1. These appeals of the assessee arise out of the three separate orders passed by the Commissioner (Appeals)-I, Aurangabad, on 26-9-2002. The corresponding orders of assessment were made by the Dy. CIT, Sr.-2, Aurangabad (hereinafter referred as to the assessing officer), under the provisions of Section 143(3) on 30-3-1998, 27-1-1999 and 23-8-1999, respectively. The appeals involve common grounds and, therefore, they were argued in a consolidated manner by the learned Counsel of the assessee and the learned departmental Representative. Therefore, a common order is passed.
2.1 From the assessment order, it is seen that the assessee company was registered on 15-12-1993. The first annual report was prepared for the period ending on 31-3-1995. The shareholders of the company are Goodyear Tyre and Rubber Company, USA, Goodyear India Ltd., Ceat Finance Ltd., Ceat Holdings Ltd., and RPG Enterprises Ltd., holding 26 per cent, 24 per cent, 25 per cent, 20 per cent and 5 per cent of the subscribed capital, respectively. The assessee company took over Waluj undertaking belonging to Ceat Ltd. and started operations in September, 1994. The purchase consideration of the plant was tentatively fixed at Rs. 5.15 crores, subject to the price determined in the due diligence report to be prepared by M/s. A.F. Ferguson & Co., M/s. A.F. Ferguson & Co. fixed the value of various assets of the undertaking to be transferred to the assessee at about Rs. 41.84 crores. The consideration paid for the assets taken over by the assessee from Ceat Ltd. was taken at Rs. 41,84,00,330. The book value of these assets in the hands of the Ceat Ltd. was Rs. 25,44,35,362. Thus, the purchase consideration of the assessee was more than the WDV of the assets in the hands of Ceat Ltd. by an amount of Rs. 16,39,64,968. The assessing officer has mentioned that the WDV of assets, whose values are in dispute, in the hands of Ceat Ltd. and their values determined by M/s.
A.S. Ferguson & Co. and adopted by the assessee as under: In connection with placing of proper values on various assets taken over by the assessee from the Ceat Ltd., the assessing officer required the assessee to furnish the treatment given to the aforesaid sale by the Ceat Ltd. It was also required to produce the income-tax records maintained by the Ceat Ltd. so that the aforesaid matter could be decided on a reasonable basis. It appears that the assessee expressed its inability to produce the income-tax records maintained by the Ceat Ltd. However, annual accounts of Ceat Ltd. were available in public domain, which were filed and perused by the assessing officer. It was found that the assessee owed an amount of about Rs. 23,625 crores to Ceat Ltd. as on 30-9-1994, being the closing date of accounts of Ceat Ltd., comprising of 15 months from 1-7-1993 to 30-9-1994. From the aforesaid balance sheet, the assessing officer also noted that in addition to transfer of the aforesaid assets of the undertaking by Ceat Ltd. to the assessee, the latter also took over stores and spares and some advances. It was also noted by the assessing officer that the radial tyre manufacturing facility was sold to the assessee for a consideration of Rs. 24.7385 crores by the Ceat Ltd. and latter company earned a profit of Rs. 7.4024 crores in the transaction.
2.2 The case of the assessing officer was that Ceat Ltd. had interest in the assessee company through other group companies, namely, Ceat Finance Ltd., Ceat Holdings Ltd. and RPG Enterprises Ltd. The agreed price for transfer of assets was more than the book value of the assets by an amount of Rs. 16,39,64,969. The transfer was done with a view to make profit whenever possible, using the assessee as a tool. The assessing officer further pointed out that it was not clarified how due diligence test was carried out. The detailed working of the due diligence test group was not furnished. Item-wise values have also not been furnished. Coming to the facts of the case, it was pointed out that valuation of cars with the WDV of Rs. 47,208 taken at Rs. 50,05,589 was completely unbelievable. The valuation of furniture and fixtures of the WDV of Rs. 20,35,366 at Rs. 83,64,031 was also not believable. The value of buildings was also shown to be higher than the WDV by a margin of about 32 per cent of the WDV, while there was addition of about 15 per cent under this head from 1-4-1994 to 29-9-1994. If this amount is ignored, then, overvaluation is about 40 per cent. The opening WDV of plant and machinery was Rs. 16,84,45,554, which has been valued in the hands of the assessee at Rs. 26,04,34,912.
Thus, excess valuation is about 35 per cent of the WDV. The assessing officer also pointed out that Waluj undertaking was commissioned in the previous year relevant to assessment year 1992-93 and it is not very old. In view thereof, there should not have been much difference between the depreciated value and market value of most of the items included in the plant and machinery.
