2014 (10) TMI 398 - HC - Income Tax

Depreciation on enhances value of assets disallowed Intention to reduce tax liability or not - Slump sale Held that - At the time of transfer of the assets, the assessee had no income for it to reduce its tax liabilities by way of such transfer, both the CIT (A) and the Tribunal had rightly concluded that the AO was in error in invoking Explanation 3 to Section 43 for determining actual cost in the deal - Tribunal was rightly in concluding that Explanation 3 to Section 43 of the Act was not required to be invoked thus, no substantial question of law arises for consideration Decided against revenue. Interest expenditure on unpaid purchase consideration Held that - Explanation 8 to section 43(1) is brought on the statute book by the Finance Act, 1986, w.e.f 1st April 1974, which explains that where an amount is paid or is payable as interest in connection with acquisition of asset, so much of such amount which is relatable to any period after such asset is first put to use shall not be included and shall be deemed to have been included in the actual cost of such asset relying upon Commissioner of IncomeTax v. Rajaram Bandekar 1993 (1) TMI 46 - BOMBAY High Court the explanation was added with an object of removing doubts with regard to the includibility of interest relatable to any period after the asset has first been put to use, in the computation of its actual cost - CIT (A) as well as the Tribunal have noticed that in view of introduction of Explanation 8 to Section 43 (1) of the Act which was held retrospective in nature, the interest cannot be capitalized which was paid after the slump sale was effected and the factory was in operation, and therefore, expenses were revenue in nature - The directions given to the AO to allow the amount of interest of ₹ 1.57 Crores is upheld Decided against revenue.

Summary

Issues:
1. Disallowance of depreciation on enhanced value of assets.
2. Disallowance of interest expenditure on unpaid purchase consideration.

Issue 1 - Disallowance of Depreciation on Enhanced Value of Assets:

The High Court considered the challenge to the order of the Income Tax Appellate Tribunal regarding the disallowance of depreciation of Rs. 9,82,47,164 made by the Assessing Officer. The Court analyzed whether the Tribunal was correct in deleting the disallowance. The Assessing Officer had invoked Explanation 3 of Section 43(1) of the Income Tax Act, 1961, and questioned the valuation report of the assets. The Court observed that the valuation report was made after the transaction, and the Assessing Officer's doubts were unfounded. The Court noted that the Tribunal and CIT [A] extensively examined the factual matrix and concluded in favor of the assessee, emphasizing that the price of Rs. 100 Crores for the slump sale was genuine. The Court held that Explanation 3 was wrongly invoked as the assessee had no income at the time of asset transfer to reduce tax liabilities. Therefore, the Court found no error in the Tribunal's decision.

Issue 2 - Disallowance of Interest Expenditure on Unpaid Purchase Consideration:

The second issue involved the disallowance of Rs. 1,57,63,526 on account of interest expenditure on unpaid purchase consideration. The Assessing Officer treated the interest as part of the total consideration for acquiring the EMD undertaking. However, the CIT [A] and the Tribunal disagreed, citing Explanation 8 to Section 43 of the Act. The Explanation clarifies that interest relatable to any period after the asset is first put to use should not be included in the actual cost of the asset. The Court referenced a Bombay High Court case to support this interpretation. The Court concurred with the lower authorities that the interest paid after the slump sale was revenue in nature and not part of the capital cost. Therefore, the Court found no substantial question of law and dismissed the Tax Appeal.

In conclusion, the High Court upheld the Tribunal's decision on both issues, ruling in favor of the assessee. The Court clarified the application of relevant provisions and explanations under the Income Tax Act, emphasizing the genuine nature of the transactions and the correct treatment of depreciation and interest expenses.