DCIT, Hyderabad V. M/s. Ushodaya Enterprises Ltd., Hyderabad

ITA 1265/HYD/2013

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3019 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-02-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 17-11-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 10-09-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KONDA RAMESH
• Keywords: Gift; Business income; Depreciation; Additional evidence; Cost of acquisition; Valuation report; Assessment record; Commercial expediency; Revenue expenditure
• Section: 92C; 143(3); 115JB; 32; 263; 63; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA.NO.1265/HYD/2013 ASSESSMENT YEAR 2007-2008 DCIT, CIRCLE - 16(2) HYDERABAD. VS. M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. PAN AAACU2690P (APPELLANT) (RESPONDENT) FOR REVENUE : MR. KONDA RAMESH FOR ASSESSEE : MR. K. GOPAL DATE OF HEARING : 17 .1 1 .2015 DATE OF PRONOUNCEMENT : 16 . 02 .2016 ORDER PER SMT. P. MADHAVI DEVI, J.M. THIS IS REVENUES APPEAL FOR THE A.Y. 2007-08. ALONG WITH THE FORM NO.36, THE REVENUE HAS RAISED T HE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE CIT(A) IS ERRONEOUS IN LAW AND FACTS OF THE CASE. 2. THE LD. CIT(A) OUGHT TO HAVE CONSIDERED THAT VALUE OF SOFTWARE FILM LIBRARY WDV OF THE ASSET IS ONLY RS.160,96,47,766 IN THE HANDS OF SRI CH RAMOJI RAO (HUF), INSTEAD OF VALUING AT AN EXORBITANT PRICE OF RS.775,00,00,000. 3. THE LD. CIT(A) OUGHT TO HAVE CONFIRMED THE ADDITION TOWARDS THE FILM SOFTWARE LIBRARY AS THE SAME IS NOT INTANGIBLE ASSET AND IT IS TO BE TREATE D 2 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. AS PLANT & MACHINERY AND THEREFORE A DEPRECIATION @ 15% HAS TO BE ALLOWED INSTEAD OF 25%. 4. ANY OTHER GROUND(S) THAT MAY BE URGED AT THE TIME OF HEARING. 1.1. FURTHER, VIDE LETTER DATED 10.10.2014, THE REVENUE HAS RAISED THE FOLLOWING ADDITIONAL GROUND OF APPEAL. 1. THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE REQUIREMENTS OF SECTION 43(1) ARE NOT MET/OR PROVISIONS ARE ERRONEOUSLY INVOKED. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE IS A COMPANY ENGAGED IN PUBLISHING OF NEWSPAPERS AND A LSO SATELLITE TELEVISION BROAD-CASTING. FOR THE RELEVAN T ASSESSMENT YEAR I.E., A.Y. 2007-08, IT FILED ITS RE TURN OF INCOME ON 31.10.2007 ADMITTING INCOME OF RS.27,10,85,700 UNDER NORMAL PROVISIONS AND BOOK PR OFIT OF RS.104,33,52,595 UNDER THE PROVISIONS OF SECTION 115JB OF THE I.T. ACT, 1961. INITIALLY, THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE I.T. ACT ON 19.03.2009. SUBSEQUENTLY, THE ASSESSMENT PROCEEDING S WERE COMPLETED UNDER SECTION 143(3) OF THE I.T. ACT COMPUTING THE TAXABLE INCOME AT RS.163,38,26,535. 3. THEREAFTER, THE LD. CIT, UNDER SECTIO N 263 OF THE I.T. ACT, HELD THE ASSESSMENT ORDER TO BE ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. THEREF ORE, THE ORIGINAL ASSESSMENT ORDER PASSED UNDER SECTION 143( 3) WAS SET ASIDE BY THE COMMISSIONER VIDE HIS ORDER DA TED 28.03.2012 UNDER SECTION 263 OF THE I.T. ACT WITH A 3 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. DIRECTION TO RE-DO THE ASSESSMENT AS PER THE DIRECT IONS GIVEN BY HIM. THE ASSESSEE CHALLENGED THE REVISION ORDER BEFORE THE ITAT BUT IT WAS UPHELD BY THE TRIBUNAL. THEREAFTER, THE A.O, IN ORDER TO GIVE EFFECT TO THE REVISION ORDER, ISSUED NOTICES UNDER SECTION 143(2) AND 142( 1) OF THE ACT AND EXAMINED THE RETURN OF INCOME OF THE ASSESSEE. HE OBSERVED THAT THE LD. CIT HAS SOUGHT T O REVISE THE ASSESSMENT ORDER ON THE GROUNDS THAT (I) EXCESS DEPRECIATION HAS BEEN CLAIMED ON FILM SOFTWARE LIBR ARY WHICH WAS PURCHASED BY THE ASSESSEE FROM SRI RAMOJI RAO (HUF) AND (II) THE DEPRECIATION ON FILM SOFTWAR E LIBRARY HAS BEEN ALLOWED AT 25% AS ALLOWABLE ON AN INTANGIBLE ASSET, THOUGH THE ASSET WAS TO BE TREATE D AS PLANT AND MACHINERY AND DEPRECIATION WAS TO BE ALLO WED ACCORDINGLY. 4. THE A.O. OBSERVED THAT SRI RAMOJI RAO IS THE KARTHA OF SRI RAMOJI RAO (HUF) AND IS ALSO THE CHAI RMAN OF M/S. USHODAYA ENTERPRISES LIMITED, WHEREIN HE, A LONG WITH HIS FAMILY MEMBERS IS THE 100% SHAREHOLDER. HE OBSERVED THAT M/S. USHAKIRAN TELEVISION AND M/S. USHAKIRAN MOVIES BEING BUSINESS UNITS OF SRI RAMOJI RAO (HUF), ARE THE OWNERS OF (FILM SOFTWARE LIBRARY) AN D ARE IN THE BUSINESS OF PRODUCTION OF FILMS AND TV PROGR AMMES WHICH ARE EXCLUSIVELY TELECAST IN THE ETV CHANNELS OWNED BY M/S. USHODAYA ENTERPRISES LIMITED AND THAT THE RESULTANT REVENUE GENERATED BY M/S. USHODAYA ENTERPRISES LIMITED FROM THE SALE OF ADVERTISING SP OTS AND TELECAST OF FILMS AND PROGRAMMES IS SHARED WITH M/S . 4 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. USHAKIRAN TELEVISION AND M/S. USHAKIRAN MOVIES. THEREFORE, HE OBSERVED THAT IT IS M/S. USHODAYA ENTERPRISES LIMITED WHICH HAS BEEN COMMERCIALLY EXPLOITING THE FILM SOFTWARE LIBRARY SINCE F.Y. 199 4-95 WHERE PRODUCTION WAS EXCLUSIVELY DONE BY M/S. USHAKIRAN TELEVISION AND M/S. USHAKIRAN MOVIES WHIC H ARE IN TURN TELECAST IN 12 CHANNELS OWNED BY IT IN DIFFERENT INDIAN LANGUAGES IN INDIA SUCH AS TELUGU (TWO CHANN ELS), BENGALI, MARATHI, KANNADA, URDU, ORIYA, GUJARATI, H INDI (FOUR CHANNELS). HE OBSERVED THAT M/S. USHODAYA ENTERPRISES LIMITED IS PRACTICALLY DEPENDING ON THE UNITS OF SRI RAMOJI RAO (HUF) FOR THE PRODUCTION AND EXPLOITATION OF FILM SOFTWARE LIBRARY SINCE F.Y. 19 94-95 AND FURTHER THAT SINCE ALL OF THEM ARE GROUP CONCER NS AND ARE OWNED AND CONTROLLED BY SHRI RAMOJI RAO AND HIS FAMILY MEMBERS, IT IS DIFFICULT TO UNDERSTAND THE P URPOSE OF M/S. USHODAYA ENTERPRISES LIMITED BUYING THE FIL M SOFTWARE LIBRARY AT AN EXORBITANT PRICE OF RS.775 C RORES, FROM SRI RAMOJI RAO (HUF), WHEN IT IS THE EXCLUSIVE USER OF THE SAME, PARTICULARLY, WHEN THE WDV OF THE ASSE T IS ONLY RS.160,96,47,766 IN THE HANDS OF SRI RAMOJI RA O (HUF) AS ON 31.03.2006 FOR THE A.Y. 2006-07. HE HEL D THAT IN VIEW OF THE ABOVE FACTS, THE ONLY POSSIBLE CONCLUSION THAT CAN BE DRAWN IS THAT THE TRANSFER O F FILM SOFTWARE LIBRARY WAS DONE AT AN ENHANCED COST OF RS .775 CRORES FROM ITS GROUP CONCERN WITH THE SOLE PURPOSE OF CLAIMING HIGHER DEPRECIATION AT RS.96,87,50,000 BY M/S. USHODAYA ENTERPRISES LIMITED, THEREBY RESULTING IN THE REDUCTION OF INCOME TAX LIABILITY. THUS, HOLDING TH AT THE 5 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. CONDITIONS SET-FORTH AS PER EXPLANATION-3 TO SECTIO N 43(1) OF THE I.T. ACT, ARE SATISFIED, HE HAS ADOPTED THE VALUE OF TV SOFTWARE BUSINESS/FILM LIBRARY IN THE HANDS OF T HE ASSESSEE COMPANY AT RS.160,96,47,766 (WDV IN THE HANDS OF SRI RAMOJI RAO (HUF) AS ON 31.03.2006). HE ACCORDINGLY, RE-WORKED OUT THE CLAIM OF DEPRECIATIO N OF THE ASSESSEE COMPANY. 5. FURTHER, DURING THE ASSESSMENT PROCEEDING S, THE A.O. ALSO ISSUED A DETAILED SHOW CAUSE NOTICE D ATED 23.07.2012 REQUIRING THE ASSESSEE TO PRODUCE THE DE TAILS OF CONTENT RIGHTS WITH RESPECT TO FILMS AND PROGRAM MES LIBRARY WHICH IS TRANSFERRED THROUGH NEGATIVES, DIS CS OR TAPES AND AS TO WHY THESE ASSETS SHOULD NOT BE TREA TED AS TANGIBLE ASSETS AND ALLOWED DEPRECIATION ACCORDIN GLY. THE ASSESSEE FILED ITS SUBMISSIONS STATING THAT THE SAT ELLITE AND CONTENT RIGHTS OF FILMS OR PROGRAMMES FORM PART OF COPY RIGHTS WHICH ARE ELIGIBLE FOR DEPRECIATION U NDER THE HEAD INTANGIBLE ASSETS AND ARE ELIGIBLE FOR DEPRE CIATION AS PROVIDED IN THE SCHEDULE TO INCOME TAX RULES. IT WAS SUBMITTED THAT THE DEPRECIATION WAS ALLOWED AS ON INTANGIBLE ASSETS FOR THE TWO CONSECUTIVE ASSESSMEN T YEARS I.E., A.YS. 2007-08 AND 2008-09. IT WAS ALSO SUBMITTED THAT IN THE A.Y. 2006-07, THE DEPARTMENT ITSELF HAD ALLOWED DEPRECIATION ON SOFTWARE LIBRARY @ 25% , CONSIDERING IT AS AN INTANGIBLE ASSET IN THE HAND S OF SRI RAMOJI RAO (HUF) WHILE BRUSHING ASIDE THE CLAIM FOR DEDUCTION UNDER RULE 9A/9B AS ARE APPLICABLE FOR RI GHTS OF FILMS, TV PROGRAMMES ETC., PRODUCED BY IT. IT W AS 6 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. SUBMITTED THAT THE ASSESSEE HAS ACQUIRED RIGHTS OVE R THE LIBRARY FROM THE HUF AND HENCE, IT IS NOT JUSTIFIED IN STATING THAT THE COPYRIGHTS ARE NOT INTANGIBLE ASSE TS AND ARE ELIGIBLE FOR DEPRECIATION AS ON TANGIBLE ASSET S. THE A.O. HOWEVER, WAS NOT SATISFIED WITH ASSESSEES CONTENTIONS AND HELD THAT THOUGH THERE IS NO DOUBT ABOUT THE INTANGIBILITY OF THE FILM SOFTWARE LIBRARY I.E. , FILMS AND OTHER TV PROGRAMMES WHICH ARE KEPT ON CDS BY THE ASSESSEE, BUT OBSERVED THAT THE RATE OF DEPRECIATIO N APPLICABLE THEREON, WOULD DEPEND NOT ON THE TANGIBI LITY OR INTANGIBILITY OF THE MOVIES BUT HOW THESE ARE PUT T O USE BY THE ASSESSEE COMPANY, I..E., THE FUNCTIONAL TEST. H E OBSERVED THAT IN THE ASSESSEE COMPANYS BUSINESS, C DS AND OTHER STORAGE MEDIA ARE USED TO STORE THE FILMS AND OTHER TV PROGRAMMES, WITHOUT WHICH THE ASSESSEE COMPANY WOULD NOT BE IN A POSITION TO TELECAST ANYT HING AND THEREFORE HELD THAT THIS IS NOT JUST AN ASSET B UT IS A VITAL TOOL OF TRADE FOR THE ASSESSEE COMPANY AND HE NCE, FALLS WITHIN THE DEFINITION OF PLANT AND MACHINERY AND IS ACCORDINGLY ELIGIBLE FOR DEPRECIATION @ 15%. HE ACCORDINGLY, RE-WORKED THE DEPRECIATION AND COMPUTE D THE TAXABLE INCOME. 6. AGGRIEVED BY THE ORDER OF THE A.O, THE A SSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO ALLO WED THE SAME. THE LD CIT(A) CONSIDERED THE ORDER OF THE LD. CIT UNDER SECTION 263 AND OBSERVED THAT THE CIT HAD NOT DIRECTED THE A.O. TO EXAMINE THE MATTER OF RATE OF DEPRECIATION AFRESH. HE OBSERVED THAT DURING THE RE VISION 7 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. PROCEEDINGS UNDER SECTION 263, THE LD. CIT DROPPED THE PROPOSAL TO TREAT THE FILM LIBRARY AS PLANT AFTER BEING SATISFIED WITH THE ASSESSEES EXPLANATION AND THERE FORE, THE A.O. DID NOT HAVE THE MANDATE TO DEAL WITH THE ISSUE ONCE AGAIN. HE, THEREFORE, DIRECTED THE A.O. TO TRE AT THE FILM LIBRARY AS AN INTANGIBLE ASSET AND ALLOW DEPRE CIATION ON THE ACQUISITION COST @ 25%. AGGRIEVED BY THE ORD ER OF THE LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 7. THE LD. D.R, ARGUED THAT THE CIT UNDER SEC TION 263 OF THE I.T. ACT HAD DIRECTED THE A.O. TO RE-DO THE ASSESSMENT WHICH INCLUDES THE ISSUE OF THE NATURE O F THE ASSET AND THE RATE OF DEPRECIATION ALLOWABLE ON SUC H ASSET. THEREFORE, ACCORDING TO HIM, THE LD. CIT(A) HAS ERRONEOUSLY HELD THAT THE A.O. HAS TRAVELLED BEYOND THE MANDATE OF THE CIT AND HAS FURTHER ERRED IN DIRECTI NG THE A.O. TO ADOPT THE RATE OF DEPRECIATION ALLOWABLE ON INTANGIBLE ASSETS I.E., @ 25%. FURTHER, HE RELIED UPON THE ORDER OF THE A.O TO ARGUE THAT THE ASSET WAS IN THE NATURE OF A TOOL OF THE TRADE AND THEREFORE WAS RIGHTLY TR EATED AS PLANT AND MACHINERY AND DEPRECIATION WAS RIGHTLY AL LOWED AT 15%. 8. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, CLAIMED IT TO BE AN INTANGIBLE ASSET, WHILE T HE A.O. TREATED IT AS PLANT AND MACHINERY. IT IS THE CASE OF THE ASSESSEE THAT THE ASSESSMENT ORDER, PASSED UNDER SE CTION 143(3) WAS ORIGINALLY PASSED ALLOWING THE DEPRECIAT ION ON THIS ASSET @ 25% AS IS ALLOWABLE ON AN INTANGIBLE A SSET 8 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. WHILE THE ASST ORDER PASSED BY THE AO U/S 143(3) RE AD WITH SECTION 263 OF THE ACT IS ONLY TO GIVE EFFECT TO THE ORDER OF THE CIT UNDER SECTION 263 OF THE ACT AND THEREFORE THE AO HAS TO LIMIT HIMSELF TO THE DIRECT IONS OF THE CIT. IT WAS SUBMITTED THAT IN THE ORDER U/S 263 OF THE ACT, SINCE THE CIT DID NOT GIVE ANY DIRECTION TO TH E AO TO RE-CONSIDER THIS ISSUE, AO CANNOT DO IT. 9. HAVING REGARD TO THE RIVAL CONTENTIONS A ND THE MATERIAL ON RECORD AS WELL AS THE WRITTEN SUBMISSIO NS FILED BY THE LD. COUNSEL FOR THE ASSESSEE, WE FIND THAT T HE FIRST ISSUE BEFORE US IS ABOUT THE NATURE OF THE ASSET TH E FILM SOFTWARE LIBRARY I.E., WHETHER IT IS AN INTANGIBLE OR TANGIBLE ASSET AND THE RATE OF DEPRECIATION ALLOWAB LE THEREON ? THE RATE OF DEPRECIATION ALLOWABLE ON AN ASSET WOULD DEPEND ON THE NATURE OF THE ASSET. 10. TO ADJUDICATE THIS ISSUE, WE NEED TO GO INTO THE FACTS OF THE CASE ONCE AGAIN. WE FIND THAT THE ASSESSMENT WAS INITIALLY COMPLETED UNDER SECTION 14 3(3) OF THE ACT ON 31.12.2009 ALLOWING THE DEPRECIATION ON THE FILM LIBRARY @ 25% TREATING THE SAME AS AN INTANGIB LE ASSET. THE CIT ASSUMED JURISDICTION UNDER SECTION 2 63 OF THE ACT BOTH ON THE GROUND OF THE VALUATION OF THE ASSET AS WELL AS ON THE GROUND OF DEPRECIATION GRANTED @ 25% TREATING THE ASSET AS AN INTANGIBLE ASSET. ASSESSEE HAS SUBMITTED ITS DETAILED EXPLANATION AS TO WHY THE AS SET FILM SOFTWARE LIBRARY SHOULD BE TREATED AS AN INT ANGIBLE ASSET. IT WAS SUBMITTED THAT IN THE HANDS OF SHRI R AMOJI 9 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. RAO (HUF) ALSO, THE ASSET WAS TREATED AS AN INTANGI BLE ASSET AND DEPRECIATION @ 25% WAS GRANTED FROM A.Y. 2006-07. IT WAS ALSO SUBMITTED THAT THE SOFTWARE LI BRARY FALLS WITHIN THE DEFINITION OF COPYRIGHT UNDER THE COPY RIGHTS ACT, 1957 AND THE DEPRECIATION ON SOFTWARE LIBRARY @ 25% WAS CLAIMED BY THE ASSESSEE AND ALSO ALLOWED BY THE AO IN THE ASST PROCEEDINGS U/S143(3) OF THE AC T. THEREAFTER, THE LD. CIT DID NOT DISCUSS ANYTHING FU RTHER ABOUT THE NATURE OF THE ASSET AND THE RATE OF DEPRE CIATION ALLOWABLE THEREON IN THE REVISION ORDER BUT AFTER DISCUSSING AT LENGTH ON THE CORRECTNESS OF THE VALU ATION OF FILM SOFTWARE LIBRARY, HE SET ASIDE THE ASSESSMEN T ORDER WITH A DIRECTION TO THE A.O. TO RE-DO THE ASSESSMEN T. NOW, IT IS THE CONTENTION OF THE LD. COUNSEL FOR THE ASS ESSEE THAT THE CIT WAS SATISFIED WITH ASSESSEES CONTENTI ONS AND THEREFORE, HAS NOT DISCUSSED ABOUT THE RATE OF DEPR ECIATION IN THE SUBSEQUENT PARAS OF HIS ORDER AND THEREFORE, HAS NOT SET ASIDE THE ASSESSMENT ORDER TO THAT EXTENT A ND A.O. HAS TRAVELLED BEYOND HIS MANDATE IN RECONSIDERING T HE ISSUE. BUT IT IS DIFFICULT TO ACCEPT THIS CONTENTIO N OF THE ASSESSEE FOR THE REASON THAT THE CIT HAS SET ASIDE THE ENTIRE ASSESSMENT AND NOT ONLY TO THE EXTENT OF VAL UATION OF THE FILM SOFTWARE LIBRARY. WE ARE OF THE OPINI ON THAT IF THE CIT WAS SATISFIED WITH ASSESSEES CONTENTION ON THE NATURE OF THE ASSET AND THE RATE OF DEPRECIATION AL LOWABLE THEREON, HE MIGHT NOT HAVE SAID SO IN DETAIL IN THE REVISION ORDER, BUT WOULD HAVE INDICATED SO BY SETTING ASIDE THE ASSESSMENT ORDER ONLY TO THE EXTENT HE DID NOT AGRE E WITH THE ASSESSEE. THE HONBLE GUJARAT HIGH COURT IN THE CASE 10 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. OF ADDL CIT VS. MUKUR CORPORATION REPORTED IN (1978 ) 111 ITR 312 (GUJ) HAS HELD THAT THERE IS NOTHING IN SEC TION 263(1) OF THE ACT TO JUSTIFY THAT BEFORE PASSING TH E FINAL ORDER UNDER THAT SECTION, THE COMMISSIONER MUST NECESSARILY AND IN ALL CASES RECORD FINAL CONCLUSIO NS ABOUT THE POINTS IN CONTROVERSY BEFORE HIM AND WHERE THE COMMISSIONER SETS ASIDE THE ASSESSMENT ORDER AND DI RECTS THE AO TO MAKE A FRESH ASSESSMENT, THE ONLY PROPER COURSE FOR THE COMMISSIONER WOULD BE NOT TO EXPRESS ANY FINAL OPINION AS REGARDS THE CONTROVERSIAL POINTS. SIMILAR VIEW WAS ALSO EXPRESSED BY THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS SESHASAYEE PAPER AND BO ARDS LTD, REPORTED IN (2000) 242 ITR 490 (MAD). IN THE C ASE BEFORE US, THE FACT THAT THE CIT HAS SET ASIDE THE WHOLE OF THE ASSESSMENT AND DIRECTED THE A.O. TO RE-DO THE ASSESSMENT MAKES IT CLEAR THAT HE WAS NOT SATISFIED WITH ASSESSEES CONTENTIONS EVEN ON THE NATURE OF THE AS SET AND THE RATE OF DEPRECIATION ALLOWABLE THEREON. THE REFORE, WE DO NOT AGREE WITH THE FINDING OF THE CIT(A) ON T HIS ISSUE. 11. EVEN WITH REGARD TO THE MERITS OF THE ISSUE, I.E., THE NATURE OF THE ASSET, WE FIND THAT UNDISPUTEDLY, BEFORE ITS TRANSFER TO THE ASSESSEE, THE ASSET WAS TREATED AS AN INTANGIBLE ASSET IN THE HANDS OF ITS PREVIOUS OWN ER, I.E., SHRI. RAMOJI RAO (HUF) AND DEPRECIATION THEREON WA S ALLOWED AT 25%. WE FIND THAT THE CIT(A), WHILE HOLD ING THAT THE AO HAS EXCEEDED HIS MANDATE, HAS ALSO HELD THAT EVEN ON MERITS, THE FILMS WHICH ARE COPIED ON DISKS 11 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. CANNOT BE TREATED AS PLANT. HOWEVER, HE HAS NOT GIV EN ANY REASONS FOR HOLDING SO, WHILE THE REASONING GIVEN B Y THE AO FOR TREATING THE FILMS AS PLANT AND MACHINERY IS THAT THE ASSET FILM SOFTWARE LIBRARY IS MOSTLY CONTAIN ED IN CDS AND OTHER STORAGE MEDIA AND THAT THE ASSESSEE W OULD NOT BE IN A POSITION TO TELECAST ANYTHING WITHOUT T HE FILM SOFTWARE LIBRARY I.E., THE FILMS AND TV PROGRAMMES THEREIN AND THEREFORE, THEY ARE THE VITAL TOOLS OF TRADE FOR THE ASSESSEE COMPANY AND HENCE PLANT AND MACHINERY. WE ARE NOT ABLE TO AGREE WITH THIS FINDING OF THE A O. AS OBSERVED EARLIER, THE ASSET WAS TREATED AS AN INTAN GIBLE ASSET IN THE HANDS OF THE PREVIOUS OWNER. THE AO HA S APPLIED THE FUNCTIONAL TEST TO TREAT IT AS PLANT AN D MACHINERY. HE HAS RELIED UPON VARIOUS DECISIONS TO HOLD SO. HAVING GONE THROUGH THE SAID JUDGMENTS, WE FIN D THAT ALL OF THESE DECISIONS ARE ON THE FUNCTIONAL TESTS TO BE APPLIED TO DETERMINE WHETHER AN ASSET IS A PLANT A ND MACHINERY. IND AS 38 IS THE ACCOUNTING STANDARD WHOSE OBJECTIVE IS TO PRESCRIBE THE ACCOUNTING TREA TMENT FOR INTANGIBLE ASSETS THAT ARE NOT SPECIFICALLY DEA LT WITH IN ANY OTHER ACCOUNTING STANDARD. THOUGH, THE SAID ACCOUNTING STANDARD IS NOT BINDING ON US UNLESS IT IS NOTIFIED BY THE CENTRAL GOVERNMENT U/S 145(2) OF TH E ACT, WE MAY GET SOME GUIDANCE ON THIS ISSUE FROM PARA 4 OF THE SAID ACCOUNTING STANDARD WHICH READS AS UNDER : 4. SOME INTANGIBLE ASSETS MAY BE CONTAINED IN OR ON A PHYSICAL SUBSTANCE SUCH AS A COMPACT DISC (IN THE C ASE OF COMPUTER SOFTWARE), LEGAL DOCUMENTATION (IN THE CAS E OF A LICENSE OR PATENT) OR FILM. IN DETERMINING WHETHER AN ASSET THAT INCORPORATES BOTH INTANGIBLE AND TANGIBLE ELEM ENTS 12 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. SHOULD BE TREATED UNDER IND AS 16, PROPERTY, PLANT AND EQUIPMENT, OR AS AN INTANGIBLE ASSET UNDER THIS STA NDARD, AN ENTITY USES JUDGMENT TO ASSESS WHICH ELEMENT IS MORE SIGNIFICANT. FOR EXAMPLE, COMPUTER SOFTWARE FOR A COMPUTER-CONTROLLED MACHINE TOOL THAT CANNOT OPERAT E COMPUTER SOFTWARE FOR A COMPUTER-CONTROLLED MACHINE TOOL THAT CANNOT OPERATE COMPUTER SOFTWARE FOR A COMPUTE R- CONTROLLED MACHINE TOOL THAT CANNOT OPERATE WITHOUT THAT SPECIFIC SOFTWARE IS AN INTEGRAL PART OF THE RELATE D HARDWARE AND IT IS TREATED AS PROPERTY, PLANT AND EQUIPMENT. THE SAME APPLIES TO THE OPERATING SYSTEM OF A COMPUTER. WHEN THE SOFTWARE IS NOT AN INTEGRAL PART OF THE RELATED HARDWARE, COMPUTER SOFTWARE IS TREATED AS A N INTANGIBLE ASSET. 11.1. FROM A READING OF THE ABOVE ACCOUNTIN G STANDARD AND ALSO THE JUDGMENTS RELIED UPON BY THE AO, WE FIND THAT AN INTANGIBLE ASSET CAN ALSO BE TREATE D AS PLANT, PROVIDED, IT BECOMES AN INTEGRAL PART OF THE TOOLS USED BY THE ENTITY TO CARRY ON ITS BUSINESS. IN TH E CASE BEFORE US, THE FILMS AND TV PROGRAMMES ARE ESSENTIA L FOR THE ASSESSEE COMPANY TO CARRY ON ITS BUSINESS OF TELECASTING OF FILMS AND OTHER PROGRAMMES, BUT THER E IS NO CAVEAT THAT THE ASSESSEE COMPANY HAS TO TELECAST ONLY THESE FILMS AND PROGRAMMES AND NONE OTHER FOR ASSES SEES BUSINESS. FURTHER, NOT ONLY THE FILMS AND PROGRAMM ES IN THE FILM SOFTWARE LIBRARY, BUT THE ASSESSEE MAY A LSO TELECAST ANY OTHER PROGRAMMES OR FILMS ON ITS CHANN ELS. BY PURCHASING THE LIBRARY, THE ASSESSEE IS GAINING EXCLUSIVE RIGHT OVER THE ASSET BUT THIS LIBRARY CAN NOT BE HELD AS A TOOL FOR CARRYING ON OF ITS BUSINESS AS A SSESSEE CAN CARRY ON ITS BUSINESS EVEN WITHOUT THE FILM SO FTWARE LIBRARY. THE SAID LIBRARY ONLY ASSISTS IN DETERMIN ING THE CONTENT OF THE TELECAST, BUT DOES NOT LIMIT THE TEL ECAST AND 13 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. IS NOT ESSENTIAL FOR THE OPERATIONS OF THE ASSESSEE S BUSINESS AND THEREFORE CANNOT BE TERMED AS THE TOOL OF THE TRADE. THUS, IT FAILS THE FUNCTIONAL TEST ADOPTED B Y THE ASSESSING OFFICER. THEREFORE, WE HOLD THAT THE ASSE T WHICH CONSISTS OF COPYRIGHTED FILMS AND PROGRAMMES IS A N INTANGIBLE ASSET ELIGIBLE FOR DEPRECIATION AT THE RATE OF 25%. THUS, THE GROUND OF APPEAL NO.3 OF THE REVENUE IS REJECTED. 