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

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘B’ : NEW DELHI) BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER and SHRI A.T. VARKEY, JUDICIAL MEMBER ITA No.134/Del./2009 (ASSESSMENT YEAR : 2005-06) ITA No.1319/Del./2011 (ASSESSMENT YEAR : 2006-07) ITA No.5656/Del./2010 (ASSESSMENT YEAR : 2007-08) ITA No.316/Del./2013 (ASSESSMENT YEAR : 2009-10) M/s. Continental Device India Ltd., vs. Addl.CIT, Range 3, C – 120, Naraina Industrial Area, New Delhi. New Delhi – 110 028. (PAN : AAACC1835E) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Pardeep Dinodia & R.K. Kapoor, CAs REVENUE BY : Smt. Parwinder Kaur, Senior DR Date of Hearing : 27.07.2015 Date of Pronouncement : 16.10.2015

O R D E R PER A.T. VARKEY, JUDICIAL MEMBER :

These four appeals filed by the assessee are directed against the Orders

passed by the Commissioner of Income-tax (Appeals) – VI, New Delhi for the assessment years 2005-06 to 2007-08 and 2009-10. In these appeals, identical grounds are raised except for variance in figure. Since common issues are

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raised in these appeals and they pertain to the same assessee, they are disposed

of by this consolidated order.

2 The assessee has taken the following grounds of appeal in ITA No.

134/Del/2009 :-

“1 That the learned CIT(A) has erred in law and on facts in upholding that the assessee was entitled to depreciation at half the normal rates, even though asset in respect of Deltron Unit was acquired and put to use on 1.10.2004; because the assessee had itself claimed depreciation on assets other than building at half of the normal rates. 2 On the facts and in the circumstances of the case, the assessee was statutorily entitled to full depreciation at normal rates as per law as the assets acquired from Deltron Ltd. were put to use admittedly on 1.10.2004 for 180 days and more during the year ending 31st March 2005 [1.10.2004 to 31.3.2005] 3 That the learned CIT(A) has further erred in upholding that the assets of Deltron Ltd. were acquired by the assessee at higher price with a view to reduce liability to income tax by claiming higher depreciation with reference to enhance cost, on wholly erroneous and illegal grounds 4 On the facts and in the circumstances of the case, it may be held that the assets like Building & Machinery were purchased on the basis of valuation of the Govt. approved valuers, who were experts; and as such, the invoking of the provision of Explanation 3 to section 43(1) was uncalled for an unjustified. 5 On the facts and in the circumstances of the case, the learned CIT(A) has failed to appreciate that the written down value as per Income Tax Rules, of Deltron Ltd. of the various assets including building was low, as cost of acquisition of building, plant and machinery etc. in the R&D unit of Deltron Ltd. had been allowed to the assessee as Scientific Research Expenditure u/s 35(1) of the Income Tax Act; and as such, the same could not be said to be the market value of these assets.” 6 That the learned CIT(A) was not justified in upholding the disallowance of 50% of boarding and lodging expenses in respect of foreign travelling”

3 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 3. Ground Nos.1 to 4 in all the appeals and Ground No. 5 in ITA No.

134/D/2009 are common. Apropos these grounds, brief facts relating to these

grounds are as follows:

electronic components. The return of income was filed on 28.10.2005 declaring

an income of Rs. 7,04,54,286/- which was processed u/s 143(1) of the Income

Tax Act, 1961 (hereinafter ‘the Act’) on 30.10.2006 at the returned income filed

by the assessee. The case was selected under scrutiny and statutory notice u/s

143(2) dated 2.8.2006 was issued to the assessee, fixing the hearing on

17.8.2006. In response to the notice, the Authorised Representative appeared

before the AO. The AO directed the assessee to furnish item-wise listing of

additions to fixed assets in each block giving date of acquisition and date put to

use with proof of acquision/delivery and use in respect of additions to assets for

value exceeding Rs. 5,00,000/- and vide letter dated 14.9.2007, the assessee

submitted these details. After perusing the details, the AO noticed that most of

these assets had been claimed to put to use on 1.10.2004. Further, the AO

observed that a new unit M/s Deltron Ltd. had been acquired in the AY 2005-06

as a going concern and all fixed assets thereof had been claimed to have been

put to use on 1.10.2004. The AO asked the assessee to submit the copy of

agreement and details and valuation of assets and liabilities and their reflection

