DE NORA India Ltd. v. Commissioner of Income-tax
[Citation -2014-LL-1222]

Citation 2014-LL-1222
Appellant Name DE NORA India Ltd.
Respondent Name Commissioner of Income-tax
Court HC
Date of Order 22/12/2014
Judgment View Judgment
Keyword Tags profits and gains of business • commencement of production • depreciation allowance • industrial undertaking • lump sum consideration • computation of income • plant and machinery • revenue expenditure • written down value • sale consideration • depreciable asset • valuation report • balancing charge • fresh assessment • work-in-progress • lump sum payment • monies borrowed • working capital • stock-in-trade • purchase price • original cost • value of land • going concern • market value • actual cost • fixed asset • new project • dead stock
Bot Summary: In Challapalli Sugars Ltd., the Supreme Court has held that the expression cost is not synonyms with price and would include the actual cost paid by the assessee, to acquire the asset in question and other expenses such as freight, warehouse charges or insurance and interest to bring the asset into existence and put them into working condition. The aforesaid decision does not help or assist the assessee in the present case, for we are not concerned with what should be capitalised but we have to answer what was the actual cost of the fixed assets on which depreciation should be claimed and allowed, i.e., the actual cost paid by the assessee for the depreciable assets acquired from Wimco Ltd. For computing the value of the said assets, the appellant-assessee and Wimco Ltd. had both relied upon the surveyor's report dated January 16, 1990, and March 6, 1990. We do not think that there is any doubt on the wording of the section or on the interpretation that has been put upon those words that the cost to be calculated for the purpose of depreciation allowance is the cost to the assessee and not to the person who makes the sale but still the question remains whether the Appellate Tribunal has the jurisdiction to hold that what the appellant has actually paid as the price of a particular asset is not its real price and the price paid includes the price of some other asset which must have been purchased. The definition of'actual cost' has been amplified by excluding such portion of the cost as is met directly or indirectly by any other person or authority. 'Actual cost' means nothing more than the cost accurately ascertained. The determination of actual cost in section 43(1) has relevancy in relation to section 32; section 32A, section 33, and section 41.'Actual cost' of an asset has no relevancy in relation to section 36(1)(iii) of the 1961 Act. Section 43 defines certain terms relevant to income from profits and gains of business and the said section commences with the words'In sections 28 to 41 and unless the context otherwise requires''actual cost' shall mean the actual cost of the assets to the assessee, reducing by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.


JUDGMENT judgment of court was delivered by V. Kameswara Rao J.-These two appeals filed by assessee DE NORA India Ltd. (earlier known as M/s. Titanor Components Ltd.) under section 260A of Income-tax Act, 1961 ("the Act" in short), relate to assessment years 1990-91 and 1991-92, wherein challenge has been made to common order dated December 21, 2001, passed by Income-tax Appellate Tribunal, Delhi Bench ("the Tribunal" in short) in ITA No. 1730/ Delhi/1999 and ITA No. 1356/Delhi/1995, whereby Tribunal has dismissed appeals of appellant-assessee on question of determination of actual cost paid by appellant to M/s. Wimco Ltd. on acquisition of fixed assets. common substantial question of law which was framed, vide order dated September 15, 2003, in these appeals is as under: "Whether, on facts and in circumstances of case, Tribunal was correct in law in placing reliance on surveyor's report for purpose of determining actual cost of asset acquired by assessee from M/s. Wimco Ltd.?" relevant facts necessary for disposal of these appeals are that appellant company was incorporated on June 7, 1989, for establishment of industrial undertaking for manufacture of coated metal electrodes, cathodic protection systems and chloralkali cells. appellant company on November 30, 1989, entered into agreement with M/s. Wimco Ltd. to purchase its metal anode division, going concern, with all its assets, liabilities and obligation specified in agreement of even date. purchase price agreed and paid by appellant assessee to M/s. Wimco Ltd. was Rs. 6,03,21,910 to be paid in cash; purchase price fixed was for acquisition of running undertaking with all assets and liabilities. first assessment year of appellant company was assessment year 199091. actual cost of fixed assets acquired was not examined by Assessing Officer and assessment made was completed at nil income. matter regarding determination of actual cost was considered for first time by Assessing Officer during assessment year 1991-92. Relying upon surveyor's report, value of said assets was taken as Rs. 3,50,37,238. We note that said surveyor was appointed by appellant company. appellant company carried out matter in appeal to Commissioner of Income-tax (Appeals) ("the CIT (Appeals)", for short) for both assessment years 1990-91 and 1991-92. Commissioner of Income-tax (Appeals) did not agree and held that Assessing Officer had rightly computed cost of fixed assets acquired at Rs. 3,50,37,238 as against Rs. 6,10,02,641 claimed by assessee. He directed Assessing Officer to make fresh assessment for assessment year 