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TMI Blog2010 (1) TMI 875X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under the head "Income from other sources - income of Rs.1,28,532 will have to be taxed under the head 'Income from other sources' and not under the head 'Capital gains', as claimed by the appellant - Held that:- AO should have an opportunity to give his finding in this regard, Matter remanded to AO. X X X X Extracts X X X X X X X X Extracts X X X X ..... in assessment order at p. 6 of the assessment order are as under: 1. Purchase of centrally air conditioning unit with generator, OTIS elevator and fire fighting equipments from M/s Baba Buildwell, Delhi for a sum of Rs.75,00,000. 2. Assessee has paid commission for arranging and finalizing the hiring facility to M/s Shivaya Laminates at Rs.10,00,000. 3. M/s Light Carts (P) Ltd. at Rs.8,00,000. 4. He has further paid Rs.3,92,377.50 to Shri R.C. Lal. 5. Rs.1,50,000 to Shri C. Lal. 6. Rs.85,000 to M/s Classic Engg. 4. It has been mentioned in the Annex. 'J' annexed to the assessment order which is stated to be a communication received by the AO from Addl. CIT in respect of determining the actual cost of above-mentioned assets, that a group concern of the assessee, namely, M/s Civic Traders (P) Ltd. had purchased the land and building of the premises known as No.225, Okhla Industrial Estate, Phase-III, New Delhi - 110 020 for total consideration of Rs.1,91,18,472. The portion of the said building, namely, basement, mezzanine floor, first floor and second floor was given by the said M/s Civic Traders (P) Ltd. to M/s Minerva Holdings Ltd. at the rent of Rs.47,08,530 per annum. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Second floor to M/s Minerva Holding Ltd. @ Rs.47,08,530 per annum (Ground floor is alleged to be with M/s Sharda Exports-A group concern) The aforesaid equipment installed allegedly by M/s Baba Buildwell at aforesaid premises i.e., 225, Okhla Industrial Estate, Phase-III, New Delhi. (Costing Rs.63,22,868) @ Rs.47,08,530 per annum Apparently, it is clear from the aforesaid facts that all the persons are of the same group i.e. Mr. J.K. Gupta/M/s Sharda Exports/M/s Civic Traders (P) Ltd. M/s Civil Traders (P) Ltd. has purchased a building at 225, Okhla Industrial Estate, Phase-III, New Delhi at a cost of Rs.1,91,18,472. Ground floor is with group concern M/s Sharda Exports. Other floors namely basement/mezzanine floor/first floor/second floor have been given on rent to M/s Minerva Holdings Ltd. @ Rs.47,08,530 per annum [Estimated proportionate cost of basement/mezzanine/first/second floor out of total building cost/investment (consisting of basement/ground floor/mezzanine/first/second floor)] = 4/5 x Total cost (Rs.1,91,18,472) = Rs.1,52,94,777 As is clear M/s Minerva Holdings (P) Ltd. is giving a total rent to the group which has been bifurcated as under: Building rent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter was referred to the Addl. CIT, Range-I, Meerut vide letter dt. 22nd March, 2004. The learned Addl. CIT, Range-I, Meerut has furnished the working of actual cost of assets and the same has been taken for calculation of depreciation. 7. Assessee has countered this with the following interpretations of Expln. 3 to s. 43(1) as under: "From the provisions of the said Expln. 3, it is crystal clear that the AO is obliged to record a satisfaction that the assets were transferred for reducing the liability to pay income-tax and for this purpose an appellate authority cannot substitute its opinion to sustain the applicability of the said Expln. 3 only because the assets which are transferred were used by any other person before the date of acquisition. The duty cast upon the AO by the provision is to determine the actual cost and not to substitute a valuer's opinion. But at the same time, it needs to be emphasized that Expln. 3 does not require determination of market value at the hands of the AO but speaks of determination of actual cost by the AO with the prior approval of the 1AC having regard to all the circumstances of the case-Ashwin Vanaspati Industries vs. CIT (2002) 174 CTR ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee with a view to reduce the tax liability has claimed higher cost and under Expln. 3 to s. 43(1), the AO is empowered to determine the cost with the previous approval of Jt. CIT/Addl. CIT. He submitted that the AO has duly determined/estimated the cost in accordance with the provision of Act in this regard. 10.1 Learned counsel of the assessee on the other hand submitted that AO has not recorded any satisfaction that assessee has resorted to inflate the cost of purchase in order to claim higher depreciation. Learned counsel claimed that de hors such satisfaction Expln. 3 to s. 43(1) cannot be invoked. The learned counsel further claimed that the said estimate itself was without any basis. He claimed that assessee had duly given its documents for purchase of its assets. He claimed that assessee cannot be held responsible to produce the purchase documents of the party from whom it purchased the asset. Learned counsel further claimed that the assets were yielding very high rent and this also justified the cost of the assets. Hence he claimed that the orders of the learned CIT(A) be sustained. 