Appeal details
Counselvise Citation
444224514 RSA 2003
Assessee PAN
Bench
Appeal Number
Duration Of Justice
9 year(s) 8 month(s) 11 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
28-08-2013
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
A
Next Hearing Date
25-10-2012
Assessment Year
1999-2000
Appeal Filed On
17-12-2003
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHES A, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.4427/AHD/2003 (ASSESSMENT YEAR : 1997-98) ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 8, AHMEDABAD. . APPELLANT VS. SANDVIK CHOKSHI LTD., PLOT NO.1174, RAJPUR VILLAGE, TALUKA: KADI, DIST.: MEHSANA. PAN : NOT AVAILABLE . RESPONDENT ITA NO.4442/AHD/2003 (ASSESSMENT YEAR : 1999-2000) ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 8, AHMEDABAD. . APPELLANT VS. SANDVIK STEEL ASIA PVT. LTD., PLOT NO.1174, RAJPUR VILLAGE, TALUKA: KADI, DIST: MEHSANA. PAN : AACCS0299N . RESPONDENT ITA NO.3536/AHD/2004 (ASSESSMENT YEAR : 2001-02) ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 8, AHMEDABAD. . APPELLANT VS. SANDVIK STEEL ASIA PVT. LTD., PLOT NO.1174, RAJPUR VILLAGE, TALUKA: KADI, DIST: MEHSANA. PAN : AACCS0299N . RESPONDENT ITA NO.3537/AHD/2004 (ASSESSMENT YEAR : 1998-99) ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 8, AHMEDABAD. . APPELLANT VS. SANDVIK CHOKSHI LTD., (NOW KNOWN AS SANDVIK ASIA LTD.) PLOT NO.1174, RAJPUR VILLAGE, ITA NO. 2561/PN/2012 A.Y. 2009-10 TALUKA: KADI, DIST.: MEHSANA. PAN : AACCS0299N . RESPONDENT ITA NO.754/AHD/2006 (ASSESSMENT YEAR : 2002-03) ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 8, AHMEDABAD. . APPELLANT VS. SANDVIK STEEL ASIA PVT. LTD., (NOW MERGED WITH SANDVIK ASIA LTD.) PLOT NO.1174, RAJPUR VILLAGE, TALUKA: KADI, DIST: MEHSANA. PAN : AACCS0299N . RESPONDENT DEPARTMENT BY : MRS. M. S. VERMA ASSESSEE BY : MR. J. D. MISTRI ORDER PER G. S. PANNU, AM THESE ARE A GROUP OF FIVE APPEALS PREFERRED BY THE REVENUE IN RELATION TO THE SAME ASSESSEE FOR DIFFERENT ASSESSMENT YEARS AND SINCE CERTAIN COMMON ISSUES ARE INVOLVED, THEREFORE, THEY HAVE BE EN CLUBBED AND HEARD TOGETHER AND A CONSOLIDATED ORDER IS BEING PASSED F OR THE SAKE OF CONVENIENCE AND BREVITY. 2. ITA NO.4427/AHD/2003 PERTAINING TO ASSESSMENT YE AR 1997-98 IS TAKEN AS THE LEAD CASE, WHICH IS DIRECTED AGAINST THE ORD ER OF THE CIT(A)-XIV, AHMEDABAD DATED 22.09.2003 WHICH, IN TURN, HAS ARIS EN FROM AN ORDER DATED 27.03.2000 PASSED BY THE ASSESSING OFFICER U/S 143 (3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT). 3. THE REVENUE HAS RAISED TWO GROUNDS OF APPEAL, FI RST BEING AGAINST THE ACTION OF THE CIT(A) IN DELETING THE DISALLOWANCE O F RS.9,82,47,164/- MADE BY ITA NO. 2561/PN/2012 A.Y. 2009-10 THE ASSESSING OFFICER OUT OF DEPRECIATION CLAIM BY INVOKING EXPLANATION 3 TO SECTION 43(1) OF THE ACT. 4. IN BRIEF, THE FACTS ARE THAT THE RESPONDENT-ASSE SSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956, DURING THE YEAR UNDER CONSIDERATION. ON 28.10.1996 ASSESSEE WAS IN CORPORATED AS A JOINT VENTURE BETWEEN SANDVIK AB OF SWEDEN (HEREINAFTER R EFERRED TO AS SANDVIK) AND CHOKSHI TUBE COMPANY LTD. (HEREINAFTER REFERRED TO AS CTC). SANDVIK IS HOLDING A MAJORITY SHARE OF 51% AND THE BALANCE OF 49% IS HELD BY CTC. DURING THE YEAR UNDER CONSIDERATION ASSESSEE ACQUIR ED THE BUSINESS OF EXTRUDED METAL DIVISION (HEREINAFTER REFERRED TO AS THE EMD) UNDERTAKING OF CTC WAS ON A SLUMP SALE BASIS THROUGH A TRIPARTITE AGREEMENT DATED 04.12.1996 ENTERED INTO BETWEEN SANDVIK, CTC AND TH E ASSESSEE COMPANY. THE ASSESSEE IS ENGAGED IN THE MANUFACTURE AND SALE OF STAINLESS STEEL SEAMLESS PIPES. IN TERMS OF THE SAID AGREEMENT, TH E EMD UNDERTAKING OF CTC WAS ACQUIRED BY THE ASSESSEE AS A GOING CONCERN FOR A SLUMP PRICE OF RS.100 CRORES. SINCE THE EMD UNDERTAKING WAS ACQUIRED ON A SLUMP SALE BASIS, NO VALUES WERE ASSIGNED TO THE INDIVIDUAL ASSETS TRANS FERRED IN THE AGREEMENT. IN ORDER TO RECORD THE VARIOUS ASSETS ACQUIRED IN THE BOOKS OF ACCOUNT, ASSESSEE APPOINTED INDEPENDENT APPROVED VALUERS TO VALUE EAC H FIXED ASSET AND ASSIGN VALUE THEREOF. ONE SUCH VALUER, MR. MUKESH SHAH WA S APPOINTED FOR DETERMINING THE FAIR MARKET VALUE OF THE PLANT AND MACHINERY INSTALLED IN THE EMD UNDERTAKING. THE SAID VALUER DETERMINED THE AG GREGATE VALUE OF PLANT AND MACHINERY AT RS.84,17,50,000/-. SIMILARLY, ASS ESSEE APPOINTED ANOTHER VALUER FOR DETERMINING THE FAIR MARKET VALUE OF LAN D AND BUILDING ACQUIRED, WHO DETERMINED THE VALUE OF LAND AT RS.41,00,000/- AND THAT OF BUILDING AT RS.4,49,00,000/-. THE CURRENT ASSETS AND THE CURRE NT LIABILITIES WHICH WERE ALSO TAKEN-OVER AS PART OF SLUMP SALE WERE RECORDED IN THE BOOKS OF ACCOUNT AT THE NET REALIZABLE VALUES, I.E. THE VALUES AT WHICH THEY WERE RECORDED IN THE ACCOUNT BOOKS OF TRANSFEROR COMPANY, CTC. THE INVE NTORY OF RAW MATERIALS ITA NO. 2561/PN/2012 A.Y. 2009-10 AND OTHER RAW MATERIALS ACQUIRED ALONGWITH EMD UNDE RTAKING WERE RECORDED AT NET REALIZABLE VALUES. AFTER APPORTIONING THE P URCHASE CONSIDERATION BETWEEN THE FIXED ASSETS AND THE NET CURRENT ASSETS THE BALANCE EXCESS CONSIDERATION OF RS.11,36,000/- WAS RECORDED AS GOO DWILL OF THE BUSINESS PURCHASED. THE VALUES ASSIGNED BY THE TWO VALUERS WERE ADOPTED BY THE ASSESSEE TO RECORD THE COST OF RESPECTIVE ASSETS IN ITS BOOKS OF ACCOUNT AND ACCORDINGLY ASSESSEE CLAIMED DEPRECIATION WITH RESP ECT TO THE COST OF ASSETS SO RECORDED. ACCORDINGLY, ASSESSEE CLAIMED DEPRECI ATION OF RS.10,78,78,165/-. THE ASSESSING OFFICER HOWEVER H AS ALLOWED DEPRECIATION OF RS.96,31,001/- ONLY THEREBY MAKING AN ADDITION O F RS.9,82,47,164/-. THE ASSESSING OFFICER HAS INVOKED EXPLANATION 3 TO SECT ION 43(1) OF THE ACT IN ORDER TO DENY DEPRECIATION CLAIMED BY THE ASSESSEE WITH RESPECT TO THE COST OF ASSETS RECORDED IN THE ACCOUNT BOOKS. THE ASSESSIN G OFFICER ADOPTED THE WRITTEN DOWN VALUE (WDV) NET OF DEPRECIATION OF THE ASSETS AS APPEARING IN THE ACCOUNT BOOKS OF THE TRANSFEROR COMPANY I.E. CT C AS THE COST OF ASSETS FOR THE PURPOSES OF CALCULATING DEPRECIATION AS AGAINST THE COST RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. 