DCIT, New Delhi V. M/s. Bilt Power Ltd., New Delhi

ITA 4276/DEL/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65776 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 24-08-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 16-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S D KAPILA R R MAURYA; AKHIL MAHAJAN CAS
• Assessee Lawyers: GEETMALA
• Keywords: Capital asset; Depreciation; Wholly owned subsidiary; Valuation report; Tax effect; Revenue expenditure
• Section: 92C; 133(6); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A: NEW DELHI BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER ITA NO. 3259 /DEL/2010 ASSESSMENT YEAR: 2007-08 BILT POWER LIMITED, NOW KNOWN AS : AVANTHA POWER & INFRASTRUCTURE LIMITED, THAPAR HOUSE, 124, JANPATH, NEW DELHI. PAN NO. AACCB7469B VS. ADDL. COMMISSIONER OF INCOME-TAX, RANGE-2, NEW DELHI. (APPELLANT) (RESPONDENT) & ITA NO. 4276 /DEL/2010 ASSESSMENT YEAR: 2007-08 DEPUTY CIT, CIRCLE 2(1), NEW DELHI. VS. BILT POWER LIMITED, NOW KNOWN AS : AVANTHA POWER & INFRASTRUCTURE LIMITED, THAPAR HOUSE, 124, JANPATH, NEW DELHI. PAN NO. AACCB7469B (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI S.D. KAPILA, R.R. MAURYA & AKHIL MAHAJAN, CAS RESPONDENT BY: MS. GEETMALA, CIT(DR) ITA NOS. 3259 & 4276/D/ 2010 2 O R D E R PER S.V. MEHROTRA, A.M. THESE ARE CROSS APPEALS DIRECTED AGAINST THE ORDER S OF LD. CIT(A) DATED 11.06.2010 FOR A.Y. 2007-08. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY WAS INCORPORATED UNDER THE COMPANIES ACT, 1956 ON 22 ND JULY, 2005, WITH THE OBJECT TO ENGAGE ITSELF TO CARRY ON THE BUSINESS OF GENERATION AND DISTRIBUTION OF POWER. THE ASSESSEES COMPANY ORIGINAL NAME WAS BILT POWER LTD. WHICH WAS SUBSEQUENTLY CHANGED TO AVANTHA POWER & INFRAST RUCTURE LTD. (APIL). FOR THE A.Y. 2007-08, THE ASSESSEE COMPANY FILED IT S RETURN OF INCOME DECLARING INCOME AT RS. 7,98,64,773/-. THE ASSESSI NG OFFICER, AFTER DETAILED DISCUSSION DETERMINED THE TOTAL INCOME AT RS. 19,73 ,68,300/- BY MAKING FOLLOWING ADDITIONS/ DISALLOWANCES: - A) DISALLOWANCE OF DEPRECIATION OF RS. 11,53,53,16 2/- ON DIFFERENTIAL AMOUNT OF FIXED ASSETS BETWEEN PURCHASES CONSIDERAT ION FOR RS. 235 CORES W.D.V. AS PER INCOME-TAX ACT AT RS. 88.66 C RORES. B) DISALLOWANCE OF NON-PROCESSING CHARGES RS. 21,5 0,367/- 3. THE ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A) WHO WHILE PARTLY ALLOWING THE APPEAL, DELETED THE DISALLOWANCES ON A CCOUNT OF DEPRECIATION. AS REGARDS LOAN PROCESSING FEE, WHILE UPHOLDING THE ASSESSEES CONTENTION ITA NOS. 3259 & 4276/D/ 2010 3 THAT THE EXPENDITURE WAS REVENUE IN NATURE ALLOWED THE DEDUCTION TO THE EXTENT OF RS. 21,50,367/- INSTEAD OF RS. 2,43,70,83 0/- AS CLAIMED BY ASSESSEE. 4. BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), BO TH ASSESSEE AND DEPARTMENT ARE IN APPEAL BEFORE US. 5. FIRST WE TAKE UP THE DEPARTMENTS APPEAL VIDE IT A NO. 4276/DEL/2010. 6. THE DEPARTMENT HAS TAKEN FOLLOWING GROUNDS OF AP PEAL: - 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS. 11,53,53,162/- ON ACCOUNT OF DISALLOWANCE OF DEPRECIATION U/S 32 OF THE I.T. ACT IGNORED THE FACT THAT TRANSFER OF ASSETS WAS A SCHEME OF DEMERGER DULY APPROVED BY THE HONBLE HIGH COURT OF DELHI AND PROVISIONS OF EXPLANATION 3 TO SECTION 43(1) OF THE I.T. ACT WERE EXPLICITLY APPLICABLE IN THE ASSESSEES CASE. 2. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING THE ADDITION OF RS. 21,50,367/- ON ACCOUNT OF DISALLOWANCE OF LOAN PROCESSING FEE CHARGES AS REVENUE EXPENDITURE. LD. CIT(A) IGNORED THE PROVISO TO SECTION 36(1)(III) OF THE I.T. ACT, 1961 WHICH IS EXPLICITLY APPLICABLE IN THE ASSESSEES CASE AND ALSO THE INSTANCE OF LOAN PROCESSING CHARGES ACCRUED EARLIER THAN ASSET WAS ACTUALLY ITA NOS. 3259 & 4276/D/ 2010 4 PUT TO USE SINCE ASSESSEE COMPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. 7. BRIEF FACTS APROPOS GROUND NO. 1 ARE THAT THE AS SESSEE COMPANY IN ITS PRESENT FORM CAME INTO EXISTENCE CONSEQUENT TO DEME RGER OF BALLARPUR INDUSTRIES LTD. (HEREINAFTER REFERRED AS BILT) AS P ER THE SCHEME OF ARRANGEMENT OF DEMERGER U/S 391 TO 394 OF THE COMPA NIES ACT, 1956, AS APPROVED BY THE HONBLE HIGH COURT OF DELHI VIDE OR DER DATED 25 TH MAY, 2006. CONSEQUENT TO THE SCHEME, BILT TRANSFERRED I TS POWER DIVISION TO THE ASSESSEE COMPANY FOR A CONSIDERATION OF RS. 235 CRO RES. THE ASSESSING OFFICER HAS OBSERVED THAT PRIOR TO SUBMISSION OF TH E SCHEME OF ARRANGEMENT AND DEMERGER BEFORE THE HONBLE HIGH COURT, THE BIL T GOT ITS PLANT AND MACHINERY AND CIVIL WORKS OF POWER DIVISION VALUED IN DECEMBER, 2005 BY SPB PROJECT & CONSULTANCY LTD., CHENNAI AND INFRAST RUCTURE LEASING & SERVICES LTD., DELHI. AS PER THIS REPORT, THE PLAN T AND MACHINERY AND CIVIL WORKS OF THE POWER DIVISION OF BILT WAS VALUED AT R S. 315.85 CRORES. THIS COMPRISED VALUE OF THE PLANT AND MACHINERY, FURNITU RE & FIXTURES AT RS. 292.27 CRORES AND BUILDING AT RS. 23.58 CRORES. IT WAS POINTED OUT BEFORE THE AO THAT THE TRANSACTION AT RS. 235 CRORES HAD BEEN DETERMINED BY THE BOARD OF DIRECTORS OF BILT AND APIL BASED ON THEIR INDIVI DUAL JUDGMENT AND TAKING INTO CONSIDERATION THE VALUATION PROVIDED BY THE IN DEPENDENT VALUERS NAMELY; SPB PROJECTS & CONSULTANCY LTD., CHENNAI (FOR TECHN ICAL VALUATION) AND ITA NOS. 3259 & 4276/D/ 2010 5 INFRASTRUCTURE LEASING & SERVICES LTD., DELHI (FOR FINANCIAL VALUATION). DETAILS OF VALUATION WERE AS UNDER: - UNITS PLANT & MACHINERY FURNITURE & FIXTURE BUILDING BALLARPUR 564,338,000 70415000 BHIGWAN 1394309000 55446000 SHREEGOPAL 644906000 67119000 SEWA 319150000 42867000 TOTAL 2922703000 235847000 GRANT TOTAL 3158550000 8. THE AO FURTHER NOTICED THAT THERE WAS ANOTHER VA LUATION DATED 04/01/2006 OF PLANT AND MACHINERY AND BUILDING BY J MR CONSULTANTS, CHENNAI WHICH VALUED THESE AT RS. 240.85 CRORES. H E HAS FURTHER POINTED OUT THAT THIS VALUATION DID NOT FIND MENTION IN THE SCHEME OF ARRANGEMENT AND DEMERGER PRESENTED BEFORE THE HONBLE HIGH COUR T. THIS VALUATION WAS AS UNDER: - DESCRIPTION APPRAISED VALUE OF PRESENT ASSETS IN RS . LAKHS PLANTS & MACHINERY CIVIL WORKS TOTAL VALUE BALLARPUR UNIT 4,136,05 704.16 4,840.21 BHIGWAN UNIT 10,500.40 554.46 11,054.86 SHREE GOPAL UNIT 4,785.24 671.19 5,429.43 SEWA UNIT 233.83 428.67 2,760.50 TOTAL 21,726.52 2,358.48 24,085.00 9. THE AO FURTHER OBSERVED THAT WHILE APPROVING THE SCHEME OF ARRANGEMENT AND DEMERGER ON 25 TH MAY, 2006, THE HONBLE HIGH COURT OF DELHI OBSERVED THAT, MERELY BECAUSE CONSIDERATION W AS BEING PAID TO THE TRANSFEROR COMPANY, IT COULD NOT BE PRESUMED THAT T HE SCHEME AS SUCH WAS CONTRARY TO PUBLIC INTEREST OR AGAINST THE INTEREST OF SHAREHOLDERS OF TRANSFEROR ITA NOS. 3259 & 4276/D/ 2010 6 COMPANY. HONBLE HIGH COURT OBSERVED THAT THE TRAN SFEROR COMPANY COULD HAVE ALWAYS TRANSFERRED/ SOLD ANY OF ITS ASSETS FOR CONSIDERATION TO THE THIRD PARTY. THE COURT FURTHER OBSERVED THAT THE SALE CO NSIDERATION AS FIXED WAS BASED UPON INDEPENDENT JUDGMENT OF TWO VALUERS NAME LY AS SPB PRODUCTS CONSULTANCY LTD. OF CHENNAI AND INFRASTRUCTURES LEA SING & FINANCIAL SERVICES LTD., NEW DELHI. THE AO FURTHER OBSERVED THAT UNDER THESE CIRCUMSTANCES, THE HONBLE HIGH COURT HELD THAT THE SALE CONSIDERATION FIXED COULD NOT BE SAID TO BE INADEQUATE OR NOT REPRESENT ING THE MARKET VALUE OF THE UNDERTAKING. THUS, IN VIEW OF THE SCHEME OF AR RANGEMENTS AND DEMERGER APPROVED BY THE HONBLE HIGH COURT OF DELH I, THE ASSESSEE COMPANY PAID RS. 235 CRORES TO BILT TOWARDS PURPORT ED COST OF PLANT & MACHINERY & BUILDING. 10. THE AO FURTHER NOTED THAT AFTER INCLUDING WDV O F OTHER ASSETS, TOTAL DEPRECIATION CLAIMED WAS AT RS. 18.57 CRORES. HE F URTHER EXAMINED THE DETAILS ON RECORD IN REGARD TO DEPRECIATION CLAIMED BY BILT IN RESPECT OF ASSETS TRANSFERRED TO ASSESSEE COMPANY. THIS WAS A S UNDER: - NAME OF THE ASSETS RATE OF DEPRECIATION WDV AS PER ASSESSEE DEPRECIATION CLAIMED FACTORY BLDG. 7.84% 22,75,22,879 17837794 OFFICE BLDG. 3.02% 25,95,263 78377 PLANT & MACHINERY 7.84% 2,11,64,83,232 166531759 FURNITURE & FIXTURE 12.77% 33,98,458 433983 TOTAL 2,34,99,99,832 184881913 ITA NOS. 3259 & 4276/D/ 2010 7 11. THE AO REQUIRED THE ASSESSEE TO FURNISH BOOK VA LUE OF THE ASSETS PURCHASED AT RS. 235 CRORES AND WDV AS PER THE TAX AUDIT REPORT IN THE BOOKS OF THE TRANSFEROR COMPANY ALONG WITH WORKING OF DEPRECIATION FOR THE PURPOSES OF INCOME-TAX RULES, 1962. THE ASSESSEES REPLY AS SUMMARIZED BY AO AT PAGES 4 & 5 WAS AS UNDER: - I) CONSIDERATION OF RS. 235 CRORES HAS BEEN DETERMINED BY THE BOARD OF DIRECTORS OF BILT AND APIL BASED ON THEIR INDEPENDENT JUDGMENT AND TAKING INTO CONSIDERATION THE VALUATION REPORT PREPARED BY M/S SPB PRODUCTS AND CONSULTANCY SERVICES, CHENNAI. II) TRANSFER OF POWER DIVISION WAS AS PER SCHEME BUT DOES NOT FALL WITHIN THE AMBIT OF SEC. 2(19AA) OF THE ACT AS THE ASSESSEE COMPANY HAS NOT SATISFIED THE CONDITIONS LAID DOWN IN SEC. 2(19AA) OF THE ACT. THESE CONDITIONS REMAINING UNSATISFIED ARE: A. THE PROPERTY OF POWER DIVISION BEING TRANSFERRED BY BILT AT CONSIDERATION OF RS. 235 CRORES IS NOT AT VALUE APPEARING IN THE BOOKS OF ACCOUNT IMMEDIATELY BEFORE THE DEMERGER. THUS, CONDITION OF CLAUSE (III) OF SEC. 2(19AA) IS NOT SATISFIED. B. ASSESSEE COMPANY HAS NOT ISSUED ANY SHARES IN CONSIDERATION OF DEMERGER TO SHAREHOLDERS OF BILT. THUS, CONDITION OF CLAUSE (IV) OF SEC. 2(19AA) IS NOT SATISFIED. ITA NOS. 3259 & 4276/D/ 2010 8 C. SHAREHOLDERS OF BILT HAVE NOT HELD IN VALUE OF SHARES IN ASSESSEE COMPANY; HOWEVER, AS ON JUNE 30, 2006 ASSESSEE COMPANY HAS ALLOTTED 26% SHARES TO BILT. THUS, CONDITION OF CLAUSE (V) OF SEC. 2(19AA) IS NOT SATISFIED. D. BILT HAS TRANSFERRED POWER DIVISION TO THE ASSESSEE COMPANY AT LUMPSUM CONSIDERATION OF RS. 235 CRORES ON SUMP SALE BASIS AND HAS PAID LONG TERM CAPITAL GAIN TAX ON THIS SALE CONSIDERATION AS PER SECTION 50B OF THE ACT. 12. ON AOS FURTHER QUERIES IN REGARD TO THE BOOK V ALUE OF THE ASSETS PURCHASED FROM BILT, THE ASSESSEE STATED AS UNDER: - (I) ASSESSEE COMPANY HAS CAPITALIZED RS.235 CRORES IN ITS BOOKS OF ACCOUNTS AS ACTUAL COST PAID FOR POWER DIVISION AS DEFINED IN SECTION 43 OF THE ACT. COPY OF THE LETTER FROM BILT SHOWING VALUE OF ASSETS OF ITS POWER DIVISION TRANSFERRED TO THE ASSESSEE COMPANY AMOUNTING TO RS. 229 CRORES WAS ALSO FILED. (II) THE ASSESSEE IN SUPPORT OF THE SALE CONSIDERATION PAID TO M/S BILT HAS ALSO SUBMITTED THE VALUATION REPORTS FROM THE REGISTERED VALUERS NAMELY SPB PROJECTS AND CONSULTANCY LIMITED DETERMINING THE VALUE OF BUSINESS AT RS. 315 CRORES AND OF M/S JMR CONSULTANTS DETERMINING THE VALUE OF THE BUSINESS AT RS. 240.85 CRORES. ITA NOS. 3259 & 4276/D/ 2010 9 THESE WERE OBTAINED PRIOR TO THE APPROVAL OF THE SCHEME BY COURT. (III) IT IS FURTHER SUBMITTED THAT EXPLANATION 7A TO SECTION 43 IS NOT APPLICABLE FOR ASSESSEE COMPANY AS IT WAS NOT A DEMERGER OF POWER DIVISION AS DEFINED IN SEC. 2(19AA) IS NOT SATISFIED. (IV) AS THE CONDITION OF SEC. 2(19AA) WERE NOT SATISFIED, THEREFORE, TRANSFEROR COMPANY I.E. BILT HAS NOT GOT ANY BENEFIT OF SEC. 47(VIB) OF THE ACT AND PAID CAPITAL GAIN TAX UNDER SECTION 50B OF THE ACT. IN OTHER WORDS, BILT HAS SHOWN TRANSFER OF POWER DIVISION AS SLUMP SALE. (V) IN THE CASE OF SLUMP SALE, A BREAK-UP OF THE COST OF EACH ASSET/LIABILITY IS NOT AVAILABLE. CONSEQUENTLY, A PROBLEM ARISES AS TO HOW TO FIND OUT THE ACTUAL COST OF DIFFERENT ASSETS ACQUIRED BY WAY OF SLUMP SALE IN THE HANDS OF PURCHASER. ACCOUNTING STANDARD 10 ISSUES BY THE ICAI PROVIDES THAT WHERE SEVERAL ASSETS ARE PURCHASED FOR A CONSOLIDATED PRICE, THE CONSIDERATION IS APPROPRIATED TO THE VARIOUS ASSETS ON A FAIR BASIS AS DETERMINED BY THE COMPETENT VALUERS. (VI) THERE IS NO SPECIFIC PROVISION U/S 43(1) WHICH DEFINES ACTUAL COST OR IN SEC. 43(6) WHICH DEFINES WRITTEN DOWN VALUE. THEREFORE, PROVISION WHICH ARE NOT THERE IN THE ACT CANNOT BE INSERTED/ ADDED BY THE ASSESSING OFFICER. ITA NOS. 3259 & 4276/D/ 2010 10 (VII) THUS ACTUAL MEANS THE ACTUAL COST OF THE ASSETS PAID BY THE ASSESSEE I.E. SEC. 235 CRORES. SINCE THE VALUE OF RS. 315 CRORES AND RS. 240.85 CRORES HAS BEEN DETERMINED BY INDEPENDENT VALUERS, THEREFORE, IT IS REASONABLE TO BELIEVE THAT CONSIDERATION WAS PAID FOR ACQUISITION OF THE CAPITAL ASSETS AT RS. 235 CRORES. 