| SooperKanoon Citation | sooperkanoon.com/73888 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | Mar-28-2005 |
| Judge | N B Sankar, M Shrawat, J Member |
| Reported in | (2005)98TTJ(Mum.)134 |
| Appellant | The Jcit, Spl.Rg. 27 |
| Respondent | Mahindra Sona Ltd. |
"On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in directing the A.O to allow depreciation on the cost of asset being purchase price namely Rs. 14,31,37,237/- as per IT Rules." ii) For the assessment year 1996-97 the ground raised are as follows.
1. "On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in directing the A.O to grant depreciation (as against the depreciation allowed of Rs. 53,50,277/- after giving effect to the order of the ld. CIT (A) for the A.Y 1995-96 wherein relief was granted to the assessee, without appreciating the fact that the depreciation was claimed on overvalued assets purchased by assessee from M/s. Mahindra & Mahindra Ltd. in which assessee has substantial share holding." 2. "On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in deleting the addition of Rs. 4,37,915/- made to the value of closing stock on account of "MODVAT".
iii) For the assessment year 1997-98 the ground raised is as follows.
"On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in directing the A.O to allow depreciation on Plant & Machinery and other assets on the basis of the WDV of the assets as determined after giving effect to the CIT (A) 's order for A.Y 1996-97 which is pending in appeal before ITAT." 2. It was observed as per the assessment order that the assessee company was incorporated on 30th Sept. 1984. The assessee company had acquired Automobile Component Unit (ACU) of M/s. Mahindra & Mahindra Ltd. (M&M Ltd) located at Nasik engaged in manufacturing activity of automotive components. The major share holding of the assessee company were M&M Ltd. and Sona Steering Systems Ltd. The A.O has observed that M&M Ltd. could be treated a person having substantial interest in the assessee company Under Section 40A(2)(ii). For purchase of ACU Units of M/s. M&M Ltd. the assessee company has paid a total consideration of Rs. 14.00 crores. The amount of consideration along with the Stamp Duty paid was allocated towards fixed assets and the assessee company had claimed depreciation on the total amount. This is the core issue raised by the A.O. The assessee was asked to explain as to why the book value of the assets in the books of M&M Ltd. should not be substituted as actual cost of the assets in the hands of the assessee. The A.O has observed that the assets were revalued just before the transfer. It was explained that M&M Ltd. had appointed a valuer viz. M/s. Universal Surveyors and Adjusters . So on the basis of the detailed valuation of the Plant and Machinery as done by the appointed valuer the said sale price was determined. The valuation was undertaken by M&M Ltd to fetch a fair price of plant and machinery. It was emphasized that the sales transaction was at arms length and in order.
3. The observation of the A.O was that the WDV of the assets in the books of M/s. M&M Ltd. was Rs. 4,71,34,476/- before the transfer took place. He has also observed that M&M Ltd. had acquired the Plant & Machinery from an another company for a consideration of Rs. 3.70 crores in the year 1984. Before the A.O it was placed on record that the amount received as consideration from the assessee by M/s. M&M Ltd. was offered to tax as per Section 45 as capital gains. It was further found by the A.O that M&M Ltd have actually shown capital loss of approximately Rs. 2.90 crores on this transfer in the income tax return. M/s. M&M Ltd. had claimed the deduction on index cost of acquisition which was deducted from the net consideration received by treating the transaction as a sale of the entire undertaking and not sales of assets so a capital loss was reflected in its income tax return. With this brief background A.O has observed in respect of invoking explanation -3 Section 43(1) as follows.
"In short the assets which were purchased second hand in 1984 and depreciated over the year have been sold at more than their original price in 1994 to the assessee to enable it to claim depreciation on the enhanced cost. The transferor company in the process has also claimed capital loss of Rs. 2.9 crores on the transaction.
Explanation 3 to Section 43(1) clearly states that where before the date of acquisition by the assessee, the assets were used by any other person and the assessing officer is satisfied that the main purpose of the transfer of such assets was the induction of a liability to income tax(by claiming depreciation with an enhance cost) the actual cost to the assessee shall be such an amount as the assessing officer may determine having regard to the circumstances of the case. In the instant case, it is clearly evident that the price of the assets have been substantially inflated in order to charge higher depreciation. M&M Ltd. being a person which substantial interest in the company would certainly benefit from the higher depreciation allowance in future years while at the same time it has booked a loss of Rs. 2.9 crores on the transfer in the current year." After invoking the provisions of Section 43(1) explanation, the A.O has also examined the valuation report and have found that it was mentioned in the valuation report that the technical know how system of preventive maintenance built over the year etc. have been taken into account to arrive at the cost determined before transfer. The machinery had been valued by taking the replacement cost from the price list of other manufacturing companies like HMT. The depreciation taken into account was based on the estimated service life by the valuer. In this regard the A.O has mentioned that such old machines were not comparable to the price of new machines. The new machinery which was referred and compared happened to be substantially improved version due to rapid advancement in technology, therefore, the latest machines were wrongly compared with the old machines and the replacement value adopted by the valuer was not beyond doubt. To substantiate this finding A.O has quoted an example of Personal Computer of 1991 which according to him had become obsolete, however the same was valued at Rs. 28,000/-.
