M/S. CONTINENTAL DEVICE INDIA LTD.,NEW DELHI vs. ACIT, NEW DELHI

In the Income-Tax Appellate Tribunal, Delhi Bench ‘B’, New Delhi

Before : Shri Bhavnesh Saini, Judicial Member And Shri L.P. Sahu, Accountant Member

ITA No. 6331/Del./2014 Assessment Year: 2010-11

M/s. Continental Device India Ltd., vs. A.C.I.T., Circle 3(1), C-120, Naraina Industrial Area, New Delhi New Delhi. PAN – AAACC 1835E (Appellant) (Respondent)

Appellant by Sh. R.K. Kapoor, C.A. Respondent by Sh. Raghunath, Sr. DR

Date of Hearing 22.11.2017 Date of Pronouncement 23.11.2017

ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the assessee against the order dated 08.09.2012 of the ld. CIT(A)-VI, New Delhi on the following grounds :

1). That the learned CIT(A) has erred in law and on facts in upholding the disallowance of depreciation of Rs.6,77,095/- as under : (i) Building Rs.3,89,281/- (ii) Plant & machinery Rs.2,03,617/- (iii) Computer Rs. 2,773/- (iv) Furniture & Fixture Rs. 4,507/- (v) Vehicles Rs.76,917/-

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by following appellate orders for assessment year 2005-06 onwards, wherein it was held that the assessee was entitled to depreciation at written down value in respect of assets purchased from Deltron Ltd., by invoking provisions of section 43(1) as against higher depreciation claimed by the assessee on market value of assets acquired by the assessee from Deltron Ltd.

2) On the facts and in the circumstances of the case, the disallowance of depreciation of Rs.6,77,095/- may be deleted.

3) That each ground is independent of and without prejudice to the other grounds raised herein.

& 2 relates to sustenance of addition of Rs. 6,77,095/- made by the AO on

account of disallowance of excessive depreciation in respect of assets purchased

from Deltron Ltd.

04.10.2010 declaring an income of Rs.4,26,58,365/- which was processed u/s

143(1) of the Income Tax Act, 1961 on 11.04.2011. Subsequently, the case was

selected for scrutiny and statutory notices were issued. During the course of

assessment proceedings, the AO noticed that the assessee had claimed

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depreciation on Plant & Machinery purchased from associate concern M/s

Deltron Ltd. He considered the depreciation of Rs.6,77,095/- as excessive and

made the disallowance of the said amount. The assessee carried the matter in

appeal before the ld. CIT(A), who after considering the submissions of the

assessee, facts and circumstances of the case and relevant provisions of law,

confirmed the action of the AO vide impugned order. Aggrieved by this order, the

assessee is in appeal before the Tribunal.

outset submitted that this issue is squarely covered in favour of the assessee vide

order dated 16.10.2015 of ITAT, Delhi Benches, New Delhi in assessee’s own case

for the earlier assessment years 2005-06 to 2006-07 and 2009-10 (copy of the

said order was furnished which is placed on record), and this order has also been

followed by the Tribunal in assessee’s appeal No. IT(TP) No. 5623/Del./2011

dated 31.12.2015 for A.Y. 2008-09 in the identical facts and circumstances of the

case.

below, but could not rebut the aforesaid contention of the ld. AR for the assessee.

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available on record and we find no justification to support the impugned order.

The issue involved in this appeal is found squarely covered in favour of the

assessee by the decisions of Coordinate Benches, for the preceding assessment

years, as noted above, in the identical facts and circumstances of the case. For the

sake of convenience and ready reference, we feel it proper to reproduce the

observations of coordinate bench made in the order dated 31.12.2015 for A.Y.

