Jitender Kumar Gupta, vs Department Of Income Tax

ACIT, Vs. Shri Jitender Kumar Gupta, Circle-I, 219, Railway Road, Meerut. Meerut.

(Appellant) (Respondent)

Assessee By : Shri M.P. Rastogi, Avocate Department By : Shri T. Vasanthan, Sr. DR

Date of Hearing : 30.04.2015 Date of Pronouncement : 05.05.2015

ORDER PER R.S. SYAL, AM:

This appeal by the Revenue is directed against the order passed by

the CIT(A) on 19.3.2007 in relation to the assessment year 2001-02.

2. It is a recalled matter qua the first ground assailing the view taken

by the ld. CIT(A) in directing to adopt value of the depreciated assets at ITA No.3431/Del/2007

Rs.89,10,245 as against Rs.22,45,000 taken by the Assessing Officer

(AO) and consequently allowing relief of depreciation amounting to

Rs.16,66,311 by ignoring the provisions of section 43(1) of the Act.

Earlier, the tribunal passed order in ITA No.445/Del/2010 for the

captioned year u/s 254(1) of the Income-tax Act, 1961 (hereinafter also

called `the Act') deciding this issue in favour of the Revenue, by

overturning the order of the ld. CIT(A) and restoring that of the AO. On

an application filed by the assessee u/s 254(2) of the Act, the tribunal

vide its later order dated 3.8.2012, recalled its original order on the first

ground.

3. Succinctly, the assessee capitalized a sum of Rs.89,10,245/-

towards certain Equipments (consisting to Centrally Air conditioning

unit with Generator, Otis elevator and Fire fighting equipments),

purchased from M/s Baba Build Well (BBW), which were earlier

installed by them in a premises at 225, Okhla Indl. Estate, Phase III,

New Delhi, owned by some other person. This premises consisting of

basement, mezzanine, ground, first and second floors was

2 ITA No.3431/Del/2007

simultaneously acquired by M/s Civic Traders (P.) Ltd., another group

concern of the assessee, from such third person for a sum of

Rs.1,91,18,472. The premises owned by such third person fitted with

the Equipments installed by BBW, prior to its purchase by the assessee

and its group concern, were given on rent by them to M/s Minerva

Holding (P) Ltd. The purchase transaction of Equipments by the

assessee from BBW took place on 1.4.2000. Even after the purchase of

the Equipments and Building by the assessee and M/s Civic Traders (P.)

Ltd. respectively, the hitherto tenant/user, namely, M/s. Minerva

Holding (P) Ltd, continued to remain as the tenant on an annual rent of

Rs. 94,17,060, splitted equally towards Building and Equipment,

namely, Rs. 47,08,530 for each. Pursuant to the Agreement with BBW,

the assessee was to pay Rs.75.00 lac towards the price of Equipments

and it simultaneously became entitled to recover rent for the three

months period prior to its acquisition on 1.4.2000, that is, from 1.1.2000

to 31.3.2000 from Minerva Holding (P) Ltd, totaling Rs.11.77 lac. After

adjusting this amount of Rs.11.77 lac against the sum of Rs.75 lac paid

to BBW, the assessee capitalized a sum of Rs.63.22 lac towards this 3 ITA No.3431/Del/2007

asset. Apart from that, a further sum of Rs.25.88 lac was incurred

towards commission etc. on such Equipments and purchase price of a

new Generator set etc., which was also capitalized by the assessee,

thereby, making total cost of `Equipments given on hire' at

Rs.89,10,245. Depreciation was claimed by the assessee on such an

amount. The Assessing Officer was not satisfied, inter alia, with the

actual cost of Equipments shown to have been purchased by the assessee

from BBW at a net consideration of Rs.63.22 lac. After conducting

inquiries, which we will advert to a little later, he made a reference to

the Addtl. CIT u/s 144A of the Act for determining the actual cost of

such Equipments. Directions given u/s 144A was made as Annexure J

to the assessment order. As per this Annexure, the Addtl. CIT noticed

that the Building was owned by M/s Civic Traders Pvt. Ltd and the

value of such Land and building in their books as on 31.3.2001, after

depreciation, stood at Rs. 1.91 crore. He noticed that the ground floor

of this property was with another sister concern, namely, M/s Sharda

Exports and the remaining parts of the property were given on rent to

M/s Minerva Holding (P) Ltd. It was also noticed that out of the total 4 ITA No.3431/Del/2007

rent paid by M/s Minerva Holding, half of it was shown towards hire of

Equipment (with purchase cost of Rs.63.22 lac) and the remaining half

towards hire of premises (with the proportionate purchase cost of

Rs.1.53 crore [1.91 crore*4/5] . It was thus held that it was a case of

colourable device employed by the group companies to bifurcate rent

between themselves. Since BBW failed to produce any proof of the

purchase cost of the Equipments and the assessee also failed to discharge

its burden in proving such purchase price as the actual cost, the

Additional Commissioner estimated their actual cost at Rs.20.00 lac.