13. AS REGARDS WDV OF THE ASSETS IN THE BOOKS OF TR ANSFEROR I.E. BILT AS ON THE DATE OF TRANSFER, THE AO ISSUED NOTICE U/S 133( 6) OF THE ACT TO BILT WHICH SUBMITTED ITS REPLY, GIVING THE VALUE OF ASSETS TRA NSFERRED TO APIL, AS UNDER: - ASSETS TRANSFERRED POWER DIVISION (AMOUNT RS.) BUILDING 13,17,66,409 LESS: ACCUMULATED DEPRECIATION 3,22,55,781 9,95,10,628 P&M 3,68,93,07,593 LESS: ACCUMULATED DEPRECIATION 1,64,72,10,288 2,04,20,97,305 2,14,16,07,933 HE OBSERVED THAT THE ABOVE VALUE OF THE ASSETS TRAN SFERRED WAS AS PER THE BOOKS VALUE AND NOT AS PER THE TAX AUDIT REPORT. H E, THEREFORE, AGAIN ISSUED NOTICE U/S 133(6) TO BILT ASKING SPECIFICALL Y TO FURNISH WDV AS PER 3CD OF TAX AUDIT REPORT IN RESPECT OF ASSETS TRANSF ERRED TO APIL. THE REPLY SUBMITTED BY BILT SHOWED THE WDV OF THE ASSETS TRAN SFERRED TO APIL AS UNDER: - BUILDING 8,91,21,537 PLANT & MACHINERY 77,75,43,827 TOTAL 86,66,65,364 ITA NOS. 3259 & 4276/D/ 2010 11 14. IN THE BACKDROP OF ABOVE FACTS, THE AO EXAMINED THE ASSESSEES CLAIM OF DEPRECIATION AT RS. 18.57 CRORES. THE AO FIRST EXAMINED THE ASSESSEES CONTENTION THAT THE ASSETS HAD BEEN ACQUIRED IN CON SEQUENCE TO SLUMP SALE BECAUSE THE CONDITIONS OF DEMERGER AS LAID DOWN U/S 2(19AA) CLAUSE (III) OF THE INCOME-TAX ACT WERE NOT SATISFIED. THE AO AFTE R EXAMINING THE ASSESSEES CONTENTION REGARDING NON-COMPLIANCE WITH CLAUSES (III), (IV) & (V) OF SECTION 2(19AA) AGREED THAT IT WAS NOT A CASE OF DEMERGER AS CONTEMPLATED UNDER THE INCOME-TAX ACT. HOWEVER, HE OBSERVED IN PARA 2.9 OF HIS ORDER AS UNDER: - THE CONDITIONS LAID DOWN IN SEC. 2(19AA)(IV) AND 2(19AA)(V) ARE LINKED TO SEC. 2(19AA)(III). ONCE ASSETS ARE TRANSFERRED NOT ON THE BOOK VALUE, THEN OBVIOUSLY, IN CASE OF A TRANSFER WHICH IS TO BE STATED ON MARKET VALUE, THE RESULTING COMPANY WILL BE UNDER NO OBLIGATION TO SATISFY THE CONDITIONS LAID DOWN IN SEC. 2(19AA)(IV) AND 2(19AA)(V). BUT THIS DOES NOT AUTOMATICALLY PROVE THAT ASSESSEE WIL L STAND TO CLAIM DEPRECIATION ON THE CONSIDERATION PAID. FROM MERE NON-COMPLIANCE OF CERTAIN CONDITIONS OF SEC. 2(19AA) ASSESSEES CLAIM, THAT I T IS ENTITLED FOR DEPRECIATION ON THE CONSIDERATION S O PAID, WILL BE A HASTY INFERENCE. 15. THE AO FURTHER CONSIDERED THE ASSESSEES CONTEN TION REGARDING THIS BEING A CASE OF SLUMP SALE AND TRANSFEROR COMPANY H AD PAID CAPITAL GAINS TAX ON THE SAID CONSIDERATION. IN THIS REGARD HE R EFERRED TO THE DECISION OF ITA NOS. 3259 & 4276/D/ 2010 12 HONBLE DELHI HIGH COURT IN THE CONTEXT OF TRANSFER OF CAPITAL ASSET BY THE HOLDING COMPANY TO THE SUBSIDIARY COMPANY IN THE CA SE OF DALMIA CERAMIC INDUSTRIES LTD. VS. CIT, 277 ITR 219. WITH REFEREN CE TO THIS CASE, THE AO OBSERVED AS UNDER: - THE ASSESSEE AMONG OTHER THINGS TOOK THE STAND THAT THE DIFFERENCE BETWEEN THE WDV AND THE PRICE RECEIVED FOR THE PROPERTY HAS BEEN TAXED IN THE HANDS OF THE HOLDING COMPANY IN THE RELEVANT ASSESSMENT YEARS AND THERE IS NO DISPUTE ON THIS ISSUE. IN VIEW OF THIS, IT WAS SUBMITTED THAT THE REVENUE CANNOT HAVE TAX BENEFIT AT BOTH THE PLACES, NAMELY, IN THE HANDS OF THE PARENT COMPANY AND AT THE HANDS OF THE ASSESSEE. IT WAS THUS SUBMITTED T HAT THERE IS NO EVASION OF TAX. HONBLE HIGH COURT OBSERVED THAT IN VIEW OF EXPLANATION 6, THE ASSESSING OFFICER AS WELL AS THE TRIBUNAL HAVE RIGHTLY REJECTED THE CONTENTION OF THE ASSESSEE AND HAVE RIGHTLY HELD THAT THE ACTUAL COST ONCE DETERMINED U/S 43(1) READ WITH EXPLANATION 6 WILL REMAIN THE SAME FOR THAT ASSESSEE. THE EXPLANATION 6 REFERRED IN THE PARA THOUGH DOES NOT APPLY TO THE CASE OF THE ASSESSEE, IT IS THE PRINCIPLE THAT MER E PAYMENT OF CAPITAL GAINS TAX BY THE SELLER COMPANY WILL NOT ENTITLE DEPRECIATION TO THE PURCHASER TAKI NG PURCHASE PRICE AS WDV, WHICH HAS BEEN ELUCIDATED. 15.1 HE, THEREFORE, CONCLUDED THAT THE ASSESSEES C LAIM IS TO BE EXAMINED WITH REFERENCE TO EXPLANATION 3 TO SEC. 43(1). ITA NOS. 3259 & 4276/D/ 2010 13 16. AFTER CONSIDERING THE INGREDIENTS OF EXPLANATIO N 3 HE EXAMINED THE FACTS OF THE PRESENT CASE AND OBSERVED AS UNDER: - THE EXPLANATION HAS FOLLOWING LIMBS; I) BEFORE THE DATE OF ACQUISITION BY THE ASSESSEE, THE ASSETS WERE USED BY ANY OTHER PERSON FOR THE PURPOSES OF HIS BUSINESS. II) INCOME-TAX 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). III) THE ACTUAL COST TO THE ASSESSEE SHALL BE SUCH AN AMOUNT AS THE INCOME-TAX OFFICER MAY, WITH THE PREVIOUS APPROVAL OF THE JOINT COMMISSIONER, DETERMINE HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. AS REGARDS THE CONDITION MENTIONED AT SL. A. ABOVE, SAME IS NOT A DOUBT AS THESE ASSETS IN QUESTION WERE USED BY BILT FOR THE PURPOSES OF BUSINESS AND SUBJECTED TO YEAR TO YEAR DEPRECIATION . SECOND CONDITION AT SL. B. IS THE SATISFACTION OF THE AO THAT THE MAIN PURPOSE OF THE TRANSFER OF SUC H 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). IN THIS RESPECT FOLLOWING FACTS ARE WORTH MENTIONING; ITA NOS. 3259 & 4276/D/ 2010 14 A. THE ASSESSEE COMPANY IN ITS PRESENT FORM CAME INTO EXISTENCE OUT OF DEMERGER OF BILT. THE CONSIDERATION PAID HAS BEEN MOBILIZED IN THE FOLLOWING MANNER; LOAN TAKEN FROM BANK RS. 165.00 CRORES SHARE CAPITAL FROM BALLARPUR RS. 18.20 CRORES INDUSTRIES SHARE CAPITAL FROM BILT PAPER HOLDING LTD. RS. 51.75 CRORES B. AS REGARDS THE LOAN OBTAINED FROM THE BANKS MATTER WAS FURTHER SCRUTINIZED TO ASCERTAIN THE SECURITY AGAINST WHICH THE LOAN WAS OBTAINED. IT WAS FOUND THAT THE ASSETS WHICH WERE RECEIVED FROM DEMERGED COMPANY WERE IN FACT PLEDGED AS SECURITY TO THE BANKS TO OBTAIN THE LOAN. DETAILS OF SECURITY WITH THE BANKS ARE AS UNDER; I) SECURITY WITH UTI BANK; RS. 825,000,000/- FIRST CHARGE ON ALL FIXED AND CURRENT ASSETS ASSIGNMENT OF POWER/STEAM PURCHASE AGREEMENT WITH BILT EXECUTED BY BORROWER ESCROW OF RECEIVABLES FROM BILT II) SECURITY WITH ICICI BANK RS. 825,000,000/- ALL MOVABLE AND IMMOVABLE PROPERTIES BOTH PRESENT AND FUTURE AND SUCH OTHER MOVABLES AS MAY BE AGREED TO BY ICICI BANK FOR SECURING THE BORROWINGS. ASSIGNMENT OF RIGHT UNDER TAKE OR PAY AGREEMENT WITH BILT IN FAVOUR OF ICICI BANK. ITA NOS. 3259 & 4276/D/ 2010 15 ESCROW OF RECEIVABLES FROMBILT. IT WAS THUS A CASE WHERE THE DEMERGED COMPANY INSTEAD OF TAKING LOANS DIRECTLY IS IN FACT PARTING WITH THE ASSETS, AGAINST WHICH ASSESSEE COMPANY OBTAINS LOAN FOR FURTHER PAYMENT TO BILT. C. ANOTHER AMOUNT OF RS. 18.20 CRORES IS MOBILIZED BY WAY OF ISSUE OF SHARE CAPITAL BALLARPUR INDUSTRIES LTD. IT IS SAME COMPANY WHICH WAS DEMERGED AND ITS POWER DIVISION WAS TRANSFERRED TO ASSESSEE COMPANY. HERE AGAIN BILT IS MAKING PAYMENT BY WAY OF SHARE CAPITAL TO APIL WHICH IS RECEIVED BACK BY BILT AT LATER DATE, NOW AS PART OF SALE CONSIDERATION OF ASSETS. ASSESSEE HAS THUS GOT BACK ITS MONEY BUT PARTED WITH THE SHARES. D. ANOTHER AMOUNT OF RS. 51.75 CRORES IS MOBILIZED BY WAY OF ISSUE OF SHARE CAPITAL BILT PAPER HOLDING LTD. THIS IS GROUP COMPANY OF THE BILT AND HOLDS 37.08% OF ITS SHARES. HERE IT IS SUBSTANTIAL SHAREHOLDER OF BILT WHO IS CONTRIBUTING 51.75 CRORES FOR SHARE CAPITAL OF APIL WHICH IN TURN IS RECEIVED BACK BY THE DEMERGED COMPANY NOW AS CONSIDERATION FOR SALE OF ASSETS. THE FUNDS COULD HAVE OTHERWISE BEEN RECEIVED BY BILT FROM BILT PAPER HOLDIN LTD. WITHOUT PARTING WITH THE ASSETS. BILT HAS THUS GOT BACK THE MONEY OF ITS SUBSTANTIAL SHARE HOLDER AFTER HAVING ROUTED THROUGH APIL BUT ONLY AFTER ITS ASSETS WERE PARTED WITH. ITA NOS. 3259 & 4276/D/ 2010 16 E. ANOTHER ASPECT REQUIRING CONSIDERATION IS THE SANCTITY OF CONSIDERATION AND REAL VALUE OF THE ASSETS ACQUIRED. THERE APPEAR QUITE A FEW FIGURES. SPB PROJECTS AND CONSULTANCY LIMITED HAS DETERMINED THE VALUE OF BUSINESS AT RS. 315 CRORES AND M/S JMR CONSULTANTS DETERMINED THE VALUE OF THE BUSINESS AT RS. 240.85 CRORES. BOOK VALUE OF THE ASSETS IN THE BOOKS OF BILT AS ON THE DATE OF TRANSFER IS AT RS. 2,14.16 CRORES AND THE VALUE FOR THE PURPOSES OF INCOME TAX ACT IS AT RS. 86.66 CRORES. IN THE PRESENCE OF THESE VARIATIONS, THE CONSIDERATION NEGOTIATED IS AT RS. 235 CRORES. WITH MULTIPLICITY OF VALUATIONS IT GETS DIFFICULT TO GIVE CREDENCE TO THE CONSIDERATION PAID, AS WDV FOR COMPUTATION OF DEPRECIATION. F. FROM THE DISCUSSIONS MADE ABOVE IT IS SEEN THAT ONLY PLANT & MACHINERY AND BUILDING HAVE BEEN TAKEN OVER BY APIL FROM BILT. HENCE THE STATUS WITH REGARD TO LAND HAVING THESE PLANT & MACHINERY AND BUILDING AND APPURTENANT THERETO WAS ALSO PROBED. IT IS SEEN FOR THE LAND THE ASSESSEE COMPANY HAS JUST OBTAINED EASEMENT RIGHTS ON VERY NOMINAL RENTS FOR A PERIOD OF 15 YEARS. DETAILS THEREOF ARE AS UNDER; LOCATION AREA OF LAND RENT PER ANNUM UNIT BALLARPUR, MAHARASHTRA 4.45 ACRES 100000 UNIT BHIGWAN, MAHARASHTRA 50 ACRES (INCREASED FROM 41.5 ACRES) 100000 PLUS 300000 SUBLETTING CHARGES TO MIDC UNIT SHREEGOPAL, HARYANA 4.5 ACRES 100000 ITA NOS. 3259 & 4276/D/ 2010 17 UNIT SEWA, ORISSA 9.40 ACRES 100000 IT MAY BE SEEN FROM THE ABOVE FACTS THAT RENT ON WHICH PROPERTY IS GIVEN IS NOMINAL. THERE ALSO DOES NOT APPEAR TO BE ANY BASIS OF RENT. IRRESPECTIVE OF THE SIZE OF LAND, WHICH VARIES FROM 4.45 ACRES TO 50 ACRES, THE RENT PAID IS RS. 1,00,000/- PER ANNUM. THE TRANSACTIONS ARE NOT AT ARMS LENGTH. OBVIOUS REASON FOR THIS COULD BE THAT, SINCE THE LAND COULD NEVER HAVE BEEN SUBJECT MATTER OF DEPRECIATION, THERE APPEARS TO MARGINAL DEPLOYMENT OF FUNDS TOWARDS EASEMENT RIGHTS OF LAND. WHAT ELSE IS PROVED FROM THE FACT IS THAT THE RENT IS ABNORMALLY LOW WHICH INDICATES DOUBT OVER THE PRICE NEGOTIATED FOR THE PURCHASE OF PLANT AND MACHINERY AND BUILDING. G. THE WDV IN THE BOOKS OF TRANSFEROR COMPANY IS AT RS. 88.66 CRORES AS ON THE DATE OF TRANSFER WHICH IS BEING NOW TAKEN AS RS. 235 CRORES BY THE TRANSFEREE WITH APPARENT PURPOSE OF CLAIMING ENHANCED DEPRECIATION AND TO REDUCE THE TAX LIABILITY. CONCLUSION: IN THESE CIRCUMSTANCES, IT IS THUS CLEAR THAT THE FUNDS HAVE BEEN RAISED FROM THE BANK ON SECURITY OF ASSETS ETC. ACQUIRED BY THE ASSESSEE COMPANY AS PART OF THE SCHEME OF ARRANGEMENT AND DEMERGER. ADDITIONALLY THE CAPITAL HAS BEEN ACQUIRED FROM DEMERGED COMPANY I.E. BILT AND BILT PAPERS HOLDINGS LIMITED WHICH ITA NOS. 3259 & 4276/D/ 2010 18 HAS 37.08% SHARES OF BILT. THE FUNDS, THUS, PAID AS PART OF SALE CONSIDERATION ARE GENERATING FROM THE DEMERGING COMPANY, THE COMPANY SUBSTANTIALLY INTERESTED IN THE DEMERGED COMPANY AND AGAINST THE SECURITY OF ASSETS ACQUIRED BY WAY OF DEMERGER OF DEMERGED COMPANY. THE TRANSACTIONS ARE THUS CIRCULAR IN NATURE IN ORDER TO ENHANCE THE VALUE OF ASSET IN THE HANDS OF ASSESSEE COMPANY FOR THE CLAIM OF HIGHER DEPRECIATION. IN VIEW OF ABOVE, I AM SATISFIED THAT THE MAIN PURPOSE OF TRANSFER OF THE ASSETS DISCUSSED ABOVE, BY WAY OF DEMERGER IS TO REDUCE LIABILITY OF INCOME TAX BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST. THIRD CONDITION IS THAT THE AO WITH THE PREVIOUS APPROVAL OF THE JOINT COMMISSIONER WILL DETERMINE THE WDV HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. IN