2008-09, which reads as under :

“ 9. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that an identical issue having similar facts has already been adjudicated by this Bench of the Tribunal in assessee’s own case for the preceding assessment years 2005-06 to 2007-08 and the succeeding year 2009-10 in ITA Nos. 134/Del/2009, 1319/Del/2011, 5656/Del/2010 and 316/Del/2013 respectively, copy of the said order dated 16.10.2015 was furnished during the course of hearing which is placed on record and the relevant findings have been given in paras 8 to 20 of the said order which read as under: “8. We have heard both the parties and have perused the records. We find that the assessee company, a private limited company, has acquired electronic business from a public limited company known as M/s Deltron Limited as a going concern vide agreement dated 27.9.2004 for a consideration of Rs. 7.54 crore. We find that in the assessment order, the AO has observed that the aforesaid fact of purchase of fixed assets was disclosed by the AR only after the probe by him during the assessment proceedings and no such details have been furnished in any manner in the audit report papers enclosed with the return of income. He has also noticed that both the companies deal in electronic business and have same address at C-120, Naraina Industrial Area and run under the same management as the directors/shareholders are also common. We further find that, the AO observes that M/s Deltron Limited for A.Y. 2005-06 has shown net current loss of Rs. 3,39,17,585/- and it has brought forward depreciation of Rs. 46,53,620/-. So according to the AO by the said transaction though M/s Deltron Limited had made a short term capital gain of Rs. 2,16,17,776/- but the said short term capital gain gets absorbed in its business losses and the said company has returned total income of “Nil” for the relevant assessment year 2005-06.Further, the AO observed that, “both the companies are engaged in the same kind of electronic business & plant and machinery used by them is unique and they are not ordinarily marketable commodities, so as to have any valuation of their

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market price. Both the companies knew that there is no market for the old plant and machinery except for the opinion that the assets of one company doing the same business are used by the other. In the absence of any market valuations the valuations, report obtained from the registered valuer are only self service documents and therefore, rejected as such”. In the said factual backdrop, the AO comes to the conclusion that the main purpose of transfer of these assets was for reduction of a liability of income tax by excess depreciation with reference to the enhanced cost and, therefore Explanation 3 to section 43(1) gets attracted. Accordingly, the AO has taken the WDV of the assets as per Explanation 3 of section 43(1) of the Act from the books of account of the seller company and ignored the price paid by the assessee on which the assessee had claimed depreciation. He has noted that assessee had claimed depreciation of Rs. 20,41,601/- whereas, according to him, deprecation allowable on the WDV of these assets is only Rs. 8,18,386/- and the difference comes to Rs. 12,23,215/-. In arriving at the above figure of Rs. 8,18,386/-, the Assessing Officer has held that the assets acquired by the appellant company were to be used for less than 180 days and therefore, the assessee was entitled to depreciation for only half o the year and not for the entire year. However, we find that before the CIT(A), the AR had pointed out certain differences in the figures in the chart of AO, which according to him, do not tally with the consideration stated in the agreement dated 27.9.2004. The ld. CIT(A) had directed the AO take the correct figures of assets taken over from M/s. Deltron Ltd. as per records and recalculate the differences, and, recomputed the disallowance accordingly. 9. Section 43(1) reads as under: “43. In sections 28 to 41 and in this section, unless the context otherwise requires— (1) "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: [Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, [but before the 1st day of March, 1975,] and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty-five thousand rupees.] Explanation 1.—Where an asset is used in the business after it ceases to be used for scientific research related to that business and a deduction has to be made under [clause (ii) of sub-section (1)] of section 32 in respect of that asset, the actual cost of the asset to the assessee shall be the actual cost to the assessee as reduced by the amount of any deduction allowed under clause (iv) of sub-section (1) of section 35 or under any corresponding provision of the Indian Income-tax Act, 1922 (11 of 1922).