2.3 In view of the aforesaid, the assessing officer came to the conclusion that the impugned transaction, involving overvaluation of assets, was undertaken with a view to claim the deduction of depreciation on the enhanced cost. Therefore, he held that the depreciation should be deducted in this case on the basis of WDV of the assets in the hands of Ceat Ltd. The assessee had claimed the deduction at Rs. 8,81,27,084, which was restricted to Rs. 4,74,86,344. It may be added here that apart from allowing the deduction of depreciation on the WDV, there was some other issue also regarding rate of depreciation on dust collector, which was allowed at 50 per cent as against the claim of 100 per cent made by the assessee.
2.4 Aggrieved by this order, the assessee filed an appeal before the Commissioner (Appeals)-I, Aurangabad.
2.5 In the course of hearing before the learned Commissioner (Appeals), the assessee provided him with a copy of due diligence report prepared by M/s. A.F. Ferguson & Co. It appears from the appellate order that the report was based upon the valuation report of M/s Budhabhatti & Associates, It was the claim of the assessee before the learned Commissioner (Appeals) that the assessing officer did not invoke the provision contained in Explanation 3 below Section 43 and, therefore, the calculation of depreciation allowance was based upon irrelevant considerations. The learned Commissioner (Appeals) discussed the valuation report in brief. He found that the method of valuation adopted by the valuer involved the determination of the market value, ascertainment of the replacement cost, estimated useful life and salvage value at the end of useful life. Replacement value was ascertained by obtaining quotations from the market, making enquiries and resorting to estimates. This included cost of machine, equipment, etc., taxes, etc., handling charges, transportation, transit insurance and installation costs. Wherever quotations pertained to the year 1992, an addition of 10 per cent was made to the quoted price to take care of the inflation. Overhead costs were placed at about 40 per cent of the quoted price.
2.6 The learned Commissioner (Appeals) requested the assessee to list out such machines whose market price and the value taken by the assessee was identical. It was also requested to pick up any item of plant or machinery and establish that its installation cost was 40 per cent of the purchase price. None of the aforesaid could be established by the assessee. Therefore, he came to the conclusion that the basis adopted for valuation of the assets by the assessee was not correct, 2.7 It was mentioned by him that the transfer of assets was not at the WDV, but it was at an enhanced value. In the course of assessment, a chart of cost of acquisition of assets as on 20-9-1994, and WDV in the hands of Ceat Ltd., as on 29-9-1994, was filed. The agreement regarding transfer of assets of Waluj undertaking by Ceat Ltd. to the assessee was also filed, in which it was mentioned that land, buildings, certain plant and machinery and furnitures are being transferred for a consideration of Rs. 51.5 crores, the price being subject to due diligence report. The total WDV of the assets on 29-9-1994 in the hands of Ceat Ltd. were Rs. 25,44,35,362. These assets were taken over by the assessee at Rs. 41,84,00,330, the difference between purchase price and WDV amounted to Rs. 16,39,64,968. The learned Commissioner (Appeals) pointed out that instead of establishing fair market value of the assets, the assessee merely supplied a copy of sale agreement and the valuation report. The valuation report remained unsubstantiated in view of the failure of the assessee to show that installation cost was about 40 per cent and the market price of any machinery transferred to the assessee was identical with the transfer consideration. The only submission made by the assessee was that all assets of Waluj plant, except for the debenture liability, certain machinery required for production of 2 and 3 wheeler tyres and some other assets, were transferred to the assessee for a lump sum consideration. The assessee had got the assets valued and adopted such values in its balance sheet.
2.8 The learned Commissioner (Appeals) considered the facts of the case and submissions made before him, but did not agree with the assessee for the following reasons: (i) it failed to substantiate its claim of depreciation before the assessing officer, (ii) it is unable to pinpoint and prove the amount attributable to acquisition of plant and machinery, (iii) it was unable to show the lump sum amount paid for purchase of plant and machinery, and 2.9 There was also the issue of deductibility of 100 per cent depreciation of air pollution equipment. The assessing officer had worked out the deduction at 50 per cent of the cost for the reason that the equipment was used for less than 180 days. The learned Commissioner (Appeals) upheld this action of the assessing officer also. Thus, the appeal of the assessee in this behalf was dismissed.
2.10 Aggrieved by this order, the assessee is in appeal before us. The appeal for assessment year 1995-96 (ITA No. 132/Pune/2003) involves major issues of determination of costs and deduction of depreciation.
Appeals for subsequent years on this issue are consequential in nature as the WDVs for those years will depend upon the costs determined in this year. The assessee has taken up three substantive grounds of appeal. The first ground is against reduction of claim of depreciation by an amount of Rs. 4,06,40,740, out of Rs. 8,81,27,084. There are number of sub-grounds in this ground, which are in the nature of arguments, which will be discussed at an appropriate place. This ground also contains averment to the effect that denial of depreciation to the extent of 100 per cent on air pollution equipments, etc. and restricting it to 50 per cent was incorrect. Ground No. 2 is against the disallowance of a sum of Rs. 5,17,645 on account of contribution towards PF and family pension fund. Ground No. 3 is against the disallowance of expenditure of Rs. 85,641 out of miscellaneous expenses.