4 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 in the depreciation chart of the assessee for AY 2005-06 and the assessee

furnished a letter dated 16.11.2007 alongwith the agreement of purchase of

plant and machinery from Deltron Ltd. and the valuation report of land, building

and plant and machinery. The AO noticed from a perusal of the agreement dated 27th day of September, 2004 that both the assessee and M/s Deltron Ltd.

have the same address i.e. C-120, Naraina Indl. Area, New Delhi-110 028 and

that both were engaged in the same electronics business. The AO therefore

observed that it was necessary to look into the relationship of management of

the two concerns and accordingly, asked the assessee to furnish the names of

common directors/shareholders and their share holdings in the two companies.

The assessee on 30.11.2007 furnished the requisite details. From the details, the

AO observed that the concerns were running under common management, the

directors were also common and they were operating from the same address.

The AO further observed that the facts of purchase of fixed assets of M/s

Deltron Ltd. as a going concern was disclosed by the assessee only after the

probe during assessment proceedings and no such details had been furnished in

any manner in the audit report or papers enclosed with the return of income.

4.1 Therefore the AO observed that it was necessary to verify whether the

fixed assets of M/s Deltron Ltd. had been accounted for on written down value

or not. Accordingly, the AO asked the assessee to submit the copy of

5 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 computation of total income of M/s Deltron Ltd., its depreciation for A.Y. 2005-

06 indicating the WDV of all assets purchased by the assessee and their

corresponding sale price in the books of M/s Deltron Ltd. and the assessee

submitted the requisite details. The AO was of the opinion that the purchase

consideration paid by the assessee on various block of assets was substantially

higher than the WDV of these assets as per the Act as on 1.4.2004.

4.2 According to the AO, in the light of the Explanation 3 of section 43(1)

defining the actual cost for the purpose of bloc of assets, he observed that it was,

therefore, necessary to look into whether the main purpose of the transfer of

assets directly or indirectly to the assessee was for the reduction of liability to

Income tax (by claiming depreciation with reference to an enhanced cost) or

not. The AO revealed that the said company had shown net current loss of Rs.

3,39,17,585/- and it had brought forward deprecation of Rs. 4,65,36,201/-.

However, the AO further observed that by way of increasing the sale

consideration of transfer of assets to any limits, there was not going to be any

tax incidence on M/s Deltron Ltd. as any short term capital gain would get

absorbed in the current s well as brought forward losses and deprecation. The

AO further observed that M/s Deltron Ltd. had evidently shown short term

capital gain of Rs. 2,16,17,776/- on transfer of land, building and plant and

machinery to the assessee company, which had been totally observed in the

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business losses and return with total income of Nil had been filed by M/s

Deltron Ltd. for A.Y. 2005-06. So he observed that the assessee had, through

this colourable device, been able to claim higher depreciation on the inflated

cost of acquisition. In the light of the aforesaid facts, the AO was satisfied that

the main purpose of transfer of these assets was for reduction of a liability to

income tax by claiming excess depreciation with reference to the enhanced cost

of acquiring M/s Deltron Ltd. and therefore, the Explanation 3 below section

43(1) was clearly attracted. The AO relied on the decision of Hon’ble Supreme

Court in the case of Mcdowell & Co. Ld. vs. CTRO 154 ITR 148 SC and,

applied Explanation to section 43(1) to adopt the actual cost at the written down

value of the assets in the hands of the transferor company, namely M/s Deltron

Ltd. and excess deprecation claimed by the assessee was worked out by the AO

as under:

