1981 (11) TMI 73 - AT - Income Tax

Summary

Issues:
1. Determination of original cost of assets transferred between related companies for income tax assessment.

The judgment by the Appellate Tribunal ITAT BOMBAY-D involved a case where a company, engaged in manufacturing plastic goods, transferred assets to another company, both being related entities. The transfer was made at a value determined by a valuation report, which was significantly higher than the book value and written down value of the assets for income tax purposes. The primary issue was whether the original cost of the assets for the transferee's income tax assessment could be lower than the consideration paid for the transfer. The Tribunal analyzed the provisions of Explanation 3 to section 43(1) of the Income-tax Act, 1961, which allows adjustments if the main purpose of the transfer was to reduce income tax liability by inflating asset costs for depreciation claims.

The Tribunal noted that for Explanation 3 to apply, it must be established that the main purpose of the transfer was to reduce income tax liability by claiming depreciation with reference to an enhanced cost of the assets. In this case, the cost adopted was not more than the market value of the assets, and there was no evidence to suggest that the transfer was made to artificially inflate asset values for tax benefits. The Tribunal emphasized that even unrelated parties would transfer assets at market rates, and the mere fact that the valuation exceeded the written down value did not imply tax avoidance. As there was no indication that the consideration exceeded the market value, the Tribunal concluded that Explanation 3 was not applicable. Therefore, the Tribunal accepted the assessee's contention and directed that the actual cost of the assets should be based on the amounts paid by the transferee for the transfer.

In conclusion, the Tribunal partially allowed the appeal, ruling in favor of the assessee by determining that the original cost of the assets transferred between related companies should be based on the consideration paid, as the transfer did not aim to reduce income tax liability through inflated asset values.