3.1 Before us, the learned Counsel pointed out that the assessee company is a joint venture between Goodyear, USA and Ceat India groups, each group holding 50 per cent shares. Both the groups were engaged in the business of production of tyres. The joint venture was conceived with a view to produce higher quality radial tyres for four-wheelers.
It was decided that for this purpose the assessee will buy the Waluj plant of Ceat Ltd. as a going concern. The tentative purchase price was fixed at Rs. 51.5 crores, subject to due diligence by M/s. A.F.Ferguson & Co. Their report placed the value of various assets of the plant at Rs. 45.44 crores. In the purchase agreement, values were not assigned specifically to various assets as it was a case of slump sale by Ceat Ltd. The factum that the instant case was a case of slump sale by Ceat Ltd. was not disputed by the assessing officer. The assessee, after purchasing the unit as a going concern for Rs. 45.40 crores, had to place values on various assets including each block of assets for the purpose of deduction of depreciation under section32 of the Act.
Section 43(1) of the Act provides that the "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. Since actual cost of any asset was not mentioned in purchase consideration, the consideration of purchase of Rs. 45.40 crores had to be allocated to various assets taken over by the assessee. Such values were ascertained on the basis of valuation report, which formed the basis of due diligence report of M/s. A.F.Ferguson & Co. As against the aforesaid, the assessing officer was of the view that the provision contained in Explanation 3 below Section 43(1) was applicable and, therefore, he adopted WDVs in the hands of Ceat Ltd. for the purpose of computing the depreciation allowance deductible in computing the income of the assessee.
3.2 In this connection, the learned Counsel drew our attention to the agreement for transfer of undertaking, placed in the paper book on pp.
81 to 122. On p. 81, it is mentioned that the Ceat Ltd. has agreed to transfer, sell and assign and convey to the assessee, and the assessee has agreed to purchase and acquire for the consideration and upon the terms and conditions hereinafter set out, the undertaking of Ceat Ltd. at Aurangabad. On p. 83, the word undertaking has been defined to mean land, hereditaments, premises, buildings, and structures; plant, machinery, equipment (excluding machinery and equipment relating solely to production of 2 and 3 wheelers), vehicles and other articles and effects and movable property of tyre manufacturing facility located thereat; assets such as raw materials, processed stock, goods, stock-in-trade, packing materials, engineering and sundry stores, packed stock of finished products belonging to or pertaining to such tyre manufacturing facility; and the workers engaged at such tyre manufacturing facility. On p. 85, it is mentioned that without limiting the generality of the foregoing, the assets shall include,- C. all plants, buildings, structures, erections, improvements, appurtenances, and fixtures situate on or forming part of the land, other machinery and equipment referred to in Section 2.1 D through I. D. all fixed machinery and fixed equipment situate on or forming part of the land and all other machinery and equipment and all tools, handling equipment and accessories other than the assets referred to in Section 2.1 E through I. J. the leases that are material contracts and subject to Section 2.5, the full benefits of all other leases of machinery and equipment of which Coat is lessee relating to the undertaking including, without limiting the generality of the foregoing, the leases described in Schedule 2.1 J. K. the material contracts and subject to Section 2.5, the full benefit of all other written contracts or commitments which are listed on Schedules 1.1 N and 2.1 J, to which Ceat is entitled in connection with the undertaking.
L. the material permits and subject to Section 2.5, the full benefit of all other licenses, registrations, and permits in respect of the undertaking.
M. all existing supplier lists of or used in connection with the undertaking.
N. all books, documents, records and files, including without limitation, all financial, local tax, accounting, personnel files and records and computer programs used with respect to or relating to the assets or the undertaking excluding copies prepared and retained by Ceat for corporate record purposes.
O. all inventories at the tyre manufacturing facility and products in transit on the closing date, and P. all prepaid expenses and deposits (excluding those items specified in Section 2.6 thereof) made by Ceat relating to the undertaking.