He, however, clarified that the AO was not bound by his opinion and

may form his own. The AO adopted this figure of Rs.20 lac and, then

increased it with a sum of Rs.2,45,000/- incurred towards purchase price

of generator and sound proofing equipments. That is how, he computed

the actual cost of such Equipments at Rs.22,45,000/- and allowed

depreciation thereon @ 25%, amounting to Rs.5,61,250/-. The excess

claim of depreciation at Rs.16,66,311/- [Rs.22,27,561/- (claimed by the

assessee) minus Rs.5,61,250/- (allowed by the AO)] was disallowed.

The ld. CIT(A) came to hold that the AO was not justified in applying 5 ITA No.3431/Del/2007

Explanation 3 to Section 43(1) of the Act inasmuch as the requirement

under the provision is to determine the actual cost and not its fair market

value. Ergo, he directed the AO to take the actual cost incurred by the

assessee as actual cost.

4. The Revenue appealed before the Tribunal. The Tribunal in the

original order considered the judgment of the Hon'ble Delhi High Court

in CIT vs. Dalmia Dadri Cement Ltd. (1980) 125 ITR 510 (Del) and

upheld the assessment order on this point. In deciding so, the Tribunal

observed that depreciated value of these assets in the hands of BBW as

on 31.3.2000 was only Rs.32,91,746/-. It further noticed that the

assessee could adduce no justification for payment of such huge

amount towards these Equipments, which were already put to use by

BBW and stood depreciated to a reduced value in their books of account.

It further noticed that building was purchased by the group concern of

the assessee in which such facilities were installed and the occupier of

the premises was to pay rent to the building owner at a specific rate and

it did not matter to the occupier that in what manner the total rent paid

6 ITA No.3431/Del/2007

by it was applied by the related parties, namely, the assessee and Civic

Traders, towards rent of building and that of equipment. The Tribunal

further noted that half of the total rent received was applied towards

building and the remaining half towards these Equipments. In view of

these facts, the Tribunal held that the rent received by the assessee for

the Equipments was itself doubtful. Ex consequenti, the view taken by

the ld. CIT(A) on this score was set aside that of the AO restored.

Thereafter, the assessee moved application u/s 254(2) of the Act

contending that the Tribunal erred in applying the judgment of Dalmia

Dadri Cement Ltd. (Delhi) by treating it as that of the jurisdictional High

Court, whereas the actual jurisdiction vested with the Hon'ble Allahabad

High Court. In support of the contention that Explanation 3 to section

43(1) ought not to have been applied by the AO and resultantly, the

disallowance was rightly deleted in the first appeal, the ld. AR relied on

the judgment of the Hon'ble Allahabad High Court in the case of

Jaswant Sugar Ltd. Vs. CIT (1973) Tax LR 1336. The Tribunal, vide its

order dated 3.8.2012 passed u/s 254(2), held that non-consideration of

the judgment of the Hon'ble jurisdictional High Court in Jaswant Sugar 7 ITA No.3431/Del/2007

Ltd. (supra) and treating the judgment in case of Dalmia Dadri Cement

Ltd. (supra) as that of the jurisdictional High Court, was a mistake

apparent from record. That is how, the original order was recalled on

this ground and the instant proceedings have now come up before us for

a fresh decision on this aspect of the matter.

5. We have heard the rival submissions in the light of material placed

on record and precedents relied. The main plank of the submissions

advanced on behalf of the assessee before us was that the AO was not

justified in reducing the actual cost of the Equipments by resorting to

the provisions to Explanation 3 to section 43(1). This view was sought

to be buttressed by relying on the judgment of the Hon'ble jurisdictional

High Court in Jaswant Sugar Mills Ltd. Vs. CIT (supra). Drawing

strength from this judgment, the ld. AR vehemently argued that the AO

erred in applying Explanation 3 to section 43(1) which, in the facts and

circumstances of the case, was not applicable because of the failure of

the AO to record any satisfaction that the main purpose of transfer of

such assets to the assessee was the reduction of liability of income-tax. 8 ITA No.3431/Del/2007 This argument was countered by the ld. DR on the preliminary issue by

contending that the judgment in Jaswant Sugar Mills Ltd. (supra) was

rendered in the context of Income-tax Act, 1922 and, hence, the same

cannot be applied in so far as the provisions of the Incomer-tax Act,

1961, currently in force, are concerned.

6. Before considering the factual scenario of the case and whether or

not the ratio decidendi of the judgment in Jaswant Sugar Mills Ltd.

