SOUTH ASIA TYRES LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2006-LL-0728-21]

Citation 2006-LL-0728-21
Appellant Name SOUTH ASIA TYRES LTD.
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 28/07/2006
Assessment Year 1995-96, 1997-98
Judgment View Judgment
Keyword Tags 100 per cent depreciation • 100 per cent subsidiary • depreciation allowance • plant and machinery • cost of acquisition • higher depreciation • method of valuation • ad hoc disallowance • subscribed capital • subsidiary company • technical know-how • enhanced liability • fair market value • additional ground • business activity • technical matter • valuation report • work-in-progress • movable property • office equipment • conveyance deed • stock-in-trade • profit on sale • purchase price • annual report • original cost • overhead cost
Bot Summary: The AO has mentioned that the WDV of assets, whose values are in dispute, in the hands of Ceat Ltd. and their values determined by M/s A.S. Ferguson Co. and adopted by the assessee as under : Purchase/book Purchase/book S. Nature Value shown value in the hands of No. of asset by the assessee Ceat Ltd. 1. Cars 47,208 50,05,589 In connection with placing of proper values on various assets taken over by the assessee from the Ceat Ltd., the AO required the assessee to furnish the treatment given to the aforesaid sale by the Ceat Ltd. It was also required to produce the income-tax records maintained by the Ceat Ltd. so that the aforesaid matter could be decided on a reasonable basis. 2.6 The learned CIT(A) requested the assessee to list out such machines whose market price and the value taken by the assessee was identical. The only submission made by the assessee was that all assets of Waluj plant, except for the debenture liability, certain machinery required for production of 2 and 3 wheeler tyres and some other assets, were transferred to the assessee for a lump sum consideration. 3.13 The learned Departmental Representative referred to the decision of Hon ble Patna High Court in the case of Motiram Roshan Lal Coal Co. vs. CIT 1 ITR 329, in which it was held that the words original cost thereof to the assessee , must be strictly construed and these words referred to the genuine original cost to the assessee and not necessarily to anything which the assessee may have stated to be the original cost. 1 4 In the light of aforesaid decisions, the learned Departmental Representative pointed out that in the course of assessment, the assessee was required to state about the treatment given by the transferor to the assets transferred to the assessee. The learned CIT(A) upheld the disallowance on the ground that the assessee had agreed to such disallowance before the AO. Having considered the submissions before us, we think it proper to restore the matter to the file of the learned CIT(A) for considering the expenditure on merits and decide the matter afresh after hearing the assessee.


K.G. BANSAL, A.M. ORDER These appeals of assessee arise out of three separate orders passed by CIT(A)-I, Aurangabad, on 26th Sept., 2002. corresponding orders of assessment were made by Dy. CIT, Sr.-2, Aurangabad (hereinafter called AO), under provisions of s. 143(3) on 30th March, 1998, 27th Jan., 1999 and 23rd Aug., 1999, respectively. appeals involve common grounds and, therefore, they were argued in consolidated manner by learned counsel of assessee and learned Departmental Representative. Therefore, common order is passed. 2.1 From assessment order, it is seen that assessee company was registered on 15th Dec., 1993. first annual report was prepared for period ending on 31st March, 1995. shareholders of company are Goodyear Tyre and Rubber Company, USA, Goodyear India Ltd., Ceat Finance Ltd., Ceat Holdings Ltd., and RPG Enterprises Ltd., holding 26 per cent, 24 per cent, 25 per cent, 20 per cent and 5 per cent of subscribed capital, respectively. assessee company took over Waluj undertaking belonging to Ceat Ltd. and started operations in September, 1994. purchase consideration of plant was tentatively fixed at Rs. 5.15 crores, subject to price determined in due diligence report to be prepared by M/s A.F. Ferguson & Co., M/s A.F. Ferguson & Co. fixed value of various assets of undertaking to be transferred to assessee at about Rs. 41.84 crores. consideration paid for assets taken over by assessee from Ceat Ltd. was taken at Rs. 41,84,00,330. book value of these assets in hands of Ceat Ltd. was Rs. 25,44,35,362. Thus, purchase consideration of assessee was more than WDV of assets in hands of Ceat Ltd. by amount of Rs. 16,39,64,968. AO has mentioned that WDV of assets, whose values are in dispute, in hands of Ceat Ltd. and their values determined by M/s A.S. Ferguson & Co. and adopted by assessee as under : (Amounts in Rs.) Purchase/book Purchase/book S. Nature Value shown value in hands of No. of asset by assessee Ceat Ltd. 1. Land 83,20,000 83,20,000 2. Buildings 9,95,41,276 13,18,70,000 Furniture 3. 20,35,366 83,64,031 & fixtures Plant & 4. 17,54,99,659 26,48,40,710 Machinery 5. Cars 47,208 50,05,589 In connection with placing of proper values on various assets taken over by assessee from Ceat Ltd., AO required assessee to furnish treatment given to aforesaid sale by Ceat Ltd. It was also required to produce income-tax records maintained by Ceat Ltd. so that aforesaid matter could be decided on reasonable basis. It appears that assessee expressed its inability to produce income-tax records maintained by Ceat Ltd. However, annual accounts of Ceat Ltd. were available in public domain, which were filed and perused by AO. It was found that assessee owed amount of about Rs. 23.625 crores to Ceat Ltd. as on 30th Sept., 1994, being closing date of accounts of Ceat Ltd., comprising of 15 months from 1st July, 1993 to 30th Sept., 1994. From aforesaid balance sheet, AO also noted that in addition to transfer of aforesaid assets of undertaking by Ceat Ltd. to assessee, latter also took over stores and spares and some advances. It was also noted by AO that radial tyre manufacturing facility was sold to assessee for consideration of Rs. 24.7385 crores by Ceat Ltd. and latter company earned profit of Rs. 7.4024 crores in transaction. 