3.3 Page 87 shows the tentative purchase price at Rs. 51.50 crores, subject to the results of due diligence review. Page 115 furnishes the details of machinery, equipments, and other assets, while p. 116 furnishes the details of laboratory equipments. Page 208 furnishes the list of two and three-wheelers tyre equipments, which did not form part of the equipment to be transferred to the assessee. Pages 211 to 220 furnish the details of various assets, their original cost as per fixed assets register and book values as on 30-6-1993. Pages 221 to 226 contain the details of capital work-in-progress and capital advances as on 30-6-1993. Pages 370 to 387 contain the conveyance deed, dated 16-2-1995, regarding land and buildings. In the conveyance deed, the value of the land has been taken at Rs. 1,20,77,830, and buildings at Rs. 13,18,70,000. It will thus be seen that the value of land assigned in the valuation report is lower at Rs. 83.20 lakhs than the value taken in conveyance deed at Rs. 1,20,77,830. The assessee had also paid stamp duty of Rs. 57,57,920 on execution of the conveyance deed and it is not known how this value has been treated in the books of the assessee for valuation of land and buildings. The total value of land and buildings amounted to about Rs. 14,39,47,832 and the payment details have been given on p. 397. A sum of Rs. 14,01,90,000 was paid on 14-12-1994 by way of cheque No. 539351 and the balance amount of Rs. 37,57,830 was stated to have been paid by the assessee to MIDC on behalf of the Ceat Ltd. 3.4 The learned Counsel referred to the accounts of Ceat Ltd., placed in the paper book on pp. 492 to 565. Page 496, being the report of the board of directors, discloses that the Aurangabad unit was transferred to the assessee and that production from the joint venture will be shared equally between the Goodyear India Ltd. and Ceat Ltd. Page 507, being P&L a/c, shows miscellaneous income of Rs. 97.18.18 (in thousands), the details of which are given in Schedule 8 on p. 511.
This schedule shows profit on sale of the division at Rs. 13,84,41 (in thousands). Schedule 4 at p. 509 shows total deductions from fixed assets at Rs. 50,13,92 (in thousands), consisting of various deductions from land, buildings, plant, machinery, furniture and fixtures, and vehicles. Note (4c) on p. 515 mentions that the entire under-taking of Waluj factory, except relating to debenture liability, certain machinery for production of 2 and three-wheeler tyres and certain other current assets, has been transferred to the assessee with effect from 29-9-1994 for a consideration of Rs. 45.0981 crores, resulting in profit of Rs. 10.8614 crores. On p. 524, it is mentioned that miscellaneous income includes extraordinary and non-recurring gains arising from sale of plain paper copier division as a going concern--Rs. 2.9827 crores; sale of tyre manufacturing plant at Waluj as a going concern-Rs. 10.8614 crores; sale of investments acquired by the company from its wholly-owned subsidiaries-Rs. 27.2587 crores, and sale of certain plant and machinery on sale and lease back, etc.
3.5 The learned Counsel drew our attention to p. 62 of the paper book being letter dated 11-2-1998 addressed by Ceat Ltd. to the assessee inter alia pointing out that-(i) a statement of Waluj unit showing income-tax depreciation, etc. for assessment years 1992-93 to 1995-96, and (ii) in the assessment year 1995-96, they have reduced from the block of assets, the WDV of the assets as on 31-3-1994, which are transferred to the assessee. Similarly, additions ,made from 1-4-1994 to 29-9-1994 have also been reduced from the block assets except the value of machinery which has been retained by them. It was also mentioned that the WDV of various assets had no relevance whatsoever with the claim of the assessee for deduction of depreciation on the assets acquired by it.
3.6 The learned Counsel also referred to the valuation report, dated 12-1-1994, made by M/s. AR Ferguson & Co. On p. 162, it was mentioned that the coverage of due diligence report had been restricted to the following areas: On p. 164, it was mentioned that the amount of Rs. 10.40 crores shown under the head Capital work-in-progress was accepted on the basis of unaudited trial balance of Waluj plant as on 30-6-1993. It is further mentioned that the valuation of land, buildings, plant and machinery being a technical matter, has been taken on the basis of valuers appointed by Coat Ltd, It is also mentioned that furniture and fixtures, office equipment, and vehicles have not been considered for revaluation. It was specifically pointed out that the remarks made by the, assessing officer in the assessment order are quite contrary to the report of M/s. A.F. Ferguson & Co. on this issue. Pages 169 to 171 furnish the details of fixed assets, capital commitments, and capital advances, revaluation of fixed assets, assets not revalued and basis of revaluation. Page 170 shows that furniture, fixtures, office equipments, and vehicles were not revalued and their values were shown in the column net value after revaluation at Rs.85.90 lakhs. The basis of revaluation of land, buildings and plant and machinery was mentioned on p. 171. Page 176 shows the WDVs and values after revaluation of land, buildings, plant and machinery, furniture and fixtures, and vehicles. This page also shows that while additions were made to the values of land at Rs. 82.60 lakhs, buildings at Rs. 2.508 crores, plant and machinery at Rs. 9.702 crores; nothing was added to the values of furnitures, fixtures, office equipment and vehicles. Page 305 contains the valuation of land and buildings, made by Shri J.M. Rathod.
3.7 Coming to the legal issues, the learned Counsel pointed out that the assessee was not a 100 per cent subsidiary company of Ceat Ltd., but it was a joint venture between Goodyear and Ceat groups. Therefore, there could have been no question of overvaluation of any asset with a view to claim higher depreciation, especially in view of the fact that the consideration was fixed initially at Rs. 51.50 crores, subject to the due diligence report, and on obtaining due diligence report, the consideration was revised to a lower figure of Rs. 45.40 crores.
