17. After careful consideration of1 above provisions and facts and circumstances of the case, I am unable to accept the stand of the Revenue. As noted above actual cost should ordinarily mean real cost or real worth of assets. If it is not market value, then what is it? Mechanism to take W.D.V as provided in Explanation 2 to Section 43(6)(c) is not available in Explanation 3 o auction 43(1). Further, assets whose actual cost is to be determined under Explanation 3 are second hand and it is always difficult to find actual cost or value of such assets as compared to new assets. In the case of transfer of an asset between two unconnected parties where price fixed is arms length price governed by market condition. This arm’s length price between two unconnected parties is nothing but market value of the asset. This arms length price has to be taken as the “actual cost” for purposes of depreciation. There is no way to ignore it and it is net possible to record merely that the main purpose of transaction is the reduction of income-tax liability. Such arms length price or market value cannot have a different meaning even in case of a transaction between connected and related parties if fixed bonafidely as per market conditions. There is no prohibition on connected parties to carry arm’s length transactions where real value of item transferred is paid. Law frowns oh fraudulent transactions carried to hoodwink the revenue. Having held that the assessee has shown enhanced cost of assets, the AO under Explanation 3 to Section 43(1) has to determine the “actual cost” to assessee which can only mean arm’s length value or real value or worth of assets transferred. Above proposition has been duly accepted by Courts. In the case of Ginners and Pressers P. Ltd. vs. CIT (supra), the decision of Bombay’ High Court strongly relied upon by the Revenue, their Lordship have made the following observations:
“There is ho doubt that, in the absence of fair market value of the assets transferred being known on the date of transfer, the requisite inference under the proviso to section” 10(5)(a) of like Act cannot be drawn. But it is not as if Act authorities as well as the Tribunal have not dealt with this aspect of the matter at all while deciding the question / applicability of the proviso to section 10(5)(a) to tits facts of the present case
17,1 It is, therefore, not possible to totally reject the concept of market value of the assets transferred as not relevant for determining “actual cost”. The provision requires consideration of all the circumstances including cost in the hands of the transferor, written down value, inflationary trends, conditions and life of assets transferred etc. etc. in the exercise of determination of cost of assets. It is true that cost shown in the transfer is primarily the cost to the transferee and such cost therefore, is a piece of good evidence. But cost shown is not final and A.O is empowered under explanation to revalue the asset and determine its actual cost He has to determine the cost on some good and acceptable basis. In the present case, actual cost of hoardings and of goodwill has been taken at nil merely because such assets were not shown as an asset in the accounts of the erstwhile firm and no depreciation was claimed. This action of the AO endorsed by higher authorities and in the proposed order of learned Accountant Member, in my view has no legal support. As already discussed, provisions of section 47(xiii) or of Section 43(6) are not attracted here as these provisions have very different purposes to serve. These deemed provisions can not be read in the Explanation (3).
17.2 The plain language of the provision (Explanation 3 to section 43(1)] leaves no amount of doubt that it is A.O who has to record satisfaction relating to main purpose of the transaction to the assessee (reduction of liability to income-tax). It is A.O who has to determine “actual cost” of assets having regard to ail the circumstances of die case and with the provisions approval of the joint Commissioner, ft should, therefore, leave no doubt that burden to determine ”actual cost” in accordance with law is on A.O and not on the assessee. The A.O has to show that he has gathered relevant material and determined actual cost after application of mind. His action is required to be approved by his superiors.
