M/s. HCP Design And Project Mgt.Ltd., Ahmedabad V. The Income tax Officer, Ward-4(3), Ahmedabad

ITA 805/AHD/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1263 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 13-06-2016
• Assessment Year: 2001-2002
• Appeal Filed On: 14-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Avoidance of tax; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, AHMEDABAD BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER . / ITA NO. 805 /AHD/201 1 / ASSESSMENT YEAR : 2001 - 02 HCP DESIGN & PROJECTS PVT LTD, PARITOSH, USMANPURA, AHMEDABAD PAN : AABCH 1843 A VS INCOME TAX OFFICER, WARD 4 ( 3 ), AHMEDABAD / (APPELLANT) / (RESPONDENT) ASSESSEE BY : SHRI P.M. MEHTA WITH SHRI G.M. THAKORE, AR REVENUE BY : SHRI K. MADHUSUDAN, SR DR / DATE OF HEARING : 13 / 0 6 /201 6 / DATE OF PRONOUNCEMENT: 14 / 06 /201 6 / O R D E R THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMI SSIONER OF INCOME - TAX (APPEALS) - V III , AHMEDABAD DATED 20 . 0 1 .201 1 FOR ASSESSMENT YEAR 200 1 - 0 2 . 2. E FFECTIVE GROUND RAISED IS AS UNDER: - IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANTS CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN UPHOLDING THE DISALLOWANCE OF RS.6,17,026/ - MADE BY THE LD. AO ON ACCOUNT OF DEPRECIATION CLAIMED BY THE APPELLANT BY APPLYING THE PROVISIONS OF EXPLANAT ION - 3 BELOW SECTION 43(1). 3. ADDITIONAL GROUND FILED BY THE ASSESSEE VIDE APPLICATION DATED 17.06.2014 IS NOT PRESSED, HENCE DISMISSED. 4. BRIEF FACTS ARE THE ASSESSEE - COMP ANY CAME INTO EXISTENCE W . E . F 1 - 4 - 2000 BY CONVERSION AND TRANSFER OF ASSETS OF A FIRM ON BOOK VALUE UNDER THE PROVISIONS CHAPTER - IX OF THE COMPANIES ACT. THE PARTNERS OF THE COMPANY WERE ISSUED SHARES AT THE BOOK VALUE OF THE ASSETS AS ON 31.03.2000. ACCORDING TO ASSESSEE, THE WDV OF FIRMS ASSETS AS ON 31.03.2000 HAS BE EN ADOPTED AS COST IN THE HANDS OF THE NEW COMPANY AT THE SAME VALUE AS ON 1 - SMC - ITA NO. 805/AHD/ 2011 HCP DESIGN & PROJECTS PVT LTD VS. ITO AY : 2001 - 02 2 4 - 20 0 0 . HOWEVER, COMPANY AUDITORS FOUND THAT COMPUTER AND PERIPHERALS WERE WRONG LY DEBITED TO MACHINERY ACCOUNT, WHICH WAS CORRECTED IN BOOKS BY TRANSFERRING SUCH ASSETS IN TO APPROPRIATE BLOCK OF ASSETS. IN OTHER WORDS, AGGREGATE WDV IN THE HANDS OF THE FIRM AND THE COST TAKEN IN THE HANDS OF THE NEW COMPANY ARE AT THE SAME VALUE. THE DEFERENCE IN CLAIM OF DEPRECIATION ON SAME WDV RE SULTED DUE TO CORRECT ION OF INTRA - BLOCK OF ASSETS VARIATION WAS RECLASSIFIED FOR SOME ITEMS; THEREBY THE MACHINERY BLOCK WDV GOT REDUCED AND COMPUTER BLOCK WDV ELIGIB LE F OR DEPRECIATION @ 60% GOT INCREASED . 4.1 LD. ASSESSING OFFICER, HOWEVER, WITHOUT AP PRECIATING THE FACTS AND EXPLANATION FURNISHED BY THE ASSESSEE SUMMARILY ASSUMED THAT THERE IS VIOLATION OF EXPLANATION 3 TO SECTION 43(1) . BESIDES WITHOUT GIVING PRESCRIBED FINDING TO THE EFFECT THAT THE INTRA - BLOCK CHANGE OF ASSETS WAS DONE WITH A MOTIVE TO REDUCE THE TAX LIABILITY , THE CLAIM OF DEPRECIATION WAS REDUCED . IN FIRST APPEAL, THE LD. CIT(A) CONFIRMED THE ACTION OF LD. ASSESSING OFFICER BY FOLLOWING OBSERVATIONS: - 6.2 I HAVE CONSIDERED THE ASSESSMENT ORDER, APPELLANTS SUBMISSION AND THE ORDERS OF THE ITAT AND CIT(A) REFERRED TO ABOVE. ON PERUSAL OF THE