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:-
INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD
|
Sl. No(s). |
ITA No(s) |
Assessment Year(s) |
|
Appeal(s) |
|||||
|
Appellant |
Respondent |
||||||||
|
1. |
2803/Ahd/2008 |
2003-04 |
Dy.CIT Cir-4 Baroda |
M/s.Prakash Chemical Agencies P.Ltd. |
|||||
|
2. |
2781/Ahd/2007 |
2004-05 |
Revenue |
Assessee |
|||||
|
3. |
2979/Ahd/2008 |
2005-06 |
Revenue |
Assessee |
|||||
|
Date of Pronouncement : |
13/04/2012 |
||||||||
O R D E R
PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER :
All these three appeals pertained to Assessment Years 2003-04, 2004-05, & 2005-06 arising from the orders of the CXIT(A)-III, Baroda respectively dated 29.05.2008, 13.03.07 and 02.06.08. The lead A.Y. is 2004-05, therefore, we shall proceed with the facts of this assessment year which shall be applied for the rest of the two assessment years.
[A] A.Y. 2004-05 (ITA No.2781/Ahd/2007 – Revenue’s appeal)
2. Ground Nos.1 & 2 raised are hereby decided as follows:-
1. The ld. C.I.T.(A) has erred in directing the A.O. to allow higher depreciation on the Gas Cylinders acquired from its associate concern through MOU, whose W.D.V. was Rs.19,84,311 and which were revalued by the assessee at Rs.82,51,157.
2. The C.I.T.(A) did not appreciate the fact that t the Hon.Supreme Court had, in the case of Saharanpur Electric Supply Co. Vs. CIT 194 ITR 294 had held that the definition of written down value in Section 43(6) envisages computation of actual cost in every assessment year and the assessee has no right to claim depreciation on inflated actual cost claiming higher depreciation by artificially inflating the actual cost through revaluation of the assets.
2.1. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) dated 11.12.2006 were that the assessee-company is an authorized dealer and indenting agent of M/s.Gujarat Alkalies & Chemicals Ltd. The assessee-company is also engaged in the business of trading in chemical. The assessee has also earned rent charges on hiring of gas cylinders. It was noticed by the A.O. that the assessee had shown profit before depreciation at Rs.1,01,56,030/- and after claiming a depreciation of Rs.85,17,293/- the net income was declared at Rs.16,25,603/-.
2.2. The background of the case was stated to be that the assessee-company had took over a firm, namely, M/s.Prakash Chemical Agencies on 11.10.2002. It was found that as per the Memorandum and Article of Association, the assessee-company has taken over the running business of the said firm along with all the assets and liabilities. In lieu thereof, shares were allotted to the ten partners of the said firm by the assessee-company. The AO has noted that the said details were available in the return of income.
2.3. The controversy was that the WDV as on 11.10.2002 of the assets of the erstwhile firm was at Rs.19,84,311/-. However, as per the return filed by the assessee-company, the value of the assets shown as on 12.10.2002 was at Rs.82,51,157/-. The AO has reproduced the WDV as on 11.10.2002 of the assets as shown by the said firm in the following manner:-
|
Sr.No. |
Particulars |
Rate |
WDV as on |
|
(%) |
11.10.2002 (Rs.) |
||
|
Block-I |
|||
|
1. |
Furniture & Fixtures |
15 |
227843 |
|
(PCA) |
|||
|
Furniture & Fixtures |
15 |
9206 |
|
|
(Infotech) |
|||
|
Total |
237049 |
||
|
Block-II |
|||
|
2. |
Plant & Machinery |
25 |
258946 |
|
(PCA) |
|||
|
Office equipment |
25 |
30766 |
|
|
(Infotech) |
|||
|
Total |
289712 |
||
|
Block-III |
|||
|
3. |
Motor Car |
20 |
1008975 |
|
Total |
1008975 |
||
|
Block-IV |
|||
|
4. |
Gas cylinders |
80 |
438021 |
|
Total |
438021 |
||
|
5. |
Block-V |
00 |
5000 |
|
Total |
5000 |
||
|
Block-VI |
|||
|
6. |
Computer |
60 |
5554 |
|
Total |
5554 |
||
|
Grand Total |
1984311 |
2.4 The AO has also reproduced the WDV taken as on 12.10.2002 by the assessee as follows:-
|
Sr.No. |
Particulars |
Rate |
WDV as on |
|
|
|
(%) |
11.10.2002 (Rs.) |
|
Block-I |
|||
|
1. |
Furniture & Fixtures |
15 |
185684 |
|
(PCA) |
|||
|
Block-II |
|||
|
2. |
Plant & Machinery |
25 |
355541 |
|
(PCA) |
|||
|
Block-III |
|||
|
3. |
Motor Car |
20 |
895049 |
|
Block-IV |
|||
|
4. |
Gas cylinders |
80 |
6804329 |
|
5. |
Block-V |
||
|
Good will |
|||
|
Block-VI |
00 |
5000 |
|
|
6. |
Computer |
60 |
5554 |
|
Grand Total |
8251157 |