5. IN COMING TO SUCH CONCLUSION, THE ASSESSING OFFI CER HAS NOT ACCEPTED THE VALUATION OF PLANT AND MACHINERY, IN PARTICULAR THE VALUATION OF EXTRUSION PRESS DONE BY THE VALUER, MR. MUKESH SHAH AND THE A SSESSING OFFICER WAS OF THE VIEW THAT THE VALUATION OF SUCH PLANT AND MACHI NERY HAS NOT BEEN ARRIVED AT ON THE BASIS OF ANY RECOGNIZED METHOD OF VALUATI ON. THE ASSESSING OFFICER ALSO EXAMINED THE SAID VALUER IN THE COURSE OF THE ASSESSMENT PROCEEDINGS. ON THE BASIS OF HIS REJECTION OF THE VALUATION OF E XTRUSION PRESS, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE VALUE ADOPTED BY T HE VALUER WAS JUST FOR ACCOMMODATING THE ASSESSEE COMPANY. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER INVOKED EXPLANATION 3 TO SECTION 43(1) OF T HE ACT AND DISALLOWED THE DEPRECIATION CLAIMED TO THE EXTENT OF RS.9,82,47,16 4/-. ITA NO. 2561/PN/2012 A.Y. 2009-10 6. IN APPEAL, ASSESSEE CONTENDED THAT SINCE THE BUS INESS WAS ACQUIRED ON A SLUMP SALE BASIS, AND NO SPECIFIC VALUE WAS AS SIGNED TO EACH OF THE ASSET TRANSFERRED IN THE AGREEMENT AND IN ORDER TO RECORD SUCH ASSETS IN THE ACCOUNT BOOKS, ASSESSEE APPOINTED INDEPENDENT APPRO VED VALUERS TO VALUE EACH FIXED ASSET AND ASSIGN VALUE THEREOF. IT WAS ALSO POINTED OUT THAT ALL THE VALUES DETERMINED BY THE VALUER WERE APPRAISED BY A FINANCIAL INSTITUTION, ICICI, WITH WHOM SUCH ASSETS WERE MORTGAGED FOR AVA ILING LOAN FACILITIES. THE ASSESSEE ALSO POINTED OUT THAT THE ASSESSING OFFICE R HAD ACCEPTED THE DETERMINATION OF TOTAL CONSIDERATION OF RS.100 CROR ES AS GENUINE AND THUS THERE WAS NO JUSTIFICATION TO INVOKE EXPLANATION 3 TO SECTION 43(1) OF THE ACT MERELY TO DENY DEPRECIATION. ASSESSEE ALSO DEFEND ED THE VALUATION OF EXTRUSION PRESS DETERMINED BY THE VALUER MR. SHAH A ND EXPLAINED THAT THE SAME WAS DONE ON THE BASIS OF REPLACEMENT COST METH OD, WHICH IS A RECOGNIZED METHOD OF VALUATION. IN ANY CASE, ASSES SEE ALSO POINTED OUT THAT THE ASSESSING OFFICER DID NOT PROVIDE A COPY OF STA TEMENT OF MR. SHAH RECORDED U/S 131(3) OF THE ACT. FURTHER, IT WAS PO INTED OUT THAT THE ASSESSING OFFICER HAD DISPUTED ONLY THE VALUATION OF EXTRUSIO N PRESS WHEREAS HE HAS REJECTED THE ENTIRE VALUATION REPORT OF PLANT AND M ACHINERY AS ALSO THE VALUATION REPORT OF LAND AND BUILDINGS WITHOUT ANY DISCUSSION OR ASSIGNING ANY REASONS THEREOF. IT WAS, THEREFORE, PLEADED THAT T HE TRANSFER OF EMD UNDERTAKING WAS NOT FOR THE PURPOSE OF REDUCING INC OME-TAX LIABILITY BY CLAIMING HIGHER DEPRECIATION ON ENHANCED COST; AND, THUS EXPLANATION 3 TO SECTION 43(1) OF THE ACT WAS WRONGLY INVOKED. THE ASSESSEE ALSO POINTED OUT BEFORE THE CIT(A), ON THE BASIS OF A TABULATION WHI CH HAS BEEN REPRODUCED IN PARA 2.5 OF THE ORDER OF THE CIT(A), THAT EVEN IF A SSESSEE WAS ALLOWED LOWER DEPRECIATION, AS DONE BY THE ASSESSING OFFICER, YET THE COMPUTATION OF INCOME WOULD RESULT IN A LOSS FOR THE NEXT SIX YEARS AND T HEREFORE, THERE COULD NOT HAVE BEEN ANY INTENTION OF REDUCING TAX LIABILITY BY CLA IMING HIGHER DEPRECIATION. THE CIT(A) HAS CONSIDERED THE RIVAL STANDS AND HAS CONCLUDED THAT IN ASSESSEES CASE THERE IS NO POSSIBLE REDUCTION OF T AX LIABILITY DUE TO CLAIMING ITA NO. 2561/PN/2012 A.Y. 2009-10 DEPRECIATION ON ENHANCE COST OF ASSETS TAKEN-OVER F ROM CTC AND THUS EXPLANATION 3 TO SECTION 43(1) OF THE ACT HAS BEEN ERRONEOUSLY INVOKED BY THE ASSESSING OFFICER. THE RELEVANT PORTION OF THE ORD ER OF THE CIT(A) IS REPRODUCED AS UNDER :- 2.6 THE REQUIREMENT OF THE SECTION APPLIED BY THE A.O. IS THAT THE A.O. HAS TO RECORD HIS SATISFACTION TO THE EFFECT T HAT THE APPELLANT HAS REDUCED THE TAX LIABILITY BY ENHANCING THE COST OF ASSETS A ND CLAIMING DEPRECIATION AT A HIGHER RATE. IN THIS CONNECTION, IT IS PERTINENT TO QUOTE THE EXTRACTS OF THE DECISION OF MADRAS HIGH COURT IN THE CASE OF CIT V. SFFSET PRESS (1995) 214 ITR 516, 518 (MAD). . ...'EXPLANATION 3 TO SECTION 43(1) WOULD BE ATTRACTED ONLY IN CASES WHERE BEFORE THE DATE OF ACQUISITION BY THE ASSESSEE, THE ASSETS WERE AT ANY TIME USED BY ANY OTHER PERSON FOR THE P URPOSE OF HIS BUSINESS AND A.O. IS SATISFIED THAT THE MAIN PURPOSE OF THE TRANSFER OF SUCH ASSETS DIRECTLY OR INDIRECTLY TO THE ASSESSEE, WAS FOR THE REDUCTION OF THE LIABILITY TO INCOME-TAX. THERE IS NO OTHER CIRCUMSTANCES, UNDER WHICH EXPLANATION CAN BE INVOKED. FURTHER, FROM THE SAID EXPLANATION 3, IT CRYSTAL CLEAR THAT THE A.O. IS OBLIGED TO RECORD HIS SATISFACTION THAT THE TRANSFE R OF THE ASSETS WAS FOR REDUCING THE LIABILITY TO PAY INCOME-TAX. WHERE TH E A.O. HAS NOT RECORDED ANY SUCH SATISFACTION, IT IS NOT OPEN FOR THE APPELLATE AUTHORITIES TO SUSTAIN THE APPLICABILITY OF THE SAID EXPLANATION-3 ONLY ON THE FULFILLMENT OF FIRST REQUIREMENT OF THAT EXPLANATION.' IN THE CASE OF JASWANT SUGAR MILLS LTD. VS. CIT 1973 TAX LK 1336, THE ALLAHABAD HIGH COURT HAS HELD THAT UNLESS THE A.O., AFTER GIVING THE ASSESSEE AN OPPORTUNITY TO E STABLISH THE GENUINENESS OF THE TRANSFER, IS OBJECTIVELY SATISFIED THAT THE ACQ UISITION OF ASSETS INVOLVED A TRANSFER FOR THE PURPOSE OF REDUCTION OF TAX LIABIL ITY, DEPRECIATION ON THE ACQUIRED ASSETS HAS TO BE ALLOWED ON THE ACTUAL PRI CE PAID FOR THEM BY THE ASSESSEE. SUCH OBJECTIVE SATISFACTION SHOULD NOT B E INFERRED FROM THE MERE FACT THE A.O. HAD OBTAINED THE APPROVAL OF THE DCIT TO HAVE RECOURSE TO THESE PROVISIONS. IN VIEW OF THE ABOVE, THE INTENTION OF THE LEGISLATURE IS CLEAR AND IN THE APPELLANT'S CASE THERE IS NO REDUCTION