SUBMISSIONS IT IS NOTICED THAT THE MAIN CONTENTION WAS THAT THE COMPANY HAD ACQUIRED THE BUSINESS OF THE FIRM ON CONVE RSION AS PER THE PROVISIONS OF THE COMPANIES ACT AND FOR THAT PURPOSE HAD PAID CONSIDERATION BY ISSUE OF SHARES. IT IS FURTHER SUBMITTED THAT EXPLANATION 3 OF SECTION 43 91) IS APPLICABLE ONLY WHEN THERE IS INTENTION OF AVOIDANCE OF TAX LIABILITY. IT IS THE CASE OF THE ASSESSEE THAT ACQUISITION BY THE ASSESSEE WAS BY PROCESS OF LAW AND THERE WAS NO INTENTION OF AVOIDANCE OF TAX. THE DEPARTMENT HAS ALSO NOT POINTED OUT ANY AVOIDANCE OF TAX EXCEPT STATING THAT IT WAS RESULTING TO HIGHER CLAIM OF DEPRECIATI ON PARTI CULARLY ON ACCOUNT OF HIGHER VALUE OF CERTAIN ASSETS ADOPTED IN THE DEPRECIATION CHART. IT IS SUBMITTED THAT THERE WAS NO INTENTION OF SUCH TAX AVOIDANCE PARTICULARLY WHEN THE ASSETS WERE ACQUIRED AT BOOK VALUE. IT IS, THEREFORE, CLAIMED THAT EXP LANATION 3 IS NOT APPLICABLE IN ITS CASE. HOWEVER, ON CONSIDERATION OF THE FACTS I FIND THAT THERE WAS NO REASON FOR ADOPTING THE HIGHER OPENING WDV IN RESPECT OF CERTAIN ASSETS ONLY ON THE GROUND THAT THE SAME VALUE ADOPTED ON CONVERSION OF FIRM INTO COM PANY. AS RIGHTLY POINTED OUT IN THE ORDER DATED 24.11.2004 PASSED BY MY PREDECESSOR, SMC - ITA NO. 805/AHD/ 2011 HCP DESIGN & PROJECTS PVT LTD VS. ITO AY : 2001 - 02 3 THE ASSESSEE HAD CLAIMED WDV OF COMPUTERS AT RS.34.21 LAKH AS AGAINST THE WDV AS PER THE BOOKS OF FIRM OF RS.21.93 LAKH AND THAT THERE CANNOT BE HIGHER MARKET VALUE OF THE COMPUTERS THAN WDV. THE AO WAS THUS JUSTIFIED IN APPLYING EXPLANATION 3 OF SECTION 43 (1) AND ADOPTING WDV AS THAT OF THE ERSTWHILE FIRM IN VIEW OF THE ABOVE FACTS. CONSIDERING ALL THESE ASPECTS THE AO WAS JUSTIFIED IN DISALLOWING THE CLAIM OF DEPREC IATION. IN SO FAR AS SETTING ASIDE OF THE ORDER BY THE ITAT TO CONSIDER PAGE 4 OF THE PAPER BOOK IS CONCERNED, THAT PAGE DOES NOT MAKE ANY DIFFERENCE IN THE FACT FOR THE REASON THAT IN THE SAID CHART THE OPENING WDV OF COMPUTER WAS ADOPTED AT RS.37,93,321 / - AS AGAINST WDV OF COMPUTERS IN THE BOOKS OF FIRM AT RS.21,92,984/ - . THIS, AS DISCUSSED ABOVE WAS NOT PROPER. THE ACTION OF THE AO IS, THEREFORE, CONFIRMED. 5. AGGRIEVED ASSESSEE IS BEFORE US, LD. COUNSEL CONTENDS AS UNDER: - ( I ) EXPLANATION 3 TO SECTION 43(1) IS NOT AT ALL APPLICABLE IN THIS CASE AS THE INCREASED IN DEPRECIATION IS NOT DUE TO OVERVALUATION OF ASSETS AS AGGREGATE WDV IS SAME. THE CLAIM OF DEPRECIATION INCREASED DUE TO CORRECTION OF INTRA - BLOCK CLASSIFICATION OF MAC HINERY BLOCK AND COMPUTER BLOCK. THE COMPANY BEING NEW WAS ELIGIBLE TO CLASSIFY THE ASSETS IN THE RIGHT BLOCK OF ASSETS . THE ASSESSING OFFICER HAS NOWHERE COMMENTED THAT THE GIVEN THE RE - CLASSIFICATION OF BLOCK OF ASSETS WAS EITHER WRONG OR MALAFIDE . ( II ) THERE IS NO FINDING THAT THE ASSESSEE WHILE MAKING THE I NCREASED CLAIM OF DEPRECIATION ANY TYPE OF OVERVALUATION OF ASSETS WITH A MOTIVE TO REDUCE THE TAX LIABILITY . I N THE ABSENCE OF SUCH FINDING, SECTION 43(1) , EXPLANATION - 3, IS NOT AT ALL APPLICABLE. RELIANCE IS PLACED ON FOLLOWING DECISIONS OF ITAT & HIGH COURT: - ( A ) THE DECISION OF THIRD MEMBER, AHMEDABAD BENCH IN THE CASE OF CHITRA PUBLICITY COMPANY PVT LTD, [2010] 4 ITR (T) 738 (AHMEDABAD TRIBUNAL) SMC - ITA NO. 805/AHD/ 2011 HCP DESIGN & PROJECTS PVT LTD VS. ITO AY : 2001 - 02 4 ( B ) THE DECISION OF HONBLE HIGH COURT OF GUJARAT IN THE CASE OF ASHWIN VANASPATI INDUSTRIES, 255 ITR 26 (GUJ.) ( III ) IT IS POINTED OUT THAT THE ASSESSING OFFICER ALSO MISCARRIED HIMSELF IN HOLDING THAT THERE IS NO TRANSFER OF ASSETS FROM FIRM TO COMPANY, INASMUCH AS THE FIRM AND COMPANY ARE SEPARATE ENTITIES AND THE USE OF WORD CONVERSION IS USED FOR CONVENIENCE ONLY . ASSESSEE - FIRM HAS BEEN TRANSFERRED TO THE NEW COMPANY BY VIRTUE OF THE PROVISION OF CHAPTER - IX OF THE COMPANIES ACT. THE RE - CLASSIFICATI ON HAVING BEEN DONE AS PER PRESCRIBED INCOME - TAX RULE S AND COMPANIES RULE S . THE ACTION OF LOWER AUTHORITIES IN REDUCING THE DEPRECIATION IS UNJUSTIFIED. 6. LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND CONTENDS THAT TH E CASE OF CHITRA PUBLICITY COMPANY PVT LTD (SUPRA) IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE. IN THAT CASE, THE HOARDINGS WERE CLAIMED AS REVENUE EXPENDITURE OF ERSTWHILE COMPANY WHICH WAS PURCHASED BY THE NEW COMPANY AND DEPRECIATION WAS CLAIMED ON T HEM. 7. I HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN MY CONSIDERED VIEW, EXPLANATION 3 TO SECTION 43(1) CAN BE INVOKED IN THE GIVEN FACTS OF THE CASE. IT PRESCRIBES THAT ASSESSING OFFICER MUST RECORD A PROPER SATISFACTION THAT THE MAIN PURPOSE OF THE TRANSFER OF SUCH ASSETS WAS REDUCTION OF LIABILITY TO INCOME - TAX. THIS MANDATORY FINDING IS CONSPICUOUSLY MISSING FROM THE ORDER IMPUGNED OF THE ASSESSING OFFICER. BESIDES, IF IT IS NOT A CASE OF TRANSFER OF ASSETS , IN THAT CASE THE E XPLANATION ITSELF WOULD NOT APPLY. IN MY CONSIDERED VIEW, IT IS PURELY FACTUAL MATTER WHERE A NEW COMPANY IS DULY FORMED AFTER TRANSFERRING ASSETS OF A FIRM AND UNDERTOOK RECLASSIFICATION OF THE ASSETS IN PROPER BLOCK S ON WHICH NO ADVERSE REMARK HAS BEEN MADE BY AUTHORITIES BELOW . SMC - ITA NO. 805/AHD/ 2011 HCP DESIGN & PROJECTS PVT LTD VS. ITO AY : 2001 - 02 5 7.1 ALTERNATIVELY ALSO , THE HONBLE SUPREME COURT IN A RECENT JUDGMENT IN THE CASE OF CIT VS. EXCEL INDUSTRIES LTD , REPORTED IN (2013) 3 5 8 ITR 295 (SC) , HAS HELD THAT THE PREPONEMENT OR POSTPONEMENT OF YEAR OF CLAIM OR ALLOWANCE IS A BASICALLY REVENUE NEUTRAL IN CHARACTER , MORE SO WHEN THE RATE OF INCOME TAX IN CASE OF COMPANY IS NEARLY SAME . THE RE - CLASSIFICATION OF ASSET AT THE MOST MAKES A BENIGN SHIFT IN THE CLAIM OF DEPRECIATION OF MACHINERY BLOCK AND COMPUTER BLOCK. DEPRECIATION BEING A CARR IED OVER ALLOWANCE BASED ON WDV; RATE OF TAX BEING SAME, FOLLOWING THE HONBLE SUPREME COURT JUDGMENT , IS A REVENUE NEUTRAL EXERCISE . SO, IN ANY CASE, THE ASSESSEE CANNOT BE BLAMED FOR THE RE - CLASSIFICATION AS DELIBERATELY TO REDUCE ITS TAX LIABILITY AS CONTEMPLATED BY SEC. 43(1) EXPLN. 3 . IN VIEW OF THESE OBSERVATIONS, I SEE NO JUSTIFICATION IN REDUCTION OF DEPRECIATION CLAIM MADE BY THE ASSESSEE WHICH IS DELETED. 8 . IN THE RESULT, ASSESSE ES APPEAL IS ALLOWED . ORDER PRONOUNCED IN THE COURT ON 1 4 T H JUNE , 201 6 AT AHMEDABAD. SD/ - R.P. TOLANI ( JUDICIAL MEMBER ) AHMEDABAD; DATED 1 4 / 0 6 /201 6 *BIJU T. / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A) 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE . / BY ORDER, TRUE COPY / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD