2016 (6) TMI 593 - AT - Income Tax

Disallowance on account of depreciation claimed applying the provisions of explanation-3 below Section 43(1) - Held that - Explanation 3 to Section 43(1) can be invoked in the given facts of the case. It prescribes that Assessing Officer must record a proper satisfaction that the main purpose of the transfer of such assets was reduction of liability to income-tax. This mandatory finding is conspicuously missing from the order impugned of the Assessing Officer. Besides, if it is not a case of transfer of assets, in that case the Explanation itself would not apply. In my considered view, it is purely factual matter where a new company is duly formed after transferring assets of a firm and undertook reclassification of the assets in proper blocks on which no adverse remark has been made by authorities below. Alternatively also, the Hon ble Supreme Court in a recent judgment in the case of CIT vs. Excel Industries Ltd, reported in (2013 (10) TMI 324 - SUPREME COURT ), has held that the preponement or postponement of year of claim or allowance is a basically revenue neutral in character, more so when the rate of income tax in case of company is nearly same. The re-classification of asset at the most makes a benign shift in the claim of depreciation of machinery block and computer block. Depreciation being a carried over allowance based on WDV; rate of tax being same, following the Hon ble Supreme Court judgment, is a revenue neutral exercise. So, in any case, the assessee cannot be blamed for the re-classification as deliberately to reduce its tax liability as contemplated by sec. 43(1) expln. 3. In view of these observations, see no justification in reduction of depreciation claim made by the assessee which is deleted. - Decided in favour of assessee

Summary

Issues: Disallowance of depreciation claimed under Section 43(1) Explanation-3

Detailed Analysis:

1. Issue: Disallowance of depreciation claimed by the assessee under Section 43(1) Explanation-3.

- The appellant challenged the disallowance of depreciation amounting to ?6,17,026 made by the Assessing Officer under Section 43(1) Explanation-3.

2. Facts and Circumstances:

- The assessee-company came into existence by converting and transferring assets from a firm to a company as per the provisions of the Companies Act.

- The partners of the company were issued shares at the book value of the assets as on 31.03.2000.

- The company auditors discovered that computer and peripherals were incorrectly debited to the machinery account, leading to correction by transferring these assets to the appropriate block of assets.

- The difference in the claim of depreciation arose due to the correction of intra-block asset classification, resulting in an increase in the WDV of the computer block eligible for depreciation at 60%.

3. Assessing Officer's Decision:

- The Assessing Officer assumed a violation of Explanation 3 to Section 43(1) without proper appreciation of facts and explanations provided by the assessee.

- The Assessing Officer reduced the claim of depreciation without establishing any motive for tax avoidance through the intra-block change of assets.

4. Decision of CIT(A):

- The CIT(A) upheld the Assessing Officer's decision based on the belief that the assessee's actions were aimed at tax avoidance, despite the absence of any concrete evidence supporting such a claim.

- The CIT(A) justified the disallowance of depreciation by emphasizing the importance of Explanation 3 to Section 43(1) and the alleged overvaluation of assets.

5. Appellant's Arguments:

- The appellant contended that Explanation 3 to Section 43(1) was inapplicable as the increased depreciation claim was not due to overvaluation but a correction in asset classification.

- The appellant highlighted the absence of any finding indicating a deliberate overvaluation of assets to reduce tax liability, as required by Section 43(1) Explanation-3.

6. Tribunal's Decision:

- The Tribunal observed that the Assessing Officer failed to provide a proper satisfaction regarding the main purpose of the asset transfer being tax liability reduction, a prerequisite for invoking Explanation 3 to Section 43(1).

- The Tribunal also referred to a Supreme Court judgment emphasizing that asset reclassification for depreciation purposes is a revenue-neutral exercise, especially when tax rates remain constant.

7. Conclusion:

- The Tribunal allowed the appellant's appeal, ruling in favor of the assessee and overturning the disallowance of depreciation.

- The Tribunal's decision was based on the lack of evidence supporting tax avoidance motives and the revenue-neutral nature of asset reclassification for depreciation purposes.

This detailed analysis highlights the key legal and factual aspects of the judgment, focusing on the disallowance of depreciation claimed by the assessee under Section 43(1) Explanation-3 and the subsequent decisions of the Assessing Officer, CIT(A), and the Tribunal.