OF TAX L IABILITY DUE TO ENTERING INTO AN AGREEMENT BY ENHANCING THE COST OF ASSETS AND CLAIM ING DEPRECIATION AT A HIGHER RATE AND, THEREFORE, THE OBSERVATION OF THE A.O. THAT THE ASSESSEE HAS SHOWN INFLATED VALUE OF ASSETS AS OPENING WDV WITH AN INTENTION TO REDUCE THE LIABILITY OF INCOME-TAX BY CLAIMING DEPRECIATIO N WITH REFERENCE TO AN ENHANCED COST, HAS NO LEGAL VALIDITY. FROM THE COM PUTATION CHART GIVE SUPRA WITH DEPRECIATION ON WDV, THERE IS NO PROFIT AT ALL , THEN WHERE IS THE QUESTION OF REDUCTION IN TAX LIABILITY, WHAT TO TALK OF THE REDUCTION IN TAX LIABILITY IN THE YEAR OF TRANSFER, I.E. FIRST YEAR OF JOINT VENTURE. EVEN IN THE SUCCEEDING YEARS THERE IS NO PROFIT EVEN WITH DEPRECIATION ON WDV OF ASSETS TRANSFERRED. IT IS ALSO PERTINENT TO NOTE HERE THAT EVEN IF NO DEPRECI ATION IS ALLOWED TO THE APPELLANT, THE TOTAL INCOME WILL REMAIN A LOSS. THE A.O. HAS SIMPLY PREFERRED TO BE SILENT ON THE MOST IMPORTANT ASPECT OF THE EXPLA NATION INVOKED BY HIM. IT IS FURTHER SEEN THAT THE A.O. HAS DISPUTED ONLY THE VA LUATION OF EXTRUSION PRESS, STILL HE HAS REJECTED THE ENTIRE VALUATION REPORT O F PLANT, MACHINERY, LAND & BUILDING, WHICH IS NOT IN THE INTEREST OF JUSTICE, ESPECIALLY IN SUCH CIRCUMSTANCES WHEN THE A.O. HAS ACCEPTED THE PAYMEN T OF RS. 100 CRORES FOR GENUINE PURPOSE AND WAS FOR ACQUISITION OF RUNNING BUSINESS OF E.M.D. UNDERTAKING. IN LIGHT OF THE ABOVE DISCUSSION, I HO LD THAT THERE IS NO JUSTIFICATION ON THE PART OF A.O. IN DISALLOWING THE DEPRECIATION OF RS. 9,82,47,164/- BY ERRONEOUSLY INVOKING EXPLANATION TO SEC. 43(1) OF T HE IT ACT AND , THEREFORE, THE A.O. IS DIRECTED TO ALLOW THE DEPRECIATION AT R S, 10,78,78,1657- AS CLAIMED BY THE APPELLANT. ITA NO. 2561/PN/2012 A.Y. 2009-10 7. AGAINST THE AFORESAID DECISION OF THE CIT(A), TH E LEARNED CIT(DR) HAS SUBMITTED THAT THE DISALLOWANCE OF DEPRECIATION HAS BEEN WRONGLY DELETED BY THE CIT(A). ACCORDING TO HER, THE CIT(A) HAS BASED HIS DECISION PRIMARILY ON THE GROUND THAT EVEN AFTER ALLOWING LOWER DEPRECIAT ION AS PER WDV APPEARING IN THE ACCOUNT BOOKS OF THE TRANSFEROR COMPANY, THE RE IS NO PROFIT IN THE HANDS OF THE ASSESSEE EVEN IN THE SUCCEEDING ASSESSMENT Y EARS AND THEREFORE THERE WAS NO INTENTION ON THE PART OF THE ASSESSEE TO RED UCE ITS TAX LIABILITY BY CLAIMING DEPRECIATION AT THE ENHANCED COST OF ASSET S. ACCORDING TO HER, THE EVENTS SUBSEQUENT TO THE TRANSFER OF ASSETS IS NOT RELEVANT TO EXAMINE THE INTENTIONS OF THE ASSESSEE FOR EFFECTING TRANSFER O F ASSETS. IT IS ALSO POINTED OUT THAT THE ASSESSING OFFICER HAD DULY EXAMINED ONE OF THE VALUERS, NAMELY, MR. MUKESH SHAH WHO HAD VALUED THE PLANT AND MACHINERY TAKEN-OVER BY THE ASSESSEE. IT IS POINTED OUT THAT AS A RESULT SUCH EXAMINATION, IT WAS ESTABLISHED THAT THE VALUE ASSIGNED BY HIM TO ONE O F MAJOR COMPONENTS OF PLANT AND MACHINERY, NAMELY, THE EXTRUSION PRESS WA S AT A VERY HIGH FIGURE OF RS.69,21,60,000/-. THE LEARNED CIT(DR) HAS POINTED OUT THAT WHILE CARRYING OUT THE VALUATION EXERCISE THE VALUER HAS ADDED 40% AS TIME FACTOR, AND WHEN HE WAS ENQUIRED ON THIS SUBJECT BY THE ASSESSING OF FICER, IT WAS STATED THAT THE SAID FACTOR HAS BEEN APPLIED ONLY IN THE VALUATION OF THE SAID MACHINERY. THE LEARNED CIT(DR) ALSO POINTED OUT THAT THE TRANSFER WAS EFFECTED AS A SLUMP SALE MEANING THEREBY THAT THE CONSIDERATION OF RS.1 00 CRORES WAS NOT BIFURCATED AGAINST INDIVIDUAL ASSET AND IN-FACT, IT WAS FOUND BY THE ASSESSING OFFICER THAT THE TRANSFEROR COMPANY HAS ALSO NOT BI FURCATED THE SAID CONSIDERATION. SHE HAS REFERRED TO THE RELEVANT DI SCUSSION IN THE ASSESSMENT ORDER WHEREBY IT IS POINTED OUT THAT IN THE ACCOUNT BOOKS OF THE TRANSFEROR COMPANY THE DEPRECIABLE VALUE OF THE BLOCK OF EXTRU DED METAL DIVISION (I.E. EMD) WAS SHOWN AS RS.22,42,91,885/- AND IT IS ALSO REVEALED THAT ON THE DATE OF TRANSFER THE TRANSFEROR COMPANY HAS NOT SHOWN AN Y SALE OF ASSETS SEPARATELY BUT IT HAS BEEN SHOWN IT AS A TRANSFER O F RUNNING UNDERTAKING FOR A SLUMP PRICE. IT WAS, THUS, CONTENDED THAT THE COST OF VARIOUS ASSETS SHOWN BY ITA NO. 2561/PN/2012 A.Y. 2009-10 THE ASSESSEE ON THE BASIS OF THE REPORT OF THE VALU ER FOR CLAIMING DEPRECIATION IS VERY HIGH IN COMPARISON TO THE WDV OF THESE ASSE TS APPEARING IN THE ACCOUNT BOOKS OF THE TRANSFEROR COMPANY ON THE DATE OF TRANSFER. THE LEARNED CIT(DR) POINTED OUT THAT THE CONSIDERATION OF RS.10 0 CRORES HAS BEEN TREATED BY THE TRANSFEROR COMPANY AS A SLUMP PRICE AND IT H AS TO BE UNDERSTOOD THAT IT REFLECTS CONSIDERATION PAID BY THE ASSESSEE ON A SL UMP PRICE BASIS FOR ACQUISITION OF A RUNNING BUSINESS AND NOT AS A PURC HASE PRICE OF VARIOUS ASSETS. THEREFORE, IN VIEW OF THE EXPLANATION 3 TO SECTION 43(1) OF THE ACT, THE ASSESSING OFFICER WAS JUSTIFIED IN CONCLUDING THAT THE COST OF ASSETS HAS BEEN SHOWN AT INFLATED PRICE FOR THE PURPOSES OF COMPUTI NG HIGHER DEPRECIATION WITH INTENTION TO REDUCE THE LIABILITY OF INCOME-TAX. I N THE COURSE OF HER SUBMISSIONS, THE LEARNED CIT(DR) HAS RELIED UPON A DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF JCIT VS. MAHIN DRA SONA LTD., (2005) 96 ITD 303 (MUM) AND ACCORDING TO HER THE SAID DECISIO N SUPPORTS THE STAND OF THE ASSESSING OFFICER. IN THIS MANNER, THE LEARNED CIT(DR) HAS SUPPORTED THE ACTION OF THE ASSESSING OFFICER IN ALLOWING DEPRECI ATION TO THE ASSESSEE ON THE ASSETS AT THE WDV VALUES FOUND IN THE INCOME-TAX RE CORDS OF THE TRANSFEROR COMPANY AS ON THE DATE OF TRANSFER AS AGAINST THE A SSESSEES CLAIM OF DEPRECIATION BASED ON THE ENHANCED VALUE OF ASSETS SHOWN ON THE BASIS OF THE SLUMP PRICE PAID FOR ACQUISITION OF THE EMD BUSINES S. 8. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE R ESPONDENT-ASSESSEE HAS VEHEMENTLY DEFENDED THE ORDER OF THE CIT(A) BY POINTING OUT THAT THE MAIN OBJECTIVE TO ACQUIRE THE RUNNING EMD UNDERTAKING FR OM CTC WAS TO ENHANCE THE PRODUCTION CAPACITY AS WELL AS TO APPLY ADVANCE D TECHNOLOGY TO MANUFACTURE WORLD CLASS HOT FINISHED STAINLESS STEE L TUBES AND PIPES. THE LEARNED COUNSEL EMPHASIZED THAT THE MAIN INTENTION OF INCORPORATING THE ASSESSEE COMPANY AS A JOINT VENTURE BETWEEN SANDVIK AND CTC WAS TO ACQUIRE THE RUNNING BUSINESS OF EMD UNDERTAKING OF CTC AND TO EXPAND ITS ANNUAL PRODUCTION CAPACITY FROM 2600 M.T. TO 7000 M .T. . THE LEARNED COUNSEL ITA NO. 2561/PN/2012 A.Y. 2009-10 POINTED OUT THAT THE CONSIDERATION PAID FOR ACQUIRI NG THE RUNNING BUSINESS OF EMD UNDERTAKING WAS RS.100 CRORES AND EVEN THE ASSE SSING OFFICER HAS NOT DOUBTED THE GENUINENESS OF THE SAME. THE BUSINESS WAS ACQUIRED ON A SLUMP PRICE BASIS AND THEREFORE THE PURCHASE AGREEM ENT DID NOT SPECIFY ANY SEPARATE CONSIDERATION FOR EACH OF THE ASSETS TAKEN -OVER. FOR THE PURPOSES OF RECORDING SUCH ASSETS, THE ASSESSEE UNDERTOOK AN EX ERCISE OF GETTING THE ASSET VALUED BY INDEPENDENT VALUERS AND IT IS ON TH E BASIS OF THE VALUES SO DETERMINED THAT RESPECTIVE ENTRIES WERE MADE IN THE ACCOUNT BOOKS. THE LEARNED COUNSEL ALSO JUSTIFIED THE VALUATION DONE B Y THE VALUERS BY POINTING OUT THAT EVEN AN INDEPENDENT PUBLIC FINANCIAL INSTITUTI ON, NAMELY, ICICI HAD CARRIED OUT A FINANCIAL APPRAISAL OF THE PROJECT AN D THE VALUES SHOWN BY THE ASSESSEE WERE ACCEPTED. IT WAS, THEREFORE, SOUGHT TO BE POINTED OUT THAT THERE WAS NO JUSTIFICATION FOR THE REVENUE TO DOUBT THE V ALUES DETERMINED BY THE VALUERS ON THE BASIS OF WHICH DEPRECIATION HAS BEEN CLAIMED. APART THEREFROM, OUR ATTENTION HAS ALSO BEEN DRAWN TO A WORKING WHIC H SHOWS THE TIME AND THE COSTS REQUIRED TO INSTALL NEW MACHINERY INSTEAD OF ACQUIRING THE RUNNING BUSINESS OF EMD UNDERTAKING OF CTC. IN THIS CONNEC TION, OUR ATTENTION HAS BEEN DRAWN TO PAGE 135 OF THE PAPER BOOK ON THE BAS IS OF WHICH, IT IS SOUGHT TO BE POINTED OUT THAT THE COST ESTIMATE FOR INSTAL LING A NEW EXTRUSION PRESS, (WHICH HAS BEEN ASSIGNED A VALUE OF RS.69,21,60,000 /- BY THE VALUER) WAS IN THE RANGE OF RS.60 CRORES AND IT WOULD HAVE INVOLVE D A FURTHER GESTATION PERIOD OF THREE YEARS BEFORE SUCH MACHINERY COULD HAVE BEE N MADE OPERATIONAL. WHEREAS IN TERMS OF THE PRESENT ARRANGEMENT ASSESSE E WAS ABLE TO ACQUIRE A RUNNING MACHINERY AT COMPETITIVE COST AND THERE WAS NO GESTATION PERIOD INVOLVED. IT WAS POINTED OUT THAT THE VALUER HAD D ULY FACTORED THE TIME PERIOD INVOLVED IN SETTING-UP A NEW UNIT IN VALUING THE EX TRUSION PRESS AT RS.69,21,60,000/- AND THEREFORE THE SAID VALUATION WAS JUSTIFIED; AND EVEN OTHERWISE, THE LEARNED COUNSEL POINTED OUT THAT THE ASSESSING OFFICER HAS NOT BROUGHT OUT ANY OTHER VALUATION REPORT TO CONTRADIC T THE VALUATION REPORT SUBMITTED BY THE ASSESSEE, WHICH WAS OF AN APPROVED VALUER. IN THE COURSE OF ITA NO. 2561/PN/2012 A.Y. 2009-10 SUBMISSION, THE LEARNED COUNSEL ALSO SUBMITTED THAT THE CIT(A) MADE NO ERROR IN COMING TO CONCLUDE THAT THERE WAS NO JUSTIFICATI ON FOR THE ASSESSING OFFICER TO HAVE INVOKED EXPLANATION 3 TO SECTION 43(1) OF T HE ACT HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. IN TH E COURSE OF HIS SUBMISSIONS, RELIANCE HAS BEEN PLACED ON THE FOLLOW ING DECISIONS (I) BOMBAY HOUSEHOLD & INDUSTRIAL PLASTIC MFG. CO. (P) LTD. VS . ITO, 1 ITD 152 (BOM); (II) R.B. BANSILAL ABIRCHAND SPINNING VS. CIT, (1970) 75 ITR 260 (BOM); AND, (III) ASHWIN VANASPATI INDUSTRIES VS. CIT, (2002) 255 ITR 26 (GUJ). 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. THE CRUX OF THE CONTROVERSY BEFORE US REVOLVES AROUND EXPLANATION 3 TO SECTION 43(1) OF THE ACT, WHICH READS AS UNDER :- EXPLANATION 3.WHERE, BEFORE THE DATE OF ACQUISIT ION BY THE ASSESSEE, THE ASSETS WERE AT ANY TIME USED BY ANY O THER PERSON FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION AND THE [ASS ESSING] OFFICER IS SATISFIED THAT THE MAIN PURPOSE OF THE TRANSFER OF SUCH ASSET S, DIRECTLY OR INDIRECTLY TO THE ASSESSEE, WAS THE REDUCTION OF A LIABILITY TO INCOM E-TAX (BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST), T HE ACTUAL COST TO THE ASSESSEE SHALL BE SUCH AN AMOUNT AS THE [ASSESSING] OFFICER MAY, WITH THE PREVIOUS APPROVAL OF THE [JOINT COMMISSIONER], DETE RMINE HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. 10. SECTION 43(1) OF THE ACT PROVIDES THE MEANING O F EXPRESSION ACTUAL COST AND PRESCRIBES THAT ACTUAL COST IN THE HANDS OF THE ASSESSEE MEANS THE ACTUAL COST OF ASSETS AS REDUCED BY THAT PORTION TH EREOF WHICH MAY HAVE BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON. EX PLANATION 3 TO SECTION 43(1) OF THE ACT STIPULATES THAT IF THE ASSETS WHICH ARE ACQ UIRED BY THE ASSESSEE WERE USED BY ANY OTHER PERSON BEFORE THE DATE OF ACQUISI TION AND THE ASSESSING OFFICER IS SATISFIED THAT THE MAIN PURPOSE OF TRANS FER OF SUCH ASSETS WAS OF REDUCING TAX LIABILITY BY CLAIMING DEPRECIATION WIT H REFERENCE TO THE ENHANCED COST, THEN HE IS EMPOWERED TO DETERMINE THE ACTUAL COST HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. IN OTHER WORDS, THE PRESCRIPTION OF THE EXPLANATION SEEK TO ENLARGE THE MEANING OF THE EXPR ESSION ACTUAL COST IN CERTAIN CIRCUMSTANCES AND EMPOWERS THE ASSESSING OF FICER TO DETERMINE THE ITA NO. 2561/PN/2012 A.Y. 2009-10 ACTUAL COST IN THE HANDS OF THE ASSESSEE OTHER THAN WHAT HAS BEEN STATED BY THE ASSESSEE. SO, HOWEVER, IT IS QUITE CLEAR FROM A READING OF THE EXPLANATION THAT POWER OF THE ASSESSING OFFICER TO DETERMINE TH E ACTUAL COST IN THE HANDS OF THE ASSESSEE IS CIRCUMSCRIBED BY A PRE-CONDITION THAT HE SHALL RECORD A SATISFACTION THAT THE ASSETS WERE TRANSFERRED FOR R EDUCING THE LIABILITY TO INCOME- TAX BY CLAIMING DEPRECIATION WITH REFERENCE TO AN E NHANCED COST. IN THIS CONTEXT, WE MAY REFER TO THE OBSERVATIONS OF THE HO