Thereafter, he referred to the provisions contained in Explanation 3 below Section 43(l), under which the assessing officer can substitute WDVs in place of purchase consideration where the assets were used previously by any other person for his business and he is satisfied that main purpose of transfer of the assets, directly or indirectly, to the assessee, was to reduce liability of income-tax by claiming deduction under Section 32 with respect to the enhanced cost. In this connection, he stressed on the words main purpose of the transfer and relied on the decision of Honble Bombay High Court in the case of Premier Automobiles Ltd. v. Income Tax Officer & Anr.
. At p. 22, it is mentioned that the concept of slump sale was initially evolved under Judge-made law, which was subsequently recognized by the legislature by inserting Section 2(42C) of the Act.
The concept involved the ascertainment whether the sale was of individual assets or of the concern as a going unit, i.e., business as a whole. On the basis of this observation, it was argued that since slump sale has been recognized for a long period of time, such sale cannot be said to be a device or the purpose for reducing income-tax liability. Reference was also made to p. 235, on which after considering that sale to be a slump sale, it was mentioned that the assessing officer will be required to decide its value under Section 55 of the Income Tax Act, the basis of indexation for computing capital gains, and quantum of depreciation on the block of assets. It was also mentioned on that page that the valuation of assets done by the transferee was for the purpose of allocating the cost of various assets in their books of account, which cannot constitute the basis for computation of profits of the assessee seller. On the basis of these observations, it was pointed out that treatment of sale and purchase consideration has to be different in the case of seller and the buyer and, therefore, the insistence of the assessing officer in calling for the income-tax records maintained by the Ceat Ltd. was misplaced. In any case, return and details, etc. filed by that assessee could have been requisitioned by the assessing officer from the corresponding assessing officer, if at all required by him, particularly when it was pointed to him that the seller is not parting with the information.
3.8 He further referred to the decision of Honble Punjab and Haryana High Court in the case of Shreyans Industiies Ltd. v. Jt. CTT (2005) 277 ITR 443 (P&H), At p. 446, it was mentioned that the assessee had paid a consideration of Rs. 14.75 crores for purchasing the paper division from M/s. Zenith Ltd. and the Tribunal found that only sum of about Rs. 10. 18 crores could be allocated towards cost of fixed assets including plant and machinery. It is not in dispute that the paper division was sold as a going concern. Therefore, the consideration included not only cost of fixed assets but also other benefits like licences, permits, entitlements, and quota rights, etc. The assessee has not given bifurcation allocating cost towards each asset taken over by it. However, a report from M/s. S.R. Botilboi & Consultants (P) Ltd. was furnished, in which the value of fixed assets was determined at about Rs. 10.18 crores. In these circumstances, actual cost under Section 43(1) of the Act of these capital assets was fairly taken at about Rs. 10.18 crores by the assessee. This finding of the Tribunal was approved by the Honble Court.
3.9 He also relied on the decision of Honble Tribunal, Ahmedabad Bench "A", in the case of Unimed Technologies Ltd. v. Dy. CIT (2000) 73 ITD 150 (Ahd). In that case, the applicability of the Explanation 3 to Section 43(l) came for discussion in the context of facts that the fair market value of the assets have been certified by the registered valuer. The assessing officer had not appointed his own valuer for such valuation. He did not think it fit to examine the valuer. It was held that the value determined by the valuer appointed by the assessee should be accepted.
3.10 He also referred to the observations of the learned Commissioner (Appeals) that the assumption of 40 per cent being the overhead cost has not been explained by the assessee. In this connection, he referred to the valuation report and pointed out that such cost not only included overhead expenses but also handling charges, transportation charges, indirect taxes such as sales-tax, etc.
3.11 He also referred to the detailed submissions made before the learned Commissioner (Appeals), placed in the paper book from pp. 31 to 61, in which the issue regarding applicability of Explanation 3 to Section 43(l) of the Act was explained. He also referred to pp. 76 to 80 of the paper book, which showed that Ceat Ltd. was to purchase a portion of tyres produced by the assessee on cost-plus basis. It was pointed out that if slump sale had been tax avoidance device, claim of higher depreciation would lead to higher purchase price by Ceat Ltd., to which that company would not have agreed to.
