Income Tax Appellate Tribunal - Delhi
Bilt Power Ltd., New Delhi vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'A': NEW DELHI
BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER
AND
SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER
ITA No. 3259 /Del/2010
Assessment Year: 2007-08
Bilt Power Limited, Addl. Commissioner of
now known as : Income-tax,
Avantha Power & Vs. Range-2,
Infrastructure Limited, New Delhi.
Thapar House, 124,
Janpath, New Delhi.
PAN No. AACCB7469B
(Appellant) (Respondent)
&
ITA No. 4276 /Del/2010
Assessment Year: 2007-08
Deputy CIT, Bilt Power Limited,
Circle 2(1), now known as :
New Delhi. Vs. Avantha Power &
Infrastructure Limited,
Thapar House, 124,
Janpath, New Delhi.
PAN No. AACCB7469B
(Appellant) (Respondent)
Appellant by: Shri S.D. Kapila, R.R. Maurya & Akhil Mahajan, CAs
Respondent by: Ms. Geetmala, CIT(DR)
ITA Nos. 3259 & 4276/D/ 2010 2
ORDER
PER S.V. MEHROTRA, A.M.
These are cross appeals directed against the orders of ld. CIT(A) dated 11.06.2010 for A.Y. 2007-08.
2. Brief facts of the case are that the assessee company was incorporated under the Companies Act, 1956 on 22nd July, 2005, with the object to engage itself to carry on the business of generation and distribution of power. The assessee's company original name was Bilt Power Ltd. which was subsequently changed to Avantha Power & Infrastructure Ltd. (APIL). For the A.Y. 2007-08, the assessee company filed its return of income declaring income at Rs. 7,98,64,773/-. The Assessing Officer, after detailed discussion determined the total income at Rs. 19,73,68,300/- by making following additions/ disallowances: -
a) disallowance of depreciation of Rs. 11,53,53,162/- on differential amount of fixed assets between purchases consideration for Rs. 235 cores - w.d.v. as per Income-tax Act at Rs. 88.66 crores.
b) disallowance of non-processing charges Rs. 21,50,367/-
3. The assessee preferred appeal before ld. CIT(A) who while partly allowing the appeal, deleted the disallowances on account of depreciation. As regards loan processing fee, while upholding the assessee's contention ITA Nos. 3259 & 4276/D/ 2010 3 that the expenditure was revenue in nature allowed the deduction to the extent of Rs. 21,50,367/- instead of Rs. 2,43,70,830/- as claimed by assessee.
4. Being aggrieved with the order of ld. CIT(A), both assessee and department are in appeal before us.
5. First we take up the Department's appeal vide ITA No. 4276/Del/2010.
6. The Department has taken following grounds of appeal: -
1. "The ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 11,53,53,162/- on account of disallowance of depreciation u/s 32 of the I.T. Act ignored the fact that transfer of assets was a "scheme of demerger" duly approved by the Hon'ble High Court of Delhi and provisions of Explanation 3 to section 43(1) of the I.T. Act were explicitly applicable in the assessee's case.
2. The ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 21,50,367/- on account of disallowance of loan processing fee charges as revenue expenditure. Ld. CIT(A) ignored the proviso to section 36(1)(iii) of the I.T. Act, 1961 which is explicitly applicable in the assessee's case and also the instance of loan processing charges accrued earlier than asset was actually ITA Nos. 3259 & 4276/D/ 2010 4 put to use since assessee company is following mercantile system of accounting."
7. Brief facts apropos ground no. 1 are that the assessee company in its present form came into existence consequent to demerger of Ballarpur Industries Ltd. (hereinafter referred as BILT) as per the scheme of arrangement of demerger u/s 391 to 394 of the Companies Act, 1956, as approved by the Hon'ble High Court of Delhi vide order dated 25th May, 2006. Consequent to the scheme, BILT transferred its power division to the assessee company for a consideration of Rs. 235 crores. The Assessing Officer has observed that prior to submission of the scheme of arrangement and demerger before the Hon'ble High Court, the BILT got its plant and machinery and civil works of power division valued in December, 2005 by SPB Project & Consultancy Ltd., Chennai and Infrastructure Leasing & Services Ltd., Delhi. As per this report, the plant and machinery and civil works of the power division of BILT was valued at Rs. 315.85 crores. This comprised value of the plant and machinery, furniture & fixtures at Rs. 292.27 crores and building at Rs. 23.58 crores. It was pointed out before the AO that the transaction at Rs. 235 crores had been determined by the Board of Directors of BILT and APIL based on their individual judgment and taking into consideration the valuation provided by the independent valuers namely; SPB Projects & Consultancy Ltd., Chennai (for technical valuation) and ITA Nos. 3259 & 4276/D/ 2010 5 Infrastructure Leasing & Services Ltd., Delhi (for financial valuation). Details of valuation were as under: -
Units Plant & Machinery Building
Furniture & Fixture
Ballarpur 564,338,000 70415000
Bhigwan 1394309000 55446000
Shreegopal 644906000 67119000
Sewa 319150000 42867000
Total 2922703000 235847000
Grant Total 3158550000
8. The AO further noticed that there was another valuation dated 04/01/2006 of Plant and Machinery and Building by JMR Consultants, Chennai which valued these at Rs. 240.85 crores. He has further pointed out that this valuation did not find mention in the Scheme of Arrangement and Demerger presented before the Hon'ble High Court. This valuation was as under: -
Description Appraised value of present assets in Rs. Lakhs Plants & Civil Works Total Value Machinery Ballarpur unit 4,136,05 704.16 4,840.21 Bhigwan unit 10,500.40 554.46 11,054.86 Shree Gopal 4,785.24 671.19 5,429.43 Unit SEWA unit 233.83 428.67 2,760.50 Total 21,726.52 2,358.48 24,085.00
9. The AO further observed that while approving the Scheme of Arrangement and Demerger on 25th May, 2006, the Hon'ble High Court of Delhi observed that, merely because consideration was being paid to the transferor company, it could not be presumed that the scheme as such was contrary to public interest or against the interest of shareholders of transferor ITA Nos. 3259 & 4276/D/ 2010 6 company. Hon'ble High Court observed that the transferor company could have always transferred/ sold any of its assets for consideration to the third party. The Court further observed that the sale consideration as fixed was based upon independent judgment of two valuers namely as SPB Products Consultancy Ltd. of Chennai and Infrastructures Leasing & Financial Services Ltd., New Delhi. The AO further observed that under these circumstances, the Hon'ble High Court held that the sale consideration fixed could not be said to be inadequate or not representing the market value of the undertaking. Thus, in view of the Scheme of Arrangements and Demerger approved by the Hon'ble High Court of Delhi, the assessee company paid Rs. 235 crores to BILT towards purported cost of Plant & Machinery & Building.
10. The AO further noted that after including WDV of other assets, total depreciation claimed was at Rs. 18.57 crores. He further examined the details on record in regard to depreciation claimed by BILT in respect of assets transferred to assessee company. This was as under: -
Name of the assets Rate of depreciation WDV as per Depreciation assessee claimed Factory Bldg. 7.84% 22,75,22,879 17837794 Office Bldg. 3.02% 25,95,263 78377 Plant & Machinery 7.84% 2,11,64,83,232 166531759 Furniture & 12.77% 33,98,458 433983 Fixture Total 2,34,99,99,832 184881913 ITA Nos. 3259 & 4276/D/ 2010 7
11. The AO required the assessee to furnish book value of the assets purchased at Rs. 235 crores and WDV as per the Tax Audit Report in the books of the transferor company along with working of depreciation for the purposes of Income-tax Rules, 1962. The assessee's reply as summarized by AO at pages 4 & 5 was as under: -
i) "Consideration of Rs. 235 crores has been determined by the Board of Directors of BILT and APIL based on their independent judgment and taking into consideration the valuation report prepared by M/s SPB Products and Consultancy Services, Chennai.
ii) Transfer of Power Division was as per Scheme but does not fall within the ambit of Sec. 2(19AA) of the Act as the assessee company has not satisfied the conditions laid down in Sec.
2(19AA) of the Act. These conditions remaining unsatisfied are:
a. The property of Power Division being transferred by BILT at consideration of Rs. 235 crores is not at value appearing in the books of account immediately before the demerger. Thus, condition of clause (iii) of sec. 2(19AA) is not satisfied.
b. Assessee Company has not issued any shares in consideration of demerger to shareholders of BILT. Thus, condition of clause (iv) of sec.
2(19AA) is not satisfied.
ITA Nos. 3259 & 4276/D/ 2010 8c. Shareholders of BILT have not held ¾ in value of shares in Assessee Company;
however, as on June 30, 2006 Assessee Company has allotted 26% shares to BILT.
Thus, condition of clause (v) of sec. 2(19AA) is not satisfied.
d. BILT has transferred Power Division to the assessee company at lumpsum consideration of Rs. 235 crores on sump sale basis and has paid long term capital gain tax on this sale consideration as per section 50B of the Act."
12. On AO's further queries in regard to the book value of the assets purchased from BILT, the assessee stated as under: -
(i) "Assessee Company has capitalized Rs.235 crores in its books of accounts as actual cost paid for Power Division as defined in section 43 of the Act. Copy of the letter from BILT showing value of assets of its Power Division transferred to the assessee company amounting to Rs. 229 crores was also filed.
(ii) The assessee in support of the sale consideration paid to M/s BILT has also submitted the valuation reports from the registered valuers namely SPB Projects and Consultancy Limited determining the value of business at Rs. 315 crores and of M/s JMR Consultants determining the value of the business at Rs. 240.85 crores.ITA Nos. 3259 & 4276/D/ 2010 9
These were obtained prior to the approval of the Scheme by Court.