Likewise he has also quoted the cost of ceiling fans and coolers adopted by the valuer which according to A.O was very high and would not fetch such a price on sale. So he has concluded that the valuation did not reflected the realistic cost of the assets. Again he has mentioned in the assessment order that a device was adopted by the assessee to reduce the tax burden by charging excessive depreciation.
At the end he has arrived at the conclusion that the actual cost of the assets should be the same value as per the WDV of the assets in the books of M/s. M&M Ltd. i.e. the transferor by invoking Explanation - 3 to Section 43(1) of IT Act. A computation of the depreciation of the assets in the form of a chart is produced in the assessment order reflecting block of assets, WDV and depreciation allowable. According to this chart the depreciation allowable for the year under consideration was computed at Rs. 22,81,367/- which was set off against the profits as per the income computed in the assessment order.
4. This issue was carried before the first appellate authority who has narrated the facts of the case as well as reproduced verbatim the written submissions of the assessee. According to him the transfer of assets was based upon sound business consideration and claim of depreciation was not alone the main motivation of the said bonafide business transaction. He has opined that the primary condition for invoking Explanation-3 to Section 43(1) was not fulfilled because the main purpose of the transfer was not the reduction of tax liability. As regards valuation of the assets his finding was as follows: "As regards valuation of assets under consideration the valuation was done by M/s. Universal Surveyors and Adjusters who were appointed by IL&FS who were consultants for the entire restructuring exercise of M&M Ltd. It is submitted by the A.O that M&M Ltd. played no role in their appointment or determining the terms and conditions because the same was done by IL&FS being the consultants of M&M Ltd. The A.R was asked to file the valuation of the assets in question based on the undertakings since the original cost by applying the indexation as notified under the Income-tax Act 1961 (Section 48) upto the financial year 1994-95 and the value has been arrived at 16.33 crores approximately and the said valuation has been given as Annexure to the Note dtd. 9/3/99, the relevant xerox copy of the same has been given as Annexure to this appellate order. Therefore, it is evident that the cost of the assets in respect of ACU Unit from M&M Ltd being Rs. 14 crores is less than the value of the said assets determined on the basis of indexation of the assets by applying the cost of inflation index as notified under the IT Act, 1961 vide Notification No. S.O.770(E) dtd. 7/11/97 and therefore in my opinion the valuation of the assets in question done by M/s.
Universal Surveyors and Adjustors appointed by IL-FS is quite in order and the same should have been accepted by the A.O. In view of these facts and circumstances and reasons given above invocation of Explanation 3 to Section 43(1) of the IT Act is not justified. The view also gets support from the judgment of Madras High Court in the case of CIT v. Sekar Offset Press, 214 ITR 516." In support he has also cited Bombay Household & Industrial Plastics Mfg. Co. (P) Ltd., 1 ITD 152, Poulose & Matthen (P) Ltd., 43 ITD 141 and Karam Chand Thaper & Bros., 66 ITD 39. Further he has referred a decision of Hon'ble Supreme Court in the case of R.D. Bansilal Abirchand Spinning & Weaving Mills, 75 ITR 271 & 272, wherein the Hon'ble Court has observed that if there is material to show that there has been fraud , collusion, inflation or false transaction made with ulterior motive the cost of the asset as reflected in the agreement to purchase is not binding on the authorities but in the absence of any such circumstances it has been held that the Tribunal and the authorities were precluded from going behind the agreement in determining the purchase price. So he has concluded that in view of the facts that the valuation determined by the appellant's valuer was less than the value determined on the basis of cost of inflation index as notified by the Board Under Section 48 and also in view of the fact that the sale price of Rs. 14 crores has been adjusted against the block of assets by the seller the provisions of Explanation - 3 of Section 43(1) were not applicable. So he has directed the A.O to allow the depreciation to the appellant on the cost of the assets i.e. Rs. 14,31,37,237/- as per IT Rules. Against this said relief granted by ld.CIT (A) now the revenue is in appeal in all the three years.