1990-91 after considering claim of depreciation of assets acquired from M/s. Wimco Ltd. in light of his findings in assessment year 1991-92. Thereupon, Assessing Officer passed appeal effect order under section 143(3) read with section 250 of Act for assessment year 1990-91 dated January 27, 1995, whereby he held that actual cost of fixed assets acquired for purpose of depreciation should be taken at Rs. 3,50,37,328 as per surveyor's report. On appeal, Commissioner of Income-tax (Appeals) affirmed said findings observing that Assessing Officer merely followed earlier order in appeal for assessment year 1991- 92. appellant being aggrieved filed appeals before Tribunal against order of Commissioner of Income-tax (Appeals) for assessment years 1990-91 and 1991-92, which appeals were dismissed by common impugned order dated December 21, 2001. contention of assessee is that depreciation is to be allowed on actual cost incurred and this is mandate of section 32 read with section 43(6) and 43(1) of Act. It is submitted that surveyor's report was internal document and cannot disturb and override actual cost incurred or paid for fixed assets. At best, surveyor's report was hypothetical or estimate and should not be equated with actual cost. Reliance is placed on judgment of Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC). We may record that before Assessing Officer, assessee had computed "actual cost" for acquisition of fixed assets at Rs. 6,10,02,641. In alternative it was submitted that Rs. 4,60,99,228 be treated as "actual cost" of fixed assets. said figure was computed by assessee after reducing net current assets, loss for period December 1, 1989, to March 30, 1990, capital work-in-progress and addition to plant and machinery between December 1, 1989, to March 30, 1990. assessee had also submitted that there was no dispute in respect of various obligations amounting to Rs. 1,49,03,413 as these were revenue expenditure in years when actually paid. In order to appreciate controversy, we will like to reproduce computation made on question of "actual cost" enclosed by appellant- assessee with present appeal as annexure B. It is stated that said computation was also filed before Tribunal. same is as under: Case as pleaded before Assessing Officer and Commissioner (Appeals) Amount Amount Particulars (Rs.) (Rs.) Total cash consideration 6,03,21,910 paid Add: Obligations NRDC Royalty 75,00,000 Warranties 72,96,000 Gratuity 1,07,413 Less: Other allocations Loss for period 1-12- 11,57,339 1989 to 30-3-1990 Capital work-in-progress 39,74,515 new project Working capital 89,75,211 Plant and machinery new 1,42,22,682 addition Cost of fixed assets claimed 6,10,02,641 6,10,02,641 in balance-sheet Case now put forward before honourable Tribunal Less: obligations which cannot legally be capitalised (NRDC, warranties, and gratuity) claimed as revenue expenditure as and when 1,49,03,413 accrued/incurred 4,60,99,228 Interest on unpaid purchase consideration for period 1-12- 1989 to 29-3-90 now claimed as revenue expenditure for 21,53,714 assessment year 1990-91 Cost of fixed assets now claimed 4,39,45,514 before hon ble Tribunal Cost of fixed assets 3,50,37,238 estimated by Department Add: Estimated interest cost for 60,00,000 implementation period as per Supreme Court decision Estimated establishment cost during 24,00,000 implementation period as per decision above 4,34,37,238 Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 at 173. aforesaid chart would indicate that Rs. 1,49,03,413, i.e., obligations relating to NRDC royalty, warranties and gratuity were to be claimed as "business expenditure" as and when incurred or accrued. With regard to interest of Rs. 21,53,714, we are not concerned as matter was remanded. last two figures, i.e., Rs. 60,00,000 and Rs. 24,00,000 have not been argued and raised before us. What was acquired and paid for by appellant-assessee was for ongoing or running undertaking. undertaking was acquired in terms of agreement dated November 30, 1989, between assessee and Wimco Ltd. consideration paid was not bifurcated and divided into different heads, as it was case of purchase of running business with all assets and liabilities. assessee had taken over all obligations and rights including advantages, handicaps, distribution network, long-term debts, investments, patent, trademarks, know-how, etc. agreement stipulates that assessee would acquire assets including land allotted in district Rampur, buildings comprising coating shop, fabrication shop, DG set room, etc., plant and equipment as per details, stock-in-process, stock-in-trade, ram materials, contractual rights with customers and suppliers, receivables from trade or others and petty cash related to said business. assessee was also to get benefit of all permits, consents and approvals and all benefits attached thereto or occurring to said business including rights, title, benefits, interests and advantages under industrial licence, import licences and other licences, quotas whether registered or otherwise, import and export entitlements. In addition, assessee had also taken over rights, title, benefits and advantages, duties, liabilities and obligations under various agreements, arrangements and understandings pertaining or relating to business with customers, suppliers and others including goodwill. Thus, consideration paid of Rs. 6,03,21,910 was for running and going concern and to acquire undertaking. Rs. 6,03,21,910 was not sub-divided or bifurcated under said agreement under different heads. Value of fixed assets, which were