18. In the case of Jogta Coal Co. Ltd. Vs. CJT 55 ITR 89, their Lordship at page 99 of the report referred to the case of Craddock vs. Zero Finance Co. Ltd. (1946) 27 Tax Cases 267. Their Lordships have stated as under:
“The learned Law Lords came to the conclusion that the Crown had failed to establish that the value of the investments was less than the nominal value of the consideration for which the respondent company had acquired them, namely, the liability to discharge the debentures and interest thereon and the allotment of the share capital as fully paid. “
18.1 The jurisdictional High Court in the case of Ashwin Vanaspati Industries vs. CIT (supra) at page 33 observed as under:
“Hence, it is crystal clear that the Assessing Officer is obliged to record a satisfaction that the assets were transferred for reducing the liability to pay income-tax and for this purpose an appellate authority cannot substitute its opinion to sustain the applicability of the said Explanation 3 only because the assets which are transferred were used by any other person before the date of acquisition. The duty cast upon the Assessing Officer by the provision is to determine the actual cost and not to substitute a valuer’s opinion. At the same time, merely because a document in the nature of contract of purchase is entered into denoting a certain price the same would not conclusively establish the correctness of the claim made by an assessee if the Assessing Office^ is of the opinion that the transaction is by way of subterfuge or device in order to avoid tax which the assessee is otherwise liable to pay or that the transaction is illusory or colourable or that the assessee has acted fraudulently. In such circumstances, it would always be open to the Assessing Office/ to go , behind the contract and ascertain the actual cost (o as to determine the correct liability to tax. “
18.2 In spite of the clear observations of the jurisdictional High Court, fully supported by other authorities and clear language that “AO is obliged”; “duty cast on AO” to determine actual cost of assets to the assessee, in the present case, the burden has been placed on the assessee to prove that actual cost of asset was the value it had claimed for the purpose of the depreciation. No attempt whatsoever was made by the A.0 or by the Commissioner who approved of his action or by CIT (Appeals) to collect any material or to take any steps to determine the actual cost of the assets. The evidence produced by the assessee before the A.0 in the shape of valuation report was wrongly rejected and on reasons which are totally unsustainable. In support of value (cost of hoarding at Rs 4,77,96,000/ – and of goodwill at Rs 3 crores), the reports of the registered valuer were placed before the AO. The A.0 did not consider above reports, although it was incumbent upon him to dislodge them. His learned CIT (A) in the order for assessment year 2005-06 rejected the report of valuation of hoardings as on 1.4.2003 as the report was dated 3.10.2004 and held it to be got prepared to suit the assessee’s requirement. The learned Accountant Member in his proposed order, took a similar view and cast burden on the assessee with a general observation that assessee did not lead any supporting evidence to justify the cost claimed. The Id. A.M. ‘s views, on the production of documents are, factually incorrect. The learned Judicial Member in his proposed order has rejected all the above reasons including the reason given by the learned CIT (Appeals) in the appellate order.
18.3 it is well known mm registered valuers are experts and value and reliability of their opinion would depend upon the material contained in their ‘reports. They are competent to fix value of properties for several earlier years. Even otherwise W.T.O in the wealth-tax purposes is required to determine in the present, the value of assets as on the valuation dates which may be five or seven years earlier. If this is not possible, as is being inferred by the learned CIT (Appeals) and by the learned Accountant Member, then scheme of fixation of value of assets under the Wealth-tax Act cannot work. Such a view would defeat the very purpose of the Wealth-tax Act and, therefore, cannot be accepted as correct. As regards fixation of value of assets as on 1.4.2003, 1 do not see anything wrong if parties having regard to their experience and other factors available at the relevant time had fixed the value of assets transferred. It was for the A.O to point out and find defect in “* the value (cost shown) claimed and proceed to determine the actual cost. A.O was to collect and examine all the relevant material available on record including actual cost of hoardings and not mechanically adopt value at Nil. Besides cost of hoardings, life of hoarding at the time of transfer, increase in cost of making and erection of such hoardings etc was to be seen. Whether cost (value) got depreciated on account of wear and tear was to be examined. The list of circumstances is by no means exhausted and there can be other relevant circumstances required to be considered in the exercise of determination of actual cost of the hoarding.
19. Another difficulty in the present case is the unnecessary burden placed on the assessee and unjustified adverse inference drawn against the assessee. As noted earlier, the learned Accountant Member has observed:
(i) Schedule I to the sale deed not produced before the Tribunal and, therefore, basis of amount of Rs 8 crore or even the basis of valuation of offices and trade mark not raised before us. There is no separate mention of hoardings, other than in memorandum of transfer nor it is known as to whether or not any amount had been received by the firm on account of these hoardings.
There is nothing before us to show that assessee had acquired hoardings for a sum of Rs 4,77,96,0007- and the same was actual cost of assets to the assessee. Is (Rs 4,77,96,0007- ) this actual cost to the assessee? There is no basis before us for fixing the consideration of Rs 8 crores nor Schedule I referred in the memorandum has been placed before us.
