2020 (9) TMI 335 - HC - Income Tax

Fixation of the value of the second-hand windmill - Depreciation on windmill - valuation method adopted by the assessing officer to determine the cost of the windmill - Consideration of valuation report given by an approved government valuer of the Canara Bank - Whether the actual purchase price of a second-hand asset can be ignored by purported recourse to Explanation 3 to Section 43(1) of the Income Tax Act, 1961 ? HELD THAT - CIT A , in our considered view, while partly allowing the assessee's appeal, proceeded to make a adopt estimations of the value and fixed the sum at ₹ 1,50,00,000/-. We find that there is no scientific basis for such fixation of the value of the second-hand windmill and such fixation has been done based on the personal opinion of the CIT A . Tribunal was fully justified in allowing the Revenue's appeal. With regard to the assessee's appeal, the Tribunal re-appreciated the factual position and in particular, noted that the manufacture of the windmill has certified that the windmill, which was sold to the assessee is no more in the market value and the technology has become obsolete. The Tribunal also considered as to what would be the effect of a report of the government valuer and noted Explanation III to Section 43(1), which requires the AO to arrive at an objective satisfaction. Tribunal observed that valuations may be relevant in ordinary circumstances, but when cumulative depreciation claimed was far in excess of the cost, the valuation report of the approved valuer becomes insignificant. Tribunal has reappreciated the factual position and come to a conclusion that the order passed by the assessing officer requires no interference. No substantial question of law.

Summary

Issues:
1. Interpretation of Section 43(1) of the Income Tax Act, 1961 regarding the actual purchase price of a second-hand asset.
2. Disallowance of depreciation in the assessment year 2009-2010 for the purchase of a windmill.
3. Valuation of the windmill for depreciation purposes.
4. Consideration of valuation reports and market value for determining the cost of the windmill.
5. Dispute over the inflated cost of the windmill to reduce tax liability.
6. Application of Explanation III to Section 43(1) of the Act.
7. Assessment of the real worth of the asset and computation of depreciation.
8. Disagreement over the claim of depreciation and the value of the windmill.
9. Judicial review of the CIT(A) decision on the valuation of the windmill.
10. Reappreciation of factual position by the Tribunal and final conclusion on the appeals.

Analysis:
1. The appeals were filed under Section 260-A of the Income Tax Act, 1961, challenging the order disallowing depreciation on the purchase of a windmill for the assessment year 2009-2010. The main question of law was whether the actual purchase price of a second-hand asset can be disregarded under Explanation 3 to Section 43(1) of the Act.

2. The assessment was reopened under Section 147 of the Act due to an excess claim of depreciation on the windmill purchase. The appellant contended that the windmill was purchased for a specific amount based on various factors like its age, location, and performance history. The Commissioner of Income Tax [Appeals] determined the cost of the windmill at a lower value, leading to appeals by both the assessee and the Revenue before the Tribunal.

3. The Tribunal dismissed the assessee's appeal and allowed the Revenue's appeal, leading to further challenges before the High Court. The appellant argued that the valuation report by an approved government valuer was not considered by the Tribunal, emphasizing the market value and the lifespan of the windmill as crucial factors in determining its cost for depreciation purposes.

4. The Revenue contended that the cost of the windmill was inflated to reduce tax liability, and the assessing officer rightly disallowed the depreciation claim. The assessing officer's decision was based on the accelerated depreciation incentive under the Act and the discrepancy in the claimed depreciation amount compared to the original owner's claim.

5. The High Court observed that the CIT(A) had fixed the windmill's value based on estimations without a scientific basis, leading to the Tribunal's decision to allow the Revenue's appeal. The Tribunal reevaluated the factual position, considering the obsolescence of the windmill technology and the excessive cumulative depreciation claimed compared to the cost.

6. Ultimately, the Tribunal's conclusion was upheld by the High Court, stating that there was no substantial question of law arising for consideration. The Tribunal's reappreciation of the facts led to the dismissal of the appeals, emphasizing the need for objective satisfaction in determining the value of second-hand assets for depreciation purposes.