2014 (12) TMI 856 - HC - Income Tax

Determination of actual cost of asset Reliance placed upon surveyor s report - Whether the Tribunal was correct in placing reliance on surveyor s report for the purpose of determining the actual cost of the asset acquired by the assessee from M/s Wimco Ltd. Held that - Obligations relating to NRDC royalty warranties and gratuity were to be claimed as business expenditure as and when incurred or accrued - the consideration paid was not bifurcated and divided into different heads as it was a case of a purchase of a running business with all assets and liabilities - The agreement stipulates that the assessee would acquire the assets including the land allotted in district Rampur buildings comprising coating shop fabrication shop DG set room etc. plant and equipments as per the details stock-in-process stock-in-trade ram materials contractual rights with customers and suppliers receivables from trade or others and petty cash related to the business - the consideration paid of 6, 03, 21, 910 was for a running and going concern and to acquire an undertaking - 6, 03, 21, 910/- was not sub-divided or bifurcated under the said agreement under different heads - Value of the fixed assets which were transferred and on which depreciation was earlier claimed by Wimco Ltd. and after acquisition by the assessee was not specified or so stated in the agreement itself It was lump sum payment. What was purchased by the appellant asseessee was an undertaking there being slump sale and the entire business including assets and liabilities were transferred for a lump sum amount - There was no break-up or division of the said amount in the agreement itself - The amount paid would be the sale consideration paid after taking into account value of the plant machinery dead stock as well as work in progress stock in trade etc. and intangible items like goodwill manpower values of different licences etc. - This cost paid would be for both depreciable and non-depreciable assets - difficulties do arise in computing the actual cost of the assets on which depreciation is to be allowed to the purchaser i.e. the appellant assessee. Assessee and the seller had evaluated the plant and machinery on the date of the sale - Therefore the authorities and the Tribunal deemed it appropriate to rely upon the surveyor s report for computing actual cost and we agree with the said conclusion. thus the order of the Tribunal is upheld Decided against assessee.

Summary

Issues Involved:
1. Determination of the actual cost of fixed assets acquired by the appellant from M/s Wimco Ltd.
2. Reliance on the surveyor's report for determining the actual cost.
3. Allowance of depreciation based on the actual cost incurred.

Issue-Wise Detailed Analysis:

1. Determination of the actual cost of fixed assets acquired by the appellant from M/s Wimco Ltd.:
The appellant company, DENORA India Ltd., purchased the metal anode division from M/s Wimco Ltd. for Rs. 6,03,21,910/- as a running concern. The initial assessment for 1990-91 did not examine the actual cost of the fixed assets, and it was done for the first time in 1991-92. The Assessing Officer, relying on a surveyor's report, valued the assets at Rs. 3,50,37,238/-. The CIT (Appeals) upheld this valuation, and the Tribunal dismissed the appellant's appeal, affirming the valuation based on the surveyor's report.

2. Reliance on the surveyor's report for determining the actual cost:
The core issue was whether the Tribunal was correct in law in relying on the surveyor's report to determine the actual cost of the assets. The appellant argued that depreciation should be allowed on the actual cost incurred, as mandated by Sections 32, 43(6), and 43(1) of the Income Tax Act. They contended that the surveyor's report was an internal document and hypothetical, thus should not override the actual cost paid. However, the court noted that both the appellant and Wimco Ltd. had relied on the surveyor's report for the valuation of the fixed assets, making it a credible basis for determining the actual cost.

3. Allowance of depreciation based on the actual cost incurred:
The appellant computed the actual cost at Rs. 6,10,02,641/- and alternatively at Rs. 4,60,99,228/- after certain adjustments. The court examined the details provided by the appellant, including the computation of purchase consideration and the allocation of costs to fixed assets. It was observed that the purchase was of an ongoing undertaking for a lump sum amount without bifurcation into different heads. The authorities and the Tribunal deemed it appropriate to rely on the surveyor's report for computing the actual cost, which the court agreed with.

Conclusion:
The court held that the actual cost of the fixed assets for depreciation purposes should be based on the surveyor's report, as it was the basis on which both the appellant and Wimco Ltd. had relied. The Supreme Court's judgments in similar cases supported the reliance on such valuation reports when determining the actual cost of assets acquired in a slump sale. The appeals were dismissed, and the question of law was answered in favor of the respondent-Revenue, affirming the Tribunal's reliance on the surveyor's report for determining the actual cost of the fixed assets.