5. On behalf of the Revenue ld. D.R, Shri D.K. Rao appeared and after narrating the background of the case as already reproduced in above para, at first he has argued that the provisions of Section 40A(2) were applicable in the present case as mentioned by the A.O because the transferor and transferee both belong to the same group of concerns. In this regard he has relied upon the observation of A.O made in respect of share holding by the said companies. He has mentioned that Shri A.G.Mahindra is the common Chairman of group concerns and M&M Ltd. has substantial share holding, therefore, rightly treated as a person having substantial interest in the assessee company. The next plank of his argument was that the transferor M&M Ltd has acquired the assets in the year 1984 for a sum of Rs. 3.7 crores. In the past depreciation has already been allowed in those assets and certain additions have been made and the WDV as on 31/3/94 was at Rs. 4.71 crores just before the transfer. Now these assets have been revalued at an exorbitant figure of Rs. 14.00 crores. According to him the entire exercise was to evade the tax. In respect of valuation being done by a valuer he has mentioned that M/s. Universal Surveyors are not independent agencies and paid by the group concerns. According to ld. D.R valuation report was prepared with the motive to give colour to this transaction as genuine but the said valuation report was full of doubts. Valuation was done on hypothetical value and the old assets were assessed at a very high figure. He has concluded that the main purpose of the entire transaction was to reduce tax liability because the transferor has only one purchaser i.e. the assessee and the entire planning was done keeping in mind the said purchaser i.e. the assessee company. The transaction was not with a view of commercial expediency and the main purpose was to reduce tax liability. Ld. D.R has also stressed that due to this transaction not only the assessee but also M&M Ltd was benefited due to the reason that Rs. 2.9 crores capital loss was generated in the hands of that company. So he has concluded that the main purpose was reduction of tax liability directly as well as indirectly hence the said provisions of IT Act were rightly invoked and in support he has cited the following decisions.
6. From the side of the respondent company ld. A.R. Ms. Padmini Khare appeared and argued at length. Strongly relying upon the decision of CIT (A) she has opened her arguments with this statement that the transfer was purely on business and commercial consideration. The Automotive Component Unit of a division of Mahindra & Mahindra Ltd. was transferred to a new company Mahindra Sona Ltd.(the appellant) a joint venture between M&M Ltd. and Sona Steering Systems(Sona) a reputed auto ancillary with technical collaboration with Koyo Seiko of Japan. The fixed assets were transferred to the new company at a consideration of Rs. 14 crores based upon a valuation report of M/s. Universal Surveyors and Adjustors Pvt. Ltd., who valued the same at Rs. 13,78,21,450/-.
There was a component of stamp duty of Rs. 29.53 lacs as well. The A.O has wrongly restricted the claim of depreciation to Rs. 22.81 lacs as against Rs. 146.19 lacs claimed by the assessee. The issue is thus that whether the provisions of Explanation- 3 to Section 43(1) were rightly invoked by A.O. She has stressed that the transfer of the undertaking was for cogent business consideration because M&M Ltd. was desirous of an exit from its non core activities. With this object M&M Ltd. appointed Infrastructure Leasing & Financial Services(IL&FS) as its consultant for divesture of the said unit. M/s. IL & FS has located a joint venture partner namely Sona Steering System Ltd.,(Sona) who have brought in share capital along with Japnese manufacturing technique. A share holders agreement was made according to which the Managing Director could be appointed by Sona. So the assessee company was benefited by this arrangement having strong market opportunity and brand equity of promoters. The assessee company has entered into this agreement keeping an eye on the turnover expected to increase under the management of Sona. In this manner ld. A.R tried to establish that it was a pure business and commercial transaction supported by a technical report of a valuer. In respect of the genuineness of the valuation report ld. A.R has mentioned that the said IL&FS has appointed Universal Surveyors & Adjustors to value the fixed assets. The valuers has long standing and enjoyed great reputation and worked as approved valuer of several financial institutions. The valuation report was prepared at the behest of IL & FS and not at the request of the assessee. Supporting the value determined of the machines by the valuer she has mentioned that the machines were in running condition and none of them have been discarded. Before transfer those machines were undergone heavy repairs, therefore, the present market value of those machines was adopted by the valuer. According to her it was worth mentioning that subsequently few machines of same specifications were also purchased at a price higher than the value taken by the valuer in the valuation report. So she has argued that since similar machines being purchased subsequently at a higher price, therefore, this fact demonstrates that the valuation was correct and appropriate. She has also mentioned that the consideration was actually paid by the appellant to M/s. M&M Ltd. She has also mentioned that financial help was required to make the payment hence loan was arranged from IFCI of the amount of Rs. 9 crores. This loan was sanctioned by IFCI subsequently for acquisition of fixed assets. Those assets were held as a security by the said financial institutions and the value of the same was taken as adopted by the valuer. One more aspect was high lighted by ld. A.R that the share holding structure was such that Sona and Associates had 37.50% share holding and M/s. M&M Ltd. also had 37.50% share holding and rest belonged to other outsiders. Since Sona had no business relationship prior to this joint venture and both the parties came together for the first time, therefore, the A.O has wrongly held that the provisions of Section 40A(2) would be attracted. Finally she has strongly opposed the action of A.O of invoking of Explanation-3 to Section 43(1) on the ground that there was no undue tax benefit enjoyed by the assessee because of this transaction. As far as M&M Ltd. is concerned a capital loss was computed but had the consideration been received lower than the said price then the amount of capital loss would be even larger. It is a general practice that transferor always tries to get the best price of his goods and the consideration in this regard was actually paid by the transferee i.e. the assessee company and no doubt had been casted by A.O about the payment of consideration.
