The DCIT, Baroda Circle-4, Baroda V. Prakash Chemicals Agencies Pvt.Ltd., Baroda

ITA 2803/AHD/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60250 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 17-01-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 06-08-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJ MEHRA
• Keywords: Capital asset; Gift; Business income; Depreciation; Principle of natural justice; Diversion of income; Bad and doubtful debts; Corroborative evidences; Assessment record
• Section: 32

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD , .. !', #$ # % BEFORE SHRI MUKUL KR.SHRAWAT, JUDICIAL MEMBER AND SHRI B.P.JAIN, ACCOUNTANT MEMBER APPEAL(S) SL. NO(S). ITA NO(S) ASSESSMENT YEAR(S) APPELLANT RESPONDENT 1. 2803/AHD/2008 2003-04 DY.CIT CIR-4 BARODA M/S.PRAKASH CHEMICAL AGENCIES P.LTD. 1 ST FLOOR INDUCHACHA HOUSE OPP.CHHANI OCTROI NAKA BARODA 390 002 PAN:AACCP 6646 G 2. 2781/AHD/2007 2004-05 REVENUE ASSESSEE 3. 2979/AHD/2008 2005-06 REVENUE ASSESSEE REVENUE BY : SHRI RAJ MEHRA SR.D.R. ASSESSEE BY : S/SHRI M.K.PATEL, ADV WITH J.C.SHAREDALAL C.A. '& ' ($/ // / DATE OF HEARING : 17.1.2012 *+, ' ($ / DATE OF PRONOUNCEMENT : 13/04/2012 #-/ O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : ALL THESE THREE APPEALS PERTAINED TO ASSESSMENT YE ARS 2003-04, 2004-05, & 2005-06 ARISING FROM THE ORDERS OF THE C XIT(A)-III, BARODA RESPECTIVELY DATED 29.05.2008, 13.03.07 AND 02.06. 08. THE LEAD A.Y. IS 2004-05, THEREFORE, WE SHALL PROCEED WITH THE FACTS OF THIS ASSESSMENT YEAR WHICH SHALL BE APPLIED FOR THE REST OF THE TWO ASSESSMENT YEARS. ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 2 - [A] A.Y. 2004-05 (ITA NO.2781/AHD/2007 - REVENUES APPEAL) 2. GROUND NOS.1 & 2 RAISED ARE HEREBY DECIDED AS F OLLOWS:- 1. THE LD. C.I.T.(A) HAS ERRED IN DIRECTING THE A.O. T O ALLOW HIGHER DEPRECIATION ON THE GAS CYLINDERS ACQUIRED FROM ITS ASSOCIATE CONCERN THROUGH MOU, WHOSE W.D.V. WAS RS.19,84,311 AND WHICH WERE REVALUED BY THE ASSESSEE AT RS.82,51,157 . 2. THE C.I.T.(A) DID NOT APPRECIATE THE FACT THAT T TH E HON.SUPREME COURT HAD, IN THE CASE OF SAHARANPUR ELECTRIC SUPPL Y CO. VS. CIT 194 ITR 294 HAD HELD THAT THE DEFINITION OF WRI TTEN DOWN VALUE IN SECTION 43(6) ENVISAGES COMPUTATION OF ACT UAL COST IN EVERY ASSESSMENT YEAR AND THE ASSESSEE HAS NO RIGHT TO CLAIM DEPRECIATION ON INFLATED ACTUAL COST CLAIMING HIGHE R DEPRECIATION BY ARTIFICIALLY INFLATING THE ACTUAL C OST THROUGH REVALUATION OF THE ASSETS. 2.1. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDI NG ASSESSMENT ORDER PASSED U/S.143(3) DATED 11.12.2006 WERE THAT THE AS SESSEE-COMPANY IS AN AUTHORIZED DEALER AND INDENTING AGENT OF M/S.GUJARA T ALKALIES & CHEMICALS LTD. THE ASSESSEE-COMPANY IS ALSO ENGAGE D IN THE BUSINESS OF TRADING IN CHEMICAL. THE ASSESSEE HAS ALSO EARNED RENT CHARGES ON HIRING OF GAS CYLINDERS. IT WAS NOTICED BY THE A.O. THAT THE ASSESSEE HAD SHOWN PROFIT BEFORE DEPRECIATION AT RS.1,01,56,030/- AND AFTER CLAIMING A DEPRECIATION OF RS.85,17,293/- THE NET INCOME WAS D ECLARED AT RS.16,25,603/-. 2.2. THE BACKGROUND OF THE CASE WAS STATED TO BE T HAT THE ASSESSEE- COMPANY HAD TOOK OVER A FIRM, NAMELY, M/S.PRAKASH CHEMICAL ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 3 - AGENCIES ON 11.10.2002. IT WAS FOUND THAT AS PER THE MEMORANDUM AND ARTICLE OF ASSOCIATION, THE ASSESSEE-COMPANY HAS TA KEN OVER THE RUNNING BUSINESS OF THE SAID FIRM ALONG WITH ALL THE ASSETS AND LIABILITIES. IN LIEU THEREOF, SHARES WERE ALLOTTED TO THE TEN PARTNERS O F THE SAID FIRM BY THE ASSESSEE-COMPANY. THE AO HAS NOTED THAT THE SAID D ETAILS WERE AVAILABLE IN THE RETURN OF INCOME. 2.3. THE CONTROVERSY WAS THAT THE WDV AS ON 11.10.2002 OF THE ASSETS OF THE ERSTWHILE FIRM WAS AT RS .19,84,311/-. HOWEVER, AS PER THE RETURN FILED BY THE ASSESSEE-COMPANY, THE VALUE OF THE ASS ETS SHOWN AS ON 12.10.2002 WAS AT RS.82,51,157/-. THE AO HAS REPRODUCED THE WDV AS ON 11.10.2002 OF THE ASSETS AS SHOWN BY THE SAID FIRM IN THE FOLLOWING MANNER:- SR.NO. PARTICULARS RATE (%) WDV AS ON 11.10.2002 (RS.) BLOCK-I 1. FURNITURE & FIXTURES (PCA) 15 227843 FURNITURE & FIXTURES (INFOTECH) 15 9206 TOTAL 237049 BLOCK-II 2. PLANT & MACHINERY (PCA) 25 258946 OFFICE EQUIPMENT (INFOTECH) 25 30766 TOTAL 289712 BLOCK-III 3. MOTOR CAR 20 1008975 TOTAL 1008975 BLOCK-IV ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 4 - 4. GAS CYLINDERS 80 438021 TOTAL 438021 5. BLOCK-V 00 5000 TOTAL 5000 BLOCK-VI 6. COMPUTER 60 5554 TOTAL 5554 GRAND TOTAL 1984311 2.4 THE AO HAS ALSO REPRODUCED THE WDV TAKEN AS ON 12.10.2002 BY THE ASSESSEE AS FOLLOWS:- SR.NO. PARTICULARS RATE (%) WDV AS ON 11.10.2002 (RS.) BLOCK-I 1. FURNITURE & FIXTURES (PCA) 15 185684 BLOCK-II 2. PLANT & MACHINERY (PCA) 25 355541 BLOCK-III 3. MOTOR CAR 20 895049 BLOCK-IV 4. GAS CYLINDERS 80 6804329 5. BLOCK-V GOOD WILL BLOCK-VI 00 5000 6. COMPUTER 60 5554 GRAND TOTAL 8251157 2.5. AS PER THE ABOVE CHART, THE VALUE AS ON 12.10. 