10.2 We have considered the rival submissions in the light of the material plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er working out the cost of the premises used by M/s Minerva Holdings Ltd. which is calculated at 4/5th of the total premises and cost is determined at Rs.1,52,94,777. It is observed in the 'Annex. J' that Minerva Holdings Ltd. is giving total rent which has been bifurcated into two parts equally being building rent and equipment rent and the said instrument is nothing but a colourable device to bifurcate the total payments receivable from M/s Minerva Holdings Ltd. in the manner which suits the group concern/persons of the group. In these circumstances, it is mentioned in the Annexure that equipment hire rent is to be arrived at in the hands of the assessee on protective basis and here the remarks of the Addl. CIT is that this is only the opinion of the undersigned and the AO is not bound by this opinion nor the same should be construed as a finding/direction under s. 144A and the AO should give his independent opinion/finding. After observing so, it has been mentioned that the scope of reference is limited to the purchase cost of equipment from M/s Baba Buildwell. Thereafter, it is mentioned that since Baba Buildwell has failed to produce proof of purchase cost and the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was noted that was a primary labour contract as all the materials for fabrication of driers and accessories were to be supplied by the assessee. A sum of Rs.3,50,000 was to be paid for the job work, however, further agreements were entered into according to which the assessee paid a total sum of Rs.7,70,000 to Bhagwati Glass in order to cover the additional jobs and that amount was capitalized and included in the amount of Rs.16,46,617 on which the depreciation was claimed. It was noticed by the AO that 90 per cent of the share capital of Bhagwati Glass was held by Shri R. Dalmia and 75 per cent of the share capital of Dalmia Dadri Cement Ltd. was owned by Bharat Development (P) Ltd. and South Asia Industries (P) Ltd. which was controlled by Shri R. Daimia and in these circumstances, the AO came to the conclusion that the cost of assets was inflated. It was noticed that Bhagwati Glass was having brought forward loss and even after showing the profit in job work there was no tax liability in the hands of Bhagwati Glass. The cost of assets got fabricated from Bhagwati Glass was estimated at Rs.3,11,954 plus 15 per cent thereof and, thus, depreciation was allowed by rounding off t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plot or collusion between the vendor and the vendee and there has been inflation or/deflation of the value for ulterior purpose, it is open to the IT authorities to refuse to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual cost was. Referring to these observations Hon'ble High Court held that the approach adopted by the Tribunal was unsustainable as the IT authorities could substitute their own figure of actual cost. Their Lordships also referred to the decision of Calcutta High Court in the case of CIT vs. Jogta Coal Co. Ltd. (1965) 55 ITR 89 (Cal) if the circumstances showed that an assessee had arranged to put a fictitious price on his assets in a contract or conveyance, it was open to the IT authorities to refuse to accept that price and go behind the contract or conveyance and ascertain what the original cost was. While holding so, reliance was placed on the decision of Pindi Kashmir Transport Co. Ltd. vs. CIT (1954) 26 ITR 595 (Lahore). Thereafter, their Lordships of Hon'ble High Court referring to Expln. 3 to s. 43 have observed that such Explanations are only elaborative and did not bring out some of the circumstances in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total cost in the hands of Baba Buildwell was an aggregate sum of Rs.15,75,250 on which depreciation of Rs.3,93,813 was claimed for the year ending on 31st March, 2000 and a value in that account was carried forward at Rs.11,81,437. Generator set was purchased by Baba Buildwell on 18th Aug., 1999 vide bill No.00594 for a total consideration of Rs.10,61,400 on which depreciation was claimed at Rs.2,65,350 leaving the closing balance at Rs.7,96,050. Fire fighting equipments are brought forward in the hands of Baba Buildwell at a value of Rs.1,03,050 as on 1st April, 1999 on which depreciation is claimed at Rs.10,305 as on 31st March, 2000 by leaving the closing balance at Rs.92,745. OTIS elevator was purchased on 8th April, 1999 for a consideration of Rs.5,52,046 on which depreciation was claimed at Rs.55,204.60 for the year ending 31st March, 2000 by taking the balance carried forward at a sum of Rs.4,96,841. Thus, total cost when claiming any depreciation in the hands of M/s Baba Buildwell can be summarised as under: (i) Air conditioner unit Rs.15,75,250 (ii) Generator set Rs.10,61,400 (iii) Fire fighting equipments Rs.1,03,050 (iv) OTIS elevator Rs.5,52,046 Total R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. In the absence of any such material, it cannot be held that payment stated to be received by the assessee as consideration for using these assets from M/s Minerva Holdings (P) Ltd. was genuine one. In 'Annex. J' it has been clearly observed that this has to be assessed on protective basis. Thus, there was a doubt in the mind of the IT authorities that the income which does not belong to the assessee has been shown in the hands of the assessee. Here, not going into that controversy because the AO himself has chosen to determine only the value of its assets in view of Expln. 