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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI AMARJIT SINGH, JM
O R D E R Per Shamim Yahya, A. M.:
This appeal by the Assessee is directed against the order of the learned Commissioner of Income Tax (Appeals)-10, Mumbai (‘ld.CIT(A) for short), dated 19.09.2016 and pertains to the assessment year (A.Y.)
2011-12.
The grounds of appeal
read as under: 1. "On the facts and in the circumstances of the case, the Hon’ble CIT(A) erred in confirming allowance of depreciation by the Assessing Officer at Rs.5,71,92,626/- as against claimed made by the appellate-company of Rs. 15,78,34,916/-.
2. The appellant craves leave to add, alter, amend and/or withdraw any ground of appeal either before or during the course of hearing of appeal.
Brief facts of the case are that assessee is a company engaged in the business of manufacturing of diamond and energy. The only issue is related to disallowance of depreciation the tune of Rs.5,71,92,626/- by the Assessing Officer based upon his order of AY 2009-10 and confirmed by the Ld. CIT(A) following his order for AY 2010-11, which in turn was relied upon Ld. CIT(A) order of AY 2009-10.
Against the above order assessee is in appeal before us.
We have heard the counsel and perused records. Ld. Counsel of the assessee submitted that the issue is squarely covered in favour of the assessee by ITAT decision in assessee’s own case for the earlier year.
Per contra Ld. Departmental Representative could not dispute the proposition that the issue is squarely covered by the decision of ITAT in assessee’s own case.
7. Upon careful consideration we note that ITAT vide order dated 21.06.2017 in ITA.No. 3861/Mum/2014 for AY 2009-10 in assessee’s own case has reversed the decision of Ld. CIT(A) and decided the issue in favour of assessee by holding as under:
In the rebuttal, the AR while taking us through the decisions as referred and relied by the Id DR, submitted that the cases are distinguishable on facts and therefore were not applicable to the case of the assessee whereas the case squarely covered by the decisions relied by him.
We have heard the rival submissions and perused the material placed including the impugned order and case laws cited by both the undisputed facts are that the assessee company was incorporated on 31.8.2007 under the provisions of Companies Act, 1956 and took over all the assets and liabilities of the erstwhile firm M/s Dharmanandan Diamonds on 1.9.2007. The assets were got revalued by the erstwhile firm on were revalued on 30.6.2007 from the independent Government Approved Registered Valuer in order to ascertain the prevailing market value of the assets and accordingly all the necessary adjustment entries were made in the books of accounts of the erstwhile firm. In consideration of transfer, the partners of erstwhile firm issued equity shares in the assessee company in the ratio of profit sharing to the partners of the erstwhile firm. The assessee company took over the said assets on 31.8.2007 and thus financial year 2007-08 was split into two parts one from 1.4.2007 to 31.8.2007 and second 1.09.2007 to 31.3.2008. In both the periods the depreciation was claimed on the basis of WDV in the hands of erstwhile firm i.e. M/s Dharmanandan Diamonds as well as the assessee based on the WDV in the books of accounts of the erstwhile firm. The assessee company calculated its WDV on 31.3.2008 by taking the cost of assets at revalued price as done by the Government Approved Registered Valuer less depreciation calculated on the basis of WDV in the hands of the erstwhile firm and from the AY-2009-10, the depreciation was claimed by the assessee company on basis of WDV as ascertained (supra) in the AY 2008-09 on 31.3.2008. The assessee company claimed depreciation in assessment year 2008-09 from 1.9.2008 to 31.3.2008 fifth proviso to secr_ion32(l) of the Act which for the sake of convenience and better understanding extracted as under : "'[Provided also that the aggregate deduction, in respect of depredation of buildings, machinery, plant or furniture, being tangible assets or know- how, patents, copyrights, trademarks, licenses, 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 18[clause (xiii)), clause (xiiib) and clause (xiv) of section 47 or 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, shaft 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, 33 the case may be, In the ratio of the number of days for which the assets were used by them."