In support of all her arguments certain case laws were cited as follows.
(1) R.S. Bansilal Abirchand Spinning & Weaving Mills, 75 ITR 260(Bom) (5) Bombay Household & Industrial Plastic Mnf. Co.P. Ltd, 1 ITD 152(Bom) 7. Parties heard at length in the light of the orders of the authorities below as well as the compilation filed. We have also examined the issue involved after considering the case laws cited from both the sides and the relevant provisions of IT Act. The issue raised before us revolve around the applicability of Explanation - 3 to Section 43(1) of IT Act. Basic facts in respect of transfer of Plant & Machinery are undisputed which have already been narrated supra. The salient features as emerges from the above discussion are that the assessee company has acquired Automotive Components unit of M&M Ltd. located at Nasik for a consideration of Rs. 14 crores. The appellant company has claimed depreciation on the said amount of consideration passed in respect of plant and machinery, however, the A.O has invoked Section 43(1), Explanation - 3. Due to this reason the claim of depreciation was restricted to Rs. 22.81 lacs as against the claim of the assessee of Rs. 146.19 crores, as stated by ld. A.R. To resolve this issue we have to examine certain points such as whether the transfer was for commercial consideration, secondly whether the valuation done by the approved valuer was at arms length, thirdly, whether there was any motive of tax planning and lastly, whether the A.O has rightly invoked the said section. We will discuss all these aspects step by step as follows: (a) To decide whether the transfer of the assets was for commercial consideration we have to examine thoroughly the brief background under which the said transfer took place. The reason given by the appellant for the transfer was that the transferor i.e. M/s. M&M Ltd. wanted to exit from its non-core activity and was desirous to concentrate on auto component business hence decided to transfer those assets. To achieve that objective M/s. M&M Ltd. has appointed IL& FS who has located a joint venture partner. The said joint venture partner viz. Sona Steering Systems joined hands with the assessee company and the fixed assets were transferred for a consideration of Rs. 14 crores. It was a sale of entire undertaking as stated by the A.O and not merely sales of assets. In this regard we have perused the contents of the agreement between M&M Ltd. and the assessee dated 30th day of March 1995. On careful examination of the terms and conditions of this "assignment of business" agreement one thing is apparent that the entire deal was executed with the sole objective to get the deal finalized with one purchaser i.e. the assessee company. The documents placed before us do not reveal that there was any other buyer and the entire terms and conditions were framed with the target to facilitate both the parties of the agreement. Further, the facts as narrated by ld. A.R that M&M Ltd preferred to restrict its involvement as investor and to induct a new partner to actively manage and promote the Auto components manufacturing business has inducted Sona Steering System Ltd as partner to enable the new company i.e. assessee to get the benefit of the latest technology. This fact thus indicates that the M&M Ltd had important role to play in the business of the assessee company.
The documents placed before us also indicate the same. Commercial expediency in such cases is a question of fact to be determined with reference to the evidence and the materials. The mere production of documentary evidence simply showing that contract was made for purchase of the assets at certain price does not conclusively establish the correctness of the claim made by the assesses specially when the other surrounding circumstances indicated that the deal was not made at arms length. In this regard we have examined the case laws cited from the side of the respondent assessee. In the case of Sekar Offset Press, 214 ITR 516 the facts were that there was dispute among partners. To settle the dispute transfer took place and the revaluation of the assets was done by the partners. So on the basis of those facts when there was serious difference among them it was held that the transfer was not with the purpose of reducing tax liability and held that the explanation - 3 to Section 43(1) was incorrectly attracted. So the facts in that case have clearly established that the surrounding circumstances compelled for such transfer, however, the situation in the present appeal could not be said to be identical. There was no compulsion for the transferor and even if there was compulsion the assets were not going to be transferred to an outsider. The transfer took place within the group having substantial interest. In our considered opinion the test of commercial consideration is that both the parties should have acted in a prudent manner with the sole objective to safeguard their respective interest. The transaction should be beyond doubt and should be at arms length so that even if look from a distance the transaction should look crystal clear. We are of the view that such transparency is missing in the entire transaction.
Interalia we also want to add that this provision is intended to counter act attempts to claim higher depreciation by purporting to purchase assets at more than their true or real cost. This section correspond to the first proviso to Clause(a) of Section 10(5) of 1922 Act. This explanation has continued in the same terms since 1962 as well. Where an asset was already in use in a business in the hands of one person and it's written down value has been ascertained by the A.O and that person transfers the assets to another person for a price exceeding its written down value, it is open to the officer to refuse to accept the sale price as the "actual cost" to the purchaser in the purchaser's assessment i.e. the assessee Company. If we further minutely analyze the terminology used by the legislature then it is evident that the legislature prefixed the word "actual" to the word "cost". The word "actual" thus lay emphasis on the reality and genuineness of the cost so as to exclude inflated or fictitious cost. But before the A.O does so, he should be satisfied that the main purpose of the transfer was the reduction of liability to income tax by claiming depreciation with reference to enhanced cost. In this regard, before we proceed further it is necessary to examine whether the A.O has noted his satisfaction and have found the recording of A.O as, "therefore this is the situation which clearly falls under the ambit of Explanation - 3 to Section 43(1)". It is a tax planning device to reduce tax burden on the company by charging excess depreciation. After this observation the A.O has adopted the WDV of the assets which were in the books of M/s. M&M Ltd. and allowed depreciation of Rs. 22,81,367/-, as per the tabulation chart produced in the assessment order itself.
