1981-VIL-22-ITAT-
Equivalent Citation: ITD 001, 152,
Income Tax Appellate Tribunal BOMBAY
Date: 07.11.1981
BOMBAY HOUSEHOLD & INDUSTRIAL PLASTIC MFG. CO. (P.) LTD.
Vs
INCOME TAX OFFICER.
BENCH
Member(s) : B. B. PALEKAR., K. B. MENON.
JUDGMENT
Per Shri B.B. Palekar, Vice President --- Podar Plastics (P.) Ltd. was a company having two kinds of activities, i. e., manufacture of plastic goods and making investments. The factory for manufacturing plastic goods was at Parel, Bombay. On 28-12-1973 a private company called Podar Shakti Plastics (P.) Ltd. was incorporated with the object, inter alia, of manufacturing and dealing in plastic products, articles and things. Members of the Podar family were interested in both the companies and they may be loosely described as sister-companies. It appears that Podar Plastics (P.) Ltd. had not been making profits in its business and that its assessments had resulted in determination of loss from business and the depreciation which was allowable was not set off and had to be carried forward in accordance with law.
2. By an agreement dated 26-12-1973 Podar Plastics (P.) Ltd. sold or transferred to Podar Shakti Plastics (P.) Ltd. certain assets (and also certain liabilities). The two companies are hereinafter referred to as "the transferor" and "the transferee", respectively. The name of the transferee was later changed to "Podar Plastics (P.) Ltd." and still later it was changed to "Bombay Household and Industrial Plastics Mfg. Co. (P.) Ltd.". The appeal under consideration relates to the assessment of this company for the assessment year 1975-76 for which the corresponding previous year is the calendar year 1974.
3. As stated earlier, it was in this year that certain assets of the transferor were sold or transferred to the transferee. The value of the assets for the purpose of the transfer, i.e., for settling the price, was determined in accordance with the report of M.E. Panthakey & Co., who are Consulting Engineers and who were required to report the fair market value of the assets in question. The corresponding book value and the written down value for the purpose of assessment to income-tax was much less than the value determined in the valuation report. The relevant particulars are as below:
Particulars Book value of transferring Report Value as per Valuation Report
Rs. Rs.
Machinery 17,504.00 5,11,304.00
Dies, plates & mould 13,052.00 3,06,620.00
36,847.12 36,847.12
Exhaust fan 1,095.00 4,421.00
Electrical installation 9,221.24 32,150.00
Air-conditioning plant 270.00 4,220.00
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Total 77,989.36 8,95,562.12
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The transferee (i.e., the assessee) paid the price or the consideration for the transfer in accordance with the valuation report and claimed for the purpose of its assessment to income-tax that the original cost was the sum paid by it.
4. However, the ITO and the Commissioner (Appeals) have taken the view that the actual cost of the assets in question may be taken at the amounts represented by the written down values of the respective assets as available from the assessment record of the transferor. The relevant particulars are as below :
Item W. D. V.
Rs.
Machinery 17,026
Water tank 4,342
Dies & moulds 38,223
Elec. installation 9,221
Air-conditioner 647
Exhaust fans 3,567
5. Other points raised in the grounds of appeal having been specifically given up by Shri Doshi at the time of hearing of this appeal, the only question for decision is whether the original cost of the assets in question could be determined for a sum less than the consideration paid by the transferee to the transferor. We have considered the relevant facts and circumstances, the order of the authorities below and the rival submissions.
6. It is common ground that the kind of adjustment which the department wants to make is possible only if the provisions of Explanation 3 to section 43(1) of the Income-tax Act, 1961, can be made applicable. The provisions of the said Explanation are as below:
"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 ITO 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 Income-tax Officer may, with the previous approval of the Inspecting Assistant Commissioner, determine having regard to all the circumstances of the case."
It is manifest that the situation in the assessments of the transferor is not at all relevant and there is no need or scope for considering it. Therefore, the point made that the transferor had large losses and will not be called upon to pay any tax even after income under section 41(1) is determined in its assessment, is of no relevance. Similarly, that the two companies were sister-companies may give rise to suspicion or cause for an enquiry and may indirectly help to say that the purpose of the transfer could be the reduction of liability to income-tax of the transferee.
7. The specific requirement of the said Explanation is that it must be shown that the main purpose of the transfer was the reduction of liability to income-tax by claiming depreciation with reference to an enhanced cost of the assets in question. In the case under consideration, the cost which is adopted is no more than the market value of the assets. Even parties who may be strangers would transfer assets at the market rate. If sister-concerns should do so, simply because the market rate may be higher than the written down value as determined for the purpose of income-tax assessments or as shown in the books of account of the transferor, it cannot be said that the main purpose of the transferor was to put an artificial value on the assets for claiming an inflated cost for the purpose of depreciation allowance. It may be another matter if the consideration was more than the market value itself, but this is not alleged in the orders of the authorities below and when we specifically requested the learned departmental representative whether it is suggested that such was the case, he has not suggested that such was the case nor has he brought to our notice any material to show that such was the case. Nor is there any other material to suggest that the transfer was made for the purpose of reduction of the income-tax liability of the transferee. We find that the provisions of Explanation 3 to section 43(1) are not applicable. It follows that the contention of the assessee must be accepted and we direct that the actual cost of the assets in question shall be adopted at the amounts paid by the transferee as the consideration for transfer of the respective assets.
8. The appeal is partly allowed.
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