2022 (9) TMI 703 - AT - Income Tax

Sale of Plant and machinery within short span of acquisition - Revenue treated the same as Scrap - denying adjustment of cost of acquisition against the consideration received on sale of these assets as claimed by the assessee - whether the assets which were acquired by the assessee on the acquisition of MIL were of any value or not ? - HELD THAT - Being old does not necessarily imply that it is scrap. And an asset qualifies as scrap when it is of no use to the assessee and incapable of fetching any value commensurate with its character. It is basically waste material - Surely the director has at no point stated that the machinery was of no use to the assessee at all and of no value also as machinery. Also the mere fact that the assets were sold within two months of acquiring them also is not relevant, we hold, for deciding its character as scrap .The asset may have been disposed for any reason as being surplus and not required by the assessee - Therefore this fact of the asset being sold within a very short period of acquiring is not relevant for determining its character as scrap. Further it is not that all machine was disposed off by the assessee which would have been the case if it were merely scrap. Assessee has sufficiently demonstrated the assets as not being scrap but of value. It has been pointed out that the acquisition of these assets alongwith the plant of MIL was negotiated by the assessee eight years back in 2003 but due to delay in getting sanction from BIFR by almost five years and the subsequent act of Board of both the companies being empowered for entering into the agreement, pushed off the actual acquisition of the business of MIL by the assessee by eight years and the same could be acquired in the impugned year only. The business acquisition agreement mentions plant and machinery being acquired by the assessee alongwith other assets . These facts are not disputed by the Revenue. If these machineries acquired by the assessee from MIL were of no use and were only scrap there was no reason to mention them as part of assets being acquired in terms of the agreement. Scrap surely could not have fetched such high proportion of amount out of total value of assets acquired. Further the assesses valuation of these assets is backed by a valuation report of a valuer. The Revenue has not pointed any infirmity in this report . The Revenue therefore could not have brushed aside and ignored this report on its own whims and fancies Appeal of the assessee are allowed.

Issues Involved:
1. Addition of Rs. 2.65 crores as gross sale amount of old machinery.
2. Non-reduction of cost allocated as per Chartered Engineer's Report.
3. Classification of assets bought as land and building only.
4. Validity of job work receipts from a shut-down factory.
5. Inclusion of plant & machinery in the block of assets.
6. Stamp duty paid indicating low price for land & superstructure.
7. Retraction of survey statement.
8. Depreciation on plant & machinery.

Detailed Analysis:

1. Addition of Rs. 2.65 crores as gross sale amount of old machinery:
The Revenue authorities treated the plant & machinery of the assessee as scrap, denying adjustment of the cost of acquisition against the consideration received on sale of these assets, and treating the entire amount of Rs. 2.65 crores as income. The assessee contended that the assets were not scrap but plant & machinery acquired from Mafatlal Industries Ltd. (MIL) and sold for Rs. 2.30 crores. The Tribunal found that the Revenue's basis for treating the machinery as scrap was insufficient, noting that the assets were part of a business acquisition agreement and fetched a significant amount upon sale, indicating they were not scrap.

2. Non-reduction of cost allocated as per Chartered Engineer's Report:
The assessee provided a valuation report by an independent valuer, valuing the plant & machinery at Rs. 2,32,67,600/-. The Tribunal noted that the Revenue did not point out any infirmity in this report and could not ignore it without substantial basis. The Tribunal thus allowed the assessee's claim to set off the cost of acquisition against the sale consideration.

3. Classification of assets bought as land and building only:
The Revenue held that the appellant bought only land & building for Rs. 6.77 crores, ignoring the bifurcation of value of land, building, and plant & machinery. The Tribunal observed that the acquisition agreement explicitly mentioned the inclusion of plant & machinery, both movable and immovable, and thus rejected the Revenue's classification.

4. Validity of job work receipts from a shut-down factory:
The Revenue questioned the job work receipts of Rs. 88,53,718/- from a shut-down factory. The Tribunal found that the assessee had shown job work income in its financial statements and incurred expenses for running the machinery, indicating the machinery was put to use. The Tribunal accepted the assessee's claim.

5. Inclusion of plant & machinery in the block of assets:
The Revenue denied depreciation on the plant & machinery, claiming they were never used and were obsolete. The Tribunal, however, found that the assessee had demonstrated the use of these assets for job work, reflected in its financial statements, and thus allowed the depreciation claim.

6. Stamp duty paid indicating low price for land & superstructure:
The Revenue made an observation that the high stamp duty paid indicated a low price for land & superstructure. The Tribunal did not find this observation relevant to the determination of the nature and value of the plant & machinery acquired and sold by the assessee.

7. Retraction of survey statement:
The Revenue held that the retraction of the survey statement by the assessee was not tenable. The Tribunal noted that the director of the assessee-company did not admit that the machinery was scrap but only stated they were old. The Tribunal found no admission of the assets being scrap in the director's statement.

8. Depreciation on plant & machinery:
The Tribunal allowed the assessee's claim for depreciation on the remaining plant & machinery, finding that the assets were not scrap and were put to use for job work during the year.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the plant & machinery acquired from MIL were not scrap and had value. The Tribunal allowed the set-off of the cost of acquisition against the sale consideration and the claim of depreciation on the remaining assets. The appeal was allowed in favor of the assessee.

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