Considering the intention of the legislature, words incorporated in the language of the section and totality of the circumstances under which the assets were transferred, our first reaction is that the provisions of Explanation - 3 to Section 43(1) have rightly been invoked. Since right now we are dealing about the first question whether the transfer was for business and commercial consideration, as discussed supra we are of the view that the entire transaction was made keeping in mind the one purchaser i.e. the appellant in whose business the transferor i.e. M&M Ltd has 37.5% share holding interest. Thus the circumstances of the case indicates that the transfer was not at arms length and this aspect has further to be seen in the subsequent paras.
(b) The next question for our consideration is whether the valuation done by the approved valuer was at arms length. In this regard ld. A.R. Ms. Khare has narrated the facts in detail, as already mentioned supra, that M&M Ltd has approached UL&FS to search a suitable partner for the purpose of divesture of the assets of one of its division. The said leasing concern has appointed Universal Surveyors to value the fixed assets. It was mentioned by ld. A.R that the said valuer has long standing in the field of valuation and several financial institutions as well as Bank also engaged the said valuer for the purpose of valuation. She has also argued that the exercise of the valuation was conducted at the behest of IL&FS and not on request either from the transferor or transferee. In any case the valuation was done by the valuer by adopting replacement value method of the equipment. It is an admitted fact that the replacement value was based upon an estimate of what it would cost to procure, install and commission a similar item of machinery. The valuer had referred price list of HMT to arrive at the replacement value of certain standard machine tools. The machines which were earlier imported and at that time available indigenously were valued on the basis of the cost of local equipments. These facts are mentioned in a letter dated 30/5/94 placed on Page- 48 of paper book addressed to IL & FS by the surveyors. The summary of the valuation done of the assets has also been incorporated in the said valuation placed on paper book page - 55 reproduced below:"S.No.Assets Depreciated value.------ ------ ------------------ The subsequent pages of the Report described the machinery and the value adopted by the valuer. Valuation of most of the machinery was done in round figures. On careful examination we have found that the basis for adoption of current replacement value has not been indicated. In other words the valuation report is silent on the present available replacement value of the machinery and no comparable instances have been cited. In our humble opinion a current replacement value can be arrived at only after ascertaining the current market price of a machinery. So before arriving at the replacement value first step in this direction had to be to gather the information in respect of the current market price. Apparently this exercise has not been down and adhoc value have been adopted.
In this regard the A.O has also made an observation reproduced herein below.
"The valuation has not been down only with regard to the fair market value of the assets but the business or the undertaking as a whole.
In such a valuation, a umber of other considerations would come in such as the skill and experience of the employees, the nature of orders or contracts in hand, the goodwill enjoyed by a running concern etc. It is mentioned in the valuation report that valuation takes into account the technical knowhow, the system of preventive maintenance built over the years and the preliminary cost to be incurred in starting a factory from the green fields stage. The machinery has been valued by taking the replacement cost of such a machine from price lists of manufacturing companies like HMT and depreciating it based on the estimated service life etc. It is to be noted that such old machines are not comparable to new machines which would be substantially improved versions with the rapid advancements in technology in every field of activity. Thus the replacement value taken therefore is not beyond doubt. This is evident from the value adopted for some of the items. A personal computer(AT 286) of 1991 vintage which is now completely obsolete has been valued of Rs. 28000 ceiling fans of 1989 vintage of Rs. 900, 2 water coolers purchased in 1988 of Rs. 15000 etc. These are items of common use and it is common knowledge that they would not fetch such prices even if one is able to find a buyer. It is clear that the valuation does not reflect the realistic cost of the assets." So the A.O has also arrived at the conclusion on examination of the valuation report that the valuation did not reflect realistic cost of the assets. He has also categorically stated that such old machines were in no way comparable to new machines. The admitted position is that these machines have been acquired by the assessee in the year 1984 for a consideration of Rs. 3.70 crores only. The contention of ld. A.R in this regard were that subsequently certain machines of the same specifications were bought by the assessee at a higher price so demonstrates that the valuation done by the valuer was not inflated . It was also argued that all the machines were in working condition and efficiently used for production. Condition of the machinery was so good that no heavy repairs were undertaken subsequent to the purchase, added by ld. A.R. At this juncture it is pertinent to mention that statements made by ld. A.R were not supported by any evidence. Merely bald statements have been made without pin pointing the exact prevailing price of equipments and even without producing the evidence of purchase of the machinery in the subsequent years. Neither the valuer now the assessee has established the genuineness of the replacement value adopted in the valuation report by producing the sale bills or any like manner independent evidence. Rather hypothetical depreciated value termed as replacement value was taken into account by the valuer in stead of ascertaining "actual cost" as referred in the section itself.