2002 TAKEN AT RS.82,41,157/- FOR THE ACCOUNTING PERIOD STARTING F ROM 12.10.2002 (I.E. THE DATE OF SUCCESSION) UPTO 31.03.2003, RELEVANT F OR A.Y. 2003-04, THE YEAR UNDER APPEAL. AS PER AO, THE ASSESSEE HAS INC REASED THE WDV OF ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 5 - THE FIXED ASSETS BY A SUM OF RS.62,66,846/- (RS.82, 41,157 RS.19,84,311) AS ON 12.10.2002. THE ASSESSEE HAS C LAIMED DEPRECIATION ON THE ALLEGED ENHANCED AMOUNT OF WDV AND, THEREFOR E, THE AO HAS RAISED AN OBJECTION THAT WHY THE ASSESSEE HAS NOT C LAIMED DEPRECIATION ON THE WDV AS SHOWN BY THE SAID FIRM? IT WAS EXPLAINE D THAT THE ERSTWHILE PARTNERSHIP FIRM M/S.PRAKASH CHEMICAL AGENCY HAS TR ANSFERRED ALL ITS ASSETS TO M/S.PRAKASH CHEMICALS AGENCIES PVT.LTD. I .E. THE APPELLANT. THE DEPRECIATION WAS CLAIMED ON THE ACTUAL COST ON WHICH THE ASSETS OF THE SAID FIRM WERE ACQUIRED BY THE ASSESSEE. IT WAS EXPLAINED THAT THE DEPRECIATION WAS ON THE PRICE AT WHICH THE CAPITAL ASSETS WERE SOLD BY THE SAID FIRM TO THE ASSESSEE-COMPANY. HOWEVER, THE AO WAS NOT CONVINCED AND AFTER NARRATING CERTAIN PROVISIONS O F IT ACT, NAMELY, SECTION 43(6) OF IT ACT, SECTION 47(XIII) OF IT ACT , HE HAS ARRIVED AT THE CONCLUSION THAT THE ASSESSEE WAS ENTITLED FOR THE C LAIM OF DEPRECIATION ON THE WDV AS SHOWN BY THE ERSTWHILE FIRM AND THE ALLO WABLE DEPRECIATION AS PER AO WAS AT RS.35,92,535/-, AS AGAINST THAT TH E ASSESSEE HAS CLAIMED THE DEPRECIATION AT RS.85,17,293/-, THEREFORE THE AO HAS ALLOWED DEPRECIATION ONLY OF RS.35,92,535/-. BEING AGGRI EVED THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 3. BEFORE THE LD.CIT(A), IT WAS EXPLAINED THAT THE SAID FIRM WAS TAKEN OVER AS AN ON-GOING CONCERN ALONG WITH ASSETS AND L IABILITIES. THE ASSETS WERE TRANSFERRED TO THE ASSESSEE-COMPANY. THE ASS ESSEE HAS CLAIMED THE DEPRECIATION ON THE ACTUAL COST, I.E. RS.82,51,15 7/-. BY REFERRING SECTION 43(1), THE ASSESSEE HAS ARGUED THAT THE SAI D ACTUAL COST SHOULD BE ALLOWED AS WRITTEN DOWN VALUE AS DEFINED IN SE CTION 43(6) OF IT ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 6 - ACT. AFTER DUE CONSIDERATION OF THE RELEVANT PROVI SIONS OF THE ACT, LD.CIT(A) HAS GIVEN A FINDING THAT IT WAS A CASE OF TAKING OVER OF A FIRM BY A COMPANY. BY SUCH TAKING OVER, THE ASSETS AND LIABILITIES OF THE FIRM HAVE BEEN TRANSFERRED TO THE ASSESSEE-COMP ANY. HOWEVER, SUCH TRANSFER IS NOT SUBJECT TO TAX BECAUSE AN EXCEPTION IS PRESCRIBED U/S.47(XIII) OF IT ACT, WHEREIN THE TRANSACTION NOT TO BE REGARDED AS TRANSFER IF THE TRANSFER OF CAPITAL ASSETS ARE MADE BY A FIRM TO A COMPANY AS A RESULT OF SUCCESSION OF THE FIRM. IT HAS ALS O BEEN NOTED BY LD.CIT(A) THAT THE CONSIDERATION FOR THE TRANSFER OF ASSETS W AS IN THE FORM OF ALLOTMENT OF SHARES. HE HAS CONCLUDED THAT THE AC TUAL COST TO THE ASSESSEE WAS RIGHTLY CALCULATED FOR THE PURPOSE OF CALCULATION OF DEPRECIATION AND THE ISSUE WAS DECIDED IN ASSESSEE S FAVOUR VIDE FOLLOWING OBSERVATIONS:- 3.2. I HAVE CONSIDERED THE SUBMISSIONS OF THE LD . A.R AND THE FACTS OF THE CASE. THIS IS A CASE OF TAKING OVER O F A FIRM BY A COMPANY. IN SUCH CASES, TRANSFER OF ASSETS AND LIA BILITIES IS INVOLVED. IN THE NORMAL COURSE, TRANSFER OF CAPITA L ASSETS FROM ONE ENTITY TO ANOTHER WOULD GIVE RISE TO CAPITAL GAINS ASSESSABLE AS SUCH. CERTAIN EXCEPTIONS TO THE GENERAL VIEW HAVE BEEN PROVIDED IN SECTION 47 WHERE SOME TRANSACTIONS HAVE BEEN DEE MED NOT TO BE REGARDED AS TRANSFER. IN CLAUSE (XIII), THE TRANSF ER OF CAPITAL ASSETS BY A FIRM TO A COMPANY AS A RESULT OF SUCCESSION OF THE FIRM BY THE COMPANY IN THE BUSINESS CARRIED ON BY THE FIRM HAS BEEN SPECIFICALLY DEEMED TO BE NOT A CASE OF TRANSFER, S UBJECT TO CERTAIN CONDITIONS. IN A CASE FALLING UNDER SECTION 43(XII I), THE PROVISIONS OF SECTION 45 SHALL NOT APPLY. SECTION 45 IS THE C HARGING SECTION FOR BRINGING ANY PROFITS OR GAINS ARISING OUT OF TR ANSFER OF A CAPITAL ASSET TO THE CHARGE OF INCOME-TAX UNDER THE HEAD C APITAL GAIN. THUS, IN A CASE WHERE SECTION 45 WOULD NOT APPLY, T HE TRANSACTION WOULD BE OUTSIDE THE SCOPE OF CAPITAL GAINS. THUS, THE TRANSACTIONS WOULD BE IN THE NATURE OF TRANSFER OF CAPITAL ASSET ALTHOUGH THE SAME WOULD BE DEEMED TO BE NOT REGARDED AS TRANSFE R FOR THE ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 7 - PURPOSE OF CHARGING OF CAPITAL GAINS. FOR ALL OTHE R PURPOSES, THE TRANSACTION IN QUESTION SATISFY THE CONDITIONS FOR TRANSFER IN RELATION TO THE CAPITAL ASSET AS DEFINED IN SECTION 2(47). IN THE INSTANT CASE, THE ASSETS WERE TRANSFERRED FROM A FI RM TO THE COMPANY THROUGH THE INSTRUMENT OF MOU. ARTICLE (2) OF THE MOU STATES AS UNDER: ASSIGNEE HAS AGREED TO PAY CONSIDERATION OF RS.4,0 0,000/- (RUPEES FOUR LACS ONLY) FOR THE PURCHASE OF THE RUN NING BUSINESS ALONG WITH GOODWILL/TRADEMARKS, TRADE-NAME S, KNOW-HOW AND ALL THE ASSETS, RIGHTS, OBLIGATION AND LIABILITIES IN INDIA. THE AFORESAID CONSIDERATION SHALL BE DISCHARGED WITHIN A PERIOD OF ONE MONTH HEREOF BY I SSUE OF 40,000 (FORTY THOUSAND) EQUITY SHARES EACH OF RS.10 /- AS FULLY PAID UP OF THE ASSIGNEE COMPANY. 