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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Per CHANDRA POOJARI, AM:
This appeal filed by the assessee is directed against the order of the CIT(A)
Kottayam dated 16/07/2018 and pertains to the assessment year 2015-16.
Ground Nos. 1 & 2 raised by the assessee is with regard to restriction of
depreciation in the written down value of the assets taken over by the assessee.
The facts of the case are that the assessee company was incorporated on
31/05/2013 pursuant to conversion of partnership firm M/s. Muthoot Health Care
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as per Part IX of the Companies Act, 2013. All the assets nd liabilities of the
erstwhile firm were taken over by the Company. On conversion, the activities of
the firm ceased to exist with effect from the conversion date. The book value of
the assets as in the firm was taken over fully by the Company. On conversion of
the firm to the Company, all the assets were revalued. As a result of revaluation,
the cost of revalued assets as on 01/06/2013 was determined at
Rs.80,55,18,048/-. Further, additions were made during the F.Y. 2013-14
amounting to Rs.5,66,19,776/-. Thus, total value of the assets as on 31/03/2014
after revaluation was Rs.86,21,37,824/-. After claiming depreciation of
Rs.9,77,91,157/- in the A.Y. 2014-15, the WDV of the assets after revaluation, as
on 31/03/2014 was shown as Rs.76,43,46,667/-.
3.1 During the FY 2014-15, an addition of Rs.7,31,43,26/- was made to the
fixed assets. Thus total value of the assets after revaluation, as on 3103/2015,
came to Rs.83,74,89,934/-. Therefore, the assessee claimed depreciation of
Rs.9,74,38,761/- on the revalued assets for the F.Y. 2014-15 i.e., A.Y. 2015-16.
The Assessing Officer after examining the claim of the assessee in detail,
recomputed the depreciation allowable without considering the revaluation of
assets and allowed depreciation of Rs.4,65,07,189/-.
On appeal, the CIT(A) relied on the judgment of the Hon’ble Jurisdictional
High Court in the case of Poulose and Mathen P. Ltd. (236 ITR 416) which is
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binding on the lower authorities. The Ld. AR relied on the decision of the ITAT,
Mumbai Bench in the case of Suyash Laboratories Ltd. It was submitted that as
regards restriction of depreciation, the assessee had taken over the assets of the
erstwhile firm at the value determined by the firm and as far as the cost to the
assessee was concerned, it was the value at which the successor takes over.
Revaluation was only a method of quantification. However, the CIT(A) observed
that the facts I the case of Suyash Laboratories Ltd. was different from the
assessee’s cae as it was not a case of conversion of partnership firm into a
company under Part IX of the Companies Act. Hence, it was held that the said
decision was not applicable to the case of the assessee. The assets in the hands
of the predecessor firm shall be considered for the allowance of depreciation.
4.1 The CIT(A) held that the decision of Jurisdictional High Court cited
supra squarely covers the issue against the assessee. The CIT(A) examined
whether the alternative argument of the assessee that the case of the assessee
was covered by the provisions of section 47(xiii) of the Act and therefore, the
revalued asset value should be adopted for the purpose of allowance of
Depreciation. In this context, the CIT(A) considered the provisions of section
32(1)(ii) of the Act where the fifth proviso reads as under:-
"Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii) clause (xiiib) and clause (xv) of section 47 or
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section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them." .
4.2 . Therefore, the CIT(A) observed that it is evident from the fifth proviso to
section 32(1 )(ii) of the Act that in cases falling under section 47(xiii) of the Act,
the total deduction under section 32 of the Act in FY 2013-14 for both transferor
and transferee put together shall not exceed the depreciation allowable to the
erstwhile Firm during the FY 2013-14, which clearly points to the fact that the
assessee was not eligible to claim depreciation on the revalued asset value. The
CIT(A) relied on the decision of the ITAT, Bangalore in the case of Padmini
Products P Ltd, 2018 Tax Pub 4079 wherein it was held as under:
"17. The case on hand is a reverse case. The company is claiming the depreciation on the value of the assets in its books of accounts. The claim of depreciation is on trademarks which are intangible assets and depreciation thereon is allowable under section 32(1) (ii) of the Income Tax Act. The two conditions mentioned in section 32 are that the assets should be owned by the assessee and should have been used for the purposes of the business or profession of the assessee. The sub-clauses thereto enumerate the deductions allowable under section 32. Sub-clause (ii) thereof provides for a deduction at a prescribed percentage of the written down value of the block of assets. 5th proviso thereto provides that in respect of circumstances such as succession, amalgamation or demerger, the average deduction on account of depreciation on tangible or intangible assets shall not exceed, in any previous year, the deduction calculated at the prescribed rates as if the succession, amalgamation or demerger has not taken place and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and amalgamated company or the demerged
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company and the resulting company as the case may be, in the ratio of days for which the assets were used by them.
