9911796707
TMI Blog2016 (1) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... uired and put to use on 1.10.2004; because the assessee had itself claimed depreciation on assets other than building at half of the normal rates. 2 On the facts and in the circumstances of the case, the assessee was statutorily entitled to full depreciation at normal rates as per law as the assets acquired from Deltron Ltd. were put to use admittedly on 1.10.2004 for 180 days and more during the year ending 31st March 2005 [1.10.2004 to 31.3.2005] 3 That the learned CIT(A) has further erred in upholding that the assets of Deltron Ltd. were acquired by the assessee at higher price with a view to reduce liability to income tax by claiming higher depreciation with reference to enhance cost, on wholly erroneous and illegal grounds 4 On the facts and in the circumstances of the case, it may be held that the assets like Building & Machinery were purchased on the basis of valuation of the Govt. approved valuers, who were experts; and as such, the invoking of the provision of Explanation 3 to section 43(1) was uncalled for an unjustified. 5 On the facts and in the circumstances of the case, the learned CIT(A) has failed to appreciate that the written down value as per Income Tax R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Naraina Indl. Area, New Delhi-110 028 and that both were engaged in the same electronics business. The AO therefore observed that it was necessary to look into the relationship of management of the two concerns and accordingly, asked the assessee to furnish the names of common directors/shareholders and their share holdings in the two companies. The assessee on 30.11.2007 furnished the requisite details. From the details, the AO observed that the concerns were running under common management, the directors were also common and they were operating from the same address. The AO further observed that the facts of purchase of fixed assets of M/s Deltron Ltd. as a going concern was disclosed by the assessee only after the probe during assessment proceedings and no such details had been furnished in any manner in the audit report or papers enclosed with the return of income. 4.1 Therefore the AO observed that it was necessary to verify whether the fixed assets of M/s Deltron Ltd. had been accounted for on written down value or not. Accordingly, the AO asked the assessee to submit the copy of computation of total income of M/s Deltron Ltd., its depreciation for A.Y. 2005- 06 indicating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.4.2004 in the case of M/s Deltron Ltd. Cost of acquisition as inflated by the assessee company Depreciation claimed by the asessee company on inflated cost Depreciation allowable on the WDV Difference Building 7,098 66,00,000 6,60,000 355 6,59,645 Plant and Machinery 59,94,066 89,66,000 11,20,750 7,49,258 3,71,492 Computers 30,533 2,88,399 86,519 9,160 77,359 Furniture and Fixtures 2,72,216 3,46,484 25,986 20,416 5,570 Vehicles 3,91,971 14,83,455 1,48,346 39,197 1,09,149 Total 66,95,884 1,76,84,338 20,41,601 8,18,386 12,23,215 The AO observed that the deprecation on building is claimed by the assessee at full rate, whereas it was admissible for half rate as all assets of the acquired plant were claimed to have been put to use is less than 180 days. He therefore observed that there would be corresponding excess claim in subsequent years for full years. 4.3 The AO observed that it was clear from the aforesaid table that the assessee had used this device to inflate the cost of building from as low as Rs. 7,098/- (WDV) to Rs. 66,00,000/- being the cost as per the agreement with the company to show cause as to why not the depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rences. The CIT further specifically held that the Assessing Officer was justified in allowing depreciation for half of the year and not for the entire year in respect of the assets acquired by the assessee company from M/s. Deltron Ltd. 6 The assessee, being aggrieved, is in appeal before us. 7 The ld. AR submitted the written synopsis which reads as under: "This addition needs to be examined and split into two aspect as under:- 1 Depreciation on building allowed at half rates. 2 Explanation 3 to section 43(1) invoked by the AO to determine the actual cost The main grounds on which the AO/CIT(A) has made/confirmed the addition are as under: 1 Both the concerns i.e. assessee and M/s Deltrono Ltd management and the directors are common. 2 The fact that fixed assets were purchased by assessee from M/s Deltron Ltd. after the probe during the assessment proceedings and no such details were furnished in audit report or papers enclosed with the return. 3 The WDV as per Income Tax Act in the books of accounts of the seller company was very less and assessee purchased these assets at higher value only to get higher amount of depreciation. 