(iii) It is further submitted that Explanation 7A to Section 43 is not applicable for assessee company as it was not a demerger of power division as defined in sec. 2(19AA) is not satisfied.
(iv) As the condition of sec. 2(19AA) were not satisfied, therefore, transferor company i.e. BILT has not got any benefit of sec. 47(vib) of the Act and paid capital gain tax under section 50B of the Act. In other words, BILT has shown transfer of Power Division as slump sale.
(v) In the case of slump sale, a break-up of the cost
of each asset/liability is not available.
Consequently, a problem arises as to how to find out the "actual cost" of different assets acquired by way of slump sale in the hands of purchaser.
Accounting Standard 10 issues by the ICAI
provides that "where several assets are
purchased for a consolidated price, the
consideration is appropriated to the various assets on a fair basis as determined by the competent valuers."
(vi) There is no specific provision u/s 43(1) which defines "actual cost" or in sec. 43(6) which defines "written down value". Therefore,
provision which are not there in the Act cannot be inserted/ added by the Assessing Officer.
ITA Nos. 3259 & 4276/D/ 2010 10
(vii) Thus actual means the actual cost of the assets paid by the assessee i.e. sec. 235 crores. Since the value of Rs. 315 crores and Rs. 240.85 crores has been determined by independent valuers, therefore, it is reasonable to believe that consideration was paid for acquisition of the capital assets at Rs. 235 crores."
13. As regards WDV of the assets in the books of transferor i.e. BILT as on the date of transfer, the AO issued notice u/s 133(6) of the Act to BILT which submitted its reply, giving the value of assets transferred to APIL, as under: -
Assets Power Division (Amount Rs.)
Transferred
Building 13,17,66,409
Less: 3,22,55,781 9,95,10,628
Accumulated
Depreciation
P&M 3,68,93,07,593
Less: 1,64,72,10,288 2,04,20,97,305 2,14,16,07,933
Accumulated
Depreciation
He observed that the above value of the assets transferred was as per the books value and not as per the Tax Audit Report. He, therefore, again issued notice u/s 133(6) to BILT asking specifically to furnish WDV as per 3CD of Tax Audit Report in respect of assets transferred to APIL. The reply submitted by BILT showed the WDV of the assets transferred to APIL as under: -
Building 8,91,21,537
Plant & Machinery 77,75,43,827
Total 86,66,65,364
ITA Nos. 3259 & 4276/D/ 2010 11
14. In the backdrop of above facts, the AO examined the assessee's claim of depreciation at Rs. 18.57 crores. The AO first examined the assessee's contention that the assets had been acquired in consequence to slump sale because the conditions of demerger as laid down u/s 2(19AA) clause (iii) of the Income-tax Act were not satisfied. The AO after examining the assessee's contention regarding non-compliance with clauses (iii), (iv) & (v) of section 2(19AA) agreed that it was not a case of demerger as contemplated under the Income-tax Act. However, he observed in para 2.9 of his order as under: -
"The conditions laid down in Sec. 2(19AA)(iv) and 2(19AA)(v) are linked to sec. 2(19AA)(iii). Once assets are transferred not on the book value, then obviously, in case of a transfer which is to be stated on market value, the resulting company will be under no obligation to satisfy the conditions laid down in sec. 2(19AA)(iv) and 2(19AA)(v). But this does not automatically prove that assessee will stand to claim depreciation on the consideration paid. From mere non-compliance of certain conditions of sec. 2(19AA) assessee's claim, that it is entitled for depreciation on the consideration so paid, will be a hasty inference."
15. The AO further considered the assessee's contention regarding this being a case of slump sale and transferor company had paid capital gains tax on the said consideration. In this regard he referred to the decision of ITA Nos. 3259 & 4276/D/ 2010 12 Hon'ble Delhi High Court in the context of transfer of capital asset by the Holding Company to the Subsidiary Company in the case of Dalmia Ceramic Industries Ltd. vs. CIT, 277 ITR 219. With reference to this case, the AO observed as under: -
"The assessee among other things took the stand that the difference between the WDV and the price received for the property has been taxed in the hands of the holding company in the relevant assessment years and there is no dispute on this issue. In view of this, it was submitted that the Revenue cannot have tax benefit at both the places, namely, in the hands of the parent company and at the hands of the assessee. It was thus submitted that there is no evasion of tax. Hon'ble High Court observed that in view of Explanation 6, the Assessing Officer as well as the Tribunal have rightly rejected the contention of the assessee and have rightly held that the actual cost once determined u/s 43(1) read with Explanation 6 will remain the same for that assessee. The explanation 6 referred in the para though does not apply to the case of the assessee, it is the principle that 'mere payment of capital gains tax by the seller company' will not entitle depreciation to the purchaser taking purchase price as WDV, which has been elucidated."
15.1 He, therefore, concluded that the assessee's claim is to be examined with reference to Explanation 3 to sec. 43(1).
ITA Nos. 3259 & 4276/D/ 2010 13
16. After considering the ingredients of Explanation 3 he examined the facts of the present case and observed as under: -
"The Explanation has following limbs;
i) Before the date of acquisition by the assessee, the assets were used by any other person for the purposes of his business.
ii) Income-tax 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).
iii) The actual cost to the assessee shall be such an amount as the Income-tax Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case.
As regards the condition mentioned at sl. A. above, same is not a doubt as these assets in question were used by BILT for the purposes of business and subjected to year to year depreciation. Second condition at sl. B. is the satisfaction of the AO 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). In this respect following facts are worth mentioning; ITA Nos. 3259 & 4276/D/ 2010 14
a. The assessee company in its present form
came into existence out of demerger of
BILT. The consideration paid has been
mobilized in the following manner;
Loan taken from bank Rs. 165.00 crores
Share capital from Ballarpur Rs. 18.20 crores
Industries
Share capital from BILT
Paper Holding Ltd. Rs. 51.75 crores
b. As regards the loan obtained from the banks
matter was further scrutinized to ascertain the security against which the loan was obtained.
It was found that the assets which were received from demerged company were in fact pledged as security to the banks to obtain the loan.
Details of security with the banks are as under;
i) Security with UTI bank; Rs. 825,000,000/-
First charge on all fixed and current assets Assignment of Power/Steam Purchase Agreement with BILT executed by borrower Escrow of receivables from BILT
ii) Security with ICICI bank - Rs. 825,000,000/-
All movable and immovable properties both present and future and such other movables as may be agreed to by ICICI Bank for securing the borrowings.
Assignment of right under take or pay Agreement with BILT in favour of ICICI Bank.
ITA Nos. 3259 & 4276/D/ 2010 15Escrow of receivables fromBILT.
It was thus a case where the demerged company instead of taking loans directly is in fact parting with the assets, against which assessee company obtains loan for further payment to BILT.
c. Another amount of Rs. 18.20 crores is mobilized by way of issue of share capital Ballarpur Industries Ltd. It is same company which was demerged and its Power Division was transferred to assessee company. Here again BILT is making payment by way of share capital to APIL which is received back by BILT at later date, now as part of sale consideration of assets. Assessee has thus got back its money but parted with the shares.
d. Another amount of Rs. 51.75 crores is mobilized
by way of issue of share capital BILT Paper
Holding Ltd. This is group company of the
BILT and holds 37.08% of its shares. Here it is substantial shareholder of BILT who is contributing 51.75 crores for share capital of APIL which in turn is received back by the demerged company now as consideration for sale of assets. The funds could have otherwise been received by BILT from BILT Paper Holdin Ltd. without parting with the assets. BILT has thus got back the money of its substantial share holder after having routed through APIL but only after its assets were parted with.
ITA Nos. 3259 & 4276/D/ 2010 16
e. Another aspect requiring consideration is the sanctity of consideration and real value of the assets acquired. There appear quite a few figures. SPB Projects and Consultancy Limited has determined the value of business at Rs. 315 crores and M/s JMR Consultants determined the value of the business at Rs. 240.85 crores.
Book value of the assets in the books of BILT as on the date of transfer is at Rs. 2,14.16 crores and the value for the purposes of Income tax Act is at Rs. 86.66 crores. In the presence of these variations, the consideration negotiated is at Rs. 235 crores. With multiplicity of valuations it gets difficult to give credence to the consideration paid, as WDV for computation of depreciation.
f. From the discussions made above it is seen that only Plant & Machinery and Building have been taken over by APIL from BILT. Hence the status with regard to land having these Plant & Machinery and Building and appurtenant thereto was also probed. It is seen for the land the assessee company has just obtained easement rights on very nominal rents for a period of 15 years. Details thereof are as under;
Location Area of Land Rent per annum
Unit Ballarpur, 4.45 Acres 100000
Maharashtra
Unit Bhigwan, Maharashtra 50 Acres (increased from 100000
41.5 acres) Plus 300000 subletting
charges to MIDC
Unit Shreegopal, Haryana 4.5 Acres 100000
ITA Nos. 3259 & 4276/D/ 2010 17
Unit Sewa, Orissa 9.40 Acres 100000
It may be seen from the above facts that rent
on which property is given is nominal. There
also does not appear to be any basis of rent.
Irrespective of the size of land, which varies from 4.45 acres to 50 acres, the rent paid is Rs.
1,00,000/- per annum. The transactions are not at arm's length. Obvious reason for this could be that, since the land could never have been subject matter of depreciation, there appears to marginal deployment of funds towards easement rights of land. What else is proved from the fact is that the rent is abnormally low which indicates doubt over the price negotiated for the purchase of Plant and Machinery and Building.
g. The WDV in the books of transferor company is at Rs. 88.66 crores as on the date of transfer which is being now taken as Rs. 235 crores by the transferee with apparent purpose of claiming enhanced depreciation and to reduce the tax liability.
