Intent to reduce tax liability need to be established before invoking explanation 3 to section 43(1)

Brief of the Case

ITAT Delhi held In the case of M/s. Continental Device India Ltd. vs. ACIT that Explanation 3 to section 43(1) is not an absolute rule. The Assessing Officer is empowered to substitute the value. However, such a valuation cannot be substituted where there is no intent to reduce the tax liability. In the instant case, as stated above, the assets as held by M/s. Deltron Ltd. and transferred to the appellant as part of transfer of electronic business on going concern basis cannot be said to be in any manner with intent to reduce the tax liability. Certainly, the effect of the transaction was that the gain declared by M/s. Deltron Ltd. was set off against the losses in its computation yet that fact cannot undetermine the genuineness of the transaction and in any case empower the Assessing Officer to substitute the valuation as determined in the registered valuer’s report which has not been found to be incorrect by any other technical valuation. Hence, we do not subscribe to the conclusion of the authorities below.

Ration decidendi – There is nothing on record to show that having regard to the value of the assets held by the transferor company, such amount paid by the assessee is excessive or unreasonable or irrational and the also valuer’s report has not been commented upon in any manner by the authorities below, explanation 3 to section 43(1) not applicable.

Facts of the Case

The assessee company is engaged in the business of manufacturing of electronic components. The return of income was filed on 28.10.2005 declaring an income of Rs. 7,04,54,286/- which was processed u/s 143(1) on 30.10.2006 at the returned income filed by the assessee. The case was selected under scrutiny and statutory notice u/s 143(2) dated 2.8.2006 was issued to the assessee.

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