4 The AO/CIT(A) has relied upon f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factually incorrect. The balance sheet was filed with return of income filed on 28.10.2005 4 There is not even an iota of evidence that something more or less has been paid or passed than the actual consideration stated in the government based on a valuation of assets by a government approved valauer. The findings of the AO are just surmises and conjectures not supported by any evidence. Valuation report of the government approved valuer is available at pages 54 to 68 5 While reducing the deprecation on building the AO has also alleged that there is no evidence when the building was occupied. It is respectfully submitted that such an observation is totally erroneous. The existing business was purchased as a going concern alongwith building. There was no special formalities required for taking over building: The building was already housing all other assets i.e. plant and machinery etc. So, the allegation is totally out of context. 6 Explanation 3 of section 43(1) requires the AO to determine the actual cost at such an amount as the AO may determine having regard to all the circumstances of the case. The AO has adopted WDV of the previous owner, i.e. Deltron Ltd., which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no discussion or decision thereon as well by the CIT(A). CIT(A) has restricted herself to Explanation 3 to section 43(1) of the I.T. Act. Following issues arise for consideration:- 1) Whether the assets in respect of which 100% write off has been allowed to Deltron Ltd. u/s 35(1)(iv)/35(2) the actual cost of which was therefore Nil in view of Explanation 1 to section 43(1), the actual cost to the buyer will still be Nil in view of Explanation 3 to section 43(1), as the AO has just gone by the WDV of the assets as per Income Tax Rules as on 31.3.2004 I the case of Deltroon Ltd. These assets, though existing and do not appear in the depreciation chart as per Income Tax Rules, although these assets do appear in the schedule of deprecation chart of Deltron Ltd. under the companies Act. (see balance sheet as on 31.3.2004).-P.B 39 2) The assessee in its submissions specifically pointed out that Rs. 7,098/- is the value of lease hold improvements of the property and it is not the WDV of the building B-96, Phase-III, Industrial Area, Mohali as held by the AO-PB-A3 3) The assessee had purchased building B-96, Phase-III Industrial Area, Mohali having a covered area of 14346 sq.ft. a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance sheet under the Companies Act for comparison with the value at which the assets were purchased by the assessee. Thus, fixed assets schedule includes the assets on which 100% deduction has been earlier allowed under section 35(1)(iv)/35(2) as deduction in respect of (R&D). It was submitted that this schedule clearly shows that the price at which the assets were purchased were reasonable and could not be brushed aside without any comment. Fixed asset schedule and the purchase value is reproduced again-PB-A4 Particulars WDV as on 31.3.2004 (under Companies Act) Value at which taken over by assessee Building 74,25,264 66,00,000 Plant & Machinery 3,71,66,624 89,66,000 Computers 82,020 69,499 Furniture & Fixture 3,76,317 3,46,484 Vehicles 5,95,569 5,11,566 Office and Other equipments 14,74,265 14,23,115 Total 4,71,20,059 1,79,16,664 8) The assessee is also filing statement of deprecation chart as per Income Tax Rules ignoring the special deduction u/s 35(1)(iv)/35(2), as if such deduction was not allowed for determining the comparative figures of WDV as on 1.4.2004 in the hands of Deltron Ltd. with the value at which all the assets including thos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind that in the assessment order, the AO has observed that the aforesaid fact of purchase of fixed assets was disclosed by the AR only after the probe by him during the assessment proceedings and no such details have been furnished in any manner in the audit report papers enclosed with the return of income. He has also noticed that both the companies deal in electronic business and have same address at C-120, Naraina Industrial Area and run under the same management as the directors/shareholders are also common. We further find that, the AO observes that M/s Deltron Limited for A.Y. 2005-06 has shown net current loss of Rs. 3,39,17,585/- and it has brought forward depreciation of Rs. 46,53,620/-. So according to the AO by the said transaction though M/s Deltron Limited had made a short term capital gain of Rs. 2,16,17,776/- but the said short term capital gain gets absorbed in its business losses and the said company has returned total income of "Nil" for the relevant assessment year 2005-06.Further, the AO observed that, "both the companies are engaged in the same kind of electronic business & plant and machinery used by them is unique and they are not ordinarily marketable commod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for tourists, exceeds twentyfive thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty-five thousand rupees.] Explanation 1.-Where an asset is used in the business after it ceases to be used for scientific research related to that business and a deduction has to be made under [clause (ii) of sub-section (1)] of section 32 in respect of that asset, the actual cost of the asset to the assessee shall be the actual cost to the assessee as reduced by the amount of any deduction allowed under clause (iv) of sub-section (1) of section 35 or under any corresponding provision of the Indian Income-tax Act, 1922 (11 of 1922). [Explanation 2.