Conclusion: In these circumstances, it is thus clear that the funds have been raised from the bank on security of assets etc. acquired by the assessee company as part of the Scheme of Arrangement and Demerger. Additionally the capital has been acquired from demerged company i.e. BILT and BILT Papers Holdings Limited which ITA Nos. 3259 & 4276/D/ 2010 18 has 37.08% shares of BILT. The funds, thus, paid as part of sale consideration are generating from the demerging company, the company substantially interested in the demerged company and against the security of assets acquired by way of demerger of demerged company. The transactions are thus circular in nature in order to enhance the value of asset in the hands of assessee company for the claim of higher depreciation.
In view of above, I am satisfied that the main purpose of transfer of the assets discussed above, by way of demerger is to reduce liability of Income tax by claiming depreciation with reference to an enhanced cost.
Third condition is that the AO with the previous approval of the joint Commissioner will determine the WDV having regard to all the circumstances of the case. In this case since the assessment is being framed by the Additional Commissioner of Income tax, such a condition stands fulfilled.
Therefore, I hereby invoke Explanation 3 to section 43(1) to restrict the WDV of the assets acquired by the assessee company from BILT and to take the WDV as appearing in the books of transferor company as on the date of transfer for the purpose of allowance of depreciation to the assessee company. Depreciation thereon will be computed as under:
ITA Nos. 3259 & 4276/D/ 2010 19
Computation of Depreciation (Amount in Rs.) Name of the WDV as per assessee WDV Depreciation Depreciation Difference Assets/Rate and percentage to as per claimed on Of the total value of AO allowable Depreciation asset Factory 22,75,22,879 9.68% 85829207 17837794 6729010 11108784 Bldg.
7.84% Office Bldg. 25,95,263 .11% 975332 78377 29455 48922 3.02% Plant & 2,11,64,83,232 90.07% 166531759 166531759 62611768 103919991 Machinery 7.84% Furniture & 33,98,458 .14% 1241332 433983 158518 275465 Fixture 12.77% Total 2,34,99,99,832 100% 886665364 184881913 69528751 11535162 Therefore, difference amount of Rs.
11,53,53,162/- claimed as depreciation is disallowed and added back to the total income of the assessee company."
(Addition Rs. 11,53,53,162/)
17. Ld. CIT(A) allowed the assessee's appeal for the following reasons: -
i) the AO did not sight any good ground for not accepting the cost of the assets in question as valued by registered value. The AO did not make any attempt to undertake the exercise of finding out the actual cost of the said assets acquired by assessee, as because main purpose of Explanation 3 is not recording the satisfaction but to determine the actual cost. The AO lacked technical competency to value the plant and machinery transferred from transferor company to transferee company. Though there were three valuers giving the ITA Nos. 3259 & 4276/D/ 2010 20 reports but finally since it was approved by Hon'ble High Court of Delhi and Bombay, there could not be any doubt on valuation of assets.
When there is transfer of old assets, valuation of such assets on transfer may arise due to escalation of present value of such assets on transfer.
ii) it was not a case of transfer of assets by a Holding Company to its Subsidiary as was in the case of M/s Dalmia Ceramic Industries Ltd. vs. CIT, 277 ITR 219.
iii) Arrangement of fund and furnishing security thereof to the lending bank do not fortify the case of the assessee for the purpose of applicability of Explanation 3 of sec. 43(1) of the Act.
iv) price paid by the assessee company to the transferor company was duly disclosed by the transferor company and resultant tax on capital gains on slump sale had also been paid. The department again taxed the transferee company on same transaction by disallowing depreciation.
v) since the transferee company was paying higher amount of Rs. 235 crores (and not 86 crores), then it should get depreciation on Rs. 235 crores only.
vi) the assessee had accounted and treated the transfer of the aforesaid undertaking on a slump sale basis. It was a transfer of an undertaking without assigning the values to individual assets and ITA Nos. 3259 & 4276/D/ 2010 21 liabilities. The consideration of Rs. 235 crores was for the undertaking of power generation business taken over by the assessee company from M/s Ballarpur Industries Ltd. Ld. CIT(A) also referred to sec. 2(42C) defining slump sale in this regard.
18. Ld. DR submitted that there were multiple valuations one by SPB Project & Consultancy Ltd., Chennai along with Infrastructure Leasing & Services Ltd., Delhi, who valued the assets at Rs. 315 crores; JMR Consultants valued at 240.85 crores; in the books of assessee it was 214.16 crores and as per Income-tax computation it was 86.66 crores. She submitted that in the light of these variations, it became incumbent upon the AO to find out the true value of the assets which were transferred at Rs. 235 crores. She submitted that it was a case of related company's transaction and, therefore, the AO rightly invoked Explanation 3 to section 43(1) as the assessee was claiming depreciation on higher value in respect of the assets which were used by the transferor company. She submitted that in this regard AO analyzed the issue with regard to the status of land having these plant and machinery and building and found that the assessee company had obtained easementary rights at a very nominal rent for a period of 15 years and concluded that the transactions were not at arm's length. She submitted that obvious reason for this was that the land was not a subject matter of depreciation. She further submitted that the assets in question were old ITA Nos. 3259 & 4276/D/ 2010 22 assets having WDV of 88.66 crores only whereas the value at the time of transfer was taken at Rs. 235 crores. She submitted that payments for this consideration were coming from the transferor company itself, directly or indirectly. She submitted that enhanced value of assets fetched higher depreciation. She submitted that ld.CIT(Appeals) findings that AO had not made any attempt to undertake the exercise of finding out the actual cost of the assets, is contrary to the facts on record. She submitted that during the course of assessment proceedings, the AO raised various queries with regard to the determination of actual cost of the said assets. The AO made efforts to ascertain the value of the said assets in the books of the transferor company. For this purpose the AO had issued summons also u/s 133(6) to the transferor company. As regards, the approval given by Hon'ble High Court of Delhi & Bombay, ld. DR submitted that merely because the transaction was approved by Hon'ble High Court, it could not be claimed that the assessee company would be entitled for higher depreciation. She submitted that depreciation is to be allowed as per the specific provisions of sec. 32 read with section 43(1) of the Act. She submitted that as far as approval of the Hon'ble High Court to the scheme of arrangement and demerger u/s 391 & 394 of the Companies Act was concerned, the same did not address the specific issues and provisions of the Income Tax Act. At the time of approval of the scheme, the Hon'ble High Court had not adjudicated the issue of "actual cost" of the assets as per the Income-tax Act and the ITA Nos. 3259 & 4276/D/ 2010 23 claim of depreciation thereon. As regards, ld. CIT(Appeals) observation that if any doubt remained regarding valuation, the AO should have taken an opinion from the departmental valuer, ld. DR submitted that the AO had not taken the actual cost of the assets on estimate or ad-hoc basis. Rather he had taken the cost which was appearing in the books of the transferor company. This left no scope for estimation or imagination. In this regard ld. DR referred to the decision of Hon'ble Kerala High Court in the case of CIT vs. Poulose & Mathen Pvt. Ltd., 236 ITR 416, wherein it has been observed as under: -
• Actual cost as contemplated u/s 43 means the actual cost of the assets to the assessee, reduced by that portion of the costs met by other person or authority directly or indirectly. The prefix of the word 'actual' to the word 'cost' is obviously intended to lay emphasis on the reality and genuineness thereof. The fixation of 'actual cost' arises only when the AO is satisfied that the main purpose of the transfer of the assets which were used by any other person at any time for the purpose of his business or profession, directly or indirectly, to the assessee was the reduction of a liability to income-tax by claiming depreciation with reference to an enhanced cost. When theAO is so satisfied, he has wide discretion to fix the 'actual cost' having regard to all the ITA Nos. 3259 & 4276/D/ 2010 24 circumstances of the case subject to the previous approval of the Deputy Commissioner.
• The AO had no grievance against the revaluation of the assets done by the approved valuer. His grievance was that it was done with a view to reduce tax liability. No doubt, the firm and the partners being commercial, men would value the assets only on a real basis and not at cost or at their other value appearing in the books. Therefore, it was all the more certain that the real rights of the partners could not be mutually adjusted on any other basis. But the question that faced the AO was that the position being so strong as it appeared to be, why did he not adopt Explanation 3 to sec. 43(1) when he sufficiently saw that after effecting the transfer there was a direct or indirect attempt to reduce the liability to income tax. The purpose of the said Explanation is to cover all such contingencies and in that view wide powers are conferred on the AO. In the instant case, in fact the assessee did it successfully obviating all collusive device ineffecting the transaction though it could not reasonably be said to be as the sole purpose of the transaction. There may be mutual adjustment of rights between the partners on the dissolution of the firm. But that did not mean the AO was debarred from ascertaining the 'actual cost' of the assets in view of the provisions contained in Explanation 3 to ITA Nos. 3259 & 4276/D/ 2010 25 section43(1). The purpose to be served under this provision is totally different. The effectiveness of the provisions could not be defeated in any manner, even if there was adjustment between the partners of the dissolved firm.
