2017 (6) TMI 1123 - AT - Income Tax

Deduction under section 80-IA - Held that - Assessee had correctly claimed the deduction under section 80-IA of the Act relying upon the decision in the case of Velayudhaswamy Spinning Mills (P) Ltd Vs. ACIT 2010 (3) TMI 860 - Madras High Court . Assessing Officer s view that since the Revenue was on appeal against the decision of the Hon ble Madras High Court in the case Velayudhaswamy Spinning Mills P. Ltd (supra) before the Hon ble Apex Court, he need not follow that decision is not correct as he did not realize that mere filing of the SLP before the Apex Court is not a valid ground for not following the judgment of the Hon ble Madras High Court. Further, it is not the case of the Revenue that the judgment of the Hon ble Madras High Court in the case Velayudhaswamy Spinning Mills P. Ltd (supra) is stayed by the Hon ble Apex Court. - Decided in favour of assessee. Addition made on account of depreciation claimed - assessee has purchased a second hand windmill - AO has observed that the claim of the cost of the windmill was excessive and in the place of actual cost paid by the assessee, adopted the WDV of the asset - invoking Explanation 3 to subsection (1) of section 43 - Held that - Once the Assessing Officer was of the opinion that the assessee has purchased the second hand windmill at a higher cost, then the burden to prove the fair market value is on the Assessing Officer. In this case, estimation of fair market value by the Chartered Engineer and Registered Valuer is very much available before the Assessing Officer. Moreover, the authorities below have not made any exercise to determine the fair market value of the windmill and they have simply adopted the WDV of the windmill in the hands of Shri K.N. Muthaiah as the cost of the windmill for the purpose of calculating depreciation. We are of the considered opinion that the Explanation 3 to section 43(1) of the Act is applicable if the assessee claims enhanced cot as the actual cost and the Assessing Officer is able to show that the cost claimed by the assessee is more than the market value of the asset. Thus, the Assessing Officer has no reason to invoke the Explanation 3 to section 43(1) of the Act. There is no prohibition or connected parties to carry arms length transactions where real value of them transferred is paid. Law frowns on fraudulent transaction carried to hoodwink the Revenue. Having held that the assessee has shown enhanced cost of assets, the Assessing Officer under Explanation 3 to section 43(1) of the Act has to determine the actual cost to assessee which can only mean arm s length value or real value or worth of assets transferred.- Decided in favour of assessee.

Summary

Issues Involved:
1. Deduction under Section 80-IA of the Income Tax Act, 1961.
2. Depreciation claimed under Section 32 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Deduction under Section 80-IA of the Income Tax Act, 1961
The Revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which allowed the assessee's deduction under Section 80-IA of the Income Tax Act, 1961. The assessee, a company engaged in manufacturing cotton yarn, claimed a deduction under Section 80-IA for its windmill operations, relying on the Jurisdictional High Court's decision in Velayudhaswamy Spinning Mills (P) Ltd Vs. ACIT. The Assessing Officer (AO) disallowed the deduction, citing that the Revenue's appeal was pending before the Supreme Court.

The CIT(A) allowed the deduction, adhering to the High Court's ruling, which established:
- Each eligible unit must be considered as the sole source of income for the initial and subsequent assessment years.
- The initial assessment year is the year the assessee opts to claim relief under Section 80-IA.
- Unabsorbed depreciation and carry-forward losses already set off against other income cannot be notionally carried forward for computing the deduction.

The Tribunal upheld the CIT(A)'s decision, emphasizing that lower judicial authorities must follow the High Court's ruling unless stayed by the Supreme Court. The Tribunal found no merit in the AO's disallowance based on the pending appeal and confirmed the CIT(A)'s order, dismissing the Revenue's ground.

Issue 2: Depreciation Claimed under Section 32 of the Income Tax Act, 1961
The Revenue also contested the CIT(A)'s deletion of the addition made on account of depreciation claimed by the assessee for a second-hand windmill. The assessee purchased the windmill at ?2,58,92,000 and claimed depreciation of ?2,07,13,600. The AO restricted the depreciation to ?9,702, adopting the Written Down Value (WDV) of the asset in the seller's hands (?12,128) as the actual cost.

The CIT(A) overturned the AO's decision, stating:
- The primary intention of purchasing the windmill was to address the acute power shortage, not to reduce tax liability.
- The AO's basis for invoking Explanation 3 to Section 43(1) was unsupported by corroborative circumstantial evidence.
- The actual cost should be the price paid, supported by a registered valuer's expert opinion.

The Tribunal agreed with the CIT(A), noting:
- The AO failed to prove the fair market value of the windmill and merely adopted the WDV in the seller's hands.
- Explanation 3 to Section 43(1) applies if the AO can show the cost claimed exceeds the market value, which was not demonstrated.
- The actual cost should reflect the arm's length price or real value, not the WDV.

The Tribunal referenced the Pune Bench's decision in Navlakha Translines v. ITO, which held that the AO must determine the actual cost based on market conditions and the arm's length price, not merely the WDV. The Tribunal found the AO's reasons for invoking Explanation 3 invalid and upheld the CIT(A)'s order, dismissing the Revenue's ground.

Conclusion:
The appeal filed by the Revenue was dismissed. The Tribunal confirmed the CIT(A)'s orders on both issues, allowing the assessee's deduction under Section 80-IA and the claimed depreciation under Section 32. The Tribunal emphasized adherence to jurisdictional High Court rulings and proper determination of actual cost based on market value.