2.2 case of AO was that Ceat Ltd. had interest in assessee company through other group companies, namely, Ceat Finance Ltd., Ceat Holdings Ltd. and RPG Enterprises Ltd. agreed price for transfer of assets was more than book value of assets by amount of Rs. 16,39,64,969. transfer was done with view to make profit whenever possible, using assessee as tool. AO further pointed out that it was not clarified how due diligence test was carried out. detailed working of due diligence test group was not furnished. Item-wise values have also not been furnished. Coming to facts of case, it was pointed out that valuation of cars with WDV of Rs. 47,208 taken at Rs. 50,05,589 was completely unbelievable. valuation of furniture and fixtures of WDV of Rs. 20,35,366 at Rs. 83,64,031 was also not believable. value of buildings was also shown to be higher than WDV by margin of about 32 per cent of WDV, while there was addition of about 15 per cent under this head from 1st April, 1994 to 29th Sept., 1994. If this amount is ignored, then, overvaluation is about 40 per cent. opening WDV of plant and machinery was Rs. 16,84,45,554, which has been valued in hands of assessee at Rs. 26,04,34,912. Thus, excess valuation is about 35 per cent of WDV. AO also pointed out that Waluj undertaking was commissioned in previous year relevant to asst. yr. 1992-93 and it is not very old. In view thereof, there should not have been much difference between depreciated value and market value of most of items included in plant and machinery. 2 . 3 In view of aforesaid, AO came to conclusion that impugned transaction, involving overvaluation of assets, was undertaken with view to claim deduction of depreciation on enhanced cost. Therefore, he held that depreciation should be deducted in this case on basis of WDV of assets in hands of Ceat Ltd. assessee had claimed deduction at Rs. 8,81,27,084, which was restricted to Rs. 4,74,86,344. It may be added here that apart from allowing deduction of depreciation on WDV, there was some other issue also regarding rate of depreciation on dust collector, which was allowed at 50 per cent as against claim of 100 per cent made by assessee. 2 . 4 Aggrieved by this order, assessee filed appeal before CIT(A)-I, Aurangabad. 2 . 5 In course of hearing before learned CIT(A), assessee provided him with copy of due diligence report prepared by M/s A.F. Ferguson & Co. It appears from appellate order that report was based upon valuation report of M/s Budhabhatti & Associates. It was claim of assessee before learned CIT(A) that AO did not invoke provision contained in Expln. 3 below s. 43 and, therefore, calculation of depreciation allowance was based upon irrelevant considerations. learned CIT(A) discussed valuation report in brief. He found that method of valuation adopted by valuer involved determination of market value, ascertainment of replacement cost, estimated useful life and salvage value at end of useful life. Replacement value was ascertained by obtaining quotations from market, making enquiries and resorting to estimates. This included cost of machine, equipment, etc., taxes, etc., handling charges, transportation, transit insurance and installation costs. Wherever quotations pertained to year 1992, addition of 10 per cent was made to quoted price to take care of inflation. Overhead costs were placed at about 40 per cent of quoted price. 2.6 learned CIT(A) requested assessee to list out such machines whose market price and value taken by assessee was identical. It was also requested to pick up any item of plant or machinery and establish that its installation cost was 40 per cent of purchase price. None of aforesaid could be established by assessee. Therefore, he came to conclusion that basis adopted for valuation of assets by assessee was not correct. 2.7 It was mentioned by him that transfer of assets was not at WDV, but it was at enhanced value. In course of assessment, chart of cost of acquisition of assets as on 20th Sept., 1994, and WDV in hands of Ceat Ltd., as on 29th Sept., 1994, was filed. agreement regarding transfer of assets of Waluj undertaking by Ceat Ltd. to assessee was also filed, in which it was mentioned that land, buildings, certain plant and machinery and furnitures are being transferred for consideration of Rs. 51.5 crores, price being subject to due diligence report. total WDV of assets on 29th Sept., 1994 in hands of Ceat Ltd. were Rs. 25,44,35,362. These assets were taken over by assessee at Rs. 41,84,00,330, difference between purchase price and WDV amounted to Rs. 16,39,64,968. learned CIT(A) pointed out that instead of establishing fair market value of assets, assessee merely supplied copy of sale agreement and valuation report. valuation report remained unsubstantiated in view of failure of assessee to show that installation cost was about 40 per cent and market price of any machinery transferred to assessee was identical with transfer consideration. only submission made by assessee was that all assets of Waluj plant, except for debenture liability, certain machinery required for production of 2 and 3 wheeler tyres and some other assets, were transferred to assessee for lump sum consideration. assessee had got assets valued and adopted such values in its balance sheet. 