As per the said provision, the total depreciation is required to be allowed to the erstwhile firm and the assessee company on WDV of assets in the hands of the erstwhile firm which shall not exceed the amount of depreciation for that year in which succession has taken place as if no succession has taken place. The assessee company computed the WDV in Its books of accounts after reducing the depreciation from the cost at which the assets were acquired by ft i.e. revalued prices as per section 43(1) which reads as under:
Definition of certain terms relevant to income from profits and gains of business or profession. In sections 28 to 41 and in this section unless the context otherwise requires (i) “actual cost" means the actual cost of the assets to the, assessee, • Reduced by that portion of the cost thereof, if any, as has. 'been met directly or indirectly by any other person or authority;” The AO has rejected the claim of depreciation of the assessee on the ground that no capital gain tax was paid by the erstwhile firm upon revaluation of its assets by claiming exemption u/s47(xiii) of the Act. The assets were taken over by the assesses company at revalued amounts and the depreciation could not be allowed on the revalued price which is many time more than the WDV of the assets in the hands of erstwhile firm. For the sake of better understanding of the issue at hand we reproduce the provisions of section 47(xiii) of the Act as below: [(xiii) 18[any transfer of a 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, or any transfer of a capita/ asset to a company in the course of 19[demutL!3iisation or] corporatization of a recognized stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company:] Provided that— (a) all the assets and liabilities of the firm 20[or of the association of persons or body of individuals] relating to the business immediately before the succession become the assets and liabilities of the company; (b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date the success/on; (c) the partners of the firm do not receive any consideration or benefit, or indirectly, in any form or manner, other than by way of allotment of shares in the company; and (d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession; (e) the 22[ demutualization or] corporatization of a recognized stock exchange in India is carried out in accordance with a scheme for 22[demutualization or] corporatization which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);] A careful perusal of the above provisions shows that capital gain on transfer of assets to company as a result of succession of firm by the company is exempt from tax if certain conditions as specified under section 47(xiii) are fulfilled. In the present case, before us, the company has succeeded the firm by fulfilling all the conditions envisaged u/s 47(xiii) of the Act and therefore the erstwhile firm was not liable for any capital gain tax which was also admitted by the AO that no capital gain tax was leviable. Thus, merely because no capital gain tax was paid by the erstwhile firm by virtue of scheme of section 47(xiii) of the Act, the AO cannot be allowed to reject the depreciation claim of the assessee so long as the same is as per the provisions of the Act. The moment the conditions as laid down in section 47(xiii) of the Act are violated, the capital gain tax becomes payable on the transfer of assets from erstwhile firm to the assessee on the basis market of the assets. The section does not speak anything about book value of or WDV of the assert of the firm but it states that the assets and liabilities before the succession of firm become assets and liabilities of the succeeding company. In other word, the exemption u/s 47(xiii) of the Act is based upon the fulfillment of certain conditions and if the conditions as stipulated in the Act are violated the capital gains tax become payable and the same would be computed on the basis of market price of the transferred assets and liability of the firm, which has been held in the case of KTC Automobiles Pvt Ltd (supra) It has been held that the capital gain tax is attracted as the conditions u/s 47(xiii) of the Act are not fulfilled by treating the consideration for transfer as loan in the assessee company and the order of CIT(A) was affirmed. Whereas in the present case before us all the conditions of section 43(xiii) of the Act were satisfied in the succession of firm by the company in taking over all the assets and liabilities and therefore exemption as provided in section 43(xiii) is available to the assessee.