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[Explanation 2.—Where an asset is acquired by the assessee by way of gift or inheritance, the actual cost of the asset to the assessee shall be the actual cost to the previous owner, as reduced by— (a) the amount of depreciation actually allowed under this Act and the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b) the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988, as if the asset was the only asset in the relevant block of assets.] 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.” 10. Therefore, sub-section (1) of section 43 of the Act lays down that actual cost in the hands of an assessee means the actual cost of the assets as reduced by that portion of the cost which may have been met directly or indirectly by any other person. Explanation 3 to the said sub-section stipulates that:- i) The assets which are acquired by the assessee were used by any other person before the date of acquisition;

ii) The Income-tax officer arrives at objective satisfaction that such assets were transferred with the main purpose of reducing tax liability by claiming depreciation with reference to enhanced cost. iii) Then the Income- tax officer is empowered to determine the actual cost having regard to all the circumstances of the case.

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mentioned, is not correct. We find that in the Director’s report, it has reported that the assessee had acquired business of Deltron Limited as a going concern (paper book page 2). Similarly, we find that in schedule T of balance sheet being notes on accounts as Note 10, assessee company has disclosed that it has purchased electronic business of M/s Deltron Ltd. at a net consideration of Rs. 7.54 Crores (Paper book Page 22). Thus, we find that the observation of the AO that the assessee did not disclose the transaction is factually incorrect. 13. We further notice that the appellant company and M/s Deltron Ltd. had entered into an agreement dated 27.9.2004, relevant clauses of which are as under:- “AND WHEREAS Deltron Ltd. is also in electronics business and does not have sufficient financial resources to run the business as a profitable unit now and in future as it needs to continuously invest heavily in R & D and in developing process capabilities to keep pace with the advancing technologies, ….. 1. That the entire electronics business of Deltron Ltd. is agreed to be taken over by CDIL at a net consideration as described in Annexure I to this agreement mentioned therein with effect from 30th September, 2004.

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heavily in R&D or develop process capability to keep pace with the advancing technology. No doubt, the ground of common management and common office is a relevant consideration but the same is not of conclusive nature. The prime requirement under Explanation to section 43(1) of the Act is that the transfer of a going concern has been effected to defraud the revenue and such defraud had been attempted by claiming depreciation at an enhanced cost. We have already stated above that here was a case of transfer by a public limited company and the purpose stated in the agreement is not a matter of dispute. The Assessing Officer in the order has opined that the assets as reflected in the books of Deltron Ltd as on 1.4.2004 at Rs. 66,95,884/- were transferred for a consideration of Rs. 1,76,84,338/- though the appellant claims that such a finding is incorrect. It has been pointed out that Deltron Ltd. is a public limited company and had been allowed 100% deduction under section 35(1)(iv)/35(2) of the Act as expenditure and as such, there was certain assets which appeared at Nil cost in the books of Deltron Ltd. It was however stated that such assets were appearing in the balance sheet prepared under the Companies Act as on 31.3.2004 at Rs. 4,71,20,059/- and if the deduction under section 35(1)(iv)/35(2) is ignored, WDV of such assets as on 31.3.2004 would stand at Rs 2,16,06,346/-. The cumulative position which emerges is as under: Particulars WDV as per WDV as on Value at Value Companies 31.3.2004 which taken adopted by Act as on (under IT Act over by the AO for 31.3.2004 without taking assessee invoking into explanation consideration 3 to section 100% dep. As 43(1) (R&D) Building 74,25,264 36,68,570 66,00,000 66,00,000 Leasehold -------- 7,098 -------- ----- improvements Plant and 3,71,66,624 1,66,59,047 89,66,000 89,66,000 Machinery Computers 82,020 61,446 69,499 2,88,399 Furniture and 3,76,317 3,63,553 3,46,484 3,46,484 Fixture Vehicles 5,95,569 3,91,971 5,11,566 14,83,455 Electrical -------- 95,852 Installation 14,23,115 Water Cool -------- 29 Other 14,74,265 3,58,164 equipments Industrial -------- 615 Installation Total 4,71,20,059 2,16,06,346 1,79,16,664 1,76,84,338

