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TMI Blog1994 (7) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... tual cost to the assessee ? ' " The relevant facts for the purpose of deciding the above question are that the assessee had other sister concerns, namely, Synthetic Stones, Saboo Emery Stones, Saboo Founders Abrasives India, Sri Engineers, Saboo Udyog, etc. These firms were dissolved and assets were distributed in order to reallocate separate businesses to separate family lines. After dissolution, the assets were distributed on the market value and subsequently, the business of the dissolved firm was taken either by a new firm or by a person as proprietary business. The assessee-firm was dissolved on March 15, 1980, and the assets were taken by one Shri R. P. Saboo. The assets were valued at the market rate prevailing on that date. The firm was reconstituted and shares were allocated so that all the brothers could have business independently along with the members of their family. The assessee-firm was constituted on June 1, 1980, and various assets contributed were valued at market price and depreciation was claimed on that basis. The Inspecting Assistant Commissioner (Assessment) allowed depreciation on the basis of the market value as claimed by the assessee. The Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------------- Name of the assets Written down value as on October Amount on 22, 1979, along with additions up to revaluation March 15, 1980 ----------------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. Building 1,03,265 9,06,314 Machinery 53,561 1,52,350 Furniture and fixtures 23,600 30,005 Generator 39,696 42,121 ------------------- ------------------ 2,20,122 11,30,890 ----------------------------------------------------------------------------------------------------------------------------------------------- The Tribunal observed that though the revaluation of the assets is higher than the written down value it cannot be rejected as it has to be seen what is the real cost representing the market value to the successor. It was found that the main purpose of transfer of the assets is not to reduce the tax. The firm was dissolved with a view to take the business of his firm with the members of the family of a particular brother. The firm was reconstituted after a gap of three or four months with different partners and, therefore, it was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were owned by the four brothers of Saboo family. On March 15, 1980, the shares in different firms were reallocated so that in one particular firm the family members of only one brother remained as partners. The assets, including land, building and machinery were revalued. The Commissioner of Income-tax exercised powers under section 263 and came to the conclusion that the revaluation was done with the clear purpose of reducing the liability to income-tax. He further observed that the issue has not been examined at the time of assessment by the Inspecting Assistant Commissioner (Assessment) and, therefore, the assessment framed by him is erroneous. Since the assessing authority has not applied his mind to the important issue it was held that it is an erroneous assessment. The assessment order was set aside and the Inspecting Assistant Commissioner (Assessment) was directed to work out the actual cost of the assets to the firm after keeping in view the provisions of Explanation 3 to section 43(1) and the observations given therein. The depreciation was not allowable. It was also found not to be in accordance with law. The Income-tax Appellate Tribunal found that the Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h reference to the enhanced cost. If the assessing authority is satisfied then he has to record a finding to this effect that the main purpose of the transfer of the assets was to reduce the liability to income-tax. In order to arrive at the satisfaction of the assessing authority, it is necessary that there must be evidence on record and an enquiry has to be made by the assessing authority. The mere transfer at a higher valuation by itself cannot be considered an act on the part of the assessee showing his intention to reduce the tax liability. The dissolution deed, partnership deed and the surrounding circumstances including the evidence have to be considered and thereafter the assessing authority could come to the conclusion as to whether the main purpose of the transfer of the assets was to reduce the tax liability. The Tribunal has not found that the Commissioner has no jurisdiction under section 263 of the Act. It was only on the merits with regard to invoking Explanation 3 to section 43(1) that it came to the conclusion that there is nothing on record that the main purpose of the transfer of the assets was to reduce the tax liability. As a matter of fact while exercising the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deed, valuation report and other relevant facts including the oral evidence. The Income-tax Appellate Tribunal has come to the conclusion that the Commissioner of Income-tax was not justified in invoking Explanation 3 when the firm was reconstituted after a gap of more than three months with different partners. The gap of three months may or may not be relevant looking to the particular circumstances of a case. Simply because after the dissolution of the firm a new firm was reconstituted after three months, does not mean that the main purpose was not for transfer of assets to reduce the tax liability. The different partners are not outsiders, but family members of the same partner, who was a partner in the earlier firm. It is no doubt true that the burden is on the assessing authority to prove that the main purpose for transfer of the assets was to reduce the tax liability, but he can definitely take into consideration the relevant facts. If the view taken by the Tribunal is accepted as the correct view then the Explanation cannot be invoked in any case, and, therefore, in order to find out whether the Explanation is applicable or not, the entirety of the circumstances has to be t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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