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TMI Blog2012 (6) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 45 shall apply to any transfer of the capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried have its application and that could have been the reason that no action was ascribed in the hands of the erstwhile firm – against revenue. Direction to allow depreciation of Gas Cylinders being “put to use” – once the assessee has demonstrated that the cylinders were purchased and were dispatched for its destination and from that very day the assessee has started receiving the lease-rent the date is very relevant to decide whether the assets in question have actually been "put to use" for 180 days or more for the purpose of eligibility of full rate of depreciation - Held that:- Since the admitted fact is that one of the business of the assessee is hiring of gas cylinders thus the assets in question have actually been leased out with effect from 27.09.2003 and have been "put to use" for hiring business for more than 180 days – against revenue. Addition of sum being difference between receipts credited in profit and loss account and the actual receipt as per TDS certificates not affording the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall proceed with the facts of this assessment year which shall be applied for the rest of the two assessment years. [A] A.Y. 2004-05 (ITA No.2781/Ahd/2007 - Revenue's appeal) 2. Ground Nos. 1 2 raised are hereby decided as follows:- 1. The ld. CIT(A) has erred in directing the A.O. to allow higher depreciation on the Gas Cylinders acquired from its associate concern through MOU, whose W.D.V. was Rs. 19,84,311 and which were revalued by the assessee at Rs. 82,51,157. 2. The CIT(A) did not appreciate the fact that tthe Hon. Supreme Court had, in the case of Saharanpur Electric Supply Co. v. CIT 194 ITR 294 had held that the definition of written down value in Section 43(6) envisages computation of actual cost in every assessment year and the assessee has no right to claim depreciation on inflated actual cost claiming higher depreciation by artificially inflating the actual cost through revaluation of the assets. 2.1 Facts in brief as emerged from the corresponding assessment order passed u/s. 143(3) dated 11.12.2006 were that the assessee-company is an authorized dealer and indenting agent of Gujarat Alkalies Chemicals Ltd. The assessee-company is also enga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articulars Rate (%) WDV as on 11.10.2002 (Rs.) Block-I 1. Furniture Fixtures (PCA) 15 185684 Block-II 2. Plant Machinery (PCA) 25 355541 Block-Ill 3. Motor Car 20 895049 Block-IV 4. Gas cylinders 80 6804329 5. Block-V Goodwill Block-VI 00 5000 6. Computer 60 5554 Grand Total 8251157 2.5 As per the above chart, the value as on 12.10.2002 taken at Rs. 82,41,157/- for the accounting period starting from 12.10.2002 (i.e. the date of succession) upto 31.03.2003, relevant for A.Y. 2003-04, the year under appeal. As per AO, the assessee has increased the WDV of the fixed assets by a sum of Rs. 62,66,846/- (Rs. 82,41,157 - Rs. 19,84,311) as on 12.10.2002. The assessee has claimed depreciation on the alleged enhanced amount of WDV and, therefore, the AO has raised an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered the submissions of the Id. A.R and the facts of the case. This is a case of taking over of a firm by a I company. In such cases, transfer of assets and liabilities is involved. In the normal course, transfer of capital assets from one entity to another would give rise to capital gains assessable as such. Certain exceptions to the general view have been provided in section 47 where some transactions have been deemed not to be regarded as transfer. In clause (xiii), the transfer of capital assets by a firm to a company as a result of succession of the firm by the company in the business carried on by the firm has been specifically deemed to be not a case of transfer, subject to certain conditions. In a case falling under section 43(xiii), the provisions of section 45 shall not apply. Section 45 is the charging section for bringing any profits or gains arising out of transfer of a capital asset to the charge of income-tax under the head "capital gain ". Thus, in a case where section 45 would not apply, the transaction would be outside the scope of capital gains. Thus, the transactions would be in the nature of transfer of capital asset although the same would be deemed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribed. He has therefore argued that as per section 32(1)(i)(ii).... (i)(ii) "in the case of any block of assets, such percentage on the written down