Both these appeals are assessee's appeals for assessment year 1992-93 and assessment year 1994-95 directed against the order of the learned Commissioner (Appeals)-XVI, Mumbai dated 7-3-2000 for assessment year 1992-93; and learned Commissioner (Appeals)-VII, Mumbai dated 20-12-1999 for assessment year 1994-95. As the issue involved in both the appeals is common, both these appeals are being disposed off by this common order for the sake of convenience.
The only effective ground raised for assessment year 1992-93 is regarding disallowance of depreciation claimed by the assessee amounting to Rs. 73,25,451 in respect of assets purchased as per the agreement dated 25-11-1991 and the issue involved in, assessment year 1994-95 is disallowance of depreciation amounting to Rs. 41,39,337 in respect of the same assets by following the order for assessment year 1992-93.
Briefly stated, the facts of the case are that the assessee purchased the business and manufacturing unit along with fixed assets from M/s.
Aegies Chemical Industries Ltd. for a lump-sum consideration of Rs. 5.81 crores as per the agreement dated 25-11-1991. The agreement was to take effect from 1-4-1991 and as per the agreement till completion of all the formalities of transfer, the seller was to carry on business on behalf of the assessee. The lump-sum consideration was allotted to various fixed assets on the basis of the market value after revaluing the assets as per the Valuation Report. Income/loss of this manufacturing unit was included by the assessee in his return of income for assessment year 1992-93 and a claim of depreciation in respect of fixed assets of this manufacturing unit was made as per the revalued amount of building at Rs. 97 lakhs and plant and machinery at Rs. 250.87 lakhs. The amount of depreciation claimed by the assessee was Rs. 73,25,451. But the assessing officer did not agree with the same and it was held by the assessing officer that the assessee had paid incredible quantum of price of fixed assets for withholding that tax due to the department by invoking the judgment of the Hon'ble Apex Court rendered in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). The assessing officer also invoked Explanation (3) to section 43(1) and held that the assessee is entitled to depreciation on the assets only on the WDV as per Income Tax Act, 1961 in the hands of the vendor. On this basis, it was calculated by the assessing officer that the depreciation allowable to the assessee is Rs. 1,22,328 including Rs. 1,655 for office equipments, Rs. 6,303 for furniture and fixture and Rs. 1,14,370 for plant and machinery. But, no depreciation was allowed by the assessing officer on building by holding that the conveyance deed of immovable property was not executed in favour of the assessee till 31-3-1992 and for the same reason, no depreciation was allowed by the assessing officer on plant and machinery by holding that the assessee was not the owner of the plant and machinery. Being aggrieved, the assessee carried the matter in appeal to the learned Commissioner (Appeals) and the action of the assessing officer was upheld by the learned Commissioner (Appeals). In assessment year 1994-95 also, no depreciation was allowed by the assessing officer to the assessee by following the order of this assessment year 1992-93 and on appeal, this assessment order was also upheld by the learned Commissioner (Appeals) on this issue. Now, the assessee is in further appeal before us for both these assessment orders.
it was contended by the learned Authorised Representative of the assessee that even after calculating the amount of depreciation allowable as per the assessing officer at Rs. 1,14,370 for plant and machinery, no depreciation was allowed by the assessing officer in respect of plant, machinery and building by holding that the assessee is not the owner of these assets because the formalities of transfer were not completed for the reason that the conveyance of immovable property was not executed till 31-3-1992. It was submitted that for the purpose of allowing depreciation, execution of conveyance is not a pre-condition and in support of this contention, reliance was placed on Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC), wherein it was held that the assessee was entitled to depreciation in respect of the houses; in respect of which, the assessee has not obtained a deed of conveyance from vendor, although it had taken the possession and made part payment of consideration. It was submitted that the facts are identical in the present case because the assessee has made the payment of consideration and obtained the possession because as per the Agreement, the vendor is running the business on behalf of the assessee and income/loss arising out of that business being run by the vendor on behalf of the assessec is included by the assessee in his return of income and the same is accepted by the assessing officer. Our attention was drawn to page Nos. I & 2 of the paper book and it was pointed out that it has been informed to the assessing officer by the assessee vide this letter filed along with the return of income that loss incurred for this business in the year ended 31-3-1992 is considered in preparing the return of income of the assessee company for assessment year 1992-93; and the same is not included in the assessment of the vendor company. Copy of the assessment order of the vendor company M/s.
Aegis Chemical Industries Ltd. for assessment year 1992-93 was also submitted and our attention was drawn to last page of the assessment order as per which, long-term capital gains on sale of undertaking and depreciable assets has been assessed in the hands of the vendor company. Copy of the computation of total income filed by the vendor company alongwith return of income was also submitted and it was contended that the capital gains on sale of undertaking and on sale of depreciable assets has been worked out by the assessee company on the basis of gross consideration for sale of undertaking at Rs. 5.81 crores and as per the same, the total long-term capital gains has been worked out by the vendor company at Rs. 97,91,590, which is accepted by the assessing officer of the vendor company as per the assessment order dated 15-3-1995 under section 143(3). It was submitted that since, the profit/loss of this unit purchased by the assessee company has been assessed in the hands of the assessee, there is no basis or reason for not allowing depreciation in respect of fixed assets of that business.
It was also contended by the learned authorised representative of the assessee that there is no reduction of tax liabilities in the case of the assessee in the present year; and hence, Explanation (3) to section 43(1) cannot be invoked by the assessing officer because it is a pre-condition in this Explanation that the assessing officer should be satisfied that the main purpose of transfer of assets was reduction of liabilities to income-tax by claiming depreciation with reference to an enhanced cost. it was also contended that as per this Explanation, the actual cost to the assessee shall be such an amount as the assessing officer may determine having regard to all the circumstances of the case and not the WDV in the hands of the vendor as adopted by the assessing officer in the present case. Reliance was placed on the judgment of the Hon'ble Apex Court rendered in the case of CIT v.Prithipal Singh & Co. (2001) 249 ITR 670 (SC), regarding reduction of income-tax liability; and it was contended that the reduction of tax liability shall be for this year and not for future year. It was submitted that since the returned income and assessed income both are at loss, there can be no reduction of tax liability in this year; and hence, the assessing officer is not justified in invoking this Explanation to section 43(1). It was also submitted that even if this Explanation is invoked, cost of assets is to be determined by the assessing officer having regard to all the circumstances of the case and assessing officer cannot simply adopt the WDV as per the income-tax in the hands of the vendor ignoring the WDV as per the books in the hands of the vendor, which is much higher than WDV as per the Income Tax Act taken by the assessing officer. Our attention was drawn to page No. 129 of the paper book, which contains the original cost as per books as on 3 1 3-1991 and WDV as per books as on 31-3-1991 in the hands of the vendor, which is reproduced below: It was also submitted by the learned Authorised Representative of the assessee that fair market value is not applicable here. Our attention was drawn to page Nos. 30 to 128 of the paper book, which contains the Valuation Report prepared by M/s. S.R. Batliboi Consultants (P) Ltd. Our attention was also drawn to page No. 39 of the paper book, which contains the calculation of current replacement cost and depreciated value and it was submitted that the assessee has claimed depreciation on the depreciated value of plant and machinery i.e. on Rs. 250.87 lakhs and not on current replacement cost i.e. Rs. 397.86 lakhs.
Regarding invoking of the judgment in the case of McDowell & Co. Ltd. (supra), it was submitted that in the judgment of the Hon'ble Apex Court rendered in the case of Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706, it was held that an act, which is otherwise valid in law, cannot be treated as non-est, merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest. Reliance was also placed on the Judgment of Hon'ble Gauhati High Court rendered in the case of CIT v.George Williamson (Assam) Ltd. (2003) 265 ITR 262, in which the judgment in the case of Union of India v. Azadi Bachao Andolan (supra) was followed. Our attention was drawn to Tribunal order in the case of Dy. CIT v. Mahendra M. Mehta as per IT Appeal No. 3200 (Mum.) of 1999, dated 30-3-2004, copy of which was submitted and kept on record. It was held in this Tribunal order that even if the transaction is prima facie with a motive to reduce the assessee's tax liability, the motives of the transaction are not really important but divergence of the true intentions vis-a-vis professed intentions of the transaction are really the determinative factor to examine a case on the touchstone of principles laid down in McDowell & Co. Ltd.'s case (supra).