3.2.1. THUS, THE CONSIDERATION FOR THE TRANSFER OF THE ASSETS WAS IN THE FORM OF ALLOTMENT OF SHARES VALUED AT THE DIFFE RENCE BETWEEN THE VALUE OF THE ASSETS AND THE LIABILITIES. COST OF THE ASSETS, THEREFORE, MUST BE TAKEN AT THE VALUE ADOPTED IN TH E INSTRUMENT OF TRANSFER (I.E. THE BOOK VALUE) UNLESS SPECIFICALLY DEEMED TO BE THE WDV OF THE ASSETS IN THE BOOKS OF THE FIRM. IN CER TAIN CASES, EG. IN CASE OF DEMERGER, AMALGAMATION, TRANSFER FROM HOLDI NG COMPANY TO SUBSIDIARY COMPANY, ETC., THE LEGISLATURE HAS SP ECIFICALLY INDICATED THAT THE ACTUAL COST OF THE TRANSFERRED CAPITAL ASSET WOULD BE THE SAME AS THE WDV IN THE BOOKS OF THE TR ANSFEROR COMPANY. HOWEVER, IN THE CASE OF TRANSFER OF CAPIT AL ASSETS FROM A FIRM TO A COMPANY CARRYING ON THE SAME BUSINESS, SU CH DEEMING PROVISIONS HAVE NOT BEEN ENACTED. THEREFORE, IT WO ULD NOT BE CORRECT TO ARTIFICIALLY APPLY THE DEEMING PROVISION S TO A CASE WHERE SUCH PROVISIONS HAVE NOT SPECIFICALLY BEEN MADE APP LICABLE. ACCORDINGLY, I AM OF THE OPINION THAT THE A.O WAS N OT JUSTIFIED IN RESTRICTING THE CLAIM OF DEPRECIATION ON THE GROUND THAT THE COST OF THE DEPRECIABLE ASSETS SHOULD BE TAKEN AS THE WDV I N THE BOOKS OF THE FIRM AND NOT AT THE ACTUAL COST TO THE COMPANY. THE A.O. IS DIRECTED TO RE-COMPUTE THE DEPRECIATION ACCORDINGLY . ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 8 - 4. FROM THE SIDE OF THE REVENUE, LD.SR.DR MR. RAJ M EHRA APPEARED AND SUPPORTED THE ORDER OF THE A.O. ACCORDING TO MR.MEHRA, SECTION 32 PRESCRIBES THE DEPRECIATION ON THE MACHINERY OR TAN GIBLE ASSETS OWNED AND USED FOR THE PURPOSE OF BUSINESS BY THE ASSESSE E ON SUCH PERCENTAGE ON THE WDV AS PRESCRIBED. HE HAS THEREFORE ARGUE D THAT AS PER SECTION 32(1)(I)(II) .. (I)(II) IN THE CASE OF ANY BLOCK OF ASSETS, SUCH PERCENTAGE ON THE WRITTEN DOWN VALUE THEREFORE AS M AY BE PRESCRIBED , THE ASSESSEE HAS WRONGLY ENHANCED WDV WHICH WAS ALR EADY IN THE ASSESSMENT RECORD OF THE SAID FIRM ON WHICH THE DEP RECIATION HAD ACTUALLY BEEN ALLOWED IN THE PAST. THEN HE HAS DRAWN OUR ATTENTION ON THE DEFINITION OF WRITTEN DOWN VALUE AS PER SECTION 4 3(6)(C)(II) OF IT ACT. HE HAS EXPLAINED THAT IN RESPECT OF ANY PREVIOUS YE AR, THE WDV OF THE BLOCK OF ASSETS IN THE IMMEDIATELY PRECEDING PREVIO US YEAR IS AS REDUCED BY THE DEPRECIATION ACTUALLY ALLOWED IN RESPECT OF THAT BLOCK OF ASSETS IN RELATION TO THE SAID PRECEDING PREVIOUS YEAR AND AS FURTHER ADJUSTED BY THE INCREASE OR REDUCTION, IF ANY. HE HAS THEREFORE ME NTIONED THAT IN THE CASE OF THE ASSESSEE, THE WDV SHOULD BE AS IT WAS DETERM INED IN THE IMMEDIATELY PRECEDING PREVIOUS YEAR IN THE HANDS OF THE SAID FIRM WHERE DEPRECIATION HAS ACTUALLY BEEN ALLOWED. HE HAS REF ERRED CIT VS. POULOSE AND MATHEN (P)LTD. 236 ITR 416 (KER.) FOR THE LEGA L PROPOSITION THAT IN A CASE WHERE ASSETS HAVE BEEN TAKEN OVER FROM A PARTN ERSHIP FIRM BY A COMPANY AND THE ASSETS HAVE BEEN RE-VALUED AT A VER Y HIGH FIGURE, THEN IT WAS HELD THAT THE AO WITHIN HIS POWERS AFTER INVOKI NG EXPLANATION-3 TO SECTION 43(1) HAS RIGHTLY REJECTED THE CLAIM. LD .DR HAS THEREFORE ARGUED THAT IN A CASE WHERE ASSESSEE HAS TAKEN OVER THE AS SETS AND LIABILITIES OF A FIRM AND IF THOSE ASSETS HAVE BEEN RE-VALUED BY TH E ASSESSEE-COMPANY AT ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 9 - A VERY HIGH FIGURE, THEN THE INVOCATION OF THE SAID EXPLANATION WAS REASONABLE AND THE AO IS EMPOWERED TO ARRIVE AT THE CORRECT FIGURE OF THE ACTUAL COST. LD.DR HAS ALSO CITED ESCORTS LTD. V S. UNION OF INDIA 199 ITR 43(SC) FOR THE LEGAL PROPOSITION THAT NO DOUBLE DEDUCTION SHOULD BE ALLOWED UNDER THE ACT. HE HAS CONCLUDED THAT ONLY THE NAME OF THE OWNER HAS BEEN CHANGED BUT THE ASSETS REMAINED THE SAME ON WHICH DEPRECIATION HAD ALREADY BEEN GRANTED BY THE REVENU E DEPARTMENT, THEREFORE ON THOSE VERY ASSETS BY ENHANCING THE VAL UE OF THOSE ASSETS THE ASSESSEE HAS TRIED TO CLAIM DOUBLE DEDUCTION OF DEP RECIATION. HE HAS PLEADED TO AFFIRM THE ACTION OF THE AO. 5. FROM THE SIDE OF THE RESPONDENT-ASSESSEE, LD.AR MR.M.K.PATEL & MR. J.C.SHAREDALAL APPEARED. HE HAS INFORMED THAT THROUGH MOU DATED 12.10.2002 THE ASSESSEE-COMPANY HAS ACQUIRED THE AS SETS AND LIABILITIES OF THE FIRM. AS PER ONE OF THE CLAUSES, THE ASSES SEE-COMPANY HAD AGREED TO TAKE OVER ALL THE LIABILITIES OF THE FIRM RECORD ED IN THE BOOKS OF ACCOUNTS ON THE DATE OF SALE OF THE RUNNING BUSINES S THAT WAS ON 11.10.2002. THE FIRM HAD TRANSFERRED ITS RUNNING BUSINESS ALONG WITH ENTIRE STOCK-IN-TRADE AND ALL ASSETS TO THE ASSESSE E-COMPANY AND ACCORDINGLY INFORMED THE DEBTORS AND CREDITORS ABOU T THE SAID AGREEMENT BY REQUESTING THEM TO MAKE THE PAYMENT OR CLAIM THE PAYMENT THEREAFTER TO THE ASSESSEE-COMPANY. HE HAS ALSO INFORMED THA T THE SAID GOING CONCERN WAS TRANSFERRED FOR A CONSIDERATION OF RS.4 LACS , PLUS, THE PARTNERS OF THE FIRM HAVE BEEN ALLOTTED THE SHARES OF THE COMPANY. LD.AR HAS ALSO MENTIONED THAT THE ASSESSMENT OF THE SAID FIRM WAS COMPLETED U/S.143(3) OF THE IT ACT FOR A.Y. 2003-04 VIDE ORDER DATED ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 