• The Tribunal's view that the revaluation of the assets on the eve of the dissolution of the firm was made bona fide for adjustment of the mutual rights of the firm could not be agreed to. This was not a case where there was no written down value, which means, in the case of assets acquired in the previous year, the actual cost to the assessee and in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the Act as defined u/s 43(6). Section 43(1) with Explanations thereof supersedes the general rule of law governing partnership, its assets and dissolution, etc. The definition of 'actual cost' contained in section 43(1), read with Explanations thereof, affords a mechanism by which to reduce the actual cost to a figure which is anything but real. When the asset was formally used by any other person for the purpose of his business and the main purpose of the transfer of the assets to the assessee was to claim a higher depreciation allowance so as to reduce the liability to pay income tax, the actual cost shall be determined by the AO in the exercise of the power conferred on ITA Nos. 3259 & 4276/D/ 2010 26 him as prescribed in Explanation 3 to sec. 43(1), no matter what the general law prescribes for determining the cost of the assets on the dissolution of partnership firm and transfer of its assets.
• The Bombay High Court in the case of Ginners & Pressers P. Ltd. vs. CIT, 113 ITR 616, held that the condition for attracting the proviso to section 10(5)(a) of the India Income tax Act, 1922 which corresponds to Explanation 3 to sec. 43(1) of the 1961 Act was satisfied because the assets had been used by the parent company for their business before they were transferred to the assessee company. If the ITO proceeded to fix or determine the actual cost of the transferred assets by adopting the written down value of the assets as per books of account of the firm with the approval of the IAC, if would be difficult to say that the method adopted was unreasonable or irrational. • Even if the assessee produced the valuation report, it could not be said that the above conclusion would be different. Therefore, the drawing of adverse inference against the assessee had no impact on the question decided by the Court. It is settled position that the Court has power to disregard the corporate entity if it is sued for tax evasion or to circumvent tax obligation. In this premise, it could not be said that the AO had acted unreasonably or arbitrarily in adopting ITA Nos. 3259 & 4276/D/ 2010 27 Explanation 3 to section 43(1) and fixing the 'actual cost' accordingly.
• Therefore, the assessee was not entitled to claim depreciation on assets taken over from the partnership-firm at the revalued figure and Explanation 3 to section 43(1) was attracted to the instant case."
19. Ld. DR further referred to the ld. CIT(Appeals) observation that when there is a transfer of old asset, valuation of such asset may arise due to escalation of present value of such asset on transfer and submitted that this observation is not supported by any conclusive evidence. In this regard, she pointed out that as per the balance sheet of the assessee company as on 31/03/2007, the total issued share capital of the assessee company was Rs. 70 crores out of which Rs. 69.95 crores belonged to transferor company viz. Ballarpur Industries Ltd. (Rs. 18.20 crores) and BILT Paper Holding Ltd. (Rs. 51.75 crores). She, therefore, submitted that the same person who enjoyed the benefits of the ownership of assets and its uses prior to transfer, continued to re-benefits even after the assets were transferred. She further submitted that the assets which had been transferred were in the nature of plant and machinery, furniture & fixture, etc. They were old assets and had already depreciated substantially over the years and their WDV in the books of transferor company was 88.66 crores. Therefore, there was no reason to take the value of those assets at Rs. 235 crores. She submitted that since ITA Nos. 3259 & 4276/D/ 2010 28 the transfer was between the related parties, the value of assets was taken as per their own convenience and understanding. Ld. DR further submitted that payment of capital gains tax by the transferor company does not affect tax implication in assessee's case. She submitted that it was not a case of double taxation as held by ld. CIT(A). She submitted that AO himself gathered information and valued the assets after taking a holistic view of the entire scenario. Ld. DR submitted that the transaction was circular in nature in-as-much as the funds paid as part of the sale consideration were generated directly or indirectly from the transferor company. She submitted that it was primarily a case of demerger and, therefore, non fulfillment of certain conditions as contemplated u/s 2(19AA), were not relevant. Real intention of the parties is to be seen. She submitted that the Hon'ble High Court has also treated it a case of demerger. She submitted that it was not a case of slump sale because valuation has been assigned to all the assets separately. In this regard she referred to pages 190 to 195 of paper book to demonstrate that assets were separately considered and value had been assigned to each of the asset by the valuers. Ld. DR submitted that net result of the entire exercise was that by showing the enhanced value for old and used assets, the assessee company had gained by claiming higher depreciation. She further submitted that after recording his satisfaction, the AO had further proceeded to ascertain the actual cost of the asset. In this regard he issued notices u/s 133(6) of the Act to the transferor company and ITA Nos. 3259 & 4276/D/ 2010 29 came to know that the WDV of the said asset was only 86.66 crores. She referred to the following case laws to buttress her submission that AO was justified in invoking the provisions of Explanation 3 to section 43(1) and had correctly adopted WDV as "actual cost":
i) Guzdar Kajora Coal Mines Ltd. vs. CIT, 85 ITR 599, in this case, it was, inter-alia, 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 with 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 and to ascertain what the actual original cost was.
ii) JCIT vs. Mahindra Sona Limited, 96 ITD 303 (Mum.), in this case, it was, inter-alia, held that the word "actual" prefixed to the word "cost"
in Explanation 3 to section 43(1) lays emphasis on the reality and genuineness of the cost so as to exclude inflation or deflation cost.
iii) ACIT vs. Jitendra Kumar Gupta, 130 TTJ 328 (Del.) ITAT, in this case, it was held that where assessee could not produce any justification for payment of a huge cost of assets, which were already put to use and had already depreciated to some extent by previous use, the AO was justified in applying provisions of Explanation 3 to section 43(1) to work out actual cost of such assets. ITA Nos. 3259 & 4276/D/ 2010 30
iv) CIT vs. Dalmia Dadri Cement Ltd., 125 ITR 510 (Del), in this case, it was, inter-alia, held that if expenses 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 purpose, it is upon to the Income-tax authorities to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual cost was.
v) Ginners & Pressers P. Ltd. vs. CIT, 113 ITR 616 (Bom.), in this case, it was, inter-alia, observed as under: -
"On the aspect of the market value of the transferred assets on the date of transfer, since the transaction was between the two companies, one of which was the holding company and the other 100% subsidiary company, the facts pertaining to the real market value of the assets transferred as on the date of transfer would be within the exclusive knowledge of either of the two companies and since the relationship between the two companies was of the type mentioned above, it would be within the exclusive knowledge of either of the two companies and since the relationship between the two companies was of the type mentioned above, it would be within the exclusive knowledge of the assessee company also. The taxing authorities as well as the Tribunal were perfectly justified in rejecting the valuation report, ITA Nos. 3259 & 4276/D/ 2010 31 for, in the absence of reasoning or ground for the opinion given by the valuer, the expert evidence wouldnot be of any value. Apart from that, the Tribunal was also further justified in drawing an advserse inference against the assessee company to the effect that, had such material been produced, the same would have gone against the assessee, which, in other words, meant that the correct market value of the assets transferred might have been lower than the consideration for which the transaction was effected and if such adverse inference had been correctly drawn by the Tribunal, it was obvious that the proviso to sec. 10(5)(a) of the 1922 Act would be clearly attracted. What would be the normal market value of the assets as on the date of transfer is a different matter, but for the purpose of attracting the proviso to section 10(5)(a) of the 1922 Act all that is required to be proved is that the market value of the assets transferred as on the date of their transfer was lower than the consideration for which the transfer had taken place and if the circumstances led to that adverse inference then the proviso to section10(5)(a) of the 1922 Act could be clearly attracted. Therefore, the taking authorities as well as the Tribunal were right in coming to the conclusion that this was a case to which the proviso to section10(5)(a) of the 1922 Act was attracted."ITA Nos. 3259 & 4276/D/ 2010 32
vi) Nagammal Cotton Mills P. Ltd. vs. CIT, 258 ITR 390, in this case, it was, inter-alia, held that AO was justified in invoking the Explanation 3 to section 43(1) because the same persons who enjoyed the benefits of the ownership of the assets and its uses continued to have such benefits even after transfer.
20. Ld. Sr. Counsel, Sh. S.D. Kapilla submitted that Ballarpur Industries Ltd., the transferor company, was incorporated in 1945 under the Indian Companies Act, 1930. The registered office is in Nagpur. It has been engaged in business of manufacturing and sale of paper. It is a public listed company on the stock exchanges. Its main business, as set out in its memorandum of an association, is of manufacturing and sale of paper and paper products, chemicals, glass, fly ash, bricks, etc. In view of persistent power shortage because of power cuttings and/or power tripping during the period prior to 1980, BILT had established the power plants at 3 places for its captive use for the purpose of manufacturing of paper at various locations as under: -
Name of the Paper Location
Manufacturing Unite
1. Ballarpur Chandrapur, Maharashtra
2. Bhighwan Maharashtra
3. Shreegopal Yamunanagar, Haryana
4. Sewa Jeypura, Orissa
He submitted that the assessee company M/s BILT Power Ltd. (Now known as Avantha Power & Infrastructure Ltd.) was incorporated on 20/07/2005 with the object of carrying on the business of generation and distribution of ITA Nos. 3259 & 4276/D/ 2010 33 power with its registered office at 144-Janpath, Delhi. During the year under assessment, the assessee company and BILT had entered into a scheme of arrangement and demerger on slump sale basis for the purpose of transfer of power division to assessee company.