2.8 learned CIT(A) considered facts of case and submissions made before him, but did not agree with assessee for following reasons : (i) it failed to substantiate its claim of depreciation before AO, (ii) it is unable to pinpoint and prove amount attributable to acquisition of plant and machinery, (iii) it was unable to show lump sum amount paid for purchase of plant and machinery, and (iv) due diligence report and valuation report were not followed. 2.9 There was also issue of deductibility of 100 per cent depreciation of air pollution equipment. AO had worked out deduction at 50 per cent of cost for reason that equipment was used for less than 180 days. learned CIT(A) upheld this action of AO also. Thus, appeal of assessee in this behalf was dismissed. 2.10 Aggrieved by this order, assessee is in appeal before us. appeal for asst. yr. 1995-96 (ITA No. 132/Pune/2003) involves major issues of determination of costs and deduction of depreciation. Appeals for subsequent years on this issue are consequential in nature as WDVs for those years will depend upon costs determined in this year. assessee has taken up three substantive grounds of appeal. first ground is against reduction of claim of depreciation by amount of Rs. 4,06,40,740, out of Rs. 8,81,27,084. There are number of sub-grounds in this ground, which are in nature of arguments, which will be discussed at appropriate place. This ground also contains averment to effect that denial of depreciation to extent of 100 per cent on air pollution equipments, etc. and restricting it to 50 per cent was incorrect. Ground No. 2 is against disallowance of sum of Rs. 5,17,645 on account of contribution towards PF and family pension fund. Ground No. 3 is against disallowance of expenditure of Rs. 85,641 out of miscellaneous expenses. 3.1 Before us, learned counsel pointed out that assessee company is joint venture between Goodyear, USA and Ceat India groups, each group holding 50 per cent shares. Both groups were engaged in business of production of tyres. joint venture was conceived with view to produce higher quality radial tyres for four-wheelers. It was decided that for this purpose assessee will buy Waluj plant of Ceat Ltd. as going concern. tentative purchase price was fixed at Rs. 51.5 crores, subject to due diligence by M/s A.F. Ferguson & Co. Their report placed value of various assets of plant at Rs. 45.44 crores. In purchase agreement, values were not assigned specifically to various assets as it was case of slump sale by Ceat Ltd. factum that instant case was case of slump sale by Ceat Ltd. was not disputed by AO. assessee, after purchasing unit as going concern for Rs. 45.40 crores, had to place values on various assets including each block of assets for purpose of deduction of depreciation under s. 32 of Act. Sec. 43(1) of Act provides that "actual cost" means actual cost of assets to assessee, reduced by that portion of cost thereof, if any, as has been met directly or indirectly by any other person or authority. Since actual cost of any asset was not mentioned in purchase consideration, consideration of purchase of Rs. 45.40 crores had to be allocated to various assets taken over by assessee. Such values were ascertained on basis of valuation report, which formed basis of due diligence report of M/s A.F. Ferguson & Co. As against aforesaid, AO was of view that provision contained in Expln. 3 below s. 43(1) was applicable and, therefore, he adopted WDVs in hands of Ceat Ltd. for purpose of computing depreciation allowance deductible in computing income of assessee. 3 . 2 In this connection, learned counsel drew our attention to agreement for transfer of undertaking , placed in paper book on pp. 81 to 122. On p. 81, it is mentioned that Ceat Ltd. has agreed to transfer, sell and assign and convey to assessee, and assessee has agreed to purchase and acquire for consideration and upon terms and conditions hereinafter set out, undertaking of Ceat Ltd. at Aurangabad. On p. 83, word undertaking has been defined to mean land, hereditaments, premises, buildings, and structures; plant, machinery, equipment (excluding machinery and equipment relating solely to production of 2 and 3 wheelers), vehicles and other articles and effects and movable property of tyre manufacturing facility located thereat; assets such as raw materials, processed stock, goods, stock-in-trade, packing materials, engineering and sundry stores, packed stock of finished products belonging to or pertaining to such tyre manufacturing facility; and workers engaged at such tyre manufacturing facility. On p. 85, it is mentioned that without limiting generality of foregoing, assets shall include; A. land. B. improvements on land. C. all plants, buildings, structures, erections, improvements, appurtenances, and fixtures situate on or forming part of land, other machinery and equipment referred to in s. 2.1 D through I. D. all fixed machinery and fixed equipment situate on or forming part of land and all other machinery and equipment and all tools, handling equipment and accessories other than assets referred to in s. 2.1 E through I. J. leases that are material contracts and subject to s. 2.5, full benefits of all other leases of machinery and equipment of which Ceat is lessee relating to undertaking including, without limiting generality of foregoing, leases described in Sch. 2.1 J. K. material contracts and subject to s. 2.5, full benefit