M/S SOUTHERN FERRO STEELS LTD.,,DHARWAD vs. ITO, HUBLI

This appeal by the assessee is directed against the order dated 28/01/2014 of the CIT passed u/s 263 for the assessment year 2009-10.

The assessee has raised the following grounds of appeal:

In the case of the assessee, assessment was completed u/s 143(3) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] on 29/12/2011. Subsequently, the CIT, on perusal of the records found that the AO allowed depreciation on enhanced value of fixed assets without examining the matter u/s 43(1) read with Explanation. Accordingly show cause notice dated 17/10/2012 was issued u/s 263 whereby the CIT proposed Page 3 of 8 to set aside the order of the AO being erroneous and prejudicial to the interest of the revenue. The assessee raised objections to the show cause notice and proposing revision of the order but could not find favour with the CIT.

Before us the learned AR of the assessee has submitted that there is no allegation of suppression of income or avoidance of tax liability in the show cause notice. Therefore, the CIT was not justified in invoking the provisions of sec.263. He further submitted that this is first year of business of the assessee and therefore, there was no scope of evasion of tax liability. The learned AR of the assessee has contended that the AO conducted due enquiry by calling relevant details and record and only after examination of the record allowed the claim of depreciation. Therefore, when the AO was satisfied with the valuation of the asset, then, the CIT cannot invoke the provisions of sec.263 in this case. As per Explanation 3 to 43(1), only when the AO is satisfied with the main purpose of transfer of the asset which was already used by other person directly or indirectly to the assessee, was a reduction of liability to income-tax by claiming depreciation on enhanced cost, AO shall verify the valuation and take a decision with the previous approval of the Joint Commissioner. In the case in hand, the AO was satisfied with the valuation of the assets purchased by the assessee, then the same cannot be held as erroneous or prejudicial to interest of the revenue. He referred to the details and documents filed by the Page 4 of 8 assessee in response to notice by the AO placed at pages 6 and 7 of the paper book III and submitted that beside other details and documents, assessee also produced bills of fixed assets and copies of invoices of the fixed assets. Therefore, the AO duly applied his mind on the issue so far as the relevant record was verified by the AO. He has further contended that the AO, along with Inspector, visited the factory premises of the assessee and valued the fixed assets in question. Thus, once the AO has examined the fixed assets and relevant records to satisfy himself it is not necessary to pass a detailed order on the issue. In support of his contention, he has relied upon the judgment of the Hon’ble Delhi High Court in the case of CIT vs. Honda Siel Power Products Ltd. (333 ITR 547). Learned AR of the assessee further submitted that in the proceedings pursuant to revision order, valuation was referred to the valuation cell which has valued the fixed assets at Rs.3.9 crore as against Rs.4.50 crores valued by the assessee. Therefore, difference in the value of the fixed assets is only about 13% which cannot be considered as erroneous on the issue of valuation. He has asserted that revision is not permitted on the ground that inquiry should have been more detailed. In support of his contention, he has relied upon the following decisions:

On the other hand, learned DR submitted that the AO did not apply his mind on the issue of valuation of fixed assets which were already used by the seller in the light of Explanation 3 to sec.43(1). There is no dispute that the fixed asset in questions were used by the seller for business purpose and the value has been enhanced in the books of the assessee in comparison to the written down value in the books of seller to the extent of 20 times more than the written down value. Therefore, the provisions of section 43(1) read with Explanation 3 are attracted in this case. Since the AO completely failed to apply his mind to verify the valuation as per the provisions of section 43(1), therefore, the order of the AO is erroneous insofar as it is prejudicial to the interest of the revenue. The learned Departmental Representative further contended that there is nothing on record to say that any visit by the AO to the factory of the assessee. Further, the purpose of visit is also not clear whether it is for inspection of the valuation of machinery or for any other purpose. Filing of invoice does not lead to inference that the AO examined the issue as per provisions of Explanation 3 to section 43(1). Therefore, the CIT was well within the powers to invoke the provisions of sec.263 of the Act when the AO has failed to apply his mind on the issue. He has relied upon the impugned order of the CIT. Page 6 of 8 6. We have considered the rival submissions as well as relevant material on record. The assessee has purchased/acquired assets from M/s.Southern Ferro Ltd. There is no dispute that the assets in question were used by the seller viz., M/s.Southern Ferro Ltd., prior to the transfer of the same to the assessee. The written down value of these assets was shown in the books of the seller at Rs.24,05,230/- whereas the assessee has shown the value of the assets in its books of account at Rs.4.5 crores. Therefore, the value in the books of the assessee is enhanced about 20 times of the WDV in the books of the seller. Once the assets in question were used by the seller before the date of acquisition by the assessee, then matter of valuation of such assets falls in the purview of Explanation 3 to section 43(1) of the Act which reads as under: “Explanation 3.- Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing] Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income- tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case.” Therefore, it was incumbent upon the AO to examine the issue as per provisions of Explanation 3 to section 43(1) and so far as matter of inquiry on the issue, it is not discretionary on the part of the AO. There is no quarrel that on examination of relevant record and explanation of the assessee, if the AO is satisfied with Page 7 of 8 the claim then a detailed order on the issue is not necessary. However, the primary requirement is the factum of conducting of enquiry and not the finding of the AO on a particular issue. In this case, the AO did not issue any notice or questionnaire on this point of valuation of fixed assets already used by the seller. Therefore, the issue was out of view of the limited enquiry conducted by the AO on the other aspects of the assessments to verify the correctness of the record. The issue in question is not regarding correctness of the record or valuation ascribed by the assessee to the fixed assets but it is about allowability of the claim of valuation under Explanation 3 to section 43(1) of the Act. When there was no examination by the AO as per the provisions of Explanation 3 to section 43(1) because the AO has not even raised any query on this issue, then it is a clear case of non- conduct of any enquiry on the issue. The AO did not ask any question, any record or explanation to justify the value assigned by the assessee which is 20 times of the WDV in the books of seller. Therefore, it is absolutely impossible to infer that the AO has conducted any enquiry on this issue. Hence, it is a case of complete lack of enquiry which renders the order of the AO erroneous so far as prejudicial to the interest of the revenue. In view of the matter when there is a complete and absolute lack of enquiry and non-application of mind on the part of the AO, decisions relied upon by the learned AR of the assessee would not help the case of the assessee. As regards the alleged visit of the Page 8 of 8 AO to the factory of the assessee, in the absence of any record as well as any other material to indicate such visit or undertaking exercise of verification of valuation, the same cannot be a material aspect to convert a case of lack of enquiry into application of mind of the AO. In view of the above facts and circumstances of the case, we do not find any reason to interfere with the order of the CIT.

In the result, the appeal of the assessee is dismissed.