21. Ld. Counsel referred to pages 113 to 116 of the paper book, wherein the order of the Hon'ble Delhi High Court in company's petition no. 67/2006 connected with company application M No. 28/2006 dated 25/05/2006, is contained to demonstrate that the Hon'ble Delhi High Court approved the scheme. Ld. Counsel submitted that in the scheme itself, it had been clearly expressed/decided/embedded enabling the concerned companies to adopt a focus business approach for maximizing the benefit and to provide an opportunity for growth. Thus, the power division was transferred to assessee company by Ballarpur Industries Ltd. with a view to become focused entity not only in the domestic market but also abroad. BILT was trying to position itself in its core business of manufacturing in paper. Accordingly, Board of Directors of the said company had decided to re- allocate its business operations by transferring aforementioned captive power plants under power division through slump sale route with the expectation to achieve faster growth and development, and enabling exploitation of opportunity for both the companies. The assessee company, in the current economic environment, immediately after its incorporation, had ITA Nos. 3259 & 4276/D/ 2010 34 been looking forward to position itself in the business of generation of power and for necessary expansion beyond its existing location. Thus, assessee company did not want to be confine in its newly acquired business at the existing locations but to expand the same business to other locations through acquisition, exploitation, etc. Thus, the main object for the acquisition of power division from BILT by the assessee company was to engage itself in generation of power and just not to avail any benefit of tax by increasing the value of fixed assets and that too with the borrowed capital from banks and others.
22. Ld. Sr. Counsel submitted that in the backdrop of these facts, Hon'ble High Court sanctioned the scheme and as regards, the consideration paid by assessee company to the transferor company of Rs. 235 crores, inter-alia, observed that merely because consideration was being paid to the transferor company, it could not be presumed that the scheme as such was contrary to public interest or against the interest of shareholders of the transferors company. The Hon'ble High Court further observed that the sale consideration, as fixed, was based upon independent judgment of two valuers. In this regard, Hon'ble High Court further observed that the Regional Director who had raised objection in this regard, nowhere stated or even contended that the sale consideration, so fixed, was inadequate and did not represent the market value of transferred undertaking. He, therefore, ITA Nos. 3259 & 4276/D/ 2010 35 submitted that it could not be pleaded that the price paid by the assessee was, in any manner, fictitious price. Ld. Counsel submitted that it was not a case of demerger as contemplated u/s 2(19AA) of the Income-tax Act. He, therefore, submitted that Explanation 7A to section 43(1) and Explanation 2B to section 43(6)(c) was not applicable to the assessee company. Ld. Counsel further submitted that assessee company had paid the consideration by mobilizing the funds as under: -
i) loan taken from UTI & ICICI Bank Rs. 165 crores
ii) share capital from Ballarpur Industries Ltd. Rs. 18.20 crores.
iii) share capital from BILT Paper Holding Company Rs. 51.75 crores
23. Ld. SR. Counsel submitted that as regards the loan obtained from the banks, matter was further to ascertain the security against which the loan was obtained. The assets, which were received from demerged company, were in fact pledged as security to the bank, to obtain the loan. The details of security with the banks were as under: -
• Security with UTI Bank Rs. 825,30,30/- • First charge on all fixed and current assets • Assignment of power/steam purchase agreement with BILT executed by borrower.
• All movable and immovable properties both present and future and such other movables as may be agreed to by ICICI Bank for securing the borrowings.ITA Nos. 3259 & 4276/D/ 2010 36
• Assignment of right under take or pay Agreement with BILT in favour of ICICI Bank.
• Escrow of receivables from BILT.
24. He submitted that on these aspects there is no dispute and, therefore, even after considering these aspects, the AO wrongly held that the price paid by assessee company was not the actual cost of the assets. As regards reliance placed by the Assessing Officer on the decision of Hon'ble Delhi High Court in the case of M/s Dalmia Ceramick Vs. CIT, 277 ITR 219. Ld. Counsel submitted that in that case, it had been, inter-alia, held as under: -
"There is no dispute that the case falls under clause (iv) of section 47. Therefore, it is clear the actual cost should the written down value of the transferor company. This aspect is required to be born while considering the question."
25. However, in the present case, there is complete absence of transaction between holding company and its subsidiary companies as contemplated u/s 47(iv) or (v) of the Act. Further, the assessee company is not 100% subsidiary of BILT. There is no relationship of holding and subsidiary company in the present case as there are no common directors or shareholders.
ITA Nos. 3259 & 4276/D/ 2010 37
26. Ld. Sr. Counsel further submitted that consideration of Rs. 235 crores was subjected to tax in assessment of BILT. BILT has not availed any tax exemption u/s 47(1)(vib). He further submitted that AO had only recorded his dissatisfaction over the valuation adopted by the assessee without recording any reason for the same. He referred to the decision of Hon'ble Delhi High Court in the case of CIT vs. Pepsico India Holding Pvt. Ltd., 334 ITR 404, wherein it was held that the AO must justify or provide the reason to reject the valuation adopted by the assessee. Ld. Sr. Counsel further submitted that AO has brought on record no evidence to doubt the genuineness of valuation report submitted by the assessee. Ld. Sr. Counsel further submitted that section 32 and 43 are parts of chapter IV and, therefore, section 43 is applicable to section 28 to 41 only. The definition of actual cost therefore, does not apply to capital gain. He submitted that for invoking Explanation 3, the AO should have material to satisfy himself that the main purpose of the transfer of 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). He submitted that after recording his satisfaction to this effect he has to determine the actual cost as contemplated under Explanation 3 to section 43(1). He submitted that AO has not recorded any satisfaction that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of the liability to Income-tax.
ITA Nos. 3259 & 4276/D/ 2010 38
27. Ld. Sr. Counsel submitted that AO has adopted the WDV of the assets as the actual cost as if it was a case of demerger and Explanation 7A was applicable. Thus, he submitted that the action of AO was not in accordance with law. Ld. Sr. Counsel submitted that without determining the actual cost of the assets, the AO could not reach the satisfaction that the main purpose of the impugned transaction was reduction in tax liability. Ld. Counsel submitted that the assessee became the owner of the impugned assets as on 01/04/2006, which was the effective date as per the scheme approved by the High Court. In this regard, ld. Counsel relied on the decision of Hon'ble SC in the case of Marshall Arts, 223 ITR 809. Ld. Counsel submitted that subsequently the assessee company obtained the loan against those assets from the bank in June, 2006. For this purpose assessee had to incur further expenditure of Rs. 2.2 crores by way of payment to Banks as processing charges. The assessee also incurred interest liability etc. of more than Rs. 11 crores, which had been allowed as business expenditure by the AO. Thus, assessee had incurred huge financial liability by taking loans from the banks for paying the price for acquiring the power plants. Ld. Counsel pointed out that out of total purchase price of Rs. 235 cores, as much as 165 crores (70%) was paid by the assessee in cash for which it had taken loans at its own risk. The transferor company had not borned any financial liability attached to these assets. Ld. Counsel pointed out that it is well known that ITA Nos. 3259 & 4276/D/ 2010 39 the banks carry out due diligence and valuation of assets offered for security through independent expert valuers. Further it is also well known that the amount of loan normally does not exceed 2/3rd of the valuation of assets after properly discounting the present devaluation for the term of the loan. He submitted that the satisfaction of the AO as contemplated under Explanation 3 to sec. 43(1) was vitiated in the face of this independent and objective evidence. The AO failed to examine the bank official or documents in this regard. He further pointed out that the AO's satisfaction was also vitiated by another peace of evidence placed before him. In this regard he pointed out that Hon'ble High Court of Bombay (Nagpur Bench and Delhi) after considering the Government's objection to the purchase price endorsed purchase price of Rs. 235 crores. They also held that the scheme was in the public interest and approved it. As regards the AO's allegation that the assessee company had mobilized funds aggregating Rs. 70 crores from the group companies, ld. Sr. Counsel submitted that this was a normal business transaction and not circular in nature as observed by AO. In this regard ld. Counsel referred to the decision of Hon'ble SC in the case of CIT vs. Ram Krishna Pillai 66 ITR 725, which reads as under: -
"A transaction by which a person carrying on business transfers the assets of that business to another assessable entity may take different forms and may have different legal effects. The assets of a business may be sold at a fixed price to a company promoted by a person who ITA Nos. 3259 & 4276/D/ 2010 40 carried on the business: if the price paid for or attributable to an asset exceeds the written down value of the asset, proviso (ii) to sec. 10(2)(vii) of the Income Income-tax Act, 1922, would ex facie be attracted. Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange and not of sale, and the true nature of the transaction will not be altered, because of stamp duty or other reasons the value of the assets transferred is shown as equivalent to the face value of the shares allotted. A person carrying on business may agree with a company floated by him that the assets belonging to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay that money consideration, shares of a certain face value shall be allotted to the transferor. In that case there are in truth two transactions, one a transaction of sale and the other a contract under which the shares are accepted in satisfaction of the liability to pay the price."
28. Ld. Counsel further referred to the decision of 3rd Member in Chitra Publicity Company 127 TTJ 7 (Ahmedabad Bench, wherein, it was, inter-alia, observed as under: -
"The revenue authorities and the ld. Accountant Member, in the proposed order, have observed that the AO is authorized to pierce the veil of the corporate and ascertain the true nature of the transaction. There can ITA Nos. 3259 & 4276/D/ 2010 41 be no quarrel on the above proposition. However, in my view, it is unnecessary to fall back on the above legal proposition as under the above Explanation, there is sufficient power with the Assessing Officer to disregard the cost of assets taken by the transferee and determined the actual cost of assets. He can made a disallowance, provided the circumstances envisaged in the provision are satisfied."