Block WDV as on Cost of Depreciation Deprecia- Difference 1.4.2004 in the acquisition as claimed by the tion case of M/s inflated by the asessee allowable Deltron Ltd. assessee company on on the company inflated cost WDV Building 7,098 66,00,000 6,60,000 355 6,59,645 Plant and 59,94,066 89,66,000 11,20,750 7,49,258 3,71,492 Machinery Computers 30,533 2,88,399 86,519 9,160 77,359 Furniture 2,72,216 3,46,484 25,986 20,416 5,570 and Fixtures Vehicles 3,91,971 14,83,455 1,48,346 39,197 1,09,149 Total 66,95,884 1,76,84,338 20,41,601 8,18,386 12,23,215

7 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 The AO observed that the deprecation on building is claimed by the assessee at

full rate, whereas it was admissible for half rate as all assets of the acquired

plant were claimed to have been put to use is less than 180 days. He therefore

observed that there would be corresponding excess claim in subsequent years

for full years.

4.3 The AO observed that it was clear from the aforesaid table that the

assessee had used this device to inflate the cost of building from as low as Rs.

7,098/- (WDV) to Rs. 66,00,000/- being the cost as per the agreement with the

company to show cause as to why not the depreciation be computed taking

WDV as on 31.3.2004 in the case of M/s Deltron Ltd. instead of inflated

purchase consideration at which cost had been shown in the books and the

attention was invited to the provision of Explanation 3 of section 43(1). In reply

the assessee relied on the valuation report of the building and land as obtained

by it from registered valuer. The AO further noted 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. The AO, therefore, rejected the valuation reports

8 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 obtained from the registered valuer holding it to be self serving documents.

Further, he held that Explanation 3 to section 43(1) do not require him to refer

to any market valuations or valuation reports and once the provisions were held

to be attracted he has the power to adopt the figures of cost as he deemed fit.

He, therefore, observed that in the context of letter and spirit of this provision,

since the intent of reducing tax liability in various years by claiming higher

depreciation had been proved in this case, the fair value that could be adopted in

any case was the written down value and accordingly, the same was adopted in

assessee’s case and excess depreciation on inflated cost claimed by the

aassessee was disallowed. The AO discussed in his order the legal position on

application of Explanation 3 to section 43(1) in various cases as held by

Hon’ble Apex Court and High Courts. The AO after considering the legal

position and facts and circumstances of the case and being unsatisfied with the

explanation of the assessee, made disallowance of deprecation of Rs.

12,23,215/- and added it to the total income of the assessee.

5 The assessee preferred an appeal before the first appellate authority and

the ld. CIT(A) upheld the order of the AO in taking the ‘actual cost’ on WDV

basis by applying the provisions of Explanation 3 to section 43(1) of the Act.

However, the AO was directed to take the correct figures of all the assets taken

over from M/s Deltron Limited as per records and to recalculate the differences.

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The CIT further specifically held that the Assessing Officer was justified in

allowing depreciation for half of the year and not for the entire year in respect of

the assets acquired by the assessee company from M/s. Deltron Ltd.

6 The assessee, being aggrieved, is in appeal before us.

7 The ld. AR submitted the written synopsis which reads as under:

“This addition needs to be examined and split into two aspect as under:- 1 Depreciation on building allowed at half rates. 2 Explanation 3 to section 43(1) invoked by the AO to determine the actual cost The main grounds on which the AO/CIT(A) has made/confirmed the addition are as under: 1 Both the concerns i.e. assessee and M/s Deltrono Ltd management and the directors are common. 2 The fact that fixed assets were purchased by assessee from M/s Deltron Ltd. after the probe during the assessment proceedings and no such details were furnished in audit report or papers enclosed with the return. 3 The WDV as per Income Tax Act in the books of accounts of the seller company was very less and assessee purchased these assets at higher value only to get higher amount of depreciation. 4 The AO/CIT(A) has relied upon few cases to justify the addition as per the respective orders. ASSESSEE’S SUBMISSIONS: 1 Firstly, it is clarified that M/s Deltron Ltd. is a listed public ltd. company. All the necessary approvals of shareholders and approval of SEBI for selling any business has been obtained. All necessary disclosures as were required under law were made in the audited accounts of Deltron Ltd. as would be seen from its balance sheet in particular at page 29, 30 and 43 of the Paper Book Therefore, any allegation that assessee (as a closely held company) will overpay to a public ltd. company is beyond payment is made by a public ltd. company to

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a closely held company, the allegation could have smelled foul play. No prudent person would get into a transaction where he had to over pay from his personal account, i.e. closely held company to a public account. Hence, the assumption of the AO/CIT concerns, the transaction is not at arm’s length is misconceived and erroneous. Infact, the AO/CIT(A) has misconstrued the requirements of arm’s length principles while judging this transaction.