-Where an asset is acquired by the assessee by way of gift or inheritance, the actual cost of the asset to the assessee shall be the actual cost to the previous owner, as reduced by- (a) the amount of depreciation actually allowed under this Act and the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b) the amount of depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported that the assessee had acquired business of Deltron Limited as a going concern (paper book page 2). Similarly, we find that in schedule T of balance sheet being notes on accounts as Note 10, assessee company has disclosed that it has purchased electronic business of M/s Deltron Ltd. at a net consideration of Rs. 7.54 Crores (Paper book Page 22). Thus, we find that the observation of the AO that the assessee did not disclose the transaction is factually incorrect. 13 We further notice that the appellant company and M/s Deltron Ltd. had entered into an agreement dated 27.9.2004, relevant clauses of which are as under:- "AND WHEREAS Deltron Ltd. is also in electronics business and does not have sufficient financial resources to run the business as a profitable unit now and in future as it needs to continuously invest heavily in R & D and in developing process capabilities to keep pace with the advancing technologies, ..... 1. That the entire electronics business of Deltron Ltd. is agreed to be taken over by CDIL at a net consideration as described in Annexure I to this agreement mentioned therein with effect from 30th September, 2004. 2. ........... 3. That in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain assets which appeared at Nil cost in the books of Deltron Ltd. It was however stated that such assets were appearing in the balance sheet prepared under the Companies Act as on 31.3.2004 at Rs. 4,71,20,059/- and if the deduction under section 35(1)(iv)/35(2) is ignored, WDV of such assets as on 31.3.2004 would stand at Rs. 2,16,06,346/-. The cumulative position which emerges is as under: Particulars WDV as per Companies Act as on 31.3.2004 WDV as on 31.3.2004 (under IT Act without taking into consideration 100% dep. As (R&D) Value at which taken over by assessee Value adopted by the AO for invoking explanation 3 to section 43(1) Building 74,25,264 36,68,570 66,00,000 66,00,000 Leasehold improvements -------- 7,098 -------- ----- Plant and Machinery 3,71,66,624 1,66,59,047 89,66,000 89,66,000 Computers 82,020 61,446 69,499 2,88,399 Furniture and Fixture 3,76,317 3,63,553 3,46,484 3,46,484 Vehicles 5,95,569 3,91,971 5,11,566 14,83,455 Electrical Installation -------- 95,852 14,23,115 Water Cool -------- 29 Other equipments 14,74,265 3,58,164 Industrial Installation -------- 615 Total 4,71,20,059 2,16,06,346 1,79,16,664 1,76,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent has not been paid by the assessee. The valuation is supported by registered valuer's report which valuation has not been shown to either fantastic or imaginary or irrational by any cogent evidence. On the contrary, having regard to the book value of the assets standing under the Companies Act, the value as adopted cannot otherwise be said to be unreasonable. 16 In arriving at the above conclusion, we find support from the judgment of Hon'ble Gujarat High Court in the case of Ashwin Vanaspati Industries v. CIT reported in 255 ITR 26 wherein their Lordships had specifically held "The valuation report is by a registered valuer Neither in the assessment order nor in the Tribunal's order is there any whisper that the valuation report by the registered valuer is incorrect in any manner whatsoever. Once there is a report by the registered valuer it is encumbent upon the authority to dislodge the same by bringing adequate material on record in the form of a departmental valuation report, because in the absence of the same a technical expert's opinion cannot be dislodged by any authority by mererly ignoring the same. In the present case that is what has happened. Neither the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose for acquiring the asset in question. In the present case, the A.O. is only disputing the valuation of intangible asset i.e. the trademark acquired by the assessee from related parties without even making an allegation that such acquisition of assets was not having any main purpose except claiming extra depreciation. 3.7 In view of our above discussion, we find that the action of the A.O. is not justified for two reasons. The first reason is this that he has not fulfilled the pre requirement for invoking the provision of Exp.(3) to Section 43(1) of the Income tax Act, 1961. The second reason is this that even after invoking this Exp.