12. THE NEXT ISSUE TO BE DECIDED IS WHETHE R THE ASSESSING OFFICER HAS RIGHTLY INVOKED EXPLANATION 3 TO SECTION 43(1) ? THE BRIEF FACTS RELATING TO THIS IS SUE ARE THAT PURSUANT TO THE ORDER OF THE CIT U/S 263 OF TH E ACT, THE AO INVOKED THE PROVISIONS OF SEC.43(1) AND EXPLANATION 3 THERETO AND ADOPTED THE WDV OF THE FI LM SOFTWARE LIBRARY IN THE HANDS OF THE PREVIOUS OWNER AS THE ACTUAL COST OF THE ASSET TO THE ASSESSEE AND ALLO WED DEPRECIATION ON THAT VALUE ONLY. ON APPEAL, THE LD CIT(A) PROCEEDED TO CONSIDER WHETHER THE PROVISIONS OF EXPLANATION-3 TO SECTION 43(1) OF THE I.T. ACT ARE ATTRACTED IN THE CASE OF THE ASSESSEE. HE OBSERVED THAT THE EXPLANATION-3 TO SECTION 43(1) IS INTENDED TO COUNT ERACT THE ATTEMPTS OF AN ASSESSEE TO CLAIM HIGHER DEPRECI ATION ON ASSETS ACQUIRED AT MORE THAN THE MARKET VALUE AN D CAN BE APPLIED ONLY TO THOSE ASSETS WHICH ARE PART OF WDV BLOCK. HE OBSERVED THAT IF THE ASSETS ARE FOUND TO BE PART OF WDV BLOCK OF ASSETS OF THE SELLER, THE SAID EXPL ANATION CANNOT BE INVOKED. HE OBSERVED THAT EVEN IN RESPECT OF ASSETS WHICH ARE IN THE BLOCK OF ASSETS, THE A.O. H AS TO BE 14 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. SATISFIED THAT THE MAIN PURPOSE OF TRANSFER OF ASSE TS IS TO CLAIM HIGHER DEPRECIATION. HE OBSERVED THAT IN ASSE SSEES CASE, THE A.O. HAS ROPED IN EXPLANATION-3 TO SECTIO N 43(1), THOUGH ALL THE FILMS IN THE FILM LIBRARY WER E NOT IN THE WDV BASKET OF FILMS. HE OBSERVED THAT THE FILMS IN THE WDV BASKET ARE MOSTLY OTHER LANGUAGE FILMS AND NOT TELUGU FILMS, THE COST OF WHICH WAS WRITTEN OFF AS REVENUE EXPENDITURE MANY YEARS AGO AND THAT THIS IS A PATEN T MISTAKE COMMITTED BY THE A.O. FURTHER, HE ALSO EXAM INED AS TO WHETHER THE A.O. HAS RECORDED THE REQUISITE SATISFACTION BEFORE INVOKING THE PROVISIONS OF EXPL ANATION- 3 TO SECTION 43(1) OF THE ACT. HE OBSERVED THAT THE ASSESSMENT RECORD DOES NOT CONTAIN ANY SUCH SATISFA CTION AND FURTHER THAT EVEN IF THE A.O. HAD RECORDED REAS ONS, THOSE REASONS WOULD NOT HAVE STOOD THE TEST OF SCRU TINY IN AS MUCH AS THE A.O. HAS ERRONEOUSLY BELIEVED THE FI LM LIBRARY TO COMPRISE OF ONLY THOSE FILMS WHICH FORM PART OF WDV OF FILMS, COMPLETELY OVERLOOKING THE FACT THAT THE LIBRARY ALSO CONSISTS OF 1596 TELUGU FILMS, WHICH W ERE NOT PART OF WDV BASKET. THUS, HE HELD THAT SINCE THE A. O. DID NOT RECORD HIS SATISFACTION TO INVOKE EXPLANATION-3 TO SECTION 43(1), THE REVALUATION OF THE FILM LIBRARY BY THE A.O. IS NOT SUSTAINABLE. HE ALSO OBSERVED THAT THE A.O. HAS TO DETERMINE THE MARKET VALUE OF THE ASSET AND NOT MERELY ADOPT THE WDV OF AN ASSET IN THE HANDS OF TH E PREVIOUS OWNER. HE OBSERVED THAT THE A.O. HAS ERRED IN ASSUMING THAT THE FILMS IN THE FILM LIBRARY BOUGHT BY THE ASSESSEE WERE ALL PART OF WDV OF FILMS AND THEREFOR E, SUBSTITUTION OF COST BY THE A.O. ALSO IS NOT SUSTAI NABLE. HE 15 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. ALSO OBSERVED THAT THE ASSESSEE HAD RELIED UPON AN EXPERT TO VALUE THE FILM LIBRARY ON THE BASIS OF CERTAIN METHODOLOGY AND EVEN IF THE EXPERT HAS RELIED ON SO ME PRESUMPTIONS WHICH ARE QUESTIONABLE AND NOT SCIENTI FIC, THE A.O. HAS FAILED TO FOLLOW ANY METHOD AT ALL AND HAS ALSO FAILED TO TAKE INTO ACCOUNT THE MUCH AND MORE VALUABLE PART OF THE LIBRARY I.E., 1596 FILMS (ANNE XURE-2) WHICH WAS OUTSIDE THE WDV BASKET. HE OBSERVED THAT SINCE THE ASSESSEES PRICE IS SUPPORTED BY AN INTER NATIONAL RENOWNED EXPERT VALUER, AS COMPARED TO THE VALUATIO N OF THE A.O. HAVING NO METHOD OR ERRONEOUS METHOD, THE FORMER HAS TO BE ACCEPTED AS MORE APPROPRIATE AND RELIABLE. HE THEREFORE, HELD THAT THE VALUE ADOPTED BY THE ASSESSEE FOR PURCHASE OF FILM LIBRARY I.E., RS.775 CRORES IS TO BE TREATED AS THE ACTUAL COST OF ENTIRE FILM LIB RARY TO THE ASSESSEE AND DEPRECIATION THEREON @ 25% IS TO BE AL LOWED. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVEN UE IS IN APPEAL BEFORE US. 13. THE LD. D.R. SUPPORTED THE ORDER OF THE A.O. AND FURTHER SUBMITTED THAT THE ASSESSEE HEREIN AS W ELL AS M/S. USHAKIRAN MOVIES AND M/S. USHAKIRAN TELEVISION ARE ALL ENTERPRISES HELD BY SHRI RAMOJI RAO (HUF) A ND HIS FAMILY MEMBERS AND THAT M/S. USHA KIRAN MOVIES AND M/S. USHAKIRAN TELEVISION PRODUCED THE FILMS AND TV PROGRAMMES RESPECTIVELY WHICH ARE TELECAST BY THE ASSESSEE HEREIN AND A PART OF THE REVENUE THEREFROM IS ALSO APPROPRIATED BY THE ASSESSEE HEREIN. HE SUBMIT TED THAT DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSE E HAS 16 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. PURCHASED THE FILM LIBRARY FROM SHRI RAMOJI RAO (HU F) AT AN EXORBITANT COST IN ORDER TO REDUCE ITS INCOME TA X LIABILITY BY CLAIMING HIGHER DEPRECIATION ON THE SA ME AND REDUCING ITS TAX LIABILITY. HE HAS DRAWN OUR ATTENT ION TO PAGE-22 OF THE ASSESSMENT ORDER TO SHOW THAT THE WD V OF THE FILM SOFTWARE LIBRARY AS ON 31 ST MARCH, 2006 FOR THE A.Y. 2006-07 IN THE BOOKS OF SHRI RAMOJI RAO (HUF) IS ONLY RS.160,96,47,766 WHEREAS THIS LIBRARY WAS VALU ED BY M/S. ERNST & YOUNG AT RS.775 CRORES AND BASED ON SU CH VALUATION, THE FILM SOFTWARE LIBRARY WAS TRANSFERRE D TO THE ASSESSEE AT SUCH AN EXORBITANT RATE AND THE DEPRECI ATION WAS CLAIMED @ 25% ON SUCH AN ENHANCED VALUE FOR TAK ING UNDUE BENEFIT. THUS, ACCORDING TO HIM, THIS TRANSAC TION ATTRACTS THE PROVISIONS OF EXPLANATION-3 TO SECTION 43(1) OF THE INCOME TAX ACT. HE SUBMITTED THAT THOUGH THE IS SUE OF THE APPLICABILITY OF EXPLANATION-3 TO SECTION 43 (1) WAS VERY MUCH PART OF THE ASSESSMENT ORDER AS WELL AS T HE ORDER OF THE LD. CIT(A), THE REVENUE HAS INADVERTEN TLY OMITTED TO RAISE SUCH GROUND AT THE TIME OF FILING OF FORM NO.36 AND PRAYED THAT THE ADDITIONAL GROUND OF APPE AL ON THIS ISSUE RAISED BY THE REVENUE BE ADMITTED AND ADJUDICATED BY THIS TRIBUNAL. 14. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE LD. CIT(A) AND EXTENSIVELY ARGUED IN FAVOUR OF THE ASSESSEE AND DR EW OUR ATTENTION TO THE RELEVANT MATERIAL ON RECORD TO DEMONSTRATE THAT THE TRANSFER OF THE ASSET AND THE VALUATION OF THE FILM SOFTWARE LIBRARY WAS DUE TO 17 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. COMMERCIAL EXPEDIENCY I.E., TO FULFILL THE CONDITIO N PRECEDENT SET BY THE FOREIGN INVESTOR M/S BLACKSTON E FP CAPITAL PARTNER (MAURITIUS) V LTD., AND NOT DUE TO ANY PREMEDITATED PLAN TO REDUCE ITS INCOME TAX LIABILIT Y BY CLAIMING HIGHER DEPRECIATION. HE ALSO HAS DRAWN OUR ATTENTION TO THE FOLLOWING JUDGMENTS IN SUPPORT OF THE CONTENTION THAT BEFORE INVOKING THE PROVISIONS OF EXPLANATION-3 TO SECTION 43(1) OF THE I.T. ACT, THE A.O. HAS TO RECORD HIS SATISFACTION THAT THE VALUATION OF TH E ASSET IS DONE AT A HIGHER RATE IN ORDER TO CLAIM HIGHER DEPRECIATION: I. ASHWIN VANASPATI INDUSTRIES VS CIT REPORTED IN 255 ITR 26 II. CHITRA PUBLICITY COMPANY (P) LTD., VS ASSISSTANT CIT REPORTED IN (2010) 4 ITR(T) 738 (AHMEDABAD) (T.M.) III. CIT VS SEKAR OFFSET PRESS REPORTED IN 214 ITR 516 14.1. HE SUBMITTED THAT AS RIGHTLY BROUGHT OUT BY THE LD. CIT(A), THERE IS NO SUCH SATISFACTION RECOR DED BY THE A.O. WHICH IS PART OF THE ASSESSMENT RECORD AND THEREFORE, THE INVOCATION OF THE SAID PROVISION IS NOT SUSTAINABLE. HE ALSO TRIED TO DISTINGUISH THE DECIS IONS RELIED UPON BY THE AO FROM THE FACTS OF THE CASE BE FORE US. FURTHER, WITHOUT PREJUDICE TO THE ABOVE CONTENTION, HE ALSO SUBMITTED THAT EVEN IF THE VALUATION OF THE AS SET AT RS.775 CRORES IS NOT ACCEPTED BY THE A.O, HE CANNOT MERELY ADOPT THE WDV OF THE ASSET IN THE HANDS OF T HE 18 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. SELLER BUT HAS TO ARRIVE AT THE ACTUAL COST OF THE ASSET TO THE ASSESSEE BY ADOPTING A SCIENTIFIC AND REASONABL E METHOD AND THAT IN ASSESSEES CASE, THE A.O. HAS FA ILED TO CARRY OUT THIS EXERCISE. ACCORDING TO HIM, THE WDV OF THE ASSET AS ADOPTED BY THE A.O. TO BE THE ACTUAL COST TO THE ASSESSEE IS NOT SUSTAINABLE WHEN THE FILM SOFTWARE LIBRARY CONSISTED ALSO OF FILMS NOT INCLUDED IN THE WDV BAS KET OF FILMS. HE THEREFORE, URGED THAT THE ORDER OF THE LD . CIT(A) BE CONFIRMED AS REGARDS THE VALUATION OF THE ASSET AT RS.775 CRORES. THE LD. COUNSEL ALSO FILED DETAILED WRITTEN SUBMISSIONS AND EXTENSIVELY ARGUED ON THE UN- SUSTAINABILITY OF THE ASSESSMENT ORDER BY RELYING O N THE JUDICIAL PRECEDENTS. 15. HAVING GONE THROUGH THE ASSESSMENT ORDER AS WELL AS THE ORDER OF THE LD. CIT(A), WE FIND THAT T HE A.O. HAS INVOKED THE PROVISIONS OF THE EXPLANATION-3 TO SECTION 43(1), WHILE THE LD. CIT(A) HAS HELD THAT THE SAID PROVISION IS NOT APPLICABLE TO THE ASSESSEES CASE. THEREFORE , WE FIND THAT ALL THE NECESSARY FACTS ARE ALREADY PART OF TH E RECORD. THEREFORE, WE ADMIT THE ADDITIONAL GROUND OF APPEAL AND PROCEED TO ADJUDICATE THE SAME. 16. FOR PROPER APPRECIATION OF THE LEGAL P OSITION AND FOR THE PURPOSE OF CLARITY AND READY REFERENCE, THE RELEVANT PROVISION IS REPRODUCED HEREUNDER: 43. IN SECTIONS 28 TO 41 AND IN THIS SECTION, UNLESS THE CONTEXT OTHERWISE REQUIRES 19 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. (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 1ST 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 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 1 [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 20 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. (B) THE AMOUNT OF DEPRECIATION THAT WOULD HAVE BEEN ALLOWABLE TO THE ASSESSEE FOR ANY ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 1988, AS IF THE ASSET WAS THE ONLY ASSET IN THE RELEVANT BLOCK OF ASSETS.] EXPLANATION 3.WHERE, BEFORE THE DATE OF ACQUISITION BY THE ASSESSEE, THE ASSETS WERE AT ANY TIME USED BY ANY OTHER PERSON FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION AND THE [ASSESSING] OFFICER IS SATISFIED THAT THE MAIN PURPOSE OF THE TRANSFER OF SUCH ASSETS, DIRECTLY OR INDIRECTLY TO THE ASSESSEE, WAS THE REDUCTION OF A LIABILITY 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 [ASSESSING] OFFICER MAY, WITH THE PREVIOUS APPROVAL OF THE 4 [JOINT COMMISSIONER], DETERMINE HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. 16.1. FROM A LITERAL READING OF THE ABOVE PROVIS ION, WE FIND THAT THE FOLLOWING CONDITIONS HAVE TO BE SA TISFIED BEFORE INVOKING THE ABOVE PROVISION. 1. THE ASSET SHOULD HAVE BEEN USED BY ANY OTHER PERSON FOR THE PURPOSE OF HIS BUSINESS BEFORE SUCH AN ASSET IS ACQUIRED BY THE ASSESSEE: AND 2. THE A.O. IS SATISFIED THAT THE MAIN PURPOSE OF THE TRANSFER OF SUCH ASSETS, DIRECTLY OR INDIRECTLY TO THE ASSESSEE, WAS THE REDUCTION OF THE LIABILITY TO INC OME TAX (BY CLAIMING DEPRECIATION WITH REFERENCE TO ENHANCED COST). 17. FROM THE FACTS OF THE CASE BEFORE US, THERE IS NO DISPUTE THAT THE ASSET FILM SOFTWARE LIBRARY W AS USED BY ITS PREVIOUS OWNER I.E., SHRI RAMOJI RAO (HUF) F OR THE PURPOSE OF ITS BUSINESS AND ALSO BY THE ASSESSEE HE REIN 21 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. BEFORE THE TRANSFER OF THE SAME TO THE ASSESSEE EXC LUSIVELY. THEREFORE, UNDISPUTEDLY THE FIRST CONDITION IS SATI SFIED. 18. IT IS NOW TO BE SEEN WHETHER THE SECOND CONDITION IS SATISFIED FOR INVOKING THE PROVISIONS OF EXPLANATION-3 TO SECTION 43(1) OF THE I.T. ACT ? F OR THIS PURPOSE, IT IS NECESSARY TO GO INTO THE CHRONOLOGY OF EVENTS. BRIEF FACTS RELATING TO THIS ISSUE ARE AS UNDER. 