2.5. As per the above chart, the value as on 12.10.2002 taken at Rs.82,41,157/- for the accounting period starting from 12.10.2002 (i.e. the date of succession) upto 31.03.2003, relevant for A.Y. 2003-04, the year under appeal. As per AO, the assessee has increased the WDV of the fixed assets by a sum of Rs.62,66,846/- (Rs.82,41,157 – Rs.19,84,311) as on 12.10.2002. The assessee has claimed depreciation on the alleged enhanced amount of WDV and, therefore, the AO has raised an objection that why the assessee has not claimed depreciation on the WDV as shown by the said firm? It was explained that the erstwhile partnership firm M/s.Prakash Chemical Agency has transferred all its assets to M/s.Prakash Chemicals Agencies Pvt.Ltd. i.e. the appellant. The depreciation was claimed on the “actual cost” on which the assets of the said firm were acquired by the assessee. It was explained that the depreciation was on the price at which the capital assets were sold by the said firm to the assessee-company. However, the AO was not convinced and after narrating certain provisions of IT Act, namely, section 43(6) of IT Act, section 47(xiii) of IT Act, he has arrived at the conclusion that the assessee was entitled for the claim of depreciation on the WDV as shown by the erstwhile firm and the allowable depreciation as per AO was at Rs.35,92,535/-, as against that the assessee has claimed the depreciation at Rs.85,17,293/-, therefore the AO has allowed depreciation only of Rs.35,92,535/-. Being aggrieved the matter was carried before the first appellate authority.
3. Before the ld.CIT(A), it was explained that the said firm was taken over as an on-going concern along with assets and liabilities. The assets were transferred to the assessee-company. The assessee has claimed the depreciation on the “actual cost”, i.e. Rs.82,51,157/-. By referring section 43(1), the assessee has argued that the said “actual cost” should be allowed as “Written Down Value” as defined in section 43(6) of IT Act. After due consideration of the relevant provisions of the Act, ld.CIT(A) has given a finding that it was a case of “taking over” of a firm by a company. By such “taking over”, the assets and liabilities of the firm have been transferred to the assessee-company. However, such transfer is not subject to tax because an exception is prescribed u/s.47(xiii) of IT Act, wherein the transaction not to be regarded as transfer if the transfer of capital assets are made by a firm to a company as a result of succession of the firm. It has also been noted by ld.CIT(A) that the consideration for the transfer of assets was in the form of allotment of shares. He has concluded that the “actual cost” to the assessee was rightly calculated for the purpose of calculation of depreciation and the issue was decided in assessee’s favour vide following observations:-
“3.2. I have considered the submissions of the ld. A.R and the facts of the case. This is a case of taking over of a firm by a company. In such cases, transfer of assets and liabilities is involved. In the normal course, transfer of capital assets from one entity to another would give rise to capital gains assessable as such. Certain exceptions to the general view have been provided in section 47 where some transactions have been deemed not to be regarded as transfer. In clause (xiii), the transfer of capital assets by a firm to a company as a result of succession of the firm by the company in the business carried on by the firm has been specifically deemed to be not a case of transfer, subject to certain conditions. In a case falling under section 43(xiii), the provisions of section 45 shall not apply. Section 45 is the charging section for bringing any profits or gains arising out of transfer of a capital asset to the charge of income-tax under the head “capital gain”. Thus, in a case where section 45 would not apply, the transaction would be outside the scope of capital gains. Thus, the transactions would be in the nature of transfer of capital asset although the same would be deemed to be not regarded as transfer for the purpose of charging of capital gains. For all other purposes, the transaction in question satisfy the conditions for “transfer” in relation to the capital asset as defined in section 2(47). In the instant case, the assets were transferred from a firm to the company through the instrument of MOU. Article (2) of the MOU states as under:
“Assignee has agreed to pay consideration of Rs.4,00,000/-(rupees Four lacs only) for the purchase of the running business along with goodwill/trademarks, trade-names, know-how and all the assets, rights, obligation and liabilities in India. The aforesaid consideration shall be discharged within a period of one month hereof by issue of 40,000 (Forty thousand) equity shares each of Rs.10/- as fully paid up of the assignee company.”