10 - 14.03.2006 AND BY APPLYING THE PROVISIONS OF SECTIO N 47(XIII) NO CAPITAL GAIN WAS LEVIED ON SUCH SUCCESSION OR TRANSFER OF A SSETS AND LIABILITIES. LD.AR HAS ALSO INFORMED THAT THE DEFINITION OF ACT UAL COST IS TO BE APPLIED IN THE PRESENT CASE AS DEFINED U/S.43(1) OF IT ACT. THEREAFTER, HE HAS REFERRED ALL THE EXPLANATIONS ANNEXED TO SEC TION 43(1) TO DEMONSTRATE THAT NONE OF THOSE PROVISIONS/ EXPLANAT IONS WOULD BE APPLICABLE TO THE ASSESSEE. HE HAS EMPHASIZED THA T BY THE ISSUE OF EQUITY SHARES THE PURCHASE CONSIDERATION WAS DISCHARGED. THE ACTUAL COST THEREFORE WAS NOT ONLY THE ASSETS BUT ALSO INCLUSIV E OF OBLIGATION TO DISCHARGE THE LIABILITIES. ACCORDING TO HIM, THE ACTUAL COST AS HAS BEEN MET BY THE ASSESSEE WAS RIGHTLY NOTED FOR THE PURPO SE OF CLAIM OF DEPRECIATION. IN CASE, THE AO WAS NOT AGREEABLE TO THE ACTION OF THE ASSESSEE, THEN HE SHOULD HAVE INVOKED EXPLANATION-3 TO SECTION 43(1) OF IT ACT. IN THE PRESENT CASE, THE REVENUE HAS NOT TAKEN ANY STEP UNDER EXPLANATION-3 TO SECTION 43(1) OF THE ACT, LD .AR HAS INFORMED. HE HAS PLACED RELIANCE ON HABIB HUSSEIN VS. CIT ON 48 ITR 859 (BOM) AND CIT VS. STANDARD VACUUM REFINING CO. OF INDIA L TD. 61 ITR 799 (CAL.). HE HAS ALSO PLACED RELIANCE ON CHITRA PUBLICITY CO.(P) LTD. VS. CIT (2010) 127 TTJ PAGE 1 (AHD.)[TM]. 6. WE HAVE HEARD BOTH THE SIDES AT SOME LENGTH. WE HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW IN THE LIGHT OF THE COMPILATION FILED. UNDISPUTEDLY, THROUGH MOU DATED 12 TH DAY OF OCTOBER-2002 THE ASSIGNER, I.E.M/S.PRAKASH CHEMICAL AGENCIES, A REGISTERED FI RM HAS TRANSFERRED ALL ITS ASSETS AND LIABILITIES TO ASSIGNEE, I.E. PRAKASH CHEMICALS AGENCIES PVT.LTD. CO. (THE ASSESSEE-COMPANY) AND TH E ASSIGNEE HAS TAKEN ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 11 - OVER ALL THE LIABILITIES AS WELL AND AGREED TO TRAN SFER A CONSIDERATION OF RS.4 LACS, PLUS THE SHARES IN THE NAME OF THE PARTN ERS OF THE SAID ERSTWHILE FIRM. THE CONTROVERSY WAS THAT THE WDV AS PER THE BOOKS OF ACCOUNTS OF THE FIRM DRAWN AS ON 11.10.2002 WERE AT RS.19,84,31 1/-. ON THE NEXT DAY, I.E. ON 12.10.2002, WHEN THE ASSESSEE-COMPANY HAD TAKEN OVER THE SAID FIRM, THE COST IN THE BOOKS OF ACCOUNTS WER E TAKEN AT RS.82,51,157/-. THE AO HAS THEREFORE RAISED A QU ESTION THAT WHY THE WDV AS SUCH WAS NOT CARRIED OVER BY THE ASSESSEE-CO MPANY AND ALSO RAISED AN OBJECTION THAT THE ENHANCED COST WAS TAKE N UP FOR THE PURPOSE OF CLAIM OF DEPRECIATION. THE AO HAS ALLOWED THE DEPR ECIATION ON THE CLOSING WDV OF THE SAID FIRM AND NOT ON THE COST AS RECORDED BY THE ASSESSEE-COMPANY. ONCE THE ADMITTED FACTUAL POSIT ION IS THAT THIS IS NOT THE CASE OF TRANSFER OF CAPITAL ASSETS BY HOLDING COMPANY TO ITS SUBSIDIARY COMPANY (EXPLANATION-6 TO SECTION 43(1) OF IT ACT); OR THIS IS NOT THE CASE OF CAPITAL ASSET BEING TRANSFERRED BY AMALGAMA TION (EXPLANATION-7 TO SECTION 43(1) OF IT ACT); OR TRANSFER OF CAPITAL AS SET BY DEMERGER (EXPLANATION-7A TO SECTION 43(1) OF IT ACT), THEN T HE ONLY RECOURSE FOR THE REVENUE DEPARTMENT OUGHT TO BE THAT THE ACTUAL COST AS DEFINED U/S.43(1) SHOULD HAVE BEEN TAKEN FOR THE CALCULATIO N OF DEPRECIATION, MEANING THEREBY THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE WHICH HAS BEEN MET DIRECTLY OR INDIRECTLY. WE HAVE RAISED A QUESTION DURING THE COURSE OF HEARING TO THE RESPONDENT-ASSESSEE THAT W HAT HAS HAPPENED IN THE CASE OF ERSTWHILE FIRM AND WHETHER ON SUCH TRAN SFER ANY CAPITAL GAIN WAS CHARGED BY THE REVENUE DEPARTMENT. IN COMPLIAN CE, LD.AR HAS DRAWN OUR ATTENTION ON AN ASSESSMENT ORDER PASSED U /S.143(3) DATED 14.3.2006, WHEREIN THE AO WAS AWARE ABOUT THE FACT THAT THE ASSETS AND ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 12 - LIABILITIES OF THE FIRM HAVE BEEN ACQUIRED BY THE C OMPANY W.E.F. 12.10.2002. NO FURTHER ACTION WAS TAKEN AS FAR AS THE TRANSFER OF THE ASSETS WAS CONCERNED. IN THIS REGARD, LD.AR HAS GI VEN THE REASON THAT IN TERMS OF SECTION 47(XIII) OF THE ACT, AN EXCEPTION HAS BEEN PRESCRIBED THAT NOTHING CONTAINED IN SECTION 45 SHALL APPLY TO THE FOLLOWING TRANSFERS VIZ. ANY TRANSFER OF THE CAPITAL ASSET OR INTANGIBLE ASS ET BY A FIRM TO A COMPANY AS A RESULT OF SUCCESSION OF THE FIRM BY A COMPANY IN THE BUSINESS CARRIED ON BY THE FIRM PROVIDED THAT ALL THE ASSETS AND LIA BILITIES OF THE FIRM RELATING TO THE BUSINESS IMMEDIATELY BEFORE THE SUC CESSION BECOME THE ASSETS AND LIABILITIES OF THE COMPANY. IN THE PRES ENT CASE, SINCE THE ASSETS AND LIABILITIES OF THE FIRM HAVE BEEN TAKEN OVER BY THE ASSESSEE-COMPANY THEREFORE THE EXCEPTION AS PRESCRIBED U/S.47(XIII) HAVE ITS APPLICATION AND THAT COULD HAVE BEEN THE REASON THAT NO ACTION WAS ASCRIBED IN THE HANDS OF THE ERSTWHILE FIRM. 6.1. AN ANOTHER ASPECT HAS ALSO BEEN ARGUED BEFORE US THAT WHAT ARE THOSE CONDITIONS UNDER WHICH THE AO IS EMPOWERED TO SUBSTITUTE THE ACTUAL COST AS DISCLOSED BY THE ASSESSEE. IN TH IS REGARD, EXPLANATION-3 TO SECTION 43(1) SAYS THAT WHERE THE AO IS SATISFIE D THAT THE MAIN PURPOSE OF THE TRANSFER OF SUCH ASSETS TO THE