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were sold at Rs. 66,00,000/-. On the contrary, it is a case where building having book value of Rs. 74,25,264/- was transferred to the assessee company at Rs. 66,00,000/- and thus, likewise, it is not a case where plant and machinery of Rs. 59.94 lacs as noted by the Assessing Officer has been transferred for consideration of Rs. 89.66 lacs. On the contrary, plant and machinery having book value of Rs. 3,71,66,000/- has been transferred for consideration of Rs. 89,66,000/-. The above value are supported by a registered valuer’s report and are not mere arbitrary valuations adopted by the assessee The Assessing Officer vis-à-vis registered valuer’s report has held that both the companies were engaged in the same kind of electronic business and plant and machinery used by them was unique and they were not ordinarily marketable commodities, so as to have any valuation of their market price. He further observed that both the companies knew that there was no market for the old plant and machinery except for the opinion that the assets of one company doing the same business were used by the other. It will be thus seen that the Assessing Officer has not found any specific defect vis-à-vis valuation adopted by the appellant on the basis of registered valuer’s report. IT could not be said that an asset though having Nil value under the Income Tax Act would be transferred also Nil value to a third party more particularly when the transfer is not of an asset but of a business on a going concern basis. The transfer of the business is not in dispute. The genuineness of the transfer of the business is also not in dispute. The purpose behind the transfer is also not in dispute. All what has been disputed by the Assessing Officer and upheld by the CIT(A) is valuation of the assets adopted for the purpose of transfer. In such circumstances, we find force in the claim made before us that it is not a case of valuation having been adopted by a higher price more particularly when the transaction is between the closely held company and public limited company and price is paid to public limited company by the closely held company. It is also not a case where price as stated in the agreement has not been paid by the assessee. The valuation is supported by registered valuer’s report which valuation has not been shown to either fantastic or imaginary or irrational by any cogent evidence. On the contrary, having regard to the book value of the assets standing under the Companies Act, the value as adopted cannot otherwise be said to be unreasonable. 16. In arriving at the above conclusion, we find support from the judgment of Hon’ble Gujarat High Court in the case of Ashwin Vanaspati Industries v. CIT reported in 255 ITR 26 wherein their Lordships had specifically held “The valuation report is by a registered valuer Neither in the assessment order nor in the Tribunal’s order is there any whisper that the valuation report by the registered valuer is incorrect in any manner whatsoever. Once there is a report by the registered valuer it is encumbent upon the authority to dislodge the same by bringing adequate material on record in the form of a departmental valuation report, because in the absence of the same a technical expert’s opinion cannot be dislodged by any authority by mererly ignoring the same. In the present case that is what has happened. Neither the Assessing Officer nor the Tribunal have even attempted to state that the valuation report and the values put on the assets are incorrect in any manner whatsoever. They have simply ignored the valuation report.” It was further held as under:

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“The assessee having made a claim for depreciation on enhanced cost, which is the actual cost in its hands, it was necessary for the authority who wanted to determine the “actual cost” (as required by Explanation 3 to section 43 of the Act) to place some evidence on record. It could not have substituted its opinion and adopted the book value or the written down value in the hands of the assessee-company. As can be seen from explanation 3 to section 43(1) of the Act, the Income-tax Officer is required to determine the actual cost to the assessee having regard to all the circumstances of the case and if in his opinion the written down value was the actual cost, he ought to have supported the same by placing sufficient evidence so as to dislodge the valuation report of the registered valuer. On his having failed to do so, seen if the earlier portion of the provision, viz., the condition of the assets having been used by another person before the date of acquisition stands fulfilled the provision cannot be applied.” 17. Further reference at this juncture is also made to the decision of the Tribunal in the case of Nirma Industries (P.) Ltd. 148 ITD 126 (Ahd) wherein it has been held as under: “3.4 We find that in the present case, the entire case of the A.O. is based on Explanation (3) to Section 43(1) as reproduced above. As per this explanation, we are of the considered opinion that the A.O. can determine the original cost of the assets for allowing depreciation to the assessee only if he is satisfied that the main purpose of transfer of such asset, directly or indirectly to the assessee, was the reduction of liability to income tax by claiming extra depreciation with reference to an enhanced cost. It is not sufficient that one of the main purposes was this. Hence, in our humble opinion, this is the first prerequisite that the A.O. has to establish that the main purpose of transfer of such asset was the reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish this, it has to be established that apart from claiming additional deprecation on enhanced cost, there is no other main purpose for acquiring the asset in question. In the present case, the A.O. is only disputing the valuation of intangible asset i.e. the trademark acquired by the assessee from related parties without even making an allegation that such acquisition of assets was not having any main purpose except claiming extra depreciation. 3.7 In view of our above discussion, we find that the action of the A.O. is not justified for two reasons. The first reason is this that he has not fulfilled the pre requirement for invoking the provision of Exp.(3) to Section 43(1) of the Income tax Act, 1961. The second reason is this that even after invoking this Exp.(3) to Section 43(1) rightly or wrongly, the A.O. has not worked out the value of the asset in question in the proper manner. He has ignored the valuation report of various technical experts such as RSML & Co. C.A. and others and instead of obtaining the departmental valuation report or any other report of any other independent valuer, the A.O. has made his own exercise for valuation of the asset in question although it cannot be accepted that the A.O. is a technical expert for valuation of the asset in question. Moreover, the A.O. has adopted the royalty rate of past instead of expected royalty rate in future. Even from the past royalty rate, he has reduced 50%

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income on this basis that the goodwill was not transferred and sub-licensed by NCWL to NL and NCCL but he has forgotten that the income of the royalty is not being affected on this count and it is not material as to whether the same is with goodwill or without goodwill. Hence, we have seen that even the valuation done by the A.O. is not proper and therefore, the action of the A.O. is not justified.” 18. The Assessing Officer has also laid emphasis on the fact that short term capital gain as declared by the transfer of company namely M/s. Deltron Ltd. has been set off against the losses in the books of the said company. Having regard to the peculiar facts and circumstances in the case of the assessee company as highlighted above, such a factor alone cannot be made a basis to invoke Explanation 3 to section 43(1) of the Act. Explanation 3 to section 43(1) of the Act is not an absolute rule. The Assessing Officer is empowered to substitute the value. However, such a valuation cannot be substituted where there is no intent to reduce the tax liability. In the instant case, as stated above, the assets as held by M/s. Deltron Ltd. and transferred to the appellant as part of transfer of electronic business on going concern basis cannot be said to be in any manner with an intent to reduce the tax liability. Certainly, the effect of the transaction was that the gain declared by M/s. Deltron Ltd. was set off against the losses in its computation yet that fact cannot undetermine the genuineness of the transaction and in any case empower the Assessing Officer to substitute the valuation as determined in the registered valuer’s report which has not been found to be incorrect by any other technical valuation. Hence, we do not subscribe to the conclusion of the authorities below. 19. The Assessing Officer has referred to the judgment of the Kerala High Court in the case of CIT vs Poulose and Mathen (Pvt.) Ltd. 236 ITR 416. In the said case, the assessee was a partner in a partnership firm consisting of nine partners. The partnership firm was dissolved on February 25, 1985 and as per the books of accounts of the firm the written down value of the assets of the firm was Rs. 3,16,110/-. However the assessee company had taken over the assets of the firm after its dissolution and, the assets were revalued at Rs. 22,30,795/- and accordingly, claimed depreciation on the value of Rs. 22,30,795/- as per the revised valuation. On such facts, the High Court held that the Explanation 3 to section 43(1) of the Act correspondents to section 10(5)(a) and 192 of the Act. It was noted that the main purpose of the said provision was that Assessing Officer had power to determine the actual cost if the reduction of liability to income tax by claiming depreciation. The Hon’ble Court held that in such a case, substitution of actual cost by the Assessing Officer was correct as the partners of the firm had constituted themselves into a private limited company. All the shareholders of the company were the partners or therefore, nominees and the shares were held in the same proportionate as held by the partners. It was also held that valuation was enhanced only for mutual adjustment of rights between the partners of the firm. It was thus held that it is a case of device which attracts Explanation 3 to section 43(1) of the Act. The facts are thus totally distinguishable as in the instant case it is a transfer of public limited company to the closely held company for the purpose which has not been disputed by either the Assessing Officer or the CIT(A). Moreover, valuation having regard to the book value of the assets also shows that the claim is not arbitrary or unreasonable or

