2016 (5) TMI 931 - AT - Income Tax

Revision u/s 263 - conclusion drawn by the CIT that the depreciation on enhanced cost was allowed by the Income Tax Officer without application of mind - Held that - There is no dispute that the assets in question were used by the seller viz., M/s.Southern Ferro Ltd., prior to the transfer of the same to the assessee. The written down value of these assets was shown in the books of the seller at ₹ 24,05,230/- whereas the assessee has shown the value of the assets in its books of account at ₹ 4.5 crores. Therefore, the value in the books of the assessee is enhanced about 20 times of the WDV in the books of the seller. Once the assets in question were used by the seller before the date of acquisition by the assessee, then matter of valuation of such assets falls in the purview of Explanation 3 to section 43(1) of the Act The issue in question is not regarding correctness of the record or valuation ascribed by the assessee to the fixed assets but it is about allowability of the claim of valuation under Explanation 3 to section 43(1) of the Act. When there was no examination by the AO as per the provisions of Explanation 3 to section 43(1) because the AO has not even raised any query on this issue, then it is a clear case of nonconduct of any enquiry on the issue. The AO did not ask any question, any record or explanation to justify the value assigned by the assessee which is 20 times of the WDV in the books of seller. Therefore, it is absolutely impossible to infer that the AO has conducted any enquiry on this issue. Hence, it is a case of complete lack of enquiry which renders the order of the AO erroneous so far as prejudicial to the interest of the revenue. In view of the matter when there is a complete and absolute lack of enquiry and non-application of mind on the part of the AO, decisions relied upon by the learned AR of the assessee would not help the case of the assessee. As regards the alleged visit of the AO to the factory of the assessee, in the absence of any record as well as any other material to indicate such visit or undertaking exercise of verification of valuation, the same cannot be a material aspect to convert a case of lack of enquiry into application of mind of the AO. In view of the above facts and circumstances of the case, we do not find any reason to interfere with the order of the CIT. - Decided against assessee

Summary

Issues:
1. Validity of CIT's order under section 263 regarding depreciation on enhanced value of fixed assets.
2. Allegation of lack of application of mind by AO in allowing depreciation on enhanced cost.
3. Interpretation of provisions of Explanation 3 to section 43(1) of the Income-tax Act, 1961.
4. Dispute over valuation of fixed assets and application of relevant legal provisions.
5. Assessment of whether CIT's invocation of section 263 was justified based on AO's actions.

Issue 1: Validity of CIT's order under section 263 regarding depreciation on enhanced value of fixed assets:
The appeal challenged the CIT's order under section 263, contending that the assessment order passed by the Income Tax Officer was not erroneous or prejudicial to the revenue's interest. The CIT had set aside the assessment order and directed the AO to decide the issue on merits and in accordance with the law. The appellant argued that the CIT's conclusion that the depreciation on enhanced cost was allowed without proper examination of relevant details was unsustainable. However, the Tribunal upheld the CIT's decision, emphasizing the need for a thorough examination of the valuation of fixed assets under the provisions of the Act.

Issue 2: Allegation of lack of application of mind by AO in allowing depreciation on enhanced cost:
The appellant claimed that the AO conducted a due inquiry, examined relevant details, and valued the fixed assets before allowing depreciation. The appellant argued that the AO's satisfaction with the valuation should preclude the CIT from invoking section 263. However, the Departmental Representative contended that the AO failed to apply his mind to verify the valuation, making the order erroneous and prejudicial to revenue. The Tribunal found that the AO did not conduct a detailed inquiry into the valuation of fixed assets, leading to a lack of application of mind, thus supporting the CIT's decision.

Issue 3: Interpretation of provisions of Explanation 3 to section 43(1) of the Income-tax Act, 1961:
The Tribunal analyzed Explanation 3 to section 43(1) concerning the transfer of assets used by another person for business purposes. The valuation of such assets must be determined with regard to reducing income tax liability. The Tribunal highlighted the mandatory nature of examining the issue under Explanation 3 and emphasized the importance of conducting a thorough inquiry into the valuation of fixed assets to ensure compliance with the Act.

Issue 4: Dispute over valuation of fixed assets and application of relevant legal provisions:
The dispute centered around the valuation of fixed assets acquired by the assessee, which were previously used by the seller. The significant difference in valuation between the seller's books and the assessee's books raised concerns regarding the application of Explanation 3 to section 43(1). The Tribunal noted the substantial increase in the value of assets in the assessee's books and highlighted the necessity for the AO to scrutinize such valuations meticulously to prevent potential tax avoidance.

Issue 5: Assessment of whether CIT's invocation of section 263 was justified based on AO's actions:
The Tribunal evaluated the AO's actions concerning the valuation of fixed assets and concluded that there was a lack of proper inquiry and application of mind. The Tribunal upheld the CIT's decision to set aside the assessment order, emphasizing the critical importance of the AO's thorough examination of valuation issues under the relevant legal provisions. The appeal was dismissed, affirming the CIT's invocation of section 263 based on the AO's inadequate assessment of the depreciation on enhanced value of fixed assets.