9. The second reason for disallowance is that the aggregate depreciation cannot exceed the actual cost of the assets in the hands of the assessee. In the present case, the actual cost is the value at which price on which the assets were taken over by the company and the shares were issued in discharge the consideration for such takeover of the assets and thus, cost in the hand of the erstwhile firm cannot be taken into consideration for determination of actual cost in the hands of the successor assessee firm but price it discharged for taking over the assets which was paid by issues of equity shares to the partners of the erstwhile firm in. profit sharing ratio and thus there is no violation of proviso to Rule 5 of the IT Rules. In the present case, the assessee has claimed depreciation on the actual "cost' incurred by it for acquisition of assets and cost to the assesses was market value of the assets transferred as ascertained by the Govt Approved registered valuer. It is pertinent to note here that on satisfaction of condition envisaged u/s 47(xiii) of the Act, capital gain tax would be exempt. Had the conditions of section 47(xiii) not fulfilled the capital gain would have been payable or chargeable on the basis of market prices of the assets
transferred on succession of the firm to the company. In view of these facts, the assessee company is entitled to be allowed depreciation on the basis of actual cost in its hands as per the provisions of section 43(1) of the Act and not on the WDV of the erstwhile firm. It is also undisputed fact that the assessee company was not in existence as on 30.6.2007 when the assets of the erstwhile firm were revalued. Even if the case of succession by the assessee company of the erstwhile firm is treated as sale /transfer as per the provisions of Act even then the exemption would be available to the erstwhile firm under the provisions of section 47(xiii) of the Act. As regard the explanation 3 to section 43(1) of the Act, the AO has power to reject the claim of the appellant if the main purpose of the transfer of assets is to reduce the tax liability. However, in the present case, we find that the main purpose of transfer/takeover of assets and liabilities of the firm was to carry on business activities in the hands of the assessee in more effective manner effective manner which is evident from the fact that during the turnover of the assessee company was Rs,895 crores and the assessee has paid MAT tax on book profits during the year. In other words, the succession by the assessee company of the erstwhile firm and taking over all the assets and liabilities was subject to the conditions of section 47(xiii) of the Act and accordingly the exemption from paying capital gain tax was available. Any violation of the conditions as stated in section 47 (xiii) would. have resulted in the capital gain liability in the hands of the erstwhile firm. In the case of M/s Ashwin Vanaspati Industry (supra), the Hon'ble Gujarat High Court has held that where the assessee has claimed depreciation on the enhanced cost in the case of succession of firm by the company where the assets were taken over on enhanced value than WDV of the firm, it is necessary for the AO to place some evidence on record and it could not substitute its opinion and adopt the book value WDV of the firm in th4e hand of the assessee company. As per the Explanation 3 of section 43(1) the AO has to determine the actual cost to the assessee by keeping in mind the circumstances and if in his opinion the WDV was the actual cost then he sought to have supported the same with by placing sufficient evidences so as to dislodge the valuation report of the registered valuer otherwise the provisions cannot be Invoked and finally held that the assessee is entitled to depreciation on the enhanced cost.
* In the case of Chitra Publicity Co Pvt Ltd (supra), the Third Member of Ahmedabad Bench of the Tribunal held as under :
26.1 have also gone through the decision of Hon’ble Madras High Court in the case of ClT v, Sekar Offset Press [1995] 214 ITR 516 [Mad}. In that case, the assets were transferred at the market value between partners. The Court held that Expln. 3 to s. 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 Unimed Technologies Ltd. v. Dy. CIT [2000] 73 ITD 150 (Ahdi) Is also considered relevant as in above ease, 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...."
> In the case of Prakash Chemical Agencies P Ltd, the Ahmedabad Bench of the Tribunal held as under:
"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. Undisputed!/, 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 ail the liabilities as well and agreed to transfer consideration of Rs, 4 lacs, plus the shares in the name of the partners the said erstwhile firm. The controversy was that the 'WDV as per the 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 dosing WDV of the said firm and not on the " cost" as recorded by the assesse-company. Once the admitted factual position is that. this is not the case of transfer of capita} 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 (Explanatton-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 depredation, meaning thereby the "actual cost"-of the assets to the assesses 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, Id.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 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 quest/on 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 depredation on the dosing 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 planation-7 to section 43(1) of IT Act); or transfer of capital asset by demerger (Expianation-7A to section 43(1) of IT Act), then the only recourse for the Revenue Department ought to be that the "actual cost" defined u/s.43(l) 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 capita! gain was charged by the Revenue Department. In compliance, Id.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, Id.AR has given the reason that in terms of Section 47(xiii) of the Act, an except 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 assesses. 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 assesses was the reduction of liability to income tax by claiming depreciation with a reference to an enhanced cost, then the "actual cost" to the assesses 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 Id.AR, because those are in respect - of other circumstances, such assets received by gift or inheritance 'Explanation-2), transaction of sale and lease-back (Explanation 4A) acquisition of same assets (Explanation-4), or where of portion of the is met by the Government by granting subsidy (Explanation-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 deprecation on various assets including hoardings. Assessing Officer re- worked the depreciation .by invoking Expiantion-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 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."
