the transactions were not conducted at arm's length and were primarily aimed at reducing tax liability through inflated depreciation claims. The Tribunal reversed the CIT(A)'s decisions and upheld the Assessing Officer's application of Explanation 3 to section 43(1) of the IT Act, thereby restricting the depreciation claims to the written down value (WDV) of the assets in the books of M&M Ltd. The appeals of the Revenue were allowed, reinforcing the view that the transactions were structured to evade taxes.