of all other written contracts or commitments which are listed on Schs. 1.1 N and 2.1 J, to which Ceat is entitled in connection with undertaking. L. material permits and subject to s. 2.5, full benefit of all other licenses, registrations, and permits in respect of undertaking. M. all existing supplier lists of or used in connection with undertaking. N. all books, documents, records and files, including without limitation, all financial, local tax, accounting, personnel files and records and computer programs used with respect to or relating to assets or undertaking excluding copies prepared and retained by Ceat for corporate record purposes. O. all inventories at tyre manufacturing facility and products in transit on closing date, and P. all prepaid expenses and deposits (excluding those items specified in s. 2.6 thereof) made by Ceat relating to undertaking. 3 . 3 Page 87 shows tentative purchase price at Rs. 51.50 crores, subject to results of due diligence review. Page 115 furnishes details of machinery, equipments, and other assets, while p. 116 furnishes details of laboratory equipments. Page 208 furnishes list of two and three-wheelers tyre equipments, which did not form part of equipment to be transferred to assessee. Pages 211 to 220 furnish details of various assets, their original cost as per fixed assets register and book values as on 30th June, 1993. Pages 221 to 226 contain details of capital work-in-progress and capital advances as on 30th June, 1993. Pages 370 to 387 contain conveyance deed, dt. 16th Feb., 1995, regarding land and buildings. In conveyance deed, value of land has been taken at Rs. 1,20,77,830, and buildings at Rs. 13,18,70,000. It will thus be seen that value of land assigned in valuation report is lower at Rs. 83.20 lakhs than value taken in conveyance deed at Rs. 1,20,77,830. assessee had also paid stamp duty of Rs. 57,57,920 on execution of conveyance deed and it is not known how this value has been treated in books of assessee for valuation of land and buildings. total value of land and buildings amounted to about Rs. 14,39,47,832 and payment details have been given on p. 397. sum of Rs. 14,01,90,000 was paid o n 14th Dec., 1994 by way of cheque No. 539351 and balance amount of Rs. 37,57,830 was stated to have been paid by assessee to MIDC on behalf of Ceat Ltd. 3.4 learned counsel referred to accounts of Ceat Ltd., placed in paper book on pp. 492 to 565. Page 496, being report of board of directors, discloses that Aurangabad unit was transferred to assessee and that production from joint venture will be shared equally between Goodyear India Ltd. and Ceat Ltd. Page 507, being P&L a/c, shows miscellaneous income of Rs. 97.18.18 (in thousands), details of which are given in Sch. 8 on p. 511. This schedule shows profit on sale of division at Rs. 13,84,41 (in thousands). Schedule 4 at p. 509 shows total deductions from fixed assets at Rs. 50,13,92 (in thousands), consisting of various deductions from land, buildings, plant, machinery, furniture and fixtures, and vehicles. Note (4 c) on p. 515 mentions that entire undertaking of Waluj factory, except relating to debenture liability, certain machinery for production of 2 and three- wheeler tyres and certain other current assets, has been transferred to assessee w.e.f. 29th Sept., 1994 for consideration of Rs. 45.0981 crores, resulting in profit of Rs. 10.8614 crores. On p. 524, it is mentioned that miscellaneous income includes extraordinary and non-recurring gains arising from sale of plain paper copier division as going concern Rs. 2.9827 crores; sale of tyre manufacturing plant at Waluj as going concern Rs. 10.8614 crores; sale of investments acquired by company from its wholly-owned subsidiaries Rs. 27.2587 crores; and sale of certain plant and machinery on sale and lease back, etc. 3.5 learned counsel drew our attention to p. 62 of paper book being letter dt. 11th Feb., 1998 addressed by Ceat Ltd. to assessee inter alia pointing out that (i) statement of Waluj unit showing income-tax depreciation, etc. for asst. yrs. 1992-93 to 1995-96, and (ii) in asst. yr.1995-96, they have reduced from block of assets, WDV of assets as on 31st March, 1994, which are transferred to assessee. Similarly, additions made from 1st April, 1994 to 29th Sept., 1994 have also been reduced from block assets except value of machinery which has been retained by them. It was also mentioned that WDV of various assets had no relevance whatsoever with claim of assessee for deduction of depreciation on assets acquired by it. 3.6 learned counsel also referred to valuation report, dt. 12th Jan., 1994, made by M/s A.F. Ferguson & Co. On p. 162, it was mentioned that coverage of due diligence report had been restricted to following areas : Employee benefit plans, salaries and labour disputes Licences Insurance Litigations Properties (a) Title reports and insurance policies (b) Energy sources and cost (c) Property and depreciation listing Correspondence with regulatory authorities. On p. 164, it was mentioned that amount of Rs. 10.40 crores shown u n d e r head Capital work-in-progress was accepted on basis of unaudited trial balance of Waluj plant as on 30th June, 1993. It is further mentioned that valuation of land, buildings, plant and machinery being technical matter, has been taken on basis of valuers appointed by Ceat Ltd. It is also mentioned that furniture and fixtures, office equipment, and vehicles have not been considered for revaluation. It was specifically pointed out that remarks made by AO in assessment order are quite contrary to report of M/s A.F. Ferguson & Co. on this issue. Pages 169 to 