2 As has been clarified that the transaction of sale of the business as a going concern was based upon a certificate of transaction was undertaken based on such valuation report. This valuation was absolutely necessary both from assessee’s as well as Deltron’s point of view because the sale was required to be approved by the shareholders of Deltron Ltd. In absence of any defect or even an allegation of any defect in such valuation, the AO/CIT(A) were not justified in ignoring the same and adopting the W.D.V. in the books of Deltron Ltd. as the actual cost under section 43(1) of the I.T. Act read with explanation 3. A direct judgment on this issue is Ashwin Vanaspati Industries vs. CIT 255 ITR 26 (Guj). (Copy enclosed)

3 The allegation of the AO that assessee did not make disclosure of this transaction and it came to be probed by him is also factually incorrect. There is a disclosure in Director’s report that assessee has acquired business of Deltron Ltd. as a going concern, PB page 2. Similarly in Schedule T of Balance sheet being notes on accounts as note no. 10 assessee company has disclosed that it has purchased Electronic Business of M/s Deltron at a net consideration of RS. 7.54 crores-PB page 22

Thus, the basic assumption of AO that assessee did not disclose the transaction is factually incorrect. The balance sheet was filed with return of income filed on 28.10.2005

4 There is not even an iota of evidence that something more or less has been paid or passed than the actual consideration stated in the government based on a valuation of assets by a government approved valauer. The findings of the AO are just surmises and conjectures not supported by any evidence. Valuation report of the government approved valuer is available at pages 54 to 68

5 While reducing the deprecation on building the AO has also alleged that there is no evidence when the building was occupied.

It is respectfully submitted that such an observation is totally erroneous. The existing business was purchased as a going concern alongwith building. There was no special formalities required for taking over building: The building was already housing all other assets i.e. plant and machinery etc. So, the allegation is totally out of context.

6 Explanation 3 of section 43(1) requires the AO to determine the actual cost at such an amount as the AO may determine having regard to all the

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circumstances of the case. The AO has adopted WDV of the previous owner, i.e. Deltron Ltd., which is highly arbitrary. It was explained to AO/CIT(A) that the assets transferred by Deltron Ltd. belonged to a unit which was entitled to 100% deduction u/s 35(1)(iv) of the Act, i.e. the cost in the hands of Deltron was most negligible or zero. The moot question is would Deltron had sold it at the same price on unrelated party at the same cost? The answer is ‘yes’ because Deltron Ltd. had got the valuation of these assets done from a Government approved valauer. Deltron Ltd., as already clarified, is a pubic limited listed company, and whereas the assessee is a closely held company. Its actions were accountable and subject to scrutiny of various agencies including it spublic shareholders. The AO has not done any exercise worth invoking the provisions of Explanation 3 of section 43(1) of the Act. He has merely adopted the W.D.V. in the books of Deltron Ltd., as against the actual price paid by the assessee to M/s Deltron for purchase of the assets as per the valuation report.

Without prejudice, CIT(A) failed to ignore various submission made before here as under:

The assessee had submitted that the cost of acquisition of assets purchased by the assessee was substantially higher than the WDV of assets as on 1.4.2004 in the hands of Deltron Ltd., because it included assets on which Deltron Ltd. had been allowed 100% deduction u/s 35(1)(iv)/35(2) as expenditure on scientific research carried on by the Deltron Ltd; and as such, these assets had Nil cost u/s 43(1) read with Explanation 1. The cost of such assets in the hands of Deltron Ltd., which had appeared at Nil value, was as under:-

i) Building Rs. 75,91,127 ii) Plant & Machinery Rs. 5,06,12,466 iii) Computers Rs. 16,94,379 iv) Furniture Rs. 2,12,182 R. 6,01,10,154

