1987 (6) TMI 90 - AT - Income Tax

Summary

Issues Involved:
1. Validity of revaluation of plant and machinery for depreciation purposes.
2. Bona fide nature of the dissolution of the partnership firm.
3. Applicability of Explanation (3) to Section 43(1) of the Income-tax Act.
4. Commissioner of Income-tax's power under Section 263 of the Income-tax Act.
5. Interference by the Commissioner in the Income-tax Officer's assessment.

Detailed Analysis:

1. Validity of Revaluation of Plant and Machinery for Depreciation Purposes:
The assessee-company claimed depreciation on the revalued plant and machinery, which was revalued by an approved valuer, Shri S.R. Jain. The revaluation increased the value from Rs. 19,28,831 to Rs. 29,51,629. The Income-tax Officer (ITO) allowed depreciation on this higher valuation. However, the Commissioner of Income-tax (CIT) viewed this revaluation as not bona fide, suspecting it was done to obtain higher depreciation and reduce taxable income. The CIT noted that the revaluation was a "make-believe affair" and aimed at reducing the tax liability of the limited company.

2. Bona Fide Nature of the Dissolution of the Partnership Firm:
The firm Mascot (India) Tools & Forgings, consisting of three partners, dissolved on 4-1-1979, and its business was taken over by a limited company. The CIT found the reasons for dissolution vague, described as "diverse reasons and good causes." The CIT concluded that the dissolution and revaluation were devices to avoid income-tax liability. The assessee contended that the partners were free to dissolve the firm and value the assets for adjusting their shares, and that the revaluation was done scientifically based on replacement cost.

3. Applicability of Explanation (3) to Section 43(1) of the Income-tax Act:
The CIT invoked Explanation (3) to Section 43(1), which pertains to determining the actual cost of assets for tax purposes. The CIT argued that the revaluation was primarily aimed at obtaining higher depreciation and reducing tax liability, thus falling under the purview of this provision. The assessee argued that the revaluation was bona fide and based on expert valuation, and hence should not be disregarded.

4. Commissioner of Income-tax's Power under Section 263 of the Income-tax Act:
The CIT exercised his power under Section 263, which allows him to revise any order passed by the ITO if it is erroneous and prejudicial to the interests of the Revenue. The CIT found the ITO's acceptance of the revaluation erroneous and prejudicial, as it did not consider the close connection between the partners and the company, and the potential tax avoidance motive. The CIT set aside the ITO's order and directed a re-examination of the claim.

5. Interference by the Commissioner in the Income-tax Officer's Assessment:
The CIT's interference was based on the finding that the ITO did not properly appreciate the close connection between the partners and the company, leading to prejudice to the Revenue. The CIT observed that the revaluation was a device to reduce tax liability, and the ITO failed to recognize this. The Tribunal upheld the CIT's order, agreeing that the ITO did not appreciate the nature and purpose of the revaluation and that the CIT's direction for re-examination was justified.

Conclusion:
The Tribunal upheld the CIT's order, dismissing the appeal by the assessee. The Tribunal agreed that the revaluation of the plant and machinery was not bona fide and was aimed at reducing tax liability. The CIT's invocation of Section 263 was justified as the ITO's order was found to be erroneous and prejudicial to the interests of the Revenue. The Tribunal emphasized the importance of examining the purpose behind the revaluation and the close connection between the parties involved.