20. It is evident from above that burden of proof was placed on the assessee whereas it should have been otherwise as discussed above. This placing of the wrong burden some time vitiate the entire order. I am further of the opinion that Accountant Member was not justified in drawing any adverse inference against the assessee or for copy of Schedule-1 to the memorandum not being part of ITAT record. If learned Accountant Member was interested, he could have asked the assessee to furnish the copy. His observations that there is nothing on record to show that assessee paid Rs 4,77,96,O00A for hoardings do not appear to be correct. It is clear from the perusal of order of the A.O and that of CIT (A) that revenue authorities at no stage doubted correctness of consideration of Rs 8 crores ‘ through the allotment of shares, not did they question value shown on any of the three assets in dispute. In fact revenue authorities fully accepted the ‘figure of cost of 3 assets as shown by the assessee. It was their case that it was inflated to wrongfully claim higher depreciation to avoid payment of tax. Therefore, the learned Accountant Member, after the hearing of the case was over and after the J.M had proposed his order, has drawn inferences on non-production of copy of schedule-1 and on assessee’s failure to show basis of consideration of Rs 8 crore. In my view, learned A.M is not justified in raising doubts on position and figures clearly accepted by the revenue authorities i.e. A.O and on appeal by the learned CIT (Appeals).
21. It may be relevant to state here that while granting approval to AO’s action under Explanation 3, vide letter dated 21.12.2006, the learned ACJT has clearly noted, “from the comparison of fixed assets schedule, (both as . per deduction and as per I.T. Act)”. So copy of schedule was clearly available of the A.0 and, therefore, same is to be treated as part of the record. At any rate in the memorandum dated 1.4.2003, the consideration of Rs 8 crore is mentioned at several places and it is accepted position that assessee company had acquired running business with all assets and liabilities.
22. The hoardings as per the J.M are/in number^69 and this number has not been controverted by learned AM or by revenue during the course of hearing. Valuation report in support of the price paid by the assessee at Rs 4,77,96,000/ – dated 3.10.2004 has been placed. It is true that at the time of transfer i.e. on 1.4.2003, aforesaid report was not available. But that could not prevent the shareholders or partners to fix the price or cost of the hoardings as on 1.4 2003. Registered valuer was also fully competent in October, 2004 lo give the valuation of hoardings as on 1.4.2003 Valuation report could not be rejected on the ground that it related to a prior date. It was necessary and incumbent on the A.O to consider the material or reasons given by the registered valuer in support of the valuation report as has been laid down by the Jurisdictional High Court in the case of Ashwin Vanaspati Industries (supra). The question was whether material and reasons given in the report were sound. The AO could have very well seen cost of hoardings shown by the erstwhile firm. Merely because cost of hoarding was claimed as a revenue deduction, it cannot follow that its value even in the hands of the transferee should be nil. Copy of valuation report is available at pages 89 to 123 of the paper book. The situation and size of each hoarding is given in the said report. The rate applied for value of each hoarding is also given. Whether hoarding is fixed on ground or on a terrace is also mentioned. It was for the A.O to see above details and then reach a conclusion on the facts and in the circumstances of the case whether such detail was reliable to what extent to determine the “actual cost”. No exercise on above lines was undertaken by the A.O. The registered valuer in its report has also given further basis of valuation by taking into account cost of labour, board, colour, RCC footing and misc. expenses. Average working of cost of hoarding is also provided. AH the above details could be examined and then rejected or accepted as warranted by the facts of the case. One wonders how cost of 2100 hoardings purchased by the’ as’sessee can be nil. It has been taken at nil because it was not an asset with the erstwhile firm. In my considered opinion, there is no nexus between material on record and the conclusion of Nil cost drawn in this case. One could have understood if it was held that hoarding had already lived its utility and had no intrinsic value at the time of transfer to the assessee company. No such finding on life or value of hoardings or their utility had been recorded. Exercise of determining the actual cost of hoarding as on 1.4.2003 was not undertaken by the A,0. The relevant facts noted above or position of hoarding was not examined. The approval required from the higher authorities was granted in this case in a routine-mechanical manner. Because hoardings were not shown as an asset by the erstwhile firm, their “actual cost” was “determined” at nil without denying the fact that assesee had paid Rs 4,77,96.000/ – for the hoardings. The learned A.M, with utmost respect, did not pursue the relevant record of the A.O or CIT (Appeals) to see facts clearly admitted by the revenue authorities.