171 furnish details of fixed assets, capital commitments, and capital advances, revaluation of fixed assets, assets not revalued and basis of revaluation. Page 170 shows that furniture, fixtures, office equipments, and vehicles were not revalued and their values were shown in column net value after revaluation at Rs.85.90 lakhs. basis of revaluation of land, buildings and plant and machinery was mentioned on p. 171. Page 176 shows WDVs and values after revaluation of land, buildings, plant and machinery, furniture and fixtures, and vehicles. This page also shows that while additions were made to values of land at Rs. 82.60 lakhs, buildings at Rs. 2.508 crores, plant and machinery at Rs. 9.702 crores; nothing was added to values of furnitures, fixtures, office equipment and vehicles. Page 305 contains valuation of land and buildings, made by Shri J.M. Rathod. 3.7 Coming to legal issues, learned counsel pointed out that assessee was not 100 per cent subsidiary company of Ceat Ltd., but it was joint venture between Goodyear and Ceat groups. Therefore, there could have been no question of overvaluation of any asset with view to claim higher depreciation, especially in view of fact that consideration was fixed initially at Rs. 51.50 crores, subject to due diligence report, and on obtaining due diligence report, consideration was revised to lower figure of Rs. 45.40 crores. Thereafter, he referred to provisions contained in Expln. 3 below s. 43(1), under which AO can substitute WDVs in place of purchase consideration where assets were used previously by any other person for his business and he is satisfied that main purpose of transfer of assets, directly or indirectly, to assessee, was to reduce liability of income-tax by claiming deduction under s. 32 with respect to enhanced cost. In this connection, he stressed on words main purpose of transfer and relied on decision of Hon ble Bombay High Court in case of Premier Automobiles Ltd. vs. ITO & Anr. (2003) 182 CTR (Bom) 202 : (2003) 264 ITR 193 (Bom). At p. 22, it is mentioned that concept of slump sale was initially evolved under Judge- made law, which was subsequently recognized by legislature by inserting s. 2(42C) of Act. concept involved ascertainment whether sale was of individual assets or of concern as going unit, i.e., business as whole. On basis of this observation, it was argued that since slump sale has been recognized for long period of time, such sale cannot be said to be device or purpose for reducing income-tax liability. Reference was also made to p. 235, on which after considering that sale to be slump sale, it was mentioned that AO will be required to decide its value under s. 55 of IT Act, basis of indexation for computing capital gains, and quantum of depreciation on block of assets. It was also mentioned on that page that valuation of assets done by transferee was for purpose of allocating cost of various assets in their books of account, which cannot constitute basis for computation of profits of assessee seller. On basis of these observations, it was pointed out that treatment of sale and purchase consideration has to be different in case of seller and buyer and, therefore, insistence of AO in calling for income-tax records maintained by Ceat Ltd. was misplaced. In any case, return and details, etc. filed by that assessee could have been requisitioned by AO from corresponding AO, if at all required by him, particularly when it was pointed to him that seller is not parting with information. 3.8 He further referred to decision of Hon ble Punjab and Haryana High Court in case of Shreyans Industries Ltd. vs. Jt. CIT (2006) 200 CTR (P&H) 609 : (2005) 277 ITR 443 (P&H). At p. 446, it was mentioned that assessee had paid consideration of Rs. 14.75 crores for purchasing paper division from M/s Zenith Ltd. and Tribunal found that only sum of about Rs. 10.18 crores could be allocated towards cost of fixed assets including plant and machinery. It is not in dispute that paper division was sold as going concern. Therefore, consideration included not only cost of fixed assets but also other benefits like licences, permits, entitlements, and quota rights, etc. assessee has not given bifurcation allocating cost towards each asset taken over by it. However, report from M/s S.R. Botilboi & Consultants (P) Ltd. was furnished, in which value of fixed assets was determined at about Rs. 10.18 crores. In these circumstances, actual cost under s. 43(1) of Act of these capital assets was fairly taken at about Rs. 10.18 crores by assessee. This finding of Tribunal was approved by Hon ble Court. 3.9 He also relied on decision of Hon ble Tribunal, Ahmedabad Bench "A", in case of Unimed Technologies Ltd. vs. Dy. CIT (2000) 69 TTJ (Ahd) 25 : (2000) 73 ITD 150 (Ahd). In that case, applicability of Expln. 3 to s. 43(1) came for discussion in context of facts that fair market value of assets have been certified by registered valuer. AO had not appointed his own valuer for such valuation. He did not think it fit to examine valuer. It was held that value determined by valuer appointed by assessee should be accepted. 3.10 He also referred to observations of learned CIT(A) that assumption of 40 per cent being overhead cost has not been explained by assessee. In this connection, he referred to valuation report and pointed out that such cost not only included overhead expenses but also handling charges, transportation charges, indirect taxes such as sales-tax, etc. 3.11 He also referred to detailed submissions made before learned CIT(A), placed in paper book from pp. 31 to 61, in which issue regarding applicability of Expln. 