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TMI Blog2002 (1) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case, the Tribunal was right in law in holding that onus of establishing that the purpose of the transaction was to reduce the tax liability was discharged by the Department? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the original cost of the assets of the dissolved firm without ascertaining the market value of the assets on the date of dissolution?" However, the Income-tax Appellate Tribunal, Ahmedabad Bench "C", has raised and referred the following question, which in its opinion takes within its sweep all the aspects raised by the proposed question: "Whether, on the facts and circumstances of the case, and having regard to the relevant provisions of the Income-tax Act, 1961, the assessee was entitled to claim depreciation on the enhanced value of the assets?" The assessee is a private limited company carrying on business of manufacturing vegetable ghee and various types of oil. The assessment years are 1980-81 and 1981-82 and the relevant accounting periods are years ended on June 30, 1979, and June 30, 1980, respectively. The controversy arises in the backdrop of the following circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. (iv) All the partners who were interested in the firm were interested in the company. This stand adopted by the Income-tax Officer was approved by the Inspecting Assistant Commissioner, Baroda Range-I, Baroda, by stating that it was settled law that a partner acquiring assets on dissolution of a firm did not result in any transfer, and hence, it was not possible to adopt the fair market value of the assets at the time of the dissolution as there was no purchaser or seller. He further placed reliance on Explanation 6 to section 43 of the Act and applying the analogy of the said provision confirmed the view of the Income-tax Officer that the assessee was entitled to depreciation only on the written down value of the assets and not on the enhanced value as claimed by the assessee. For the next assessment year 1981-82 also the claim of depreciation was restricted on the written down value. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Baroda, who allowed the appeal holding that even if there was intention since inception that the assessee would take over the running business of the firm that would not decide the issue because the intention was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion. Mr. Hemani, the learned advocate appearing on behalf of Mr. S.N. Soparkar for the applicant-assessee, assailed the order of the Tribunal stating that the Tribunal could not have suo motu invoked Explanation 3 to section 43(1) of the Act to uphold the assessment order. It was further submitted that the Tribunal had gone beyond the findings recorded by the Income-tax Officer and made out a new case altogether. That the Tribunal had erred in holding that change in the management/control would not make any difference to the transaction and this was an incorrect assumption in law. He also submitted that, even assuming that Explanation 3 to section 43(1) of the Act could be invoked, yet on the facts and in law the same would not be applicable because, firstly, the provision required that there was a transfer of assets from one person to another, while in the present case on dissolution there was no transfer. He further submitted that even if it was assumed that there was transfer of the assets, the provision required that the main purpose of the transfer must be reduction of tax liability and the satisfaction for the same had to be that of the Income-tax Officer and the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Income-tax Officer may, with the previous approval of the Inspecting Assistant Commissioner, determine having regard to all the circumstances of the case." Therefore, sub-section (1) of section 43 of the Act lays down that actual cost in the hands of an assessee means the actual cost of the assets as reduced by that portion of the cost which may have been met directly or indirectly by any other person. Explanation 3 to the said sub-section stipulates that: (i) The assets which are acquired by the assessee were used by any other person before the date of acquisition. (ii) The Income-tax Officer arrives at objective satisfaction that such assets were transferred with the main purpose of reducing tax liability by claiming depreciation with reference to enhanced cost. (iii) Then the Income-tax Officer is empowered to determine the actual cost having regard to all the circumstances of the case. Thus, the Explanation, in fact, extends the meaning of the term "actual cost" in certain circumstances and grants power to the Income-tax Officer to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -----------|------------- | | | | 1. | Land | 1,00,000 | - | 2. | Factory building | 3,50,000 | 82,523 | 3. | Residential building | 1,50,000 | 35,367 | 4. | Plant and machinery | 33,68,026 | 6,77,055 | | | | | ------------------------------------------------------------------------ It is common ground between the parties that the assessee has claimed enhanced cost relatable to only three assets, viz., factory building, residential building and plant and machinery. The Tribunal, however, held that the total payment made by the assessee was not only in respect of the assets for which the assessee had claimed enhanced cost but was also in respect of goodwill, tenancy rights, etc. In short, the Tribunal considered that the entire transaction and payment was for acquisition of the running concern of the erstwhile firm. Having gone through the deed of dissolution, we find that in unequivocal terms, when the entire deed is read as one document, it talks about acquisition of only assets and not liabilities. Clause (1) of the dissolution deed, relevant extracts of clause (5) and clause (6) of the deed as are relevant for our purpose are reproduced hereunder: "(1) The partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the liabilities of the said firm are concerned, they are shown in the balance-sheet and there is no further liabilities, known or unknown to be payable in the names of the said firm and in spite of the same, if there arises any liability or liabilities in the name of the said firm for a period prior to the date of dissolution, the parties of the second to eighth part shall pay the same and they shall further see and make all endeavours to see that the party of the first part will not be responsible for the payment of the same in any manner. However, in any case, if the party of the first part has to pay such liabilities or debts, outstanding in the name of the said firm in respect of the parties prior to the dissolution, the parties of the second to eighth part will indemnify the party of the first part for the same together with running interest at the rate of 15 per cent. per annum together with cost." On a conjoint reading of these clauses it is absolutely dear that the assessee-company acquired only assets and nothing else. The liabilities of the firm till date of dissolution being taken over by the erstwhile partners with an indemnity in favour of the assessee, that such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation report obtained prior to the point of time of the dissolution. 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 (registered valuer's report) cannot be dislodged by any authority by merely ignoring the same. In the present case that is what has happened. Neither the Assessing Officer nor the Tribunal have even attempted to state that the valuation report and the values put on the assets are incorrect in any manner whatsoever. They have simply ignored the valuation report. The assessee having made a claim for depreciation on enhanced cost, which is the actual cost in its hands, it was necessary for the authority who wanted to determine the "actual cost" (as required by Explanation 3 to section 43 of the Act) to place some evidence on record. It could not have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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