The assessee had also produced the relevant assessment orders in support of its submissions. It was therefore but natural that these assets of Rs. 6 crores though in existence, will not appear in the WDV schedule of assets (I.T. Chart) as on 1.4.2004 relied upon by the AO, for holding that the value at which the sale has taken place is higher than the WDV as on 1.4.2004. The assessee had also raised certain other issues connected to the determination of actual cost for the purpose of Explanation 3 to section 43(1), which were reproduce in the appellate order as part of submissions of the assessee, but there was no discussion or decision thereon as well by the CIT(A). CIT(A) has restricted herself to Explanation 3 to section 43(1) of the I.T. Act. Following issues arise for consideration:-

1) Whether the assets in respect of which 100% write off has been allowed to Deltron Ltd. u/s 35(1)(iv)/35(2) the actual cost of which was therefore Nil in view of Explanation 1 to section 43(1), the actual cost to the buyer will still be

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Nil in view of Explanation 3 to section 43(1), as the AO has just gone by the WDV of the assets as per Income Tax Rules as on 31.3.2004 I the case of Deltroon Ltd. These assets, though existing and do not appear in the depreciation chart as per Income Tax Rules, although these assets do appear in the schedule of deprecation chart of Deltron Ltd. under the companies Act. (see balance sheet as on 31.3.2004).-P.B 39

2) The assessee in its submissions specifically pointed out that Rs. 7,098/- is the value of lease hold improvements of the property and it is not the WDV of the building B-96, Phase-III, Industrial Area, Mohali as held by the AO-PB-A3

3) The assessee had purchased building B-96, Phase-III Industrial Area, Mohali having a covered area of 14346 sq.ft. at a value of Rs. 66 lakhs, which had Nil cost on account of deduction allowed to Deltron Ltd. u/s 35(i)(iv)(35)(2).-PBA-3

4) Explanation 3 to section 43(1) specifically provides that the Assessing Officer shall determine the actual cost having regard to the circumstances of the case, where the Assessing Officer is of the view that the sale at the higher value was shown to enable the assessee to claim higher depreciation. The WDV of the assets cannot by any stretch of imagination be the actual cost for the purpose of Explanation 3 to section 43(1). The Explanation 3 does not provide the WDV of such assets to be the actual cost, but it was left to the wisdom of the AO to determine the actual cost having regard to the circumstances of the case. It may be noted that the legislature in its wisdom had specifically stated that WDV shall be the actual cost in other explanations, except in Explanation 3. Please refer to Explanation 4, 4A, 6, 7 & 7A and 2 of section 43(1).

5) Whether the expert opinion of Govt. approved valaurs as regards the value of the building and plant and machinery purchased by the assessee can be disregarded/overlooked withut any discussion or reasoning thereon by the AO. The AO cannot be said to be an expert in the matter of determining the actual cost for the purpose of Explanation 3 to section 43(1)-Copy of valuation reports are available at PB 54 to 68.

6 The case laws relied upon by the AO relate to dissolution of partnership firm within a short time of period of their creation for enhancing the value of the assets considerably before transfer of such assets on dissolution. In all of these cases the facts are distinguishable from the facts of the assessee’s case. M/s Deltron Ltd. is not a partnership firm, but is a quoted company (Public Ltd. Co.), which has been in existence for over two decades. Therefore, the reliance by the AO on these citations is totally misplaced as the facts of the assessee’s case are substantially different. M/s Deltron Ltd. had been allowed 100% deduction as expenditure under the special provisions in respect of its cost of assets valued at Rs. 6 crores approximately. These assets, therefore, could not appear in the deprecation chart as per Income Tax Rules. But it does not mean it has no value.

