High Court Of Madras
Nagammal Cotton Mills (P) Ltd. vs. CIT
Section 43(1), Expln. 3
Asst. Year 1982-83, 1983-84
R. Jayasimha Babu & A.K. Rajan, JJ.
Tax Case Nos. 150 & 151 of 1989
13th December, 2001
P.P.S. Janardhanaraja, for the Applicant : T. Ravi Kumar, for the Respondent
R. JAYASIMHA BABU, J. :
The assessee-company had been on 1st Sept., 1980, admitted as a partner in a firm whose other two partners were the only two shareholders and directors of the company. That firm was dissolved w.e.f. 18th Oct., 1981, and as per the terms of the dissolution the assessee took over all the assets and liabilities of the firm. According to the assessee the assets were taken over at the market value. The value so adopted by it was very much more than the written down value of the assets as depreciation and extra shift allowance had been claimed, and had been allowed with respect to those machineries in earlier years. The assessment years are 1989-90 to 1983-84 (sic).
2. The AO invoked Expln. 3 to s. 43(1) of the IT Act which reads thus : “Sec. 43(1) 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 AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the AO may, with the previous approval of the Jt. CIT, determine having regard to all the circumstances of the case.”
3. The AO found that while the original cost of the machineries was Rs. 90,68,955.57, the written down value of those machineries as per the firmâs assessment was Rs. 23,81,706. However, the assessee had, while taking over the assets, valued those items at Rs. 44,45,382 and thereafter made the claim for depreciation with reference to that figure treating that figure as its cost.
4. The AO, therefore, after obtaining the previous approval of the IAC determined the cost of the assets taken over by the assessee at the written down value for income-tax purposes as on the date of the take over of the firm. He then proceeded to disallow the sum of Rs. 2,77,205 from the sum of Rs. 5,14,819 that had been claimed by the assessee as depreciation.
5. In assesseeâs appeal on this issue, the CIT(A) confirmed the disallowance. Further appeal by the assessee to the Tribunal was unsuccessful. This reference before us is at the instance of the assessee and the question referred is:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that provision of Expln. 3 to s. 43(1) applied to the facts of the case and that the assessee is not entitled to depreciation on the book value of assets of the earlier firm but only on the values as fixed by the ITO under Expln. 3 to s. 43(1) of the IT Act, 1961 ?” The learned counsel for the assessee submitted that the value of the machineries which the assessee had adopted when it took over the assets at the time of dissolution was in accordance with what had been said in the case of A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC) : TC 2R.453 wherein the Court approved the observation of this Court in the case of Md. Ussain vs. Abdul Gaffoor AIR 1950 Mad 758. Counsel submitted that the formation of the company was only due to the insistence of the lenders that the business of the company, namely, the running of the cotton mill should be by an incorporated company before the financial institutions could lend money to it. However, there is no material on record to substantiate that claim. he fact that the assessee had adopted the market value at the time of dissolution even when such value is much higher than the written down value, would afford sufficient basis for invoking Expln. 3 to s. 43(1) when the surrounding circumstances indicate that the purpose of the transfer of the assets directly or indirectly to the assessee where the assets had suffered depreciation prior to such transfer is such as to indicate that the main purpose of transfer was to enable the assessee to gain higher depreciation by taking a higher figure as itâs cost at the time of such transfer. Here the firm was dissolved within about 13 months of its formation. The two partners besides the assessee- company were also the only two shareholders and directors of the company. The reality before and after the dissolution was the same. The same persons who enjoyed the benefits of the ownership of the assets and its uses continue to have such benefits, the two partners indirectly and the assessee itself directly. The findings recorded by the Tribunal in this background cannot be faulted. The question referred to us is, therefore, answered in favour of the Revenue and against the assessee.
[Citation : 258 ITR 390]