19. SHRI RAMOJI RAO (HUF) OWNS TWO BUSINESS UNITS VIZ., M/S. USHAKIRAN MOVIES (UKM) AND M/S. USHAKI RAN TELEVISION (UKTV) AND IS ALSO THE CHAIRMAN OF THE ASSESSEE HEREIN AND HE AND HIS FAMILY MEMBERS ARE I TS SHAREHOLDERS. THUS, ALL THE ABOVE PARTIES ARE RELA TED TO EACH OTHER. ALL THE ASSETS AND LIABILITIES OF UKM A ND UKTV ARE TAKEN OVER BY THE ASSESSEE HEREIN AT BOOK VALUE AS PER THE BOOKS OF ACCOUNT OF SHRI RAMOJI RAO (HUF) EXCEP T THE FILM SOFTWARE LIBRARY WHICH WAS TAKEN OVER AT RS.77 5 CRORES. IN THE TV TELECAST BUSINESS CIRCLES, IT IS UNDERSTOOD THAT CONTENT RIGHTS OF FILMS CONSISTS OF SATELLITE RIGHTS OF FEATURE FILMS AND TV PROGRAMMES ALONG WIT H THE SOFTWARE FOR EXPLOITATION IN TV CHANNELS. SHRI RAMO JI RAO (HUF) HAD ACQUIRED SOFTWARE LIBRARY CONSISTING OF T V PROGRAMME SOFTWARE AND SATELLITE RIGHTS OF VARIOUS FEATURE FILMS SPREAD-OVER A PERIOD OF TIME I.E., FROM 5 YEA RS TO 50 YEARS AND IN SOME CASES, THE PERIOD IS PERPETUAL. T HE BUSINESS UNITS OF SHRI RAMOJI RAO (HUF), UKM AND UK TV HAVE CLAIMED THE EXPENDITURE INCURRED BY THEM ON FI LMS OR PROGRAMMES PRODUCED BY THEM UNDER RULE 9A OR 9B IN 22 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. EARLIER YEARS UP TO A.Y. 2002-03 AND THEREAFTER, FR OM A.Y. 2006-07, DEPRECIATION WAS CLAIMED BY THEM ON THE SOFTWARE LIBRARY TREATING IT AS AN INTANGIBLE ASSET . ONCE AGAIN FROM THE A.Y. 2006-07, SHRI RAMOJI RAO (HUF), CLAIMED DEDUCTION UNDER RULE 9A OR 9B ON THE FILM A ND TV PROGRAMMES PRODUCED DURING THE RELEVANT PREVIOUS YEAR WHICH WAS NOT ACCEPTED BY THE A.O. AND THE DEPRECIATION WAS ALLOWED ON THE SOFTWARE LIBRARY. IN THE CASE OF FILMS PRODUCED, ONCE DEDUCTION IS CLAIMED U NDER RULE 9A/9B OF I.T. RULES, THERE WILL NOT BE ANY VA LUE IN THE BOOKS FOR THE SAID FILMS, BUT RIGHTS OF THE PIC TURES CAN BE SOLD AND SUBSTANTIAL INCOME CAN BE DERIVED FROM SALE OF SUCH RIGHTS. THUS THEY HAVE COMMERCIAL VALUE. ADMITTEDLY, AT THE TIME OF SALE OF SOFTWARE LIBRARY TO THE ASSESSEE COMPANY, THE WDV OF THE SOFTWARE LIBRARY I N THE BOOKS OF THE SHRI RAMOJI RAO (HUF) WAS A SUM OF RS.160.96 CRORES. THE FILM SOFTWARE LIBRARY INCLUDE D THE FILMS IN THE WDV BASKET AS WELL AS THE OTHER FILMS WHICH WERE CLAIMED AS DEDUCTION IN FULL UNDER RULE 9A/9B OF THE I.T. ACT AND THEREFORE, THOUGH THEIR VALUE IN THE B OOKS WAS NIL, THEY POSSESSED COMMERCIAL VALUE AND HAVE TO BE GIVEN A VALUE WHEN THEY ARE TRANSFERRED. 19.1. DURING THE RELEVANT PREVIOUS YEAR, IN ORDER TO EXPAND ITS BUSINESS AND ALSO WITHSTAND THE COMPETIT ION IN THE MARKET, THE ASSESSEE COMPANY APPROACHED A PRIVA TE EQUITY CAPITAL COMPANY, M/S. BLACK STONE FP CAPITAL PARTNER, (MAURITIUS) V LIMITED, A FOREIGN COMPANY, FOR INVESTMENT IN THE EQUITY SHARES OF THE ASSESSEE COM PANY. 23 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. THE SAID COMPANY DESIRED THAT THE ASSESSEE COMPANY SHOULD ACQUIRE AND OWN THE FILM SOFTWARE LIBRARY FR OM SHRI RAMOJI RAO (HUF) BEFORE IT MAKES THE INVESTMEN T IN THE EQUITY SHARES OF THE ASSESSEE COMPANY. TO FULFI LL ITS CONTRACTUAL OBLIGATION AND FACILITATE THE FOREIGN D IRECT INVESTMENT INTO THE ASSESSEE COMPANY, THE ASSESSEE COMPANY DESIRED TO ACQUIRE THE SAID ASSET FROM SHRI RAMOJI RAO (HUF) AND FOR THE SAID PURPOSE, THE VALU ATION OF THE FILM SOFTWARE LIBRARY WAS REFERRED TO M/S. E RNST & YOUNG, A REPUTED COMPANY HAVING EXPERTISE IN VALUAT ION OF ASSETS. ERNST & YOUNG RECOMMENDED THE VALUE OF T HE SOFTWARE LIBRARY IN THE RANGE OF RS.746.41 CRORES T O RS.814.27 CRORES TAKING INTO CONSIDERATION THE RIGH TS IN ALL THE FILMS AND PROGRAMMES IN THE SOFTWARE LIBRAR Y PROPOSED FOR SALE AT THAT TIME BY SHRI RAMOJI RAO ( HUF). BY VIRTUE OF ACQUIRING THE ASSET, THE ASSESSEE HAD ACQUIRED THE ENTIRE FILM SOFTWARE LIBRARY CONSISTIN G OF 47.95 LAKH MINUTES OF TV PROGRAMMES AND 3778 FILMS WITH SATELLITE RIGHTS FOR A PERIOD RANGING FROM 5 T O 50 YEARS AND FOR SOME FILMS FOR A PERPETUAL PERIOD. 19.2. M/S. BLACK STONE HAD AGREED TO INVE ST A SUM OF RS.1217 CRORES FOR ACQUIRING 26% STAKE IN THE AS SESSEE COMPANY BY ENTERING INTO NECESSARY AGREEMENTS, SUBJ ECT TO THE APPROVAL FROM FOREIGN INVESTMENT PROMOTION B OARD (FIPB), GOVERNMENT OF INDIA, AS IS REQUIRED DURIN G THAT PERIOD. IN ANTICIPATION OF THE SAID AGREEMENT GOING THROUGH, THE ASSESSEE COMPANY HAD ALSO OBTAINED A L OAN FROM STANDARD CHARTERED BANK AND ACQUIRED THE SOFTW ARE 24 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. LIBRARY FROM SHRI RAMOJI RAO (HUF) DURING THE F.YS. 2006- 07 AND THE PURPOSE WAS ONLY TO FACILITATE THE INVES TMENT BY M/S. BLACK STONE IN ASSESSEE COMPANY. HOWEVER, M /S. BLACK STONE COULD NOT INVEST IN ASSESSEE COMPANY AS APPROVAL FROM THE FIPB COULD NOT BE OBTAINED BEFORE THE DUE DATE AND THE DEAL DID NOT MATERIALIZE/WAS NOT EXECUTED. THEREFORE, THE ASSESSEE COMPANY HAD APPROACHED ANOTHER INVESTOR, A DOMESTIC COMPANY I. E., M/S EQUATOR TRADING ENTERPRISE PVT. LIMITED, WHICH CAME FORWARD TO INVEST A SUM OF RS.2604 CRORES AFTER CAR RYING OUT THE DUE DILIGENCE OF THE ACTIVITIES, ASSETS AND LIABILITIES OF THE ASSESSEE COMPANY INCLUDING THE SOFTWARE LIBR ARY ACQUIRED BY THE ASSESSEE COMPANY FROM SHRI RAMOJI R AO (HUF). IT WAS THEREAFTER, THAT THE DOMESTIC INVESTO R ACQUIRED 39% OF SHARE CAPITAL OF ASSESSEE COMPANY B Y WAY OF ALLOTMENT OF SHARES FROM THE ASSESSEE COMPAN Y AND ALSO PURCHASE OF SHARES FROM SHRI RAMOJI RAO (H UF). THUS, M/S EQUATOR TRADING ENTERPRISE PVT. LIMITED, INVESTED A SUM OF RS.2604 CRORES IN ASSESSEE COMPAN Y FOR 39% OF SHARE CAPITAL AND DESIRED THAT THE ASSESSEE COMPANY SHOULD BE SPLIT INTO FOUR COMPANIES AND THE SOFTWARE LIBRARY WAS ACCORDINGLY TRANSFERRED TO ONE OF THE COMPANIES AT THE VALUE ACQUIRED FROM SHRI RAMOJI RA O (HUF). M/S. EQUATOR TRADING ENTERPRISE PVT. LIMITED HAD ALSO PAID NON-COMPETE FEES OF RS.670 CRORES SUBSEQU ENTLY TO RAMOJI RAO (HUF). 19.3. DURING THE ASSESSMENT PROCEEDINGS UN DER SECTION 143(3) OF THE I.T. ACT, THE A.O. ACCEPTED T HE 25 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. CONTENTION OF THE ASSESSEE THAT IT HAD ACQUIRED SOF TWARE LIBRARY AT RS.775 CRORES AND ALSO ALLOWED DEPRECIAT ION THEREON AS AN INTANGIBLE ASSET @ 25%. THE CIT SOUGH T TO REVISE THE ASSESSMENT ORDER UNDER SECTION 263 OF TH E I.T. ACT ON THE GROUNDS OF HIGH/EXORBITANT VALUATION OF THE LIBRARY AND ALSO INCORRECT RATE OF DEPRECIATION ALL OWED ON THE SAME. BEFORE THE LD. CIT, THE ASSESSEE HAD EXPL AINED THAT THERE WAS NO INTENTION TO ENHANCE THE VALUATIO N OF THE SOFTWARE LIBRARY FOR THE PURPOSE OF CLAIMING EN HANCED DEPRECIATION IN THE BOOKS OF ACCOUNT OF THE ASSESSE E DUE TO THE ABOVE FACTS OF INVESTMENT OF EQUITY CAPITAL BY UNRELATED PARTIES AND FURTHER THAT SHRI RAMOJI RAO (HUF) IS ALSO ASSESSED TO TAX BY THE SAME A.O. AND HE WAS AWARE OF THE BOOK VALUE OF THE SOFTWARE LIBRARY AND ACCEP TED THE SALE CONSIDERATION OF SOFTWARE LIBRARY IN THE ASSES SMENT OF SHRI RAMOJI RAO (HUF) WHICH ESTABLISHES THE FACT TH AT THE MARKET VALUE OF THE SOFTWARE LIBRARY WAS AT ARMS L ENGTH. IT WAS ALSO SUBMITTED THAT SHRI RAMOJI RAO (HUF) H AD SHOWN THE ENTIRE SALE VALUE OF SOFTWARE LIBRARY IN ITS RETURN OF INCOME AS INCOME FROM BUSINESS, BUT THE DEPARTMENT HAD ASSESSED THE SALE CONSIDERATION UNDE R THE HEAD LONG TERM CAPITAL GAIN AND SHRI RAMOJI R AO (HUF) HAD PAID THE TAXES AS DEMANDED, THOUGH HE APPEALED AGAINST THE TREATMENT OF BUSINESS INCOME A S INCOME FROM CAPITAL GAINS BEFORE ITAT. THUS, IT WAS SUBMITTED THAT THERE IS NO INTENTION TO REDUCE THE TAX LIABILITY PARTICULARLY, AS THE OUTSIDE INVESTOR INV ESTED A SUM OF RS.2604 CRORES IN THE ASSESSEE COMPANY BY TA KING 26 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. INTO ACCOUNT THE VALUE OF VARIOUS ASSETS INCLUDING SOFTWARE LIBRARY. 20. THE LD. CIT, HOWEVER, WAS NOT CONVINCED WITH THE ASSESSEES SUBMISSIONS ABOVE AND HELD THAT THE A.O. HAS NOT CONSIDERED THE VALUATION REPORT GIVEN BY M/ S. ERNST & YOUNG P. LTD., AND THAT IT IS ALSO NOT AVAI LABLE ON THE ASSESSMENT RECORD OF THE A.O. HE FURTHER OBSERV ED THAT THERE WAS A CHANGE OF INCUMBENT DURING THE ASSESSMENT PROCEEDINGS AND THEREFORE, THE SUCCESSOR A.O. DID NOT EXAMINE THE APPLICABILITY OF PROVISIONS OF SECTION 43(1) READ WITH EXPLANATION (3) OF THE I.T. ACT. HE FURTHER OBSERVED THAT THE ASSESSEE COMPANY CLAIMED DEPRECIA TION OF SOFTWARE LIBRARY ON A SUM OF RS.788.01 CRORES, W HILE IT ACQUIRED THE SOFTWARE LIBRARY ONLY FOR A SUM OF RS. 755 CRORES. IN REPLY TO A QUERY ON THIS ISSUE, ASSESSEE HAD SUBMITTED THAT THERE WERE OTHER INTANGIBLE ASSETS A LSO WHICH WERE ACQUIRED BY THE ASSESSEE DURING THE PREV IOUS YEAR BUT THE A.O. DID NOT VERIFY THE DETAILS OF FIL MS PURCHASED BY THE ASSESSEE COMPANY FROM OTHERS IN TH E MARKET. THE LD. CIT OBSERVED THAT THERE IS NO EVIDE NCE ON RECORD THAT THE A.O. EXAMINED THE APPLICABILITY OF SECTION 43(1) READ WITH EXPLANATION-3 OF I.T. ACT. HE FURTH ER OBSERVED THAT THE VALUATION REPORT OF ERNST & YOUNG CONTAINS SEVERAL CONTRADICTIONS AND THE A.O. OUGHT TO HAVE EXAMINED THE CONTENTS OF THE VALUATION REPORT CLOSELY. THUS, HE HELD THE ASSESSMENT ORDER TO BE ERRONEOUS IN SO FAR AS IT WAS PREJUDICIAL TO THE IN TEREST OF 27 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. THE REVENUE. ON APPEAL BY THE ASSESSEE BEFORE THE I TAT, THE SAME WAS UPHELD. 21. DURING THE COURSE OF ASSESSMENT PROCEEDINGS UNDER SECTION 143(3) READ WITH SECTION 263 OF THE I .T. ACT, THE A.O. RE-EXAMINED ALL THE CONTENTIONS OF THE ASS ESSEE AND HELD THAT THE TRANSACTION IS BETWEEN THE RELATE D PARTIES AND THAT THE ASSESSEE HAS BEEN USING THE AS SET OF ITS SISTER CONCERNS EXCLUSIVELY AND THEREFORE, IT I S DIFFICULT TO UNDERSTAND THE PURPOSE OF THE ASSESSEE TO BUY TH E SAME FILM SOFTWARE LIBRARY AT AN EXORBITANT PRICE O F RS.775 CRORES WHILE THE WDV OF THE ASSET IS ONLY RS.160,96,47,766 IN THE HANDS OF SHRI RAMOJI RAO (H UF) AS ON 31.03.2006. HE HELD THAT THE ONLY CONCLUSION POSSIBLE AT THIS JUNCTURE IS THAT THE TRANSFER OF F ILM SOFTWARE LIBRARY WAS DONE AT AN ENHANCED COST FROM ITS GROUP CONCERN WITH THE SOLE PURPOSE TO CLAIM HIGHER DEPRECIATION BY M/S. USHAKIRAN ENTERPRISES LIMITED THEREBY, RESULTING IN REDUCTION OF INCOME TAX LIABI LITY AND THUS THE PROVISIONS OF THE EXPLANATION-3 TO SECTION 43(1) OF THE I.T. ACT ARE ATTRACTED. THE LD. CIT(A), ON T HE OTHER HAND, HELD THAT THE EXPLANATION-3 TO SECTION 43(1) IS NOT APPLICABLE AS THE A.O. HAS NOT RECORDED THE REQUISI TE SATISFACTION BEFORE INVOKING THE SAID PROVISIONS. A CCORDING TO HIM, THE A.O.S OBSERVATIONS IN THE ASSESSMENT O RDER ARE NOT SUFFICIENT COMPLIANCE AS ENVISAGED IN THE S AID PROVISO BUT OUGHT TO HAVE RECORDED REASONS WHICH LE D HIM TO HIS SATISFACTION THAT THE MAIN PURPOSE OF THE TR ANSFER WAS TO REDUCE THE TAX LIABILITY. HE FURTHER HELD TH AT EVEN IF 28 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. THE A.O. HAD RECORDED REASONS, THOSE REASONS WOULD NOT HAVE STOOD THE TEST OF SCRUTINY INASMUCH AS HE ERRONEOUSLY BELIEVED THE FILM LIBRARY TO COMPRISE O F ONLY THOSE FILMS WHICH FORMED PART OF WDV BASKET OF FILM S, COMPLETELY OVERLOOKING THE FACT THAT THE LIBRARY CO NSISTED OF 1596 TELUGU FILMS ALSO WHICH WERE NOT PART OF WD V BASKET. HE OBSERVED THAT THE A.O. HAS APPLIED THE PROVISION ON THE PREMISE THAT THE MAIN PURPOSE OF TRANSFER WAS REDUCTION OF TAX LIABILITY WHILE THE M AIN PURPOSE WAS TO SELL EQUITY OF THE COMPANY WHICH MATERIALIZED LONG AFTER THE ACQUISITION OF THE FILM LIBRARY BY THE ASSESSEE. THEREFORE, ACCORDING TO HIM, THE PROVISIONS OF EXPLANATION-3 TO SECTION 43(1) OF THE I.T. ACT ARE NOT ATTRACTED. HE ACCORDINGLY DELETED THE DISAL LOWANCE MADE BY THE A.O. AGAINST WHICH THE REVENUE IS NOW I N APPEAL BEFORE US. 22. THE LD. D.R. RELIED UPON THE ORDERS OF THE A.O. AND SUBMITTED THAT THE ASSESSEE AND ALL THE OTHER E NTITIES BEING RELATED PARTIES, THE A.O. HAS RIGHTLY BROUGHT