THIS CASE SINCE THE ASSESSMENT IS BEING FRAMED BY THE ADDITIONAL COMMISSIONER OF INCOME TAX, SUCH A CONDITION STANDS FULFILLED. THEREFORE, I HEREBY INVOKE EXPLANATION 3 TO SECTION 43(1) TO RESTRICT THE WDV OF THE ASSETS ACQUIRED BY THE ASSESSEE COMPANY FROM BILT AND TO TAKE THE WDV AS APPEARING IN THE BOOKS OF TRANSFEROR COMPANY AS ON THE DATE OF TRANSFER FOR THE PURPOSE OF ALLOWANCE OF DEPRECIATION TO THE ASSESSEE COMPANY. DEPRECIATION THEREON WILL BE COMPUTED AS UNDER: ITA NOS. 3259 & 4276/D/ 2010 19 COMPUTATION OF DEPRECIATION (AMOUNT IN RS.) NAME OF THE ASSETS/RATE OF DEPRECIATION WDV AS PER ASSESSEE AND PERCENTAGE TO THE TOTAL VALUE OF ASSET WDV AS PER AO DEPRECIATION CLAIMED DEPRECIATION ON ALLOWABLE DIFFERENCE FACTORY BLDG. 7.84% 22,75,22,879 9.68% 85829207 17837794 6729010 11108784 OFFICE BLDG. 3.02% 25,95,263 .11% 975332 78377 29455 48922 PLANT & MACHINERY 7.84% 2,11,64,83,232 90.07% 166531759 166531759 62611768 103919991 FURNITURE & FIXTURE 12.77% 33,98,458 .14% 1241332 433983 158518 275465 TOTAL 2,34,99,99,832 100% 886665364 184881913 69528751 11535162 THEREFORE, DIFFERENCE AMOUNT OF RS. 11,53,53,162/- CLAIMED AS DEPRECIATION IS DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. (ADDITION RS. 11,53,53,162/) 17. LD. CIT(A) ALLOWED THE ASSESSEES APPEAL FOR TH E FOLLOWING REASONS: - I) THE AO DID NOT SIGHT ANY GOOD GROUND FOR NOT AC CEPTING THE COST OF THE ASSETS IN QUESTION AS VALUED BY REGISTERED VALU E. THE AO DID NOT MAKE ANY ATTEMPT TO UNDERTAKE THE EXERCISE OF FINDI NG OUT THE ACTUAL COST OF THE SAID ASSETS ACQUIRED BY ASSESSEE, AS BE CAUSE MAIN PURPOSE OF EXPLANATION 3 IS NOT RECORDING THE SATIS FACTION BUT TO DETERMINE THE ACTUAL COST. THE AO LACKED TECHNICAL COMPETENCY TO VALUE THE PLANT AND MACHINERY TRANSFERRED FROM TRAN SFEROR COMPANY TO TRANSFEREE COMPANY. THOUGH THERE WERE THREE VALUER S GIVING THE ITA NOS. 3259 & 4276/D/ 2010 20 REPORTS BUT FINALLY SINCE IT WAS APPROVED BY HONBL E HIGH COURT OF DELHI AND BOMBAY, THERE COULD NOT BE ANY DOUBT ON VALUATI ON OF ASSETS. WHEN THERE IS TRANSFER OF OLD ASSETS, VALUATION OF SUCH ASSETS ON TRANSFER MAY ARISE DUE TO ESCALATION OF PRESENT VAL UE OF SUCH ASSETS ON TRANSFER. II) IT WAS NOT A CASE OF TRANSFER OF ASSETS BY A H OLDING COMPANY TO ITS SUBSIDIARY AS WAS IN THE CASE OF M/S DALMIA CERAMIC INDUSTRIES LTD. VS. CIT, 277 ITR 219. III) ARRANGEMENT OF FUND AND FURNISHING SECURITY T HEREOF TO THE LENDING BANK DO NOT FORTIFY THE CASE OF THE ASSESSEE FOR TH E PURPOSE OF APPLICABILITY OF EXPLANATION 3 OF SEC. 43(1) OF THE ACT. IV) PRICE PAID BY THE ASSESSEE COMPANY TO THE TRAN SFEROR COMPANY WAS DULY DISCLOSED BY THE TRANSFEROR COMPANY AND RE SULTANT TAX ON CAPITAL GAINS ON SLUMP SALE HAD ALSO BEEN PAID. TH E DEPARTMENT AGAIN TAXED THE TRANSFEREE COMPANY ON SAME TRANSACTION BY DISALLOWING DEPRECIATION. V) SINCE THE TRANSFEREE COMPANY WAS PAYING HIGHER AMOUNT OF RS. 235 CRORES (AND NOT 86 CRORES), THEN IT SHOULD GET DEPR ECIATION ON RS. 235 CRORES ONLY. VI) THE ASSESSEE HAD ACCOUNTED AND TREATED THE TRA NSFER OF THE AFORESAID UNDERTAKING ON A SLUMP SALE BASIS. IT WA S A TRANSFER OF AN UNDERTAKING WITHOUT ASSIGNING THE VALUES TO INDIVID UAL ASSETS AND ITA NOS. 3259 & 4276/D/ 2010 21 LIABILITIES. THE CONSIDERATION OF RS. 235 CRORES W AS FOR THE UNDERTAKING OF POWER GENERATION BUSINESS TAKEN OVER BY THE ASSE SSEE COMPANY FROM M/S BALLARPUR INDUSTRIES LTD. LD. CIT(A) ALSO REFERRED TO SEC. 2(42C) DEFINING SLUMP SALE IN THIS REGARD. 18. LD. DR SUBMITTED THAT THERE WERE MULTIPLE VALUA TIONS ONE BY SPB PROJECT & CONSULTANCY LTD., CHENNAI ALONG WITH INFR ASTRUCTURE LEASING & SERVICES LTD., DELHI, WHO VALUED THE ASSETS AT RS. 315 CRORES; JMR CONSULTANTS VALUED AT 240.85 CRORES; IN THE BOOKS O F ASSESSEE IT WAS 214.16 CRORES AND AS PER INCOME-TAX COMPUTATION IT WAS 86. 66 CRORES. SHE SUBMITTED THAT IN THE LIGHT OF THESE VARIATIONS, IT BECAME INCUMBENT UPON THE AO TO FIND OUT THE TRUE VALUE OF THE ASSETS WHICH W ERE TRANSFERRED AT RS. 235 CRORES. SHE SUBMITTED THAT IT WAS A CASE OF RELATE D COMPANYS TRANSACTION AND, THEREFORE, THE AO RIGHTLY INVOKED EXPLANATION 3 TO SECTION 43(1) AS THE ASSESSEE WAS CLAIMING DEPRECIATION ON HIGHER VALUE IN RESPECT OF THE ASSETS WHICH WERE USED BY THE TRANSFEROR COMPANY. SHE SUB MITTED THAT IN THIS REGARD AO ANALYZED THE ISSUE WITH REGARD TO THE STA TUS OF LAND HAVING THESE PLANT AND MACHINERY AND BUILDING AND FOUND THAT THE ASSESSEE COMPANY HAD OBTAINED EASEMENTARY RIGHTS AT A VERY NOMINAL RENT FOR A PERIOD OF 15 YEARS AND CONCLUDED THAT THE TRANSACTIONS WERE NOT AT ARM S LENGTH. SHE SUBMITTED THAT OBVIOUS REASON FOR THIS WAS THAT THE LAND WAS NOT A SUBJECT MATTER OF DEPRECIATION. SHE FURTHER SUBMITTED THAT THE ASSET S IN QUESTION WERE OLD ITA NOS. 3259 & 4276/D/ 2010 22 ASSETS HAVING WDV OF 88.66 CRORES ONLY WHEREAS THE VALUE AT THE TIME OF TRANSFER WAS TAKEN AT RS. 235 CRORES. SHE SUBMITTE D THAT PAYMENTS FOR THIS CONSIDERATION WERE COMING FROM THE TRANSFEROR COMPA NY ITSELF, DIRECTLY OR INDIRECTLY. SHE SUBMITTED THAT ENHANCED VALUE OF A SSETS FETCHED HIGHER DEPRECIATION. SHE SUBMITTED THAT LD.CIT(APPEALS) F INDINGS THAT AO HAD NOT MADE ANY ATTEMPT TO UNDERTAKE THE EXERCISE OF FINDI NG OUT THE ACTUAL COST OF THE ASSETS, IS CONTRARY TO THE FACTS ON RECORD. SH E SUBMITTED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO RAISED VAR IOUS QUERIES WITH REGARD TO THE DETERMINATION OF ACTUAL COST OF THE S AID ASSETS. THE AO MADE EFFORTS TO ASCERTAIN THE VALUE OF THE SAID ASSETS I N THE BOOKS OF THE TRANSFEROR COMPANY. FOR THIS PURPOSE THE AO HAD ISSUED SUMMON S ALSO U/S 133(6) TO THE TRANSFEROR COMPANY. AS REGARDS, THE APPROVAL G IVEN BY HONBLE HIGH COURT OF DELHI & BOMBAY, LD. DR SUBMITTED THAT MERE LY BECAUSE THE TRANSACTION WAS APPROVED BY HONBLE HIGH COURT, IT COULD NOT BE CLAIMED THAT THE ASSESSEE COMPANY WOULD BE ENTITLED FOR HIGHER D EPRECIATION. SHE SUBMITTED THAT DEPRECIATION IS TO BE ALLOWED AS PER THE SPECIFIC PROVISIONS OF SEC. 32 READ WITH SECTION 43(1) OF THE ACT. SHE SU BMITTED THAT AS FAR AS APPROVAL OF THE HONBLE HIGH COURT TO THE SCHEME OF ARRANGEMENT AND DEMERGER U/S 391 & 394 OF THE COMPANIES ACT WAS CON CERNED, THE SAME DID NOT ADDRESS THE SPECIFIC ISSUES AND PROVISIONS OF T HE INCOME TAX ACT. AT THE TIME OF APPROVAL OF THE SCHEME, THE HONBLE HIGH CO URT HAD NOT ADJUDICATED THE ISSUE OF ACTUAL COST OF THE ASSETS AS PER THE INCOME-TAX ACT AND THE ITA NOS. 3259 & 4276/D/ 2010 23 CLAIM OF DEPRECIATION THEREON. AS REGARDS, LD. CIT (APPEALS) OBSERVATION THAT IF ANY DOUBT REMAINED REGARDING VALUATION, THE AO S HOULD HAVE TAKEN AN OPINION FROM THE DEPARTMENTAL VALUER, LD. DR SUBMIT TED THAT THE AO HAD NOT TAKEN THE ACTUAL COST OF THE ASSETS ON ESTIMATE OR AD-HOC BASIS. RATHER HE HAD TAKEN THE COST WHICH WAS APPEARING IN THE BOOKS OF THE TRANSFEROR COMPANY. THIS LEFT NO SCOPE FOR ESTIMATION OR IMAG INATION. IN THIS REGARD LD. DR REFERRED TO THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. POULOSE & MATHEN PVT. LTD., 236 ITR 416, WHEREI N IT HAS BEEN OBSERVED AS UNDER: - ACTUAL COST AS CONTEMPLATED U/S 43 MEANS THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE, REDUCED BY THAT PORTION OF THE COSTS MET BY OTHER PERSON OR AUTHORITY DIRECTLY OR INDIRECTLY. THE PREFIX OF TH E WORD ACTUAL TO THE WORD COST IS OBVIOUSLY INTENDED TO LAY EMPHASIS ON THE REALITY AND GENUINENESS THEREOF. THE FIXATION OF ACTUAL COST ARISES ONLY WHEN THE AO IS SATISFIED THAT THE MAIN PURPOSE OF THE TRANSFER OF THE ASSETS WHICH WERE USED BY ANY OTHER PERSON AT ANY TIME FOR THE PURPOSE OF HIS BUSINESS OR PROFESSION, DIRECTLY OR INDIRECTLY, TO THE ASSESSEE WAS THE REDUCTION OF A LIABILITY TO INCOME-TAX BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST. WHEN THEAO IS SO SATISFIED, HE HAS WIDE DISCRETION TO FIX THE ACTUAL COST HAVING REGARD TO ALL THE ITA NOS. 3259 & 4276/D/ 2010 24 CIRCUMSTANCES OF THE CASE SUBJECT TO THE PREVIOUS APPROVAL OF THE DEPUTY COMMISSIONER. THE AO HAD NO GRIEVANCE AGAINST THE REVALUATION OF THE ASSETS DONE BY THE APPROVED VALUER. HIS GRIEVANCE WAS THAT IT WAS DONE WITH A VIEW TO REDUCE TAX LIABILITY. NO DOUBT, THE FIRM AND THE PARTNERS BEING COMMERCIAL, MEN WOULD VALUE THE ASSETS ONLY ON A REAL BASIS AND NOT AT COST OR AT THEIR OTHER VALUE APPEARING IN THE BOOKS. THEREFORE, IT WAS ALL THE MORE CERTAIN THAT THE REA L RIGHTS OF THE PARTNERS COULD NOT BE MUTUALLY ADJUSTED ON ANY OTHER BASIS. BUT THE QUESTION THAT FACED THE AO WAS THAT THE POSITION BEING SO STRONG AS IT APPEARED TO BE, WHY DID HE NOT ADOPT EXPLANATION 3 TO SEC. 43(1) WHEN HE SUFFICIENTLY SAW THAT AFTER EFFECTING THE TRANSFER THERE WAS A DIRECT OR INDIRECT ATTEMPT TO REDUCE THE LIABILITY TO INCOME TAX. THE PURPOSE OF THE SAID EXPLANATION IS TO COVER ALL SUCH CONTINGENCIES AND IN THAT VIEW WIDE POWERS ARE CONFERRED ON THE AO. IN THE INSTANT CASE, IN FACT THE ASSESSEE DID IT SUCCESSFU LLY OBVIATING ALL COLLUSIVE DEVICE INEFFECTING THE TRANSACTION THOUGH IT COULD NOT REASONABLY BE SAID TO BE AS THE SOLE PURPOSE OF THE TRANSACTION. THER E MAY BE MUTUAL ADJUSTMENT OF RIGHTS BETWEEN THE PARTNERS ON THE DISSOLUTION OF THE FIRM. BUT THAT DID NOT MEAN THE AO WAS DEBARRED FROM ASCERTAINING THE ACTUAL COST OF THE ASSETS IN VIE W OF THE PROVISIONS CONTAINED IN EXPLANATION 3 TO ITA NOS. 3259 & 4276/D/ 2010 25 SECTION43(1). THE PURPOSE TO BE SERVED UNDER THIS PROVISION IS TOTALLY DIFFERENT. THE EFFECTIVENESS OF THE PROVISIONS COULD NOT BE DEFEATED IN ANY MANNER, EVEN IF THERE WAS ADJUSTMENT BETWEEN THE PARTNERS OF THE DISSOLVED FIRM. THE TRIBUNALS VIEW THAT THE REVALUATION OF THE ASSETS ON THE EVE OF THE DISSOLUTION OF THE FIRM WA S MADE BONA FIDE FOR ADJUSTMENT OF THE MUTUAL RIGHTS OF THE FIRM COULD NOT BE AGREED TO. THIS WAS NOT A CASE WHERE THERE WAS 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 YEAR, THE ACTUAL COST TO THE ASSESSEE LESS ALL DEPRECIATION ACTUALLY ALLOWED TO HIM UNDER THE ACT AS DEFINED U/S 43(6). SECTION 43(1) WITH EXPLANATIONS THEREOF SUPERSEDES THE GENERAL RULE OF LAW GOVERNING PARTNERSHIP, ITS ASSETS AND DISSOLUTION, ETC. THE DEFINITION OF ACTUAL COST CONTAINED IN SECTION 43(1), READ WITH EXPLANATIONS THEREOF, AFFORDS A MECHANISM BY WHICH TO 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 ASSETS TO T HE ASSESSEE WAS TO CLAIM A HIGHER DEPRECIATION ALLOWANCE SO AS TO REDUCE THE LIABILITY TO PAY INCOME TAX, THE ACTUAL COST SHALL BE DETERMINED BY THE AO IN THE EXERCISE OF THE POWER CONFERRED ON ITA NOS. 3259 & 4276/D/ 2010 26 HIM AS PRESCRIBED IN EXPLANATION 3 TO SEC. 43(1), NO MATTER WHAT THE GENERAL LAW PRESCRIBES FOR DETERMINING THE COST OF THE ASSETS ON THE DISSOLUTION OF PARTNERSHIP FIRM AND TRANSFER OF ITS ASSETS. THE BOMBAY HIGH COURT IN THE CASE OF GINNERS & PRESSERS P. LTD. VS. CIT, 113 ITR 616, HELD THAT TH E CONDITION FOR ATTRACTING THE PROVISO TO SECTION 10(5)(A) OF THE INDIA INCOME TAX ACT, 1922 WHICH CORRESPONDS TO EXPLANATION 3 TO SEC. 43(1) OF THE 1961 ACT WAS SATISFIED BECAUSE THE ASSETS HAD BEEN USED BY THE PARENT COMPANY FOR THEIR BUSINESS BEFORE THEY WERE TRANSFERRED TO THE ASSESSEE COMPANY. IF THE ITO PROCEEDED TO FIX OR DETERMINE THE ACTUAL COST OF THE TRANSFERRED ASSETS BY ADOPTING THE WRITTEN DOWN VALUE OF THE ASSETS AS PER BOOKS OF ACCOUNT OF THE FIRM WITH THE APPROVAL OF THE IAC, IF WOULD BE DIFFICULT TO SAY THAT THE METHOD ADOPTED WAS UNREASONABLE OR IRRATIONAL. EVEN IF THE ASSESSEE PRODUCED THE VALUATION REPORT, IT COULD NOT BE SAID THAT THE ABOVE CONCLUSION WOULD BE DIFFERENT. THEREFORE, THE DRAWING