In all the three circumstances above, the erstwhile company ceases to exist and a new company comes into existence. In the case on hand also, on account of conversion, the erstwhile partnership firm ceased to exist while the company has come into existence. Therefore, the assets come to vest in the hands of the company and there is no cost of assets to the company on such vesting. When the transaction itself has been treated to be not a transfer, but is akin to succession, in our opinion the 5th proviso to sub- clause (ii) of section 36(1) applies and the depreciation has to be calculated as if there is no transfer.
Further, as there is no transfer, there is no cost to the assessee. Depreciation is allowable on the WDV of the asset and WDV has been defined under section 43(6) to mean In the case of assets aquired in the previous year, the actual cost to the assessee. As actual cost to the assessee was 'Nil', the WD value of the assets in the hands of the predecessor firm shall be considered for the allowance of depreciation.”
4.3 In the light of the above decisions, the CIT(A) held that the claim of
depreciation on the revalued asset value by the assessee was in violation of the
fifth proviso to section 32(1)(ii) of the Act and therefore, is not valid
Against this, the assessee is in appeal before us. The Ld. AR reiterated the
same submissions which were made before the CIT(A).
The Ld. DR submitted that this issue is squarely covered against the assessee
by the judgment of the Jurisdictional High Court in the case of Poulose and
Mathen P. Ltd. (236 ITR 416).t The Assessing Officer was justified in invoking
Explanation 3 to section 43(1) of the I.T. Act and fixing the actual cost of the
asset.
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We have heard the rival submissions and perused the record. We find that
this issue is squarely covered by the judgment of the Jurisdictional High Court in
the case of Poulose and Mathen P. Ltd. (236 ITR 416) wherein it was held as
under:
"5. Let us examine as to how the Assessing Officer has completed the first assessment relating to the year 1986-87 which contains all the material particulars for taking decision in these cases. While arriving at a loss of Rs. 9,84,906/- the company has claimed depreciation amounting to Rs. 10,06,657/- for the assessment year 1986-87. The total value of the assets taken over by the firm Poulose and Mathen was Rs. 22,35,540/-.. There were eight partners in the said firm and they were members of the families of Poulose and Mathen. As per the terms of the partnership deed dated 1-9- 1984, the assessee-company was admitted as a partner with 10 per cent share. The firm was dissolved on 25-2-1985 and all the assets and liabilities of the firm were taken over by the assessee-company. All the remaining partners had been allotted shares in the company. Thus, the shareholders of the company were the partners of the erstwhile firm. As per the account books of the firm, written down value as on 31-12-1984 was Rs.3,16,110/-. After the company had taken over the assets of the firm after its dissolution, the assets were revalued as on 25-2-1985 at Rs. 22,30,795/-. The assessee- company claimed depreciation on the value of Rs. 22,30,795/- as per the revised valuation of the assets. The Assessing Officer came to the conclusion that the main purpose of the dissolution of the firm and transferring the assets and liabilities to the company was only with a view to reduce the liability to income-tax by claiming depreciation with reference to the enhanced cost of the company. Therefore, he took the view that Explanation 3 to section 43(7) should be adopted. Accordingly, the Assessing Officer calculated depreciation on the basis of the total value of the assets, namely, Rs. 3,16,110/- and disallowing the claim for depreciation of Rs. 22,30,795/-.
We cannot agree with the conclusion of the Tribunal that the revaluation of the assets on the eve of the dissolution of the firm was made bona fide for adjustment of the mutual rights of the firm. This is not a case where there is no written down value, which means, in the case of assets acquired in the previous year, the actual cost to the assesses and in the case of assets acquired before the previous year, the actual cost to the assessee less all
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depreciation actually allowed to him under the Act as defined under section 43(6), Section 43(1) with Explanations thereof supersedes the general rule of law governing partnership, its assets and dissolution, etc., The definition of 'actual cost' contained in section 43(1) read with Explanations thereof affords a mechanism by which to reduce the actual cost to a figure which is anything but real. When the asset was formally used by any other person for the purpose of his business and the main purpose of the transfer of the asset to the assessee is to claim a higher depreciation allowance so as to reduce the liability to pay income-tax, the 'actual cost' shall be determined by the Assessing Officer in the exercise of the power conferred on him as prescribed in Explanation 3 to section 43(1), no matter what the general law prescribes for determining the costs of the assets on the dissolution of the partnership- firm and transfer of its assets….
Even if the assessee produces the valuation report, it cannot be said that the above conclusion would be different. Therefore, the drawing of adverse inference against the assessee has no impact on the decided by the Court. The attempt of the Tribunal to distinguish the above decision on the basis that the assessee has furnished the revaluation report in the present case would not fructify.
It is a settled position that the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation. (See: Firestone Tyre & Rubber Co. v. Lewellin [1957] 1 WLR 464). In CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609, the Supreme Court said that the income-tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction. It further said :
"... It is true that from the juristic point of view the company is a legal personality entirety distinct from its members and the company is capable of enjoining rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the realities behind the legal facade. . .." (p. 616)
In this premise it cannot be said that the Assessing Officer has acted unreasonably or arbitrarily in adopting Explanation 3 to section 43(1) and fixing the 'actual cost' accordingly.
