ACIT, CHENNAI vs. SMT. V. SABITHAMANI, COIMBATORE

आदेश /O R D E R

PER BENCH:

These cross appeals of the assessee and Revenue

respectively, are directed against the order dated 30.03.2016 of the

Commissioner of Income Tax (Appeals) -2, Coimbatore.

reproduced hereunder:-

Grounds taken by assessee:-

“1. The Commissioner of Income Tax (Appeals) is not justified in holding that “by implication” the assessee- appellant acceded to the actual cost of determination at `1,50,00,000/- - the filing of cross-objection is as good as filing appeal by assessee and CIT(A) cannot take advantage based on this fact.

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Grounds taken by Revenue:-

“2. Ld. CIT(A) has erred in law and on facts of the case in failing to appreciate that the assessing officer, while computing the ‘actual cost’ of the asset, has taken into account the effective life of the asset, the wear and tear of the asset during its utilisation, the amount of depreciation already allowed on the asset in the hands of the seller and the intent of the legislature in allowing an accelerated depreciation on the renewable energy device.

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previous owner put together would exceed the cost of the asset.”

All the grounds relate to issue of acquisition of a second hand windmill

by the assessee during the relevant previous year and pricing of such

windmill.

the business of trading in steel goods, had filed her return for the impugned assessment year declaring income of `12,92,820/-.

Assessee had an operating profit of `63,37,493/- from operation of

windmill, which became a loss of `34,83,780/- by virtue of claim of

depreciation of `98,21,273/-. Original return was processed under

Section 143(1) of the Act. Thereafter assessment was reopened for a

reason that assessee had claimed excessive depreciation. A.O. noted that the claim of depreciation of `98,21,273/- included depreciation of

`94,44,000/- on a windmill. As per the A.O., such claim of

depreciation was on second hand windmill acquired by the assessee

on 29.03.2013 from one M/s Soundararaja Mills Ltd. According to the

A.O., the windmill was already used by another person and

depreciation claimed for a number of years. The A.O. was of the

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opinion that the main idea behind the purchase of the windmill at a price of `2,36,00,000/- was to reduce tax liability by claiming

depreciation on such enhanced cost. As per the A.O., M/s

Soundararaja Mills Ltd., who had sold the windmill to the assessee, had claimed depreciation of `3,00,00,000/- on such windmill for the

period April 2003 to March 2009. The assessee, as per the A.O., had claimed the depreciation of `2,07,68,000/- for the period March 2009

to March 2010, based on an enhanced value of windmill. Thus, as per

the A.O., the total asset value, if depreciation alone was considered, came to `5,07,68,000/-. The A.O. noted that the manufacturer of the

windmill, namely, Enercon (India) Ltd. had certified its cost as `3,00,00,000/- and if the aggregate of the depreciation claimed by M/s

Soundararaja Mills Ltd. and by Smt. V. Sabithamani, the assessee,

considered together, it would be much more than the cost of windmill.

valuing the windmill at `2,55,34,000/-, the Assessing Officer did not

accept such valuation report. As per the A.O., once the depreciation

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claimed by the original user was considered, it was clear that the price

at which assessee acquired the windmill was heavily overvalued. The

A.O. noted that WDV of the windmill as on the date of acquisition by the assessee was only `1920/-. In any case, as per the A.O., by

acquiring the windmill at `2,36,00,000/- from M/s Soundararaja Mills

Ltd., assessee was taking undue benefit of the enhanced rate of

depreciation available for windmills under the Act. Relying on

Explanation 3 to Section 43(1) of the Act, the Ld. A.O. held that the

main purpose of acquiring windmill was reduction of liability to tax, by

claiming depreciation with reference to the enhanced cost. He worked out the actual cost of the windmill as `43,28,388/- and allowed

depreciation only on the said amount. Such depreciation came to `17,31,355/- and the resultant disallowance came to `77,12,645/-

CIT(Appeals). Argument of the assessee was that the Assessing

Officer had fixed an arbitrary value for the windmill. According to the

assessee, fair market value of the asset was certified by registered

valuer and such registered valuer had given a value higher than the

price paid by the assessee. Contention of the assessee was that she

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had raised a term loan of `144 lakhs from M/s Canara Bank,

Gandhipuram Branch, Coimbatore, for buying the windmill from M/s

Soundararaja Mills Ltd. Relying on the valuation report given by Shri

P. Muthuperumal, registered valuer, appointed by M/s Canara Bank,

the assessee contended that the total valuation given by the said valuer was `2,55,34,000/- which, inter alia, included windmill value of