OF ADVERSE INFERENCE AGAINST THE ASSESSEE HAD NO IMPACT ON THE QUESTION DECIDED BY THE COURT. IT IS SETTLED POSITION THAT THE COURT HAS POWER TO DISREGARD THE CORPORATE ENTITY IF IT IS SUED FOR TA X EVASION OR TO CIRCUMVENT TAX OBLIGATION. IN THIS PREMISE, IT COULD NOT BE SAID THAT THE AO HAD ACTED UNREASONABLY OR ARBITRARILY IN ADOPTING ITA NOS. 3259 & 4276/D/ 2010 27 EXPLANATION 3 TO SECTION 43(1) AND FIXING THE ACTUAL COST ACCORDINGLY. THEREFORE, THE ASSESSEE WAS NOT ENTITLED TO CLAIM DEPRECIATION ON ASSETS TAKEN OVER FROM THE PARTNERSHIP-FIRM AT THE REVALUED FIGURE AND EXPLANATION 3 TO SECTION 43(1) WAS ATTRACTED TO THE INSTANT CASE. 19. LD. DR FURTHER REFERRED TO THE LD. CIT(APPEALS) OBSERVATION THAT WHEN THERE IS A TRANSFER OF OLD ASSET, VALUATION OF SUCH ASSET MAY ARISE DUE TO ESCALATION OF PRESENT VALUE OF SUCH ASSET ON TRANSF ER AND SUBMITTED THAT THIS OBSERVATION IS NOT SUPPORTED BY ANY CONCLUSIVE EVID ENCE. IN THIS REGARD, SHE POINTED OUT THAT AS PER THE BALANCE SHEET OF THE AS SESSEE COMPANY AS ON 31/03/2007, THE TOTAL ISSUED SHARE CAPITAL OF THE A SSESSEE COMPANY WAS RS. 70 CRORES OUT OF WHICH RS. 69.95 CRORES BELONGED TO TRANSFEROR COMPANY VIZ. BALLARPUR INDUSTRIES LTD. (RS. 18.20 CRORES) AND BI LT PAPER HOLDING LTD. (RS. 51.75 CRORES). SHE, THEREFORE, SUBMITTED THAT THE SAME PERSON WHO ENJOYED THE BENEFITS OF THE OWNERSHIP OF ASSETS AND ITS USE S PRIOR TO TRANSFER, CONTINUED TO RE-BENEFITS EVEN AFTER THE ASSETS WERE TRANSFERRED. SHE FURTHER SUBMITTED THAT THE ASSETS WHICH HAD BEEN TRANSFERRE D WERE IN THE NATURE OF PLANT AND MACHINERY, FURNITURE & FIXTURE, ETC. TH EY WERE OLD ASSETS AND HAD ALREADY DEPRECIATED SUBSTANTIALLY OVER THE YEARS AN D THEIR WDV IN THE BOOKS OF TRANSFEROR COMPANY WAS 88.66 CRORES. THEREFORE, THERE WAS NO REASON TO TAKE THE VALUE OF THOSE ASSETS AT RS. 235 CRORES. SHE SUBMITTED THAT SINCE ITA NOS. 3259 & 4276/D/ 2010 28 THE TRANSFER WAS BETWEEN THE RELATED PARTIES, THE V ALUE OF ASSETS WAS TAKEN AS PER THEIR OWN CONVENIENCE AND UNDERSTANDING. LD . DR FURTHER SUBMITTED THAT PAYMENT OF CAPITAL GAINS TAX BY THE TRANSFEROR COMPANY DOES NOT AFFECT TAX IMPLICATION IN ASSESSEES CASE. SHE SUBMITTED THAT IT WAS NOT A CASE OF DOUBLE TAXATION AS HELD BY LD. CIT(A). SHE SUBMITT ED THAT AO HIMSELF GATHERED INFORMATION AND VALUED THE ASSETS AFTER TA KING A HOLISTIC VIEW OF THE ENTIRE SCENARIO. LD. DR SUBMITTED THAT THE TRANSAC TION WAS CIRCULAR IN NATURE IN-AS-MUCH AS THE FUNDS PAID AS PART OF THE SALE CO NSIDERATION WERE GENERATED DIRECTLY OR INDIRECTLY FROM THE TRANSFERO R COMPANY. SHE SUBMITTED THAT IT WAS PRIMARILY A CASE OF DEMERGER AND, THERE FORE, NON FULFILLMENT OF CERTAIN CONDITIONS AS CONTEMPLATED U/S 2(19AA), WER E NOT RELEVANT. REAL INTENTION OF THE PARTIES IS TO BE SEEN. SHE SUBMIT TED THAT THE HONBLE HIGH COURT HAS ALSO TREATED IT A CASE OF DEMERGER. SHE SUBMITTED THAT IT WAS NOT A CASE OF SLUMP SALE BECAUSE VALUATION HAS BEEN ASSIG NED TO ALL THE ASSETS SEPARATELY. IN THIS REGARD SHE REFERRED TO PAGES 190 TO 195 OF PAPER BOOK TO DEMONSTRATE THAT ASSETS WERE SEPARATELY CONSIDERED AND VALUE HAD BEEN ASSIGNED TO EACH OF THE ASSET BY THE VALUERS. LD. DR SUBMITTED THAT NET RESULT OF THE ENTIRE EXERCISE WAS THAT BY SHOWING T HE ENHANCED VALUE FOR OLD AND USED ASSETS, THE ASSESSEE COMPANY HAD GAINED BY CLAIMING HIGHER DEPRECIATION. SHE FURTHER SUBMITTED THAT AFTER REC ORDING HIS SATISFACTION, THE AO HAD FURTHER PROCEEDED TO ASCERTAIN THE ACTUAL CO ST OF THE ASSET. IN THIS REGARD HE ISSUED NOTICES U/S 133(6) OF THE ACT TO T HE TRANSFEROR COMPANY AND ITA NOS. 3259 & 4276/D/ 2010 29 CAME TO KNOW THAT THE WDV OF THE SAID ASSET WAS ONL Y 86.66 CRORES. SHE REFERRED TO THE FOLLOWING CASE LAWS TO BUTTRESS HER SUBMISSION THAT AO WAS JUSTIFIED IN INVOKING THE PROVISIONS OF EXPLANATION 3 TO SECTION 43(1) AND HAD CORRECTLY ADOPTED WDV AS ACTUAL COST: I) GUZDAR KAJORA COAL MINES LTD. VS. CIT, 85 ITR 599 , IN THIS CASE, IT WAS, INTER-ALIA, HELD THAT IF CIRCUMSTANCES EXIST S HOWING THAT A FICTITIOUS PRICE HAS BEEN PUT ON THE ASSET OR THERE IS FRAUD O R COLLUSION BETWEEN THE VENDOR AND THE VENDEE AND THERE HAS BEEN INFLAT ION OR DEFLATION OF VALUE WITH ULTERIOR PURPOSES, IT IS OPEN TO THE INC OME-TAX AUTHORITIES TO REFUSE TO ACCEPT THE PRICE MENTIONED IN THE DEED OR ALLEGED BY THE ASSESSEE AND TO ASCERTAIN WHAT THE ACTUAL ORIGINAL COST WAS. II) JCIT VS. MAHINDRA SONA LIMITED, 96 ITD 303 (MUM.) , IN THIS CASE, IT WAS, INTER-ALIA, HELD THAT THE WORD ACTUAL PRE FIXED TO THE WORD COST IN EXPLANATION 3 TO SECTION 43(1) LAYS EMPHASIS ON THE REALITY AND GENUINENESS OF THE COST SO AS TO EXCLUDE INFLATION OR DEFLATION COST. III) ACIT VS. JITENDRA KUMAR GUPTA, 130 TTJ 328 (DEL.) I TAT , IN THIS CASE, IT WAS HELD THAT WHERE ASSESSEE COULD NOT PRO DUCE ANY JUSTIFICATION FOR PAYMENT OF A HUGE COST OF ASSETS, WHICH WERE ALREADY PUT TO USE AND HAD ALREADY DEPRECIATED TO SOME EXTE NT BY PREVIOUS USE, THE AO WAS JUSTIFIED IN APPLYING PROVISIONS OF EXPLANATION 3 TO SECTION 43(1) TO WORK OUT ACTUAL COST OF SUCH ASSET S. ITA NOS. 3259 & 4276/D/ 2010 30 IV) CIT VS. DALMIA DADRI CEMENT LTD., 125 ITR 510 (DEL) , IN THIS CASE, IT WAS, INTER-ALIA, HELD THAT IF EXPENSES EXI ST SHOWING THAT A FICTITIOUS PRICE HAS BEEN PUT ON THE ASSET OR THERE IS FRAUD OR COLLUSION BETWEEN THE VENDOR AND THE VENDEE AND THERE HAS BEE N INFLATION OR DEFLATION OF VALUE FOR ULTERIOR PURPOSE, IT IS UPON TO THE INCOME-TAX AUTHORITIES TO ACCEPT THE PRICE MENTIONED IN THE DE ED OR ALLEGED BY THE ASSESSEE AND TO ASCERTAIN WHAT THE ACTUAL COST WAS. V) GINNERS & PRESSERS P. LTD. VS. CIT, 113 ITR 616 (BO M.) , IN THIS CASE, IT WAS, INTER-ALIA, OBSERVED AS UNDER: - ON THE ASPECT OF THE MARKET VALUE OF THE TRANSFERRED ASSETS ON THE DATE OF TRANSFER, SINCE T HE TRANSACTION WAS BETWEEN THE TWO COMPANIES, ONE OF WHICH WAS THE HOLDING COMPANY AND THE OTHER 100% SUBSIDIARY COMPANY, THE FACTS PERTAINING TO THE REAL MARKET VALUE OF THE ASSETS TRANSFERRED AS ON THE DATE OF TRANSFER WOULD BE WITHIN THE EXCLUSIVE KNOWLEDGE OF EITHER OF THE TWO COMPANIES AND SINCE THE RELATIONSHIP BETWEEN THE TWO COMPANIES WAS OF THE TYPE MENTIONED ABOVE, IT WOULD BE WITHIN THE EXCLUSIVE KNOWLEDGE OF EITHER OF THE TWO COMPANIES AND SINCE THE RELATIONSHIP BETWEEN THE TWO COMPANIES WAS OF THE TYPE MENTIONED ABOVE, IT WOULD BE WITHIN THE EXCLUSIVE KNOWLEDGE OF THE ASSESSEE COMPANY ALSO. THE TAXING AUTHORITIES AS WELL AS THE TRIBUNAL WERE PERFECTLY JUSTIFIED IN REJECTING THE VALUATION REPO RT, ITA NOS. 3259 & 4276/D/ 2010 31 FOR, IN THE ABSENCE OF REASONING OR GROUND FOR THE OPINION GIVEN BY THE VALUER, THE EXPERT EVIDENCE WOULDNOT BE OF ANY VALUE. APART FROM THAT, THE TRIBUNAL WAS ALSO FURTHER JUSTIFIED IN DRAWING AN ADVSERSE INFERENCE AGAINST THE ASSESSEE COMPANY TO THE EFFECT THAT, HAD SUCH MATERIAL BEEN PRODUCED, THE SAME WOULD HAVE GONE AGAINST THE ASSESSEE, WHICH, IN OTHER WORDS, MEANT THAT THE CORRECT MARKET VALUE OF THE ASSETS TRANSFERRED MIGHT HAVE BEEN LOWER THAN THE CONSIDERATION FOR WHICH THE TRANSACTION WAS EFFECTED AND IF SUCH ADVERSE INFERENCE HAD BEEN CORRECTLY DRAWN BY THE TRIBUNAL, IT WAS OBVIOUS THAT THE PROVISO TO SEC. 10(5)(A) OF THE 1922 ACT WOULD BE CLEARLY ATTRACTED. WHAT WOULD BE THE NORMAL MARKET VALUE OF THE ASSETS AS ON THE DATE OF TRANSFER IS A DIFFE RENT MATTER, BUT FOR THE PURPOSE OF ATTRACTING THE PROVISO TO SECTION 10(5)(A) OF THE 1922 ACT ALL THA T IS REQUIRED TO BE PROVED IS THAT THE MARKET VALUE O F THE ASSETS TRANSFERRED AS ON THE DATE OF THEIR TRANSFER WAS LOWER THAN THE CONSIDERATION FOR WHICH THE TRANSFER HAD TAKEN PLACE AND IF THE CIRCUMSTANCES LED TO THAT ADVERSE INFERENCE THEN THE PROVISO TO SECTION10(5)(A) OF THE 1922 ACT COULD BE CLEARLY ATTRACTED. THEREFORE, THE TAKING AUTHORITIES AS WELL AS THE TRIBUNAL WERE RIGHT IN COMING TO THE CONCLUSION THAT THIS WAS A CASE TO WHICH THE PROVISO TO SECTION10(5)(A) OF THE 1922 ACT WAS ATTRACTED. ITA NOS. 3259 & 4276/D/ 2010 32 VI) NAGAMMAL COTTON MILLS P. LTD. VS. CIT, 258 ITR 390 , IN THIS CASE, IT WAS, INTER-ALIA, HELD THAT AO WAS JUSTIFIED IN I NVOKING THE EXPLANATION 3 TO SECTION 43(1) BECAUSE THE SAME PERSONS WHO ENJ OYED THE BENEFITS OF THE OWNERSHIP OF THE ASSETS AND ITS USES CONTINU ED TO HAVE SUCH BENEFITS EVEN AFTER TRANSFER. 20. LD. SR. COUNSEL, SH. S.D. KAPILLA SUBMITTED THA T BALLARPUR INDUSTRIES LTD., THE TRANSFEROR COMPANY, WAS INCORPORATED IN 1 945 UNDER THE INDIAN COMPANIES ACT, 1930. THE REGISTERED OFFICE IS IN N AGPUR. IT HAS BEEN ENGAGED IN BUSINESS OF MANUFACTURING AND SALE OF PA PER. IT IS A PUBLIC LISTED COMPANY ON THE STOCK EXCHANGES. ITS MAIN BUSINESS, AS SET OUT IN ITS MEMORANDUM OF AN ASSOCIATION, IS OF MANUFACTURING A ND SALE OF PAPER AND PAPER PRODUCTS, CHEMICALS, GLASS, FLY ASH, BRICKS, ETC. IN VIEW OF PERSISTENT POWER SHORTAGE BECAUSE OF POWER CUTTINGS AND/OR POW ER TRIPPING DURING THE PERIOD PRIOR TO 1980, BILT HAD ESTABLISHED THE POWE R PLANTS AT 3 PLACES FOR ITS CAPTIVE USE FOR THE PURPOSE OF MANUFACTURING OF PAPER AT VARIOUS LOCATIONS AS UNDER: - NAME OF THE PAPER MANUFACTURING UNITE LOCATION 1. BALLARPUR CHANDRAPUR, MAHARASHTRA 2. BHIGHWAN MAHARASHTRA 3. SHREEGOPAL YAMUNANAGAR, HARYANA 4. SEWA JEYPURA, ORISSA HE SUBMITTED THAT THE ASSESSEE COMPANY M/S BILT P OWER LTD. (NOW KNOWN AS AVANTHA POWER & INFRASTRUCTURE LTD.) WAS INCORPO RATED ON 20/07/2005 WITH THE OBJECT OF CARRYING ON THE BUSINESS OF GENE RATION AND DISTRIBUTION OF ITA NOS. 3259 & 4276/D/ 2010 33 POWER WITH ITS REGISTERED OFFICE AT 144-JANPATH, DE LHI. DURING THE YEAR UNDER ASSESSMENT, THE ASSESSEE COMPANY AND BILT HAD ENTER ED INTO A SCHEME OF ARRANGEMENT AND DEMERGER ON SLUMP SALE BASIS FOR TH E PURPOSE OF TRANSFER OF POWER DIVISION TO ASSESSEE COMPANY. 21. LD. COUNSEL REFERRED TO PAGES 113 TO 116 OF THE PAPER BOOK, WHEREIN THE ORDER OF THE HONBLE DELHI HIGH COURT IN COMPAN YS PETITION NO. 67/2006 CONNECTED WITH COMPANY APPLICATION M NO. 28/2006 DA TED 25/05/2006, IS CONTAINED TO DEMONSTRATE THAT THE HONBLE DELHI HIG H COURT APPROVED THE SCHEME. LD. COUNSEL SUBMITTED THAT IN THE SCHEME I TSELF, IT HAD BEEN CLEARLY EXPRESSED/DECIDED/EMBEDDED ENABLING THE CONCERNED C OMPANIES TO ADOPT A FOCUS BUSINESS APPROACH FOR MAXIMIZING THE BENEFIT AND TO PROVIDE AN OPPORTUNITY FOR GROWTH. THUS, THE POWER DIVISION W AS TRANSFERRED TO ASSESSEE COMPANY BY BALLARPUR INDUSTRIES LTD. WITH A VIEW TO BECOME FOCUSED ENTITY NOT ONLY IN THE DOMESTIC MARKET BUT ALSO ABROAD. BILT WAS TRYING TO POSITION ITSELF IN ITS CORE BUSINESS OF M ANUFACTURING IN PAPER. ACCORDINGLY, BOARD OF DIRECTORS OF THE SAID COMPANY HAD DECIDED TO RE- ALLOCATE ITS BUSINESS OPERATIONS BY TRANSFERRING AF OREMENTIONED CAPTIVE POWER PLANTS UNDER POWER DIVISION THROUGH SLUMP SAL E ROUTE WITH THE EXPECTATION TO ACHIEVE FASTER GROWTH AND DEVELOPMEN T, AND ENABLING EXPLOITATION OF OPPORTUNITY FOR BOTH THE COMPANIES. THE ASSESSEE COMPANY, IN THE CURRENT ECONOMIC ENVIRONMENT, IMMEDIATELY AF TER ITS INCORPORATION, HAD ITA NOS. 3259 & 4276/D/ 2010 34 BEEN LOOKING FORWARD TO POSITION ITSELF IN THE BUSI NESS OF GENERATION OF POWER AND FOR NECESSARY EXPANSION BEYOND ITS EXISTING LOC ATION. THUS, ASSESSEE COMPANY DID NOT WANT TO BE CONFINE IN ITS NEWLY ACQ UIRED BUSINESS AT THE EXISTING LOCATIONS BUT TO EXPAND THE SAME BUSINESS TO OTHER LOCATIONS THROUGH ACQUISITION, EXPLOITATION, ETC. THUS, THE MAIN OBJECT FOR THE ACQUISITION OF POWER DIVISION FROM BILT BY THE ASSE SSEE COMPANY WAS TO ENGAGE ITSELF IN GENERATION OF POWER AND JUST NOT T O AVAIL ANY BENEFIT OF TAX BY INCREASING THE VALUE OF FIXED ASSETS AND THAT TOO W ITH THE BORROWED CAPITAL FROM BANKS AND OTHERS. 