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TMI Blog2017 (6) TMI 1123X X X X Extracts X X X X X X X X Extracts X X X X ..... ein, the Assessing Officer made various disallowances including disallowance of deduction under section 80-IA of the Act on wind mill. 3 During the course of assessment proceedings, it was observed by the Assessing Officer that the assessee had claimed the deduction under section 80-IA of the Act relying upon the decision of the Jurisdictional High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd Vs. ACIT reported in 231 CTR (Mad) 368 [2010]. However the Assessing Officer opined that since the Revenue is in appeal and the matter is pending before the Hon. Apex Court, he made disallowance at Rs..23,49,034/- under section 80-IA of the Act. 4. On appeal by the assessee, ld.CIT (A) decided the issue in favour of the assessee by following the decision of the Jurisdictional High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd Vs. ACIT (supra), wherein, it was held that:- i) Each eligible unit of the industrial undertaking has to be considered as if such eligible business where the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year upto the period prescribed under the Act f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und raised in the appeal of the Revenue is with regard to deletion of addition made on account of depreciation claimed by the assessee. The assessee has purchased a second hand windmill from one Shri K.N. Muthiah at the cost of Rs..2,58,92,000/- by availing term loan from Indian Overseas Bank for Rs..1,25,00,000/- with a margin of 50%. Against this windmill, the assessee has claimed depreciation of Rs..2,07,13,600/- as per the provisions of section 43(i)(c) of the Act as this windmill forms part of the block of assets. However, the Assessing Officer has observed that the claim of the cost of the windmill was excessive and in the place of actual cost paid by the assessee, adopted the WDV of the asset in the hands of Shri K.N. Muthiah, the seller as on 01.04.2010 at Rs..12,128/- treated it to be the actual cost in the hands of the assessee and on which the assessee is eligible to claim depreciation @ 80% i.e., Rs..9,702/-. Thus, the claim of the assessee of depreciation at Rs..2,07,13,600/- has been restricted to Rs..9,702/- under section 43(6) of the Act. 8. The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee, the ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n itself with new term loan for the same. Hence, the assessee has decided to purchase second hand wind mill at a competitive price in the open market with the enquiry made in various places and with known persons who are in this field. Thus, the assessee purchased the second hand wind mill at Rs..2,58,92,000/- and produced valuation report of the Chartered Engineer & Registered Valuer evaluating the present market value. Against the actual cost of the windmill, the assessee has claimed eligible depreciation at Rs..2,07,13,600/-. 12. For invoking Explanation 3 to sub section (1) of section 43 of the Act, the Assessing Officer has observed that in the case of windmill, unlike the plant and machinery used in regular course of business, the frequency of sale or transfer of an asset within the span of life time of the asset is high. This is mainly because of an accelerated depreciation @ 80% available for windmill in a year and the entire cost of purchase is claimed as depreciation within 3 to 4 financial years from the year of purchase. Thereafter, the asset was sold at some irrational and unreasonable sale value by the persons after availing full depreciation. The above general reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acceptable. Mechanism to take WDV as provided in expn.2 to s. 43(6) (c) is not available in Explanation 3 to section 43(1) of the Act. Further, assets whose actual cost is to be determined under Explanation 3 are second hand and it is always difficult to find actual cost or value of such assets as compared to new assets. In the case of transfer of an asset between two unconnected parties price fixed is ALP governed by market condition. This ALP between two unconnected parties is nothing but market value of the asset. This ALP has to be taken as the "actual cost" for purposes of depreciation. There is no way to ignore it and it is not possible to record merely that the main purpose of transaction is the reduction of income- tax liability. Such ALP or market value cannot have a different meaning in case of a transaction between connected and related parties if fixed bonafidely as per market conditions. There is no prohibition or connected parties to carry arms' length transactions where real value of them transferred is paid. Law frowns on fraudulent transaction carried to hoodwink the Revenue. Having held that the assessee has shown enhanced cost of assets, the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be compared with the 3 wind mills purchased by the assessee from Vestas RRB India Ltd. cannot be compared also could not be controverted by the learned DR. We find in the instant case no other exercise has been done either by the AO or CIT(A) to determine the fair market value of the windmills and they have simply adopted the WDV of the 3 wind mills in the hands of Snowcem India Ltd. as the cost of the 3 windmills for the purpose of calculating depreciation. We also find merit in the submission of the learned counsel for the assessee that Explanation 3 to section 43(1) is applicable if the assessee claims enhanced cost as the actual cost and the AO is able to show that the cost claimed by the assessee is more than the market value of the asset. Since the cost of a new wind mill has been claimed to be around Rs. 2.70 Crores during F.Y. 2003-04, therefore, the market value of the second hand wind mills of 2 to 3 years old cannot be Rs. 9 to 10 lakhs as adopted by the AO being the WDV of the wind mills in the hands of the Snowcem India Ltd. especially when the rate of depreciation is 80% on wind mills. 