Moreover, the word "cost" is not synonymous with "price" because the cost taken in other components of expenditure such as freight, transportation insurance etc. There is no independent material on record to show that the valuation done by the valuer was pari materia with the prevailing replacement cost of such machineries. In this regard one more argument was advanced by ld. A.R that the consideration which had genuinely been passed between the parties could not be doubted. She has emphasized that the consideration of the fixed asset was actually paid by the assessee company to M&M Ltd. She has also vehemently stated that the portion of the consideration was also financed by a financial institution namely IFCI. This loan was granted by IFCI subsequently for the acquisition of fixed assets which were taken as security. For that purpose IFCI has also scrutinized the value of the assets and accepted the same.
So ld. A.R has argued that the said financial institution who had advanced the loan on taking security of the said assets had a greater stake and only after proper satisfaction accepted the loan proposition of about Rs. 9.00 crores based upon the said valuation.
Though this argument has some force but again there is nothing on record to establish that what were the securities taken in to account by IFCI and what was the basis of sanctioning of loan.
Whether the IFCI has taken those very assets as security and the assessee company has mortgaged those fixed assets in favour of IFCI against the loan sanctioned of Rs. 9.00 crores. Rather the facts of the case reveals that there was "private placement of secured non convertible debentures aggregating of Rs. 900 lacks" as mentioned in a letter of IFCI dated 26/7/95 placed on paper book page-102.
According to this letter IFCI has agreed to subscribe the proposed issue of secured non convertible debentures(NCD) to the extent of Rs. 900 lakhs on private placement basis. As per terms and conditions of NCD set out in Appendix- I placed on page - 103 IFCI has sanctioned the said amount and the purpose of the issue was that the proceeds of the issue of NCD's shall be utilized solely for acquisition of fixed assets and current assets of the Auto Component Unit of M&M Ltd. Pate No. 104 to Pg.111 consists debentures trust deed executed by the assessee favouring IFCI. Further on Page- 229 of the paper book the assessee has placed "Subscription Agreement" entered into between the assessee and IFCI according to which, as well, the debentures together with premium were held as securities.
To our understanding the funds were generated to the extent of Rs. 9.00 crores by the assessee company on issue of NCDs and the facts do not reveal that it is a simple transaction of raising of loan against mortgage of Plant & Machinery. Therefore, it appears that IFCI had no interest on the valuation of the assets so transferred, therefore, the arguments in this regard of ld. A.R has no substance.
As far as the case laws are concerned, ld. A.R has placed reliance of a decision of Hon'ble Bombay High Court (Nagpur Bench) in the case of R.B. Banshilal Abirchand Spinning and Weaving Mills, 75 ITR 260, where the Court has observed that in the absence of fraud, collusion, or false transaction made with ulterior purposes the Income Tax Authorities was precluded from going behind the agreement of purchase in determining the purchase price and fix their own valuation. However, the Court has also observed that cost of the assets had to be ascertained by price that could be paid in the prevailing market condition because there was no material on record to show that the valuation by the experts was either exaggerated or incorrect. On the other hand, on appreciation of the facts of the present appeal, it appears that there was an element of collusion between the purchaser and the seller and the said transaction appears to be with the purpose of reduction of tax liability. In such cases when the transaction is not at arms length and the deal is made to subterfuge to avoid tax then in a number of decisions it has been held that the A.O can go behind the contract and ascertain the actual cost for the purposes of correct ascertainment of Income-tax liability of the assessee. Few of them as cited by ld. D.R are Kungundi Industrial Works, 57 ITR 540 and Jogta Coal Co.
Ltd., 55 ITR 89. In our humble opinion since the assessee has not objectively satisfied that the acquisition of assets was based upon genuine consideration reflecting the actual cost of the Plant & Machinery then though the valuation done by an approved valuer, the same was not reliable because mere production of a documentary evidence is not suffice specially when the surrounding circumstances did not support the said valuation.
(c) The next relevant question for our consideration is whether there was any motive of reduction of tax liability by claiming depreciation with reference to the enhanced cost. In this regard the observation of the A.O was that on one hand the transferor company has claimed a capital loss of Rs. 2.90 crores by treating the transfer as sale of entire undertaking and on the other hand the assessee has also reduced the tax liability by claiming excessive depreciation on the enhanced cost of plant and machinery. Through this device neither the transferor nor the assessee has paid tax and the tax liability was reduced substantially in both the cases.