22. LD. SR. COUNSEL SUBMITTED THAT IN THE BACKDROP OF THESE FACTS, HONBLE HIGH COURT SANCTIONED THE SCHEME AND AS REGARDS, TH E CONSIDERATION PAID BY ASSESSEE COMPANY TO THE TRANSFEROR COMPANY OF RS. 2 35 CRORES, INTER-ALIA, OBSERVED THAT MERELY BECAUSE CONSIDERATION WAS BEIN G PAID TO THE TRANSFEROR COMPANY, IT COULD NOT BE PRESUMED THAT THE SCHEME A S SUCH WAS CONTRARY TO PUBLIC INTEREST OR AGAINST THE INTEREST OF SHAREHOL DERS OF THE TRANSFERORS COMPANY. THE HONBLE HIGH COURT FURTHER OBSERVED T HAT THE SALE CONSIDERATION, AS FIXED, WAS BASED UPON INDEPENDENT JUDGMENT OF TWO VALUERS. IN THIS REGARD, HONBLE HIGH COURT FURTHE R OBSERVED THAT THE REGIONAL DIRECTOR WHO HAD RAISED OBJECTION IN THIS REGARD, NOWHERE STATED OR EVEN CONTENDED THAT THE SALE CONSIDERATION, SO FIXE D, WAS INADEQUATE AND DID NOT REPRESENT THE MARKET VALUE OF TRANSFERRED U NDERTAKING. HE, THEREFORE, ITA NOS. 3259 & 4276/D/ 2010 35 SUBMITTED THAT IT COULD NOT BE PLEADED THAT THE PRI CE PAID BY THE ASSESSEE WAS, IN ANY MANNER, FICTITIOUS PRICE. LD. COUNSEL SUBMITTED THAT IT WAS NOT A CASE OF DEMERGER AS CONTEMPLATED U/S 2(19AA) OF THE INCOME-TAX ACT. HE, THEREFORE, SUBMITTED THAT EXPLANATION 7A TO SECTION 43(1) AND EXPLANATION 2B TO SECTION 43(6)(C) WAS NOT APPLICABLE TO THE ASSES SEE COMPANY. LD. COUNSEL FURTHER SUBMITTED THAT ASSESSEE COMPANY HAD PAID THE CONSIDERATION BY MOBILIZING THE FUNDS AS UNDER: - I) LOAN TAKEN FROM UTI & ICICI BANK RS. 165 CRORES II) SHARE CAPITAL FROM BALLARPUR INDUSTRIES LTD. RS . 18.20 CRORES. III) SHARE CAPITAL FROM BILT PAPER HOLDING COMPANY RS. 51.75 CRORES 23. LD. SR. COUNSEL SUBMITTED THAT AS REGARDS THE L OAN OBTAINED FROM THE BANKS, MATTER WAS FURTHER TO ASCERTAIN THE SECURITY AGAINST WHICH THE LOAN WAS OBTAINED. THE ASSETS, WHICH WERE RECEIVED FROM DEMERGED COMPANY, WERE IN FACT PLEDGED AS SECURITY TO THE BANK, TO OB TAIN THE LOAN. THE DETAILS OF SECURITY WITH THE BANKS WERE AS UNDER: - SECURITY WITH UTI BANK RS. 825,30,30/- FIRST CHARGE ON ALL FIXED AND CURRENT ASSETS ASSIGNMENT OF POWER/STEAM PURCHASE AGREEMENT WITH BILT EXECUTED BY BORROWER. ALL MOVABLE AND IMMOVABLE PROPERTIES BOTH PRESENT AND FUTURE AND SUCH OTHER MOVABLES AS MAY BE AGREED TO BY ICIC I BANK FOR SECURING THE BORROWINGS. ITA NOS. 3259 & 4276/D/ 2010 36 ASSIGNMENT OF RIGHT UNDER TAKE OR PAY AGREEMENT WI TH BILT IN FAVOUR OF ICICI BANK. ESCROW OF RECEIVABLES FROM BILT. 24. HE SUBMITTED THAT ON THESE ASPECTS THERE IS NO DISPUTE AND, THEREFORE, EVEN AFTER CONSIDERING THESE ASPECTS, THE AO WRONGL Y HELD THAT THE PRICE PAID BY ASSESSEE COMPANY WAS NOT THE ACTUAL COST OF THE ASSETS. AS REGARDS RELIANCE PLACED BY THE ASSESSING OFFICER ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF M/S DALMIA CERAMICK VS. CIT, 277 ITR 219. LD. COUNSEL SUBMITTED THAT IN THAT CASE, IT HAD BEE N, INTER-ALIA, HELD AS UNDER: - THERE IS NO DISPUTE THAT THE CASE FALLS UNDER CLAUSE (IV) OF SECTION 47. THEREFORE, IT IS CLEAR THE ACTUAL COST SHOULD THE WRITTEN DOWN VALUE OF THE TRANSFEROR COMPANY. THIS ASPECT IS REQUIRED TO BE BORN WHILE CONSIDERING THE QUESTION. 25. HOWEVER, IN THE PRESENT CASE, THERE IS COMPLETE ABSENCE OF TRANSACTION BETWEEN HOLDING COMPANY AND ITS SUBSIDIARY COMPANIE S AS CONTEMPLATED U/S 47(IV) OR (V) OF THE ACT. FURTHER, THE ASSESSEE CO MPANY IS NOT 100% SUBSIDIARY OF BILT. THERE IS NO RELATIONSHIP OF HO LDING AND SUBSIDIARY COMPANY IN THE PRESENT CASE AS THERE ARE NO COMMON DIRECTORS OR SHAREHOLDERS. ITA NOS. 3259 & 4276/D/ 2010 37 26. LD. SR. COUNSEL FURTHER SUBMITTED THAT CONSIDER ATION OF RS. 235 CRORES WAS SUBJECTED TO TAX IN ASSESSMENT OF BILT. BILT H AS NOT AVAILED ANY TAX EXEMPTION U/S 47(1)(VIB). HE FURTHER SUBMITTED THA T AO HAD ONLY RECORDED HIS DISSATISFACTION OVER THE VALUATION ADOPTED BY T HE ASSESSEE WITHOUT RECORDING ANY REASON FOR THE SAME. HE REFERRED TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. PEPSICO IND IA HOLDING PVT. LTD., 334 ITR 404, WHEREIN IT WAS HELD THAT THE AO MUST JUSTI FY OR PROVIDE THE REASON TO REJECT THE VALUATION ADOPTED BY THE ASSESSEE. L D. SR. COUNSEL FURTHER SUBMITTED THAT AO HAS BROUGHT ON RECORD NO EVIDENCE TO DOUBT THE GENUINENESS OF VALUATION REPORT SUBMITTED BY THE AS SESSEE. LD. SR. COUNSEL FURTHER SUBMITTED THAT SECTION 32 AND 43 ARE PARTS OF CHAPTER IV AND, THEREFORE, SECTION 43 IS APPLICABLE TO SECTION 28 T O 41 ONLY. THE DEFINITION OF ACTUAL COST THEREFORE, DOES NOT APPLY TO CAPITAL GA IN. HE SUBMITTED THAT FOR INVOKING EXPLANATION 3, THE AO SHOULD HAVE MATERIAL TO SATISFY HIMSELF THAT THE MAIN PURPOSE OF THE TRANSFER OF ASSETS, DIRECTL Y OR INDIRECTLY TO THE ASSESSEE, WAS THE REDUCTION OF A LIABILITY TO INCOM E-TAX (BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST). HE SUBMITTED THAT AFTER RECORDING HIS SATISFACTION TO THIS EFFECT HE HAS TO DETERMINE THE ACTUAL COST AS CONTEMPLATED UNDER EXPLANATION 3 TO SECTION 43(1). HE SUBMITTED THAT AO HAS NOT RECORDED ANY SATISFACTION THAT THE MAIN PUR POSE OF THE TRANSFER OF SUCH ASSETS, DIRECTLY OR INDIRECTLY TO THE ASSESSEE , WAS THE REDUCTION OF THE LIABILITY TO INCOME-TAX. ITA NOS. 3259 & 4276/D/ 2010 38 27. LD. SR. COUNSEL SUBMITTED THAT AO HAS ADOPTED T HE WDV OF THE ASSETS AS THE ACTUAL COST AS IF IT WAS A CASE OF DEMERGER AND EXPLANATION 7A WAS APPLICABLE. THUS, HE SUBMITTED THAT THE ACTION OF AO WAS NOT IN ACCORDANCE WITH LAW. LD. SR. COUNSEL SUBMITTED THAT WITHOUT DETERMINING THE ACTUAL COST OF THE ASSETS, THE AO COULD NOT REACH THE SATISFACT ION THAT THE MAIN PURPOSE OF THE IMPUGNED TRANSACTION WAS REDUCTION IN TAX LI ABILITY. LD. COUNSEL SUBMITTED THAT THE ASSESSEE BECAME THE OWNER OF THE IMPUGNED ASSETS AS ON 01/04/2006, WHICH WAS THE EFFECTIVE DATE AS PER THE SCHEME APPROVED BY THE HIGH COURT. IN THIS REGARD, LD. COUNSEL RELIED ON THE DECISION OF HONBLE SC IN THE CASE OF MARSHALL ARTS, 223 ITR 809. LD. COUNSEL SUBMITTED THAT SUBSEQUENTLY THE ASSESSEE COMPANY OBTAINED THE LOAN AGAINST THOSE ASSETS FROM THE BANK IN JUNE, 2006. FOR THIS PURPOSE ASSE SSEE HAD TO INCUR FURTHER EXPENDITURE OF RS. 2.2 CRORES BY WAY OF PAYMENT TO BANKS AS PROCESSING CHARGES. THE ASSESSEE ALSO INCURRED INTEREST LIABI LITY ETC. OF MORE THAN RS. 11 CRORES, WHICH HAD BEEN ALLOWED AS BUSINESS EXPEN DITURE BY THE AO. THUS, ASSESSEE HAD INCURRED HUGE FINANCIAL LIABILIT Y BY TAKING LOANS FROM THE BANKS FOR PAYING THE PRICE FOR ACQUIRING THE POWER PLANTS. LD. COUNSEL POINTED OUT THAT OUT OF TOTAL PURCHASE PRICE OF RS. 235 CORES, AS MUCH AS 165 CRORES (70%) WAS PAID BY THE ASSESSEE IN CASH FOR W HICH IT HAD TAKEN LOANS AT ITS OWN RISK. THE TRANSFEROR COMPANY HAD NOT BO RNED ANY FINANCIAL LIABILITY ATTACHED TO THESE ASSETS. LD. COUNSEL POINTED OUT THAT IT IS WELL KNOWN THAT ITA NOS. 3259 & 4276/D/ 2010 39 THE BANKS CARRY OUT DUE DILIGENCE AND VALUATION OF ASSETS OFFERED FOR SECURITY THROUGH INDEPENDENT EXPERT VALUERS. FURTHER IT IS ALSO WELL KNOWN THAT THE AMOUNT OF LOAN NORMALLY DOES NOT EXCEED 2/3 RD OF THE VALUATION OF ASSETS AFTER PROPERLY DISCOUNTING THE PRESENT DEVALUATION FOR THE TERM OF THE LOAN. HE SUBMITTED THAT THE SATISFACTION OF THE AO AS CON TEMPLATED UNDER EXPLANATION 3 TO SEC. 43(1) WAS VITIATED IN THE FAC E OF THIS INDEPENDENT AND OBJECTIVE EVIDENCE. THE AO FAILED TO EXAMINE THE B ANK OFFICIAL OR DOCUMENTS IN THIS REGARD. HE FURTHER POINTED OUT THAT THE AO S SATISFACTION WAS ALSO VITIATED BY ANOTHER PEACE OF EVIDENCE PLACED BEFORE HIM. IN THIS REGARD HE POINTED OUT THAT HONBLE HIGH COURT OF BOMBAY (NAGP UR BENCH AND DELHI) AFTER CONSIDERING THE GOVERNMENTS OBJECTION TO THE PURCHASE PRICE ENDORSED PURCHASE PRICE OF RS. 235 CRORES. THEY ALSO HELD T HAT THE SCHEME WAS IN THE PUBLIC INTEREST AND APPROVED IT. AS REGARDS THE AO S ALLEGATION THAT THE ASSESSEE COMPANY HAD MOBILIZED FUNDS AGGREGATING RS . 70 CRORES FROM THE GROUP COMPANIES, LD. SR. COUNSEL SUBMITTED THAT THI S WAS A NORMAL BUSINESS TRANSACTION AND NOT CIRCULAR IN NATURE AS OBSERVED BY AO. IN THIS REGARD LD. COUNSEL REFERRED TO THE DECISION OF HONBLE SC IN T HE CASE OF CIT VS. RAM KRISHNA PILLAI 66 ITR 725, WHICH READS AS UNDER: - A TRANSACTION BY WHICH A PERSON CARRYING ON BUSINE SS TRANSFERS THE ASSETS OF THAT BUSINESS TO ANOTHER AS SESSABLE ENTITY MAY TAKE DIFFERENT FORMS AND MAY HAVE DIFFER ENT LEGAL EFFECTS. THE ASSETS OF A BUSINESS MAY BE SOL D AT A FIXED PRICE TO A COMPANY PROMOTED BY A PERSON WHO ITA NOS. 3259 & 4276/D/ 2010 40 CARRIED ON THE BUSINESS: IF THE PRICE PAID FOR OR ATTRIBUTABLE TO AN ASSET EXCEEDS THE WRITTEN DOWN V ALUE OF THE ASSET, PROVISO (II) TO SEC. 10(2)(VII) OF THE I NCOME INCOME-TAX ACT, 1922, WOULD EX FACIE BE ATTRACTED. WHERE THE PERSON CARRYING ON THE BUSINESS TRANSFERS THE ASSETS TO A COMPANY IN CONSIDERATION OF ALLOTMENT O F SHARES, IT WOULD BE A CASE OF EXCHANGE AND NOT OF S ALE, AND THE TRUE NATURE OF THE TRANSACTION WILL NOT BE ALTERED, BECAUSE OF STAMP DUTY OR OTHER REASONS THE VALUE OF THE ASSETS TRANSFERRED IS SHOWN AS EQUIVALENT TO THE FA CE VALUE OF THE SHARES ALLOTTED. A PERSON CARRYING ON BUSINESS MAY AGREE WITH A COMPANY FLOATED BY HIM TH AT THE ASSETS BELONGING TO HIM SHALL BE TRANSFERRED TO THE COMPANY FOR A CERTAIN MONEY CONSIDERATION AND THAT IN SATISFACTION OF THE LIABILITY TO PAY THAT MONEY CONSIDERATION, SHARES OF A CERTAIN FACE VALUE SHALL BE ALLOTTED TO THE TRANSFEROR. IN THAT CASE THERE ARE IN TRUTH TWO TRANSACTIONS, ONE A TRANSACTION OF SALE AND THE OTHER A CONTRACT UNDER WHICH THE SHARES ARE ACCEPTED IN SATISFACTION OF THE LIABILITY TO PAY THE PRICE. 28. LD. COUNSEL FURTHER REFERRED TO THE DECISION OF 3 RD MEMBER IN CHITRA PUBLICITY COMPANY 127 TTJ 7 (AHMEDABAD BENCH, WHERE IN, IT WAS, INTER-ALIA, OBSERVED AS UNDER: - THE REVENUE AUTHORITIES AND THE LD. ACCOUNTANT MEMBER, IN THE PROPOSED ORDER, HAVE OBSERVED THAT T HE AO IS AUTHORIZED TO PIERCE THE VEIL OF THE CORPORAT E AND ASCERTAIN THE TRUE NATURE OF THE TRANSACTION. THER E CAN ITA NOS. 3259 & 4276/D/ 2010 41 BE NO QUARREL ON THE ABOVE PROPOSITION. HOWEVER, I N MY VIEW, IT IS UNNECESSARY TO FALL BACK ON THE ABOV E LEGAL PROPOSITION AS UNDER THE ABOVE EXPLANATION, T HERE IS SUFFICIENT POWER WITH THE ASSESSING OFFICER TO DISREGARD THE COST OF ASSETS TAKEN BY THE TRANSFERE E AND DETERMINED THE ACTUAL COST OF ASSETS. HE CAN MADE A DISALLOWANCE, PROVIDED THE CIRCUMSTANCES ENVISAGED IN THE PROVISION ARE SATISFIED. 29. LD. SR. COUNSEL SUBMITTED THAT THE TRANSACTION WAS WELL WITHIN THE FRAMEWORK OF LAW AND THE CONTRACTS BETWEEN THE PART IES WERE ENFORCEABLE IN LAW. FURTHER EXPLANATION 3 TO SECTION 43(1) RESTRI CTING THE MEANING OF ACTUAL COST HAS BEEN INTRODUCED BY THE LEGISLATURE TO GIVE SUFFICIENT POWER TO THE AO TO DETERMINE THE ACTUAL COST IN ACCORDANCE WITH LAW . AS REGARDS THE OBJECTION OF AO THAT THOUGH PLANT AND MACHINERY AND BUILDING HAD BEEN TRANSFERRED, LANDS ON WHICH THE PLANTS WERE SITUATE D HAD NOT BEEN TRANSFERRED, LD. COUNSEL SUBMITTED THAT IT WAS EXPL AINED TO THE AO THAT THESE BUILDINGS WERE SITUATED ON INDUSTRIAL LANDS WHICH W ERE NOT FREE HOLD LANDS. THUS, THE TRANSFEROR COMPANY, ITSELF BEING A LEASEH OLDER OF THE LANDS ON WHICH POWER PLANT WERE SITUATED, COULD NOT HAVE TRA NSFERRED THE LANDS. IT COULD ONLY SUBLEASE THE LANDS WITH THE PRIOR APPROV AL OF THE LESSOR AUTHORITIES. AS REGARDS THE AOS DOUBT ABOUT THE P URCHASE PRICE ON THE GROUND THAT LEASE RENT PAYABLE BY THE ASSESSEE WAS INADEQUATE, LD. SR. COUNSEL SUBMITTED THAT RENT IS REVENUE EXPENDITURE. THEREFORE, PAYMENT OF ITA NOS. 3259 & 4276/D/ 2010 42 LOWER RENT DOES NOT REDUCE THE TAX LIABILITY OF THE ASSESSEE BECAUSE THE PAYMENT OF HIGHER RENT COULD ONLY REDUCE THE ASSESS EES TOTAL INCOME. LD. COUNSEL REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SIMON CARVES LTD., 105 ITR 212, WHEREIN IT WAS, INT ER-ALIA, OBSERVED THAT THE TAXING AUTHORITIES EXERCISE QUASI-JUDICIAL POWERS A ND IN DOING SO THEY MUST ACT IN A FAIR AND NOT A PARTISAN MANNER. ALTHOUGH IT IS PART OF THEIR DUTY TO ENSURE THAT NO TAX WHICH IS LEGITIMATELY DUE FROM A N ASSESSEE SHOULD REMAIN UNRECOVERED, THEY MUST ALSO AT THE SAME TIME NOT AC T IN A MANNER AS MIGHT INDICATE THAT SCALES ARE WEIGHTED AGAINST THE ASSES SEE. 30. LD. COUNSEL FURTHER REFERRED TO THE FOLLOWING C OMPUTATION SUBMITTED BEFORE LD. CIT(A) TO DEMONSTRATE THAT THERE WAS INS IGNIFICANT MANDATORY BENEFIT ON ACCOUNT OF CLAIM OF DEPRECIATION ON THE PURCHASE CONSIDERATION OF RS. 235 CRORES: RS. CRORES LIABILITY TOWARDS INTEREST ON LOAN (RS. 165 CRORES) IN RELATION TO UNDERTAKINGS RS. 15.43 (INTEREST FOR THE PERIOD JULY 06 TO MAR. 07 RS. 11. 