2017 (11) TMI 1351 - AT - Income Tax

Disallowance of excessive depreciation in respect of assets purchased from Deltron Ltd - Held that - The issue involved in this appeal is found squarely covered in favour of the assessee by the decisions of Coordinate Benches, for the preceding assessment years 2008-09 Assessing Officer was not justified in invoking Explanation 3 to section 43(1) of the Act on the facts and circumstances of the case of the appellant company and therefore, appellant is entitled to claim of depreciation on the actual cost as incurred by the appellant on transfer of the electronic business on going concern basis from M/s. Deltron Ltd. to the appellant company. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of Depreciation
2. Application of Section 43(1) Explanation 3 of the Income Tax Act, 1961

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation:

The primary issue in the appeal was the disallowance of depreciation amounting to ?6,77,095/- on various assets (Building, Plant & Machinery, Computer, Furniture & Fixture, Vehicles) purchased from Deltron Ltd. The Assessing Officer (AO) considered the depreciation claimed by the assessee as excessive and disallowed it. The assessee argued that the issue was covered in their favor by previous ITAT orders for the assessment years 2005-06 to 2006-07 and 2009-10, where similar facts and circumstances were considered.

2. Application of Section 43(1) Explanation 3 of the Income Tax Act, 1961:

The AO invoked Section 43(1) Explanation 3, which allows the AO to determine the actual cost of assets if they believe the main purpose of the transfer was to reduce tax liability by claiming depreciation on an enhanced cost. The AO argued that the assets purchased from Deltron Ltd. were transferred at an inflated value to claim higher depreciation. The AO used the Written Down Value (WDV) from Deltron Ltd.'s books instead of the market value for depreciation calculation.

Detailed Analysis:

Depreciation Disallowance:

The assessee filed its return declaring an income of ?4,26,58,365/-, which was processed under Section 143(1) of the Income Tax Act, 1961. During scrutiny, the AO noticed the depreciation claimed on assets purchased from Deltron Ltd. was excessive and disallowed ?6,77,095/-. The assessee appealed to the CIT(A), who upheld the AO's decision. The assessee then appealed to the ITAT, arguing that the issue was already decided in their favor in previous years.

Application of Section 43(1) Explanation 3:

The AO's primary contention was that the assets were transferred between related entities (Deltron Ltd. and the assessee) at inflated values to claim higher depreciation. The AO believed the main purpose of the transfer was to reduce tax liability, invoking Section 43(1) Explanation 3. The AO used the WDV from Deltron Ltd.'s books, ignoring the market value and the registered valuer's report provided by the assessee.

The ITAT examined the facts and previous orders. It was noted that the transfer of assets was disclosed in the Director's report and the balance sheet, contrary to the AO's claim. The agreement between the parties stated that Deltron Ltd. lacked financial resources to continue the business, necessitating the transfer. The ITAT found that the AO's assertion that the assets were transferred to reduce tax liability was not substantiated with evidence.

The ITAT referred to previous judgments, including the Gujarat High Court's decision in Ashwin Vanaspati Industries v. CIT, which emphasized that the AO must provide evidence to dislodge a registered valuer's report. The ITAT concluded that the AO failed to prove that the main purpose of the transfer was to reduce tax liability. The valuation provided by the registered valuer was not shown to be incorrect or unreasonable.

The ITAT also referred to the Tribunal's decision in Nirma Industries (P.) Ltd., which highlighted that the AO must establish that the main purpose of the transfer was to reduce tax liability before invoking Section 43(1) Explanation 3. The ITAT found that the AO did not fulfill this requirement and improperly invoked the provision.

Conclusion:

The ITAT found no justification to support the disallowance of depreciation and held that the issue was covered in favor of the assessee by previous ITAT decisions. The appeal was allowed, and the addition made by the AO on account of disallowance of depreciation was deleted. The ITAT emphasized that the AO must provide evidence to dislodge a registered valuer's report and cannot arbitrarily substitute the actual cost of assets.

Result:

The appeal of the assessee was allowed, and the disallowance of depreciation was deleted. The ITAT reiterated the importance of substantiating claims with evidence and following legal provisions correctly.

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