As against this, it was contended by the learned Departmental Representative of the revenue that the assessee is not an owner; and hence, depreciation was rightly disallowed by the assessing officer. It was also contended that the vendor company is a sister concern; and hence, the price of fixed assets were inflated to avail higher depreciation benefit; and hence, judgment of the Hon'ble Apex Court rendered in the case of McDowell& Co. Ltd. (supra) was also rightly invoked by the assessing officer. Reliance was placed on the following judicial pronouncements in support of the contention that depreciation is allowable only on written down value of assets and not on enhanced cost: (iii) Mittal Belting & Machinery Stores v. CIT (2002) 253 ITR 341 (Punj. & Har.) Regarding the ownership for allowing of depreciation, it was contended that no depreciation is allowable until registered deed of conveyance is executed in assessee's favour. Reliance was placed on the judgment of the Hon'ble Gauhati High Court rendered in the case of CIT v. A.B.C. India Ltd. (1997) 226 ITR 733. Our attention was drawn by the learned Departmental Representative of the revenue on para No. 9 of the agreement as appearing on page No. 18 of the paper book, as per which, the vendor was to carry on business for and on behalf of the assessee and on this basis, it was contended that there was no transfer of assets by the vendor to the assessee. Our attention was also drawn to para No. 3.1 of the valuation report as appearing on page No. 33 of the paper book, as per which, it is stated by the valuer that the valuation has been done in accordance with the instruction of the MD of the vendor company. Our attention was also drawn in para No. 3.4 of the valuation report as appearing on page No. 33 of the paper book, as per which, current replacement cost of plant and machinery has been estimated on the basis of current quotations and it was contended that this is not a proper method of valuation. Attention was also drawn to para No. 3.6 of this report as appearing on page No. 34 of the paper book, as per which, it is stated by the valuer that in their opinion, no adjustments need to be made for technological obsolescence. It was contended by the learned Departmental Representative of the revenue that as per para No. I I of this valuation report as appearing on page No. 38 of the paper book, even pre-operative expenses to the extent of 12.5 per cent of the current replacement cost, has been added in the valuation. It was contended by the learned Departmental Representative of the revenue that the agreement price is determined as per this valuation report and both these documents are self-serving documents; and hence, the assessing officer has rightly invoked the judgment of the Hon'ble Apex Court in the case of McDowell& Co. Ltd (supra) and disallowed the claim of depreciation of the assessee.
7. In rejoinder, it was submitted by the learned Authorised Representative of the assessee that valuation report was not doubted by the assessing officer or learned Commissioner (Appeals). Regarding invoking of Explanation (3) to section 43(1), it was again contended that since there was loss in the present year, this Explanation cannot be invoked on a presumption that the assessee might avoid taxes in subsequent years; and it was contended that there can be losses in subsequent years also; and hence, avoidance of taxes should be in the current year only. Regarding the various judgments relied upon by the learned Departmental Representative of the revenue for the contention that the depreciation should be allowed on WDV of assets and not on enhanced cost, it was submitted by the learned Authorised Representative of the assessee that the facts in the case of Alagappa Cotton Mills (supra) and in the case of Mittal Belting & Machinery Stores(supra) are different; and hence, these judgments of the Hon'ble Madras and Hon'ble Punjab & Haryana High Courts cannot be made applicable in the present case. Regarding the judgment of the Hon'ble Gauhati High Court rendered in the case of A.B.C. India Ltd. (supra), on the ownership issue for allowance of depreciation, it was contended by the learned Authorised Representative that the judgment of the Hon'ble Apex Court in the case of Mysore Minerals Ltd. (supra) should be followed.