NBLE GUJARAT HIGH COURT IN THE CASE OF ASHWIN VANASPATI INDUSTRIES (SUPRA) WHE REIN IT IS EXPLAINED THAT MERELY BECAUSE A DOCUMENT IN THE NATURE OF CONTRACT OF PURCHASE IS ENTERED INTO DENOTING A CERTAIN PRICE, THE SAME WOULD NOT C ONCLUSIVELY ESTABLISH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE. SO, HOWEVER IT WOULD BE OPEN FOR THE ASSESSING OFFICER TO EXAMINE THAT THE TRANS ACTION IS BY WAY OF SUBTERFUGE OR DEVICE IN ORDER TO AVOID TAX WHICH TH E ASSESSEE WAS OTHERWISE LIABLE TO PAY OR THAT THE TRANSACTION IS ILLUSORY O R COLOURABLE. IN-FACT, EVEN THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF MAHINDRA SONA LTD. (SUPRA), RELIED UPON BY THE LEARNED CIT(DR) BE FORE US, ALSO OBSERVES THAT IN ORDER TO EXAMINE THE APPLICABILITY OF EXPLANATIO N 3 TO SECTION 43(1) OF THE ACT IN RELATION TO A TRANSACTION, THE COMMERCIAL REASON S NECESSITATING THE TRANSACTION ARE LIABLE TO BE EXAMINED, WHICH IS A Q UESTION OF FACT TO BE DETERMINED WITH REFERENCE TO THE EVIDENCE AND MATER IAL ON RECORD. EVEN THE HONBLE MADRAS HIGH COURT IN THE CASE OF SFFSET PRE SS (SUPRA), WHICH HAS BEEN REFERRED BY THE CIT(A) ALSO EMPHASIZED THAT EX PLANATION 3 TO SECTION 43(1) OF THE ACT WOULD BE APPLICABLE ONLY IN CASE W HERE THE ASSESSING OFFICER IS SATISFIED THAT THE MAIN PURPOSE OF THE TRANSFER OF ASSETS WAS THE REDUCTION OF THE LIABILITY OF INCOME-TAX BY CLAIMING DEPRECIATIO N WITH REFERENCE TO AN ENHANCED COST. IN SUM AND SUBSTANCE, IT WOULD BE A PPROPRIATE TO DEDUCE THAT IT WOULD BE OPEN TO THE ASSESSING OFFICER TO GO BEH IND A CONTRACT OF PURCHASE AND ASCERTAIN THE ACTUAL COST ONLY AFTER RECORDING AN OBJECTIVE SATISFACTION THAT THE MAIN PURPOSE OF THE TRANSFER OF ASSETS WAS THE DEDUCTION OF A LIABILITY TO INCOME-TAX BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST. ITA NO. 2561/PN/2012 A.Y. 2009-10 11. IN THE ABOVE BACKGROUND, THE CIT(A) HAS HELD TH AT IN THE ASSESSEES CASE THERE IS NO REDUCTION OF TAX LIABILITY DUE TO THE IMPUGNED TRANSACTION OF ASSETS AT ENHANCE COST AND CLAIMING DEPRECIATION TH EREOF AT ENHANCED COST. ACCORDING TO THE CIT(A), THERE IS NO PROFIT IN THE HANDS OF THE ASSESSEE EVEN IF THE DEPRECIATION IS ALLOWED ON LOWER VALUE OF ASSET S, AS DETERMINED BY THE ASSESSING OFFICER, EITHER IN THE CURRENT YEAR OR EV EN IN THE SUCCEEDING YEARS. SECONDLY, AS PER THE CIT(A), THE ASSESSING OFFICER HAS MERELY DISPUTED THE VALUATION OF EXTRUSION PRESS WHEREAS HE HAS REJECTE D THE ENTIRE VALUATION REPORT OF PLANT & MACHINERY, LAND AND BUILDING WHIC H IS UNJUSTIFIED CONSIDERING THE FACT THAT THE PAYMENT OF TOTAL CONSIDERATION OF RS.100 CRORES FOR ACQUIRING THE RUNNING BUSINESS OF EMD UNDERTAKING HAS NOT BEE N FOUND TO BE IN GENUINE. 12. IN THE PRESENT CASE, AS WE ARE NOTED EARLIER AS SESSEE IS A COMPANY WHICH HAS BEEN INCORPORATED ON 28.10.1996 I.E. DURI NG THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION ITSELF. IT HAS BEEN FORMED AS A JOINT VENTURE BETWEEN SANDVIK AND CTC WITH SAN DVIK HOLDING A MAJORITY SHARE OF 51% AND THE BALANCE OF 49% BEING HELD BY C TC. IT HAS ALSO BEEN POINTED OUT THAT THE INVESTMENTS MADE BY SANDVIK AR E WITH THE PRIOR APPROVAL OF RESERVE BANK OF INDIA. THE EMD UNDERTAKING OWNE D BY CTC HAS BEEN TAKEN-OVER AS A RUNNING BUSINESS BY THE ASSESSEE CO MPANY FOR A SLUMP PRICE OF RS.100 CRORES. IT HAS BEEN EXPLAINED THAT THE M AIN PURPOSE TO FORM THE JOINT VENTURE COMPANY AND TO ACQUIRE THE EMD UNDERTAKING OF CTC WAS TO EXPAND THE ANNUAL CAPACITY FROM 2600 M.T. TO 7000 M.T. AND TO APPLY THE TECHNOLOGY TO MANUFACTURE WORLD CLASS HOT FINISHED STAINLESS S TEEL SEAMLESS TUBES AND PIPE, A TECHNOLOGY WHICH WAS AVAILABLE WITH SANDVIK . IT IS ALSO NOT IN DISPUTE THAT THE EMD UNDERTAKING WAS ACQUIRED ON A SLUMP SA LE BASIS AND IN THE AGREEMENT OF TRANSFER DATED 04.12.1996 NO VALUES WE RE ASSIGNED TO THE INDIVIDUAL ASSETS TRANSFERRED IN THE AGREEMENT. IN ORDER TO RECORD THEIR VALUES IN THE BOOKS OF ACCOUNT, ASSESSEE APPOINTED INDEPEN DENT APPROVED VALUERS TO ITA NO. 2561/PN/2012 A.Y. 2009-10 VALUE THE PLANT & MACHINERY LAND AND BUILDING. THE VALUES ASSIGNED BY THESE VALUERS HAS FORMED THE BASIS FOR THE ASSESSEE TO RE CORD THESE ASSETS IN ITS BOOKS OF ACCOUNT AND ACCORDINGLY WITH RESPECT TO TH E DEPRECIABLE ASSETS, THE CLAIM OF DEPRECIATION WAS MADE ON THE VALUE SO DETE RMINED BY THE VALUERS. OSTENSIBLY, THE ACTUAL COST OF ASSETS RECORDED BY T HE ASSESSEE IN ITS BOOKS OF ACCOUNT IS WITH REFERENCE TO THE TOTAL PRICE PAID F OR ACQUIRING RUNNING BUSINESS OF EMD UNDERTAKING OF CTC. IT IS ALSO NOT IN DISPU TE THAT THE SLUMP PRICE CONSIDERATION OF RS.100 CRORES PAID BY THE ASSESSEE FOR ACQUIRING THE EMD UNDERTAKING OF CTC HAS NOT BEEN DOUBTED BY THE ASSE SSING OFFICER. AT THIS POINT, WE MAY ALSO OBSERVE THAT DURING ASSESSMENT P ROCEEDINGS, THE ASSESSING OFFICER MADE VERIFICATION FROM THE INCOME -TAX RECORDS OF TRANSFEROR COMPANY I.E. CTC AND ONE OF THE POINTS WHICH EMERGE D WAS THAT THE CTC HAD ALSO NOT BIFURCATED THE CONSIDERATION OF 100 CRORES AGAINST THE INDIVIDUAL ASSETS SOLD, MEANING THEREBY THAT THE TRANSFEROR I. E. CTC AS WELL AS THE ASSESSEE TRANSFEREE ARRIVED AT THE PRICE OF RS.100 CRORES ON SLUMP SALE BASIS FOR TRANSFER OF THE RUNNING BUSINESS OF THE EMD UND ERTAKING. THEREFORE, THE FACTUM OF THE ASSESSEE NOT HAVING PAID CONSIDERATIO N FOR ACQUIRING INDIVIDUAL ASSETS CANNOT BE CONSTRUED AS ILLUSORY OR COLOURABL E. IN SUCH A SCENARIO, THE ONLY OPTION FOR THE ASSESSEE WAS TO ACCOUNT FOR THE INDIVIDUAL ASSETS ON THE BASIS OF THE VALUES THAT WOULD BE ASSIGNED BY INDEP ENDENT APPROVED VALUERS. IT IS ALSO NOT IN DISPUTE THAT THE TOTAL CONSIDERAT ION PAID BY THE ASSESSEE COMPANY TO ACQUIRE THE RUNNING BUSINESS OF EMD UNDE RTAKING WAS AT MARKET VALUE OR IN OTHER WORDS, AT AN ARMS LENGTH PRICE B ECAUSE THE