ASSESSEE WAS THE REDUCTION OF LIABILITY TO INCOME TAX BY CLAIMING DEPRECIATION WITH A REFER ENCE TO AN ENHANCED COST, THEN THE ACTUAL COST TO THE ASSESSEE SHALL BE SUCH AN AMOUNT AS THE AO MAY DETERMINE HAVING REGARD TO ALL THE CIRCUMSTA NCES OF THE CASE. IN THE PRESENT CASE, UNDISPUTEDLY, THE AO HAS NOT INVO KED THE SAID EXPLANATION. WE CAN THEREFORE HOLD THAT WITHOUT T HE INVOCATION OF THE SAID EXPLANATION, THE AO WAS NOT JUSTIFIED TO DISTU RB THE ACTUAL COST AS ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 13 - RECORDED IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE-C OMPANY ON THE DATE OF ITS ACQUISITION OF ASSETS AND LIABILITIES OF THE ER STWHILE FIRM. REST OF THE EXPLANATION THROUGH WHICH AO COULD HAVE DISTURBED T HE ACTUAL COST ARE ALSO NOT APPLICABLE AS ELABORATELY EXPLAINED BY LD. AR, BECAUSE THOSE ARE IN RESPECT OF OTHER CIRCUMSTANCES, SUCH AS, ASSETS RECEIVED BY GIFT OR INHERITANCE (EXPLANATION-2), TRANSACTION OF SALE AN D LEASE-BACK (EXPLANATION 4A), REACQUISITION OF SAME ASSETS (EXP LANATION-4), OR WHERE A PORTION OF THE COST IS MET BY THE GOVERNMENT BY G RANTING SUBSIDY (EXPLANTION-10 OF THE SAID SECTION, ETC.). SINCE THE ACTION OF THE AO DID NOT COME WITHIN THE PURVIEW OF ANY SUCH ENABLING SE CTIONS, THEREFORE WE ARE NOT IN AGREEMENT WITH THE SUBSTITUTION OF ACTU AL COST AS REPLACED BY THE AO. 6.2. IN THE CASE OF CHITRA PUBLICITY CO.(SUPRA), TH E ASSESSEE-COMPANY TOOK OVER ADVERTISEMENT BUSINESS OF A FIRM. THE AS SESSEE-COMPANY HAS CLAIMED DEPRECIATION ON VARIOUS ASSETS INCLUDING HO ARDINGS. ASSESSING OFFICER RE-WORKED THE DEPRECIATION BY INVOKING EXP LANTION-3 TO SECTION 43(1) OF THE ACT ON THE BASIS THAT THE BOOK VALUE O F THE HOARDING WAS NIL IN THE BOOKS OF THE FIRM. IT WAS HELD THAT THE MA IN PURPOSE TO INVOKE THE SAID EXPLANATION IS TO EMPOWER THE AO TO DETERMINE ACTUAL COST OF ASSETS AND THE SAME TO BE DETERMINED HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. THE AO CAN DETERMINE TH E ACTUAL COST AT ARMS LENGTH VALUE OR AT REAL VALUE OF THE ASSETS T RANSFERRED. IN THE SAID CASE, THE RESPECTED THIRD MEMBER HAS OPINED THAT AT NO STAGE THE REVENUE AUTHORITIES HAVE DOUBTED THE CORRECTNESS OF THE CONSIDERATION OF RS.8 CRORES PAID BY THE ASSESSEE-COMPANY THROUGH AL LOTMENT OF SHARES. ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 14 - ACCORDING TO US, FACTS OF THE PRESENT CASE BEING AK IN TO THE FACTS OF THE CITED DECISION, THEREFORE THE SAME CAN BE APPLIED T O DECIDE THE ISSUE INVOLVED. AS FAR AS THE DECISIONS CITED BY THE L D.AR ARE CONCERNED, IT IS CORRECT THAT THE AO IS EMPOWERED TO INVOKE THE EXPL ANATION-3 AS HELD IN THE CASE OF POULOSE & MATHEN (P) LTD.(SUPRA), BUT T HE FACT IS THAT NO SUCH EXPLANATION WAS AT ALL INVOKED IN THE PRESENT CASE. AN ANOTHER CASE LAW HAS BEEN CITED BY THE LD.AR, I.E. VIZ. KUNGUNDI IND USTRIAL WORKS PRIVATE LTD. VS. CIT REPORTED AT 57 ITR 540 (AP), WHEREIN T HE ASSESSEE-COMPANY WAS FORMED FROM THE THEN EXISTING REGISTERED FIRM. THE QUESTION WAS THAT THE ASSETS WERE USED BY THE FIRM BEFORE THE CO MPANY WAS FORMED. THE SHAREHOLDERS OF THE COMPANY WERE NO OTHER THAN THE OLD PARTNERS OF THE FIRM. THE HONBLE COURT HAS OBSERVED THAT THE RE WAS ONLY CHANGE- OVER IN THE STATUS OF THE OWNERSHIP. WHAT WAS EA RLIER BELONGED TO PARTNERSHIP-FIRM WAS THEREAFTER BELONGED TO A PRIVA TE LIMITED COMPANY. SO, IT WAS NOT A CASE WHERE THE PRICE WAS ACTUALLY PAID BY ONE PERSON TO ANOTHER PERSON. IN THOSE CIRCUMSTANCES, THE VIEW W AS TAKEN IN FAVOUR OF THE REVENUE. HOWEVER, THE CASE IN HAND IS NOT THAT A COMPANY HAS BEEN FORMED FROM THE EXISTING REGISTERED FIRM. IT IS AL SO NOT A CASE THAT NO CONSIDERATION HAS ACTUALLY BEEN PAID. AS PER THE C LAUSES OF THE MOU, UNDER CONSIDERATION, THE ASSETS HAVE BEEN TRANSFERR ED BY THE FIRM IN FAVOUR OF THE ASSESSEE-COMPANY IN LIEU OF AN AMOUNT OF CONSIDERATION. ON ACCOUNT OF THESE FACTS, THIS CASE LAW DO NOT APP LY ON THE ASSESSEE. WE THEREFORE AFFIRM THE VIEW TAKEN BY THE LD.CIT(A) AND REJECT THESE GROUNDS OF THE REVENUE. 7. GROUND NO.3 READS AS UNDER:- ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 15 - 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD.C.I.T(A) HAS ERRED IN LAW IN DIRECTING TO ALLOW DEPRECIATION OF GAS CYLINDERS WHICH WERE NOT ACTUAL LY PUT TO USE IN CONTRAVENTION OF THE DECISION OF HONBLE MUMBAI HIGH COURT IN THE CASE OF D.G. AGARWAL VS. CIT 267 ITR 768, WHERE IT WAS HELD THAT THE WORD USED DENOTES THAT THE ASSET HAS BEEN ACTUALLY USED, AND NOT THAT IT IS ME RELY READY FOR USE. 7.1. THERE WAS AN ADDITION TO LCH GAS CYLINDERS AMO UNTING TO RS.36,21,656/-. THE ASSESSEE HAS CLAIMED DEPRECIAT ION @ 80%. IT WAS NOTICED BY THE AO THAT THE CYLINDERS WERE PURCHASED AND GIVEN ON RENT TO AN ASSOCIATE CONCERN NAMELY M/S.PRAKASH GAS AGENCY. IN TURN, M/S. PRAKASH GAS AGENCY HAS GIVEN THOSE CYLINDERS ON REN T TO GUJARAT ALKALIES & CHEMICALS. THE ASSESSEE HAS RECEIVED R ENT FROM M/S.PRAKASH GAS AGENCY. THE ASSESSEE HAS PURCHASED THE CYLIND ERS FROM M/S.INDIAN SUGAR & GENERAL ENGINEERING