2016 (1) TMI 977 - AT - Income Tax

Succession of the firm - revaluation of assets - claim of depreciation by the assessee allowed by CIT(A) - cost of acquisition - AO was of the firm belief that the transaction does not constitute transfer in terms of Sec. 2(47) of the Act. According to the AO, the revaluation of the assets was only an increase in the value on paper and depreciation on the revalued assets cannot be allowed as per the provisions of the Act. - Not to be treated as transfer u/s 47(xiii) Held that - A perusal of the assessment order shows that the AO has heavily relied upon Explanation-1 to Sec. 43(6) of the Act. The relevance of the applicability of Explanation-1 to Sec. 43(6) of the Act is highly questionable in the hands of the present assessee inasmuch as the said explanation refers to the provisions of Sec. 170(2) of the Act which is relevant when the predecessor cannot be found then the assessment of the income of the previous year in which the succession took place upto the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor. The facts of the case in hand do not warrant any relevance to the aforesaid provision of the Act. It would not be out of place to mention here that the revaluation of the assets is supported by the certificate of a registered valuor and the AO has not appointed his own valuor for valuation of disputed assets nor the AO has disputed the valuation adopted by the assessee, this rules out the applicability of Explanation-3 to Sec. 43 of the Act. The partners of the firm should not receive any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares in the company. Considering the entire facts in totality in the light of the judicial decisions referred to above, we could not find any reason to interfere with the findings of the Ld. CIT(A).- Decided against revenue

Summary

Issues:
1. Reopening of assessments based on claimed depreciation on revalued assets acquired during succession.
2. Disallowance of depreciation by Assessing Officer.
3. Interpretation of Sec. 47(xiii) regarding transfer of assets during succession.
4. Dispute over applicability of Explanation-1 to Sec. 43(6) of the Act.
5. Valuation of assets and relevance of registered valuer's report.
6. Consideration of shares as a mode of payment in asset acquisition.
7. Compliance with conditions under Sec. 47(xiii) for transfer of assets during succession.
8. Judicial precedents supporting depreciation claim based on actual cost incurred.

Analysis:
1. The appeals by the Revenue challenged the orders of the Ld. CIT(A) regarding the disallowance of depreciation on revalued assets acquired during succession for the assessment years 2005-06 & 2006-07.
2. The Assessing Officer reopened the assessments under Sec. 147 due to claimed depreciation on assets acquired during succession, contending that the revalued assets' depreciation cannot be allowed as per the Act.
3. The Ld. CIT(A) directed the AO to allow depreciation, citing Sec. 47(xiii) and judicial precedents supporting the successor company's entitlement to depreciation based on actual cost incurred during asset acquisition.
4. The Tribunal noted the acceptance of the transaction in the hands of the partnership firm under Sec. 47(xiii) and questioned the AO's objections against the successor company's depreciation claim.
5. The Tribunal highlighted the relevance of a registered valuer's report in asset valuation, emphasizing the necessity for the AO to disprove the valuation report with substantial evidence.
6. The Tribunal rejected the AO's argument against the consideration of shares as payment for asset acquisition, citing Sec. 47(xiii) conditions prohibiting partners from receiving any other form of consideration.
7. The Tribunal emphasized compliance with Sec. 47(xiii) conditions for transfer of assets during succession, supporting the Ld. CIT(A)'s decision to allow depreciation based on actual cost incurred.
8. Judicial precedents were cited to strengthen the depreciation claim, emphasizing the need for the AO to provide evidence to challenge the valuation report and support disallowance of depreciation based on actual cost.

This detailed analysis of the judgment provides a comprehensive overview of the issues involved and the Tribunal's reasoning in addressing each point raised during the proceedings.