49 CRORES) (APPROX.) DEPRECIATION ON PURCHASE CONSIDERATION RS. 235 CROR ES RS. 18.49 AS PER AUDITORS REPORT IN FORM 3CD DEPRECIATION ON WDV RS. 88.66 CRORES AS COMPUTED IN ASSTT. ORDER (REFER PAGE NO. 13 OF ASSTT. ORDER) RS. 6.95 DIFFERENCE IN DEPRECIATION ON RS. 235 CRORES AS AGA INST RS.11.54 RS. 11.54 RS. 88.66 CRORES. BENEFIT OF DEPRECIATION OVER THE INTEREST LIABILITY FOR BORROWED MONEY (RS. 165 CRORE) IN RESPECT OF PURCHA SE CONSIDERATION RS. 235 CRORES. RS. 3.89 ITA NOS. 3259 & 4276/D/ 2010 43 31. HE SUBMITTED THAT EVEN THIS TAX EFFECT DISAPPEA RS IF WE TAKE INTO TAX SUFFERED BY THE TRANSFEROR ASSOCIATE COMPANY. 32. LD. DR IN THE REJOINDER SUBMITTED THAT AS REGAR DS THE SUBMISSIONS OF LD. AR THAT THE AO HAD NOT LAWFULLY EXERCISED JURISDICT ION IN INVOKING EXPLANATION 3 TO SEC. 43(1) OF THE ACT AND HE SHOULD HAVE MATER IAL TO SATISFY HIMSELF THAT THE MAIN PURPOSE OF THE TRANSFER OF SUCH ASSETS WAS THE REDUCTION OF THE LIABILITY. LD. DR SUBMITTED THAT THE ASSETS WHICH WERE TRANSFERRED AT THE TIME OF DEMERGER WERE OLD AND USED ASSETS AND HAD ALREAD Y DEPRECIATED TO A VALUE OF RS. 86.66 CRORES. THE NATURE OF ASSETS WA S NOT SUCH WHICH WILL APPRECIATE OVER THE YEARS. 33. AS REGARDS THE LD. ARS OBJECTION THAT THE AO H AD NOT DETERMINED THE ACTUAL COST OF THE ASSETS AS LAID DOWN IN EXPLANATI ON 3 TO SEC. 43(1) LD. DR SUBMITTED THAT AO MADE DUE EFFORTS TO DETERMINE THE ACTUAL COST OF THE ASSETS IN THE HANDS OF THE ASSESSEE. HE EVEN OBTAI NED INFORMATION FROM THE TRANSFEROR COMPANY TO KNOW THE STATUS OF THE ASSETS IN THEIR HANDS AT THE TIME OF TRANSFER. THE AOS ACTION OF ADOPTING WDV AS ACTUAL COST WAS SUPPORTED BY VARIOUS CASE LAWS AS DISCUSSED EARLIER . LD. DR SUBMITTED THAT THE OBJECTION OF LD. AR THAT ON PAGE 13 OF ASSESSME NT ORDER, THE AO HAS SIMPLY USED WORDS WDV INSTEAD OF ACTUAL COST, L D. DR SUBMITTED THAT AO HAS DISCUSSED THE ENTIRE ISSUE FROM PAGE 9 TO PAGE 13 OF THE ASSESSMENT ITA NOS. 3259 & 4276/D/ 2010 44 ORDER AND ON PAGE 10 HE HAS CLARIFIED THAT THE ACTU AL COST TO THE ASSESSEE SHALL BE SUCH AN AMOUNT AS THE ITO MAY, WITH THE PR EVIOUS APPROVAL OF THE JOINT COMMISSIONER, DETERMINE HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. AFTER THAT HE HAS DISCUSSED THE ISSUE ELABOR ATELY AND IN THE END IN PARA 2.12, HE HAS GIVEN A CHART WHICH SHOWS THAT TH E WDV AS PER THE ASSESSEES BOOKS WAS RS. 2349999832/-. HE, THEN, H AS REPLACED THIS WDV BY A FIGURE OF 88.66 CRORES FOR THE PURPOSE OF CALC ULATING DEPRECIATION. IF THE ORDER IS READ AS A WHOLE, THE OBJECTION OF THE LD. AR IS NOT SUSTAINABLE. AS REGARDS THE LD. ARS OBJECTION THAT WDV CANNOT BE T AKEN AS ACTUAL COST AND IT IS NOT REFLECTIVE OF MARKET PRICE, LD. DR SUBMIT TED THAT THE ASSETS IN QUESTION ARE THE OLD ASSETS WHICH HAVE VERY NOMINAL RESALE VALUE. THE NATURE OF ASSETS IS ALSO SUCH WHICH WILL NOT GET AP PRECIATED OVER THE YEARS. SHE SUBMITTED THAT EVEN THE ASSESSEE DOES NOT HAVE THE EXACT MARKET PRICE OF THESE ASSETS AND THIS FACT IS STRENGTHENED BY TH E MULTIPLICITY OF VALUATIONS. IN FACT THE ASSESSEE COMPANY IS THE ONLY BUYER AND THE TRANSACTION IS MADE TO FACILITATE BOTH THE PARTIES. THEREFORE, THE AO WAS VERY REASONABLE IN ADOPTING WDV AS ACTUAL COST AND HIS ACTION WAS SUPP ORTED BY THE JUDGMENTS OF VARIOUS HONBLE COURTS. AS REGARDS, THE SUBMISS ION OF LD. COUNSEL THAT RAISING OF LOANS OF RS. 165 CRORES ON THE ASSETS IS REFLECTIVE OF THEIR VALUE, LD. DR SUBMITTED THAT BANKS HAVE NOT ANALYZED THE ISSUE OF ACTUAL COST OF THE ASSETS AS PER THE SPECIFIC PROVISIONS OF THE INCOME -TAX ACT. EVEN THE CIT(A) HAS GIVEN FINDINGS ON PAGE 13 OF THE ORDER THAT AR RANGEMENT OF FUND AND ITA NOS. 3259 & 4276/D/ 2010 45 FURNISHING SECURITY THEREOF TO THE LENDING BANK DO NOT FORTIFY THE CASE OF THE APPELLANT FOR THE PURPOSE OF APPLICABILITY OF EXPLA NATION 3 OF SEC. 43(1) OF THE ACT. 34. AS REGARDS, THE SUBMISSION OF LD. AR THAT BANKS CARRY OUT DUE DILIGENCE AND VALUATION OF ASSETS THROUGH INDEPENDENT VALUERS , LD. DR SUBMITTED THAT NO SUCH EVIDENCE HAS BEEN BROUGHT ON RECORD BY THE ASSESSEE. AS REGARDS THE SUBMISSION OF LD. COUNSEL THAT TRANSACTION WAS APPROVED BY THE HONBLE DELHI HIGH COURT, LD. DR SUBMITTED THAT MERELY BECA USE THE HONBLE HIGH COURT GIVE APPROVAL TO THE SCHEME OF ARRANGEMENT AN D DEMERGER UNDER THE COMPANIES ACT WILL NOT AUTOMATICALLY ENTITLE THE AS SESSEE TO CLAIM HIGHER DEPRECIATION. THE INCOME-TAX PROVISIONS ARE SPECIF IC IN THIS REGARD AND THE ISSUE IS TO BE ANALYZED ACCORDINGLY. IN THIS REGAR D LD. DR REFERRED TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF INDO RAMA SYNTHETICS LIMITED, 23 TAXMAN.COM 390 , WHEREIN IT HAS BEEN HELD THAT THE INCOME-TAX PROVISION CANNOT BE READ AS MANDATORY REQUIREMENT F OR ALL SCHEMES OF AMALGAMATION/ARRANGEMENT/DEMERGER U/S 391/392/394 O F COMPANIES ACT. HONBLE DELHI HIGH COURT, INTER-ALIA, OBSERVED AS U NDER: - IN THE PROCEEDINGS U/S 392(1)(B) OF THE 1956 ACT, THE COURT CANNOT RE WRITE THE SCHEME APPROVED IN THE MEETING CALLED U/S 391(2) OF THE 1956 ACT, BUT, IT CAN ONLY MAKE SUCH MODIFICATION AS IT MAY CONSIDER ITA NOS. 3259 & 4276/D/ 2010 46 NECESSARY FOR PROPER WORKING OF THE COMPROMISE OR ARRANGEMENT. THUS, AT THE TIME OF DEMERGER, THE SPECIFIC ISSUES AND PROVISIONS OF THE INCOME-TAX ACT ARE NOT CONSIDERED AND HENCE, THE IS SUE REMAINS TO BE DETERMINED BY THE TAX AUTHORITIES. 35. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. 36. AT THE OUTSET, WE MAY OBSERVE THAT AO HAS NOT C ONSIDERED THE ENTIRE SCHEME AS DEMERGER UNDER THE INCOME-TAX ACT AS CONT EMPLATED U/S 2(19AA) OF THE INCOME-TAX ACT. THEREFORE, WE DO NOT CONSID ER IT NECESSARY TO EXAMINE THE OBSERVATIONS OF AO, AND LD. CIT(A) AND THE SUBMISSIONS OF BOTH THE PARTIES ON THIS COUNT AS IT WOULD ONLY BE OF AC ADEMIC INTEREST. THIS IS EVIDENT FROM THE FACT THAT AO HAS INVOKED EXPLANATI ON 3 TO SEC. 43(1) AND NOT EXPLANATION 7A TO SEC. 43(1). FURTHER THE CO NTENTION OF ASSESSEE THAT TRANSFEROR COMPANY HAD ALSO PAID LONG TERM CAPITAL GAIN TAX ON THE SALE CONSIDERATION IS ALSO NOT OF MUCH SIGNIFICANCE BECA USE TAX LIABILITY IS TO BE DETERMINED QUA ASSESSEE. THEREFORE, THE MAIN ISSUE FOR OUR CONSIDERATION IS WHETHER AO WAS JUSTIFIED IN INVOKING EXPLANATION 3 TO SEC.43(1) BY HOLDING THAT THE ENTIRE PURPOSE OF THIS SCHEME WAS REDUCTIO N OF TAX LIABILITY BY CLAIMING HIGHER DEPRECIATION IN RESPECT OF THOSE AS SETS WHICH WERE EARLIER USED BY TRANSFEROR COMPANY BY ESCALATING THE COST O F THE ASSETS. ITA NOS. 3259 & 4276/D/ 2010 47 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 FUNDAMENT AL PRINCIPLE THAT DEPARTMENT CANNOT QUESTION THE WISDOM OF ASSESSEE IN CARRYING OUT ITS BUSINESS OPERATIONS. DEPARTMENT CANNOT DICTATE AS TO HOW TH E ASSESSEE SHOULD CONDUCT ITS BUSINESS. HOWEVER, LEGISLATURE HAS MAD E 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 FI ND OUT THE TRUE INTENTION. THESE SECTIONS PROVIDE CIRCUMSTANCES IN WHICH DEPAR TMENT CAN IMPUTE ITS JUDGMENT TO THE ASSESSEES DECISION. THE RELEVANT P ROVISIONS ARE TO BE FOUND IN SECTION 40A(2), EXPLANATION 3 TO SEC. 43(1), SEC TION 92C ETC. BUT BEFORE THESE PROVISIONS CAN BE INVOKED, LEGISLATURE HAS RE QUIRED THE AO TO ACQUIRE NECESSARY SATISFACTION IN THIS REGARD WHICH OBVIOUS LY HAS TO BE ACQUIRED JUDICIOUSLY AND NOT ARBITRARILY. THE AO SHOULD DEM ONSTRATE THAT HIS SATISFACTION WAS RATIONAL AND BASED ON RELEVANT FAC TORS. 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. ITA NOS. 3259 & 4276/D/ 2010 48 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 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 AO IS SATISFIED THAT THE MAIN PURPOSE OF T RANSFER OF SUCH ASSETS WAS THE REDUCTION OF LIABILITY TO INCOME-TAX BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST; IV) THE AO CAN REFUSE TO ACCEPT THE SALE PRICE AS T HE ACTUAL COST TO THE PURCHASER (ASSESSEE) IN THE PURCHASERS ASSES SMENTS. 37. THE LEGISLATURE HAS PREFIXED THE WORD ACTUAL TO THE WORD COST WHICH CLEARLY SIGNIFIES THAT EMPHASIS IS ON THE REALITY A ND GENUINENESS OF THE COST ITA NOS. 3259 & 4276/D/ 2010 49 SO AS TO EXCLUDE COLLUSIVE, INFLATED, DEFLATED OR F ICTITIOUS COST. AS ALREADY POINTED OUT THAT THE AO IS REQUIRED TO JUDICIOUSLY ACQUIRE THE NECESSARY SATISFACTION REGARDING THE OBJECT OF TRANSFER. IT IS 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 LIAB ILITY. THERE MAY BE GENUINE CASES ALSO WHERE THE ASSET HAS APPRECIATED IN VALUE SINCE ITS ORIGINAL PURCHASE AND CONSEQUENTLY, THE MARKET VALU E ON THE DATE OF THE SALE IS GREATER THAN WRITTEN DOWN VALUE IN THE AOS CHAR T. IN THE ABSENCE OF ANY FINDING, THAT THE MAIN PURPOSE OF THE TRANSFER IS T O REDUCE THE TAX LIABILITY WITH REFERENCE TO ENHANCED COST, IT IS NOT PERMISSIBLE T O THE AO TO REJECT THE COST PAID FOR THE TRANSFER. THE AO CANNOT SUBSTITUTE HI S 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. THU S, 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 AT IN A REASONABLE MANNER, THERE BEING NO ALLEGATIO N OF INFLATED COST BY REASON OF FRAUD, COLLUSION, SUBTERFUGE, DEVISE OR F ALSE 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 PURCHASE PRICE. THE THRESH HOLD CONDITION IS T HAT THE TRANSFER SHOULD BE WITH INTENT TO GET THE BENEFIT OF ENHANCED VALUE OF ASSET. THEREFORE, BEFORE INVOKING EXPLANATION 3, THE AO IS REQUIRED TO RECOR D HIS SATISFACTION THAT ITA NOS. 3259 & 4276/D/ 2010 50 ENTIRE TRANSACTION WAS UNDERTAKEN WITH A VIEW TO RE DUCE THE TAX LIABILITY BY CLAIMING HIGHER DEPRECIATION. BEFORE WE EMBARK UPO N 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 OBJECTION IS THAT AO HAS NOT RECORDED HIS REQUISITE SATISFACT ION FOR INVOKING EXPLANATION 3: WE ARE NOT IN AGREEMENT WITH LD. SR. COUNSELS A RGUMENT BECAUSE, AS RIGHTLY POINTED OUT BY LD. DR, A HOLISTIC VIEW IS T O BE TAKEN. THE ENTIRE DISCUSSION BY AO PROCEEDS ON THE PREMISE THAT ASSES SEE WAS TRYING TO CLAIM HIGHER DEPRECIATION ON ENHANCED COST. THE NEXT OBJ ECTION OF LD. SR. COUNSEL IS THAT AO DID NOT DETERMINE THE ACTUAL COST AS REQ UIRED IN EXPLANATION 3. WE ARE NOT IN AGREEMENT WITH THIS ARGUMENT ALSO OF LD. SR. COUNSEL BECAUSE, AS RIGHTLY DEMONSTRATED BY LD. DR, AO HAD MADE ALL OUT EFFORTS TO FIND OUT THE ACTUAL COST. WE DO NOT FIND ANY SUBSTANCE IN THIS PLEA OF THE ASSESSEE BECAUSE AO HAD TAKEN INTO CONSIDERATION DIFFERENT V ALUATION REPORTS AND WDV OF ASSETS BEFORE ARRIVING AT THE CONCLUSION THA T WDV AS PER INCOME-TAX RECORDS WAS THE ACTUAL COST OF ASSETS. HE HAD ALSO RAISED THE QUERIES WITH REGARD TO DETERMINATION OF ACTUAL COST OF THE SAID ASSETS AND GATHERED INFORMATION FROM THE TRANSFEROR COMPANY BY ISSUING NOTICES U/S 133(6). WE ARE ALSO IN AGREEMENT WITH LD. DR THAT VALUE APPROV ED BY THE HONBLE HIGH COURT OF DELHI & BOMBAY WAS NOT BINDING ON TAX AUTH ORITIES BECAUSE THE HONBLE HIGH COURT HAD NOT ADJUDICATED THE ISSUE OF ACTUAL COST OF THE ASSETS AS PER THE INCOME-TAX ACT. HOWEVER, THIS HAD PERSU ASIVE VALUE IN ITA NOS. 3259 & 4276/D/ 2010 51 DETERMINING THE ACTUAL COST OF ASSETS. THE THIRD A RGUMENT IS IN REGARD TO EFFECTIVE DATE OF TRANSFER. WE ARE IN AGREEMENT WI TH THE LD. COUNSEL FOR THE ASSESSEE THAT THE EFFECTIVE DATE, AS PER THE SCHEME APPROVED BY THE HONBLE HIGH COURT, WAS 01/04/06 IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MARSHALL SONS, 223 ITR 809 AND THE A SSESSEE COMPANY OBTAINED THE LOAN AGAINST THE ASSETS ACQUIRED BY IT FROM BANK IN JUNE, 2006. FURTHER THERE IS NO QUARREL WITH THE PROPOSITION OF LD. DR THAT IN CERTAIN CIRCUMSTANCES WDV OF ASSETS MAY CONSTITUTE ACTUAL C OST TO THE ASSESSEE. HAVING CONSIDERED THESE ASPECTS, NOW WE PROCEED TO DECIDE THE MAIN ISSUE WHICH IS WHAT WAS THE ACTUAL COST TO THE ASSESSEE A ND CONSEQUENTLY WHETHER AO WAS JUSTIFIED IN INVOKING THE EXPLANATION 3 TO S EC. 43(1). IN THIS CONTEXT WE HAVE TO FIND OUT THE REAL VALUE OF ASSETS ACQUIR ED BY THE ASSESSEE. IN THIS REGARD THE FIRST ASPECT TO BE TAKEN INTO CONSI DERATION IS THE APPROVAL OF THE HONBLE HIGH COURT TO THE SCHEME OF ARRANGEMENT AND DEMERGER U/S 391 TO 394 OF THE COMPANIES ACT. SECTION 391 OF THE CO MPANIES ACT EMPOWERS THE COURT TO SANCTION THE SCHEME. SECTION 392 EMPO WERS THE COURT TO SUPERVISE THE CARRYING OUT OF THE SCHEME OR TO MODI FY THE SAME AS IT DEEMS FIT. SECTION 3(94) EMPOWERS THE COURT EITHER THRO UGH THE ORDER SANCTIONING THE SCHEME OR BY A SUBSEQUENT ORDER TO MAKE PROVISI ONS FOR CERTAIN MATTERS INCLUDING INCIDENTAL, CONSEQUENTIAL AND SUPPLEMENTA L MATTERS AS NECESSARY TO SECURE THAT THE RECONSTRUCTION OR AMALGAMATION I S FULLY AND EFFECTIVELY CARRIED OUT. IN EXERCISING ITS DISCRETION TO SANCT ION THE SCHEME, THE COURT ITA NOS. 3259 & 4276/D/ 2010 52 CONSIDERS, FIRSTLY WHETHER THE STATUTORY PROVISIONS HAVE BEEN FULFILLED; SECONDLY, WHETHER THE CLASSES WERE FAIRLY REPRESENT ED BY THOSE WHO ATTENDED THE MEETING; THIRDLY WHETHER THE STATUTORY MAJORITY WAS ACTING BONAFIDE; AND FOURTHLY, WHETHER THE SCHEME IS SUCH AS A MAN OF BUSINESS WOULD REASONABLY APPROVE. FOLLOWING PRINCIPLES HAV E BEEN LAID DOWN IN THE CASE OF MIHEER H. MAFATLAL VS. MAFATLAL INDUSTRIES LTD. (1996) 87 COMP. CASES 792 : 1. THE REQUISITE STATUTORY PROCEDURE FOR SUPPORTIN G THE SCHEME HAS BEEN COMPLIED WITH AND THAT THE REQUISIT E MEETINGS HAVE BEEN HELD; 2. THE SCHEME IS BACKED UP BY THE REQUISITE MAJORIT Y VOTE AS REQUIRED; 3. AT THE MEETING REQUISITE CLASS PERSONS HAD THE RELEVANT MATERIAL TO ENABLE THEM ARRIVE AT AN INFORMED DECISION FOR APPROVING THE SCHEME. THE MAJORITY DECISION OF THE CONCERNED CLASS IS JUST AN D FAIR TO THE CLASS AS A WHOLE SO AS TO LEGITIMATELY BLIND EVEN THE DISSENTING MEMBERS OF THAT CLASS. 4. NECESSARY MATERIAL IS PLACED BEFORE THE VOTERS A T THE MEETINGS CONCERNED; 5. THE REQUISITE MATERIAL IS PLACED BEFORE THE COUR T AND THE COURT IS SATISFIED ABOUT THE SAME; 6. THE PROPOSED SCHEME IS FOUND NOT TO BE VIOLATIVE OF ANY PROVISION OF LAW AND IS NOT CONTRARY TO PUBLIC POLICY. FOR ASCERTAINING THE REAL PURPOSE UNDERLYI NG THE SCHEME WITH A VIEW TO BE SATISFIED ON THIS ASPE CT, THE COURT, IF NECESSARY, CAN PIERCE THE VEIL OF APP ARENT ITA NOS. 3259 & 4276/D/ 2010 53 CORPORATE PURPOSE UNDERLYING THE SCHEME AND CAN JUDICIOUSLY X-RAY THE SAME; 7. THE REQUISITE CLASS ACTED IN BONA FIDE AND IN GO OD FAITH AND DID NOT COERCE THE MINORITY; 8. THE SCHEME AS A WHOLE IS JUST, FAIR AND REASONAB LE FROM THE POINT OF VIEW OF PRUDENT MEN OF BUSINESS TAKING A COMMERCIAL DECISION BENEFICIAL TO THE CLAS S REPRESENTED BY THEM FOR WHOM THE SCHEME IS MEANT; AND 9. ONCE THE AFORESAID BROAD PARAMETERS ARE FOUND TO HAVE BEEN MET, THE COURT WILL HAVE NO FURTHER JURISDICTION TO SIT IN APPEAL OVER THE COMMERCIAL WISDOM OF THE MAJORITY OF THE CLASS OF PERSONS WHO WITH THEIR OPEN EYES HAVE GIVEN THEIR APPROVAL TO T HE SCHEME EVEN IF IN THE VIEW OF THE COURT THERE WOULD BE A BETTER SCHEME FOR THE COMPANY AND ITS MEMBERS OR CREDITORS. 38. THEREFORE, IN CONTEXT TO PRESENT PROCEEDINGS, T HE EFFECT OF ORDER OF HONBLE DELHI HIGH COURT IS TO BE CONSIDERED KEEPIN G IN VIEW THE AFOREMENTIONED ASPECTS. WE FIND THAT HONBLE DELHI HIGH COURT WHILE SANCTIONING THE SCHEME HAS OBSERVED AS UNDER: - DEPARTMENT OF COMPANY AFFAIRS, NOIDA, ON BEHALF OF CENTRAL GOVERNMENT WHEREBY HE RAISED THREE OBJECTIONS: THE FIRST OBJECTION IS THAT BY TH E PROPOSED SCHEME OF ARRANGEMENT/DEMERGER, THE TRANSFEREE COMPANY IS LIABLE TO PAY RS. 235 CRORES AS CONSIDERATION FOR TRANSFER OF ITA NOS. 3259 & 4276/D/ 2010 54 TRANSFERRED UNDERTAKING OF THE TRANSFEROR COMPANY. HE SUBMITTED THAT SHARES SHOULD HAVE BEEN ALLOTTED TO THE SHAREHOLDERS OF THE TRANSFEROR COMPANY, INSTEAD OF PAYING CONSIDERATION OF RS. 235 CRORES TO THE TRANSFEROR COMPANY AND THIS IS PRIMA FACIE AGAINST THE INTEREST OF SHAREHOLDERS OF THE TRANSFEROR COMPANY. THE COURT OBSERVED THAT MERELY BECAUSE CONSIDERATION IS BEING PAID TO THE TRANSFEROR COMPANY, IT CANNOT BE PRESUMED THAT THE SCHEME AS SUCH IS CONTRARY TO PUBLIC INTEREST O R AGAINST THE INTEREST OF SHAREHOLDERS OF THE TRANSFEROR COMPANY. UNDER NORMAL CIRCUMSTANCES, THE TRANSFEROR COMPANY COULD HAVE ALWAYS TRANSFERRED/SOLD ANY OF ITS ASSETS FOR CONSIDERATION TO THE THIRD PARTY. THE COURT FURTHE R OBSERVED THAT THE SALE CONSIDERATION AS FIXED IS BASED UPON INDEPENDENT JUDGMENT OF TWO VALUERS, NAMELY, M/S SPB PRODUCTS AND CONSULTANCY LIMITED, CHENNAI AND M/S INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LTD., NEW DELHI. THE REGIONAL DIRECTOR NOWHERE STATED OR EVEN CONTENDED THAT THE SALE CONSIDERATION SO FIXED IS INADEQUATE AND DOES NOT REPRESENT THE MARKET VALUE OF TRANSFERRED UNDERTAKING-1. THE COURT DID NOT FIND ANY MERIT IN THE SAID OBJECTION AND REJECTED THE SAME. THE SECOND OBJECTION IS THAT THERE IS NO OBJECT CLAUSE OF THE SCHEME AND THEREFORE, THE PURPOSE AND BENEFITS UNDER THE SCHEME AS PROPOSED MAY BE ASCERTAINED. THE ITA NOS. 3259 & 4276/D/ 2010 55 COURT OBSERVED THAT THE TRANSFEROR COMPANY IS BEING SPLIT INTO THREE PARTS AND TRANSFERRED UNDERTAKING NO. 1 I.E. (POWER DIVISION) IS BEING TRANSFERRED TO THE TRANSFEREE COMPANY FOR A SUM OF RS. 235 CRORES. COURT DID NOT FIND ANY MERIT IN TH IS OBJECTION ALSO AND REJECTED THE SAME. THE THIRD OBJECTION IS IN RESPECT OF THE ARTICLES AND MEMORANDUM OF ASSOCIATION OF THE TRANSFEREE COMPANY NO. 2 AND THE PROPOSED SCHEME UNDER WHICH TRANSFERRED UNDERTAKING NO. 2 I.E. (REAL ESTATE DIVISION) IS TO BE TRANSFERRED TO THE TRANSFEREE COMPANY NO. 2. THE COURT ORDERED THAT IT NEED NOT EXAMINE THIS ASPECT AS THE MUMBAI HIGH COURT HAS ALREADY GRANTED SANCTION TO THE SCHEME OF ARRANGEMENT/DEMERGER IN THE CASE OF THE TRANSFEREE COMPANY NO. 2; AND THERE BEING NO INVESTIGATION PROCEEDINGS PENDING IN RELATION TO THE PETITIONER COMPANY U/S 235 TO 251 OF THE COMPANIES ACT, 1956. THE SCHEME OF ARRANGEMENT/DEMERGER IN RESPECT OF TRANSFEROR COMPANY AND TRANSFEREE COMPANY NO. 2 HAS ALREADY BEEN SANCTIONED BY HIGH COURT OF JUDICATURE AT BOMBAY, NAGPUR VIDE ORDER DT. 25/4/06. 39. THUS, IT CANNOT BE DENIED THAT THE APPROVAL GRA NTED BY THE HONBLE DELHI HIGH COURT HAD PERSUASIVE VALUE FOR DECIDING THE ACTUAL COST OF ASSETS TO THE ASSESSEE. IT COULD NOT BE IGNORED PARTICULA RLY BECAUSE HONBLE COURT EXPRESSLY CONSIDERS THE BONAFIDE OF THE ENTIRE SCHE ME. HOWEVER, THIS IS NOT ITA NOS. 3259 & 4276/D/ 2010 56 BINDING ON INCOME-TAX AUTHORITIES WHILE CONSIDERING THE ACTUAL COST AS CONTEMPLATED IN EXPLANATION 3 TO SECTION 43(1). 40. THE NEXT ASPECT TO BE CONSIDERED IS THE OBJECT WITH WHICH BILT HIVED OFF ITS POWER DIVISION TO THE ASSESSEE COMPANY. TH E ASSESSEE COMPANY WAS SET UP TO SPEARHEAD THE POWER SECTOR INITIATIVE S OF THE AVANTHA POWER & INFRASTRUCTURE GROUP. THE OBJECTIVE OF DEMERGER OF THE POWER ASSET OF BALLARPUR INDUSTRIES LTD. WAS TO CREATE PLATFORM, W HEREIN THE COMPANY COULD UNDERTAKE LARGER POWER PROJECTS. THE COMPANYS PLA NS WERE TO EXPAND THEIR GENERATION CAPACITY AND DEVELOPMENT EFFORTS IN ORDE R TO CAPITALIZE ON THE PREVAILING AND FORECEABLE FUTURE AND MEET BALANCE D EFICIT BETWEEN ELECTRICITY DEMAND AND SUPPLY IN INDIA. IT WAS POINTED OUT BY THE ASSESSEE BEFORE LD. CIT(A) THAT DEMERGER OF THE POWER SECTION HAS RESUL TED IN THE FOLLOWING BENEFIT: - A) POLICY TO VENTURE INTO POWER SECTOR AS A BUSINES S PROPOSITION; B) BETTER FOCUS ON THE POWER GENERATION AS A PROFIT CENTRE; C) INDEPENDENT UNITS COULD BE BENCH MARKED AGAINST PEERS; D) BETTER UTILIZATION OF THE CAPACITY SINCE THE UNI TS HAS THE FLEXIBILITY TO SERVICE OTHER ENTITIES THE COMPANY HAD TWO PRONGED BUSINESS MODEL: TO MANAGE AND EXPAND THE EXISTING CAPTIVE POWER PL ANT (CPP) CAPACITIES FOR SUPPORTING THE GROUPS REQUIREMENTS AS WELL AS FOR ITA NOS. 3259 & 4276/D/ 2010 57 TAPPING THE OPPORTUNITIES AVAILABLE IN THE BROADER MARKET IN THE FORM OF OTHER COMPANIES CAPTIVE POWER REQUIREMENTS; AND TO SPEARHEAD THE POWER SECTOR INITIATIVES OF THE G ROUP BY UNDERTAKING SUPER CRITICAL AND SUB-CRITICAL POWER P ROJECTS UNDER THE INDEPENDENT POWER PROJECT (IPP) MODEL. E) THESE OBJECTIVES CLEARLY SPELLED OUT THE PURPOSE WITH WHICH DEMERGER OF THE POWER DIVISION OF BALLARPUR INDUSTR IES LTD. WAS UNDERTAKEN. F) THE BENEFIT OF ENHANCED DEPRECIATION GOT ALMOST MITIGATED BECAUSE OF INTEREST PAYMENT OF THE OUTSIDER VIZ. AL L BANKS AS IS EVIDENT FROM THE WORKING SUBMITTED BEFORE THE LD. C IT(A). THE ASSESSEE HAS TAKEN LOAN FROM ICICI BANK AND AXIS BA NK (UTI BANK) RS. 165 CRORES FOR MAKING PAYMENT FOR AVAILIN G THIS FACILITY AND HAD PAID MORE THAN 2 CRORES TOWARDS LOAN PROCES SING CHARGES. THE AO HAS NOT DISPUTED THE OBJECTIVE WITH WHICH AS SESSEE HAD MADE THIS ARRANGEMENT. THE MAIN/PRIMARY OBJECTIVE OF ASSESSE E IS RELEVANT FOR PURPOSES OF EXPLANATION 3. IF THE PRIMARY OBJECTIV E WAS NOT TAX REDUCTION. THE EXPLANATION 3 COULD NOT BE INVOKED. 41. THE NEXT ASPECT IS REGARDING INTEREST LIABILITY INCURRED BY ASSESSEE TOWARDS INTEREST PAYMENT ON THE LOAN OF RS. 165 CRO RES TAKEN BY IT. ONE CANNOT LOOSE SIGHT OF THE FACT THAT THIS WAS ACTUAL CASH OUTFLOW OF ASSESSEE ITA NOS. 3259 & 4276/D/ 2010 58 AND IT WAS NOT TO ANY RELATED PARTY. THIS COST INC URRED BY THE ASSESSEE WAS SOLELY ON BUSINESS CONSIDERATIONS IN-AS-MUCH AS THE AO HAS ALLOWED THE INTEREST CHARGES IN ASSESSEES ASSESSMENT. HERE IS NOT A CASE WHERE ASSESSEE HAS MERELY CLAIMED DEPRECIATION ON ENHANCE D VALUE OF ASSET BUT HAS SIMULTANEOUSLY INCURRED THE INTEREST COST ON AC COUNT OF LOAN TAKEN FROM BANKS. THEREFORE, IT CANNOT BE SAID THAT THE MAIN O BJECT WAS TO CLAIM DEPRECIATION ON ENHANCED VALUE OF ASSETS. THE AO H AS OBSERVED THAT THIS LOAN ULTIMATELY BENEFITED BILT AS THE PAYMENT HAS B EEN MADE TO THAT COMPANY ONLY BY ASSESSEE. WE DO NOT FIND MUCH SUBS TANCE IN THIS PLEA OF AO AS WE DO NOT FIND ANY IMPROPRIETORY IN THIS TRAN SACTION. WE FURTHER FIND CONSIDERABLE FORCE IN THE SUBMISSION OF LD. SR. COU NSEL FOR THE ASSESSEE THAT SUCH A BIG LOAN COULD NOT BE AVAILED BY ASSESSEE WI THOUT DETAILED DUE DILIGENCE BEING UNDERTAKEN BY THE RESPECTIVE BANKS BEFORE GRANTING LOAN. BANK HAS TO ENSURE FULL SECURITY OF THE LOAN GIVEN BY IT. THE LOAN HAD BEEN GIVEN ON THE SECURITY OF ASSETS AND, THEREFORE, IT CANNOT BE DENIED THAT THEY MUST HAVE TAKEN DUE CARE TO ENSURE THAT THE PROPER VALUATION OF ASSETS WAS AS PER THE REPORTS OF INDEPENDENT VALUERS. 