value therefore as may be prescribed", the assessee has wrongly enhanced WDV which was already in the assessment record of the said firm on which the depreciation had actually been allowed in the past. Then he has drawn our attention on the definition of "written down value" as per section 43(6)(c)(ii) of IT Act. He has explained that in respect of any previous year, the WDV of the block of assets in the immediately preceding previous year is as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or reduction, if any. He has therefore mentioned that in the case of the assessee, the WDV should be as it was determined in the immediately preceding previous year in the hands of the said firm where depreciation has actually been allowed. He has referred CIT v. Poulose Matheni (P.) Ltd. [1999] 236 ITR 416/[1998] 101 Taxman 97 (Ker.) for the legal proposition that in a case where assets have been taken over from a par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reafter, he has referred all the Explanations annexed to section 43(1) to demonstrate that none of those provisions/explanations would be applicable to the assessee. He has emphasized that by the issue of equity shares the purchase consideration was discharged. The actual cost therefore was not only the assets but also inclusive of obligation to discharge the liabilities. According to him, the actual cost as has been met by the assessee was rightly noted for the purpose of claim of depreciation. In case, the AO was not agreeable to the action of the assessee, then he should have invoked Explanation-3 to section 43(1) of IT Act. In the present case, the Revenue has not taken any step under Explanation-3 to section 43(1) of the Act, ld.AR has informed. He has placed reliance on Habib Hussein v. CIT [1963] 48 ITR 859 (Bom) and CIT v. Standard Vacuum Refining Co. of India Ltd. [1966] 61 ITR 799 (Cal.). He has also placed reliance on Chitra Publicity Co. (P) Ltd. v. CIT [2010] 127 TTJ 1/4 ITR (Trib.) 738 (Ahd.) [TM]. 6. We have heard both the sides at some length. We have perused the orders of the authorities below in the light of the compilation filed. Undisputedly, thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 45 shall apply to the following transfers viz. any transfer of the capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried, on by the firm provided that all the assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company. In the present case, since the assets and liabilities of the firm have been taken over by the assessee-company therefore the exception as prescribed u/s.47(xiii) have its application and that could have been the reason that no action was ascribed in the hands of the erstwhile firm. 6.1 An another aspect has also been argued before us that what are those conditions under which the AO is empowered to substitute the "actual cost" as disclosed by the assessee. In this regard, Explanation-3 to section 43(1) says that where the AO is satisfied that the main purpose of the transfer of such assets to the assessee was the reduction of liability to income tax by claiming depreciation with a reference to an enhanced cost, then the "actual cost" to the assessee shall be such an amount as the AO may determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present case. An another case law has been cited by the ld.AR, i.e. viz. Kungundi Industrial Works (P.) Ltd. v. CIT [1965] 57 ITR 540 (AP), wherein the assessee-company was formed from the then existing Registered Firm. The question was that the assets were used by the firm before the company was formed. The shareholders of the company were no other than the old partners of the firm. The Hon'ble Court has observed that there was only changeover in the status of the ownership. What was earlier belonged to partnership-firm was thereafter belonged to a private limited company. So, it was not a case where the price was actually paid by one person to another person. In those circumstances, the view was taken in favour of the Revenue. However, the case in hand is not that a company has been formed from the existing registered firm. It is also not a case that no consideration has actually been paid. As per the clauses of the MoU, under consideration, the assets have been transferred by the firm in favour of the assessee-company in lieu of an amount of consideration. On account of these facts, this case law do not apply on the assessee. We therefore affirm the view taken by the ld.C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9/2003, hence allowed only 50% of the normal rate of depreciation. Accordingly, depreciation to the extent of Rs. 14,48,662/- was disallowed. The matter was carried