3.2.1. Thus, the consideration for the transfer of the assets was in the form of allotment of shares valued at the difference between the value of the assets and the liabilities. Cost of the assets, therefore, must be taken at the value adopted in the instrument of transfer (i.e. the book value) unless specifically deemed to be the WDV of the assets in the books of the firm. In certain cases, eg. in case of demerger, amalgamation, transfer from holding company to subsidiary company, etc., the legislature has specifically indicated that the “actual cost” of the transferred capital asset would be the same as the WDV in the books of the transferor company. However, in the case of transfer of capital assets from a firm to a company carrying on the same business, such deeming provisions have not been enacted. Therefore, it would not be correct to artificially apply the deeming provisions to a case where such provisions have not specifically been made applicable. Accordingly, I am of the opinion that the A.O was not justified in restricting the claim of depreciation on the ground that the cost of the depreciable assets should be taken as the WDV in the books of the firm and not at the actual cost to the company. The A.O. is directed to re-compute the depreciation accordingly.”
4. From the side of the Revenue, ld.Sr.DR Mr. Raj Mehra appeared and supported the order of the A.O. According to Mr.Mehra, section 32 prescribes the depreciation on the machinery or tangible assets owned and used for the purpose of business by the assessee on such percentage on the WDV as prescribed. He has therefore argued that as per section 32(1)(i)(ii) ….. (i)(ii) “in the case of any block of assets, such percentage on the written down value therefore as may be prescribed”, the assessee has wrongly enhanced WDV which was already in the assessment record of the said firm on which the depreciation had actually been allowed in the past. Then he has drawn our attention on the definition of “written down value” as per section 43(6)(c)(ii) of IT Act. He has explained that in respect of any previous year, the WDV of the block of assets in the immediately preceding previous year is as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or reduction, if any. He has therefore mentioned that in the case of the assessee, the WDV should be as it was determined in the immediately preceding previous year in the hands of the said firm where depreciation has actually been allowed. He has referred CIT vs. Poulose and Mathen (P)Ltd. 236 ITR 416 (Ker.) for the legal proposition that in a case where assets have been taken over from a partnership firm by a company and the assets have been re-valued at a very high figure, then it was held that the AO within his powers after invoking Explanation-3 to section 43(1) has rightly rejected the claim. Ld.DR has therefore argued that in a case where assessee has taken over the assets and liabilities of a firm and if those assets have been re-valued by the assessee-company at a very high figure, then the invocation of the said Explanation was reasonable and the AO is empowered to arrive at the correct figure of the “actual cost”. Ld.DR has also cited Escorts Ltd. vs. Union of India 199 ITR 43(SC) for the legal proposition that no double deduction should be allowed under the Act. He has concluded that only the name of the owner has been changed but the assets remained the same on which depreciation had already been granted by the Revenue Department, therefore on those very assets by enhancing the value of those assets the assessee has tried to claim double deduction of depreciation. He has pleaded to affirm the action of the AO.