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(7) The assessee had filed a deprecation chart as on 31.3.2004 (fixed assets schedule) forming part of audited balance sheet under the Companies Act for comparison with the value at which the assets were purchased by the assessee. Thus, fixed assets schedule includes the assets on which 100% deduction has been earlier allowed under section 35(1)(iv)/35(2) as deduction in respect of (R&D). It was submitted that this schedule clearly shows that the price at which the assets were purchased were reasonable and could not be brushed aside without any comment. Fixed asset schedule and the purchase value is reproduced again-PB-A4

Particulars WDV as on 31.3.2004 Value at which taken (under Companies Act) over by assessee Building 74,25,264 66,00,000 Plant & Machinery 3,71,66,624 89,66,000 Computers 82,020 69,499 Furniture & Fixture 3,76,317 3,46,484 Vehicles 5,95,569 5,11,566 Office and Other 14,74,265 14,23,115 equipments Total 4,71,20,059 1,79,16,664

8) The assessee is also filing statement of deprecation chart as per Income Tax Rules ignoring the special deduction u/s 35(1)(iv)/35(2), as if such deduction was not allowed for determining the comparative figures of WDV as on 1.4.2004 in the hands of Deltron Ltd. with the value at which all the assets including those which had Nil value, which have been purchased by the assessee to reconsider as to whether the provisions of Explanation 3 to section 43(1) are attracted in the case of the assessee.

Statement of WDV without taking into consideration of section 35(1)(vi) and the value at which the assets were taken over by the assessee is as under:

Particulars WDV as on 31.3.2004 Value at which (under IT Act without taken over by taking into consideration assessee 100% dep. As (R&D) Building 36,68,570 66,00,000 Leasehold improvements 7,098 ------- Plant and Machinery 1,66,59,047 89,66,000 Computers 61,446 69,499 Furniture and Fixture 3,63,553 3,46,484 Vehicles 3,91,971 5,11,566 Electrical Installation 95,852 14,23,115 Water Cool 29 Other equipments 3,58,164 Industrial Installation 615

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Total 2,16,06,346 1,79,16,664

Combined comparative statement showing the WDV as per Companies Act, WDV as per I.T. Act (without taking effect of 100% dep. As (R&D) and the vlaue at which the assets were taken over by the assessee to establish the reasonableness of the value of the assets taken over

Particulars WDV as per WDV as on Value at Companies Act 31.3.2004 which taken as on (under IT Act over by 31.3.2004 without taking assessee into consideration 100% dep. As (R&D) Building 74,25,264 36,68,570 66,00,000 Leasehold improvements -------- 7,098 -------- Plant and Machinery 3,71,66,624 1,66,59,047 89,66,000 Computers 82,020 61,446 69,499 Furniture and Fixture 3,76,317 3,63,553 3,46,484 Vehicles 5,95,569 3,91,971 5,11,566 Electrical Installation -------- 95,852 Water Cool -------- 29 14,23,115 Other equipments 14,74,265 3,58,164 Industrial Installation -------- 615 Total 4,71,20,059 2,16,06,346 1,79,16,664

It is requested that the above aspects of the case which had remained unconsidered may be examined and your honour give finding/decision thereon.”

On the other hand, ld. DR relied on the orders of the lower authorities below.

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

15 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 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 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

16 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 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—

17 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013

(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).

[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

18 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 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 4[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 enchanced cost. iii) Then the Income- tax officer is empowered to determine the actual

cost having regard to all the circumstances of the case.

11 So from a perusal of the aforesaid provision, we find that the AO needs to

satisfy that the main purpose of the transfer of such assets directly or indirectly

to the assessee was for the reduction of a liability of income tax by claiming

deprecation with reference to an enhanced cost. Then only, the AO can invoke

Explanation 3 to fix the actual cost. So, therefore, the requirement of law is that

19 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 the main purpose of the transfer of assets was for the reduction of a liability to

income tax without satisfying the same, the AO cannot invoke Explanation 3 to

section 43(1).

12 Here, in this case, we firstly notice that the AO’s observation that neither

in the audit report or in the papers filed alongwith the return the acquisition was

not 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.

20 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013

a) the transfer of all the plant & machinery and all the material as appearing in the books of Deltron Ltd. as on 30th September 2004 without payment of excise duty.

