Case Law Details
Undisputedly, through MOU dated 12th day of October-2002 the assigner, i.e.M/s.Prakash Chemical Agencies, a Registered firm has transferred all its assets and liabilities to assignee, i.e. Prakash Chemicals Agencies Pvt.Ltd. Co. (the assessee-company) and the assignee has taken over all the liabilities as well and agreed to transfer a consideration of Rs.4 lacs, plus the shares in the name of the partners of the said erstwhile firm. The controversy was that the WDV as per the books of accounts of the firm drawn as on 11.10.2002 were at Rs.19,84,311/-. On the next day, i.e. on 12.10.2002, when the assessee-company had taken over the said firm, the “cost” in the books of accounts were taken at Rs.82,51,157/-. The AO has therefore raised a question that why the WDV as such was not carried over by the assessee-company and also raised an objection that the enhanced cost was taken up for the purpose of claim of depreciation. The AO has allowed the depreciation on the closing WDV of the said firm and not on the “ cost” as recorded by the assessee-company. Once the admitted factual position is that this is not the case of transfer of capital assets by holding company to its subsidiary company (Explanation-6 to section 43(1) of IT Act); or this is not the case of capital asset being transferred by amalgamation (Explanation-7 to section 43(1) of IT Act); or transfer of capital asset by demerger (Explanation-7A to section 43(1) of IT Act), then the only recourse for the Revenue Department ought to be that the “actual cost” as defined u/s.43(1) should have been taken for the calculation of depreciation, meaning thereby the “actual cost” of the assets to the assessee which has been met directly or indirectly. We have raised a question during the course of hearing to the respondent-assessee that what has happened in the case of erstwhile firm and whether on such transfer any capital gain was charged by the Revenue Department. In compliance, ld.AR has drawn our attention on an assessment order passed u/s.143(3) dated 14.3.2006, wherein the AO was aware about the fact that the assets and liabilities of the firm have been acquired by the company w.e.f. 12.10.2002. No further action was taken as far as the transfer of the assets was concerned. In this regard, ld.AR has given the reason that in terms of section 47(xiii) of the Act, an exception has been prescribed that nothing contained in section 45 shall apply to the following transfers viz. any transfer of the capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm provided that all the assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company. In the present case, since the assets and liabilities of the firm have been taken over by the assessee-company therefore the exception as prescribed u/s.47(xiii) have its application and that could have been the reason that no action was ascribed in the hands of the erstwhile firm.
An another aspect has also been argued before us that what are those conditions under which the AO is empowered to substitute the “actual cost” as disclosed by the assessee. In this regard, Explanation-3 to section 43(1) says that where the AO is satisfied that the main purpose of the transfer of such assets to the assessee was the reduction of liability to income tax by claiming depreciation with a reference to an enhanced cost, then the “actual cost” to the assessee shall be such an amount as the AO may determine having regard to all the circumstances of the case. In the present case, undisputedly, the AO has not invoked the said Explanation. We can therefore hold that without the invocation of the said explanation, the AO was not justified to disturb the “actual cost” as recorded in the books of accounts of the assessee-company on the date of its acquisition of assets and liabilities of the erstwhile firm. Rest of the Explanation through which AO could have disturbed the “actual cost” are also not applicable as elaborately explained by ld.AR, because those are in respect of other circumstances, such as, assets received by gift or inheritance (Explanation-2), transaction of sale and lease-back (Explanation 4A), reacquisition of same assets (Explanation-4), or where a portion of the cost is met by the Government by granting subsidy (Explantion-10 of the said section, etc.). Since the action of the AO did not come within the purview of any such enabling sections, therefore we are not in agreement with the substitution of “actual cost” as replaced by the AO.
In the case of Chitra Publicity Co.(supra), the assessee-company took over advertisement business of a firm. The assessee-company has claimed depreciation on various assets including hoardings. Assessing Officer re-worked the depreciation by invoking Explantion-3 to section 43(1) of the Act on the basis that the book value of the hoarding was NIL in the books of the firm. It was held that the main purpose to invoke the said Explanation is to empower the AO to determine “actual cost” of assets and the same to be determined having regard to all the circumstances of the case. The AO can determine the “actual cost” at arm’s length value or at real value of the assets transferred. In the said case, the Respected Third Member has opined that at no stage the Revenue Authorities have doubted the correctness of the consideration of Rs.8 crores paid by the assessee-company through allotment of shares. According to us, facts of the present case being akin to the facts of the cited decision, therefore the same can be applied to decide the issue involved. As far as the decisions cited by the ld.AR are concerned, it is correct that the AO is empowered to invoke the Explanation-3 as held in the case of Poulose & Mathen (P) Ltd.(supra), but the fact is that no such Explanation was at all invoked in the present case. An another case law has been cited by the ld.AR, i.e. viz. Kungundi Industrial Works Private Ltd. vs. CIT reported at 57 ITR 540 (AP), wherein the assessee-company was formed from the then existing Registered Firm. The question was that the assets were used by the firm before the company was formed. The shareholders of the company were no other than the old partners of the firm. The Hon’ble Court has observed that there was only change-over in the status of the ownership. What was earlier belonged to partnership-firm was thereafter belonged to a private limited company. So, it was not a case where the price was actually paid by one person to another person. In those circumstances, the view was taken in favour of the Revenue. However, the case in hand is not that a company has been formed from the existing registered firm. It is also not a case that no consideration has actually been paid. As per the clauses of the MOU, under consideration, the assets have been transferred by the firm in favour of the assessee-company in lieu of an amount of consideration. On account of these facts, this case law do not apply on the assessee. We therefore affirm the view taken by the ld.CIT(A) and reject these grounds of the Revenue.
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FULL TEXT OF THE JUDGMENT IS AS FOLLOWS:-
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