23. Proceeding to the question of actual cost of goodwill or trade name, it is well established that goodwill is an important asset of business which is acquired over a period of time. There are well-recognized methods of computing value of goodwill/trade name of a business. It is computed by taking into account profits made by the concern over a period, capital employed, efforts of the partner etc. and thereafter its value is determined. As per information placed on record, sales effected by the firm and the company are available at page 73 of the paper book. The turnover of the firm in the last year of its business i.e. in financial year 2002-03 is shown at Rs 8,58,26,749/ -. In the earlier two years also, it is more than Rs 8 crores. It jumped up to Rs 11,67,00,000/ – in the first year of company’s business and thereafter it jumped to Rs 14,38,00,000/ -. These turnover figures are not in dispute. Based on above turnover figures, the registered valuer who without a doubt is an expert, determined the value of goodwill/trade name at Rs 3 erores. Detailed calculations are given in the valuation report. It was open to the A.O to examine those calculations and ro arrive h in own conclusion Such exercise was not undertaken. Merely because goodwill’ acquired by the firm was not shown as an asset or was shown at slightly less figure and no depreciation was claimed by the firm, its value was taken al nil. How could value of goodwill or trade name for a concern making high profit and in business for several years, be nil? What the AO has done is quite contrary to the principle laid down by the Supreme Court in the case of Jogta Coal Co. Ltd. Vs. CIT (supra). In the said case, it was held that having accepted the total cost for the transfer and where the actual cost of assets determined is less than the stated sale consideration, the differences would be taken towards goodwill of the business. Here the parties under agreement themselves determined the value of goodwill and stated the same in the memorandum of transfer which is further supported by an expert opinion. The AO, without considering relevant facts and circumstances of the case and for erroneous reasons, took actual cost of goodwill at nil. In my considered opinion, no basis whatsoever has been given for taking value of goodwill/trade name at nil. No fault has been found by the valuation report given in this case and, therefore, the same could not be rejected. Above aspects have not been noted by the Id. A.M. in his proposed order.
24. Even in the case of buildings at Rajkot and Surat, actual cost of these buildings has been taken at the written down value found in the hands of the firm. In these days of high inflation, value of immovable properties like land and buildings have jumped several fold and there is no comparison between the value/worth of a building and its written down value in books. A.O made no attempt to find whether there was any error in the cost of buildings claimed by the part in? in the memorandum. Therefore, the said r figure could not be rejected.
25. In the above circumstances and when no attempt was made by the A.O to undertake exercise of finding actual cost as required by the statutory provision and as per principles laid down by the jurisdictional High Court in the case of Ashwin Vanaspati Industries vs. CIT (supra), it is not possible to hold that provisions of Explanation 3 to Section 43(1) have been rightly applied. No good ground has been laid for not accepting cost fixed between the parties in the memorandum as “actual cost” of three assets. The power vested in the A.O in Explanation- 3 to section 43(1) was not exercised in accordance with law. Without proper determination of “actual cost”, it is not possible to record a satisfaction that assessee has claimed depreciation on enhanced cost of assets to the assessee. In view of close connection between circumstances/ conditions (ii) and (iii) and in view of my finding pn condition No. (iii), I hold that condition No. (ii) is also not satisfied No case, for taking action under Explanation 3 to section 43(1) has been made out. On facts and circumstances of the case, there was no justification to remand the matter back to the A.O to have another inning and determine actual cost of goodwill/trade name and of buildings at Rajkot and Surat.
26. I have also gone through the decision of Hon’ble Madras High Court in the case of CIT Vs Sekar Offset Press 214 ITR 516. In that case, the assets were transferred at the market value between partners. The Court held that Explanation 3 to Section 43(1) had no application to the case as the main purpose of the transfer of assets was not reduction of tax liability. The decision is relevant. The other decision of the Tribunal in the case of Unirned Technologies Ltd. vs DCIT 73 ITD 150 is also considered relevant as in above case, valuation report furnished by the assessee in support of cost of the assets acquired was accepted by the Tribunal, as AO did not appoint his own valuer nor thought it necessary to examine assessee’s valuer. In the absence of any other valuation report and there being no other evidence to show that the report was not reliable, it was held that valuation report filed by the assessee could not be ignored. Factual position here is similar, I am, therefore, of the view that two decisions cited on behalf of the assessee are relevant to the facts of the case. Ld. A.M. in the proposed order has taken great pains to distinguish the decision of the Jurisdictional High Court in the case of Ashwin Vanaspati Industries vs. CIT (supra). However, I do not find any material distinguishing feature to hold that principles laid down in that case are not applicable to the facts of the case before me. In my considered opinion, the aforesaid decision should be applied to consider whether Explanation (3) to Section 43(1) is correctly applied. This aspect has been elaborated above.