OUT THAT THE INTENTION FOR THE TRANSFER OF THE ASSET AT AN ENHANCED RATE WAS TO REDUCE THE TAX LIABILITY OF TH E ASSESSEE BY CLAIMING HIGHER DEPRECIATION. HE HAS RE FERRED TO THE DECISIONS RELIED UPON BY THE A.O. TO JUSTIFY INVOKING OF THE EXPLANATION-3 TO SECTION 43(1) AND ALSO OF M AKING DISALLOWANCE. THE LD. D.R. HAS ALSO FILED WRITTEN SUBMISSIONS IN SUPPORT OF THE CONTENTIONS OF THE RE VENUE. HE HAS ALSO PLACED RELIANCE UPON THE JUDGMENT OF TH E HONBLE SUPREME COURT IN THE CASE OF MAX DATA PVT. LTD. 29 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. VS. CIT IN CIVIL APPEAL NO.9772 OF 2013 WHEREIN WHI LE CONSIDERING THE PROVISIONS OF SECTION 271(1)(C) OF THE I.T. ACT, IT WAS HELD THAT BEFORE INITIATING PENALTY PRO CEEDINGS UNDER SECTION 271(1)(C) OF THE ACT, THE REQUIREMENT OF LAW IS THAT THE A.O. HAS TO BE SATISFIED WHETHER THE PE NALTY PROCEEDINGS BE INITIATED DURING THE COURSE OF ASSES SMENT PROCEEDINGS BUT IT IS NOT THE REQUIREMENT TO RECORD HIS SATISFACTION IN A PARTICULAR MANNER OR REDUCE IT IN TO WRITING. HE FURTHER RELIED UPON THE APPROVAL GRANTE D BY THE ADDL. CIT DATED 05.02.2013 TO THE A.O. TO INVOK E THE PROVISIONS OF SECTION 43(1) OF THE ACT AND FINALISE THE PROCEEDINGS ACCORDINGLY. THE COPY OF THE APPROVAL I S PLACED AT PAGE NO.1 OF THE PAPER BOOK FILED BY HIM. HE ALSO RELIED ON THE JUDGMENTS REFERRED TO BY THE A.O . IN THE ASSESSMENT ORDER AND THE FOLLOWING OTHER DECISIONS : (I) GUJDAR KAJORIA COAL MINES LTD., VS. CIT, CALCUTTA (1972) 85 ITR 599 (SC) (II) CIT (CENTRAL), NEW DELHI VS. DALMIA DADRI CEMENT LTD., (1980) 125 ITR 510 (DEL.) (HC) (III) NAGAMMAL COTTON MILLS (P) LTD., VS. CIT (2002) 258 ITR 390 (MAD.) (HC). (IV) CIT VS. POULOSE & MATHEN P. LTD., (1999) 236 ITR 416 (KERALA) (H.C.) (V) MAK DATA P. LTD., VS. CIT-II, SLP (CIVIL) NO.18389 OF 2013 (VI) BILT POWER LTD., NEW DELHI VS. ADDL. CIT, RANGE-2, NEW DELHI (2012) 34 CCH 134 (DEL.) (TRIBU.) 30 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. (VII) USHODAYA ENTERPRISES P. LTD., HYDERABAD VS. ACIT, CIRCLE-16(2), HYDERABAD ITA.NO.26/H/2011 DATED 22.10.2014 (HYD.) (TRIBU.) 23. THE LD. COUNSEL FOR THE ASSESSEE, WHILE REITERATING THE ABOVE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AS TO THE NATURE OF THE TRANSACTI ON, SUBMITTED THAT IT WAS ONLY TO ATTRACT CAPITAL INVES TMENT TO EXPAND ITS BUSINESS, THAT THE ASSESSEE HAD APPROACH ED A PRIVATE INVESTOR I.E., M/S. BLACK STONE WHO AGREED TO INVEST A SUM OF RS.1217 CRORES FOR ACQUIRING 26% ST AKE IN THE ASSESSEE COMPANY SUBJECT TO THE APPROVAL FROM FOREIGN INVESTMENT PROMOTION BOARD (FIPB), GOVERNMENT OF INDIA. HE SUBMITTED THAT M/S. BLACK S TONE IS IN NO WAY CONNECTED TO ASSESSEE COMPANY OR TO AN Y OF THE BUSINESS UNITS OF SHRI RAMOJI RAO (HUF). HE SUBMITTED THAT M/S. BLACK STONE HAD ENTERED INTO TH E AGREEMENT WITH THE ASSESSEE AND PENDING SUCH AGREEMENT, THE ASSESSEE COMPANY HAD OBTAINED A LOAN FROM STANDARD CHARTERED BANK AND ACQUIRED THE FILM SOFTWARE LIBRARY FROM SHRI RAMOJI RAO (HUF) TO FACI LITATE THE INVESTMENT IN THE ASSESSEE COMPANY BY M/S. BLAC K STONE. HE HAS DRAWN OUR ATTENTION TO PAGES 214 OF T HE PAPER BOOK FILED BY THE ASSESSEE TO DEMONSTRATE THA T THE PROPOSED INVESTOR HAD STIPULATED THAT THE SOFTWARE LIBRARY SHOULD BE OWNED BY THE ASSESSEE. HE SUBMITTED THAT FINAL APPROVAL WAS NOT GRANTED BY FIPB, DUE TO WHICH, THE AGREEMENT COULD NOT BE ACTED UPON. SINCE THE ASSESS EE HAD ALREADY TAKEN A LOAN FROM STANDARD CHARTERED BA NK, 31 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. THE ASSESSEE HAD TO APPROACH ANOTHER PRIVATE EQUITY FIRM FOR INVESTMENT IN ASSESSEE FIRM I.E., M/S. EQUATOR TRADING ENTERPRISE PVT. LIMITED. HE HAS SUBMITTED THAT THE VALUATION OF THE FILM LIBRARY HAS BEEN CARRIED OUT BY A REPUTED COMPANY, M/S. ERNST & YOUNG AND SUBMITTED THAT THE SAID REPORT HAD TAKEN INTO CONSIDERATION A LL THE RELEVANT FACTS AND FACTORS BEFORE ARRIVING AT THE V ALUE. HE SUBMITTED THAT THE FACT OF THE ASSESSEE ENTERING IN TO AN AGREEMENT WITH M/S. BLACK STONE AND THE SAID AGREEM ENT NOT BEING ACTED UPON DUE TO APPROVAL NOT GIVEN BY F IPB AND THE FACT THAT ASSESSEE HAD TAKEN LOAN FROM STAN DARD CHARTERED BANK ON THE BASIS OF THE SAID AGREEMENT A RE ALL MATTER OF RECORD AND NOT IN DISPUTE. HE SUBMITTED T HAT IT IS ALSO NOT DISPUTED THAT M/S. EQUATOR TRADING ENTE RPRISE PVT. LIMITED IS ALSO A UN-RELATED PARTY TO THE ASSE SSEE AND THAT THIS COMPANY HAS ACCEPTED THE VALUATION OF THE FILM SOFTWARE LIBRARY BY M/S. ERNST & YOUNG. THUS, ACCO RDING TO HIM, THE VALUE OF THE FILM SOFTWARE LIBRARY IS A T ARMS LENGTH AND THEREFORE, THE A.O., HAVING MADE SUBJECT IVE ENQUIRY HAS ACCEPTED THE VALUE ADOPTED FOR THE FILM SOFTWARE LIBRARY. HE HAS ALSO SUBMITTED THAT THE CIRCUMSTANCES WHICH HAVE NECESSITATED THE TRANSFER OF THE FILM SOFTWARE LIBRARY FROM SHRI RAMOJI RAO (HUF) IS ALSO NOT IN DISPUTE. ACCORDING TO HIM, THE INVESTMENT OF EQUITY CAPITAL WAS POSSIBLE ONLY WHEN THE ASSESSEE ABIDED BY THE CONDITIONS OF THE AGREEMENTS AND ACQUIRED AND OWNED THE FILM SOFTWARE LIBRARY. 32 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. 23.1. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT EVEN IF IT IS TO BE ACCEPTED THAT TH E A.O. WAS SATISFIED THAT THE TRANSFER OF THE ASSET HAD TA KEN PLACE IN ORDER TO ENABLE THE ASSESSEE TO CLAIM HIGH ER DEPRECIATION,, THE A.O. IS REQUIRED TO VALUE THE AS SET WITH THE APPROVAL OF THE JCIT AFTER TAKING INTO CONSIDER ATION OF ALL THE RELEVANT CIRCUMSTANCES. HE HAS SUBMITTED TH AT THE A.O. HAS FAILED TO CARRY OUT THIS EXERCISE, BUT INS TEAD HAS TAKEN THE WDV OF THE ASSET IN THE HANDS OF THE PREV IOUS OWNER AS THE VALUE WITHOUT TAKING INTO CONSIDERATIO N THE FACT THAT SOME OF THE ASSETS I.E., FILMS AND TV PROGRAMMES TRANSFERRED TO THE ASSESSEE, WERE IN ADD ITION TO THE ASSETS IN THE WDV BASKET. THUS, THE VALUE AD OPTED BY THE A.O. IS TOTALLY WITHOUT ANY BASIS. THE LD. C OUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE INCOME FROM THE SALE OF FILM SOFTWARE LIBRARY HAS BEEN OFFERED AS BUSINESS INCOME BY SHRI RAMOJI RAO (HUF) BUT THE DEPARTMENT HAS NOT ACCEPTED THE SAME AS BUSINESS INCOME BUT HAS TREATED IT AS LONG TERM CAPITAL GAIN . HE SUBMITTED THAT THE SHRI RAMOJI RAO (HUF) IS IN APPE AL BEFORE THE ITAT AGAINST THE ABOVE. HE SUBMITTED THA T THE FACT THAT SHRI RAMOJI RAO (HUF) HAS OFFERED THE INC OME IN HIS HANDS ALSO GOES TO PROVE THAT THERE WAS NO INTE NTION ON THE PART OF ANY OF THE RELATED PARTIES TO CLAIM HIGHER DEPRECIATION OR TO REDUCE THE TAX LIABILITY. IN SUP PORT OF HIS CONTENTION, HE PLACED RELIANCE ON THE FOLLOWING DECISIONS. 33 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. (I) ASHWIN VANASPATI INDUSTRIES VS. CIT (2002) 255 ITR 26 (GUJ.) (HC) (II) CHITRA PUBLICITY CO. P. LTD., VS. ACIT (2010) 4 ITR 738 (AHD.) (T.M.) (III) CIT VS. SEKAR OFFSET PRESS (1995) 214 ITR 516 (IV) KUNGENDI INDUSTRIAL WORKS P. LTD., VS. CIT 57 ITR 540 (A.P.) (V) CIT VS. POULOSE & MATHEN P. LTD., (1999) 236 ITR 416. 24. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE ASSE SSEE HAD ARGUED THAT THE A.O. HAS NOT RECORDED A FINDING IN THE ASSESSMENT ORDER OR BEFORE SEEKING THE APPROVAL OF JCIT THAT THE INTENTION OF THE ASSESSEE WAS TO REDUCE TH E TAX LIABILITY AND CIT(A) HAS ACCEPTED THIS CONTENTION A ND THUS, ACCORDING TO HIM, THE DISALLOWANCE AND THE CONSEQUE NTIAL ADDITIONS ARE NOT SUSTAINABLE. ACCORDING TO HIM, TH E A.O. HAS TO RECORD HIS SATISFACTION IN WRITING BEFORE PR OCEEDING FURTHER AND IN SUPPORT OF THIS CONTENTION, HE PLACE D RELIANCE UPON THE JUDGMENT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF ASWIN VANASPATI (CITED SUPRA). BEFOR E APPLYING THE SAID DECISION, WE PROCEED TO CONSIDER THE FACTS OF THE CASE AS TO WHETHER THE FACTS ON RECORD WOULD SATISFY THE APPREHENSION OF THE A.O. THAT THE TRANS FER OF THE ASSET IS TO REDUCE TAX LIABILITY. THE AGREEMENT OF THE ASSESSEE WITH M/S. BLACK STONE FOR INVESTMENT OF EQ UITY FUND IN THE ASSESSEE COMPANY IS NOT DISPUTED AND IT IS ALSO NOT OUT OF PLACE TO MENTION THAT WHEN SUCH AN 34 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. INVESTMENT IS PROPOSED TO BE MADE, THE INVESTOR COM PANY WOULD STIPULATE CERTAIN CONDITIONS. AS SEEN FROM TH E AGREEMENT BETWEEN THE ASSESSEE COMPANY AND M/S. BLA CK STONE, ONE OF THE CONDITIONS PRECEDENT TO COMPLETIO N OF THE AGREEMENT WAS ACQUISITION OF THE FILM SOFTWARE LIBRARY AND TV PROGRAMMES LIBRARY FROM M/S. USHAKIR AN TELEVISION, M/S. USHAKIRAN MOVIES AND SHRI RAMOJI R AO (HUF). IT IS ALSO NOT IN DISPUTE THAT THE AGREEMEN T COULD NOT BE COMPLETED DUE TO NON-RECEIPT OF THE APPROVAL FROM FIPB WITHIN THE DUE DATE AND IT IS FOR THE PURPOSE OF THE EXECUTION OF THE AGREEMENT THAT THE ASSESSEE HAD GO T THE FILM SOFTWARE LIBRARY VALUED BY ERNST & YOUNG. THUS , IT IS CLEAR THAT THE VALUATION OF THE ASSET WAS DONE W ITH AN INTENTION TO GET EQUITY FUND FROM A THIRD PARTY. TH E FURTHER FACT THAT THE ASSESSEE HAD TAKEN LOAN FROM STANDARD CHARTERED BANK AND SINCE THE ASSESSEES AGREEMENT WITH M/S. BLACK STONE COULD NOT BE EXECUT ED, THE ASSESSEE HAD TO APPROACH ANOTHER PARTY FOR THE EQUITY INVESTMENT ALSO IS NOT DISPUTED. ACCORDING TO US, T HE ABOVE FACTS JUSTIFY THE REFERENCE OF THE VALUATION OF THE ASSET TO ERNST AND YOUNG, BUT DOES NOT PROVE THAT T HE VALUATION FIXED/ARRIVED AT, WAS REASONABLE AND WAS NOT EXORBITANT OR THAT THE HIGHER VALUATION WAS NOT FOR CLAIMING HIGHER DEPRECIATION AS THE TRANSACTION WAS BETWEEN RELATED PARTIES. HOWEVER, THE FACT THAT THE THIRD PARTIES HAVE ACCEPTED THE VALUATION GOES TO PROVE T HAT THE VALUATION IS NOT ENTIRELY UNRELIABLE. THE ONLY GROU ND ON WHICH THE A.O. SEEMS TO HAVE ENTERTAINED THE DOUBT IS 35 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. BECAUSE BOTH THE SELLER AS WELL AS THE PURCHASER AR E RELATED PARTIES. 