(3) to Section 43(1) rightly or wrongly, the A.O. has not worked out the value of the asset in question in the proper manner. He has ignored the valuation report of various technical experts such as RSML & Co. C.A. and others and instead of obtaining the departmental valuation report or any other report of any other independent valuer, the A.O. has made his own exercise for valuation of the asset in question although it cannot be accepted that the A.O. is a technical expert for valuation of the asset in question. Moreover, the A.O. has adopted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its dissolution and, the assets were revalued at Rs. 22,30,795/- and accordingly, claimed depreciation on the value of Rs. 22,30,795/- as per the revised valuation. On such facts, the High Court held that the Explanation 3 to section 43(1) of the Act correspondents to section 10(5)(a) and 192 of the Act. It was noted that the main purpose of the said provision was that Assessing Officer had power to determine the actual cost if the reduction of liability to income tax by claiming depreciation. The Hon'ble Court held that in such a case, substitution of actual cost by the Assessing Officer was correct as the partners of the firm had constituted themselves into a private limited company. All the shareholders of the company were the partners or therefore, nominees and the shares were held in the same proportionate as held by the partners. It was also held that valuation was enhanced only for mutual adjustment of rights between the partners of the firm. It was thus held that it is a case of device which attracts Explanation 3 to section 43(1) of the Act. The facts are thus totally distinguishable as in the instant case it is a transfer of public limited company to the closely held comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as well as the allocation between depreciable and non-depreciable assets. There is no dispute to the above conclusion of the Hon'ble Apex Court. However, on the said facts as is the case of the assessee company, such an interference is not warranted as there is nothing on record to show that having regard to the value of the assets held by the transfer or company, such amount paid by the assessee is excessive or unreasonable or irrational. The valuer's report has not been commented upon in any manner by the authorities below either by leading expert opinion or to show such valuation was excessive and has been done with anintent to reduce the tax liability. The others judgments as referred by the Assessing Officer are also distinguishable on the facts of the case of the assessee and therefore, cannot be made a basis to draw the conclusion as has been drawn by the Assessing Officer and upheld by the CIT (A). 20 Having regard to the above, we hold that 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 actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the chart above that the assessee himself has taken the deprecation for half year on addition to assets taken from Delton, except for building. During the proceedings, learned AR was also required to substantiate as to when was the building occupied/ put to use by the assessee concern. In response thereto, one note was submitted, explaining thereby that when the electronics business of Deltron Ltd. ('DL' in shrot) was transferred to assessee concern on 30.09.2004 all plant and machinery as well as all material was transferred on a going-concern basis and the business was carried on after the said date as though no change had taken place. It is pertinent to mention here that the 'note' submitted by the assessee is repetition of his arguments already filed. He was required to substantiate as to when was the building occupied/ put to use by the assessee concern. However, nothing has been produced to substantiate the claim of the assessee. iv) As already discussed above, as per the legal requirement of section 32; date of acquisition and date on which asset is put to use are the determining factor for calculating the depreciation. However nothing has been produced to substantiate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the details of foreign traveling expenses are filed which were also filed before the A.O./ CIT(A). He therefore submitted that the AO had not doubted the genuineness of the travel or expenses. He further submitted that only out of the foreign currency, withdrawn had been picked up for disallowance and 50% ad hoc disallowance had been made, only in absence of supporting bills. He submitted that foreign currency, withdrawn as per the permissible limits and was not excessive and there was no allegation that expenses are of personal nature. He further submitted that the total export turnover of the assessee during the year were about Rs. 53 crores and assessee had exports to almost all the countries visited by the directors and employees of the assessee. In view of the above, ld. AR pleaded that the order of the CIT (A) on this issue be set aside. 27 We have heard both the sides on the issue and perused the material on record. In the instant case, the assessee claimed foreign and travelling expenses of Rs. 20,33,758/-. The Assessing Officer has noted that during the assessment proceedings, the assessee could not furnish bills and vouchers in respect of boarding and lodging ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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