29. Ld. Sr. Counsel submitted that the transaction was well within the framework of law and the contracts between the parties were enforceable in law. Further Explanation 3 to section 43(1) restricting the meaning of actual cost has been introduced by the legislature to give sufficient power to the AO to determine the actual cost in accordance with law. As regards the objection of AO that though plant and machinery and building had been transferred, lands on which the plants were situated had not been transferred, ld. Counsel submitted that it was explained to the AO that these buildings were situated on industrial lands which were not free hold lands. Thus, the transferor company, itself being a leaseholder of the lands on which power plant were situated, could not have transferred the lands. It could only sublease the lands with the prior approval of the lessor authorities. As regards the AO's doubt about the purchase price on the ground that lease rent payable by the assessee was inadequate, ld. Sr. Counsel submitted that rent is revenue expenditure. Therefore, payment of ITA Nos. 3259 & 4276/D/ 2010 42 lower rent does not reduce the tax liability of the assessee because the payment of higher rent could only reduce the assessee's total income. Ld. Counsel referred to the decision of Hon'ble Supreme Court in the case of Simon Carves Ltd., 105 ITR 212, wherein it was, inter-alia, observed that the taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax which is legitimately due from an assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that scales are weighted against the assessee.
30. Ld. Counsel further referred to the following computation submitted before ld. CIT(A) to demonstrate that there was insignificant mandatory benefit on account of claim of depreciation on the purchase consideration of Rs. 235 crores:
Rs. Crores Liability towards interest on Loan (Rs. 165 crores) in relation to undertakings Rs. 15.43 (Interest for the period July 06 to Mar. 07 Rs. 11.49 crores) (approx.) Depreciation on purchase consideration Rs. 235 crores Rs. 18.49 as per auditor's Report in Form 3CD Depreciation on WDV Rs. 88.66 crores as computed in Asstt. Order (Refer page no. 13 of asstt. order) Rs. 6.95 Difference in depreciation on Rs. 235 crores as against Rs.11.54 Rs. 11.54 Rs. 88.66 crores.
Benefit of depreciation over the interest liability for borrowed money (Rs. 165 crore) in respect of purchase consideration Rs. 235 crores. Rs. 3.89 ITA Nos. 3259 & 4276/D/ 2010 43
31. He submitted that even this tax effect disappears if we take into tax suffered by the transferor associate company.
32. Ld. DR in the rejoinder submitted that as regards the submissions of ld. AR that the AO had not lawfully exercised jurisdiction in invoking Explanation 3 to sec. 43(1) of the Act and he should have material to satisfy himself that the main purpose of the transfer of such assets was the reduction of the liability. Ld. DR submitted that the assets which were transferred at the time of demerger were old and used assets and had already depreciated to a value of Rs. 86.66 crores. The nature of assets was not such which will appreciate over the years.
33. As regards the ld. AR's objection that the AO had not determined the actual cost of the assets as laid down in Explanation 3 to sec. 43(1) ld. DR submitted that AO made due efforts to determine the actual cost of the assets in the hands of the assessee. He even obtained information from the transferor company to know the status of the assets in their hands at the time of transfer. The AO's action of adopting WDV as actual cost was supported by various case laws as discussed earlier. Ld. DR submitted that the objection of ld. AR that on page 13 of assessment order, the AO has simply used words "WDV" instead of "actual cost", ld. DR submitted that AO has discussed the entire issue from page 9 to page 13 of the assessment ITA Nos. 3259 & 4276/D/ 2010 44 order and on page 10 he has clarified that the actual cost to the assessee shall be such an amount as the ITO may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case. After that he has discussed the issue elaborately and in the end in para 2.12, he has given a chart which shows that the WDV as per the assessee's books was Rs. 2349999832/-. He, then, has replaced this WDV by a figure of 88.66 crores for the purpose of calculating depreciation. If the order is read as a whole, the objection of the ld. AR is not sustainable. As regards the ld. AR's objection that WDV cannot be taken as actual cost and it is not reflective of market price, ld. DR submitted that the assets in question are the old assets which have very nominal resale value. The nature of assets is also such which will not get appreciated over the years. She submitted that even the assessee does not have the exact market price of these assets and this fact is strengthened by the multiplicity of valuations. In fact the assessee company is the only buyer and the transaction is made to facilitate both the parties. Therefore, the AO was very reasonable in adopting WDV as actual cost and his action was supported by the judgments of various Hon'ble Courts. As regards, the submission of ld. Counsel that raising of loans of Rs. 165 crores on the assets is reflective of their value, ld. DR submitted that banks have not analyzed the issue of actual cost of the assets as per the specific provisions of the Income-tax Act. Even the CIT(A) has given findings on page 13 of the order that 'arrangement of fund and ITA Nos. 3259 & 4276/D/ 2010 45 furnishing security thereof to the lending bank do not fortify the case of the appellant for the purpose of applicability of Explanation 3 of sec. 43(1) of the Act'.
34. As regards, the submission of ld. AR that banks carry out due diligence and valuation of assets through independent valuers, Ld. DR submitted that no such evidence has been brought on record by the assessee. As regards the submission of ld. Counsel that transaction was approved by the Hon'ble Delhi High Court, ld. DR submitted that merely because the Hon'ble High Court give approval to the scheme of arrangement and demerger under the Companies Act will not automatically entitle the assessee to claim higher depreciation. The Income-tax provisions are specific in this regard and the issue is to be analyzed accordingly. In this regard ld. DR referred to the decision of Hon'ble Delhi High Court in the case of Indo Rama Synthetics Limited, 23 Taxman.com 390, wherein it has been held that the Income-tax provision cannot be read as mandatory requirement for all schemes of amalgamation/arrangement/demerger u/s 391/392/394 of Companies Act. Hon'ble Delhi High Court, inter-alia, observed as under: -
"In the proceedings u/s 392(1)(b) of the 1956 Act, the court cannot re write the scheme approved in the meeting called u/s 391(2) of the 1956 Act, but, it can only make such modification as it may consider ITA Nos. 3259 & 4276/D/ 2010 46 necessary for proper working of the compromise or arrangement."
Thus, at the time of demerger, the specific issues and provisions of the Income-tax Act are not considered and hence, the issue remains to be determined by the tax authorities.
35. We have considered the rival submissions and have perused the record of the case.
36. At the outset, we may observe that AO has not considered the entire scheme as demerger under the Income-tax Act as contemplated u/s 2(19AA) of the Income-tax Act. Therefore, we do not consider it necessary to examine the observations of AO, and ld. CIT(A) and the submissions of both the parties on this count as it would only be of academic interest. This is evident from the fact that AO has invoked Explanation 3 to sec. 43(1) and not Explanation 7A to sec. 43(1). Further the contention of assessee that transferor company had also paid long term capital gain tax on the sale consideration is also not of much significance because tax liability is to be determined qua assessee. Therefore, the main issue for our consideration is whether AO was justified in invoking Explanation 3 to sec.43(1) by holding that the entire purpose of this scheme was reduction of tax liability by claiming higher depreciation in respect of those assets which were earlier used by transferor company by escalating the cost of the assets. ITA Nos. 3259 & 4276/D/ 2010 47 Explanation 3 has been incorporated in sec. 43(1) to counter the attempts of assessee to claim higher depreciation by purporting to purchase assets at more than their true or real cost. It is fundamental principle that department cannot question the wisdom of assessee in carrying out its business operations. Department cannot dictate as to how the assessee should conduct its business. However, legislature has made specific provisions in the Income-tax Act when department can depart from this fundamental principle and ignore the apparent state of affairs and pearce the smoky screen created by assessee in the transaction to find out the true intention. These sections provide circumstances in which department can impute its judgment to the assessee's decision. The relevant provisions are to be found in section 40A(2), Explanation 3 to sec. 43(1), section 92C etc. But before these provisions can be invoked, legislature has required the AO to acquire necessary satisfaction in this regard which obviously has to be acquired judiciously and not arbitrarily. The AO should demonstrate that his satisfaction was rational and based on relevant factors. Explanation 3 to section 43(1) reads as under: -
43. "In sections 28 to 41 and in this section, unless the context otherwise requires-
(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.ITA Nos. 3259 & 4276/D/ 2010 48
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 [Joint Commissioner],determine having regard to all the circumstances of the case."
Thus, the basic ingredients of Explanation 3 are as under: -
i) an asset was already in use in a business in the hands of one persons;
ii) that person transfers the asset to assessee;
iii) the AO is satisfied that the main purpose of transfer of such assets was the reduction of liability to Income-tax by claiming depreciation with reference to an enhanced cost;
iv) the AO can refuse to accept the sale price as the actual cost to the purchaser (assessee) in the purchasers assessments.
