2011 (3) TMI 582 - HC - Income Tax

Depreciation - assessee acquired manufacturing assets and other assets such as land and building situated at various locations - For acquisition of these assets, the assessee paid due consideration - In order to show the value of the fixed assets, namely plant and machinery as well as land and building and to claim deprecation thereupon, the assessee filed valuation reports in respect of these assets before the Assessing Officer - The Assessing Officer dug certain holes in the said valuation reports and found some shortcomings therein to reject the valuation as given by the registered valuers - According to him, the valuer had not given any reference of purchase price of the plant and machinery, book value of land and building and original cost of the assets to the seller. Held that the defects or deficiencies allegedly pointed out by the authorities in the valuation report were not material enough to reject the said valuation report especially when there was no evidence material brought on record to dispute the said valuation - As a matter of fact the orders of the authorities show that the adverse inference drawn by them while doubting or disputing the valuation report was mainly based on assumption and surmises without there being any evidence/material to support and substantiate the same - Hence, the Income-tax Appellate Tribunal has rightly held that the depreciation was allowable and answer the question in favour of the assessee

Issues Involved:

1. Deletion of additions made by the Income-tax Appellate Tribunal on account of Modvat credit receivable and its addition to the value of the closing stock.
2. Accepting the valuation of assets acquired by the assessee from five vendor companies based on valuation reports as shown in the relevant agreements.

Detailed Analysis:

Issue 1: Modvat Credit Receivable and Addition to Closing Stock

The court addressed the deletion of additions related to Modvat credit receivable and its inclusion in the closing stock value. The learned counsel for the Revenue did not dispute that this issue was covered by the Supreme Court judgment in CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275. The court noted that in an earlier appeal for the assessment year 1996-97, the Revenue's appeal was dismissed following the same judgment. The assessee's method of showing the closing stock, which had been consistently followed and accepted by the Department from the assessment year 2001-02 onwards, was deemed legitimate. Consequently, the court concluded that no question of law arose on this aspect.

Issue 2: Valuation of Assets of Five Vendor Companies

The primary question was whether the Income-tax Appellate Tribunal erred in directing the Assessing Officer to accept the valuation of assets acquired by the assessee from five vendor companies based on valuation reports as shown in the relevant agreements.

Circumstances and Background:

The assessee, engaged in manufacturing soft drinks, acquired manufacturing assets and other assets from five companies that were previously its franchisees. The Assessing Officer claimed that the purchase was to eliminate future competition and establish a monopoly. He alleged that the land value was suppressed, and the price of plant and machinery was inflated to claim excess depreciation. The agreement was deemed collusive, and the value of land was increased by 50%, while the value of bottles and crates was reduced by 50%.

Tribunal's Findings:

The Tribunal found that the acquisition was supported by relevant agreements and valuation reports from registered valuers. It directed the Assessing Officer to accept the valuation of the assets as shown in the agreements and supported by the valuation reports. The Tribunal's rationale included:

1. Specific assets were purchased at an agreed price, supported by valuation reports.
2. No goodwill was acquired as the companies were franchisees of the assessee, and the goodwill belonged to the assessee.
3. The valuation reports provided a basis for valuing different assets, and no significant defects were pointed out by the Assessing Officer.
4. The method of valuation adopted by the registered valuers was well accepted.
5. There was no basis for the Assessing Officer to inflate the land value or deflate the value of bottles and crates.
6. The cost paid by the assessee for the assets was the actual cost, and depreciation was rightly claimed as per section 43(6) of the Act.

Court's Conclusion:

The court agreed with the Tribunal's approach and concluded that it was in accordance with the law. The specified lump sum consideration paid for the assets was as per the agreements. The assumptions made by the Assessing Officer and the Commissioner of Income-tax (Appeals) were unfounded. There was no material or legitimate reason to discard the valuation reports. The court found no justification for inflating the land value by 50% or reducing the value of bottles and crates by 50%. The Income-tax Appellate Tribunal rightly held that depreciation was allowable.

Final Judgment:

The court answered the question in favor of the assessee and against the Department, dismissing the appeal. The Tribunal's order directing the acceptance of the asset valuation as per the agreements and valuation reports was upheld.

← Previous Next →