transferred and on which depreciation was earlier claimed by Wimco Ltd. and after acquisition by assessee was not specified or so stated in agreement itself. It was lump sum payment. appellant had, however, filed before us details of final purchase consideration paid to Wimco Ltd., which is as under: Amount (in Particulars Indian rupees) Basic purchase, consideration based on net 5,65,80,256 operating assets as on 31-3-1989. Increase in purchase consideration at 17 per cent. 21,53,714 on unpaid amount for period 1-12-89-29-3-90 Interest on delayed payments 7,560 Increase/(decrease) in purchase consideration due to movements with effect from 1-4-1989 (i) On account of fixed assets 37,81,995 (ii) On account of working capital 70,88,869 (iii) Loss for period 1-4-89-30-3-1990 34,23,556 (iv) Corporate overheads 12,00,000 (v) Increase at 17 per cent. on next monthly 1,03,578 movement of above Fifty per cent. stamp duty paid at Bombay 1,60,140 Total 6,03,21,910 Another chart enclosed with appeal by assessee, pertains to and give details of balance to be allocated on fixed assets, reads as under: Balance to be allocated on fixed assets Market Stamp Factored Particulars Total value duty value Land 13,57,500 20,497 13,77,997 23,67,962 Building: 33,00,480 49,835 33,50,315 57,57,212 Residence Factory 59,47,898 89,808 60,37,706 1,03,75,249 Plant and 2,40,43,043 2,40,43,043 4,13,15,782 machinery Furniture 3,88,317 3,88,317 66,72,387 Motor car 13,417 13,417 23,056 (WDV) Patent 6,10,02,641 2,88,693 1,60,140 3,54,99,488 (WDV) reading of aforesaid chart would indicate that appellant-assessee had factored value of land at Rs. 23,67,962. It is obvious; depreciation is not to be allowed on land. aforesaid chart also gives details of market value, stamp duty and total value of fixed assets purchased. same was Rs. 3,54,99,488 including value of land taken at Rs. 13,77,997. It is evident that what was purchased by appellant-assessee was undertaking there being slump sale and entire business including assets and liabilities were transferred for lump sum amount. There was no break-up or division of said amount in agreement itself. amount paid would be sale consideration paid after taking into account value of plant, machinery, dead stock as well as work-in-progress, stock-in-trade, etc., and intangible items like goodwill, manpower, values of different licences, etc. This cost paid would be for both depreciable and non-depreciable assets. In such cases, difficulties do arise in computing actual cost of assets on which depreciation is to be allowed to purchaser, i.e., appellant-assessee. There are decisions which hold that lump sum price cannot be attributed for different items if no bifurcation or division being made by assessee or by purchaser. But, in facts of present case, there is evidence that appellant assessee and seller had evaluated plant and machinery on date of sale. Therefore, authorities and Tribunal deemed it appropriate to rely upon surveyor's report for computing actual cost and we agree with said conclusion. CIT v. Artex Manufacturing Co. [1997] 227 ITR 260 (SC), was case of slump sale on lump sum price but Supreme court held that balancing charge under section 41(2) of Act could be computed, in spite of fact what was payable by assessee was difference between written down value and actual cost of depreciable asset on sale. This, it was held, was possible in said case, as necessary information was furnished by assessee before Assessing Officer. Supreme Court rejected contention of assessee that value of plant, machinery and dead stock was not mentioned in agreement for slump sale and, therefore, no value could be attributed to different items, observing that assessee had himself furnished information to Assessing Officer and, therefore, it cannot be said that price attributed to items transferred was not indicated. In same volume, Supreme Court in CIT v. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 (SC), concluded otherwise in case, again of slump sale with lump sum consideration being paid for going concern, on ground that assessee had not furnished bifurcation or information in this regard. This distinction was noticed by Supreme Court in PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC). This was case relating to capital gains under section 45 of Act. Supreme Court reversed decision of High Court holding that section 45 was not applicable, for it was not possible to apply computation provision which was inextricably linked and together with charging section constituted integrated code. Thus, undertaking cannot be confused with its parts or assets and in case lump sum payment was made, it cannot be earmarked item-wise. However, in said decision, Supreme Court noticed decision in Artex Manufacturing Co. (supra) where in case of slump sale for lump sum amount, bifurcation was accepted on ground that there was evidence on record submitted by assessee. sale consideration for plant, machinery, dead stock, etc., was arrived at and computed. valuation report in Artex Manufacturing Co. (supra) was used for computing liability under section 41(2) of Act. In present case, as noticed above, assessee had appointed surveyor who had computed and valued fixed assets to be transferred. This information was furnished by assessee, bifurcating purchase price. Thus, valuer's report, etc., was treated and bifurcating purchase price. Thus, valuer's report, etc., was treated and constituted as actual cost paid by appellant-assessee in respect of fixed assets for purpose of depreciation. Actual cost as per