3 to s. 43(1) of Act was explained. He also referred to pp. 76 to 80 of paper book, which showed that Ceat Ltd. was to purchase portion of tyres produced by assessee on cost-plus basis. It was pointed out that if slump sale had been tax avoidance device, claim of higher depreciation would lead to higher purchase price by Ceat Ltd., to which that company would not have agreed to. 3.12 On other hand, learned Departmental Representative pointed out that question in this case is whether depreciation should be allowed to be deducted as per WDVs in hands of Ceat Ltd. or on basis of consideration charged by Ceat Ltd. from assessee. In this case, cost of various assets taken over by assessee from Ceat Ltd. is fixed. He referred to decision in case of Unimed Technologies Ltd. (supra), wherein question was about adoption of value of asset on basis of its fair market value as certified by registered valuer. learned Departmental Representative pointed out that since cost is fixed on basis of consideration paid, ratio of aforesaid case is not applicable to facts of instant case. In alternative, it was pointed out that due diligence report prepared by M/s A.F. Ferguson & Co. was qualified report and value arrived at therein was dependent upon technical report, which formed basis of valuation of assets. Such report cannot be taken to be correct in toto. Thereafter, he referred to decision of Hon ble Bombay High Court in case of Premier Automobiles Ltd. (supra), where question was regarding computation of capital gains accruing to seller in respect of slump sale. In this order, it was inter alia held that when concern is transferred as going concern, number of assets such as goodwill etc. are also transferred, on which some value will have to be placed. Coming to issue that tax treatment in case of Ceat Ltd. is not material in deciding case of assessee, references were made to discussion on pp. 233 and 235 of that order. At p. 233, it was inter alia mentioned that slump sale agreement is contractual in nature. only condition in case of slump sale is that sale should be for lump sum price. Therefore, in such sale, there is transfer of entire business activity for fixed price. Thus, sale price is not attributed to individual items of assets. At p. 235, it was inter alia mentioned that AO has to allocate total amount of Rs. 210 crores not only to land, building, plant and machinery but to all other assets also and only then computation of capital gains could be said to be correct. Thus, in nutshell, his argument was that tax treatment given to transaction by Ceat Ltd. was material and price paid by assessee was for all assets received by it. Only thereafter, AO can decide matter regarding grant of depreciation. 3.13 learned Departmental Representative referred to decision of Hon ble Patna High Court in case of Motiram Roshan Lal Coal Co. vs. CIT (1933) 1 ITR 329 (Pat), in which it was held that words original cost thereof to assessee , must be strictly construed and these words referred to genuine original cost to assessee and not necessarily to anything which assessee may have stated to be original cost. learned Departmental Representative referred to decision of Hon ble Madras High Court in case of CIT vs. Harveys Ltd. (1940) 8 ITR 307 (Mad), in which it was held that original cost of particular asset is entirely question of fact, which has to be decided depending upon evidence produced to prove it. On basis of this decision, case of learned Departmental Representative was that it is for assessee to produce creditable evidence to establish costs of various assets. He also relied on decision of Hon ble Calcutta High Court in case of CIT vs. Jogta Coal Co. Ltd. (1965) 55 ITR 89 (Cal). In that case, evidence was not produced regarding market values of various items finding place in balance sheet, because of which Tribunal estimated such values. Hon ble Court held that original cost of asset is entirely question of fact. If on consideration of facts, it is found that assessee arranged to put fictitious price on any asset, it was open to IT authorities to refuse to accept that price. 3 . 1 4 In light of aforesaid decisions, learned Departmental Representative pointed out that in course of assessment, assessee was required to state about treatment given by transferor to assets transferred to assessee. However, that was not done on plea that records of transferor were not available with it. learned Departmental Representative also tried to raise issue that instant case was probably not case of slump sale by Ceat Ltd. because tyre manufacturing facility for two and three-wheelers cannot be separated from tyre manufacturing facility for four- wheelers. It was his case that tyre cutting presses were common machines used for manufacture of all kinds of tyres. He also drew our attention to fact that assessee could not explain before learned CIT(A) its contention regarding value addition of 40 per cent by way of installation to machinery and could not establish costs taken by assessee with reference to any machinery taken over by it. 4.1 We have considered facts of case and rival submissions. first issue in this case is whether main purpose of impugned transaction was to reduce tax liability by claiming depreciation with reference to enhanced cost. case of learned counsel was that assessee is joint venture between Goodyear and Ceat groups, each holding half share. joint venture was undertaken for manufacturing of better quality tyres with help of technology available with Goodyear. purchase price was tentatively placed at Rs. 51.5 crores subject to due diligence report. On receipt of