ASSESSING OFFICER HAS NOT DOUBTED THE GENUINENESS OF THE TOTA L CONSIDERATION PAID AMOUNTING TO RS.100 CRORES. THE INVESTMENT BY SAND VIK INTO THE ASSESSEE COMPANY HAS BEEN SUBJECT TO RBI APPROVALS, THE ACQU ISITION OF THE EMD UNDERTAKING OF THE CTC IS WITH A VIEW TO EXPAND THE ANNUAL PRODUCTION CAPACITY AND PRODUCE WORLD CLASS PRODUCTS BY USING THE TECHNOLOGY KNOWN TO SANDVIK ARE FEATURES WHICH ARE NOT DISPUTED AND THE PRESENCE OF SUCH FEATURES CANNOT ENTAIL AN INFERENCE THAT THE TRANSA CTION IN QUESTION IS A ITA NO. 2561/PN/2012 A.Y. 2009-10 SUBTERFUGE OR DEVICE IN ORDER AVOID TAX WHICH ASSES SEE WAS OTHERWISE LIABLE TO PAID BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST OF ASSETS. IN-FACT, WE FIND THAT IN SUM AND SUBSTANCE THE STAN D OF THE ASSESSING OFFICER IS THAT THE WDV OF THE ASSETS OF EMD UNDERTAKING SHOWN IN THE BOOKS OF CTC WAS RS.8,86,20,002/- ON THE DATE OF TRANSFER WHEREA S THE ASSESSEE HAS CLAIMED DEPRECIATION WITH RESPECT TO AN ACTUAL COST OF RS.89,33,72,821/-. IN OUR CONSIDERED OPINION, THE AFORESAID FACT CANNOT B E THE BASIS TO INFER THAT MAIN PURPOSE OF THE TRANSFER OF ASSETS WAS THE REDU CTION OF A LIABILITY TO INCOME-TAX BY CLAIMING DEPRECIATION WITH REFERENCE TO ENHANCED COSTS. THE PURPOSE OF ACQUIRING THE EMD UNDERTAKING, AND WHICH HAS BEEN ALSO EMPHASIZED BY THE LEARNED COUNSEL DURING THE COURSE OF HEARING, WAS EXPANSION OF THE EXISTING PRODUCTION CAPACITY AND A PPLICATION OF NEW TECHNOLOGY TO MANUFACTURE OF WORLD CLASS PRODUCTS, WHICH WAS AVAILABLE WITH SANDVIK. MOREOVER, THE ASSESSEE COMPANY WAS INCORP ORATED DURING THE YEAR UNDER CONSIDERATION ITSELF AND THAT TOO WITH THE PR IMARY PURPOSE OF ACQUIRING THE RUNNING BUSINESS OF EMD UNDERTAKING OF CTC AND THUS IT HAD NO PRE- EXISTING INCOMES SO AS TO INFER THAT THE IMPUGNED T RANSFER OF ASSETS TO THE ASSESSEE WAS WITH THE PURPOSE OF REDUCING ITS LIABI LITY TO INCOME-TAX BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST. IN THE ABSENCE OF ANY PRE-EXISTING INCOME-GENERATING APPARATUS ON THE DATE OF TRANSFER OF THE IMPUGNED ASSETS, IT COULD NOT BE SAID THAT THE TRAN SFER OF ASSETS TO THE ASSESSEE WAS WITH THE MAIN PURPOSE OF REDUCING ITS TAX LIABILITY. IT IS IN THIS CONTEXT THAT THE CIT(A) HAS CARRIED OUT THE EXERCIS E OF LOOKING AT THE FINANCIAL RESULTS OF THE ASSESSEE COMPANY FOR THE SUBSEQUENT FIVE YEARS WITHOUT CONSIDERING THE DEPRECATION ON ENHANCED COST. THE RESULT OF THE EXERCISE, WHICH IS REFLECTED IN A TABULATION EXTRACTED IN PAR A 2.5 OF THE ORDER OF THE CIT(A) REVEALS THAT THERE IS NO TAXABLE INCOME. WH ILE IN-PRINCIPLE WE ARE IN AGREEMENT WITH THE ARGUMENT OF THE LEARNED CIT(DR) THAT THE FINANCIAL RESULTS OF THE SUBSEQUENT YEARS CANNOT BE A GUIDE TO SEE WH AT WAS THE MAIN PURPOSE OF THE TRANSFER IN THE CONTEXT OF EXPLANATION 3 TO SECTION 43(1) OF THE ACT, SO ITA NO. 2561/PN/2012 A.Y. 2009-10 HOWEVER, THE FACT THAT AT THE TIME OF TRANSFER OF T HE ASSETS ASSESSEE HAD NO INCOME SO AS TO THINK OF REDUCING ITS TAX LIABILITY BY WAY OF IMPUGNED TRANSFER AND RATHER THERE WAS AN ABSENCE OF ANY INCOME GENER ATING APPARATUS, DOES PROVIDE A CREDENCE TO THE APPROACH OF THE CIT(A) OF CONSIDERING THE TOTALITY OF THE CIRCUMSTANCES, TO CONCLUDE THAT IN THE PRESENT CASE THE ASSESSING OFFICER HAS ERRONEOUSLY INVOKED THE EXPLANATION 3 TO SECTIO N 43(1) OF THE ACT. 13. BEFORE PARTING, WE MAY MAKE A REFERENCE TO THE ACTION OF THE ASSESSING OFFICER IN REJECTING THE VALUATION REPORT OF PLANT AND MACHINERY MADE BY ONE MR. MUKESH SHAH, AN INDEPENDENT VALUER. IT TRANSPI RES THAT IN TERMS OF A VALUATION REPORT THE TOTAL VALUE OF PLANT AND MACHI NERY WAS DETERMINED BY THE VALUER AT RS.84,70,50,000/-, WHICH INCLUDED VALUATI ON OF EXTRUSION PRESS OF RS.69,21,60,000/-. THE OBJECTION OF THE ASSESSING OFFICER WAS WITH RESPECT TO THE VALUATION MADE BY THE VALUER OF EXTRUSION PRESS . AS PER THE ASSESSING OFFICER, THE VALUER ADDED 40% AS TIME FACTOR COST A ND ON BEING EXAMINED IN THIS CONTEXT, THE VALUER DENIED HAVING TAKEN ANY SU CH FACTOR IN OTHER VALUATIONS. IN THIS CONTEXT, WE FIND THAT THE ASSE SSEE EXPLAINED THAT IF THE ASSESSEE COMPANY WAS TO ACQUIRE A NEW MACHINERY THE COST WAS IN THE RANGE OF RS.60 CRORES AND FURTHER BEFORE THE MACHINERY IS PUT TO USE AND OPERATIONALISED IT INVOLVED A GESTATION PERIOD OF T HREE YEARS. IN TERMS OF THE PRESENT ARRANGEMENT, ASSESSEE WAS ABLE TO ACQUIRE A RUNNING MACHINERY WITHOUT ANY GESTATION PERIOD, WHICH HAS BEEN VALUED AT RS.69,51,60,000/- BY THE VALUER. IN JUSTIFYING SUCH VALUATION, IT HAS B EEN POINTED OUT THAT THE TIME FACTOR TAKEN BY THE VAUER WAS AKIN TO VALUING A PRO PERTY ON REPLACEMENT COST BASIS. THE EXPLANATION RENDERED BY THE ASSESSEE, I N OUR VIEW, IS QUITE FAIR AND REASONABLE. IN ANY CASE, WHEN ON THE BASIS OF ALL THE FACTS AND CIRCUMSTANCES OF THE CASE, IT COULD BE ESTABLISHED THAT THE MAIN PURPOSE OF TRANSFER OF EMD UNDERTAKING TO THE ASSESSEE COMPANY WAS NOT FOR RED UCING ITS LIABILITY TO INCOME-TAX BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST, THE ITA NO. 2561/PN/2012 A.Y. 2009-10 AFORESAID OBJECTION OF THE ASSESSING OFFICER IS QUI TE IRRELEVANT AND EXTRANEOUS TO THE PERTINENT ISSUE ON HAND. 14. ANOTHER ASPECT RAISED BY THE LEARNED CIT(DR) WA S BASED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE MAHINDRA SONA LTD. (SUPRA). IN THE SAID CASE ASSESSEE HAD ACQUIRED A RUNNING MANUFACTURING ACTIVITY FROM OTHER CONCERN AT A CONSIDERATION WHIC H WAS HIGHER THAN THE BOOK VALUES IN THE HANDS OF THE TRANSFEROR COMPANY. THE TRANSFEREE RECORDED THE VALUE OF ASSETS ON THE BASIS OF A VALUATION REPORT. THE ASSESSING OFFICER APPLIED EXPLANATION 3 TO SECTION 43(1) OF THE ACT A ND DENIED THE ASSESSEES CLAIM FOR DEPRECIATION ON THE ENHANCED VALUE OF ASS ETS. THE SAID ACTION WAS FOUND JUSTIFIABLE BY