37. The legislature has prefixed the word "actual" to the word "cost" which clearly signifies that emphasis is on the reality and genuineness of the cost ITA Nos. 3259 & 4276/D/ 2010 49 so as to exclude collusive, inflated, deflated or fictitious cost. As already pointed out that the AO is required to judiciously acquire the necessary satisfaction regarding the object of transfer. It is not to be understood that every case wherever assessee acquires a used asset from other person then the object would only be reduction of tax liability. There may be genuine cases also where the asset has appreciated in value since its original purchase and consequently, the market value on the date of the sale is greater than written down value in the AO's chart. In the absence of any finding, that the main purpose of the transfer is to reduce the tax liability with reference to enhanced cost, it is not permissible to the AO to reject the cost paid for the transfer. The AO cannot substitute his own estimate of the value rejecting the assessee's estimate as was held in by Hon'ble Supreme Court in Joyta Coal Company Ltd. vs. CIT, 36 ITR 521. Thus, where at the time of partition of a family, as was the case in Kalu Ram Govind Ram vs. CIT, 57 ITR 335, the assets were allotted among the members at a valuation arrived at in a reasonable manner, there being no allegation of inflated cost by reason of fraud, collusion, subterfuge, devise or false transaction made with an ulterior purpose, the department was held to be precluded from going behind the agreement between the purchaser and the seller in determining the purchase price. The thresh hold condition is that the transfer should be with intent to get the benefit of enhanced value of asset. Therefore, before invoking Explanation 3, the AO is required to record his satisfaction that ITA Nos. 3259 & 4276/D/ 2010 50 entire transaction was undertaken with a view to reduce the tax liability by claiming higher depreciation. Before we embark upon for detailed discussion regarding actual cost to the assessee in terms of Explanation 3, we first decide some objections of both the sides. The assessee's objection is that AO has not recorded his requisite satisfaction for invoking Explanation 3: we are not in agreement with ld. Sr. Counsel's argument because, as rightly pointed out by ld. DR, a holistic view is to be taken. The entire discussion by AO proceeds on the premise that assessee was trying to claim higher depreciation on enhanced cost. The next objection of ld. Sr. Counsel is that AO did not determine the actual cost as required in Explanation 3. We are not in agreement with this argument also of ld. Sr. Counsel because, as rightly demonstrated by ld. DR, AO had made all out efforts to find out the actual cost. We do not find any substance in this plea of the assessee because AO had taken into consideration different valuation reports and WDV of assets before arriving at the conclusion that WDV as per Income-tax records was the actual cost of assets. He had also raised the queries with regard to determination of actual cost of the said assets and gathered information from the transferor company by issuing notices u/s 133(6). We are also in agreement with ld. DR that value approved by the Hon'ble High Court of Delhi & Bombay was not binding on tax authorities because the Hon'ble High Court had not adjudicated the issue of actual cost of the assets as per the Income-tax Act. However, this had persuasive value in ITA Nos. 3259 & 4276/D/ 2010 51 determining the actual cost of assets. The third argument is in regard to effective date of transfer. We are in agreement with the ld. Counsel for the assessee that the effective date, as per the scheme approved by the Hon'ble High Court, was 01/04/06 in view of the decision of Hon'ble Supreme Court in the case of Marshall Sons, 223 ITR 809 and the assessee company obtained the loan against the assets acquired by it from bank in June, 2006. Further there is no quarrel with the proposition of ld. DR that in certain circumstances WDV of assets may constitute actual cost to the assessee. Having considered these aspects, now we proceed to decide the main issue which is what was the actual cost to the assessee and consequently whether AO was justified in invoking the Explanation 3 to sec. 43(1). In this context we have to find out the real value of assets acquired by the assessee. In this regard the first aspect to be taken into consideration is the approval of the Hon'ble High Court to the scheme of arrangement and demerger u/s 391 to 394 of the Companies Act. Section 391 of the Companies Act empowers the court to sanction the scheme. Section 392 empowers the court to supervise the carrying out of the scheme or to modify the same as it deems fit. Section 3(94) empowers the court either through the order sanctioning the scheme or by a subsequent order to make provisions for certain matters including incidental, consequential and supplemental matters as necessary to secure that the reconstruction or amalgamation is fully and effectively carried out. In exercising its discretion to sanction the scheme, the court ITA Nos. 3259 & 4276/D/ 2010 52 considers, firstly whether the statutory provisions have been fulfilled; secondly, whether the classes were fairly represented by those who attended the meeting; thirdly whether the statutory majority was acting bonafide; and fourthly, whether the scheme is such as "a man of business"
would reasonably approve. Following principles have been laid down in the case of Miheer H. Mafatlal vs. Mafatlal Industries Ltd. (1996) 87 Comp.
Cases 792 :
1. The requisite statutory procedure for supporting the Scheme has been complied with and that the requisite meetings have been held;
2. The Scheme is backed up by the requisite majority vote as required;
3. At the meeting requisite class persons had the relevant material to enable them arrive at an informed decision for approving the Scheme. The majority decision of the concerned class is just and fair to the class as a whole so as to legitimately blind even the dissenting members of that class.
4. Necessary material is placed before the voters at the meetings concerned;
5. The requisite material is placed before the Court and the Court is satisfied about the same;
6. The proposed Scheme is found not to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the Scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent ITA Nos. 3259 & 4276/D/ 2010 53 corporate purpose underlying the Scheme and can judiciously X-ray the same;
7. The requisite class acted in bona fide and in good faith and did not coerce the minority;
8. The Scheme as a whole is just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the Scheme is meant; and
9. Once the aforesaid broad parameters are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the Scheme even if in the view of the Court there would be a better Scheme for the company and its members or creditors."
38. Therefore, in context to present proceedings, the effect of order of Hon'ble Delhi High Court is to be considered keeping in view the aforementioned aspects. We find that Hon'ble Delhi High Court while sanctioning the scheme has observed as under: -
"Department of Company Affairs, Noida, on behalf of Central Government whereby he raised three objections: The first objection is that by the proposed scheme of arrangement/demerger, the Transferee Company is liable to pay Rs. 235 crores as consideration for transfer of ITA Nos. 3259 & 4276/D/ 2010 54 "transferred undertaking" of the Transferor Company. He submitted that shares should have been allotted to the shareholders of the Transferor Company, instead of paying consideration of Rs. 235 crores to the Transferor Company and this is prima facie against the interest of shareholders of the Transferor Company. The Court observed that merely because consideration is being paid to the Transferor Company, it cannot be presumed that the scheme as such is contrary to public interest or against the interest of shareholders of the Transferor Company. Under normal circumstances, the Transferor Company could have always transferred/sold any of its assets for consideration to the third party. The Court further observed that the sale consideration as fixed is based upon independent judgment of two valuers, namely, M/s SPB Products and Consultancy Limited, Chennai and M/s Infrastructure Leasing and Financial Services Ltd., New Delhi. The Regional Director nowhere stated or even contended that the sale consideration so fixed is inadequate and does not represent the market value of "transferred undertaking-1". The Court did not find any merit in the said objection and rejected the same. The second objection is that there is no object clause of the scheme and therefore, the purpose and benefits under the scheme as proposed may be ascertained. The ITA Nos. 3259 & 4276/D/ 2010 55 Court observed that the Transferor Company is being split into three parts and transferred undertaking no. 1 i.e. (Power Division) is being transferred to the transferee company for a sum of Rs. 235 crores. Court did not find any merit in this objection also and rejected the same. The third objection is in respect of the articles and memorandum of association of the transferee company no. 2 and the proposed scheme under which transferred undertaking no. 2 i.e. (Real Estate Division) is to be transferred to the transferee company no. 2. the Court ordered that it need not examine this aspect as the Mumbai High Court has already granted sanction to the scheme of arrangement/demerger in the case of the transferee company no. 2; and there being no investigation proceedings pending in relation to the petitioner company u/s 235 to 251 of the Companies Act, 1956. The scheme of Arrangement/Demerger in respect of Transferor Company and Transferee Company No. 2 has already been sanctioned by High Court of Judicature at Bombay, Nagpur vide order dt. 25/4/06."
39. Thus, it cannot be denied that the approval granted by the Hon'ble Delhi High Court had persuasive value for deciding the actual cost of assets to the assessee. It could not be ignored particularly because Hon'ble Court expressly considers the bonafide of the entire scheme. However, this is not ITA Nos. 3259 & 4276/D/ 2010 56 binding on Income-tax Authorities while considering the actual cost as contemplated in Explanation 3 to section 43(1).
40. The next aspect to be considered is the object with which BILT hived off its power division to the assessee company. The assessee company was set up to spearhead the power sector initiatives of the Avantha Power & Infrastructure Group. The objective of demerger of the power asset of Ballarpur Industries Ltd. was to create platform, wherein the company could undertake larger power projects. The company's plans were to expand their generation capacity and development efforts in order to capitalize on the prevailing and foreceable future and meet balance deficit between electricity demand and supply in India. It was pointed out by the assessee before ld. CIT(A) that demerger of the power section has resulted in the following benefit: -
a) Policy to venture into power sector as a business proposition;
b) Better focus on the power generation as a profit centre;
c) Independent units could be bench marked against peers;
d) Better utilization of the capacity since the units has the flexibility to service other entities The company had two pronged business model:
To manage and expand the existing captive power plant (CPP) capacities for supporting the group's requirements as well as for ITA Nos. 3259 & 4276/D/ 2010 57 tapping the opportunities available in the broader market in the form of other companies captive power requirements; and To spearhead the power sector initiatives of the group by undertaking super critical and sub-critical power projects under the independent power project (IPP) model.
e) These objectives clearly spelled out the purpose with which demerger of the power division of Ballarpur Industries Ltd. was undertaken.
f) The benefit of enhanced depreciation got almost mitigated because of interest payment of the outsider viz. all banks as is evident from the working submitted before the ld. CIT(A). The assessee has taken loan from ICICI Bank and AXIS Bank (UTI Bank) Rs. 165 crores for making payment for availing this facility and had paid more than 2 crores towards loan processing charges.
The AO has not disputed the objective with which assessee had made this arrangement. The main/primary objective of assessee is relevant for purposes of Explanation 3. If the primary objective was not tax reduction. The Explanation 3 could not be invoked.
41. The next aspect is regarding interest liability incurred by assessee towards interest payment on the loan of Rs. 165 crores taken by it. One cannot loose sight of the fact that this was actual cash outflow of assessee ITA Nos. 3259 & 4276/D/ 2010 58 and it was not to any related party. This cost incurred by the assessee was solely on business considerations in-as-much as the AO has allowed the interest charges in assessee's assessment. Here is not a case where assessee has merely claimed depreciation on enhanced value of asset but has simultaneously incurred the interest cost on account of loan taken from Banks. Therefore, it cannot be said that the main object was to claim depreciation on enhanced value of assets. The AO has observed that this loan ultimately benefited BILT as the payment has been made to that company only by assessee. We do not find much substance in this plea of AO as we do not find any improprietory in this transaction. We further find considerable force in the submission of ld. Sr. Counsel for the assessee that such a big loan could not be availed by assessee without detailed due diligence being undertaken by the respective banks before granting loan. Bank has to ensure full security of the loan given by it. The loan had been given on the security of assets and, therefore, it cannot be denied that they must have taken due care to ensure that the proper valuation of assets was as per the reports of independent valuers.