3.12 On the other hand, the learned departmental Representative pointed out that the question in this case is whether depreciation should be allowed to be deducted as per WDVs in the hands of the Ceat Ltd. or on the basis of the consideration charged by the Ceat Ltd. from the assessee. In this case, cost of various assets taken over by the assessee from Ceat Ltd. is fixed. He referred to the decision in the case of Unimed Technologies Ltd. (supra), wherein the question was about adoption of the value of an asset on the basis of its fair market value as certified by the registered valuer. The learned departmental Representative pointed out that since the cost is fixed on the basis of consideration paid, the ratio of the aforesaid case is not applicable to the facts of the instant case. In the alternative, it was pointed out that the due diligence report prepared by M/s A.F. Ferguson & Co.
was a qualified report and the value arrived at therein was dependent upon the technical report, which formed the basis of the valuation of assets. Such a report cannot be taken to be correct in toto.
Thereafter, he referred to the decision of Honble Bombay High Court in the case of Premier Automobiles Ltd. (supra), where the question was regarding computation of capital gains accruing to the seller in respect of a slump sale. In this order, it was inter alia held that when a concern is transferred as a going concern, a number of assets such as goodwill etc. are also transferred, on which some value will have to be placed. Coming to the issue that tax treatment in the case of Ceat Ltd. is not material in deciding the case of the assessee, references were made to the discussion on pp. 233 and 235 of that order. At p. 233, it was inter aha mentioned that slump sale agreement is contractual in nature. The only condition in the case of slump sale is that the sale should be for a lump sum price. Therefore, in such a sale, there is transfer of entire business activity for a fixed price.
Thus, sale price is not attributed to individual items of assets. At p.
235, it was inter alia mentioned that the assessing officer has to allocate the total amount of Rs. 210 crores not only to land, building, plant and machinery but to all other assets also and only then the computation of capital gains could be said to be correct. Thus, in a nutshell, his argument was that tax treatment given to the transaction by Ceat Ltd. was material and price paid by the assessee was for all the assets received by it. Only thereafter, the assessing officer can decide the matter regarding grant of depreciation.
3.13 The learned Departmental Representative referred to the decision of Honble Patna High Court in the case of Motiram Roshan Lal Coal Co.
v. CIT (1933) 1 ITR 329 (Pat), in which it was held that the words original cost thereof to the assessee, must be strictly construed and these words referred to the genuine original cost to the assessee and not necessarily to anything which the assessee may have stated to be the original cost. The learned Departmental Representative referred to the decision of Honble Madras High Court in the case of CIT v. Harveys Ltd. (1940) 8 ITR 307 (Mad), in which it was held that original cost of a particular asset is entirely a question of fact, which has to be decided depending upon the evidence produced to prove it. On the basis of this decision, the case of the learned departmental Representative was that it is for the assessee to produce creditable evidence to establish costs of various assets.
He also relied on the decision of Honble Calcutta High Court in the case of CIT v. Jogta Coal Co. Ltd. (1965) 55 ITR 89 (Cal). In that case, evidence was not produced regarding market values of various items finding place in the balance sheet, because of which the Tribunal estimated such values. The Honble court held that original cost of an asset is entirely a question of fact. If on consideration of facts, it is found that the assessee arranged to put fictitious price on any asset, it was open to the IT authorities to refuse to accept that price.
3.14 In the light of aforesaid decisions, the learned Departmental Representative pointed out that in the course of assessment, the assessee was required to state about the treatment given by the transferor to the assets transferred to the assessee. However, that was not done on the plea that records of the transferor were not available with it. The learned departmental Representative also tried to raise the issue that the instant case was probably not a case of Slump sale by Ceat Ltd. because tyre manufacturing facility for two and three-wheelers cannot be separated from tyre manufacturing facility for four-wheelers. It was his case that tyre cutting presses were common machines used for manufacture of all kinds of tyres. He also drew our attention to the fact that the assessee could not explain before the learned Commissioner (Appeals) its contention regarding value addition of 40 per cent by way of installation to the machinery and could not establish the costs taken by the assessee with reference to any machinery taken over by it.