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irrational, particularly when supported by registered valuer’s report furnished by the assessee. Likewise, is the case of Kungundi Industrial Works Pvt. Ltd. vs. CIT 57 ITR 540 wherein too, it was a case of conversion of firm into company and not a transfer by the public limited company to the private limited company. It was noticed that the shares allotted in the same proportionate to the shareholders as the shares held by the partners in the partnership firm. It was thus held that both the entities are distinct and separate but it is not a case where price is actually paid by one person to another person. Thus the above judgment has also no application to the case of the appellant. In the case of Guzdar Kajora Coal Mines Ltd. vs. CIT, it is seen that the facts were that the assessee purchased through deed of conveyance dated 3.4.1996 all the cumulative lands and other assets together with machinery belonging to Guzdar Kajora Coal Mines Ltd. for a consideration of Rs. 6,00,000/-. In the said case, the ITO on directions of the Tribunal had carried out valuation which proved that vendor company was making good profits but no provision had been made for the goodwill of the company in the business, which was worked out to Rs. 2,56,960/-. In such circumstances, it was held that if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purposes it is open to the income tax authorities to refuse to accept the price mentioned in the deed or alleged by the assessee ad to ascertain what was the actual original was. It was thus held that it was open to the income tax authorities to determine and to the assessee to show whether the goodwill of the business is or is not included in the consideration or the price paid for the acquisition of the asset. Thus having regard to the above, in such circumstances, it was held that if circumstances exist for going behind the valuation as also the allocation given in the deed of conveyance, it was and is open to the income tax authorities to determine the valuation as well as the allocation between depreciable and non-depreciable assets. There is no dispute to the above conclusion of the Hon’ble Apex Court. However, on the said facts as is the case of the assessee company, such an interference is not warranted as there is nothing on record to show that having regard to the value of the assets held by the transfer or company, such amount paid by the assessee is excessive or unreasonable or irrational. The valuer’s report has not been commented upon in any manner by the authorities below either by leading expert opinion or to show such valuation was excessive and has been done with anintent to reduce the tax liability. The others judgments as referred by the Assessing Officer are also distinguishable on the facts of the case of the assessee and therefore, cannot be made a basis to draw the conclusion as has been drawn by the Assessing Officer and upheld by the CIT (A). 20. Having regard to the above, we hold that Assessing Officer was not justified in invoking Explanation 3 to section 43(1) of the Act on the facts and circumstances of the case of the appellant company and therefore, appellant is entitled to claim of depreciation on the actual cost as incurred by the appellant on transfer of the electronic business on going concern basis from M/s. Deltron Ltd. to the appellant company.” 10. So, respectfully following the aforesaid referred to order dated 16.10.2015 for the assessment years 2005-06 to 2007-08 and 2009-10, the claim of the assessee is

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allowed and the addition made by the AO on account of disallowance of depreciation is deleted. 11. Vide Ground No. 7, the grievance of the assessee relates to the charging of interest u/s 234D of the Act. As regards to this ground the common contention of both the parties was that it is consequential in nature. We order accordingly.”

finding that there is no change in the facts and circumstances of the case, we find

the appeal of the assessee full of merit and the same accordingly deserves to be

allowed.

Order pronounced in the open court on 23.11.2017.

Sd/- Sd/- (Bhavnesh Saini) (L.P. Sahu) Judicial member Accountant Member

Dated: 23.11.2017 *aks* Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant Registrar Income Tax Appellate Tribunal Delhi Benches, New Delhi