Madras High Court
Nagammal Cotton Mills (Pvt.) Ltd. vs Commissioner Of Income-Tax on 13 December, 2001
Equivalent citations: [2001]258ITR390(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu, A.K. Rajan
JUDGMENT R. Jayasimha Babu, J.
1. The assessee-company had been on September 1, 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 with effect from October 18, 1981, and as per the terms of the dissolution the asses-see took over all the assets and liabilities of the firm. According to the asses-see, 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 1979-80 to 1983-84.
2. The Assessing Officer invoked Explanation 3 to Section 43(1) of the Income-tax Act, 1961, which reads thus :
"43(1). Expln. 3.--Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly, to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case."
3. The Assessing Officer 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 firm's 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 Assessing Officer therefore after obtaining the previous approval of the Inspecting Assistant Commissioner 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 the assessee's appeal on this issue, the Commissioner 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 the provision of Explanation 3 to Section 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 value as fixed by the Income-tax Officer under Explanation 3 to Section 43(1) of the Income-tax Act, 1961 ?"
6. 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 v. CIT , wherein the court approved the observation of this court in the case of N. Muhammad Ussain Sahib v. S.N. Abdul Gaffoor Sahib, . 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.
7. The 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 Explanation 3 to Section 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 its 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 person 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.