14 A perusal of the above agreement makes it abundantly clear that the

purport of the transfer of electronic business from the public limited company

namely M/s. Deltron Ltd. to the assessee was on account of lack of sufficient

financial source to run the said business as a profitable unit by the public limited

company. This purpose as stated in the agreement has not been found to be

rejected, commented or disputed by any of the authorities below. There is no

material to dispute the assertion that M/s. Deltron Ltd., a public limited

company had resources to invest 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

21 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013

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 Act 31.3.2004 (under IT which taken adopted by as on Act without taking over by the AO for 31.3.2004 into consideration assessee invoking 100% dep. As explanation (R&D) 3 to section 43(1)

22 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013

Building 74,25,264 36,68,570 66,00,000 66,00,000 Leasehold -------- 7,098 -------- ----- improvements Plant and Machinery 3,71,66,624 1,66,59,047 89,66,000 89,66,000 Computers 82,020 61,446 69,499 2,88,399 Furniture and Fixture 3,76,317 3,63,553 3,46,484 3,46,484 Vehicles 5,95,569 3,91,971 5,11,566 14,83,455 Electrical Installation -------- 95,852 Water Cool -------- 29 14,23,115 Other equipments 14,74,265 3,58,164 Industrial Installation -------- 615 Total 4,71,20,059 2,16,06,346 1,79,16,664 1,76,84,338

15 From the aforesaid tabulation, we find force in the contention of the

learned AR that it is not a case where building as held by the Assessing Officer

of Rs. 7,098/- 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

23 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 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

24 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 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:

“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

25 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 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)

26 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 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% 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

27 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 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

28 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 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 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

29 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 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

30 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 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.

21 The Assessing Officer has further held that the assets were used by the

appellant for less than 180 days and therefore, appellant is entitled to claim of

31 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013

depreciation for half of the year and not for the entire year. The CIT(A) has also

confirmed the above conclusion and held as under:

“I have carefully considered the appelant’s submission and have also gone through the assessment order. My observation on the issue are as under:

i) On page 4 of the assessment order, a chart has been given by the Assessing Officer. Column 3 of the chart gives the cost of acquisition as shown by the assessee and column 4 of the chart shows the depreciation claimed by the assessee. As per the chart, except for depreciation on building, the assessee himself has claimed depreciation at half rate. ii) Second proviso to section 32 lays down as under.

“provided further that where an asset referred to in clause (i) or clause (ii){ or clause (iia)}, as the case may be, is acquired by the assessee during the previous year and is put to use for the purpose of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sun-section in respect of such asset shall be restricted to fifty percent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (iia)}, as the case may be.” A reading of the above proviso makes it clear that two primary condition for calculation of depreciation are – ‘date of acquisition’ and ‘date on which the asset is put to use for the purposes of business or profession’.

iii) During the proceedings before me, the learned AR was asked to give details of the additions made to fixed assets during the year under consideration. The relevant extracts of the chart given by the learned AR is reproduced are under:

Addition on which Addition on which depreciation is depreciation is taken taken for full year for half year DELTRON DELTRON Building 6600000 - Plant & Machinery - 8966000 Plant & Machinery (Computer) - 288399 Officer Equipment - 1423115 Furniture & Fixture - 346484 vechicles - 511566 Electrical Installation - - 6,600,000 11,535,564

32 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013

It is clear from the chart above that the assessee himself has taken the deprecation for half year on addition to assets taken from Delton, except for building. During the proceedings, learned AR was also required to substantiate as to when was the building occupied/ put to use by the assessee concern. In response thereto, one note was submitted, explaining thereby that when the electronics business of Deltron Ltd. (‘DL’ in shrot) was transferred to assessee concern on 30.09.2004 all plant and machinery as well as all material was transferred on a going-concern basis and the business was carried on after the said date as though no change had taken place. It is pertinent to mention here that the ‘note’ submitted by the assessee is repetition of his arguments already filed. He was required to substantiate as to when was the building occupied/ put to use by the assessee concern. However, nothing has been produced to substantiate the claim of the assessee. iv) As already discussed above, as per the legal requirement of section 32; date of acquisition and date on which asset is put to use are the determining factor for calculating the depreciation. However nothing has been produced to substantiate that the conditions are satisfied for claiming depreciation for more than 180 days. Moreover, as already pointed out, except for building, the assessee itself has claimed depreciation for half year. in view of the above, I find that the Assessing Officer was justified in allowing the depreciation at half rates and grounds of appeal 1,2,& 7 are, therefore, dismissed.”