(supra) is applicable to the instant case on merits, we would like to deal

with the preliminary argument raised by the ld. DR about the

inapplicability of this judgment due to the same having been rendered

under the 1922 Act. It goes without saying that if the language of a

provision contained in the earlier and the current Acts is same, then the

decisions rendered in the context of the earlier Act do not lose their

binding force and vice versa. Thus, it becomes imperative to make a

comparative analysis of the corresponding provisions of the former and

the current Acts for ascertaining if the language is different or similar. 9 ITA No.3431/Del/2007

7. In this regard, it is observed that section 10 of the Income-tax Act,

1922 deals with the determination of income under the head 'Profits and

gains of business, profession or vocation', which is similar to Chapter

IV-D of the Income-tax Act, 1961 Act dealing with the computation of

income under the head `Profits and gains of business or profession'.

Clause (vi) of section 10(2) of the 1922 Act provides for allowing

depreciation. Clause (a) of sub-section (5) of section 10 of the 1922 Act

deals with the determination of 'actual cost.' This provision runs as

under:-

"(a) in the case of assets acquired in the previous year, the actual cost to the assessee:

Provided that 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 and the 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), the actual cost to the assessee shall be such an amount as the Income-tax Officer may, with the previous

10 ITA No.3431/Del/2007

approval of the Inspecting Assistant Commissioner, determine having regard to all the circumstances of the case:"

8. The corresponding provision for the determination of `actual cost'

has been enshrined in section 43 of the 1961 Act, the relevant part of

which is as under:-

Section 43(1) : "actual cost" to mean `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........' ...................

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 Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case.

9. On a conjoint reading of the provisions of the 1922 Act and 1961

Act in this regard, it can be seen that sub-section (1) of section 43

defining 'actual cost' is worded more or less on the same lines as section

10(5)(a) of the 1922 Act, except providing for reducing that portion of

cost, if any, as has been met directly or indirectly by any other person or 11 ITA No.3431/Del/2007

authority. Extantly, we are not dealing with any issue about the

deductibility or otherwise of any portion of cost which has been met

directly or indirectly by any other person or authority. We are

concerned with the determination of `actual cost' of an asset, which

was earlier used by a previous owner for the purpose of his business.

This issue is covered by Explanation 2 to section 43(1) of the 1961 Act

and proviso to section 10(5)(a) of the 1922 Act. A cursory look at the

language of both these provisions divulges that except for change in the

designation of the authorities, which are the AO and Jt. Commissioner

under the current Act, they are identical. Once the language of the

provision in both the Acts is found to be similar, there can be no

impediment in considering the decisions given under the 1922 Act while

interpreting the analogous provisions of the 1961 Act. We, therefore,

refuse to accept this contention advanced on behalf of the ld. DR.

10. Now, let us proceed to see if the ratio laid down by the Hon'ble

Allahabad High Court in the case of Jaswant Sugar Mills (supra) is

applicable to the facts of the present case. The assessee in that case 12 ITA No.3431/Del/2007

purchased machinery at a cost of Rs.1,26,040/- from Seth Banarsi Das,

who was using it at Bijnor Sugar Mills. The exact cost of this machinery

to Seth Banarsi Das was not known, but, it was estimated that when the

machinery was purchased in 1948 it must have cost about Rs.90,000/-.

The assessee purchased such machinery during the previous year

relevant to the assessment year 1954-55 for a stated consideration of

Rs.1,26,040/-. The Income-tax Officer, with the approval of the

Inspecting Assistant Commissioner, took recourse to the proviso to

section 10(5)(a) and accordingly reduced the actual cost of such

machinery to Rs.1 lac. When the matter finally went before the Hon'ble

Allahabad High Court, their Lordships noticed that the Income-tax

Officer had not recorded any reasons disclosing the grounds on which

he was satisfied that the transfer was for reducing tax liability. It was

held that the Income-tax Officer must record an objective satisfaction

before using this provision. As there was nothing on record to show that

the ITO was so satisfied nor there was any material which could show

the reaching of satisfaction by the Income-tax Officer in terms of section

10(5)(a), the Hon'ble High Court held that the Tribunal erred in holding 13 ITA No.3431/Del/2007

that the requirement of section 10(5)(a) was fulfilled on account of the

fact that the Inspecting Assistant Commissioner had granted approval. It

was eventually laid down by the Hon'ble High Court vide its judgment

dated 15.12.1972 that the assessee was entitled to depreciation on the

actual cost of the machinery purchased from Seth Banarsi Dass and

proviso to section 10(5)(a) was not applicable.

