In the case of Varadaraja Textiles P Ltd. vs. ACIT (ITAT Chennai), the Income Tax Appellate Tribunal (ITAT) has delivered a significant ruling regarding depreciation on a textile spinning unit acquired through an auction sale conducted by the Bank of Baroda.
1. Background: Varadaraja Textiles P Ltd., the assessee, acquired a textile spinning unit, which included land, building, and machinery, through an auction held by the Bank of Baroda. The total consideration for this acquisition was Rs. 7.33 crores. The assessee claimed depreciation on the acquired assets, including normal depreciation and additional depreciation.
2. Disallowance of Depreciation: During the assessment, the Assessing Officer (AO) noticed that the building and machinery were previously used by Rayars Spinners Pvt. Ltd. on 2004. Citing Explanation (3) to Section 43 of the Income Tax Act, the AO disallowed depreciation and took the written down value of the assets at ‘nil.’ The AO’s decision was based on the assumption that the main purpose of transferring these assets to the assessee was to reduce the income tax liability by claiming depreciation based on an enhanced cost.
3. CIT(A) Confirmation: The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the AO’s decision, further affirming the disallowance of depreciation by relying on Explanation (3) to Section 43.
4. Legal Challenge – ITAT’s Verdict: The assessee appealed to the Income Tax Appellate Tribunal (ITAT) against the disallowance of depreciation. The ITAT considered the provisions of Explanation (3) to Section 43 and examined the facts of the case.
The ITAT emphasized that the application of Explanation (3) hinges on the AO’s satisfaction that the primary purpose of transferring assets to the assessee was to reduce the income tax liability by claiming depreciation with reference to an enhanced cost.
The ITAT also noted that the textile spinning unit was acquired through an open auction conducted by a nationalized bank, Bank of Baroda. Given that the unit’s purchase was made through a transparent auction, there was no element of enhanced cost paid to any party or unaccounted money involved in the transfer.
The ITAT reviewed the documentary evidence, including the valuation report of the machinery, auction details, and the sale certificate issued by Bank of Baroda. Based on this evidence, the ITAT concluded that there was no ground for invoking the provisions of Explanation (3) to Section 43.
5. Conclusion: The ruling by ITAT Chennai in the Varadaraja Textiles case is significant as it clarifies that depreciation is allowed for a textile spinning unit acquired through an auction sale. The decision underscores the importance of considering the specific circumstances and transparent acquisition methods, such as public auctions, when assessing depreciation claims. The ITAT’s verdict favors the assessee, allowing them to claim depreciation and reversing the orders of the AO and CIT(A). This case reaffirms the principle of fair and open acquisition in tax matters.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
These appeals by the assessee are arising out of the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi in Order No. ITBA/NFAC/S/250/2022-23/1047066926 & 1047068864(1) of even date 07.11.2022. The assessment was framed by the ACIT, Corporate Circle-2, / ITOP, Corporate Ward -4, Coimbatore for the assessment years 2014-15 & 2015-16 u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’), vide orders dated 28.12.2016 & 27.12.2017 respectively.
2. The only issue in these appeals of assessee is as regards to the order of CIT(A) confirming the action of the AO in taking the value of machinery i.e, building and machinery purchased through auction from Bank of Baroda at ‘nil’ as against purchased by assessee at Rs.7.33 crores and disallowed depreciation claimed on the same. For this, assessee has raised following effective grounds in assessment year 2014-15 in ITA No.3/CHNY/2023:-
(2) The learned CIT(A) has erred in coming to the conclusion that transfer of asset from M/s. Rayars Spinners Pvt. Ltd. to the appellant Company is for the purpose of reducing Income-tax liability, in the facts and circumstances of the case.
(3) The learned CIT(A) ought to have appreciated that M/s. Rayars Spinners Pvt. Ltd. is not related to the appellant Company and the value fixed for the land, building, plant & machinery is supported by the valuation of an approved valuer, who is also not related to the appellant Company.
(4) The learned CIT(A) ought to have appreciated that the investment made by the appellant in a Textile Spinning Unit is for the purpose of enhancing the business of the Company, which is also a Textile Spinning Mill and therefore, the purchased asset is used in the business carried on and is entitled for depreciation as per the Income Tax Rules 1962, at the actual cost as paid while bidding in an auction held by Bank for recovery of its dues.