5. From the side of the respondent-assessee, ld.AR Mr.M.K.Patel & Mr. J.C.Sharedalal appeared. He has informed that through MOU dated 12.10.2002 the assessee-company has acquired the assets and liabilities of the firm. As per one of the clauses, the assessee-company had agreed to take over all the liabilities of the firm recorded in the books of accounts on the date of sale of the running business that was on 11.10.2002. The firm had transferred its running business along with entire stock-in-trade and all assets to the assessee-company and accordingly informed the debtors and creditors about the said agreement by requesting them to make the payment or claim the payment thereafter to the assessee-company. He has also informed that the said going concern was transferred for a consideration of Rs.4 lacs , plus, the partners of the firm have been allotted the shares of the company. Ld.AR has also mentioned that the assessment of the said firm was completed u/s.143(3) of the IT Act for A.Y. 2003-04 vide order dated 14.03.2006 and by applying the provisions of section 47(xiii) no capital gain was levied on such succession or transfer of assets and liabilities. Ld.AR has also informed that the definition of “actual cost” is to be applied in the present case as defined u/s.43(1) of IT Act. Thereafter, he has referred all the Explanations annexed to section 43(1) to demonstrate that none of those provisions/ explanations would be applicable to the assessee. He has emphasized that by the issue of equity shares the purchase consideration was discharged. The actual cost therefore was not only the assets but also inclusive of obligation to discharge the liabilities. According to him, the actual cost as has been met by the assessee was rightly noted for the purpose of claim of depreciation. In case, the AO was not agreeable to the action of the assessee, then he should have invoked Explanation-3 to section 43(1) of IT Act. In the present case, the Revenue has not taken any step under Explanation-3 to section 43(1) of the Act, ld.AR has informed. He has placed reliance on Habib Hussein vs. CIT on 48 ITR 859 (Bom) and CIT vs. Standard Vacuum Refining Co. of India Ltd. 61 ITR 799 (Cal.). He has also placed reliance on Chitra Publicity Co.(P) Ltd. vs. CIT (2010) 127 TTJ page 1 (Ahd.)[TM].
6. We have heard both the sides at some length. We have perused the orders of the authorities below in the light of the compilation filed. 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.
6.1. 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.
6.2. 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.
7. Ground No.3 reads as under:-
3. On the facts and in the circumstances of the case, the ld.C.I.T(A) has erred in law in directing to allow depreciation of Gas Cylinders Which were not actually put to use in contravention of the decision of Honb’le Mumbai High Court in the case of D.G. Agarwal vs. CIT 267 ITR 768, where it was held that the word “used” denotes that the asset has been actually used, and not that it is merely “ready for use”.
7.1. There was an addition to LCH gas cylinders amounting to Rs.36,21,656/-. The assessee has claimed depreciation @ 80%. It was noticed by the AO that the cylinders were purchased and given on rent to an associate concern namely M/s.Prakash Gas Agency. In turn, M/s. Prakash Gas Agency has given those cylinders on rent to Gujarat Alkalies & Chemicals. The assessee has received rent from M/s.Prakash Gas Agency. The assessee has purchased the cylinders from M/s.Indian Sugar & General Engineering Corporation, Yamunanagar Haryana. The assessee was asked to furnish the Xerox copies of the purchase bills. It was explained that 100 LCH cylinders were purchased from Indian Sugar & General Engineering Corporation, Haryana. Those cylinders were found to be directly delivered to Gujarat Alkalies & Chemicals, Ranoli, Dist. Vadodara. The details of the dispatch have also been examined, according to which 25 cylinders were dispatched on 27.9.2003. It was also noted that as per the driver’s copy, the cylinders were delivered at Gujarat Alkalies & Chemicals on 30/09/2003. The AO has reproduced the Truck number and the number of cylinders dispatched. The assessee has therefore claimed full rate of depreciation on the ground that the cylinders were “put to use” before 30/09/2003. It was also informed that the rent on the cylinders was received from 27/09/2003 from M/s.Prakash Gas Agency, an associate concern. The AO has objected that as per section 32(1) the assessee could claim depreciation on the assets when they have been used for the purpose of the business. Since the cylinders were dispatched on 27/09/2003 at 17.30 hours therefore they were not “put to use” by Indian Sugar & General Engineering Corporation because according to AO normally it took two to three days to reach a truck from Yamunanagar Haryana to Baroda Gujarat. He has held that the cylinders were not “put to use” on or before 30/09/2003, hence allowed only 50% of the normal rate of depreciation. Accordingly, depreciation to the extent of Rs.14,48,662/- was disallowed. The matter was carried before the first appellate authority. After hearing the submissions of both the sides, ld.CIT(A) has held the issue in favour of the assessee by referring few case laws, namely, CIT vs. Shaam Finance Ltd. 231 ITR 308 (SC), CIT vs. Pinacle Finance Ltd. 268 ITR 395 (Guj.) and CIT vs. Bansal Credit Ltd. 259 ITR 69(Del.). According to ld.CIT(A), where the business of the assessee consists of hiring out of machinery and where the income derived from hiring is shown as business income, then it must be considered as having used the machinery for the purpose of the business. He has held that the assets in question have been leased out with effect from 27.09.2003, hence assets were “put to use” for more than 180 days, therefore eligible for full rate of depreciation.
