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TMI Blog1987 (6) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... with a valuation report from a qualified person. The other assets and liabilities were agreed to be taken at their book value. 2. An approved valuer, Shri S.R. Jain, revalued the plant and machinery as on4-1-1979and the assessee-company claimed depreciation on the revised value. The amount of appreciation was credited to the account of the partners in the books of the firm on4-1-1979. Before the Income-tax Officer the company relied on the decision of the Allahabad High Court in the case of Matrumal Dhanna Lal v. ITO [1972] 86 ITR 497 and reference was also made to the decision in the case of Kalooram Govindram v. CIT [1965] 57 ITR 335 (SC). While making the assessment of the company the Income-tax Officer allowed depreciation on the higher valuation of the plant and machinery. 3. The CIT was of the view that the revaluation of the machinery at Rs. 29,51,629 as against the written down value of Rs. 19,28,831 was not bonafide and in view of the provisions of section 43(1) read with Explanation (3) to the section the main purpose of the Valuation was to obtain higher depreciation and thus to reduce the taxable income. Considering the order of the Income-tax Officer, to be errone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 43(1) of the Income-tax Act. He also drew our attention to the reply given by the assessee on28th January, 1983that the assessee had explained that the revaluation was done on the basis of replacement cost of the machinery on the basis of prices and rate structure prevalent on4-1-1979. From this value the depreciation as accrued up to4-1-1979was deducted and the resultant figure was taken as the value of the plant and machinery. It was also pointed out that this transaction cannot result in any profit in the hands of the partners as the revaluation was neither a sale nor a discard or demolition or destruction under section 41(2) of the Income-tax Act. It was also pointed out that the company had agreed to allow 2,000 fully paid up equity shares of the face value of Rs. 100 in its capital to the other outgoing partners besides other payments of the accounts in full satisfaction of all their rights and claims against the company and also for relinquishing all the entire business and assets of the partners and the firm in favour of the company. It was contended that the value of the machinery had not been enhanced and fixed arbitrarily and notionally but on a scientific bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer and this has resulted in prejudice to the Revenue. It was also contended that in such circumstances it was open to the Revenue to ignore the corporate veil so as to bring out the real situation insofar as the motive of the assessee was concerned. Reliance was placed on the order of the Andhra Pradesh High Court in the case of Kungundi Industrial Works (P.) Ltd. v. CIT [1965] 57 ITR 540. In this case the partners of a firm decided to convert themselves into a private limited company and the shares were allotted to the erstwhile partners or their nominees. At the time of change over the assets were revalued appreciably and it was taken at a figure much higher than the written down value. The company had claimed the depreciation allowance on its assets on the basis of their enhanced value. This had not been allowed by the Revenue and the Tribunal. The High Court held that the increase in the value was out of proportion and the reasons advanced for the change over did not justify the increase in the value of the assets. It was held that the main purpose of the change over was reduction of liability to income-tax by claiming higher depreciation. While doing so the court observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, that is, the assessee-company was also a company only in form but having Shri Harbans Lal Goel and his wife as the main shareholders. This very company has taken over the business and it is open to Shri Harbans Lal Goel to decide that henceforth he would continue the business in the status of a limited company. Legally an individual and a limited company are separate entities, and for purposes of law they have to be treated separately. However, in the present case what we have to see is not only the transfer of business but the purpose of such a transfer. The ostensible reason given in the deed of dissolution was a vague assertion that the dissolution was taking place for diverse reasons and good causes. These reasons and good causes have not been spelt either in the deed of dissolution or in any other document and the only assertion made before us was that it is beneficial to carry on business in the form of a company when the business expands. It makes it easier to have transactions with foreign companies and concerns and adds a respectability to the business name. Apart from this ostensible reason, one has to ascertain the purpose of revaluation of the plant and machinery wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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