CORPORATION, YAMUNANAGA R HARYANA. THE ASSESSEE WAS ASKED TO FURNISH THE XEROX COPIES OF T HE PURCHASE BILLS. IT WAS EXPLAINED THAT 100 LCH CYLINDERS WERE PURCHASED FROM INDIAN SUGAR & GENERAL ENGINEERING CORPORATION, HARYANA. THOSE CYLINDERS WERE FOUND TO BE DIRECTLY DELIVERED TO GUJARAT ALKA LIES & CHEMICALS, RANOLI, DIST. VADODARA. THE DETAILS OF THE DISPATC H HAVE ALSO BEEN EXAMINED, ACCORDING TO WHICH 25 CYLINDERS WERE DISP ATCHED ON 27.9.2003. IT WAS ALSO NOTED THAT AS PER THE DRIV ERS COPY, THE CYLINDERS WERE DELIVERED AT GUJARAT ALKALIES & CHEMICALS ON 3 0/09/2003. THE AO HAS REPRODUCED THE TRUCK NUMBER AND THE NUMBER OF C YLINDERS DISPATCHED. THE ASSESSEE HAS THEREFORE CLAIMED FULL RATE OF DEPRECIATION ON THE GROUND THAT THE CYLINDERS WERE PUT TO USE BEFORE 30/09/2003. IT WAS ALSO INFORMED THAT THE RENT ON THE CYLINDER S ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 16 - WAS RECEIVED FROM 27/09/2003 FROM M/S.PRAKASH GAS A GENCY, AN ASSOCIATE CONCERN. THE AO HAS OBJECTED THAT AS PER SECTION 32(1) THE ASSESSEE COULD CLAIM DEPRECIATION ON THE ASSETS WHE N THEY HAVE BEEN USED FOR THE PURPOSE OF THE BUSINESS. SINCE THE CYLINDE RS WERE DISPATCHED ON 27/09/2003 AT 17.30 HOURS THEREFORE THEY WERE NOT PUT TO USE BY INDIAN SUGAR & GENERAL ENGINEERING CORPORATION BECAUSE ACC ORDING TO AO NORMALLY IT TOOK TWO TO THREE DAYS TO REACH A TRUCK FROM YAMUNANAGAR HARYANA TO BARODA GUJARAT. HE HAS HELD THAT THE C YLINDERS WERE NOT PUT TO USE ON OR BEFORE 30/09/2003, HENCE ALLOWED ONLY 50% OF THE NORMAL RATE OF DEPRECIATION. ACCORDINGLY, DEPRECIATION T O THE EXTENT OF RS.14,48,662/- WAS DISALLOWED. THE MATTER WAS CAR RIED BEFORE THE FIRST APPELLATE AUTHORITY. AFTER HEARING THE SUBMISSIO NS OF BOTH THE SIDES, LD.CIT(A) HAS HELD THE ISSUE IN FAVOUR OF THE ASSES SEE BY REFERRING FEW CASE LAWS, NAMELY, CIT VS. SHAAM FINANCE LTD. 231 ITR 308 (SC), CIT VS. PINACLE FINANCE LTD. 268 ITR 395 (GUJ.) AND CIT VS. BANSAL CREDIT LTD. 259 ITR 69(DEL.). ACCORDING TO LD.CIT(A), WHE RE THE BUSINESS OF THE ASSESSEE CONSISTS OF HIRING OUT OF MACHINERY AN D WHERE THE INCOME DERIVED FROM HIRING IS SHOWN AS BUSINESS INCOME, TH EN IT MUST BE CONSIDERED AS HAVING USED THE MACHINERY FOR THE PUR POSE OF THE BUSINESS. HE HAS HELD THAT THE ASSETS IN QUESTION HAVE BEEN LEASED OUT WITH EFFECT FROM 27.09.2003, HENCE ASSETS WERE PUT TO USE FOR MORE THAN 180 DAYS, THEREFORE ELIGIBLE FOR FULL RATE OF DEPRECIATION. 8. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL PLACED BEFORE US. ONCE THE ASSESSEE HAS DEMONSTRATED TH AT THE CYLINDERS WERE PURCHASED FROM INDIAN SUGAR & GENERAL ENGINEERING C ORPORATION ON ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 17 - 27.9.2003 AND WERE DISPATCHED FOR ITS DESTINATION A ND FROM THAT VERY DAY THE ASSESSEE HAS STARTED RECEIVING THE LEASE-RENT, THEN IN OUR CONSIDERED OPINION THAT DATE IS VERY RELEVANT TO DECIDE WHETHE R THE ASSETS IN QUESTION HAVE ACTUALLY BEEN PUT TO USE FOR 180 DAYS OR MOR E FOR THE PURPOSE OF ELIGIBILITY OF FULL RATE OF DEPRECIATION. SINCE TH E ADMITTED FACT IS THAT ONE OF THE BUSINESS OF THE ASSESSEE IS HIRING OF GAS CY LINDERS THEREFORE WE HEREBY HOLD THAT THE LD.CIT(A) HAS RIGHTLY FOLLOWED THE PRECEDENTS CITED AND HELD THAT THE ASSETS IN QUESTION HAVE ACTUALLY BEEN LEASED OUT WITH EFFECT FROM 27.09.2003 AND HAVE BEEN PUT TO USE F OR HIRING BUSINESS FOR MORE THAN 180 DAYS. WE THEREFORE AFFIRM THE FACT UAL AS WELL AS LEGAL FINDING OF LD.CIT(A) AND DISMISS THIS GROUND OF THE REVENUE. 9. GROUND NO.4 READS AS UNDER:- 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. C.I.T(A) HAS ERRED IN NOT AFFORDING TH E ASSESSING OFFICER AN OPPORTUNITY TO REBUT THE EVIDENCE PUT BE FORE HIM ON THE ISSUE OF ADDITION OF RS.16,12,749/- BEING DI FFERENCE BETWEEN RECEIPTS CREDITED IN PROFIT AND LOSS ACCOUN T AND THE ACTUAL RECEIPT AS PER TDS CERTIFICATES. 9.1. AS PER P&L ACCOUNT, THE ASSESSEE HAS CREDITED SERVICE CHARGES AND COMMISSION AT RS.65,89,025/-. IT WAS NOTED B Y THE AO THAT AS PER THE TDS CERTIFICATE OF GUJARAT ALKALIES, THE SERVIC E CHARGES AND COMMISSION AMOUNTED TO RS.73,71,368/- . A SUM OF R S.3,87,006/- WAS DEDUCTED AT SOURCE. IN ADDITION TO THE ABOVE, IT W AS ALSO NOTED BY THE AO THAT THE ASSESSEE HAS RECEIVED SUB-CONTRACTOR PAYME NT OF RS.13,35,256/-. THE TOTAL AMOUNT AS PER AO WAS RS.87,06,624/- WHICH SHOULD HAVE BEEN DISCLOSED BY THE ASSESSEE, HOWEVER, AS AGAINST THAT THE ASSESSEE HAD SHOWN INCOME OF RS.65,89,025/-, THEREFORE, THE BALA NCE OF RS.16,12,749/- ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 18 - WAS TAXED AS UNDISCLOSED INCOME. THE MATTER WAS CA RRIED BEFORE THE FIRST APPELLATE AUTHORITY. 