due diligence report, it was found that price was lower at Rs. 41.4 crores. Thus, it was contended that transaction was undertaken in transparent manner and its aim was to produce better quality tyres. There was nothing inherent in transaction, which could lead to inference of collusion between Ceat Ltd. and buyer. In any case, such collusion would have harmed interests of Goodyear, who was holding 50 per cent shares of assessee company and, therefore, they would not have accepted transaction which would have harmed their interests. It was also pointed out that concept slump sale is not new and it has been recognized for very long period. Such sales have taken place in past and recognized for purpose of levy of capital gains by treating unit as going concern, thereby holding it to be capital asset. Therefore, it was not case which was caught within mischief of Expln. 3 to s. 43(1). It was also pointed out that wherever legislature so decided, it cancelled consequence of enhanced cost by creating fiction, as in Expln. 6. No such fiction was provided in Expln. 3. As against aforesaid, learned Departmental Representative only made argument that instant case may not be case of slump sale as manufacturing facility for tyres of 2 and 3 wheelers cannot be separated from facility of manufacturing tyres of four wheelers. After consideration of rival submissions, we are of view that no pre-planned tax avoidance device has been resorted to while effecting transaction. reason is that placing of price was based upon due diligence report by M/s A.F. Ferguson & Co., which gave report fixing price at lower amount than tentatively agreed original amount. We are also of view that issue whether tyre manufacturing facilities for two and three- wheelers and four-wheeler can be totally separated or not is not real issue involved before us. Assuming that it cannot be so done, still, fact remains that certain lands, buildings, plant and machinery, and other assets were transferred by Ceat Ltd. to assessee on basis of report of M/s A.F. Ferguson & Co. What is required to be done is to allocate purchase consideration among various assets irrespective of whether all assets of Waluj unit or only some assets were contracted to be transferred to assessee. Thus, it is held that provisions of Expln. 3 are not applicable on facts and in circumstances of instant case. 4.2 second issue in this case is regarding placing of values on different assets. case of learned counsel was that such values were placed on basis of report of M/s A.F. Ferguson & Co., while case of learned Departmental Representative was that word actual cost has to be construed strictly. Since assessee is claiming depreciation, onus is on it to establish costs of various assets. We have also described cases cited by learned Departmental Representative, ratios of which are that (i) word cost has to be construed strictly, and (ii) determination of cost is question of fact, based upon evidence produced. assessee had produced certain evidence in form of technical report and report of M/s A.F. Ferguson & Co., which according to us should form basis for valuation of various assets. 4.3 In aforesaid report, market value of land has been taken at Rs. 83.20 lakhs (p. 326 of paper book). assessee has also filed conveyance deed, in which value of land for stamp duty purposes was taken at Rs. 1,20,77,830, say Rs. 120.80 lakhs. learned counsel was required to state as to why value of land should not be adopted at Rs. 120.80 lakhs, as mentioned in conveyance deed. learned Departmental Representative accepted proposition that value adopted for stamp duty purposes represented picture of market value more correctly than value adopted in report of M/s A.F. Ferguson & Co., which was based upon number of assumptions and presumptions. Therefore, we are of view that value of land has to be taken at Rs. 120.80 lakhs. assessee had adopted value of buildings at Rs. 131.87 lakhs which was also value adopted in conveyance deed. Therefore, there appears to be no need to make any change in value of buildings. result of aforesaid discussion is that land was undervalued by amount of Rs. 37.60 lakhs, which will have to be reduced from other assets. It may also be mentioned that assessee had paid stamp duty amounting to about Rs. 57.58 lakhs on 16th Feb., 1995 for conveyance of land and buildings. It would be fair to apportion this expenditure between land and buildings on basis of ratio of cost of land and buildings to total cost of both these assets. Thus, expenditure of Rs. 4,84,500 is allocated to land. However, it may be mentioned that this expenditure was not incurred as consideration of transfer of unit and, therefore, such adjustment has to be made at time of addition to land and buildings on their conveyance. 4.4 In respect of other assets, it is seen that value of plant and machinery has been enhanced, but values of furniture, fixture and office equipments; and vehicles have not been enhanced. values of furniture and fixture, and office equipment amounts to Rs. 83.60 lakhs and value of vehicles amounts to Rs. 50.40 lakhs. As against aforesaid, value of plant and machinery has been taken at Rs. 26.518 crores (p. 327 of paper book). While rates of depreciation for plant and machinery, furniture and fixture, etc. and vehicles are different, nonetheless, value of plant and machinery is about 20 times value of other assets taken together. Therefore, revaluation of these assets will not make much impact in claim of depreciation of assessee. Thus, we do not find that any useful purpose will be served by putting different values on such assets than values put on them in report of M/s A.F. Ferguson & Co. 4.5 In nutshell, it is held that value of land has been understated in report by amount of Rs. 37.60 lakhs, which shall be reduced from value of plant and machinery. At this stage, it may also be mentioned that we are reducing whole value of Rs. 37.60 lakhs from value of plant and machinery and not from other assets on proportionate basis. reason is that assessee has enhanced value of plant and machinery only. Therefore, reduction in value of plant and machinery by amount of Rs. 37.60 lakhs shall be equitable to both sides as values of furniture and fixture etc. and vehicles have not been enhanced. 