THE TRIBUNAL. IN OUR CONSIDER ATION OPINION, THE ISSUE OF APPLICABILITY OF EXPLANATION 3 TO SECTION 43(1) OF THE ACT HAS TO BE EXAMINED IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES OF EACH CA SE, THOUGH THE CARDINAL PRINCIPLE IS THAT THE TRANSFER OUGHT TO HAVE BEEN M ADE ON COMMERCIAL CONSIDERATIONS, AND THAT THERE SHOULD NOT BE ANY MO TIVE OF TAX PLANNING. FACTUALLY SPEAKING, THE MUMBAI BENCH OF THE TRIBUNA L IN THE CASE MAHINDRA SONA LTD. (SUPRA) CAME TO CONCLUDE THAT EXPLANATION 3 TO SECTION 43(1) OF THE ACT WAS ATTRACTED. ONE OF THE POINTS NOTED BY THE TRIBUNAL WAS THAT THE TRANSFEROR COMPANY HAD JUST BEFORE THE TRANSFER OF THE ASSETS GOT THE ASSETS RE- VALUED. THIS ASPECT IS QUITE DISTINCT AND IN ANY C ASE THE SAID DECISION RESTS ON ITS OWN TAKE FACTS WHEREAS THE FACTS IN THE PRESENT CASE HAVE BEEN FOUND TO BE OTHERWISE BY THE CIT(A), WHICH WE HAVE AFFIRMED. T HUS THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, IN OUR CONSIDERED OPI NION, OPERATES ON A DIFFERENT FACT FOOTING AND IS NOT APPLICABLE TO THE PRESENT CASE. 15. WE MAY AGAIN OBSERVE THAT THE SPECIFIC REQUIREM ENT OF EXPLANATION 3 TO SECTION 43(1) OF THE ACT IS THAT IT MUST BE DEMONST RATED THAT THE MAIN PURPOSE OF THE TRANSFER WAS REDUCTION OF LIABILITY TO INCOM E-TAX BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST OF THE ASSETS. IN THE CASE UNDER ITA NO. 2561/PN/2012 A.Y. 2009-10 CONSIDERATION, THE COST WHICH HAS BEEN ADOPTED BY T HE ASSESSEE COMPANY IS OFCOURSE MORE THAN THE WDV OF SUCH ASSETS APPEARING IN THE BOOKS OF ACCOUNT OF THE TRANSFEROR COMPANY YET THERE IS NO D ISPUTE THAT THE COSTS ASCERTAINED BY THE ASSESSEE ARE BASED ON THE CONSID ERATION PAID BY THE ASSESSEE AS A SLUMP SALE PRICE. PERTINENTLY, THE S LUMP SALE PRICE OF RS.100 CRORES PAID BY THE ASSESSEE HAS NOT BEEN SHOWN BY T HE ASSESSING OFFICER TO BE AN ARTIFICIAL VALUE OR A PRICE WHICH DOES NOT RE FLECT THE MARKET PRICE OF THE BUSINESS OF EMD UNDERTAKING OF CTC. IT WOULD HAVE BEEN ANOTHER MATTER IF THE CONSIDERATION PAID BY THE ASSESSEE FOR ACQUISIT ION OF EMD UNDERTAKING WAS SHOWN TO BE MORE THAN THE MARKET PRICE, SO HOWE VER, THAT IS NOT THE CASE OF THE REVENUE EITHER BEFORE US OR EVEN OF THE ASSE SSING OFFICER IN THE IMPUGNED ASSESSMENT ORDER. THERE IS NO COGENT MATE RIAL TO SUGGEST THAT THE TRANSFER WAS MADE FOR THE PURPOSE OF REDUCTION OF T HE INCOME-TAX LIABILITY OF THE ASSESSEE TRANSFEREE. 16. THEREFORE, IN VIEW OF THE AFORESAID DISCUSSION, WE HOLD THAT THE CIT(A) MADE NO MISTAKE IN CONCLUDING THAT THE EXPLANATION 3 TO SECTION 43(1) OF THE ACT WAS NOT APPLICABLE TO THE CASE IN QUESTION. TH US, THE REVENUE FAILS ON THIS GROUND. 17. THE SECOND GROUND OF APPEAL RAISED BY THE REVEN UE IS AGAINST THE ACTION OF THE CIT(A) IN DELETING THE DISALLOWANCE O F RS.1,57,63,526/- MADE BY THE ASSESSING OFFICER OUT OF INTEREST EXPENDITURE. IN BRIEF, THE FACTS ARE THAT THE ASSESSING OFFICER NOTED THAT THE AFORESAID AMOU NT OF INTEREST RELATED TO THE DELAY IN PAYMENT OF SALE CONSIDERATION TO CTC AND A CCORDINGLY THE ASSESSING OFFICER WAS OF THE OPINION THAT THE SAID INTEREST W AS NOTHING BUT PART OF THE TOTAL CONSIDERATION PAID BY THE ASSESSEE FOR ACQUIRING TH E EMD UNDERTAKING OF CTC. AS PER THE ASSESSING OFFICER, FOR THE AFORESAID REA SON ASSESSEE WAS NOT ENTITLED TO CLAIM THE AFORESAID INTEREST AMOUNT AS A REVENUE EXPENDITURE AND THE SAME WAS TO BE TREATED AS A CAPITAL EXPENDITUR E RELATABLE TO THE COST OF ITA NO. 2561/PN/2012 A.Y. 2009-10 ACQUISITION. THE CIT(A) HAS, HOWEVER, DIFFERED WIT H THE ASSESSING OFFICER ON ACCOUNT OF THE PROVISIONS OF EXPLANATION 8 TO SECTI ON 43(1) OF THE ACT. ACCORDING TO THE CIT(A), HAVING REGARD TO THE EXPLA NATION 8 TO SECTION 43(1) OF THE ACT, NO PORTION OF INTEREST CAN BE CAPITALIZED ONCE THE SALE IS EFFECTED AND ASSETS ARE OPERATIONAL AND THEREFORE IN THIS LIGHT THE IMPUGNED INTEREST EXPENDITURE WAS RIGHTLY CLAIMED BY THE ASSESSEE AS A REVENUE EXPENDITURE. AGAINST SUCH DECISION OF THE CIT(A), REVENUE IS IN APPEAL BEFORE US. 18. BEFORE US, THE ONLY POINT RAISED BY THE LEARNED CIT(DR) IS ON THE SAME LINES AS TAKEN BY THE ASSESSING OFFICER WHICH IS TO THE EFFECT THAT THE INTEREST IN QUESTION IS ON ACCOUNT OF DELAY IN PAYMENT OF CONSI DERATION FOR ACQUIRING THE EMD UNDERTAKING AND THEREFORE IT SHOULD BE CONSIDER ED AS A CAPITAL EXPENDITURE. 19. HAVING CONSIDERED THE OBJECTION RAISED BY TH E REVENUE, IN OUR CONSIDERED OPINION, NO ERROR CAN BE FOUND IN THE OR DER OF THE CIT(A) ON THIS ASPECT. QUITE CLEARLY, THE CIT(A) IS JUSTIFIED IN ASSERTING THAT ASSESSEE PURCHASED A RUNNING UNDERTAKING AS A GOING CONCERN IS TERMS OF AN AGREEMENT DATED 04.12.1996 W.E.F. 21.12.1996 AND FROM THE SAI D DATE IT CAN BE INFERRED THAT THE ASSETS/BUSINESS OF THE UNDERTAKING WAS OPE RATIONAL. THE FOLLOWING DISCUSSION IN THE ORDER OF THE CIT(A) IS RELEVANT : - 3.3 I HAVE CAREFULLY CONSIDERED THE OBSERVATION OF THE A.O. AND THE SUBMISSION OF THE COUNSEL OF THE APPELLANT ALONGWIT H THE DECISION AS RELIED UPON BY THE APPELLANT. I AM NOT INCLINED TO AGREE W ITH THE ACTION OF A.O. IN CAPITALISING THE AMOUNT OF INTEREST PARTLY, WITH RE FERENCE TO THE W.D.V. OF THE FIXED ASSETS IN THE HANDS OF TRANSFEROR. FURTHER, E XPLANATION 8 TO SECTION 43(1), WHICH HAS BEEN INSERTED BY THE FINANCE ACT, 1986 WI TH RETROSPECTIVE EFFECT FROM 1ST APRIL, 1974 CLARITIES WHAT IS NOT INCLUDIB LE IN 'ACTUAL COST' - THAT WHERE ANY AMOUNT IS PAID OR IS PAYABLE AS INTEREST IN CON NECTION WITH THE ACQUISITION OF AN ASSET SO MUCH OF SUCH AMOUNT AS IS RELATABLE TO ANY PERIOD AFTER SUCH ASSET IS FIRST PUT TO USE IS NOT TO BE INCLUDED AND IN TO BE DEEMED NEVER TO HAVE BEEN INCLUDED, IN THE ACTUAL COST OF SUCH ASSE T. WHILE DECIDING THE ISSUE IN THE CASE OF CIT VS. RAJARAM BANDEKAR (1993) 202 ITR 514, 523 (BOM),, IT HAS BEEN HELD THAT AMOUNT PAYABLE BY THE ASSESSES O N INSTALMENT BASIS FOR ACQUISITION OF THE ASSET UNDER THE DEFERRED PAYMENT SCHEME PERTAINING TO THE PERIOD SUBSEQUENT TO THE DATE THE MACHINERY WAS FIR ST PUT TO USE COULD NOT FORM PART OF 'ACTUAL COST BY VIRTUE OF THE PROVISI ONS OF EXPLANATION 8 FOR THE ASST. YEAR 1974-75. IN THE SAME CASE, REPORTED IN ( 1994) 208 ITR 503, 505 ITA NO. 2561/PN/2012 A.Y. 2009-10 (BOM), FURTHER IT HAS BEEN HELD THAT INTEREST/DISCO UNTING CHARGES OF RS. 2,59,956/- IN RESPECT OF MACHINERY PURCHASED UNDER DEFERRED PAYMENT SCHEME COULD NOT BE CAPITALISED FOR ALLOWANCE OF DE PRECIATION AND DEVELOPMENT REBATE. IN VIEW OF EXPLANATION 8 TO SEC . 