17. We find the Ahmedabad Bench of the Tribunal in the case of Chitra publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quarrel on above proposition. However, in my view, it is unnecessary to fall back on the above legal proposition as under the above Explanation, there is sufficient power with the AO to disregard the cost of assets taken by the transferee and determine the actual cost of the assets. He can make a disallowance, provided circumstances envisaged in the provision are satisfied. The Revenue authorities and the learned AM in the proposed order have made out a good case that the main purpose of transfer of asset was reduction of liability to income-tax (by claiming depreciation on enhanced cost). However, as already noted, recording of above satisfaction is not the main purpose of the Explanation. The real purpose of the provision is to authorize the AO to determine actual cost to the assessee. What is the meaning of "actual cost" ? "Actual cost" is to be determined by the AO having regard to all the circumstances of the case. In other words, facts and material on record is to be considered in the process of determination of actual cost. Such cost cannot be any fancy or imaginary figure. This is clear from use of strong words like "determine" and check in the provision on arbitrary exerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o assessee which can only mean arm's length value or real value or worth of assets transferred. Above proposition has been duly accepted by Courts. In the case of Ginners & pressers (P) Ltd. Vs. CIT (supra), the decision of Bombay High Court strongly relied upon by the Revenue, their Lordships have made the following observations. "There is no doubt that, in the absence of fair market value of the assets transferred being known on the date of transfer, the requisite inference under the proviso to s. 10(5)(1) of the Act cannot be drawn. But it is not as if the taxing authorities as well as the Tribunal have not dealt with this aspect of the matter at all while deciding the question of applicability of the proviso to s. 10(5)(1) to the facts of the present case". 17.1 It is, therefore, not possible to totally reject the concept of market value of the assets transferred as not relevant for determining "actual cost". The provision requires consideration of all the circumstances including cost in the hands of the transferor, WDV, inflationary trends, conditions and life of assets transferred etc. in the exercise of determination of cost of assets. It is true that cost shown in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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. At the same time, merely because a document in the nature of contract or purchase is entered into denoting a certain price the same would not conclusively establish the correctness of the claim made by an assessee if the AO is of the opinion that the transaction is by way of subterfuge or device in order to avoid tax which the assessee is otherwise liable to pay or that the transaction is illusory or colourable or that the assessee has acted fraudulently. In such circumstances, it would always be open to the AO to go behind the contract and ascertain the actual cost so as to determine the correct liability to tax". 18.2 Inspite of the clear observations of the jurisdictional High Court, fully supported by other authorities and clear language that "AO is obliged", "duty cast on AO" to determine actual cost of assets to the assessee, in the present case, the burden has been placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in IT Act, depreciation is allowed at a higher percentage as an incentive, and hence, WDV as per IT Act cannot reflect the market value of the particular fixed asset. Whereas, the assets are sold on the basis of market value of the assets and not on the basis of WDV as per IT Act. For extra depreciation allowed to the vendor as per IT Act as an incentive, the vendor has to be assessed for capital gains on sale of assets by reducing the WDV as per IT Act from sale proceeds of the assets. But in the hands of the assessee, the actual cost paid by the assessee for the assets should be considered for allowing depreciation to the assessee, particularly so, when the conditions required for invoking Expln. 3 to s. 43(1) are not being fulfilled. The AO was not justified in disallowing the claim of the assessee for depreciation or in reducing the claim of depreciation by invoking Expln. 2 to s. 43(1). - Union of India Vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) and Dy. CIT Vs. Mahendra M. Mehta (2004) 89 TTJ (Mumbai) 1 relied on". 19. Various decisions relied on by the learned DR are not applicable to the facts of the present case. In the case of JCIT Vs. Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Hon'ble Delhi High Court in the case of CIT Vs. Dalmia Dadri Cement Ltd. reported in 125 ITR 510 we find it was held in the above case that when the assessee has paid an excessive amount to connected persons in a collusive transaction, the department is entitled to ascertain the actual cost. However, in the instant case the transaction is not between connected persons and it has not been proved or brought on record by the lower authorities that it is collusive in nature. We find merit in the submission of the learned counsel for the assessee that Vestas RRB India Ltd. or Snowcem had no interest in the reduction of tax liability of the assessee since nothing has been brought to our notice that either Vestas RRB India Ltd. or Snowcem are related to the assessee or they are related to each other. 22. The various other decisions relied on by the AO and CIT(A) are also distinguishable and not applicable to the facts of the present case because in those cases the transactions have taken place between related parties. In this view of the matter and relying on the decision of the Third Member (Ahmedabad Bench) of the Tribunal in the case of Chitra Publicity Company Pvt. Ltd.(S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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