25. LET US NOW EXAMINE THE JUDICIAL PRECEDENTS RELIED UPON BY BOTH THE PARTIES. WITH REGARD TO THE CITATION RELIED UPON BY THE LD. D.R., WE FIND THAT THE HONBLE SUPREME COURT IN THE CASE OF GUZDAR KAJORA COAL MINES LTD., VS. CIT, CALCUTTA (CITED SUPRA) WHILE D EALING WITH THE CORRECTNESS OF THE VALUATION OF AN ASSET O N ITS TRANSFER BETWEEN RELATED PARTIES ADOPTED FOR THE PU RPOSE OF CLAIMING DEPRECIATION, HAS HELD AS UNDER : 11. NOW, THE ORIGINAL COST OF A PARTICULAR ASSET IS A QUESTION OF FACT WHICH HAS TO BE DETERMINED ON THE EVIDENCE OF THE MATERIAL PRODUCED BEFORE OR AVAILABLE TO THE IT AUTHORITIES. ANY DOCUMENT OR FORMAL DEED MENTIONING THE CONSIDERATION OR THE COS T PAID FOR THE PURCHASE OF AN ASSET BY AN ASSESSEE WOULD BE A PIECE OF EVIDENCE AND, PRIMA FACIE, THE STATEMENTS OR FIGURES GIVEN THEREIN WOULD SHOW HOW MUCH THE COST OF THE ASSET TO THE ASSESSEE IS. BUT, IF CIRCUMSTANCES EXIST SHOWING THAT A FICTITIOUS PRICE HAS BEEN PUT ON THE ASSET OR THERE IS FRAUD OR COLLUSIO N BETWEEN THE VENDOR AND THE VENDEE AND THERE HAS BEEN INFLATION OR DEFLATION OF VALUE FOR ULTERIOR PURPOSES IT IS OPEN TO THE IT AUTHORITIES TO REFUSE TO ACCEPT THE PRICE MENTIONED IN THE DEED OR ALLEGED B Y THE ASSESSEE AND TO ASCERTAIN WHAT THE ACTUAL ORIGINAL COST WAS: SEE PINDI KASHMIR TRANSPORT CO. LTD. V. CIT (1954) 26 ITR 595 (LAH-PAK) : TC29R.253 AND KALOORAM GOVINDRAM VS. CIT (1965) 57 ITR 335 (SC) : TC29R.254. IN THIS VIEW OF THE MATTER IT IS OPEN TO THE IT AUTHORITIES TO DETERMINE AND TO THE ASSES SEE TO SHOW WHETHER THE GOODWILL OF THE BUSINESS IS OR IS NOT INCLUDED IN THE CONSIDERATION OR THE PRICE PAID FOR THE ACQUISITION OF THE ASSET. IN OTHER WORDS, EVEN IF IT IS NOT EXPRESSLY MENTIONED THAT GOODWILL HAS BEEN SOLD, IT CAN BE SHOWN AND ASCERTAINED BY EVIDENCE 36 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. WHETHER THE SAME HAS BEEN PURCHASED OR NOT BY THE ASSESSEE. THE EXPRESSION 'GOODWILL' HAS BEEN CONSIDERED AND EXPLAINED BY THIS COURT IN S.C. CAMBATTA & CO. P. LTD. VS. CEPT (1961) 41 ITR 500 (SC), AND NOTHING MORE NEED BE SAID ABOUT IT. THE PRINCIPLES STATED BY US ARE BY NO MEANS EXHAUSTIVE AND ARE MAINLY ILLUSTRATIVE. 12. KEEPING IN VIEW THE FACTS OF THE PRESENT CASE, WE MAY MAKE IT CLEAR THAT, IF CIRCUMSTANCES EXIST FOR GOING BEHIND THE VALUATION AS ALSO THE ALLOCATION GIVEN IN THE DEED OF CONVEYANCE, IT WAS AND IS OPEN TO THE IT AUTHORITIES TO DETERMINE THE VALUATION AS WELL AS THE ALLOCATION BETWEEN DEPRECIABLE AND NON- DEPRECIABLE ASSETS. 26. IN THE CASE OF CIT (CENTRAL), NEW DELHI VS. DALMIA DADRI CEMENT LTD. (CITED SUPRA), THE HONBLE DELHI HIGH COURT WHILE DEALING WITH THE PROVISIONS OF EXPLANATION-3 TO SECTION 43(1) OF THE ACT HAS HELD AS UNDER : 11. WE HAVE HEARD THE PARTIES AND GIVEN OUR UTMOST CONSIDERATION TO ALL THE CIRCUMSTANCES. AS I S CLEAR FROM THE NARRATION OF FACTS, IN THE BOOKS OF BHAGWATI GLASS, THE TOTAL EXPENDITURE INCURRED BY I T IN THE EXECUTION OF THE CONTRACT JOBS WAS RS. 3,11,954. AS AGAINST THAT THE ASSESSEE HAS PAID RS. 7,70,000 TO IT FOR EXECUTION OF THOSE JOBS. THIS, O N THE FACE OF IT, APPEARS TO BE A VERY HIGH PAYMENT, SPECIALLY WHEN THE TRIBUNAL HAS NOTED THAT THE JOBS DID NOT REQUIRE ANY SPECIALISED OR SOPHISTICATED SK ILL. IT WAS MOSTLY A LABOUR CONTRACT AS THE MATERIAL WAS ENTIRELY SUPPLIED BY THE ASSESSEE. IT IS NEXT ALSO CLEAR THAT THE ASSESSEE AND BHAGWATI GLASS WERE CONNECTED CONCERNS INDIRECTLY OWNED BY R. DALMIA, AND THAT BHAGWATI GLASS HAD A CARRIED FORWARD LOSS OF OVER RS. 7 LAKHS THIS YEAR. THE RESULT HAS BEEN THAT ALTHOUGH BHAGWATI GLASS ENJOYED A PROFIT OF ABOUT RS. 4,58,000 IN THE EXECUTION OF THIS CONTRACT, NO TAX LIABILITY ENSUED TO IT AND THE ENTIRE PROFIT WAS WI PED 37 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. OFF AGAINST THE LARGE BROUGHT FORWARD LOSS. AT THE SAME TIME, THE ASSESSEE HAS CLAIMED TO BE ENTITLED TO DEPRECIATION, ETC., ON THE CAPITAL VALUE OF THOSE W ORKS AT RS. 7,70,000. THE I.T. AUTHORITIES WERE, THEREFO RE, RIGHT IN OBSERVING THAT THERE WAS CONSIDERABLE ELEMENT OF COLLUSION IN THE ENTIRE AFFAIR WHICH COU LD NOT BE TREATED AS THE RESULT OF NORMAL COMMERCIAL CONSIDERATIONS. THE CAPITAL COST HAS NO DOUBT BEEN INFLATED IN THE HANDS OF THE ASSESSEE TO ENABLE IT TO CLAIM HIGHER DEPRECIATION, ETC. 12. WE FIND THAT THE TERM 'ACTUAL COST' CAME UP FOR CONSIDERATION BEFORE THE SUPREME COURT IN TH E CASE OF GUZDAR KAJORA C041 MINES LTD. VS. CIT 1972 CTR (SC) 231; (1972) 85 ITR 599. IT WAS OBSERVED THAT THE ORIGINAL COST OF A PARTICULAR ASSET IS A QUESTION OF FACT WHICH HAS TO BE DETERMINED ON THE EVIDENCE OF THE MATERIAL PRODUCED BEFORE OR AVAILAB LE TO THE I.T. AUTHORITIES. ANY DOCUMENT OR FORMAL DEE D MENTIONING THE CONSIDERATION OR THE COST PAID FOR T HE PURCHASE OF AN ASSET BY AN ASSESSEE WOULD BE A PIECE OF EVIDENCE AND, PRIMA FACIE, THE STATEMENTS OR FIGURES GIVEN THEREIN WOULD SHOW HOW MUCH THE COST OF THE ASSET TO THE ASSESSEE IS. BUT IF CIRCUMSTANC ES EXIST SHOWING THAT A FICTITIOUS PRICE HAS BEEN PUT ON THE ASSET OR THERE IS FRAUD OR COLLUSION BETWEEN TH E VENDOR AND THE VENDEE AND THERE HAS BEEN INFLATION OR DEFLATION OF VALUE FOR ULTERIOR PURPOSE, IT IS O PEN TO THE I.T. AUTHORITIES TO REFUSE TO ACCEPT THE PRICE MENTIONED IN THE DEED OR ALLEGED BY THE ASSESSEE AN D TO ASCERTAIN WHAT THE ACTUAL COST WAS. THESE OBSERVATIONS IN OUR VIEW RENDER THE APPROACH ADOPTED BY THE TRIBUNAL IN THE PRESENT CASE AS UNSUSTAINABLE WHEN IT OBSERVED THAT COLLUSION AND INFLATION WOULD NOT ENTITLE THE I.T. AUTHORITIES TO SUBSTITUTE THEIR OWN FIGURE OF ACTUAL COST. 13. IN THE CASE OF GUZDAR KAJORA COAL MINES LTD. (SUPRA), THE DEED OF CONVEYANCE EXECUTED IN FAVOUR OF THE ASSESSEE PURPORTED TO TRANSFER CERTAI N ASSETS FOR A CONSIDERATION OF RS. 6 LAKHS PAID BY T HE ASSESSEE. THOSE ASSETS INCLUDED MACHINERY, PLANTS, STORES, BUILDINGS, ETC. THE I.T. AUTHORITIES FOUND THAT 38 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. SOME OF THE DIRECTORS AND SHAREHOLDERS OF THE ASSESSEE AND THE VENDOR-COMPANY WERE THE SAME AND CONNECTED, AND THERE WERE CERTAIN INFLATIONS AN D DEFLATIONS OF THE WRITTEN DOWN VALUES OF THE ASSETS . NO PROVISION HAD BEEN MADE FOR GOODWILL OF THE BUSINESS. THE ITO, THEREFORE, ALLOCATED PART OF RS. 6 LAKHS TO GOODWILL. THE VALUE OF THE DEPRECIABLE ASS ETS WAS COMPUTED AT RS. 33,973 ONLY. THE TRIBUNAL THEN REJECTED THE ASSESSEE'S CLAIM HOLDING, INTER ALIA, THAT THE ALLOCATION IN THE DEED OF CONVEYANCE WAS ARBITRARY. ON A REFERENCE OF THE QUESTION WHETHER T HE ITO WAS COMPETENT TO GO BEYOND THE CONVEYANCE AND FIX A VALUATION OF THE ASSETS ON HIS OWN, THE HIGH COURT ANSWERED THE QUESTION IN THE AFFIRMATIVE. ON APPEAL TO THE SUPREME COURT, IT WAS HELD THAT THERE WAS NO ERROR OR INFIRMITY THAT WOULD JUSTIFY INTERFERENCE BY THE SUPREME COURT. 14. SIMILARLY, THE CALCUTTA HIGH COURT IN JOGTA COAL CO. LTD. VS. CIT (1965) 55 ITR 89, OBSERVED TH AT IF THE CIRCUMSTANCES SHOWED THAN AN ASSESSEE HAD ARRANGED TO PUT A FICTITIOUS PRICE ON HIS ASSETS IN A CONTRACT OR CONVEYANCE, IT WAS OPEN TO THE I.T. AUTHORITIES TO REFUSE TO ACCEPT THAT PRICE, GO BEHI ND THE CONTRACT OR CONVEYANCE AND ASCERTAIN WHAT THE ORIGINAL COST WAS. THE LAHORE HIGH COURT (PAKISTAN) HAS ALSO IN THE CASE OF PINDI KASHMIR TRANSPORT CO. LTD. (1954) 26 ITR 595 (LAH- PAK), OBSERVED THAT TH E I.T. AUTHORITIES WERE JUSTIFIED IN LAW IN GOING BEH IND THE CONTRACT FOR DETERMINING THE ORIGINAL COST TO T HE COMPANY, FOR THE PURPOSE OF MAKING ALLOWANCE OF DEPRECIATION. 15. SO FAR AS THE EXPLANATIONS ADDED TO S. 43 OF THE ACT, SPECIALLY EXPLN. NO. 3, UNDER WHICH ALO NE THE TRIBUNAL HAS OBSERVED THE INTERFERENCE BY WAY O F DETERMINATION OF ACTUAL COST CAN BE MADE, WE ARE OF OPINION THAT SUCH EXPLANATIONS ARE ONLY ELABORATIVE AND TEND TO BRING OUT SOME OF THE CIRCUMSTANCES IN WHICH THE MAIN PROVISION OF THE LAW CAN OPERATE. THEY CAN BY NO STRETCH BE TREATED AS EXHAUSTIVE OR TO OTHERWISE LIMIT THE WIDE SCOPE WHICH THE PROVISION OF LAW MAY EMBRACE. RATHER THE INCORPORATION OF SOME 39 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. OF THESE EXPLANATIONS BY ITSELF SHOWS THAT THE LEGISLATURE ENVISAGED INTERFERENCE IN GIVEN CIRCUMSTANCES IN THE AMOUNT OF PURPORTED ACTUAL COS T. 16. WE ARE FURTHER OF OPINION THAT THE TRIBUNAL WAS NOT JUSTIFIED IN RESTRICTING THE OPERATION OF T HE ACTUALITY OF COST TO CASES WHERE PART OF THAT CONSIDERATION WAS NOT PAID OR PLOUGHED BACK OR COVERED SOME OTHER ITEMS. IN THESE CASES, THE COST WOULD BE WHAT IS IN FACT PAID. WHAT WAS NOT PAID OR WAS RETURNED WOULD NEVER BE CONSIDERED AS COST. THIS WILL BE INDEPENDENT OF THE PROVISIONS CONTAINE D IN THE IT ACT. THE PROVISIONS OF THIS ACT HAVE NOT BEEN INTRODUCED FOR THIS PURPOSE. THEY HAVE RATHER A SPECIAL OBJECTIVE AND IS DIRECTED TOWARDS NULLIFYIN G THE MALPRACTICES, SOMETIMES INDULGED IN SOME QUARTERS, OF DISPROPORTIONATELY INFLATING CAPITAL C OST IN ORDER TO EARN HIGH DEPRECIATION, AND PASS ON IN COLLUSION SUBSTANTIAL AMOUNTS TO SISTER CONCERNS OR CLOSELY CONNECTED PARTIES TO WHOM THOSE AMOUNTS MAY HAVE LITTLE OR NEGLIGIBLE BEARING ON THE INCIDE NCE OF TAX. THIS IS WHAT APPEARS TO HAVE HAPPENED IN TH E PRESENT CASE. IN OUR OPINION, WHEN THE LEGISLATURE HAS PREFIXED THE WORD 'ACTUAL' TO THE WORD 'COST', IT WAS TO LAY EMPHASIS ON THE REALITY AND GENUINENESS THEREOF AND EXCLUDE COLLUSIVE, INFLATED, DEFLATED O R FICTITIOUS COSTS. 27. IN THE CASE OF CIT VS. POULOSE & MATHEN P. LTD., (CITED SUPRA), THE HONBLE KERALA HIGH COURT WHILE CONSIDERING THE APPLICABILITY OF THE PROVISIONS OF EXPLANATION-3 TO SECTION 43(1) HAS HELD AS UNDER : 15. WE CANNOT AGREE WITH THE CONCLUSION OF THE TRIBUNAL THAT THE REVALUATION OF THE ASSETS ON THE EVE OF THE DISSOLUTION OF THE FIRM WAS MADE BONA FI DE FOR ADJUSTMENT OF THE MUTUAL RIGHTS OF THE FIRM. TH IS IS NOT A CASE WHERE THERE IS NO WRITTEN DOWN VALUE, WHICH MEANS, IN THE CASE OF ASSETS ACQUIRED IN THE PREVIOUS YEAR, THE ACTUAL COST TO THE ASSESSEE AND IN THE CASE OF ASSETS ACQUIRED BEFORE THE PREVIOUS YEA R, 40 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. THE ACTUAL COST TO THE ASSESSEE LESS ALL DEPRECIATI ON ACTUALLY ALLOWED TO HIM UNDER THE ACT AS DEFINED UNDER S. 43(6). SEC. 43(1) WITH EXPLANATIONS THEREO F SUPERSEDES THE GENERAL RULE OF LAW GOVERNING PARTNERSHIP, ITS ASSETS AND DISSOLUTION ETC. THE DEFINITION OF ACTUAL COST CONTAINED IN S. 43(1) R EAD WITH EXPLANATIONS THEREOF AFFORDS A MECHANISM BY WHICH REDUCE THE ACTUAL COST TO A FIGURE WHICH IS ANYTHING BUT REAL. WHEN THE ASSET WAS FORMALLY USED BY ANY OTHER PERSON FOR THE PURPOSE OF HIS BUSINESS AND THE MAIN PURPOSE OF THE TRANSFER OF THE ASSET T O THE ASSESSEE IS TO CLAIM A HIGHER DEPRECIATION ALLOWANCE SO AS TO REDUCE THE LIABILITY TO PAY INCO ME- TAX, THE ACTUAL COST SHALL BE DETERMINED BY THE A O IN THE EXERCISE OF THE POWER CONFERRED ON HIM AS PRESCRIBED IN EXPLN. 3 TO S. 43(1) NO MATTER WHAT T HE GENERAL LAW PRESCRIBES FOR DETERMINING THE COSTS OF THE ASSETS ON DISSOLUTION OF PARTNERSHIP FIRMS AND TRANSFER OF ITS ASSETS. 16. BOTH THE CONTESTING PARTIES, ASSESSEE AS WELL AS THE REVENUE, PLACED RELIANCE ON THE DECISIO N OF THE BOMBAY HIGH COURT IN GINNERS & PRESSERS P. LTD. VS. CIT 1978 CTR (BOM) 235 : (1978) 113 ITR 616 (BOM) : TC 29R.714, AND THE TRIBUNAL SAID SO IN ITS IMPUGNED ORDER. THAT WAS A CASE WHERE S. 10(5)( A) OF THE 1922 ACT CORRESPONDING TO EXPLN. 