assessee was ascertainable with reference to said document, i.e., surveyor's report. To hold to contrary, would be ignoring information and material which formed very basis of transfer and relied by appellant-assessee. In Challapalli Sugars Ltd. (supra), Supreme Court has held that expression "cost" is not synonyms with "price" and would include actual cost paid by assessee, to acquire asset in question and other expenses such as freight, warehouse charges or insurance and interest to bring asset into existence and put them into working condition. Interest on monies borrowed for purchase of fixed asset prior to asset coming into production, i.e., till erection stage should be capitalised. It was held as under (page 175 of 98 ITR): "It would appear from above that accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by newly started company which is in process of constructing and erecting its plant, interest incurred before commencement of production on such borrowed money can be capitalised and added to cost of fixed assets which have been created as result of such expenditure. above rule of accountancy should, in our view, be adopted for determining actual cost of assets in absence of any statutory definition or other indication to contrary." aforesaid decision does not help or assist assessee in present case, for we are not concerned with what should be capitalised but we have to answer what was actual cost of fixed assets on which depreciation should be claimed and allowed, i.e., actual cost paid by assessee for depreciable assets acquired from Wimco Ltd. For computing value of said assets, appellant-assessee and Wimco Ltd. had both relied upon surveyor's report dated January 16, 1990, and March 6, 1990. said surveyor had valued all buildings, boundary wall and other plant and equipment. aforesaid valuation report is detailed and elaborates and is also basis on which Wimco Ltd. had paid tax on resultant transfer. We note for benefit judgment of Supreme Court in case of Jogta Coal Co. Ltd. v. CIT [1959] 36 ITR 521 (SC); AIR 1959 SC 1232 , wherein Supreme Court has held as under (page 525 of 36 ITR): "The words which require to be considered are'on original cost thereof to assessee'. It has been held by Privy Council in CIT v. Buckingham and Carnatic Co. Ltd. [1935] 3 ITR 384 (PC) that word'assessee' in section 10(2)(vi) refers to person who owns property in question and who is being assessed and not predecessor and depreciation allowance is to be based on original cost of such property to such person (i.e., assessee) and therefore cost to be considered for purpose of calculating depreciation allowance is original cost of purchaser who is being assessed and not written down value to his predecessor. We do not think that there is any doubt on wording of section or on interpretation that has been put upon those words that cost to be calculated for purpose of depreciation allowance is cost to assessee and not to person who makes sale but still question remains whether Appellate Tribunal has jurisdiction to hold that what appellant has actually paid as price of particular asset is not its real price and price paid includes price of some other asset which must have been purchased." Further, in Deputy CIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC); [2008] 2 SCC 465, Supreme Court has held as under (page 200 of 298 ITR): "Section 43 groups together all provisions in nature of definitions or interpretations relevant to computation of income under head'Profits and gains of business'. Section 43(1) defines'actual cost'. definition of'actual cost' has been amplified by excluding such portion of cost as is met directly or indirectly by any other person or authority. Explanation 8 has been inserted in section 43(1) by Finance Act, 1986 (23 of 1986), with retrospective effect from April 1, 1974. It is important to note that words'actual cost' would mean whole cost and not estimate of cost.'Actual cost' means nothing more than cost accurately ascertained. determination of actual cost in section 43(1) has relevancy in relation to section 32 (depreciation allowance); section 32A (investment allowance), section 33 (development rebate allowance), and section 41 (balancing charge).'Actual cost' of asset has no relevancy in relation to section 36(1)(iii) of 1961 Act. This reasoning flows from bare reading of section 43(1). Section 43 defines certain terms relevant to income from profits and gains of business and, therefore, said section commences with words'In sections 28 to 41 and unless context otherwise requires''actual cost' shall mean actual cost of assets to assessee, reducing by that portion of cost thereof, if any, as has been met directly or indirectly by any other person or authority. In other words, Explanation 8 applies only to those sections like sections 32, 32A, 33 and 41 which deal with concepts like depreciation. concept of depreciation is not there in section 36(1)(iii). That is why Legislature has used words 'unless context otherwise requires'. Hence, Explanation 8 has no relevancy to section 36(1)(iii). It has relevancy to aforementioned enumerated sections. Therefore, in our view, Explanation 8 has no application to facts of present case." In these circumstances, we do not find any merit in submission made by assessee. question of law is, accordingly, answered against appellant-assessee and in favour of respondent-Revenue. appeals are dismissed. There will be no order as to costs. *** DE NORA India Ltd. v. Commissioner of Income-tax
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