As pointed out above, though large number of questions of law have been framed by the Tribunal for decision, we need to answer only the questions referred to by this Court in the judgments referred to above. Once we answer these questions specifically, the answers to other questions would
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follow. On the common question referred to us in all these references, we answer that the assessee is not entitled to claim depreciation on the assets taken over from the partnership-firm at the revalued figure. In other words, the question is answered in the negative, that is to say, in favour of the revenue and against the assessee. On the additional question referred to us in IT Reference Nos. 112 and 113 of 1996, we answer that Explanation 3 to section 43(1) is attracted to the facts of the present case. That means the question is answered in the affirmative, that is to say, in favour of the revenue and against the assessee. The reference cases are disposed of as above."
7.1 Accordingly, in view of the above judgment of the Jurisdictional High Court
in the case of Poulose and Mathen P. Ltd.cited supra, we are inclined to dismiss
this ground of appeal of the assessee.
The next ground, Ground No.3 is with regard to disallowance of an amount
of Rs.13,82,825 out of the conveyance expenses.
The facts of the issue are that the assessee claimed an expense of
Rs.18,43,766/- towards conveyance. During the scrutiny assessment for A.Y.
2014-15, the previous Assessing Officer disallowed 75% of the conveyance,
following the same method, this year also 75% of the conveyance expenses was
disallowed.
On appeal, the CIT(A) directed the Assessing Officer to follow the earlier
order for the assessment year 2012-13 which reads as under:
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“4.2.3 The AO disallowed the part of the expenses related to travelling and conveyance relating to the payments made to the doctors on the ground that the genuineness of the same could not be proved by the assessee. During the course of appeal proceedings, the learned AR produced the vouchers representing the payments made to the doctors for reimbursement of travelling expenses. On perusal of these vouchers, it was observed that these are self-made vouchers and no signature of the doctors was seen on these vouchers. Hence, it is to be held that the genuineness of the payments remains unproved.
4.2.4 However, the Appellant also disputed the estimated disallowance at 75% of the travelling and conveyance expenditure. Further, according to learned AR the total expenditure on account of reimbursement to Doctors for the A.Y. 2013-14 is only Rs.19,94,802/- whereas the Assessing Officer has disallowed an amount of Rs.32,61,970/-. There is merit in the argument of the learned AR. The method of estimation disallowance made by the Assessing Officer was not appropriate as the actual expenditure incurred on reimbursement of expenses to doctors is quantifiable. Therefore, the Assessing Officer is directed to verify the actual expenditure shown to have been incurred by the Appellant towards reimbursement of travelling & conveyance expenditure shown to have been incurred. The ground raised on this issue is partly allowed.”
10.1 Accordingly, the CIT(A) directed the Assessing Officer to follow the
directions issued in the A.Y. 2012-13 in respect of disallowance of conveyance
expenses paid to doctors.
Against this, the assessee is in appeal before us.
We have heard the rival submissions and perused the record. We find a
similar issue came up for consideration before the Tribunal in assessee’s own
case in ITA No. 173/Coch/2018 and vide order dated 05/10/2018, it was held as
under:
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“5. We have heard the rival submissions and perused the record. The main contention of the Ld. AR is that the travelling and conveyance expenditure was incurred by the assessee towards reimbursement of the same incurred by doctors and it does not contain any element of profit to the doctors so as to deduct TDS and disallowance of the same is unwarranted. More so, ad-hoc disallowance is not called for. In this case, the CIT(A) remitted the issue to the file of the Assessing Officer and directed the Assessing Officer to verify the actual expenditure said to have been incurred by the assessee towards reimbursement of travelling and conveyance paid to doctors and to disallow the actual expenditure shown to have been incurred. In our opinion, this finding of the CIT(A) is inappropriate. If the assessee has incurred expenditure towards reimbursement of travelling and conveyance which was paid to doctors , it is to be allowed as it was incurred wholly and exclusively for the purpose of the business of the assessee. It is the duty of the assessee to prove that the expenditure was incurred for the purpose of business. We remit this issue to the file of the Assessing Officer with the observation that the assessee is directed to place necessary evidence in support of the expenditure claimed before the Assessing Officer. Hence, this ground of appeal of the assessee is partly allowed for statistical purposes.”
12.1 In view of the above order of the Tribunal, we remit this issue to the file
of the Assessing Officer with similar direction. Hence, this ground of appeal of
the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed for statistical
purposes. Order pronounced in the open Court on this 8th February, 2019
sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER
Place: Kochi Dated: 8th February, 2019
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GJ Copy to: 1. Muthoot Health Care P. Ltd., Hospital Building, College Road, Kozhencherry-689641. 2. The Assistant Commissioner of Income-tax, Circe-1, Thiruvalla. 3. The Commissioner of Income-tax(Appeals), Kottayam. 4. The Pr. Commissioner of Income-tax, Kottayam. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order
(ASSISTANT REGISTRAR) I.T.A.T., Cochin