before the first appellate authority. After hearing the submissions of both the sides, ld.CIT(A) has held the issue in favour of the assessee by referring few case laws namely, CIT v. Shaan Finance Ltd. [1998] 231 ITR 308/97 Taxman 435 (SC), CIT v. Pinnacle Finance Ltd [2004] 268 ITR 395/139 Taxman 328 (Guj.) and CIT v. Bansal Credit Ltd. [2003] 259 ITR 69/126 Taxman 149 (Delhi). According to ld.CIT(A), where the business of the assessee consists of hiring out of machinery and where the income derived from hiring is shown as business income, then it must be considered as having used the machinery for the purpose of the business. He has held that the assets in question have been leased out with effect from 27.09.2003, hence assets were "put to use" for more than 180 days, therefore eligible for full rate of depreciation. 8. We have heard both the sides and perused the material placed before us. Once the assessee has demonstrated that the cylinders were purchased from Indian Sugar General Engineering Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come on which no tax was deducted Rs. 70,640/- Income on which tax was deducted Rs.87,06,624/-" 10.1 On appreciation of the reconciliation and the TDS certificates, ld.CIT(A) has held that some of the amount was already added back in the prior period income and for rest of the amount as per reconciliation a sum of Rs. 17,72,574/- was reduced on account of purchases which were included in the credit side. On appreciation of those facts and evidences, ld.CIT(A) has deleted the addition. 11. We have heard both the sides. At the outset, ld.DR has vehemently stated that the provisions of Rule 46A was infringed by ld.CIT(A) by not confronting certain new evidences to the AO. We find force in this preliminary objection of the ld.DR. Rather, we have asked whether the reconciliation with supporting evidences was in the knowledge of the AO. However, in the absence of any satisfactory answer, we are of the view that natural justice demands to restore this ground of the Revenue back to the stage of the AO to be decided de novo after investigation and verification of the TDS certificates and other corroborative e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entical and has been so since A.Y 1991-92. The arrangement as aforesaid has been made for valid commercial and business reasons. These reasons have not been faulted or shown to be sham by the A. O. The motive for the so-called diversion of income would not be evasion of tax since no tax has been actually evaded under the given circumstances. Accordingly, I am of the opinion that this addition of Rs. 2,41,701/- was not warranted and is, accordingly, directed to be deleted." 14. On hearing the submissions of both the sides, we are also of the view that for alleging the impugned diversion of profit the AO has overlooked the business model and the pattern of business activity of the assessee. The AO was expected to investigate the cost of investment, the upkeep of cylinders, realization of sales and business link of the associate concern. Though the business activity of the group concern is leasing out of LCH cylinders but the dealing with the GACL of the sister-concern should have been taken into account before alleging the diversion of profit. An another fact has also been highlighted by ld.CIT(A) that the said sister-concern was not a loss making concern. Rather, ld.CIT(A) has v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming higher depreciation by artificially inflating the actual cost through revaluation of the assets. 16.1 The issue as raised by the Revenue for this Asst. Year is identical with the issue already decided supra. Following our view as discussed hereinabove while deciding Revenue's appeal for A.Y. 2004-05, we hereby reject the grounds of the Revenue. Revenue's appeal is dismissed. [C] A.Y. 2005-06 (ITA No.2979/Ahd/2008 - Revenue's appeal) 17 . Ground No. 1 reads as under:- 1. The Ld. CIT(A) did not appreciate the fact that the Hon'ble Supreme Court had, in the case of Saharanpur Electric Supply Co. v. CIT 194 ITR 294 had held that the definition of written down value in Section 43(6) envisages computation of actual cost in every assessment year and the assessee has no right to claim depreciation on inflated actual cost claiming higher depreciation by artificially inflating the actual cost through revaluation of the assets. 17.1 This ground is covered by our decision taken in A.Y. 2004-05 ( supra ), following the same, this ground of the Revenue is hereby dismissed. 18. Ground No.2 reads as under:- 2. On the facts and in the circumstances of the case, the le ..... 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