8. We have heard both the sides and perused the material placed before us. Once the assessee has demonstrated that the cylinders were purchased from Indian Sugar & General Engineering Corporation on 27.9.2003 and were dispatched for its destination and from that very day the assessee has started receiving the lease-rent, then in our considered opinion that date is very relevant to decide whether the assets in question have actually been “put to use” for 180 days or more for the purpose of eligibility of full rate of depreciation. Since the admitted fact is that one of the business of the assessee is hiring of gas cylinders therefore we hereby hold that the ld.CIT(A) has rightly followed the precedents cited and held that the assets in question have actually been leased out with effect from 27.09.2003 and have been “put to use” for hiring business for more than 180 days. We therefore affirm the factual as well as legal finding of ld.CIT(A) and dismiss this ground of the Revenue.
9. Ground No.4 reads as under:-
4. On the facts and in the circumstances of the case and in law, the ld. C.I.T(A) has erred in not affording the Assessing Officer an opportunity to rebut the evidence put before him on the issue of addition of Rs.16,12,749/- being difference between receipts credited in profit and loss account and the actual receipt as per TDS certificates.
9.1. As per P&L account, the assessee has credited “service charges” and “commission” at Rs.65,89,025/-. It was noted by the AO that as per the TDS certificate of Gujarat Alkalies, the service charges and commission amounted to Rs.73,71,368/- . A sum of Rs.3,87,006/- was deducted at source. In addition to the above, it was also noted by the AO that the assessee has received sub-contractor payment of Rs.13,35,256/-. The total amount as per AO was Rs.87,06,624/- which should have been disclosed by the assessee, however, as against that the assessee had shown income of Rs.65,89,025/-, therefore, the balance of Rs.16,12,749/- was taxed as undisclosed income. The matter was carried before the first appellate authority.
10. Before ld.CIT(A), the assessee has furnished a reconciliation as follows:-
|
“Income as per profit and loss account |
: |
Rs.65,89,025/- |
||
|
Add: (i) Previous year Income. |
Rs.4,15,665/- |
|||
|
(ii)Discount Income. |
Rs.17,72,574/- |
: |
Rs.21,88,239/- |
|
|
—————– |
||||
|
Rs.87,77,264/- |
||||
|
Less: Income on which no tax was deducted |
Rs. |
70,640/- |
||
|
Income on which tax was deducted |
Rs.87,06,624/-” |
|||
|
========= |
||||
10.1. On appreciation of the reconciliation and the TDS certificates, ld.CIT(A) has held that some of the amount was already added back in the prior period income and for rest of the amount as per reconciliation a sum of Rs.17,72,574/- was reduced on account of purchases which were included in the credit side. On appreciation of those facts and evidences, ld.CIT(A) has deleted the addition.
11. We have heard both the sides. At the outset, ld.DR has vehemently stated that the provisions of Rule 46A was infringed by ld.CIT(A) by not confronting certain new evidences to the AO. We find force in this preliminary objection of the ld.DR. Rather, we have asked whether the reconciliation with supporting evidences was in the knowledge of the AO. However, in the absence of any satisfactory answer, we are of the view that natural justice demands to restore this ground of the Revenue back to the stage of the AO to be decided de novo after investigation and verification of the TDS certificates and other corroborative evidences. In the result, this ground of the Revenue may be treated as allowed but for statistical purposes.