3 TO S. 43( 1) OF THE PRESENT ACT CAME UP FOR DISCUSSION. THE FACT S OF THAT CASE NARRATED HEREUNDER ARE MORE OR LOSS SIMIL AR TO THE FACTS ON HAND. THE ASSESSEE, A PRIVATE LIMIT ED COMPANY, WAS A SUBSIDIARY OF ANOTHER PRIVATE LIMITE D COMPANY. THE OBJECT OF FORMATION OF THE ASSESSEE- COMPANY WAS TO TAKE OVER SOME OIL AND GINNING MILLS , FACTORIES AND LAND BELONGING TO AND USED IN ITS BUSINESS BY THE PRESENT COMPANY. THESE ASSETS WERE TAKEN OVER BY THE ASSESSEE-COMPANY AT A COST OF RS. 13,50,000. THEIR WRITTEN DOWN VALUE FOR THE PARENT COMPANY WAS ONLY RS. 2,21,412 WHILE THEIR ORIGINAL PURCHASE COST TO THE PARENT COMPANY WAS RS. 5,52,475. THE ASSESSEE PAID FOR THE ASSETS BY ISSUI NG FULLY PAID UP SHARES OF THAT VALUE. THE ITO APPLIED THE PROVISO TO S. 10(5)(A) AND, WITH THE PREVIOUS APPROVAL OF THE IAC, HE FIXED THE ACTUAL COST OF TH E 41 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. ASSETS TO THE ASSESSEE AT THEIR WRITTEN DOWN VALUE IN THE BOOKS OF THE TRANSFEROR PLUS THE BALANCING CHAR GE ARISING UNDER S. 10(2)(VII). THE TRIBUNAL REJECTED THE CONTENTION OF THE ASSESSEE THAT THE ASSETS HAD BEEN TRANSFERRED TO THE ASSESSEE BY THE PARENT COMPANY AFTER THEY HAD BEEN GOT VALUED BY VALUERS, BECAUSE THE MATERIAL ON THE BASIS OF WHICH THE VALUE HAD BE EN FIXED BY THE VALUERS FOR THE ASSETS IN QUESTION HAD BEEN WITHHELD BY THE WITNESS WHO WAS EXAMINED ON BEHALF OF THE VALUERS BEFORE THE ITO AND THE NON- PRODUCTION OF SUCH MATERIAL LED TO AN ADVERSE INFERENCE BEING DRAWN AGAINST THE ASSESSEE- COMPANY. ON THESE FACTS, TWO QUESTIONS AROSE FOR CONSIDERATION BEFORE THE HIGH COURT ON REFERENCE. FIRST QUESTION IS WHETHER THE PROVISO TO S. 10(5)(A ) HAS BEEN PROPERLY APPLIED AND THE SECOND QUESTION IS, WHETHER THE TRIBUNAL IS JUSTIFIED IN REJECTING THE VALUATION AND DRAWING AN ADVERSE INFERENCE AGAINST THE ASSESSEE. AS FAR AS THE FIRST QUESTION IS CONCE RNED THE COURT FOUND THAT THE CONDITION FOR ATTRACTING T HE PROVISO TO S. 10(5)(A) WAS SATISFIED BECAUSE THE ASSETS HAD BEEN USED BY THE PARENT COMPANY FOR THEIR BUSINESS BEFORE THEY WERE TRANSFERRED TO THE ASSESSEE-COMPANY. ON THE SECOND QUESTION THE COURT FOUND THAT THE TRIBUNAL WAS JUSTIFIED IN REJECTING THE VALUATION REPORT AND DRAWING AN ADVERSE INFERENCE AGAINST THE ASSESSEE. THE FIRST QUESTION ALONE IS RELEVANT IN THE PRESENT CASE AND ON THAT QUESTION T HE COURT SAID THAT THE ITO PROCEEDED TO FIX OR DETERMI NE THE ACTUAL COST (WRITTEN DOWN VALUE) OF THE ASSETS TRANSFERRED BY ADOPTING THE WRITTEN DOWN VALUE OF THOSE ASSETS TRANSFERRED IN THE BOOKS OF THE TRANSF EROR OF THE ASSESSEE-COMPANY AS ON THE DATE OF TRANSFER AND ADDED TO THAT FIGURE THE BALANCING CHARGE ARISI NG UNDER S. 10(2)(VII) OF THE ACT. THE COURT FURTHER OBSERVED : 'IT CANNOT BE DISPUTED THAT THIS METHOD, IF ADOPTED, WOULD CLEARLY GIVE THE ACTUAL COST OF THE ASSETS TRANSFERRED TO THE TRANSFEROR- COMPANY AS ON THE DATE OF TRANSFER, THE DETERMINATION WOULD BE IRRATIONAL OR UNREASONABLE. IF THE ITO ADOPTED THIS METHOD 42 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. OF DETERMINING THE ACTUAL COST OF THE TRANSFERRED ASSETS WITH THE APPROVAL OF THE IAC, IT WILL BE DIFFICULT TO SAY THAT THE METHOD ADOPTED WAS UNREASONABLE OR IRRATIONAL'. 17. EVEN IF THE ASSESSEE PRODUCES THE VALUATION REPORT, IT CANNOT BE SAID THAT THE ABOVE CONCLUSION WOULD BE DIFFERENT. THEREFORE, THE DRAWING OF ADVER SE INFERENCE AGAINST THE ASSESSEE HAS NO IMPACT ON THE QUESTION DECIDED BY THE COURT. THE ATTEMPT OF THE TRIBUNAL TO DISTINGUISH THE ABOVE DECISION ON THE BASIS THAT THE ASSESSEE HAS FURNISHED THE REVALUATI ON REPORT IN THE PRESENT CASE WOULD NOT FRUCTIFY. 28. IN THE CASE OF NAGAMMAL COTTON MILLS P. LTD. VS. CIT (CITED SUPRA), THE HONBLE MADRAS HIGH COUR T HAS HELD AS UNDER : 6. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE VALUE OF THE MACHINERIES WHICH T HE ASSESSEE HAD ADOPTED WHEN IT TOOK OVER THE ASSETS A T THE TIME OF DISSOLUTION WAS IN ACCORDANCE WITH WHAT HAD BEEN SAID IN THE CASE OF A.L.A. FIRM VS. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC) : TC 2R.453 WHEREIN THE COURT APPROVED THE OBSERVATION OF THIS COURT IN THE CASE OF MD. USSAIN VS. ABDUL GAFFOOR AIR 1950 MAD 758. COUNSEL SUBMITTED THAT THE FORMATION OF THE COMPANY WAS ONLY DUE TO THE INSISTENCE OF THE LENDERS THAT THE BUSINESS OF THE COMPANY, NAMELY, THE RUNNING OF THE COTTON MILL SHOULD BE BY AN INCORPORATED COMPANY BEFORE THE FINANCIAL INSTITUTIONS COULD LEND MONEY TO IT. HOWE VER, THERE IS NO MATERIAL ON RECORD TO SUBSTANTIATE THAT CLAIM. 7. THE FACT THAT THE ASSESSEE HAD ADOPTED THE MARKET VALUE AT THE TIME OF DISSOLUTION EVEN WH EN SUCH VALUE IS MUCH HIGHER THAN THE WRITTEN DOWN VALUE, WOULD AFFORD SUFFICIENT BASIS FOR INVOKING EXPLN. 3 TO S. 43(1) WHEN THE SURROUNDING CIRCUMSTANCES INDICATE THAT THE PURPOSE OF THE TRANSFER OF THE ASSETS DIRECTLY OR INDIRECTLY TO TH E 43 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. ASSESSEE WHERE THE ASSETS HAD SUFFERED DEPRECIATION PRIOR TO SUCH TRANSFER IS SUCH AS TO INDICATE THAT THE MAIN PURPOSE OF TRANSFER WAS TO ENABLE THE ASSESSEE TO GAIN HIGHER DEPRECIATION BY TAKING A HIGHER FIGU RE AS ITS COST AT THE TIME OF SUCH TRANSFER. HERE THE FIRM WAS DISSOLVED WITHIN ABOUT 13 MONTHS OF ITS FORMATION. THE TWO PARTNERS BESIDES THE ASSESSEE- COMPANY WERE ALSO THE ONLY TWO SHAREHOLDERS AND DIRECTORS OF THE COMPANY. THE REALITY BEFORE AND AF TER THE DISSOLUTION WAS THE SAME. THE SAME PERSONS WHO ENJOYED THE BENEFITS OF THE OWNERSHIP OF THE ASSETS AND ITS USES CONTINUE TO HAVE SUCH BENEFITS, THE TW O PARTNERS INDIRECTLY AND THE ASSESSEE ITSELF DIRECTL Y. THE FINDINGS RECORDED BY THE TRIBUNAL IN THIS BACKGROUND CANNOT BE FAULTED. THE QUESTION REFERRED TO US IS, THEREFORE, ANSWERED IN FAVOUR OF THE REVE NUE AND AGAINST THE ASSESSEE. 29. THE COORDINATE BENCH OF DELHI TRIBUNAL IN THE CASE OF BILT POWER LTD., NEW DELHI VS. ADDL. CIT, RANGE- 2, NEW DELHI (CITED SUPRA), HAS HELD AS UNDER : 36. AT THE OUTSET, WE MAY OBSERVE THAT AO HAS NOT CONSIDERED THE ENTIRE SCHEME AS DEMERGER UNDER THE INCOME-TAX ACT AS CONTEMPLATED U/S 2(19AA) OF THE INCOME-TAX ACT. THEREFORE, WE DO NOT CONSIDER IT NECESSARY TO EXAMINE THE OBSERVATIONS O F AO, AND LD. CIT(A) AND THE SUBMISSIONS OF BOTH THE PARTIES ON THIS COUNT AS IT WOULD ONLY BE OF ACADEM IC INTEREST. THIS IS EVIDENT FROM THE FACT THAT AO HAS INVOKED EXPLANATION 3 TO SEC. 43(1) AND NOT EXPLANATION 7A TO SEC. 43(1). FURTHER THE CONTENTIO N OF ASSESSEE THAT TRANSFEROR COMPANY HAD ALSO PAID LONG TERM CAPITAL GAIN TAX ON THE SALE CONSIDERATION IS ALSO NOT OF MUCH SIGNIFICANCE BECAUSE TAX LIABILITY IS T O BE DETERMINED QUA ASSESSEE. THEREFORE, THE MAIN ISSUE FOR OUR CONSIDERATION IS WHETHER AO WAS JUSTIFIED I N INVOKING EXPLANATION 3 TO SEC.43(1) BY HOLDING THAT THE ENTIRE PURPOSE OF THIS SCHEME WAS REDUCTION OF TAX LIABILITY BY CLAIMING HIGHER DEPRECIATION IN RE SPECT OF THOSE ASSETS WHICH WERE EARLIER USED BY TRANSFER OR COMPANY BY ESCALATING THE COST OF THE ASSETS. 44 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. EXPLANATION 3 HAS BEEN INCORPORATED IN SEC. 43(1) T O COUNTER THE ATTEMPTS OF ASSESSEE TO CLAIM HIGHER DEPRECIATION BY PURPORTING TO PURCHASE ASSETS AT MORE THAN THEIR TRUE OR REAL COST. IT IS FUNDAMENTA L PRINCIPLE THAT DEPARTMENT CANNOT QUESTION THE WISDO M OF ASSESSEE IN CARRYING OUT ITS BUSINESS OPERATIONS . DEPARTMENT CANNOT DICTATE AS TO HOW THE ASSESSEE SHOULD CONDUCT ITS BUSINESS. HOWEVER, LEGISLATURE H AS MADE SPECIFIC PROVISIONS IN THE INCOME-TAX ACT WHEN DEPARTMENT CAN DEPART FROM THIS FUNDAMENTAL PRINCIPLE AND IGNORE THE APPARENT STATE OF AFFAIRS AND PEARCE THE SMOKY-SCREEN CREATED BY ASSESSEE IN THE TRANSACTION TO FIND OUT THE TRUE INTENTION. THESE SECTIONS PROVIDE CIRCUMSTANCES IN WHICH DEPARTMENT CAN IMPUTE ITS JUDGMENT TO THE ASSESSEES DECISION. THE RELEVANT PROVISIONS ARE TO BE FOUND IN SECTION 40A(2), EXPLANATION 3 TO SEC. 43(1), SECTION 92C ET C. BUT BEFORE THESE PROVISIONS CAN BE INVOKED, LEGISLATURE HAS REQUIRED THE AO TO ACQUIRE NECESSAR Y SATISFACTION IN THIS REGARD WHICH OBVIOUSLY HAS TO BE ACQUIRED JUDICIOUSLY AND NOT ARBITRARILY. THE AO SHOULD DEMONSTRATE THAT HIS SATISFACTION WAS RATION AL AND BASED ON RELEVANT FACTORS. EXPLANATION 3 TO SECTION 43(1) READS AS UNDER: - 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. EXPLANATION 3 - WHERE, BEFORE THE DATE OF ACQUISITION BY THE ASSESSEE, THE ASSETS WERE AT ANY TIME USED BY ANY OTHER PERSON FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION AND THE AO IS SATISFIED THAT THE MAIN PURPOSE OF THE TRANSFER OF SUCH ASSETS, DIRECTLY OR INDIRECTLY TO THE ASSESSEE, WAS THE REDUCTION OF A LIABILITY TO INCOME TAX (BY CLAIMING DEPRECIATION WITH 45 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. REFERENCE TO AN ENHANCED COST), THE ACTUAL COST TO THE ASSESSEE SHALL BE SUCH AN AMOUNT AS THE AO MAY, WITH THE PREVIOUS APPROVAL OF THE [JOINT COMMISSIONER],DETERMINE HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. ' THUS, THE BASIC INGREDIENTS OF EXPLANATION 3 ARE AS UNDER: - I) AN ASSET WAS ALREADY IN USE IN A BUSINESS IN THE HANDS OF ONE PERSONS; II) THAT PERSON TRANSFERS THE ASSET TO ASSESSEE; III) THE A.O. IS SATISFIED THAT THE MAIN PURPOSE OF TRANSFER OF SUCH ASSETS WAS THE REDUCTION OF LIABILITY TO INCOME-TAX BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST; IV) THE A.O. CAN REFUSE TO ACCEPT THE SALE PRICE AS THE ACTUAL COST TO THE PURCHASER (ASSESSEE) IN THE PURCHASERS ASSESSMENTS. 37. THE LEGISLATURE HAS PREFIXED THE WORD 'ACTUAL' TO THE WORD 'COST' WHICH CLEARLY SIGNIFIES THAT EMPHASIS IS ON THE REALITY AND GENUINENESS OF THE COST SO AS TO EXCLUDE COLLUSIVE, INFLATED, DEFLATED OR FICTITIOUS COST. AS ALREADY POINTED OUT THAT THE AO IS REQUIRED TO JUDICIOUSLY ACQUIRE THE NECESSARY SATISFACTION REGARDING THE OBJECT OF TRANSFER. IT I S NOT TO BE UNDERSTOOD THAT EVERY CASE WHEREVER ASSESSEE ACQUIRES A USED ASSET FROM OTHER PERSON THEN THE OBJECT WOULD ONLY BE REDUCTION OF TAX LIABILITY. TH ERE MAY BE GENUINE CASES ALSO WHERE THE ASSET HAS APPRECIATED IN VALUE SINCE ITS ORIGINAL PURCHASE AN D CONSEQUENTLY, THE MARKET VALUE ON THE DATE OF THE SALE IS GREATER THAN WRITTEN DOWN VALUE IN THE AOS CHART. IN THE ABSENCE OF ANY FINDING, THAT THE MAIN PURPOSE OF THE TRANSFER IS TO REDUCE THE TAX LIABIL ITY WITH REFERENCE TO ENHANCED COST, IT IS NOT PERMISSI BLE 46 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. TO THE AO TO REJECT THE COST PAID FOR THE TRANSFER. THE AO CANNOT SUBSTITUTE HIS OWN ESTIMATE OF THE VALUE REJECTING THE ASSESSEES ESTIMATE AS WAS HELD IN BY HONBLE SUPREME COURT IN JOYTA COAL COMPANY LTD. VS. CIT, 36 ITR 521. THUS, WHERE AT THE TIME OF PARTITION OF A FAMILY, AS WAS THE CASE IN KALU RAM GOVIND RAM VS. CIT, 57 ITR 335, THE ASSETS WERE ALLOTTED AMONG THE MEMBERS AT A VALUATION ARRIVED A T IN A REASONABLE MANNER, THERE BEING NO ALLEGATION O F INFLATED COST BY REASON OF FRAUD, COLLUSION, SUBTER FUGE, DEVISE OR FALSE TRANSACTION MADE WITH AN ULTERIOR PURPOSE, THE DEPARTMENT WAS HELD TO BE PRECLUDED FROM GOING BEHIND THE AGREEMENT BETWEEN THE PURCHASER AND THE SELLER IN DETERMINING THE PURCHAS E PRICE. THE THRESH HOLD CONDITION IS THAT THE TRANSF ER SHOULD BE WITH INTENT TO GET THE BENEFIT OF ENHANCE D VALUE OF ASSET. THEREFORE, BEFORE INVOKING EXPLANAT ION 3, THE AO IS REQUIRED TO RECORD HIS SATISFACTION TH AT ENTIRE TRANSACTION WAS UNDERTAKEN WITH A VIEW TO REDUCE THE TAX LIABILITY BY CLAIMING HIGHER DEPRECIATION. BEFORE WE EMBARK UPON FOR DETAILED DISCUSSION REGARDING ACTUAL COST TO THE ASSESSEE IN TERMS OF EXPLANATION 3, WE FIRST DECIDE SOME OBJECTIONS OF BOTH THE SIDES. THE ASSESSEES OBJECT ION IS THAT AO HAS NOT RECORDED HIS REQUISITE SATISFACT ION FOR INVOKING EXPLANATION 3: WE ARE NOT IN AGREEMENT WITH LD. SR. COUNSELS ARGUMENT BECAUSE, AS RIGHTLY POINTED OUT BY LD. DR, A HOLISTIC VIEW IS TO BE TAK EN. THE ENTIRE DISCUSSION BY AO PROCEEDS ON THE PREMISE THAT ASSESSEE WAS TRYING TO CLAIM HIGHER DEPRECIATI ON ON ENHANCED COST. THE NEXT OBJECTION OF LD. SR. COUNSEL IS THAT AO DID NOT DETERMINE THE ACTUAL COS T AS REQUIRED IN EXPLANATION 3. WE ARE NOT IN AGREEMENT WITH THIS ARGUMENT ALSO OF LD. SR. COUNSE L BECAUSE, AS RIGHTLY DEMONSTRATED BY LD. DR, AO HAD MADE ALL OUT EFFORTS TO FIND OUT THE ACTUAL COST. W E DO NOT FIND ANY SUBSTANCE IN THIS PLEA OF THE ASSESSEE BECAUSE AO HAD TAKEN INTO CONSIDERATION DIFFERENT VALUATION REPORTS AND WDV OF ASSETS BEFORE ARRIVING AT THE CONCLUSION THAT WDV AS PER INCOME-TAX RECORD S WAS THE ACTUAL COST OF ASSETS. 