Undisputed position is that the M&M Ltd i.e. transferor has acquired those assets in the year 1984 for a consideration of Rs. 3.70 crores. There were certain addition and the WDV as on 31/3/1994 i.e.
just before the transfer as per the books was Rs. 4.71 crores. The result is that on those assets firstly the transferor M&M Ltd has claimed the depreciation in its income tax returns regularly in the past. Before transfer those assets were revalued at Rs. 14.00 crores. On the revalued assets now again the transferee i.e. the assessee has started claiming the depreciation once again on the substantial value on the same assets. To check this method of taking the advantage of depreciation on the same assets again and again by revaluing the same the legislature has incorporated the said Explanation -3 in the statute of Section 43(1). One argument in this regard was placed from the side of the respondent assessee that the assets being transferred to a different entity and the cost was actually paid, therefore, in such circumstances the purchaser i.e.
the assessee has to be allowed depreciation on the price which was actually paid. But in our humble opinion the mere production of documentary evidence showing that a contract has been made for purchasing assets at a certain price do not conclusively establish the correctness of a claim made by an assessee as far as the application of Explanation - 3 is concerned. It is open to the A.O to refuse to accept that price if in his opinion the purpose is of reduction of tax liability. Though it is not open for the department to dictate an assessee of the method he should adopt in conducting his business, all that the department is concerned with is the tax which is due under law. To tax an assessee, revenue authorities has been empowered to lift the veil. Here in this case it was found by the A.O and is an accepted position that M&M Ltd. has 37.50% share holding. So according to revenue though both the parties are separate entities but having common interest. In the case of Dalmia Dadri Cement Ltd., 125 ITR 510 as cited by the parties above, Hon'ble Delhi High Court has opined that there was considerable element of collusion in the entire affair which could not be treated as a the result of normal commercial consideration. The Hon'ble Court has held that the capital cost has no doubt been inflated in the hands of the assessee to enable it to claim higher depreciation.
It was observed that if circumstances indicate that a fictitious price has been put on the asset or there a collusion between the vendor and the vendee then it was held that it is open to Income Tax Authorities to refuse to accept the price mentioned in the deed.
Since both the parties i.e. the vendor and the vendee are closely associated and considered by the A.O as persons having substantial interest in the company by invoking Section 40A(2)(b), the element of collusion cannot be ruled out. There is no dispute about this fact that all those assets which were formerly belonged to vendor company had become the assets to the vendee company and the said change-over certainly affected the position of tax liability as well. The vendor M&M Ltd. has been benefited by this transfer by claiming capital loss of approximately 2.90 crores. We are however, concerned in this proceeding only with the depreciation allowance in the hands of the assessee company. The assessee company has equally been benefited. The "actual cost" of a particular assets is entirely a question of fact and like any other question of fact depends upon the evidence produced to prove it. If the circumstances show that an assessee has arranged to put an extremely high price then the revenue authorities are duty bound to arrive at the correct value of assets. An agreement between two connected parties thus necessarily not the last word and the A.O can go beyond the contract. That being the case the A.O has to record his satisfaction that the main purpose of transfer is directly or indirectly to reduce the tax liability. The only question to be considered whether this condition is satisfied, this indeed is a question of fact and has to be inferred from the proved or admitted circumstances of the case. The share holders of the new company i.e. the assessee are no other than the old share holders and the persons involved has substantial interest in both the companies, such as the name of Mr. A.G. Mahindra has also attracted the attention of the Revenue Authorities apart from the share holding structure of the vendor and vendee companies. Though the entities are distinct and separate as far as the law is concerned, but this is not the case where the price has exchanged between unknown and unconnected parties. Their inter-say relationship is not in dispute. If that is the position then circumstances definitely warrants to attract explanation - 3 of Section 43(1). It must be borne in mind that for the application of this section the change over or transfer of asset need not be the only reason but the main purpose should be the reduction of liability of income tax. Of course, several reasons have been shown for the said change over by ld.A.R namely the efficient working of the concern, purely a commercial consideration, and future prospects of the units. But if these reasons were the only guiding motive, then what was the reason that the same assets were given a higher value even when in fact, though not in law, the assets did not change the hand, being share holders having common substantial interest in both the entities. It is this consideration that weighed with the Income Tax Authorities. That being the case it was inevitable not to attract the said provision. In support of above discussion we rely upon Kungundi Industrial Works Pvt. Ltd., 57 ITR (d) So far from the above discussion we have arrived at a conclusion that the transaction was not arms length but still before we conclude it is still pertinent to examine whether the A.O has rightly invoked the section. The fact that M/s. M&M Ltd. had adopted the cost at the time of transfer much higher than the WDV would afford sufficient basis for invoking Explanation -3 to Section 43(1), specially when the surrounding circumstances indicate that the purpose of the transfer of the assets directly or indirectly to the assessee, where the assets had offered depreciation