4.6 AO shall work out deductible amount of depreciation on aforesaid basis. Ground No. 1.9 was not really pressed by learned counsel as machinery and equipment mentioned therein were used by assessee for less than 180 days in relevant previous year. Therefore, no adjustment in depreciation is required on this sub-ground. 4.7 In result, ground No. 1 is partly allowed. 5. Ground No. 2 is against refusal of learned CIT(A) in deducting sum of Rs. 5,17,645, being assessee s contribution towards PF and family pension fund. On perusal of order of AO, it was found that assessee had claimed deduction of Rs. 29,14,490, being miscellaneous expenses incurred by it. AO pointed out that it constituted PF trust and superannuation trust, which were not recognized by CIT, Nashik. Therefore, expenditure in respect of aforesaid contributions, amounting to Rs. 6,68,979 was not allowed. assessee took up ground No. 4 against this finding of AO before learned CIT(A). Before learned CIT(A), approval of CIT, Aurangabad, in this behalf was filed. On basis of order, learned CIT(A) granted relief of Rs. 1,51,334 to assessee. 5.2 Before us, it was pointed out that details of various payments were furnished in "statement of facts" filed before learned CIT(A), which were not considered by him fully. In view thereof, it was urged that matter may be restored to file of CIT(A) for ascertaining correct amount admissible to assessee. No particular argument was made by learned Departmental Representative in this behalf. 5.3 We have considered facts of case and rival submissions made before us. We restore this matter to file of learned CIT(A) to consider facts mentioned in "statement of facts", examine them and allow proper reduction to assessee after hearing it in matter. 6 . Ground No. 3 is against disallowance of guest-house expenses of Rs. 85,641. This ground was not argued by learned counsel in view of decision of Hon ble Supreme Court in case of Britannia Industries Ltd. vs. CIT (2005) 198 CTR (SC) 313 : (2005) 278 ITR 546 (SC). Thus, this ground is dismissed. 7. In result, appeal is partly allowed. ITA No. 133/Pune/2003 for asst. yr. 1996-97 8. Ground No. 1 and its sub-grounds are similar to ground No. 1 of ITA No. 132/Pune/2003 (supra). In view of decision in that appeal, it is directed that WDVs of various assets shall be found on basis of deduction of depreciation in that year, and depreciation for this year shall be deducted accordingly. Thus, this ground is partly allowed. 9 . Second ground is against confirmation of disallowance of Rs. 10 lakhs from various expenses. It is also mentioned that learned CIT(A) erred in holding that assessee agreed for disallowance of aforesaid amount. On perusal of ground of appeal before learned CIT(A), it is seen that assessee had challenged aforesaid ad hoc disallowance on ground, inter alia, that expenses were fully verifiable and have been audited by statutory and tax auditors. learned CIT(A) upheld disallowance on ground that assessee had agreed to such disallowance before AO. Having considered submissions before us, we think it proper to restore matter to file of learned CIT(A) for considering expenditure on merits and decide matter afresh after hearing assessee. 10. Ground No. 3 is against refusal of learned CIT(A) to admit fresh ground of appeal against disallowance of Rs. 6,98,889, being increase in liability of technical know-how fees on account of fluctuation in foreign exchange. Before us, it was pointed out that assessee had moved additional ground vide its letter dt. 11th Sept., 2002, submitted before learned CIT(A) on same day. learned CIT(A) passed order on 26th Sept., 2002 after submission of additional ground of appeal. It appears that learned CIT(A) did not consider this issue at all. In view thereof, it is held that learned CIT(A) shall consider admissibility of ground. If ground is admitted, he shall also decide ground on merit after hearing assessee. Thus, this ground is treated as allowed for statistical purposes. 11. In result, appeal of assessee is partly allowed. ITA No. 134/Pune/2000 for asst. yr. 1997-98 1 2 . Ground No. 1 is similar to ground No.1 in ITA Nos. 132 & 133/Pune/2003 (supra). It is directed that AO shall work out WDVs of assets taken from Ceat Ltd. on basis of orders in those appeals, and allow deduction of depreciation for this year accordingly. Thus, this ground is partly allowed. 13. Ground No. 2 is regarding deduction of enhanced liability in respect of technical know-how fees due to fluctuation in foreign exchange. Similar ground is restored to file of learned CIT(A) for fresh decision in ITA No. 133/Pune/2003 (supra). Following decision in that appeal, this ground is also restored to file of learned CIT(A) for fresh decision. Thus, this ground is treated as allowed for statistical purposes. 14. In result, appeal is partly allowed. *** SOUTH ASIA TYRES LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
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