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TMI Blog2017 (2) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... ra Bank, based on a valuation report requisitioned by the said bank and in the said valuation report, the value of the windmill was fixed as ₹ 2,19,00,000/-. It may also be true that Government approved valuer had fixed the value of windmill at ₹ 2,95,00,000/-. However, for invoking Explanation 3 to Section 43(1) what is required is the objective satisfaction reached by the Assessing Officer that the main purpose of transfer is reduction of tax liability. The valuations may be relevant in ordinary circumstances but when the cumulated depreciation claimed was far in excess of the cost, relevance of such valuations, in our opinion, is insignificant. Especially so since CIT(Appeals) had found glaring deficiencies in such valuation, where only depreciation for one year alone was considered. CIT(Appeals), in our opinion, was not justified in substituting the value adopted by the A.O. with one based on a method adopted by TIIC, a Government agency. A.O. had adopted a fair method of multiplying the average generation per year with per unit cost of electricity generated. This was the method adopted by the assessee itself for valuing four numbers of windmill offered by it as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second hand windmill at enhanced cost was only to reduce the liability to income-tax and Ld. CIT(A) in his order in para No.4.4 was of the considered view that the A.O. was justified in invoking the provisions of Explanation (3) to Section 43(1). 4. The Ld. CIT(A) has erred in law and facts of the case by adopting the valuation method adopted by TIIC which is for the purpose of advancing the loan which is not5 based on the life of the asset or actual performance of the asset. 5. The Ld. CIT(Appeals) has failed to appreciate the facts that the value adopted by the Assessing Officer with the approval of the Joint Commissioner of Income Tax was based on the effective life of the asset and average generation of electricity from the windmill. 6. The Ld. CIT(A) has erred in adopting the value by which the depreciation claimed by the assessee and the previous owner put together would exceed the cost of the asset. All the grounds relate to issue of acquisition of a second hand windmill by the assessee during the relevant previous year and pricing of such windmill. 3. Facts apropos are that the assessee, an individual, engaged in the business of trading in stee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., by acquiring the windmill at ₹ 2,36,00,000/- from M/s Soundararaja Mills Ltd., assessee was taking undue benefit of the enhanced rate of depreciation available for windmills under the Act. Relying on Explanation 3 to Section 43(1) of the Act, the Ld. A.O. held that the main purpose of acquiring windmill was reduction of liability to tax, by claiming depreciation with reference to the enhanced cost. He worked out the actual cost of the windmill as ₹ 43,28,388/- and allowed depreciation only on the said amount. Such depreciation came to ₹ 17,31,355/- and the resultant disallowance came to ₹ 77,12,645/- 5. Aggrieved, the assessee moved in appeal before the CIT(Appeals). Argument of the assessee was that the Assessing Officer had fixed an arbitrary value for the windmill. According to the assessee, fair market value of the asset was certified by registered valuer and such registered valuer had given a value higher than the price paid by the assessee. Contention of the assessee was that she had raised a term loan of ₹ 144 lakhs from M/s Canara Bank, Gandhipuram Branch, Coimbatore, for buying the windmill from M/s Soundararaja Mills Ltd. Relying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand windmills and if such method was applied, the value of windmill acquired by the assessee would be ₹ 1,50,00,000/-. The Ld. CIT(Appeals) noted that the assessee herself had suggested adoption of such value in her grounds. Thus, he modified the order of the Assessing Officer and directed the A.O. to consider the actual cost as ₹ 1,50,00,000/- and recompute the disallowance. 7. Now before us, the assessee is aggrieved on adoption of value of ₹ 1,50,00,000/- as actual cost, whereas, the Revenue is aggrieved on rejection of the value assigned by the Assessing Officer. 8. The Ld. representative for the assessee submitted that Explanation 3 to Section 43(1) of the Act had no application. According to him, the said Explanation could be applied only where the main purpose of transfer of assets was reduction of liability to incometax. Ld. A.R. submitted that the parties were not related and there was no valid ground for coming to a conclusion that the purpose of transfer was reduction of tax liability. As per the Ld. A.R., a genuine transaction was disbelieved. Contention of the Ld. A.R. was that depreciated value of machinery had no relevance in fixing actual s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ival contentions. Claim of the assessee is that she had acquired windmill from M/s Soundararaja Mills Ltd. for a price of ₹ 2,36,10,000/- and M/s Soundararaja Mills Ltd. was in no way related to her. As per the assessee, it was a pure business transaction and assessee was not concerned on the quantum of depreciation claimed by M/s Soundararaja Mills Ltd. Section 43(1) of the Act and Explanation 3 thereto, which has been applied by the A.O., are reproduced hereunder:- 43. In sections 28 to 41 and in this section, unless the context otherwise requires - (1) actual cost means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority: Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, but before the first day of March, 1975, and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five 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 thous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the assessee to acquire the second hand windmill at an excessive cost. It is not disputed that depreciated value of the said windmill in the hands of M/s Soundararaja Mills Ltd. was negligible at the time of such sale. M/s Enercon (India) Ltd. who manufactured the windmill had certified that the model sold by M/s Soundararaja Mills Ltd. to the assessee was no more in market. They also declined to assign a value which, in other words, mean that the windmill which was more than 5-1/2 years old was of obsolete technology. These factors, in our opinion, clearly indicate that the transfer of windmill to the assessee from M/s Soundararaja Mills Ltd. at a price of ₹ 2.36 Crores itself was a questionable and doubtful one, with the only intention to reduce tax liability. It may be true that assessee had raised a loan of ₹ 144 lakhs from M/s Canara Bank, based on a valuation report requisitioned by the said bank and in the said valuation report, the value of the windmill was fixed as ₹ 2,19,00,000/-. It may also be true that Government approved valuer had fixed the value of windmill at ₹ 2,95,00,000/-. However, for invoking Explanation 3 to Section 43(1) what is re ..... 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