42. Ld. CIT(A) has observed and rightly so that AO has not pointed out any mistake in the valuation report. It is true that AO is entitled to ignore the valuation report also but for determining the actual cost of assets it cannot be denied that it was very material evidence.
ITA Nos. 3259 & 4276/D/ 2010 59
43. The AO has observed that the assessee company had just obtained easementary rights of land having the plant and machinery and buildings at very nominal rents for a period of 15 years. The AO after taking into consideration the nominal rent fixed for this purpose observed that the obvious reason was that the land would never have been subject matter of depreciation. We find that assessee has clarified this aspect by stating that since BILT itself was leaseholder therefore, it could not transfer the land. We are unable to discern anything wrong in this explanation, as the facts are on record.
44. In view of above facts, we are of the opinion that ld. CIT(A) has rightly held that the actual cost of the assets was Rs. 235 crores and not the written down value as per Income-tax assessments.
45. There is one more important aspect which fortifies our view upholding the ld. CIT(A)'s findings. It is pertinent to note that two WDV's were available before the AO one as per the books of the assessee and second as per the Income-tax computation.
46. Admittedly, as per the books of account of the BILT, the WDV was Rs. 214.16 crores on the date of transfer and the WDV as per Income-tax Act ITA Nos. 3259 & 4276/D/ 2010 60 was 86.66 crores. The AO has completely ignored this important aspect while concluding that the actual cost for purposes of Explanation 3 to section 43(1) was 86.66 crores as per the Income-tax Act. WDV as per books of account of the assessee is determined on the basis of rate of depreciation prescribed under the Companies Act in Schedule XIV to the Companies Act. The depreciation rates have been prescribed differently under Companies Act and Income-tax Act. The object of allowing depreciation, as a charge against the profits, is to enable the assessee to recover the original cost of assets in course of time so that when the replacement of assets is required, the assessee's business operations do not hamper for the availability of funds. Therefore, Companies Act prescribes normally such rates which may ensure the achievement of aforementioned objective. However, under the Income Tax Act such rates are prescribed which ensure that assessee recovers its capital cost in shortest possible of time. Therefore, the rates of depreciation prescribed under Companies Act are more realistic. Under the Companies Act the object is that the company's assets should continue in the books upto their entire life span. Be that as it may, since two WDV's were available before the AO for determining the actual cost, he could not have ignored the WDV as per the books of the company the adoption of which was more beneficial to company. Admittedly, there is very minor difference (235 - 214.16) crores in the valuation of assets as per books of BILT and the actual consideration paid by the assessee company. ITA Nos. 3259 & 4276/D/ 2010 61 Therefore, this aspect clearly establishes the bonafide of assessee in adopting the actual cost of assets at Rs. 235 crores. We, therefore, do not find any reason to disturb the findings of ld. CIT(A).
47. In the result, this ground is dismissed.
48. Ground no. 2 of department's appeal and ground no. 1 & 2 of assessee's appeal relate to allowability of loan processing fees.
49. Brief facts apropos this issue are that assessee company had paid 2,43,70,830/-as loan processing fees to ICICI Bank and AXIS Bank for availing term loan of Rs. 165 crores from them. The assessee had debited Rs. 21,50,367/- in the profit and loss account and balance Rs. 2,22,20,463/- was shown as deferred finance charges under the head "loans and advances". The AO disallowed the assessee's claim holding the amount paid being capital in nature. He observed that loan processing charges were covered by the definition of interest as mentioned in section 2(28A) and since this was paid for acquisition of assets therefore, it was not allowable as deduction u/s 36(1)(iii). He, inter-alia, observed that the loan in question was taken to acquire asset i.e. power plant from M/s BILT, which fact was not disputed by the assessee. He further observed that loan processing charges was a pre-condition for sanctioned disbursement of loan and had to be ITA Nos. 3259 & 4276/D/ 2010 62 incurred. Therefore, even if payment of loan processing charges was made after the asset i.e. power plant was first put to use, the instance of loan processing charges accrued earlier i.e. before asset was actually acquired as payment was a pre-condition or at least simultaneously event of ownership for any purchase made in lieu of consideration. He, therefore, made an addition of Rs. 21,50,367/-.
50. Before ld. CIT(A) it was submitted that in the accounts the loan processing charges were booked in the following manner:
a) Rs. 21,50,367/- was charged to profit and loss account.
b) Rs. 2,27,20,463/- was treated in accounts as "deferred finance charges" for amortization in equal installments in subsequent years.
It was clarified that the assessee company preferred to claim processing fee Rs. 21,50,367/- in the return since the same had already been booked in accounts, whereas balance Rs. 2,22,20,463/- was claimed at the earliest opportunity in course of assessment proceedings. Before ld. CIT(A), it was submitted that the "purpose" for raising finance from banks and the nature of expenditure are prime factors as opposed to manner of disclosure in the accounts. It was contended that expenditure was incurred in order to discharge the liability after 1/04/2006. Further it was submitted that loan processing charges was in the nature of interest defined u/s 2(28A) of the Income Tax Act and since assessee had acquired a running power plant, ITA Nos. 3259 & 4276/D/ 2010 63 there was no pre-operating period of construction involved here. Ld. CIT(A) observed that in this case the decision of Hon'ble SC in M/s Goetz India Ltd. was not applicable because here assessee had booked Rs. 21,50,367/- in the profit and loss account and balance was treated as deferred revenue expenditure. However, he directed the AO to allow deduction of Rs. 21,50,367/- only.
51. Being aggrieved with the findings of ld. CIT(A) both assessee and department are in appeal before us and have taken following grounds of appeal:
Grounds of Assessee's appeal:
1. That the ld. CIT(A)-V, New Delhi was wrong in allowing "Loan Processing Fees" Rs. 21,50,367/- inplace of Rs.
2,43,70,830/- as revenue expenditure u/s 36(1)(iii) which was actually paid/payable by the appellant company during the year under consideration.
2. That the ld. CIT(A) was wrong in treating "Loan Processing Fees" Rs. 2,43,70,830/- actually paid/payable during the year under consideration as deferred expenditure and such expenditure is allowable in 9 years.
3. That the order is otherwise bad in law."
Ground of Department's appeal:
2. The ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 21,50,367/- on account of disallowance of loan processing fee charges as revenue expenditure. Ld. CIT(A) ignored the proviso to section 36(1)(iii) of the I.T. Act, ITA Nos. 3259 & 4276/D/ 2010 64 1961 which is explicitly applicable in the assessee's case and also the instance of loan processing charges accrued earlier than asset was actually put to use since assessee company is following mercantile system of accounting."
52. Ld. DR submitted that in view of the decision of Hon'ble SC in the case of Goetz India Ltd. 284 ITR 323, the assessee's claim is not legally maintainable because the same had not been claimed in the return of income filed by the assessee. She further submitted that proviso to section 36(1)(iii) prohibits allowability of interest for capital borrowed and deployed for the acquisition of the asset till the time it is put to use. Further the expenditure had been incurred prior to the sanction of loan and since the assessee was following mercantile system of accounting, the same was not allowable. Ld. Counsel for the assessee submitted that the expenditure was incurred after assets had been first put to use in business by the assessee.
Ld. counsel further submitted that it is not a case of new business but take over of going concern.
53. We have considered the rival submissions and have perused the record of the case. The facts are not disputed. As per section 2(28A) interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit claim or other similar right or obligation) and includes any service fee or other charge in respect of the ITA Nos. 3259 & 4276/D/ 2010 65 moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. Therefore, loan processing charges were in the nature of interest only. As per proviso to section 36(1)(iii), the interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession is not allowable. Thus, up to the date the asset is put to use, the interest is to be capitalized. The interest for the period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, is not allowable as deduction.
54. The effective date as per the decision of Hon'ble High Court sanctioning the scheme of demerger was 01/04/06 and the assessee company had acquired the running plant of Ballarpur Industries Ltd. and the loan was taken in July, 2006. However, this loan was for paying the purchase price of assets acquired by the assessee and, therefore, the AO has rightly observed that the incidence of expenditure occurred prior to obtaining assets. Here we have to examine the nature of payment with reference to the assessee company which has acquired the power business of Ballarpur Industries Ltd. Since, the entire amount of loan had been obtained for acquiring the asset, therefore, all the expenses incidental to the acquisition of loan have to be treated as capital in nature. Merely because assessee had acquired going concern will not alter the nature of payment in ITA Nos. 3259 & 4276/D/ 2010 66 the hands of the assessee. The intention of the legislature is that all the expenses incurred up to the date of acquisition of asset have to be treated as capital in nature. We, therefore, do not find any infirmity in the order of AO in treating the entire loan processing fee paid for obtaining loan from bank being capital in nature. The assessee however, would be entitled to claim depreciation by capitalizing this figure with the cost of asset acquired by it.
55. We, therefore, set aside the order of ld. CIT(A) on this issue.
56. In the result, the assessee's ground of appeal is dismissed and department's ground of appeal is allowed.
57. In the result, the Department's appeal is partly allowed and assessee's appeal is dismissed Order pronounced in the open court on 09/11/12 Sd- Sd/-
(U.B.S. BEDI) (S.V. MEHROTRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 09/11/12
*Kavita
ITA Nos. 3259 & 4276/D/ 2010 67
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, New Delhi.
TRUE COPY
By Order
ASSISTANT REGISTRAR