We have considered the rival submissions and perused the materials on record. We find that the assessee's claim of depreciation has been denied by the assessing officer on the basis that conveyance deed was not registered in the name of the assessee. Apart from this, the assessing officer is of the view that even if depreciation is to be allowed to the assessee, the same is to be allowed on the basis of WDV as per Income Tax Act in the hands of the vendor, which comes to Rs. 1,22,328 as against Rs. 73,25,451 claimed by the assessee on the basis of cost of these assets to the assessee. The assessing officer has also invoked the judgment of the Hon'ble Apex Court in the case of McDowell& Co. Ltd. (supra) and has held that the assessee has paid incredible amount of price to withhold the taxes due to the department. So far as, the issue of ownership by way of registered conveyance deed and allowability of depreciation is concerned, we are of the considered view that the depreciation cannot be denied to the assessee on this ground because the assessee has acquired the business and Industrial Undertaking as a going concern and income/ loss of such Industrial Undertaking has been included by the assessee in its return of income and this has been accepted by the assessing officer and only depreciation has been disallowed. When the income/loss from this Industrial Undertaking is assessed in the hands of the assessee, depreciation in respect of assets, which were used in this Industrial Undertaking, has to be allowed. The judgment of Hon'ble Apex Court in the case of Mysore Minerals Ltd. (supra) also helps the case of the assessee; and therefore, we reject this ground of the assessing officer for not allowing depreciation to the assessee. Regarding the alternative plea of the assessing officer for granting depreciation to the assessee on the basis of WDV as per Income Tax Act in the hands of the vendor by invoking Explanation (3) to section 43(1), and also by invoking the judgment of Hon'ble Apex Court in the case of McDowell & Co. Ltd. (supra), we find that there is force in the arguments of the learned Authorised Representative of the assessee that there is no scope of any reduction in tax liability of the assessee in the present year because the returned income is loss and assessed income is also a loss and as per the Explanation the assessing officer should be satisfied that the main purpose of transfer of such assets was the reduction of liability to Income-tax by claiming depreciation with reference to an enhanced cost. The revenue fails this test because there is no reduction of liability to income tax by claiming depreciation with reference to enhanced cost in view of loss even after disallowance of depreciation. Regarding the invoking of the judgment of the Hon'ble Apex Court rendered in the case of McDowell & Co. Ltd. (supra), we find that the assessing officer has proceeded in the matter by comparing the sale price as per the agreement with WDV as per Income Tax Act as on 31-3-1991; but has ignored the WDV as per the books as on 31-3-1991, which is appearing on page No. 129 of the paper book. We find that WDV as per the books as on 31-3-1991 in the hands of the vendor was Rs. 54.72 lakhs for building, which has been sold by the vendor to the assessee at Rs. 97 lakhs and in respect of plant and machinery, WDV as per books of the vendor as on 31-3-1991 was Rs. 148.75 lakhs, which is sold to the assessee at Rs. 250.87 lakhs. Other items of assets i.e., furniture and fixture, office equipments and vehicles have been sold to the assessee at WDV as per books of the assessee-company as on 31-3-1991. The assessing officer has proceeded in the matter by comparing the WDV as per Income Tax Act, which is only Rs. 6.06 lakhs as against Rs. 54.72 lakhs being WDV as per books in the case of building and in the case of plant and machinery, WDV as per Income Tax Act considered by the assessing officer to compare the selling price is only Rs. 4.57 lakhs as against Rs. 148.57 lakhs being WDV as per books of the vendor as on 31-3-1991. This is an admitted fact that in Income Tax Act, depreciation is allowed at a higher percentage as an incentive; and hence, WDV as per Income Tax Act cannot reflect the market value of the particular fixed asset. Whereas, the assets are sold on the basis of market value of the assets and not on the basis of WDV as per Income Tax Act. For extra depreciation allowed to the vendor as per Income Tax Act as an incentive, the vendor has to be assessed for capital gains on sale of assets by reducing the WDV as per Income Tax Act from sale proceeds of the assets. But in the hands of the assessee, the actual cost paid by the assessee for the assets should be considered for allowing depreciation to the assessee, particularly so, when the conditions required for invoking Explanation (3) to section 43(1) are not being fulfilled. Regarding the invoking of the judgment of the Hon'ble Apex Court in the case of McDowell & Co.
Ltd. (supra), we find that there is no case of revenue because the profit/loss from this Industrial Undertaking, which has been acquired by the assessee for a consideration of Rs. 5.81 crores has been included by the assessee in its return of income and the same has been accepted by the assessing officer and having accepted so, the department cannot take this stand that the transaction is with the intention and motive to reduce the assessee's tax liability and hence, is a colourable transaction. This fact also supports the case of the assessee that there was no motive to reduce the tax liability of the assessee because even assessed income after disallowance of total depreciation is a loss. The judgment of the Hon'ble Apex Court in the case of Azadi Bachao Andolan (supra) and the Tribunal order in the case of Mahendra M. Mehta (supra) also support the case of the assessee.
From the above discussions, we are of the considered opinion that the assessing officer was not justified in disallowing the claim of the assessee for depreciation or in reducing the claim of depreciation by invoking judgment of Hon'ble Apex Court in the case of McDowell & Co.
Ltd. (supra) and by also invoking Explanation (3) to section 43(1) and under these facts and circumstances, we direct the assessing officer to allow the claim of the assessee for depreciation as claimed by him at Rs. 73,25,451 in assessment year 199293 and depreciation claimed by the assessee for assessment year 1994-95 at Rs. 41,39,337, which has been disallowed by the assessing officer by following assessment order for assessment year 1992-93.