2017 (2) TMI 544 - AT - Income Tax

Acquisition of second hand windmill and pricing of such windmill - assessee is aggrieved on adoption of value as actual cost, whereas, the Revenue is aggrieved on rejection of the value assigned by the Assessing Officer - Held that - It is not disputed that depreciated value of the said windmill in the hands of M/s Soundararaja Mills Ltd. was negligible at the time of such sale. M/s Enercon (India) Ltd. who manufactured the windmill had certified that the model sold by M/s Soundararaja Mills Ltd. to the assessee was no more in market. They also declined to assign a value which, in other words, mean that the windmill which was more than 5-1/2 years old was of obsolete technology. These factors, in our opinion, clearly indicate that the transfer of windmill to the assessee from M/s Soundararaja Mills Ltd. at a price of ₹ 2.36 Crores itself was a questionable and doubtful one, with the only intention to reduce tax liability. It may be true that assessee had raised a loan of ₹ 144 lakhs from M/s Canara Bank, based on a valuation report requisitioned by the said bank and in the said valuation report, the value of the windmill was fixed as ₹ 2,19,00,000/-. It may also be true that Government approved valuer had fixed the value of windmill at ₹ 2,95,00,000/-. However, for invoking Explanation 3 to Section 43(1) what is required is the objective satisfaction reached by the Assessing Officer that the main purpose of transfer is reduction of tax liability. The valuations may be relevant in ordinary circumstances but when the cumulated depreciation claimed was far in excess of the cost, relevance of such valuations, in our opinion, is insignificant. Especially so since CIT(Appeals) had found glaring deficiencies in such valuation, where only depreciation for one year alone was considered. CIT(Appeals), in our opinion, was not justified in substituting the value adopted by the A.O. with one based on a method adopted by TIIC, a Government agency. A.O. had adopted a fair method of multiplying the average generation per year with per unit cost of electricity generated. This was the method adopted by the assessee itself for valuing four numbers of windmill offered by it as collateral for raising loan from M/s Canara Bank, except for the difference in unit rate. In our opinion, the conditions for invoking Explanation 3 to Section 43(1) of the Act were satisfied. We, therefore, have no hesitation to set aside the order of the CIT(Appeals) and reinstate the order of the A.O.

Issues Involved:
1. Justification of the Commissioner of Income Tax (Appeals) in holding the cost of acquisition of the windmill.
2. Estimation of the cost of acquisition of the second-hand windmill.
3. Applicability of Explanation 3 to Section 43(1) of the Income Tax Act.
4. Legality of the reopening of assessment to reduce depreciation claim.
5. Valuation method adopted by the Assessing Officer and CIT(A).
6. Main purpose behind the acquisition of the second-hand windmill.

Detailed Analysis:

1. Justification of the Commissioner of Income Tax (Appeals) in holding the cost of acquisition of the windmill:
The Commissioner of Income Tax (Appeals) held that the assessee acceded to the actual cost determination of ?1,50,00,000 by implication, which the assessee contested, arguing that the filing of a cross-objection is equivalent to filing an appeal and should not be used against them.

2. Estimation of the cost of acquisition of the second-hand windmill:
The Commissioner of Income Tax (Appeals) estimated the cost of acquisition of the second-hand windmill at ?1,50,00,000, contrary to the actual cost of ?2,36,10,000 claimed by the assessee. The assessee argued that the valuation was certified by a registered valuer and supported by a bank loan valuation.

3. Applicability of Explanation 3 to Section 43(1) of the Income Tax Act:
The Assessing Officer invoked Explanation 3 to Section 43(1), asserting that the main purpose of acquiring the windmill was to reduce tax liability by claiming depreciation on an enhanced cost. The assessee contended that the transaction was genuine and not intended to reduce tax liability, emphasizing that the parties were unrelated and the transaction was a business decision.

4. Legality of the reopening of assessment to reduce depreciation claim:
The reopening of the assessment was challenged by the assessee, arguing that it was not legal to reduce the depreciation claim from ?98,21,273 to ?94,44,000. However, no arguments were advanced by the assessee on this point during the hearing.

5. Valuation method adopted by the Assessing Officer and CIT(A):
The Assessing Officer did not accept the valuation report provided by the assessee, which was prepared for availing a bank loan. The A.O. determined the actual cost of the windmill as ?43,28,388 and allowed depreciation on this amount. The CIT(A) found deficiencies in the valuation report and adopted a valuation method suggested by the Tamilnadu Industrial Investment Corporation, setting the value at ?1,50,00,000. The Tribunal found the A.O.'s method of multiplying the average generation per year with the per-unit cost of electricity generated to be fair and reinstated the A.O.'s order.

6. Main purpose behind the acquisition of the second-hand windmill:
The Tribunal agreed with the A.O. that the main purpose of the transfer was to reduce tax liability, as the cumulative depreciation claimed by the previous owner and the assessee exceeded the original cost of the windmill. The Tribunal emphasized the need to look beyond the form of the transaction to its substance, concluding that the acquisition at an excessive cost was motivated by tax reduction.

Conclusion:
The Tribunal dismissed the appeal of the assessee and allowed the appeal of the Revenue, reinstating the order of the Assessing Officer. The Tribunal found that the conditions for invoking Explanation 3 to Section 43(1) were satisfied and that the A.O.'s method of valuation was justified. The order was pronounced on 3rd February 2017 at Chennai.

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