43(1) OF THE I.T. ACT, THE LEGISLATIVE INTENTION IS VERY CLEAR ON THE ISSUE WH ETHER INTEREST ON DEFERRED PAYMENT AND BALANCE PAYMENT COULD BE INCLUDED IN TH E COST OF ASSET OR NOT. IT IS CLEAR THAT THE AMOUNT PAYABLE ON INSTALMENT BASI S FOR ACQUISITION OF THE ASSET UNDER THE DEFERRED PAYMENT SCHEME PERTAINING TO THE PERIOD SUBSEQUENT TO THE DATE THE MACHINERY WAS FIRST PUT TO USE COULD NOT FORM PART OF 'ACTUAL COST' AND NOT TO BE INCLUDED AND IS TO B E DEEMED NEVER TO HAVE BEEN INCLUDED IN THE ACTUAL COST OF ASSET. FURTHER, IT C AN BE SEEN THAT EXPLANATION 8 HAS RETROSPECTIVE EFFECT FROM 1ST APRIL 1974. IN LI GHT OF EXPLANATION 8 AS WELL AS IN VIEW OF THE JUDICIAL PRONOUNCEMENTS, SUPRA, I FE EL THAT THE ACTION OF A.O. IN CAPITALISING PART OF THE INTEREST ON DEFERRED PAYME NT AFTER THE ASSET WAS FIRST PUT TO USE IS NOT IN ORDER AND THE SAME SHOULD HAVE BEEN ALLOWED AS REVENUE EXPENSES. SIMILARLY, THE ACTION OF THE A.O. IN DISA LLOWING BALANCE AMOUNT OF INTEREST OF RS.1,43,66,563/- OUT OF TOTAL INTEREST OF RS.1,57,63,526/- IS NOT IN ORDER. WITH THE EXCEPTION OF INTEREST OF RS.13,96,9 63/-, THE BALANCE INTEREST IS NEITHER CONSIDERED CAPITAL NOR REVENUE. IN VIEW OF DECISIONS SUPRA AND EXPLANATION 8 TO SEC. 43(1), THE INTEREST CANNOT BE CAPITALISED AND SINCE IT IS PAID AFTER THE SLUMP SALE IS EFFECTED AND FACTORY I S OPERATIONAL, THE SAME IS HELD AS REVENUE EXPENDITURE AND THE A.O. IS DIRECTE D TO ALLOW THE AMOUNT OF INTEREST OF RS.1,57,63,526/- AS REVENUE EXPENDITURE . 20. IN THE ABSENCE OF ANY MATERIAL TO NEGATE THE AB OVE FACTUAL FINDINGS OF THE CIT(A), WE HERE AFFIRM THE SAME. ACCORDINGLY, REVENUE FAILS ON THIS ASPECT. 21. IN THE RESULT, APPEAL OF THE REVENUE IN ITA NO. 4427/AHD/2003 FOR ASSESSMENT YEAR 1997-98 IS DISMISSED. 22. THE ISSUES RAISED IN OTHER APPEALS ARE SIMILAR TO WHAT HAS BEEN CONSIDERED BY US IN ITA NO.4427/AHD/2003 PERTAINING TO ASSESSMENT YEAR 1997-98 IN THE EARLIER PARAGRAPHS AND THUS OUR DECI SION IN ITA NO.4427/AHD/2003 SHALL APPLY MUTATIS-MUTANDIS IN OTHER APPEALS EXCEPT IN RELATION TO GROUND OF APPEAL NO.2 IN ITA NO.3536/AH D/2004 PERTAINING TO ASSESSMENT YEAR 2001-02 WHICH RELATES TO AN ISSUE N OT DEALT EARLIER. 23. GROUND OF APPEAL NO.2 IN ITA NO.3536/AHD/2004 P ERTAINING TO ASSESSMENT YEAR 2001-02 IS AGAINST THE ACTION OF TH E CIT(A) IN DELETING THE DISALLOWANCE OUT OF BAD DEBTS OF RS.1,81,32,913/- M ADE BY THE ASSESSING ITA NO. 2561/PN/2012 A.Y. 2009-10 OFFICER. THE ASSESSING OFFICER NOTED THAT THE BAD DEBTS CLAIMED TO THE EXTENT OF RS.1,81,32,913/- WAS IN RELATION TO AMOUNTS WHIC H WERE SAID TO BE IRRECOVERABLE FROM CTC. THE ASSESSING OFFICER WAS OF THE OPINION THAT THE CTC BEING A JOINT VENTURE PARTNER OF SANDVIK IT COU LD NOT BE SAID THAT THE DEBT HAD BECOME IRRECOVERABLE. HE, THEREFORE, DISALLOWE D THE CLAIM OF BAD DEBT OF RS.1,81,32,913/-. THE CIT(A) HAS ALLOWED THE CLAIM HOLDING THAT THE CLAIM WAS GENUINE AND THAT THE ASSESSING OFFICER WAS NOT ABLE TO PROVE THAT THE DEBTS HAD NOT BECOME BAD. AGAINST SUCH DECISION OF THE C IT(A), REVENUE IS IN APPEAL BEFORE US. 24. AT THE TIME OF HEARING, IT WAS A COMMON POINT B ETWEEN THE PARTIES THAT IN VIEW OF THE JUDGMENT OF THE HONBLE SUPREME COUR T IN THE CASE OF TRF LTD. VS. CIT, (2010) 323 ITR 397 (SC), THE TEST TO BE AP PLIED IS TO EXAMINE AS TO WHETHER OR NOT THE SAID BAD DEBT HAS BEEN ACTUALLY WRITTEN-OFF AS IRRECOVERABLE IN THE ACCOUNT BOOKS OR NOT. THE LEARNED COUNSEL F OR THE ASSESSEE SUBMITTED THAT THE MATTER MAY BE SET-ASIDE TO THE FILE OF THE ASSESSING OFFICER FOR THE LIMITED PURPOSE OF EXAMINING AS TO WHETHER OR NOT T HE CLAIM HAS BEEN ACTUALLY WRITTEN-OFF IN THE ACCOUNT BOOKS, WHICH WAS A REQUI REMENT LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF TRF LTD. (SUPR A). THE LEARNED CIT(DR) HAS ALSO NO OBJECTION TO THE SAID PROPOSITION. 25. THEREFORE, IN VIEW OF THE AFORESAID, WE DIRECT THE ASSESSING OFFICER TO VERIFY AS TO WHETHER THE AFORESAID BAD DEBTS CLAIME D HAVE BEEN ACTUALLY WRITTEN-OFF AS IRRECOVERABLE IN THE ACCOUNT BOOKS A ND IF IT IS SO FOUND THE CLAIM BE ALLOWED FOLLOWING THE PARITY OF REASONING LAID D OWN BY THE HONBLE SUPREME COURT IN THE CASE OF TRF LTD. (SUPRA). OF COURSE, THE ASSESSING OFFICER SHALL ALLOW THE ASSESSEE A REASONABLE OPPORTUNITY TO PUT- FORTH THE RELEVANT MATERIAL IN SUPPORT OF ITS STAND ON THIS ASPECT. THE ASSESS ING OFFICER IS DIRECTED ACCORDINGLY. THUS, ON THIS GROUND, REVENUE SUCCEED S FOR STATISTICAL PURPOSES. ITA NO. 2561/PN/2012 A.Y. 2009-10 26. IN THE RESULT, APPEALS OF THE REVENUE IN ITA NO .4427/AHD/2003 FOR A.Y. 1997-98, ITA NO.4442/AHD/2003 FOR A.Y. 1999-2000, I TA NO. 3537/AHD/2004 FOR A.Y. 1998-99 AND ITA NO. 754/AHD/2006 FOR A.Y. 2002-03 ARE DISMISSED AND ITA NO.3536/AHD/2004 FOR A.Y. 2001-02 IS ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH AUGUST, 2013. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 28 TH AUGUST, 2013. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-XIV, AHMEDABAD; 4) THE CIT-XIV, AHMEDABAD; 5) THE DR, A BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T., PUNE