12. Ground No.5 reads as under:-
5. On the facts and in the circumstances of the case and in law the ld.C.I.T(A) has erred in deleting the addition of Rs.2,41,701/- being diversion of profit under charging rent on cylinders leased to the associate concern.
12.1. The AO has opined that there was diversion of profit to assessee’s associate concern, M/s.Prakash Gas Agencies. The assessee has purchased cylinders from outside parties and given on rent to its associate concern who, in turn, given on rent to Gujarat Alkalies & Chemicals. The AO has prepared a chart and on that basis noted that the rent was received @ Rs.400/- p.m. for the period 01/04/2003 to 31/08/2003. For the period 01/09/2003 to 31/03/2004, the rate was Rs.350/- p.m. The said associate concern has received rent from Gujarat Alkalies & Chemicals Ltd.@ Rs.400/- to Rs.500/- per cylinder per month. According to AO, the assessee has shown per cylinder per month rent by less amount of Rs.100/- for the period 01/04/2003 to 31/08/2003 and less by Rs.50/- per cylinder per month for the period 01/09/2003 to 08/09/2003. The AO has calculated that the less rent received by the assessee was Rs.2,41,701/-. The same was taxed in the hands of the assessee on the allegation that the said amount was the diversion of profit by the assessee.
13. After examining the facts of the case, ld.CIT(A) has held that the addition was made merely on presumption and the addition was deleted after assigning the following reasons:-
“6.2. I have considered the submissions of the ld.A.R and the facts of the case. The disallowance of Rs.2,41,701/- relates to the difference in lease rent charged by the assessee from PGA as compared to the lease rent charged by the PGA from GACL. It has been held that that this amount of income has been diverted from the assessee company to PGA. Presumably, the addition has been made on the assumption that by such diversion of income some benefit has accrued to the assessee in the form of lower or nil incidence of tax on the impugned amount. However, PGA is not a loss making, but a profit making concern. This has been verified from the return of income filed by PGA for A.Y 2004-05. The rate of tax applicable in the case of a firm and in the case of a domestic company is identical and has been so since A.Y 1991-92. The arrangement as aforesaid has been made for valid commercial and business reasons. These reasons have not been faulted or shown to be sham by the A.O. The motive for the so called diversion of income would not be evasion of tax since no tax has been actually evaded under the given circumstances. Accordingly, I am of the opinion that this addition of Rs.2,41,701/- was not warranted and is, accordingly, directed to be deleted.”
14. On hearing the submissions of both the sides, we are also of the view that for alleging the impugned diversion of profit the AO has overlooked the business model and the pattern of business activity of the assessee. The AO was expected to investigate the cost of investment, the upkeep of cylinders, realization of sales and business link of the associate concern. Though the business activity of the group concern is leasing out of LCH cylinders but the dealing with the GACL of the sister-concern should have been taken into account before alleging the diversion of profit. An another fact has also been highlighted by ld.CIT(A) that the said sister-concern was not a loss making concern. Rather, ld.CIT(A) has verified the income tax return of the said sister-concern and thereupon held that the rate of tax as applicable in the case of the said sister-concern was identical with the rate of tax of the assessee. According to ld.CIT(A), there was no mala fide motive for such diversion of income on the part of the assessee. Considering the facts and circumstances of the case, we hereby affirm the findings of the ld.CIT(A) and dismiss this ground of the Revenue.
15. Ground No.6 reads as under:
6. On the facts and in the circumstances of the case and in law the ld. C.I.T.(A) has erred in deleting the addition of Rs.36,801/- Being vehicle expenses for personal use without appreciating the fact that unlike in the case of Sayaji Iron & Works Ltd. 172 CTR 339, there is no addition on account of perquisites in the hands of directors of the assessee company.