10. BEFORE LD.CIT(A), THE ASSESSEE HAS FURNISHED A RECONCILIATION AS FOLLOWS:- INCOME AS PER PROFIT AND LOSS ACCOUNT : RS.65,89,025/- ADD: (I) PREVIOUS YEAR INCOME. RS.4,15,665/- (II)DISCOUNT INCOME. RS .17,72,574/- : RS.21,88,239 /- ----------------- RS.87,77,264/- LESS: INCOME ON WHICH NO TAX WAS DEDUCTED RS. 70,640/- INCOME ON WHICH TAX WAS DEDUCTED RS.87,06 ,624/- = ======== 10.1. ON APPRECIATION OF THE RECONCILIATION AND THE TDS CERTIFICATES, LD.CIT(A) HAS HELD THAT SOME OF THE AMOUNT WAS ALRE ADY ADDED BACK IN THE PRIOR PERIOD INCOME AND FOR REST OF THE AMOUNT AS PER RECONCILIATION A SUM OF RS.17,72,574/- WAS REDUCED ON ACCOUNT OF PUR CHASES WHICH WERE INCLUDED IN THE CREDIT SIDE. ON APPRECIATION OF TH OSE FACTS AND EVIDENCES, LD.CIT(A) HAS DELETED THE ADDITION. 11. WE HAVE HEARD BOTH THE SIDES. AT THE OUTSET, L D.DR HAS VEHEMENTLY STATED THAT THE PROVISIONS OF RULE 46A W AS INFRINGED BY LD.CIT(A) BY NOT CONFRONTING CERTAIN NEW EVIDENCES TO THE AO. WE FIND FORCE IN THIS PRELIMINARY OBJECTION OF THE LD.DR. RATHER, WE HAVE ASKED WHETHER THE RECONCILIATION WITH SUPPORTING EVIDENCE S WAS IN THE KNOWLEDGE OF THE AO. HOWEVER, IN THE ABSENCE OF ANY SATISFACTORY ANSWER, WE ARE OF THE VIEW THAT NATURAL JUSTICE DEM ANDS TO RESTORE THIS GROUND OF THE REVENUE BACK TO THE STAGE OF THE AO T O BE DECIDED DE NOVO ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 19 - AFTER INVESTIGATION AND VERIFICATION OF THE TDS CER TIFICATES AND OTHER CORROBORATIVE EVIDENCES. IN THE RESULT, THIS GROUN D OF THE REVENUE MAY BE TREATED AS ALLOWED BUT FOR STATISTICAL PURPOSES. 12. GROUND NO.5 READS AS UNDER:- 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LD.C.I.T(A) HAS ERRED IN DELETING THE ADDITION OF RS.2,41,701/- BEING DIVERSION OF PROFIT UNDER CHARG ING RENT ON CYLINDERS LEASED TO THE ASSOCIATE CONCERN. 12.1. THE AO HAS OPINED THAT THERE WAS DIVERSION O F PROFIT TO ASSESSEES ASSOCIATE CONCERN, M/S.PRAKASH GAS AGENCIES. THE A SSESSEE HAS PURCHASED CYLINDERS FROM OUTSIDE PARTIES AND GIVEN ON RENT TO ITS ASSOCIATE CONCERN WHO, IN TURN, GIVEN ON RENT TO GUJARAT ALKA LIES & CHEMICALS. THE AO HAS PREPARED A CHART AND ON THAT BASIS NOTED THAT THE RENT WAS RECEIVED @ RS.400/- P.M. FOR THE PERIOD 01/04/2003 TO 31/08/2003. FOR THE PERIOD 01/09/2003 TO 31/03/2004, THE RATE WAS R S.350/- P.M. THE SAID ASSOCIATE CONCERN HAS RECEIVED RENT FROM GUJAR AT ALKALIES & CHEMICALS LTD.@ RS.400/- TO RS.500/- PER CYLINDER P ER MONTH. ACCORDING TO AO, THE ASSESSEE HAS SHOWN PER CYLINDE R PER MONTH RENT BY LESS AMOUNT OF RS.100/- FOR THE PERIOD 01/04/2003 TO 31/08/2003 AND LESS BY RS.50/- PER CYLINDER PER MONTH FOR THE PERIOD 01 /09/2003 TO 08/09/2003. THE AO HAS CALCULATED THAT THE LESS R ENT RECEIVED BY THE ASSESSEE WAS RS.2,41,701/-. THE SAME WAS TAXED IN THE HANDS OF THE ASSESSEE ON THE ALLEGATION THAT THE SAID AMOUNT WAS THE DIVERSION OF PROFIT BY THE ASSESSEE. ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 20 - 13. AFTER EXAMINING THE FACTS OF THE CASE, LD.CIT(A ) HAS HELD THAT THE ADDITION WAS MADE MERELY ON PRESUMPTION AND THE ADD ITION WAS DELETED AFTER ASSIGNING THE FOLLOWING REASONS:- 6.2. I HAVE CONSIDERED THE SUBMISSIONS OF THE LD.A .R AND THE FACTS OF THE CASE. THE DISALLOWANCE OF RS.2,41,701/- REL ATES TO THE DIFFERENCE IN LEASE RENT CHARGED BY THE ASSESSEE FR OM PGA AS COMPARED TO THE LEASE RENT CHARGED BY THE PGA FROM GACL. IT HAS BEEN HELD THAT THAT THIS AMOUNT OF INCOME HAS B EEN DIVERTED FROM THE ASSESSEE COMPANY TO PGA. PRESUMABLY, THE ADDITION HAS BEEN MADE ON THE ASSUMPTION THAT BY SUCH DIVERSION OF INCOME SOME BENEFIT HAS ACCRUED TO THE ASSESSEE IN THE FOR M OF LOWER OR NIL INCIDENCE OF TAX ON THE IMPUGNED AMOUNT. HOWEVER, PGA IS NOT A LOSS MAKING, BUT A PROFIT MAKING CONCERN. THIS HAS BEEN VERIFIED FROM THE RETURN OF INCOME FILED BY PGA FOR A.Y 2004 -05. THE RATE OF TAX APPLICABLE IN THE CASE OF A FIRM AND IN THE CASE OF A DOMESTIC COMPANY IS IDENTICAL AND HAS BEEN SO SINCE A.Y 1991 -92. THE ARRANGEMENT AS AFORESAID HAS BEEN MADE FOR VALID CO MMERCIAL AND BUSINESS REASONS. THESE REASONS HAVE NOT BEEN FAUL TED OR SHOWN TO BE SHAM BY THE A.O. THE MOTIVE FOR THE SO CALLE D DIVERSION OF INCOME WOULD NOT BE EVASION OF TAX SINCE NO TAX HAS BEEN ACTUALLY EVADED UNDER THE GIVEN CIRCUMSTANCES. ACCORDINGLY, I AM OF THE OPINION THAT THIS ADDITION OF RS.2,41,701/- WAS NOT WARRANTED AND IS, ACCORDINGLY, DIRECTED TO BE DELETED. 14. ON HEARING THE SUBMISSIONS OF BOTH THE SIDES, W E ARE ALSO OF THE VIEW THAT FOR ALLEGING THE IMPUGNED DIVERSION OF PR OFIT THE AO HAS OVERLOOKED THE BUSINESS MODEL AND THE PATTERN OF BU SINESS ACTIVITY OF THE ASSESSEE. THE AO WAS EXPECTED TO INVESTIGATE THE C OST OF INVESTMENT, THE UPKEEP OF CYLINDERS, REALIZATION OF SALES AND BUSIN ESS LINK OF THE ASSOCIATE CONCERN. THOUGH THE BUSINESS ACTIVITY OF THE GROUP CONCERN IS LEASING OUT OF LCH CYLINDERS BUT THE DEALING WITH THE GACL OF T HE SISTER-CONCERN ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 21 - SHOULD HAVE BEEN TAKEN INTO ACCOUNT BEFORE ALLEGING THE DIVERSION OF PROFIT. AN ANOTHER FACT HAS ALSO BEEN HIGHLIGHTED BY LD.CIT(A) THAT THE SAID SISTER-CONCERN WAS NOT A LOSS MAKING CONCERN. RATHER, LD.CIT(A) HAS VERIFIED THE INCOME TAX RETURN OF THE SAID SISTER-C ONCERN AND THEREUPON HELD THAT THE RATE OF TAX AS APPLICABLE IN THE CASE OF THE SAID SISTER-CONCERN WAS IDENTICAL WITH THE RATE OF TAX OF THE ASSESSEE. ACCORDING TO LD.CIT(A), THERE WAS NO MALA FIDE MOTIVE FOR SUCH D IVERSION OF INCOME ON THE PART OF THE ASSESSEE. CONSIDERING THE FACT S AND CIRCUMSTANCES OF THE CASE, WE HEREBY AFFIRM THE FINDINGS OF THE LD.C IT(A) AND DISMISS THIS GROUND OF THE REVENUE. 