prior to such transfer, is such as to indicate that the main purpose of transfer was to enable the assessee to gain higher depreciation by taking a higher figure as its cost at the time of such transfer. The reality before and after the transfer remained the same that the common share holders or persons continued to use those assets and also continued to enjoy the benefits. Almost on identical circumstances Hon'ble Madras High Court in the case of Nagammall Cotton Mill, 258 ITR 390 has held that the A.O was justified in fixing actual cost as WDV on the date of take over. We are unable to endorse this view point that the assets already subject to depreciation can again be entitled for depreciation by simply revaluing the cost. This is not a case where there was no written down value of the assets, which means the assets were subject to depreciation and the cost as on the date of transfer ought to be reduced by the depreciation actually allowed. The Hon'ble Kerala High Court in the case of CIT v. Poulose & Matthen, 236 ITR 416 has also opined in the like manner that even if the assessee produces the valuation report it cannot be said that the transfer was at the actual cost of the assets. The facts of that case were more or less similar to the facts on hand. A decision was cited in that precedent of Hon'ble Bombay High Court in the case of Ginners and & Pressers Pvt. Ltd., wherein the assessee, a Private Ltd. Company was a subsidiary of another private limited company. The object of formation was to take over some Oil & Ginning Mills. Assets were taken over at a higher cost than written down value. The assessee paid for the assets by issuing fully paid up shares. The A.O has applied the then Section 10(5)(a) and fixed the actual cost of the assets. In this regard it was held that the conditions for attracting the said proviso was satisfied because the assets had been used by the appellant company for their business before they were transferred to the assessee company. The Hon'ble Jurisdictional High Court has also held that the Tribunal was justified in rejecting the valuation report and drawing a diverse inference against the assessee. It was held that the proviso was properly applicable and the basis adopted by the Department in fixing the actual cost of the transfer of assets to the assessee company was not unreasonable or erroneous and was in accordance with the requirement of law. The ratio laid down by the Hon'ble Bombay High Court is directly applicable in the instant appeal now before us and binding upon us hence we hereby respectfully follow the same. There are few decisions cited from the side of the assessee namely Karamchand Thappar, 66 ITD 39 and the issue was disallowance of depreciation in case of purchase and lease back transaction. The issue being different before the Tribunal from the instant appeal hence presently not relevant. There is one more case of the Tribunal namely Bombay Household and Industrial Plastic, 1 ITD 152, wherein the finding of the Tribunal was that there was no other material to suggest that the transfer was made for the purpose of reduction of Income Tax liability of the transferee, hence held that Explanation- 3 to Section 43(1) would not apply. After recording this finding the Co-ordinate Bench has held that the explanation - 3 to Section 43(1) would not apply. This is not the position in the instant appeal because in view of above discussion it is evident that the purpose was to reduce the tax liability. In an another case as cited by ld. A.R of Ashwin Vanaspati Industries, 255 ITR 26(Guj) the transfer of assets taken place by company on taking over assets of firm on its dissolution. There was no evidence that transfer was made with a view to claming depreciation on enhanced cost. The Court has specifically mentioned that in fact the assessee had not claimed depreciation on the enhanced cost of all assets but only in relation to three assets and more significantly such enhanced cost was supported by a valuation report obtained prior to the point of time of dissolution. Since there was no allegation that the valuation report was incorrect in any manner whatsoever hence considering the matter of that case it was held that the assessee was entitled to depreciation on the enhanced value of the assets. The Hon'ble Court has also considered the facts of that case from another angle and a finding was given that the A.O had never considered that the transaction was entered into with a view to reduce tax liability, therefore, the decision was given in favour of the assessee.
8. We have considered this appeal considering the entirety of the circumstances and the issue involved from all angles and thereafter arrive at the conclusion that Section 43(1) authorizes the A.O to adopt actual cost for the purposes of depreciation differently from what is shown as the cost by the assessee. Explanation - 3 confers the authority to the A.O to estimate the value of any used assets, if the A.O is satisfied that the main purpose of transfer of such asset directly or indirectly to the assessee is prompted by the object of claiming larger depreciation on such enhanced base. These provisions were thus correctly applied in the instant appeal. The transaction was suspected because of pattern of share holding clearly indicating that the transferor namely M/s. M&M Ltd. was a person having substantial interest in the assessee company. Once it is established that both the parties had a common interest and the transaction was with collusion of each other then the valuation done by an approved valuer had become doubtful. Particularly when valuation was done exorbitantly at a higher price without any support of cogent evidence. The aspect of tax planning has also been examined by us and that too was found in existence when the said transfer took place. Under the totality of the facts and circumstances we are of the view that since a device was adopted to avoid tax, therefore, the A.O has rightly calculated the depreciation on the basis of the available figures of W.D.V as per the books of accounts. The first appellate authority has not considered all such aspects as discussed supra relevant to arrive at the right conclusion and so wrongly applied the ratio of certain precedents. The conclusion drawn by the first appellate authority is thus hereby reversed.