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2014 (8) TMI 1217 - HC - Income TaxValidity of Revision order u/s 263 - 100% depreciation on the purchase and lease back arrangement - as per tribunal Section 263 is not applicable to the facts of the present case - Whether the Tribunals view relating to Explanation 3 to Section 43(1) and Explanation 4-A to the said Section is correct? - HELD THAT - Question of genuineness of the transaction was examined by the Assessing Officer and it was highlighted that the transaction was between two unrelated parties and the assessee had to purchase the assets by payment of a substantial amount. Therefore, it was pleaded, there was no question of over valuation of the assets and it was highlighted that the seller company would have suffered or paid tax as the capital gains on the sale of assets, on which, depreciation had been claimed by the purchaser assessee. Even the claim of 100% depreciation did not result in reduction of tax liability as over a duration of lease, ₹ 174.69 lakhs was to accrue as income by way of these rentals as against claim of depreciation of ₹ 150 lakhs. It is therefore clear that the Assessing Officer, when he raised the said queries had in mind Explanation 3 to Section 43(1) of the Act and whether or not, the same should be applied in the facts of the present case. Tribunal, in the impugned order, has rightly observed that in view of the correspondence and reply given by the assessee, the Assessing Officer had required the assessee to file details with regard to the claim of the depreciation and justify the same. The assessee had supplied with said information and justified the claim for said depreciation. Apparently, the Assessing Officer was fully satisfied with the said explanation offered by the assessee including why Explanation 3 to Section 43(1) of the Act should not be invoked. In these circumstances, we do not think, the finding of the Tribunal by relying up the judgment of the Supreme Court in Malabar Industrial Co. Ltd 2000 (2) TMI 10 - SUPREME COURT can be faulted. The present case is not one of no enquiry, but at best the revenue can plead and claim that it was a case of insufficient or inadequate enquiry as alleged. This aspect was examined by the Delhi High Court in CIT Vs. Sunbeam Auto Ltd. 2009 (9) TMI 633 - DELHI HIGH COURT and on the aspect whether power under Section 263 can be exercised for further detailed or full verification It is an acceptable position that explanation 4A to Section 43(1) would not apply to the year in question, as it was inserted by the Finance (No. 2) Act, 1996 w.e.f. 1.10.1996 - the questions of law are answered in favour of the respondent-assessee
Issues Involved:
1. Applicability of Section 263 of the Income Tax Act, 1961. 2. Correctness of Tribunal's view on Explanation 3 to Section 43(1) and Explanation 4-A to the said Section. Issue-wise Detailed Analysis: 1. Applicability of Section 263 of the Income Tax Act, 1961: The appeal pertains to the Assessment Year 1994-95 and questions whether the Tribunal was right in its view that Section 263 of the Income Tax Act, 1961 is not applicable to the facts of the present case. The Commissioner of Income Tax (CIT) had invoked Section 263, claiming the assessment order was erroneous and prejudicial to the revenue due to the allowance of depreciation on assets purchased and leased back to M/s. Jaiprakash Industries Ltd. and APSEB. The CIT argued that these assets were previously used by the sellers for their business, and the transaction was a device to claim 100% depreciation, reducing tax liability. The CIT held that the Assessing Officer (AO) failed to conduct detailed inquiries regarding the applicability of Explanation 3 to Section 43(1), making the assessment erroneous and prejudicial to the revenue. The Tribunal, however, set aside the CIT's order, reasoning that the AO had specifically examined the depreciation claim during the assessment proceedings. The Tribunal noted that the AO had conducted due inquiries and was satisfied with the assessee's claim. Referring to Malabar Industrial Co. Ltd. Vs. CIT, it was emphasized that Section 263 cannot be invoked to correct every mistake or error unless the order is erroneous and prejudicial to the revenue. The Tribunal concluded that the AO's opinion was plausible and not unsustainable in law, thus not warranting Section 263's invocation. 2. Correctness of Tribunal's view on Explanation 3 to Section 43(1) and Explanation 4-A to the said Section: Explanation 3 to Section 43(1) was central to the CIT's argument. This explanation allows the AO to determine the actual cost of assets if the main purpose of their transfer was to reduce tax liability by claiming depreciation with reference to an enhanced cost. The Tribunal found that the AO had considered this explanation during the assessment. The assessee had justified the depreciation claim, arguing that the assets were purchased from unrelated parties, and the transactions were genuine. The AO's acceptance of this explanation indicated that he had considered the applicability of Explanation 3. The High Court agreed with the Tribunal, noting that the AO had made inquiries and was satisfied with the assessee's explanation, including why Explanation 3 should not be invoked. The Court referred to CIT Vs. Sunbeam Auto Ltd. and IT Officer Vs. D.G. Housing Projects Ltd., emphasizing that Section 263 cannot be used for further detailed verification unless the CIT establishes that the AO's order was erroneous and unsustainable in law. The Court concluded that the Tribunal's finding was justified, as the AO had conducted inquiries and formed a plausible opinion. Regarding Explanation 4-A to Section 43(1), the Court noted that it was not applicable to the year in question since it was inserted by the Finance (No. 2) Act, 1996, effective from 1.10.1996. Conclusion: The High Court upheld the Tribunal's decision, answering the questions of law in favor of the respondent-assessee and against the appellant-revenue. The appeal was dismissed with no order as to costs. The judgment emphasized the importance of detailed inquiries by the AO and the limitations of Section 263 in correcting perceived errors unless they are clearly erroneous and prejudicial to the revenue.
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