4.1 We have considered the facts of the case and rival submissions. The first issue in this case is whether the main purpose of impugned transaction was to reduce tax liability by claiming depreciation with reference to an enhanced cost. The case of the learned Counsel was that the assessee is joint venture between Goodyear and Ceat groups, each holding half share. The joint venture was undertaken for manufacturing of better quality tyres with the help of technology available with Goodyear. The purchase price was tentatively placed at Rs. 51.5 crores subject to due diligence report. On receipt of due diligence report, it was found that price was lower at Rs. 41.4 crores. Thus, it was contended that the transaction was undertaken in a transparent manner and its aim was to produce better quality tyres. There was nothing inherent in the transaction, which could lead to inference of collusion between Ceat Ltd. and the buyer. In any case, such a collusion would have harmed the interests of the Goodyear, who was holding 50 per cent shares of the assessee company and, therefore, they would not have accepted a transaction which would have harmed their interests. It was also pointed out that the concept slump sale is not new and it has been recognized for a very long period. Such sales have taken place in the past and recognized for the purpose of levy of capital gains by treating the unit as a going concern, thereby holding it to be a capital asset. Therefore, it was not a case which was caught within the mischief of Explanation 3 to Section 43(1). It was also pointed out that wherever legislature so decided, it cancelled the consequence of enhanced cost by creating a fiction, as in Explanation 6. No such fiction was provided in Explanation 3. As against the aforesaid, the learned departmental Representative only made the argument that the instant case may not be a case of slump sale as manufacturing facility for tyres of 2 and 3 wheelers cannot be separated from the facility of manufacturing tyres of four wheelers. After consideration of the rival submissions, we are of the view that no pre-planned tax avoidance device has been resorted to while effecting the transaction. The reason is that the placing of the price was based upon the due diligence report by M/s. A.F. Ferguson & Co., which gave a report fixing the price at lower amount than the tentatively agreed original amount. We are also of the view that the issue whether the tyre manufacturing facilities for two and three-wheelers and four-wheeler can be totally separated or not is not the real issue involved before us. Assuming that it cannot be so done, still, the fact remains that certain lands, buildings, plant and machinery, and other assets were transferred by Ceat Ltd. to the assessee on the basis of the report of M/s. A.F.Ferguson & Co. What is required to be done is to allocate purchase consideration among various assets irrespective of whether all the assets of Waluj unit or only some assets were contracted to be transferred to the assessee. Thus, it is held that provisions of Explanation 3 are not applicable on the facts and in the circumstances of the instant case.
4.2 The second issue in this case is regarding placing of the values on different assets. The case of the learned Counsel was that such values were placed on the basis of report of M/s A.F. Ferguson & Co., while the case of the learned departmental Representative was that the word actual cost has to be construed strictly. Since, the assessee is claiming depreciation, the onus is on it to establish costs of various assets. We have also described the cases cited by the learned departmental Representative, the ratios of which are that-(i) the word cost has to be construed strictly, and (ii) determination of cost is a question of fact, based upon the evidence produced. The assessee had produced certain evidence in the form of technical report and the report of M/s. A.F. Ferguson & Co., which according to us should form the basis for valuation of various assets.
4.3 In the aforesaid report, the market value of the land has been taken at Rs. 83.20 lakhs (p. 326 of the paper book). The assessee has also filed conveyance deed, in which the value of the land for stamp duty purposes was taken at Rs. 1,20,77,830, say Rs. 120.80 lakhs. The learned Counsel was required to state as to why the value of the land should not be adopted at Rs. 120.80 lakhs, as mentioned in the conveyance deed. The learned Departmental Representative accepted the proposition that the value adopted for stamp duty purposes represented picture of the market value more correctly than the value adopted in the report of M/s A.F. Ferguson & Co., which was based upon a number of assumptions and presumptions. Therefore, we are of the view that value of land has to be taken at Rs. 120.80 lakhs. Tbe assessee had adopted the value of buildings at Rs. 131.87 lakhs which was also the value adopted in the conveyance deed. Therefore, there appears to be no need to make any change in the value of the buildings. The result of aforesaid discussion is that land was undervalued by an amount of Rs. 37.60 lakhs, which will have to be reduced from other assets. It may also be mentioned that the assessee had paid stamp duty amounting to about Rs. 57.58 lakhs on 16-2-1995 for conveyance of land and buildings. It would be fair to apportion this expenditure between the land and buildings on the basis of the ratio of the cost of the land and buildings to the total cost of both these assets. Thus, the expenditure of Rs. 4,84,500 is allocated to the land. However, it may be mentioned that this expenditure was not incurred as consideration of transfer of the unit and, therefore, such adjustment has to be made at the time of addition to land and buildings on their conveyance.
4.4 In respect of other assets, it is seen that the value of the plant and machinery has been enhanced, but the values of furniture, fixture and office equipments; and vehicles have not been enhanced. The values of furniture and fixture, and office equipment amounts to Rs. 83.60 lakhs and the value of vehicles amounts to Rs. 50.40 lakhs. As against the aforesaid, the value of plant and machinery has been taken at Rs. 26.518 crores (p. 327 of the paper book). While the rates of depreciation for plant and machinery, furniture and fixture, etc. and vehicles are different, nonetheless, the value of plant and machinery is about 20 times the value of other assets taken together. Therefore, revaluation of these assets will not make much impact in the claim of depreciation of the assessee. Thus, we do not find that any useful purpose will be served by putting different values on such assets than the values put on them in the report of M/s. A.F. Ferguson & Co.
4.5 In a nutshell, it is held that the value of land has been understated in the report by an amount of Rs. 37.60 lakhs, which shall be reduced from the value of plant and machinery. At this stage, it may also be mentioned that we are reducing the whole value of Rs. 37.60 lakhs from the value of plant and machinery and not from other assets on proportionate basis. The reason is that the assessee has enhanced the value of plant and machinery only. Therefore, reduction in the value of plant and machinery by an amount of Rs. 37.60 lakhs shall be equitable to both sides as values of furniture and fixture etc. and vehicles have not been enhanced.
