2015 (3) TMI 319 - AT - Income Tax

Disallowance on account of depreciation - transfer of assets was a scheme of demerger duly approved by the Hon ble High Court of Delhi - whether provisions of Explanation 3 to section 43(1) of the I.T. Act were explicitly applicable in the assessee s case? - AR s objection that the AO had not determined the actual cost of the assets as laid down in Explanation 3 to sec. 43(1) - Held that - AO was very reasonable in adopting WDV as actual cost and his action was supported by the judgments of various Hon ble Courts. As regards, the submission of ld. Counsel that raising of loans of ₹ 165 crores on the assets is reflective of their value, ld. DR submitted that banks have not analyzed the issue of actual cost of the assets as per the specific provisions of the Income-tax Act. Even the CIT(A) has given findings of the order that arrangement of fund and furnishing security thereof to the lending bank do not fortify the case of the appellant for the purpose of applicability of Explanation 3 of sec. 43(1) of the Act . The approval granted by the Hon ble Delhi High Court had persuasive value for deciding the actual cost of assets to the assessee. It could not be ignored particularly because Hon ble Court expressly considers the bonafide of the entire scheme. However, this is not binding on Income-tax Authorities while considering the actual cost as contemplated in Explanation 3 to section 43(1).The assessee company was set up to spearhead the power sector initiatives of the Avantha Power & Infrastructure Group. The objective of demerger of the power asset of Ballarpur Industries Ltd. was to create platform, wherein the company could undertake larger power projects. The company s plans were to expand their generation capacity and development efforts in order to capitalize on the prevailing and foreceable future and meet balance deficit between electricity demand and supply in India.The AO has not disputed the objective with which assessee had made this arrangement. The main/primary objective of assessee is relevant for purposes of Explanation 3. If the primary objective was not tax reduction. The Explanation 3 could not be invoked. Companies Act prescribes normally such rates which may ensure the achievement of aforementioned objective. However, under the Income Tax Act such rates are prescribed which ensure that assessee recovers its capital cost in shortest possible of time. Therefore, the rates of depreciation prescribed under Companies Act are more realistic. Under the Companies Act the object is that the company s assets should continue in the books upto their entire life span. Be that as it may, since two WDV s were available before the AO for determining the actual cost, he could not have ignored the WDV as per the books of the company the adoption of which was more beneficial to company. Admittedly, there is very minor difference (235 - 214.16) crores in the valuation of assets as per books of BILT and the actual consideration paid by the assessee company. Therefore, this aspect clearly establishes the bonafide of assessee in adopting the actual cost of assets at ₹ 235 crores. We, therefore, do not find any reason to disturb the findings of ld. CIT(A). - Decided in favour of assessee. Allowability of loan processing fees - Held that - The effective date as per the decision of Hon ble High Court sanctioning the scheme of demerger was 01/04/06 and the assessee company had acquired the running plant of Ballarpur Industries Ltd. and the loan was taken in July, 2006. However, this loan was for paying the purchase price of assets acquired by the assessee and, therefore, the AO has rightly observed that the incidence of expenditure occurred prior to obtaining assets. Here we have to examine the nature of payment with reference to the assessee company which has acquired the power business of Ballarpur Industries Ltd. Since, the entire amount of loan had been obtained for acquiring the asset, therefore, all the expenses incidental to the acquisition of loan have to be treated as capital in nature. Merely because assessee had acquired going concern will not alter the nature of payment in the hands of the assessee. The intention of the legislature is that all the expenses incurred up to the date of acquisition of asset have to be treated as capital in nature. We, therefore, do not find any infirmity in the order of AO in treating the entire loan processing fee paid for obtaining loan from bank being capital in nature. The assessee however, would be entitled to claim depreciation by capitalizing this figure with the cost of asset acquired by it. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on fixed assets.
2. Disallowance of loan processing charges.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Fixed Assets:

The assessee company, engaged in the business of generation and distribution of power, filed its return of income declaring Rs. 7,98,64,773/-. The Assessing Officer (AO) determined the total income at Rs. 19,73,68,300/- by making several additions, including a disallowance of depreciation amounting to Rs. 11,53,53,162/- on the differential amount of fixed assets. The AO argued that the transfer of assets was part of a "scheme of demerger" approved by the High Court, and thus, the provisions of Explanation 3 to section 43(1) of the Income-tax Act were applicable. The AO contended that the main purpose of the transfer was to reduce tax liability by claiming depreciation on an enhanced cost.

The CIT(A) deleted the disallowance, stating that the AO did not provide substantial grounds for rejecting the cost of assets as valued by registered valuers. The CIT(A) emphasized that the valuation was approved by the High Court and that the AO lacked the technical competency to value the plant and machinery.

The Department appealed, arguing that the AO was justified in invoking Explanation 3 to section 43(1) due to the significant difference between the written down value (WDV) of the assets and the purchase consideration. The Department highlighted that the assets were old and used, with a WDV of Rs. 86.66 crores, but were transferred at Rs. 235 crores, suggesting an inflated cost to claim higher depreciation.

The Tribunal upheld the CIT(A)'s decision, concluding that the primary objective of the transfer was not tax reduction but business reorganization. The Tribunal noted that the assessee had incurred substantial interest liability on the loans taken to finance the purchase, which negated the argument of tax reduction as the primary motive. The Tribunal also considered the persuasive value of the High Court's approval of the scheme and the independent valuation reports.

2. Disallowance of Loan Processing Charges:

The assessee claimed Rs. 2,43,70,830/- as loan processing fees for availing term loans from ICICI Bank and AXIS Bank. The AO disallowed the claim, treating the expenditure as capital in nature, arguing that the loan processing charges were covered under the definition of "interest" as per section 2(28A) and were incurred for acquiring assets, thus not allowable under section 36(1)(iii).

The CIT(A) allowed the deduction of Rs. 21,50,367/- booked in the profit and loss account but disallowed the remaining amount, treating it as deferred expenditure.

The Department appealed, asserting that the entire amount should be disallowed, while the assessee contended that the full amount should be allowed as revenue expenditure.

The Tribunal upheld the AO's decision, concluding that the loan processing charges were indeed capital in nature as they were directly related to the acquisition of assets. The Tribunal emphasized that all expenses incidental to the acquisition of the loan should be capitalized and not treated as revenue expenditure, allowing the assessee to claim depreciation on the capitalized amount.

Conclusion:

The Tribunal dismissed the Department's appeal regarding the disallowance of depreciation and upheld the CIT(A)'s decision. However, the Tribunal allowed the Department's appeal concerning the disallowance of loan processing charges, reversing the CIT(A)'s partial allowance and treating the entire amount as capital expenditure.