3 to s. 43, we will examine only the question that whether or not the AO was right in determining the actual cost or whether CIT(A) was right in holding that the cost shown by the assessee should be adopted. It has already been discussed that cost in the hands of the previous owner was only a sum of Rs.32,91,746 on which depreciation was also claimed and keeping in view the age of the assets and keeping in view the nature of these assets that value of these cannot increase in the installed shape, we are of the opinion that the AO was right in taking the value at Rs.20 lacs which will be the depreciated cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work has left and present address of Shri H.C. Arora was not given. No feedback (customer satisfaction record has been produced). On the basis of these observations, the AO referred to the decision of the Hon'ble apex Court in the case of Sumati Dayal vs. CIT (1995) 125 CTR (SC) 124 : (1995) 214 ITR 801 (SC); CIT vs. Durga Prasad More 1973 CTR (SC) 500 : (1971) 82 ITR 540 (SC) and McDowell and Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) and accordingly disallowed the payment of Rs.15 lacs. 11.2 Upon assessee's appeal the CIT(A) elaborately referred to the statement and assessee's submission on AO's observations learned CIT(A) held as under: "The facts of the case and the submissions of the appellant have been considered. The AO proceeded to treat this as a non-genuine business expenditure on various extraneous consideration, such as the absence of formal agreement to carry out the job; and that Shri Raj Kumar Kansal, director of the company has no knowledge about airconditioning, civil work, electrical work, etc.; and that Shri Raj Kumar Kansal was unable to give details as to how he came in contact with Shri J.K. Gupta; and that the person, who was responsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at Okhla and to amend the assessment order accordingly." 11.3 Against this order the Revenue is in appeal before us. 11.4 We will adjudicate this issue after referring to related issue raised by the Revenue in ITA No.4342/Del/2007 for asst. yr. 2002-03 according to which learned CIT(A) has erred in allowing the business expenditure of Rs.20 lacs incurred by the assessee on maintenance and supervision of hired assets at Okhla. 11.5 On this issue the AO noted that assessee has debited Rs.20 lacs in P and L a/c as maintenance and supervision expenses. AO also noted that assessee received total hire charges of Rs.47,08,530 from hired assets and has incurred direct expenditure of Rs.20 lacs to earned this income. The payment was made to M/s Shivaya Laminations (P) Ltd. to supervise the maintenance work. AO investigated the matter. He observed that there is no agreement registered or otherwise between the assessee and Shivaya Laminations (P) Ltd. regarding this supervision work. The AO did not accept the copy of minutes of meeting between the parties produced in this regard. AO observed that deal which imposed responsibility of monthly visit of a director of the company, was signed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought up by the AO and referred to the details of examination carried out by the AO and concluded that "the facts of the case and the submissions of the appellant have been considered. The AO proceeded to treat this as a non-genuine business expenditure on various extraneous considerations, such as the absence of formal agreement to carry out the job, the supervision was not carried according to the terms settled, capacity of supervision was not there and the information received from the ITO-Ward 8(2), Delhi in the case of Shivaya Laminations (P) Ltd. is a different one. The disallowance has been made by AO on presumptions, without brining in any concrete material on record. On going through the material on record, and after considering the appellate order of the appellant for asst. yr. 2001-02 and moreover as I find that AO has nowhere stated that no such work has been carried out and in the absence of which the transaction cannot be held to be sham. The job has been done to the satisfaction of the appellant and as the payments for the job done have been confirmed by the payee the expenditure claimed is a genuine business expenditure arid I, accordingly, direct the AO to allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his regard the AO has not accepted the assessee's explanation that assessee has brought these IDBI bonds through stock exchange and they were listed securities and the listed securities were covered under the capital gain and the difference of redemption and cost was accordingly offered. 12.3 The learned CIT(A) referred to the CBDT Circular No.2 of 2002 [(2002) 173 CTR (St) 217] as under: "4.2 In a case where the bond is acquired during the year by an intermediate purchase (a person who has acquired the bond by purchase during the term of the bond and not as original subscription) the difference between the market value as on the valuation date and the cost for which he acquired the bond, will be taxed as interest income or business income, as the case may be, and no capital gains will arise as there would be no transfer of the bond on the valuation date. 6.1 Where the bond is redeemed by an intermediate purchaser the difference between the redemption price and the cost of the bond to such purchase will be taxable as interest or business income, as the case may be. For this purpose, again, the cost of the bond will mean the aggregate of the cost at which the bonds were acquired ..... X X X X Extracts X X X X X X X X Extracts X X X X
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