`2,19,00,000/- and land value of `36,34,000/-. Assessee also relied

on the valuation done by one M/s Vaidyanathan and Associates,

Government approved valuer, who had valued the windmill at `2,95,00,000/-. As per the assessee, there was a huge market for

second hand windmill due to substantial profits from sale of power

generated through windmills. As per the assessee, it might be true

that M/s Soundararaja Mills Ltd. did not offer any short term capital

gains for the sale of windmill to her. However, according to the

assessee, they had confirmed receipt of the consideration and how

they treated the amount in their books of account was not relevant.

above arguments. According to him, what the assessee had acquired

was a wholly depreciated windmill having negligible value. As per the

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Ld. CIT(Appeals), there were deficiencies in the valuation report

produced by the assessee. According to him, the valuer had applied

depreciation at 27% only for one year though the windmill was used for

six years by the earlier owner. As per the Ld. CIT(Appeals), the

manufacture of the windmill model acquired by the assessee was

stopped long back by M/s Enercon (India) Ltd. and it was an obsolete

item. Hence he held that the Assessing Officer was justified in

invoking Explanation 3 to Section 43(1) of the Act. However, at the

same time, the Ld. CIT(Appeals) held that the method of arriving at the

actual cost adopted by the Assessing Officer was not a reasonable

one. According to him, the Assessing Officer had applied a

multiplication of average units of power generated per annum with per unit value of `3/- for arriving at such value. As against this, as per the

Ld. CIT(Appeals), the assessee had given a working based on a unit rate of `15/-. The Ld. CIT(Appeals) was of the opinion that the method

of valuation based on number of units generated per year may not

reflect the future potentiality of the windmill. Ld. CIT(Appeals) noted

that Tamilnadu Industrial Investment Corporation, a Government

agency, had given a guideline method for valuing second hand

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windmills and if such method was applied, the value of windmill acquired by the assessee would be `1,50,00,000/-. The Ld.

CIT(Appeals) noted that the assessee herself had suggested adoption

of such value in her grounds. Thus, he modified the order of the

Assessing Officer and directed the A.O. to consider the actual cost as `1,50,00,000/- and recompute the disallowance.

on rejection of the value assigned by the Assessing Officer.

Explanation 3 to Section 43(1) of the Act had no application.

According to him, the said Explanation could be applied only where the

main purpose of transfer of assets was reduction of liability to income-

tax. Ld. A.R. submitted that the parties were not related and there was

no valid ground for coming to a conclusion that the purpose of transfer

was reduction of tax liability. As per the Ld. A.R., a genuine

transaction was disbelieved. Contention of the Ld. A.R. was that

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depreciated value of machinery had no relevance in fixing actual sale

price which was dependent on market forces. Submission of the Ld.

A.R. was that wind power was a lucrative and profit earning business.

According to him, the second hand windmill was having a high value

considering the profit potentiality. Just because the earlier owner had

derived benefit of enhanced depreciation on windmill, would not, as

per the Ld. A.R., discredit the claim of assessee for depreciation on

the cost at which assessee had acquired the windmill. According to

Ld. A.R., the agreement for transfer of windmill entered with M/s

Soundararaja Mills Ltd. was never doubted by the lower authorities. In

any case, according to the Ld. A.R., the cost at which the assessee

had acquired the windmill could never be considered as fictitious or

far-fetched since the valuation made by M/s Canara Bank was

available on record. By virtue of such valuation, the windmill, according to the Ld. A.R., had to be valued at `2,55,34,000/-. As per

the Ld. A.R., the assessee had acquired the windmill at a lower amount of `2,36,10,000/- and therefore, the question of application of

Explanation 3 to Section 43(1) of the Act did not arise. Further, as per

the Ld. A.R., the Ld. CIT(Appeals) had assigned the value of

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`1,50,00,000/- based on a method of estimation devised by TIIC, the

Government agency and how such method was applied to arrive at value of `1.5 Crores was never explained by the Ld. CIT(Appeals) at

any part of his order. Thus, according to him, the CIT(Appeals) had

erred in not allowing the depreciation claim of the assessee in full.

Though one of the grounds taken by the assessee does assail the

reopening, no arguments on this were advanced by the Ld. A.R.

the grounds of appeal, submitted that explanation 3 to Section 43(1) of

the Act would clearly apply. According to him, unscrupulous persons

were taking advantage of the higher depreciation rates available for

windmill with ulterior motives. As per the Ld. D.R., if depreciation

claimed by the assessee as well as earlier owner were considered, the total depreciation was in excess of `5 Crores, whereas the windmill

itself had a cost of less than `3 Crores. Thus, according to him, this

was the right case where Explanation 3 to Section 43(1) was invoked.

