2024 (1) TMI 1134 - AT - Income Tax

Disallowance of depreciation on wind mill - sequence of events to show that the assessee is the beneficial owner of the asset - AR submitted that depreciation is claimed by the transferor of the assets and therefore not allowed in the hands of the assessee in the same year - AO did not accept the explanation of the assessee that it had purchased the wind mill during the FY relevant to A.Y. 2015-16 due to lack of any supporting document and the fact that enquiry by the Ld. AO revealed that no sale of wind mill was recorded in the books of the seller APIL for Financial Year 2014-15 HELD THAT - Admittedly, seller company APIL has claimed depreciation on wind mill during the A.Y. 2015-16. Therefore denial of impugned depreciation in the hands of the assessee is justified. The contention raised during appellate proceedings have been dealt with by the Ld. CIT(A) by recording cogent reasons. The decision in the case of Smt. Sivakami 2009 (11) TMI 127 - MADRAS HIGH COURT will not render assistance to the assessee as in that case the assessee established ownership of buses by documentary evidence whereas in the case at hand purchase of wind mill in the Financial Year 2014-15 could not be proved with documentary evidence. The twin conditions precedent, namely ownership and use of the asset i.e. wind mill, for purposes of assessee s business during the Financial Year 2014-15 relevant to A.Y. 2015-16 are not satisfied in the case of the assessee. We, therefore decline to interfere and decide ground No. 1 against the assessee. Addition u/s 56(2)(viib) - shares being issued at excessive rate - adopting a different method i.e. Net Asset Value method of valuation - HELD THAT - As not in dispute that the assessee issued 12,03,000/- equity shares to its 100% holding company, at a premium of Rs. 40/- each. It is also not in dispute that shares have been issued at premium based on fair market value as computed and certified by Chartered Accountant who determined the fair market value in accordance with Discounted Cash Flow method which is a well recognised method of valuation under Rule 11UA of the Income Tax Rules, 1962. In this view of the matter, in our humble opinion, AO/ CIT(A) are not justified in adopting a different method i.e. Net Asset Value method of valuation resulting in the impugned addition u/s 56(2)(viib) of the Act. In an identical case of KBC India Pvt. Ltd 2022 (11) TMI 1362 - ITAT DELHI equity shares were allotted by the assessee to its holding company at premium and the Tribunal held that in such a scenario no addition can be made u/s 56(2)(viib). Thus we hold that the objective behind the provisions of section 56(2)(viib) of the Act is to prevent unlawful gain by issuing company in the garb of capital receipts. In the transaction between holding and its subsidiary company no income can be said to accrue to the ultimate beneficiary i.e. holding company. The chargeability of deemed income arising from transactions between holding and subsidiary or vice-versa militates against the solemn object of section 56(2)(viib) - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on windmills.
2. Addition under section 56(2)(viib) of the Income Tax Act, 1961.

Issue 1: Disallowance of Depreciation on Windmills

The assessee claimed depreciation of Rs. 12,96,28,561/- on windmills under section 32 of the Income Tax Act, 1961. The Ld. Assessing Officer (AO) disallowed this claim, stating that the transfer of the windmills from M/s Ansal Properties and Infrastructure Limited was not completed within the financial year 2014-15. The AO observed that the obligations under the slump sale agreement dated 23.03.2015 were not fulfilled by the end of the financial year. The Ld. Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, noting that the seller had not recorded the sale of the windmills in its books for the financial year 2014-15 and continued to claim depreciation on the asset. The Tribunal agreed with the findings of the AO and CIT(A), concluding that the conditions of ownership and use of the asset for claiming depreciation were not satisfied by the assessee for the relevant assessment year. Therefore, the disallowance of depreciation was confirmed.

Issue 2: Addition under Section 56(2)(viib)

The assessee issued 12,03,000 equity shares at Rs. 50 per share, supported by a valuation report using the Discounted Cash Flow (DCF) method as prescribed under Rule 11UA. The AO rejected this valuation, citing inflated financial projections and instead computed the fair market value at Rs. 23.05 per share based on the Net Asset Value method, resulting in an addition of Rs. 3,24,20,850/- under section 56(2)(viib). The CIT(A) upheld the AO's decision, noting that the projections used in the DCF method were unreliable due to unfulfilled acquisition plans of windmill projects. The Tribunal, however, found that the DCF method is a recognized method under Rule 11UA and that the shares were issued to the assessee's 100% holding company. The Tribunal held that in such cases, the provisions of section 56(2)(viib) are not applicable, and the AO/CIT(A) were not justified in adopting a different valuation method. The Tribunal cited similar cases where the DCF method was upheld and ruled in favor of the assessee, thereby deleting the addition made under section 56(2)(viib).

Conclusion

The Tribunal upheld the disallowance of depreciation on windmills but deleted the addition made under section 56(2)(viib), thereby partly allowing the appeal of the assessee.