47 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. 30. IN ASSESSEES OWN CASE FOR A.Y. 2008-09, B BENCH OF THIS TRIBUNAL (CITED SUPRA), WHILE DEALING WITH THE DISALLOWANCE OF DEPRECIATION CLAIMED ON NON-COM PETE FEE OF RS.670 CRORES PAID BY THE ASSESSEE COMPANY T O UKT AND UKM FOR NON-COMPETING IN THE BUSINESS DIRECTLY OR INDIRECTLY FOR A PERIOD OF FIVE YEARS FROM THE DATE OF AGREEMENT, HAS HELD AS UNDER : . . . . . .THEREFORE, CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES WE ARE OF THE VIEW THAT AS THE IMPACT OF ACQUISITION OF 39% OF EQUITY SHARES BY M/ S EQUATOR TRADING ENTERPRISES PVT. LTD. HAS NOT AT AL L BEEN EXAMINED BY AO AT THE TIME OF ASSESSMENT PROCEEDING OR BY THE LEARNED CIT(A) WHILE DISPOSING OF ASSESSEE'S APPEAL AND FURTHER AS THE ADDITIONAL EVIDENCES PRODUCED BEFORE US WERE NOT EXAMINED EITHER BY THE AO OR BY CIT(A), WHICH CERTAINLY HAVE A CRUCIAL BEARING ON THE ISSUE AS TO WHETHER THE PAYMENT OF NON-COMPETE FEE IS GENUINE AND NECESSARY, WE ARE INCLINED TO REMIT THE MATTER BACK TO THE FILE OF AO FOR DECIDING AFRESH. ONLY AFTER THE ISSUE RELATING TO GENUINENESS OF NON-COMPETE FEE PAID AND NECESSITY TO PAY SUCH FEE IS RESOLVED, AO WILL DECI DE THE ALLOWABILITY OF DEPRECIATION CLAIMED ON SUCH NO N- COMPETE FEE BY KEEPING IN VIEW THE STATUTORY PROVISION AS WELL AS THE RATIO LAID DOWN IN THE DECISIONS REFERRED TO HEREINABOVE AND ANY OTHER DECISION BROUGHT TO HIS NOTICE. IT IS NEEDLESS TO MENTION THAT AO MUST AFFORD A FAIR OPPORTUNITY OF HEARING TO ASSESSEE IN THE MATTER BEFORE DECIDING T HE ISSUE. THIS GROUND IS CONSIDERED TO BE ALLOWED FOR STATISTICAL PURPOSES. 31. WITH REGARD TO THE DECISIONS RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE, WE FIND THAT IN THE C ASE OF ASHWIN VANASPATI INDUSTRIES VS. CIT REPORTED IN (20 02) 255 ITR 26 (GUJ.) (HC), THE HONBLE GUJARAT HIGH CO URT HAS HELD THAT BEFORE APPLYING THE PROVISIONS OF 48 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. EXPLANATION-3 TO SECTION 43(1), THE A.O. HAS TO RE CORD HIS SATISFACTION THAT THE ASSETS WERE TRANSFERRED FOR R EDUCING THE LIABILITY TO PAY INCOME TAX AND FOR THIS PURPOS E, AN APPELLATE AUTHORITY CANNOT SUBSTITUTE ITS OPINION T O SUSTAIN THE APPLICABILITY OF THE SAID PROVISION ONL Y BECAUSE THE ASSETS WHICH WERE TRANSFERRED WERE USED BY ANY OTHER PERSON BEFORE DATE OF ACQUISITION. IT WAS FURTHER HELD THAT MERELY BECAUSE DOCUMENT IN THE NATURE OF CONTRACT OF PURCHASE IS ENTERED INTO, DENOTING CERT AIN PRICE, THE SAME WOULD NOT CONCLUSIVELY ESTABLISH TH E CORRECTNESS OF THE CLAIM MADE BY AN ASSESSEE IF TH E A.O. IS OF THE OPINION THAT THE TRANSACTION IS BY WAY OF SUBTERFUGE OR DEVICE ONLY TO AVOID TAX WHICH THE AS SESSEE IS OTHERWISE LIABLE TO PAY OR THAT THE TRANSACTION IS AN ILLUSIONARY OR COLOURABLE OR THAT THE ASSESSEE HAS ACTED FRAUDULENTLY. IT WAS FURTHER EMPHASIZED THAT THE EXPLANATION-3 DOES NOT REQUIRE DETERMINATION OF MAR KET VALUE AT THE HANDS OF THE A.O. BUT SPEAKS OF DETERMINATION OF ACTUAL COST BY THE A.O. WITH THE P RIOR APPROVAL OF THE JCIT HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. 31.1. IN THE CASE OF CHITRA PUBLICITY CO. P. LTD., VS. ACIT REPORTED IN (2010) 4 ITR 738 (AHD.) (T.M.) IT WAS HELD THAT THE A.O. UNDER EXPLANATION-3 TO SECTION 43(1) HAS TO DETERMINE THE ACTUAL COST WHICH CAN ONLY MEAN AR MS LENGTH VALUE OR REAL VALUE OR WORTH OF ASSETS TRANS FERRED AND IT IS, THEREFORE, NOT POSSIBLE TO TOTALLY REJEC T THE 49 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. CONCEPT OF MARKET VALUE OF ASSETS TRANSFERRED AS NO T RELEVANT FOR DETERMINING THE ACTUAL COST. 31.2. IN THE CASE OF CIT VS. SEKAR OFFSET PR ESS REPORTED IN (1995) 214 ITR 516 IT WAS HELD THAT THE EXPLANATION-3 TO SECTION 43(1) OF THE I.T. ACT, WOU LD BE ATTRACTED ONLY IN CASES WHERE, BEFORE THE DATE OF ACQUISITION BY THE ASSESSEE, THE ASSETS WERE AT ANY TIME USED BY ANY OTHER PERSON FOR THE PURPOSE OF BUSINES S AND THE INCOME TAX OFFICER IS SATISFIED THAT THE MAIN P URPOSE OF THE TRANSFER OF SUCH ASSETS DIRECTLY OR INDIRECT LY TO THE ASSESSEE WAS FOR THE REDUCTION OF THE LIABILITY TO INCOME TAX. IT WAS HELD THAT THERE ARE NO OTHER CIRCUMSTAN CES, UNDER WHICH, THE EXPLANATION CAN BE INVOKED. 31.3. IN THE CASE OF KUNGENDI INDUSTRIAL WOR KS P. LTD., VS. CIT REPORTED IN 57 ITR 540 (AP) WHEREI N SIMILAR PROVISIONS OF SECTION 192(2) OF THE ACT WAS CONSIDERED AND IT WAS HELD THAT THE INCREASE IN THE VALUE OF THE ASSET WAS SUBSTANTIAL AND OUT OF THE PROPORT ION TO THE WDV IN THE HANDS OF THE PREVIOUS OWNER AND THE REASONS ADVANCED FOR THE CHANGE-OVER DID NOT JUSTIF Y THE INCREASE IN VALUE OF THE ASSETS. 31.4. WITH RESPECT TO THE CASE OF CIT VS. POULOSE & MATHEN P. LTD., REPORTED IN 236 ITR 416, IT WAS SUB MITTED THAT THE A.O. HAS RELIED UPON THIS DECISION FOR INV OKING THE PROVISIONS OF SECTION 43(1). HOWEVER, HE HAS SU BMITTED THAT THE FACTS OF THE CASE BEFORE US ARE DISTINGUIS HABLE FROM THE SAID CASE BEFORE THE HONBLE MADRAS HIGH C OURT. 50 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. THUS, ACCORDING TO HIM, THE A.O. HAS INVOKED THE PROVISIONS OF SECTION 43(1) AND EXPLANATION-3 THERE TO, WITHOUT RECORDING THE SATISFACTION AND HENCE, THE SUBSEQUENT VALUATION OF THE WDV OF THE ASSET BY THE A.O. IS NOT SUSTAINABLE. 32. FROM ALL THE ABOVE DECISIONS, THE BASIC AND COMMON CONCEPT THAT HAS EMERGED IS THAT BEFORE APPL YING THE EXPLANATION-3 TO SECTION 43(1) OF THE ACT, THE A.O. HAS TO BE SATISFIED THAT THE MAIN PURPOSE OF THE TRANSF ER OF THE ASSET WAS REDUCTION OF TAX LIABILITY BY CLAIMING DEPRECIATION ON THE ENHANCED COST. WE FIND THAT THO UGH THE A.O. HAS EXTENSIVELY REPRODUCED THE FINDINGS OF THE LD. CIT UNDER SECTION 263, HIS SHOW CAUSE NOTICE TO THE ASSESSEE AND ALSO THE ASSESSEES SUBMISSIONS TO THE A.O, THERE IS NO MENTION OF THE APPLICABILITY OF SECTION 43(1) AND THE EXPLANATION-3 THERETO, TO THE FACTS OF ASSE SSEES CASE IN THE SHOW CAUSE NOTICE DATED 04.12.2012, BUT THE SHOW CAUSE NOTICE IS ONLY REFERRING TO THE INACCURA CIES OR INCONSISTENCIES IN THE VALUERS REPORT AND THERE IS NO MENTION OF THE CIRCUMSTANCES LEADING TO THE TRANSFE R OF THE ASSET IN THE ASSESSEES SUBMISSIONS THERETO. TH E A.O. HAS RECORDED HIS SATISFACTION IN THE ASSESSMENT ORD ER THAT BECAUSE THE TRANSACTION IS BETWEEN RELATED PARTIES AND THE ASSET HAS BEEN TRANSFERRED AT AN EXORBITANT PRICE, THE PROVISIONS OF SECTION 43(1) ARE ATTRACTED. IN THE E NTIRE ASSESSMENT ORDER, THERE IS NO WHISPER OF THE CIRCUMSTANCES LEADING TO THE TRANSFER OF THE ASSET I.E., THE 51 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. AGREEMENTS WITH THE THIRD PARTIES FOR INVESTMENT OF EQUITY AND THE PRE-CONDITION SET BY THEM FOR SUCH INVESTME NT. 32.1. SIMILAR CIRCUMSTANCE EXISTED IN THE ASSESSEE S OWN CASE FOR THE SUBSEQUENT A.Y. 2008-09 REGARDING THE NON-COMPETING FEE AND THIS TRIBUNAL HAS OBSERVED TH AT THE FACTUAL POSITION HAS NOT BEEN PROPERLY APPRECIA TED BY THE AUTHORITIES BELOW AND HAS SET ASIDE THE ISSUE F OR RECONSIDERATION. IN THE CASE BEFORE US, THE LD. CIT (A) ALSO HAS NOT REFERRED TO OR VERIFIED THE CIRCUMSTANCES L EADING TO THE TRANSFER OF THE ASSET TO COME TO THE CONCLUS ION THAT THE ABOVE PROVISIONS ARE NOT APPLICABLE TO THE CASE ON HAND BUT HAS GRANTED RELIEF ON THE GROUND THAT THE A.O. HAS NOT RECORDED HIS SATISFACTION BEFORE INVOKING T HE ABOVE PROVISIONS. THOUGH, THE LD. D.R. HAS NOT BEEN ABLE TO REBUT THE FACTUAL SUBMISSIONS OF THE ASSESSEE ON THE CIRCUMSTANCES LEADING TO THE TRANSFER OF THE ASSET, WE FIND THAT THE SAME NEEDS VERIFICATION BY THE AUTHORITIES BELOW. IN VIEW OF THE SAME, WE DEEM IT FIT AND PROPER TO R EMAND THIS ISSUE TO THE FILE OF THE A.O. FOR THE LIMITED PURPOSE OF VERIFICATION OF THE FACTS AND CIRCUMSTANCES STATED TO BE THE CAUSE OF TRANSFER OF THE ASSET TO THE ASSESSEE HEREIN WHICH ARE REPRODUCED IN THE ABOVE PARAGRAPHS AND WE HOLD THAT IF THE SAID CIRCUMSTANCES ARE PROVED TO H AVE EXISTED, THEN THE PROVISIONS OF EXPLANATION-3 TO SE CTION 43(1) ARE CLEARLY NOT ATTRACTED. HOWEVER, IF THE AB OVE CIRCUMSTANCES ARE NOT PROVED OR ARE FOUND TO BE NOT THE REASON/PURPOSE FOR TRANSFER OF THE ASSET, ONLY THEN SHALL THE A.O. INVOKE THE ABOVE PROVISION. BUT IN SUCH 52 ITA.NO.1265/HYD/2013 M/S. USHODAYA ENTERPRISES LTD., HYDERABAD. CIRCUMSTANCES, WE DIRECT THAT IF THE A.O. IS NOT SA TISFIED WITH THE VALUATION DONE BY ERNST & YOUNG, THEN AFTE R GIVING A SPEAKING ORDER FOR NOT ACCEPTING THE SAME, THE A.O. SHALL REVALUE THE ASSET IN ACCORDANCE WITH THE PROVISIONS OF LAW AND SHALL NOT ADOPT THE WDV OF TH E ASSET IN THE HANDS OF THE PREVIOUS OWNER. IN THE RESULT, GROUND NO. 2 AND THE ADDITIONAL GROUND OF APPEAL ARE TREAT ED AS ALLOWED FOR STATISTICAL PURPOSES. 33. IN THE RESULT, APPEAL OF THE REVENUE IS TREATE D AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 16.02.2016. SD/- SD/- (S. RIFAUR RAHMAN) (SMT. P. MADHAVI DEVI) ACOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 16 TH FEBRUARY, 2016 VBP/- COPY TO : 1. DY. DIRECTOR OF INCOME TAX, CIRCLE - 16(2), ROOM NO.611, 6 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 2. M/S. USHODAYA ENTERPRISES LIMITED, 6 - 3 - 570, SOMAJIGUDA, HYDERABAD. 3. CIT(A) - V, HYDERABAD. 4. CIT - I V, HYDERABAD 5. D.R. ITAT A BENCH, HYDERABAD. 6. GUARD FILE