42. LD. CIT(A) HAS OBSERVED AND RIGHTLY SO THAT AO HAS NOT POINTED OUT ANY MISTAKE IN THE VALUATION REPORT. IT IS TRUE THAT A O IS ENTITLED TO IGNORE THE VALUATION REPORT ALSO BUT FOR DETERMINING THE ACTUA L COST OF ASSETS IT CANNOT BE DENIED THAT IT WAS VERY MATERIAL EVIDENCE. ITA NOS. 3259 & 4276/D/ 2010 59 43. THE AO HAS OBSERVED THAT THE ASSESSEE COMPANY H AD JUST OBTAINED EASEMENTARY RIGHTS OF LAND HAVING THE PLANT AND MAC HINERY AND BUILDINGS AT VERY NOMINAL RENTS FOR A PERIOD OF 15 YEARS. THE A O AFTER TAKING INTO CONSIDERATION THE NOMINAL RENT FIXED FOR THIS PURPO SE OBSERVED THAT THE OBVIOUS REASON WAS THAT THE LAND WOULD NEVER HAVE B EEN SUBJECT MATTER OF DEPRECIATION. WE FIND THAT ASSESSEE HAS CLARIFIED THIS ASPECT BY STATING THAT SINCE BILT ITSELF WAS LEASEHOLDER THEREFORE, IT COU LD NOT TRANSFER THE LAND. WE ARE UNABLE TO DISCERN ANYTHING WRONG IN THIS EXP LANATION, AS THE FACTS ARE ON RECORD. 44. IN VIEW OF ABOVE FACTS, WE ARE OF THE OPINION T HAT LD. CIT(A) HAS RIGHTLY HELD THAT THE ACTUAL COST OF THE ASSETS WAS RS. 235 CRORES AND NOT THE WRITTEN DOWN VALUE AS PER INCOME-TAX ASSESSMENTS. 45. THERE IS ONE MORE IMPORTANT ASPECT WHICH FORTIF IES OUR VIEW UPHOLDING THE LD. CIT(A)S FINDINGS. IT IS PERTINENT TO NOTE THAT TWO WDVS WERE AVAILABLE BEFORE THE AO ONE AS PER THE BOOKS OF THE ASSESSEE AND SECOND AS PER THE INCOME-TAX COMPUTATION. 46. ADMITTEDLY, AS PER THE BOOKS OF ACCOUNT OF THE BILT, THE WDV WAS RS. 214.16 CRORES ON THE DATE OF TRANSFER AND THE WDV A S PER INCOME-TAX ACT ITA NOS. 3259 & 4276/D/ 2010 60 WAS 86.66 CRORES. THE AO HAS COMPLETELY IGNORED TH IS IMPORTANT ASPECT WHILE CONCLUDING THAT THE ACTUAL COST FOR PURPOSES OF EXPLANATION 3 TO SECTION 43(1) WAS 86.66 CRORES AS PER THE INCOME-TAX ACT. W DV AS PER BOOKS OF ACCOUNT OF THE ASSESSEE IS DETERMINED ON THE BASIS OF RATE OF DEPRECIATION PRESCRIBED UNDER THE COMPANIES ACT IN SCHEDULE XIV TO THE COMPANIES ACT. THE DEPRECIATION RATES HAVE BEEN PRESCRIBED DIFFERE NTLY UNDER COMPANIES ACT AND INCOME-TAX ACT. THE OBJECT OF ALLOWING DEP RECIATION, AS A CHARGE AGAINST THE PROFITS, IS TO ENABLE THE ASSESSEE TO R ECOVER THE ORIGINAL COST OF ASSETS IN COURSE OF TIME SO THAT WHEN THE REPLACEME NT OF ASSETS IS REQUIRED, THE ASSESSEES BUSINESS OPERATIONS DO NOT HAMPER FO R THE AVAILABILITY OF FUNDS. THEREFORE, COMPANIES ACT PRESCRIBES NORMALL Y SUCH RATES WHICH MAY ENSURE THE ACHIEVEMENT OF AFOREMENTIONED OBJECTIVE. HOWEVER, UNDER THE INCOME TAX ACT SUCH RATES ARE PRESCRIBED WHICH ENSU RE THAT ASSESSEE RECOVERS ITS CAPITAL COST IN SHORTEST POSSIBLE OF T IME. THEREFORE, THE RATES OF DEPRECIATION PRESCRIBED UNDER COMPANIES ACT ARE MOR E REALISTIC. UNDER THE COMPANIES ACT THE OBJECT IS THAT THE COMPANYS ASSE TS SHOULD CONTINUE IN THE BOOKS UPTO THEIR ENTIRE LIFE SPAN. BE THAT AS IT MAY, SINCE TWO WDVS WERE AVAILABLE BEFORE THE AO FOR DETERMINING THE AC TUAL COST, HE COULD NOT HAVE IGNORED THE WDV AS PER THE BOOKS OF THE COMPAN Y THE ADOPTION OF WHICH WAS MORE BENEFICIAL TO COMPANY. ADMITTEDLY, THERE IS VERY MINOR DIFFERENCE (235 214.16) CRORES IN THE VALUATION O F ASSETS AS PER BOOKS OF BILT AND THE ACTUAL CONSIDERATION PAID BY THE ASSES SEE COMPANY. ITA NOS. 3259 & 4276/D/ 2010 61 THEREFORE, THIS ASPECT CLEARLY ESTABLISHES THE BONA FIDE OF ASSESSEE IN ADOPTING THE ACTUAL COST OF ASSETS AT RS. 235 CRORE S. WE, THEREFORE, DO NOT FIND ANY REASON TO DISTURB THE FINDINGS OF LD. CIT( A). 47. IN THE RESULT, THIS GROUND IS DISMISSED. 48. GROUND NO. 2 OF DEPARTMENTS APPEAL AND GROUND NO. 1 & 2 OF ASSESSEES APPEAL RELATE TO ALLOWABILITY OF LOAN PR OCESSING FEES. 49. BRIEF FACTS APROPOS THIS ISSUE ARE THAT ASSESSE E COMPANY HAD PAID 2,43,70,830/-AS LOAN PROCESSING FEES TO ICICI BANK AND AXIS BANK FOR AVAILING TERM LOAN OF RS. 165 CRORES FROM THEM. TH E ASSESSEE HAD DEBITED RS. 21,50,367/- IN THE PROFIT AND LOSS ACCOUNT AND BALA NCE RS. 2,22,20,463/- WAS SHOWN AS DEFERRED FINANCE CHARGES UNDER THE HEA D LOANS AND ADVANCES. THE AO DISALLOWED THE ASSESSEES CLAIM HOLDING THE AMOUNT PAID BEING CAPITAL IN NATURE. HE OBSERVED THAT LOA N PROCESSING CHARGES WERE COVERED BY THE DEFINITION OF INTEREST AS MENTIONED IN SECTION 2(28A) AND SINCE THIS WAS PAID FOR ACQUISITION OF ASSETS THERE FORE, IT WAS NOT ALLOWABLE AS DEDUCTION U/S 36(1)(III). HE, INTER-ALIA, OBSERVED THAT THE LOAN IN QUESTION WAS TAKEN TO ACQUIRE ASSET I.E. POWER PLANT FROM M/S BI LT, WHICH FACT WAS NOT DISPUTED BY THE ASSESSEE. HE FURTHER OBSERVED THAT LOAN PROCESSING CHARGES WAS A PRE-CONDITION FOR SANCTIONED DISBURSEMENT OF LOAN AND HAD TO BE ITA NOS. 3259 & 4276/D/ 2010 62 INCURRED. THEREFORE, EVEN IF PAYMENT OF LOAN PROCE SSING CHARGES WAS MADE AFTER THE ASSET I.E. POWER PLANT WAS FIRST PUT TO U SE, THE INSTANCE OF LOAN PROCESSING CHARGES ACCRUED EARLIER I.E. BEFORE ASSE T WAS ACTUALLY ACQUIRED AS PAYMENT WAS A PRE-CONDITION OR AT LEAST SIMULTAN EOUSLY EVENT OF OWNERSHIP FOR ANY PURCHASE MADE IN LIEU OF CONSIDER ATION. HE, THEREFORE, MADE AN ADDITION OF RS. 21,50,367/-. 50. BEFORE LD. CIT(A) IT WAS SUBMITTED THAT IN THE ACCOUNTS THE LOAN PROCESSING CHARGES WERE BOOKED IN THE FOLLOWING MAN NER: A) RS. 21,50,367/- WAS CHARGED TO PROFIT AND LOSS ACCOUNT. B) RS. 2,27,20,463/- WAS TREATED IN ACCOUNTS AS D EFERRED FINANCE CHARGES FOR AMORTIZATION IN EQUAL INSTALLMENTS IN SUBSEQUENT YEARS. IT WAS CLARIFIED THAT THE ASSESSEE COMPANY PREFER RED TO CLAIM PROCESSING FEE RS. 21,50,367/- IN THE RETURN SINCE THE SAME HA D ALREADY BEEN BOOKED IN ACCOUNTS, WHEREAS BALANCE RS. 2,22,20,463/- WAS CLA IMED AT THE EARLIEST OPPORTUNITY IN COURSE OF ASSESSMENT PROCEEDINGS. B EFORE LD. CIT(A), IT WAS SUBMITTED THAT THE PURPOSE FOR RAISING FINANCE FR OM BANKS AND THE NATURE OF EXPENDITURE ARE PRIME FACTORS AS OPPOSED TO MANNER OF DISCLOSURE IN THE ACCOUNTS. IT WAS CONTENDED THAT EXPENDITURE WAS IN CURRED IN ORDER TO DISCHARGE THE LIABILITY AFTER 1/04/2006. FURTHER I T WAS SUBMITTED THAT LOAN PROCESSING CHARGES WAS IN THE NATURE OF INTEREST DE FINED U/S 2(28A) OF THE INCOME TAX ACT AND SINCE ASSESSEE HAD ACQUIRED A RU NNING POWER PLANT, ITA NOS. 3259 & 4276/D/ 2010 63 THERE WAS NO PRE-OPERATING PERIOD OF CONSTRUCTION I NVOLVED HERE. LD. CIT(A) OBSERVED THAT IN THIS CASE THE DECISION OF HONBLE SC IN M/S GOETZ INDIA LTD. WAS NOT APPLICABLE BECAUSE HERE ASSESSEE HAD BOOKED RS. 21,50,367/- IN THE PROFIT AND LOSS ACCOUNT AND BALANCE WAS TREATED AS DEFERRED REVENUE EXPENDITURE. HOWEVER, HE DIRECTED THE AO TO ALLOW DEDUCTION OF RS. 21,50,367/- ONLY. 51. BEING AGGRIEVED WITH THE FINDINGS OF LD. CIT(A) BOTH ASSESSEE AND DEPARTMENT ARE IN APPEAL BEFORE US AND HAVE TAKEN F OLLOWING GROUNDS OF APPEAL: GROUNDS OF ASSESSEES APPEAL : 1. THAT THE LD. CIT(A)-V, NEW DELHI WAS WRONG IN A LLOWING LOAN PROCESSING FEES RS. 21,50,367/- INPLACE OF R S. 2,43,70,830/- AS REVENUE EXPENDITURE U/S 36(1)(III) WHICH WAS ACTUALLY PAID/PAYABLE BY THE APPELLANT COMPANY DURI NG THE YEAR UNDER CONSIDERATION. 2. THAT THE LD. CIT(A) WAS WRONG IN TREATING LOAN PROCESSING FEES RS. 2,43,70,830/- ACTUALLY PAID/PA YABLE DURING THE YEAR UNDER CONSIDERATION AS DEFERRED EXP ENDITURE AND SUCH EXPENDITURE IS ALLOWABLE IN 9 YEARS. 3. THAT THE ORDER IS OTHERWISE BAD IN LAW. GROUND OF DEPARTMENTS APPEAL : 2. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING THE ADDITION OF RS. 21,50,367/- ON ACCOUNT OF DISAL LOWANCE OF LOAN PROCESSING FEE CHARGES AS REVENUE EXPENDITURE. LD. CIT(A) IGNORED THE PROVISO TO SECTION 36(1)(III) OF THE I.T. ACT, ITA NOS. 3259 & 4276/D/ 2010 64 1961 WHICH IS EXPLICITLY APPLICABLE IN THE ASSESSEE S CASE AND ALSO THE INSTANCE OF LOAN PROCESSING CHARGES ACCRUE D EARLIER THAN ASSET WAS ACTUALLY PUT TO USE SINCE ASSESSEE C OMPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. 52. LD. DR SUBMITTED THAT IN VIEW OF THE DECISION O F HONBLE SC IN THE CASE OF GOETZ INDIA LTD. 284 ITR 323, THE ASSESSEES CLA IM IS NOT LEGALLY MAINTAINABLE BECAUSE THE SAME HAD NOT BEEN CLAIMED IN THE RETURN OF INCOME FILED BY THE ASSESSEE. SHE FURTHER SUBMITTED THAT PROVISO TO SECTION 36(1)(III) PROHIBITS ALLOWABILITY OF INTEREST FOR C APITAL BORROWED AND DEPLOYED FOR THE ACQUISITION OF THE ASSET TILL THE TIME IT I S PUT TO USE. FURTHER THE EXPENDITURE HAD BEEN INCURRED PRIOR TO THE SANCTION OF LOAN AND SINCE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING, THE SAME WAS NOT ALLOWABLE. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE EXPENDITURE WAS INCURRED AFTER ASSETS HAD BEEN FIRST PUT TO USE IN BUSINESS BY THE ASSESSEE. LD. COUNSEL FURTHER SUBMITTED THAT IT IS NOT A CASE OF NEW BUSINESS BUT TAKE OVER OF GOING CONCERN. 53. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. THE FACTS ARE NOT DISPUTED. A S PER SECTION 2(28A) INTEREST MEANS INTEREST PAYABLE IN ANY MANNER IN RE SPECT OF ANY MONEYS BORROWED OR DEBT INCURRED (INCLUDING A DEPOSIT CLAI M OR OTHER SIMILAR RIGHT OR OBLIGATION) AND INCLUDES ANY SERVICE FEE OR OTHER C HARGE IN RESPECT OF THE ITA NOS. 3259 & 4276/D/ 2010 65 MONEYS BORROWED OR DEBT INCURRED OR IN RESPECT OF A NY CREDIT FACILITY WHICH HAS NOT BEEN UTILIZED. THEREFORE, LOAN PROCESSING CHARGES WERE IN THE NATURE OF INTEREST ONLY. AS PER PROVISO TO SECTION 36(1)( III), THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN A SSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION IS NOT ALLOWABLE. THUS, UP TO THE DATE THE ASSET IS PUT TO USE, THE INTEREST IS TO BE CAPITALI ZED. THE INTEREST FOR THE PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUC H ASSET WAS FIRST PUT TO USE, IS NOT ALLOWABLE AS DEDUCTION. 54. THE EFFECTIVE DATE AS PER THE DECISION OF HONB LE HIGH COURT SANCTIONING THE SCHEME OF DEMERGER WAS 01/04/06 AND THE ASSESSEE COMPANY HAD ACQUIRED THE RUNNING PLANT OF BALLARPUR INDUSTRIES LTD. AND THE LOAN WAS TAKEN IN JULY, 2006. HOWEVER, THIS LOAN W AS FOR PAYING THE PURCHASE PRICE OF ASSETS ACQUIRED BY THE ASSESSEE A ND, THEREFORE, THE AO HAS RIGHTLY OBSERVED THAT THE INCIDENCE OF EXPENDIT URE OCCURRED PRIOR TO OBTAINING ASSETS. HERE WE HAVE TO EXAMINE THE NATUR E OF PAYMENT WITH REFERENCE TO THE ASSESSEE COMPANY WHICH HAS ACQUIRE D THE POWER BUSINESS OF BALLARPUR INDUSTRIES LTD. SINCE, THE ENTIRE AMO UNT OF LOAN HAD BEEN OBTAINED FOR ACQUIRING THE ASSET, THEREFORE, ALL TH E EXPENSES INCIDENTAL TO THE ACQUISITION OF LOAN HAVE TO BE TREATED AS CAPITAL I N NATURE. MERELY BECAUSE ASSESSEE HAD ACQUIRED GOING CONCERN WILL NOT ALTER THE NATURE OF PAYMENT IN ITA NOS. 3259 & 4276/D/ 2010 66 THE HANDS OF THE ASSESSEE. THE INTENTION OF THE LE GISLATURE IS THAT ALL THE EXPENSES INCURRED UP TO THE DATE OF ACQUISITION OF ASSET HAVE TO BE TREATED AS CAPITAL IN NATURE. WE, THEREFORE, DO NOT FIND A NY INFIRMITY IN THE ORDER OF AO IN TREATING THE ENTIRE LOAN PROCESSING FEE PAID FOR OBTAINING LOAN FROM BANK BEING CAPITAL IN NATURE. THE ASSESSEE HOWEVER , WOULD BE ENTITLED TO CLAIM DEPRECIATION BY CAPITALIZING THIS FIGURE WITH THE COST OF ASSET ACQUIRED BY IT. 55. WE, THEREFORE, SET ASIDE THE ORDER OF LD. CIT(A ) ON THIS ISSUE. 56. IN THE RESULT, THE ASSESSEES GROUND OF APPEAL IS DISMISSED AND DEPARTMENTS GROUND OF APPEAL IS ALLOWED. 57. IN THE RESULT, THE DEPARTMENTS APPEAL IS PARTL Y ALLOWED AND ASSESSEES APPEAL IS DISMISSED ORDER PRONOUNCED IN THE OPEN COURT ON 09/11/12 SD- SD/- (U.B.S. BEDI) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 09/11/12 *KAVITA ITA NOS. 3259 & 4276/D/ 2010 67 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER ASSISTANT REGISTRAR