15. GROUND NO.6 READS AS UNDER: 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. C.I.T.(A) HAS ERRED IN DELETING THE ADD ITION OF RS.36,801/- BEING VEHICLE EXPENSES FOR PERSONAL USE WITHOUT APPRECIATING THE FACT THAT UNLIKE IN THE CASE OF SA YAJI IRON & WORKS LTD. 172 CTR 339, THERE IS NO ADDITION ON ACC OUNT OF PERQUISITES IN THE HANDS OF DIRECTORS OF THE ASSESS EE COMPANY. 15.1. AS PER P&L ACCOUNT, THE ASSESSEE HAS DEBITED VEHICLE EXPENSES AT RS.3,68,019/-, HOWEVER, IN THE IMMEDIATE PRECEDI NG YEAR, AS PER AO, THE VEHICLE EXPENSES WERE SHOWN AT RS.1,15,631/-. ACCORDING TO HIM, THERE WAS A POSSIBILITY OF USING THE VEHICLES BY TH E DIRECTORS FOR THEIR PERSONAL USE. THE AO HAS DISALLOWED 10%, I.E. RS. 36,801/-. THE MATTER WAS CARRIED BEFORE THE LD.CIT(A) WHO HAS FOLLOWED S AYAJI IRON & ENGG.CO. VS. CIT [2002] 172 CTR 339 (GUJ.) AND DE LETED THE ADDITION. UNDISPUTEDLY, THIS IS THE CASE OF A COMPANY, HENCE FOLLOWING THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE ABSENCE OF ANY SPECIFIC INSTANCE OF USER OF VEHICLE FOR NON-BUSINESS PURPOSE, WE ARE OF THE VIEW THAT THERE ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 22 - WAS NO SCOPE FOR SUCH AN ADHOC DISALLOWANCE. BY AF FIRMING THE FINDINGS OF THE LD.CIT(A), WE HEREBY DISMISS THIS GROUND OF THE REVENUE. [B] A.Y. 2003-04 (ITA NO.2803/AHD/2008 - REVENUES APPEAL) 16. GROUNDS READ AS UNDER:- 1. THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE A .O. TO ALLOW HIGHER DEPRECIATION ON THE ASSETS ACQUIRED ON 11.1. 2002, WHOSE WRITTEN DOWN VALUE (WDV) WAS RS.593415/- AND WHICH WERE REVALUED BY THE ASSESSEE AT RS.71864/-. 2. THE LD. CIT(A) DID NOT APPRECIATE THE FACT THAT THE HON.SUPREME COURT HAD, IN THE CASE OF SAHARANPUR EL ECTRIC SUPPLY CO. VS. CIT 194 ITR 294 HAD HELD THAT THE DE FINITION OF WRITTEN DOWN VALUE IN SECTION 43(6) ENVISAGES COMPUTATION OF ACTUAL COST IN EVERY ASSESSMENT YEAR AND THE ASSESSEE HAS NO RIGHT TO CLAIM DEPRECIATION ON INFL ATED ACTUAL COST CLAIMING HIGHER DEPRECIATION BY ARTIFIC IALLY INFLATING THE ACTUAL COST THROUGH REVALUATION OF TH E ASSETS. 16.1. THE ISSUE AS RAISED BY THE REVENUE FOR THIS A SST.YEAR IS IDENTICAL WITH THE ISSUE ALREADY DECIDED SUPRA. FOLLOWING OU R VIEW AS DISCUSSED HEREINABOVE WHILE DECIDING REVENUES APPEAL FOR A.Y . 2004-05, WE HEREBY REJECT THE GROUNDS OF THE REVENUE. REVENUE S APPEAL IS DISMISSED. [C] A.Y. 2005-06 (ITA NO.2979/AHD/2008 - REVENUES APPEAL) 17. GROUND NO.1 READS AS UNDER:- ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 23 - 1. THE LD. CIT(A) DID NOT APPRECIATE THE FACT THAT THE HON.SUPREME COURT HAD, IN THE CASE OF SAHARANPUR EL ECTRIC SUPPLY CO.L VS. CIT 194 ITR 294 HAD HELD THAT THE D EFINITION OF WRITTEN DOWN VALUE IN SECTION 43(6) ENVISAGES COMPUTATION OF ACTUAL COST IN EVERY ASSESSMENT YEAR AND THE ASSESSEE HAS NO RIGHT TO CLAIM DEPRECIATION ON INFL ATED ACTUAL COST CLAIMING HIGHER DEPRECIATION BY ARTIFIC IALLY INFLATING THE ACTUAL COST THROUGH REVALUATION OF TH E ASSETS. 17.1. THIS GROUND IS COVERED BY OUR DECISION TAKEN IN A.Y. 2004-05 (SUPRA), FOLLOWING THE SAME, THIS GROUND OF THE REV ENUE IS HEREBY DISMISSED. 18. GROUND NO.2 READS AS UNDER:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG THE ASSESSING OFFICER, TO DELETE THE ADDITION OF RS.9,5 4,436/-, DISALLOWED AS BAD DEBTS, THOUGH ASSESSEE FAILED TO PROVE THAT IT HAD MADE ANY EFFORTS FOR THE RECOVERY AND ALSO I GNORING THE UNDERLYING PRINCIPLES LAID DOWN BY THE GUJARAT HIGH COURT IN THE CASE OF DHALL ENTERPRISES & ENGINEERS PVT.LTD. VS. CIT 295 ITR 481 (GUJ.). 18.1. THE ASSESSEE HAS CLAIMED BAD DEBT BY DEBITING A SUM OF RS.9,54,436/- IN P&L ACCOUNT. THE SAME WAS DISAL LOWED, HOWEVER LD.CIT(A) HAS FOLLOWED FEW CASE LAWS AND ALLOWED TH E CLAIM OF BAD DEBT. NOW THIS ISSUE IS SQUARELY COVERED BY A LATEST DECI SION OF HONBLE SUPREME COURT PRONOUNCED IN THE CASE OF TRF LTD. 323 ITR 397 (SC), ITA NOS.2803/A/08,2781/A/07 AND 2979/A/2008 DCIT VS. M/S.PRAKASH CEHMICALS AGENCIES P.LTD. ASST.YEARS 2003-04,2004-05 & 2005-06 - 24 - HENCE FOLLOWING THIS DECISION WE HEREBY CONFIRM THE FINDINGS OF LD.CIT(A). GROUND IS DISMISSED. 19. IN THE RESULT, REVENUES APPEAL(S) FOR A.Y. 20 04-05 IS PARTLY ALLOWED AND FOR A.YS. 2003-04 & 2005-06 ARE DISMISS ED. SD/- SD/- ( .. !' ) ( ) #$ ( B.P. JAIN ) ( MUKUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL ME MBER AHMEDABAD; DATED 13/ 04 /2012 NOMINATED MEMBER SD/- SD/- (AM) (JM) 13.4.12 A.C. MKS .(..', .'../ T.C. NAIR, SR. PS #- ' /0 1#0, #- ' /0 1#0, #- ' /0 1#0, #- ' /0 1#0,/ COPY OF THE ORDER FORWARDED TO : 1. 23 / THE APPELLANT 2. /423 / THE RESPONDENT. 3. 5 / CONCERNED CIT 4. 5() / THE CIT(A)-III, BARODA 5. 089 /' , , / DR, ITAT, AHMEDABAD 6. 9: ;& / GUARD FILE. #-' #-' #-' #-' / BY ORDER, 40 / //TRUE COPY// < <<