Claim of the assessee is that she had acquired windmill from M/s

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Soundararaja Mills Ltd. for a price of `2,36,10,000/- and M/s

Soundararaja Mills Ltd. was in no way related to her. As per the

assessee, it was a pure business transaction and assessee was not

concerned on the quantum of depreciation claimed by M/s

Soundararaja Mills Ltd. Section 43(1) of the Act and Explanation 3

thereto, which has been applied by the A.O., are reproduced

hereunder:-

“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 first 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. - …. …. …. …. …. … …. …. …. …. …. … …. …. …. …. …. …. …. …. …. … …. …

Explanation 2. - …. …. …. …. …. …. …. …. …. …. …. ... …. …. … …. …. … …. …. …. …. …. …

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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.”

which it can be applied. The requirement is that the Assessing Officer

should be satisfied that the purpose of transfer of assets was reduction

of liability to tax. No doubt, such satisfaction should be an objective

one and not a subjective one. The basis on which Assessing Officer,

had in the case before us, reached this satisfaction is that the

depreciation claimed by the earlier owner as well as the assessee on

the windmill when aggregated, came to a sum in excess of `5 Crores,

and this was much higher than original cost of the windmill as such. In

our opinion, when original cost of the windmill was itself much less

than `5 Crores, the main purpose of transfer of windmill by M/s

Soundararaja Mills Ltd. to the assessee could only be seen as

motivated by an intent to reduce liability to income-tax. It is a well

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settled principle of law that what is permissible is tax planning and not

evasion. When an attempt is made to evade tax, it is the bounden

duty of the authorities to find the real intention. It is the duty of the

judicial authorities, in every case, when ingenuity is expended to avoid

taxes and scuttle welfare legislations, to get behind the smoke screen

and discover the true state of affairs. Form has to take make-way for

substance. That the parties were not related and transfer of windmill

from M/s Soundararaja Mills Ltd. to the assessee was only a business

transaction, in our opinion, were not relevant factors. Relevant factor

was the main purpose which motivated the assessee to acquire the

second hand windmill at an excessive cost. It is not disputed that

depreciated value of the said windmill in the hands of M/s

Soundararaja Mills Ltd. was negligible at the time of such sale. M/s

Enercon (India) Ltd. who manufactured the windmill had certified that

the model sold by M/s Soundararaja Mills Ltd. to the assessee was no

more in market. They also declined to assign a value which, in other

words, mean that the windmill which was more than 5-1/2 years old

was of obsolete technology. These factors, in our opinion, clearly

indicate that the transfer of windmill to the assessee from M/s

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Soundararaja Mills Ltd. at a price of ` 2.36 Crores itself was a

questionable and doubtful one, with the only intention to reduce tax liability. It may be true that assessee had raised a loan of `144 lakhs

from M/s Canara Bank, based on a valuation report requisitioned by

the said bank and in the said valuation report, the value of the windmill was fixed as `2,19,00,000/-. It may also be true that Government

approved valuer had fixed the value of windmill at `2,95,00,000/-.

However, for invoking Explanation 3 to Section 43(1) what is required

is the objective satisfaction reached by the Assessing Officer that the

main purpose of transfer is reduction of tax liability. The valuations

may be relevant in ordinary circumstances but when the cumulated

depreciation claimed was far in excess of the cost, relevance of such

valuations, in our opinion, is insignificant. Especially so since

CIT(Appeals) had found glaring deficiencies in such valuation, where

only depreciation for one year alone was considered. The

CIT(Appeals), in our opinion, was not justified in substituting the value

adopted by the A.O. with one based on a method adopted by TIIC, a

Government agency. A.O. had adopted a fair method of multiplying

the average generation per year with per unit cost of electricity

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generated. This was the method adopted by the assessee itself for valuing four numbers of windmill offered by it as collateral for raising loan from M/s Canara Bank, except for the difference in unit rate. In our opinion, the conditions for invoking Explanation 3 to Section 43(1) of the Act were satisfied. We, therefore, have no hesitation to set aside the order of the CIT(Appeals) and reinstate the order of the A.O.

Order pronounced on 3rd February, 2017 at Chennai.

sd/- sd/- (अ�ाहम पी.जॉज�) (एन.आर.एस. गणेशन) (N.R.S. Ganesan) (Abraham P. George) �या�यक सद�य/Judicial Member लेखा सद�य/Accountant Member

चे�नई/Chennai, �दनांक/Dated, the 3rd February, 2017.

Kri. आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. �नधा�रती /Assessee 2. Assessing Officer 3. आयकर आयु�त (अपील)/CIT(A)-2, Coimbatore 4. Principal CIT-1, Coimbatore 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.