2015 (5) TMI 714 - AT - Income Tax

Excess claim of depreciation - Equipments given on hire - cost of acquisition u//s 43(1) - CIT(A)directing to adopt value of the depreciated assets at ₹ 89,10,245 as against ₹ 22,45,000 taken by the Assessing Officer (AO) and consequently allowing relief of depreciation amounting to ₹ 16,66,311 - Held that - It is manifest from the order of the ld. CIT(A) that he simply took on record the details from the assessee and proceeded to delete the disallowance without any independent appraisal. Such Equipments were purchased and commercially exploited by BBW for at least three months, earning rent of ₹ 11.77 lac from their hiring, before transferring them to the assessee. It defies all the logics that any Equipment commercially exploited for at least three months by giving it on hire, after purchase, would fetch the same price at which it was acquired. The Tribunal, being a final fact finding authority, cannot act as a mute spectator to the designs of the parties in arranging their affairs in such a manner so as to scuttle the legitimate tax due to the exchequer. A thing which can be seen with a naked eye, cannot be lost sight of on some unrealistic reasoning. It is not a case in which the AO has arbitrarily formed a view that the purchase price of the Equipments was declared higher and simply ignored it without any bedrock. Rather, he took pains in establishing that the case of the assessee was caught within the mischief of Expl. 3 to section 43(1).The order passed by the ld. CIT(A) in holding otherwise, is, therefore, overturned. Correctness of the amount substituted as actual cost - Held that - assessee capitalized actual cost of Equipments purchased from BBW at a net of ₹ 63.22 lac, which has been held by us above to be unacceptable. The AO determined the actual cost of such Equipments at ₹ 20 lac, which is again devoid of rationality and is not more than an ad hocism. - The written down value of such Equipments in the hands of BBW at the time of sale to the assessee stood at ₹ 32.91 lac. No details of Installation charges etc. incurred by BBW has been made available. In our considered opinion, the ends of justice would meet adequately, if the total actual cost of such Equipments purchased from BBW is taken at ₹ 35.00 lac on all inclusive basis. The impugned order on this score is set aside and the AO is directed to allow depreciation by considering ₹ 35.00 lac as the actual cost of Equipments purchased from BBW as against his estimate of ₹ 20.00 lac.

Summary

Issues Involved:
1. Determination of the actual cost of depreciated assets.
2. Application of Explanation 3 to Section 43(1) of the Income-tax Act, 1961.
3. Validity of the Assessing Officer's (AO) satisfaction regarding the main purpose of asset transfer.

Detailed Analysis:

1. Determination of the Actual Cost of Depreciated Assets:
The core issue revolved around the actual cost of certain equipment purchased by the assessee from M/s Baba Build Well (BBW) for Rs. 75 lakh, which was capitalized at Rs. 89,10,245. The AO questioned the authenticity of this valuation and, after inquiries, estimated the actual cost at Rs. 20 lakh, allowing depreciation accordingly. The CIT(A) disagreed with the AO, directing the AO to accept the declared cost by the assessee. The Tribunal, however, found the assessee's valuation unsupported by credible evidence and deemed the AO's estimation of Rs. 20 lakh as arbitrary. It concluded that the realistic estimate of the actual cost should be Rs. 35 lakh, considering the written down value of the equipment in BBW's books.

2. Application of Explanation 3 to Section 43(1) of the Income-tax Act, 1961:
The Tribunal examined whether the AO correctly invoked Explanation 3 to Section 43(1), which allows the AO to determine the actual cost of an asset if it was previously used by another person and transferred to the assessee with the main purpose of reducing tax liability. The Tribunal noted that the AO conducted detailed inquiries and established that the declared purchase price was inflated, thus justifying the application of Explanation 3. The Tribunal emphasized that the AO's implied satisfaction, derived from his detailed actions and investigations, was sufficient to invoke Explanation 3.

3. Validity of the AO's Satisfaction Regarding the Main Purpose of Asset Transfer:
The Tribunal scrutinized whether the AO recorded an objective satisfaction that the main purpose of the asset transfer was to reduce tax liability. It referenced the judgment of the Hon'ble Supreme Court in Guzdar Kajora Coal Mines Ltd. vs. CIT, which allows the AO to disregard the declared cost if it is found to be fictitious or inflated for ulterior motives. The Tribunal found that the AO's thorough investigation and the subsequent findings provided a clear basis for his satisfaction. The Tribunal rejected the assessee's reliance on the judgment in Jaswant Sugar Mills Ltd. vs. CIT, noting that the Supreme Court's precedent in Guzdar Kajora Coal Mines Ltd. held greater authority.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, directing the AO to consider Rs. 35 lakh as the actual cost of the equipment for depreciation purposes, instead of the assessee's declared Rs. 63.22 lakh or the AO's estimated Rs. 20 lakh. The Tribunal upheld the AO's application of Explanation 3 to Section 43(1), confirming that the AO had adequately established an objective satisfaction regarding the inflated cost aimed at reducing tax liability.