In the case of R B Bansilal Abirchand Spinning and Weaving Mills (supra) has Held, that the cost of the assets had to be ascertained by the price that could be paid in the prevailing market conditions. I he written down value of the assets is not relevant Is determining the cost of the assets to a purchaser. There was no material on record to show that the valuation by the experts -was either exaggerated or incorrect. In the absence of fraud, collusion, inflation or false transaction made with ulterior purposes, the income-tax authorities were precluded from going behind the agreement of purchase in determining the purchase price and fix their own valuation. In all the above decisions it has been held that the assessee is entitled to depreciation on the price at which the assets were taken over if the conditions of section 47(xiii) of the Act were fulfilled.
So far as the various decisions referred by the Id DR, we found them to be distinguishable on facts some of which are discussed as under: - > In the Case of Pouiose and Mathen (Pvt) Ltd (supra), the Hon'ble Kerala High Court has held that the assessee is not entitled to depreciation on the revalued figure. But the facts of the case are distinguishable as the assessee company which took over the assets was a partner in the firm having nine partners and other eight partners were shareholder in the > company and the assessee company took over assets and liabilities of the firm by dissolving the firm whereas in the present case the assessee company was born on 31.08.2007 and was not a partner in firm. This decision is also referred to by ITAT and in the case of Prakash Chemical Agencies as relied by the Id AR but not followed. The decision in the case Kungundi Industrial Works P Ltd Vs CIT reported in 57 ITR540(AP) as relied upon in this case is also distinguished by the Ahd ITAT. > In the case of Mahindra Sons Ltd (supra), the Mumbai Bench of the Tribunal has held that since a device was adopted to avoid tax, therefore, the Assessing Officer has rightly calculated the depreciation on the basis of the available figures of WDV as per the books of account but this case are distinguishable as the terms of the deal were not fair, deal was not at arm's length price, assets were revalued at replacement value without any basis and the purpose was purely to claim higher depreciation only, AO made analysis of various items of assets and found that obsolete plants were revalued at exorbitantly high price.
> In the case of Ginners and Pressers Pvt Ltd (supra) the Hon'ble Bombay High Court the facts are distinguishable as there was no supporting evidence of actual cost adopted by the assessee company whereas in the assessee's case the valuation was done by the Govt Approved Registered Valuer which the lower authorities and was not doubted at all. No fallacy or adverse finding by the AO that the assets transferred are not at market price. After examining and considering the cases law as relied by the id AR and Id DR we find that the assessee is squarely covered by the ratio laid down by the cases relied by the Id AR whereas the decisions referred and relied by the Id DR are distinguishable in facts and therefore not applicable in the instant case of the assesses. Accordingly, we set aside the order of CIT(A) and hold that the assessee is entitled to depreciation on the enhanced cost at which the assessee has taken over the assets and direct the AO to allow the depreciation as claimed by the assessee of Rs, 35,21,38,615/-.
11. In the result, the appeal of the assessee stands allowed 8. We find that Ld. CIT(A) for the present assessment year has referred and followed his decision for A.Y. 2010-11, wherein he had referred to this decision of Ld. CIT(A) is assessee case for AY 2009-10.
9. Since the issue has been decided by the ITAT in earlier year in assessee’s favour the disallowance of depreciation by the AO for this year is not sustainable as the same is consequential to the depreciation allowed and W.D.V of assets in earlier year. All the issues raised by the AO has been elaborately decided by the ITAT is assessee’s favour.
It is not the case that Hon’ble Bombay High Court has reversed the decision of ITAT as above.
10. In the background of aforesaid discussion and precedent we set aside the order of authorities below and hold that disallowance of depreciation by the AO is not sustainable.
In the result, assessee’s appeal is allowed as above.
Order pronounced on 15 th March, 2019.