3. Brief facts are that the AO during the course of assessment proceedings noticed that the assessee has acquired Unit-II at The kkalur that consisting of land and machinery through auction from Bank of Baroda for a total cost of Rs.7.33 crores during the financial year 2012-13. The assessee claimed depreciation for the same building and machinery at the cost of purchase price of Rs.7.33 crores and in addition to the same normal depreciation claimed on the above plant and machinery and also claimed additional depreciation. The AO noted that the building and machinery were previously owned and used by Rayars Spinners Pvt. Ltd., on 2004. According to AO, as the building and machineries were used by previous owners, the assessee was required to produce the details of written down value of machineries as per the books of accounts of the previous owner in term of provisions of Explanation (3) to Section 43 of the Act. The assessee explained before AO that this land, building and machinery were purchased through auction from Bank of Baroda for a sum of Rs.7.33 crores and accordingly, depreciation and additional depreciation was claimed on the above machinery. Bu the AO applied the provisions of Explanation (3) to section 43 of the Act and disallowed the claim of depreciation by holding that the written down value of the above mentioned asset as zero. Aggrieved, assessee preferred appeal before CIT(A).
4. The CIT(A) also confirmed the action of the AO by relying on the provisions of Explanation (3) to Section 43 of the Act. Aggrieved, now assessee is in appeal before the Tribunal.
5. We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the assessee had acquired textile spinning unit at a auction conducted by Bank of Baroda for a total consideration of Rs.7.33 crores i.e., the land and building and machineries. The AO disallowed the depreciation by relying on Explanation (3) to section 43 of the Act by taking the written down value of building and machinery at ‘zero’ and disallowed the claim of depreciation and additional depreciation. The CIT(A) confirmed the action of the AO. At the time of hearing, the ld. counsel for the assessee drew our attention to Explanation (3) to Section 43 of the Act and stated that on reading of Explanation (3), it is mandatory that the AO should be satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee by the other person was to reduce the liability of income-tax by claiming depreciation with reference to the enhanced cost, claimed by the assessee. Further, the ld. counsel for the assessee before us also contended that this textile unit includes land, building and machineries were auctioned by Bank of Baroda and assessee was a successful bidder in the auction and paid consideration of Rs.7.33 crores for acquiring this textile spinning unit. Once textile unit is acquired by assessee in open auction, there is no question of any element of enhanced cost paid to any party or unaccounted money paid to that party in the absence of any finding given by AO. The AO has to give a specific finding that the transfer of such asset directly or indirectly to the assessee by other person was for the purpose of reduction of liability to income-tax by claiming deprecation with reference to the enhanced cost paid by assessee. The ld. counsel for the assessee took us through the assessment order and stated that the AO has simply reproduced Explanation (3) to section 43 of the Act and there is no satisfaction recorded by him that the assessee has paid enhanced cost. Admittedly, the assessee purchased this asset through open auction and that also through nationalized bank i.e., Bank of Baroda. We have gone through Explanation (3) to section 43 of the Act, which reads as under:-
Explanation 3.—Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case.
We noted that once the building and machinery is acquired by assessee through an open auction from Bank of Baroda, there is no question of any enhanced cost paid by assessee for such transfer. Hence in our view, there is no occasion to disallow depreciation by taking cost of machinery at ‘nil’. Next, the textile spinning unit acquired by assessee is supported by valuation report of the plant and machinery of Rayars Spinners Pvt. Ltd., including auction details of property of factory, land and building under sale of SARFAESI proceedings and sale certificate issued by Bank of Baroda, Coimbatore in favour of assessee, having contradicting these documents, the AO cannot invoke the provisions of Explanation (3) to section 43 of the Act. Hence, we allow the claim of depreciation and reverse the orders of CIT(A) and that of the AO. This appeal of the assessee is allowed.
6. Similar are the facts in assessee’s appeal in ITA No.4/CHNY/2023 for the assessment year 2015-16, as the same machinery is under dispute. The deprecation in that year also allowed accordingly.
7. In the result, both the appeals filed by the assessee are allowed.
Order pronounced in the open court on 15th September, 2023 at Chennai.