4.6 The assessing officer shall work out the deductible amount of depreciation on the aforesaid basis. Ground No. 1.9 was not really pressed by the learned Counsel as machinery and equipment mentioned therein were used by the assessee for less than 180 days in relevant previous year. Therefore, no adjustment in the depreciation is required on this sub-ground.
5. Ground No. 2 is against the refusal of the learned Commissioner (Appeals) in deducting a sum of Rs. 5,17,645, being assessees contribution towards PF and family pension fund. On perusal of the order of the assessing officer, it was found that the assessee had claimed deduction of Rs. 29,14,490, being miscellaneous expenses incurred by it. The assessing officer pointed out that it constituted a PF trust and a superannuation trust, which were not recognized by the CIT, Nashik. Therefore, the expenditure in respect of the aforesaid contributions, amounting to Rs. 6,68,979 was not allowed. The assessee took up ground No. 4 against this finding of the assessing officer before the learned Commissioner (Appeals). Before the learned Commissioner (Appeals), approval of the CIT, Aurangabad, in this behalf was filed. On the basis of the order, the learned Commissioner (Appeals) granted relief of Rs. 1,51,334 to the assessee.
5.2 Before us, it was pointed out that the details of various payments were furnished in the "statement of facts" filed before the learned Commissioner (Appeals), which were not considered by him fully. In view thereof, it was urged that the matter may be restored to the file of the Commissioner (Appeals) for ascertaining the correct amount admissible to the assessee. No particular argument was made by the learned departmental Representative in this behalf.
5.3 We have considered the facts of the case and rival submissions made before us. We restore this matter to the file of the learned Commissioner (Appeals) to consider the facts mentioned in the "statement of facts", examine them and allow a proper reduction to the assessee after hearing it in the matter.
6. Ground No. 3 is against the disallowance of guest-house expenses of Rs. 85,641. This ground was not argued by the learned Counsel in view of the decision of Honble Supreme Court in the case of Britannia Industries Ltd. v. CIT . Thus, this ground is 8. Ground No. 1 and its sub-grounds are similar to ground No. 1 of ITA No. 132/Pune/2003 (supra). In view of the decision in that appeal, it is directed that WDVs of various assets shall be found on the basis of deduction of depreciation in that year, and the depreciation for this year shall be deducted accordingly. Thus, this ground is partly allowed.
9. Second ground is against the confirmation of disallowance of Rs. 10 lakhs from various expenses. It is also mentioned that the learned Commissioner (Appeals) erred in holding that the assessee agreed for disallowance of the aforesaid amount. On perusal of the ground of appeal before the learned Commissioner (Appeals), it is seen that the assessee had challenged the aforesaid ad hoc disallowance on the ground, inter alia, that the expenses were fully verifiable and have been audited by statutory and tax auditors. The learned Commissioner (Appeals) upheld the disallowance on the ground that the assessee had agreed to such disallowance before the assessing officer. Having considered the submissions before us, we think it proper to restore the matter to the file of the learned Commissioner (Appeals) for considering the expenditure on merits and decide the matter afresh after hearing the assessee.
10. Ground No. 3 is against the refusal of the learned Commissioner (Appeals) to admit a fresh ground of appeal against the disallowance of Rs. 6,98,889, being increase in liability of technical know-how fees on account of fluctuation in foreign exchange. Before us, it was pointed out that the assessee had moved the additional ground vide its letter dated 11-9-2002, submitted before the learned Commissioner (Appeals) on the same day. The learned Commissioner (Appeals) passed the order on 26-9-2002 after submission of the additional ground of appeal. It appears that the learned Commissioner (Appeals) did not consider this issue at all. In view thereof, it is held that the learned Commissioner (Appeals) shall consider the admissibility of the ground. If the ground is admitted, he shall also decide the ground on merit after hearing the assessee. Thus, this ground is treated as allowed for statistical purposes.
12. Ground No. I is similar to the ground No. 1 in ITA Nos. 132 & 133/Pune/2003 (supra). It is directed that the assessing officer shall work out the WDVs of the assets taken from Ceat Ltd. on the basis of the orders in those appeals, and allow deduction of depreciation for this year accordingly. Thus, this ground is partly allowed.
13. Ground No. 2 is regarding deduction of enhanced liability in respect of technical know-how fees due to fluctuation in foreign exchange. Similar ground is restored to the file of the learned Commissioner (Appeals) for fresh decision in ITA No. 133/Pune/2003 (supra). Following the decision in that appeal, this ground is also restored to the file of the learned Commissioner (Appeals) for fresh decision. Thus, this ground is treated as allowed for statistical purposes.