22 Having regard to the above finding, we do not find any merit in the claim

of the appellant that depreciation is to be allowed for the entire year particularly

having regard to the fact that assessee itself had chosen to claim depreciation for

half of the year for all assets other than the building. The assessee has also not

placed on record any evidence to substantiate when was the building

occupied/put to use by the appellant company. In such regard, the conclusion as

drawn by both the Assessing Officer and CIT(A) is in order and therefore, it is

directed that the depreciation is to be allowed only for half of the year and not

for the entire year.

33 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 23 In light of the above, Ground No. 1 and 2 as raised by the appellant are

rejected and ground No. 3 to 5 are allowed.

24 Ground No. 6 in ITA No. 134/Del/2009 is against the disallowance of

50% of boarding and lodging expenses in respect of foreign travelling.

25 The assessee has claimed the directors foreign travelling expenses of Rs.

20,33,758/-. During the assessment proceedings, the AO asked the assessee to

the file the details of the same along with the bills and vouchers. The AO

observed that although the details were filed but no bills and voucher with

respect to the boarding and lodging were filed for an amount Rs. 6,32,295/-.

Accordingly, the AO disallowed 50% of the amount. Before the CIT(A) also,

the assessee did not produce bills and vouchers to the aforesaid expenses.

Therefore, the CIT(A) held that the AO was justified and reasonable in

disallowing 50% of the claim for which evidence was not produced.

26 Ld. AR for the assessee submitted that the AO had disallowed a sum of

Rs. 3,66,148/- being 50 % of expenses on boarding and lodging for which the

assessee could not produce the bills and vouchers. He submitted that the

boarding and lodging expenses have been incurred out of foreign exchange @

500 USD per day. He submitted that the AO stated that assessee filed details but

did not furnish details of boarding & lodging. He submitted that the details of

foreign traveling expenses are filed which were also filed before the A.O./

34 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 CIT(A). He therefore submitted that the AO had not doubted the genuineness of

the travel or expenses. He further submitted that only out of the foreign

currency, withdrawn had been picked up for disallowance and 50% ad hoc

disallowance had been made, only in absence of supporting bills. He submitted

that foreign currency, withdrawn as per the permissible limits and was not

excessive and there was no allegation that expenses are of personal nature. He

further submitted that the total export turnover of the assessee during the year

were about Rs. 53 crores and assessee had exports to almost all the countries

visited by the directors and employees of the assessee. In view of the above, ld.

AR pleaded that the order of the CIT (A) on this issue be set aside.

27 We have heard both the sides on the issue and perused the material on

record. In the instant case, the assessee claimed foreign and travelling expenses

of Rs. 20,33,758/-. The Assessing Officer has noted that during the assessment

proceedings, the assessee could not furnish bills and vouchers in respect of

boarding and lodging expenses aggregating to Rs. 6,32,295/- and as such,

disallowed 50% of the expenditure and computed the disallowance at Rs.

3,66,148/-. It is thus apparent that Assessing Officer has not disputed the

genuineness of the expenditure on an individual specific level. The travelling

expenses have also been allowed in entirety other than above disallowance of

boarding and lodging disallowance in an adhoc manner on the ground that

35 ITA No.134/Del/2009 ITA No.1319/Del/2011 ITA No.5656/Del/2010 ITA No.316/Del/2013 supporting explanation were not furnished. We do not find merit in such a

manner and the method of the disallowance. The Assessing Officer neither

having identified, highlighted the specific items in respect of which,

disallowance has been made by him, the adhoc disallowance so made is deleted.

The ground raised is thus allowed.

28 Since the facts and the grounds raised in the other three appeals (ITA

Nos.1319/Del/2011, 5656/Del/2010 and 316/Del/2013) are similar, and so are

disposed off on the same lines.

28 In the result, all the appeals are partly allowed. Order pronounced in the Open Court on this 16th day of October, 2015.

Sd/- sd/- (N.K. SAINI) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: the 16th day of October, 2015 TS Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT

ASSISTANT REGISTRAR ITAT, New Delhi