15.1. As per P&L Account, the assessee has debited “vehicle expenses” at Rs.3,68,019/-, however, in the immediate preceding year, as per AO, the vehicle expenses were shown at Rs.1,15,631/-. According to him, there was a possibility of using the vehicles by the Directors for their personal use. The AO has disallowed 10%, i.e. Rs.36,801/-. The matter was carried before the ld.CIT(A) who has followed Sayaji Iron & Engg.Co. vs. CIT [2002] 172 CTR 339 (Guj.) and deleted the addition. Undisputedly, this is the case of a company, hence following the decision of the Hon’ble Gujarat High Court in the absence of any specific instance of user of vehicle for non-business purpose, we are of the view that there was no scope for such an adhoc disallowance. By affirming the findings of the ld.CIT(A), we hereby dismiss this ground of the Revenue.
[B] A.Y. 2003-04 (ITA No.2803/Ahd/2008 – Revenue’s appeal)
16. Grounds read as under:-
1. The learned CIT(A) has erred in directing the A.O. to allow higher depreciation on the assets acquired on 11.1.2002, whose written down value (WDV) was Rs.593415/- and which were revalued by the assessee at Rs.71864/-.
2. The Ld. CIT(A) did not appreciate the fact that the Hon.Supreme Court had, in the case of Saharanpur Electric Supply Co. Vs. CIT 194 ITR 294 had held that the definition of written down value in Section 43(6) envisages computation of actual cost in every assessment year and the assessee has no right to claim depreciation on inflated actual cost claiming higher depreciation by artificially inflating the actual cost through revaluation of the assets.
16.1. The issue as raised by the Revenue for this Asst.Year is identical with the issue already decided supra. Following our view as discussed hereinabove while deciding Revenue’s appeal for A.Y. 2004-05, we hereby reject the grounds of the Revenue. Revenue’s appeal is dismissed.
[C] A.Y. 2005-06 (ITA No.2979/Ahd/2008 – Revenue’s appeal)
17. Ground No.1 reads as under:-
1. The Ld. CIT(A) did not appreciate the fact that the Hon.Supreme Court had, in the case of Saharanpur Electric Supply Co.l Vs. CIT 194 ITR 294 had held that the definition of written down value in Section 43(6) envisages computation of actual cost in every assessment year and the assessee has no right to claim depreciation on inflated actual cost claiming higher depreciation by artificially inflating the actual cost through revaluation of the assets.
17.1. This ground is covered by our decision taken in A.Y. 2004-05 (supra), following the same, this ground of the Revenue is hereby dismissed.
18. Ground No.2 reads as under:-
2. On the facts and in the circumstances of the case, the learned CIT(A) erred in law and on facts in directing the assessing officer, to delete the addition of Rs.9,54,436/-, disallowed as bad debts, though assessee failed to prove that it had made any efforts for the recovery and also ignoring the underlying principles laid down by the Gujarat High Court in the case of Dhall Enterprises & Engineers Pvt.Ltd. vs. CIT 295 ITR 481 (Guj.).
18.1. The assessee has claimed bad debt by debiting a sum of Rs.9,54,436/- in P&L account. The same was disallowed, however ld.CIT(A) has followed few case laws and allowed the claim of bad debt. Now this issue is squarely covered by a latest decision of Hon’ble Supreme Court pronounced in the case of TRF Ltd. 323 ITR 397 (SC), hence following this decision we hereby confirm the findings of ld.CIT(A). Ground is dismissed.
19. In the result, Revenue’s appeal(s) for A.Y. 2004-05 is partly allowed and for A.Ys. 2003-04 & 2005-06 are dismissed.
Ahmedabad; Dated 13/04/2012
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Sl. No(s). |
ITA No(s) |
Assessment Year(s) |
|
Appeal(s) |
|||||
|
Appellant |
Respondent |
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|
1. |
2803/Ahd/2008 |
2003-04 |
Dy.CIT Cir-4 Baroda |
M/s.Prakash Chemical Agencies P.Ltd. |
|||||
|
2. |
2781/Ahd/2007 |
2004-05 |
Revenue |
Assessee |
|||||
|
3. |
2979/Ahd/2008 |
2005-06 |
Revenue |
Assessee |
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Date of Pronouncement : |
13/04/2012 |
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