11. At this juncture, it would be befitting to take note of the judgment

dated 31st July, 1972 rendered by the Hon'ble Supreme Court in Guzdar

Kajora Coal Mines Ltd. Vs. CIT (1972) 85 ITR 599 (SC). The assessee

in that case purchased colliery lands, hereditaments and premises, mines,

minerals, powers and privileges and all other hereditaments together

with the machinery belonging to a company for a consideration of Rs.6

lac. The total consideration was bifurcated in three parts, namely,

Rs.3,50,000/- for machinery and other moveable properties ;

Rs.1,50,000/- for building and structures, and ; Rs.1 lac for the rest of

properties not capable of being passed by delivery. From the assessment

year 1946-47, the assessee started claiming depreciation on the assets so

14 ITA No.3431/Del/2007

purchased on the basis of their written down value as per the record of

the vendor company and not the above bifurcated value, which was

allowed by the ITO. It went on till the assessment year 1952-53 when,

again, the ITO allowed depreciation on the old basis. Before the AAC,

the assessee raised a ground that the ITO should have worked out

depreciation on the value of assets based on the above bifurcation of

Rs.6 lac. This contention was negatived by the ITO, who noticed that

the vendor had been making good profits, but, no provision was made

for the goodwill of the company in the above bifurcation of Rs.6 lac in

three categories. The ITO opined that if such provision had been made,

the value of goodwill would have worked out at Rs.2,56,960/- and the

remaining amount of Rs.3,43,040/- (Rs.6,00,000-Rs.2,59,256/-) towards

other assets. The Tribunal took note of the fact that the figures of

Rs.3,50,000/-, Rs.1,50,000/- and Rs.1,00,000/- were arbitrarily put and

there was no understandable break-up of the valuation. The assessee

contended before the Hon'ble High Court that the ITO was not

competent to go beyond the agreed price and fix a valuation of the assets

on his own. The High Court rejected the assessee's contention. When 15 ITA No.3431/Del/2007

the matter finally went before the Hon'ble Supreme Court, their

Lordships took into account the provisions of section 10(2) and also

10(5) of the 1922 Act defining the original cost. After taking note of the

provisions of section 10(5) of the 1922 Act, the Hon'ble Supreme Court

held as under:-

"Keeping in view sub-s. (5) of s. 10 of the Act the original actual cost to the assessee of the asset with regard to which depreciation allowance is claimed has to be ascertained for the purpose, inter alia, of finding out the written down value in case of assets other than ocean going ships. ...... The original cost of a particular asset is a question of fact which has to be determined on the evidence of the material produced or available to the IT authorities. Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by an assessee would be a piece of evidence and, prima facie, the statements or figures given therein would show how much the cost of the asset to the assessee is. But, 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 for ulterior purposes it is open to the IT 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......"

12. It is evident from the above observations of the Hon'ble Summit

Court rendered in the context of section 10(5) of the 1922 Act that the

original cost of an asset should ordinarily be determined on the basis of

the documents showing the cost paid for purchase of such asset. But, if

16 ITA No.3431/Del/2007

the apparent circumstances suggest that the real position is different and

the price has been inflated or deflated for an ulterior motive, then it is

open to the income-tax authorities to disregard the apparent value and

ascertain the correct actual cost. Ergo, it is discernible that the Hon'ble

Apex Court dealing, inter alia, with the interpretation of section 10(5) of

the 1922 Act has clearly laid down that the ITO should not desist from

determining the actual cost of an asset, if the circumstances show that

some fictitious price was put by the parties on the assets with a deceitful

intention. The Hon'ble Supreme Court disregarded the apparent price

assigned to the assets for the purposes of grant of depreciation and

consequently upheld the grant of depreciation to the vendee by treating

its actual cost equal to the written down value of such assets in the hands

of the vendor prior to the date of sale.

13. It is pertinent to note that whereas the judgment of the Hon'ble

Supreme Court in Guzdar Kajora Coal Mines(supra) is dated 31st July,

1972, the judgment of the Hon'ble Allahabad High Court in Jaswant

Sugar Mill (supra) is dated 15.12.1972. There is no reference to the

17 ITA No.3431/Del/2007

judgment of the Hon'ble Supreme Court in the judgment of the Hon'ble

High Court, which is otherwise on the interpretation of the same section

and directly relevant on the point. It appears that the parties failed to

bring the Hon'ble Apex Court judgment to the notice of the Hon'ble

High Court, which resulted in rendering the decision without

considering the ratio decidendi laid down by the Hon'ble Supreme

Court in Guzdar Kajora Coal Mines Ltd. (supra). There is hardly any

need to accentuate that the wisdom of a superior court gets precedence

and when the superior court is none other than the Hon'ble Supreme

Court, its judgments have a binding force across the length and breadth

of India. Article 141 of the Constitution of India unequivocally states

that : `The law declared by the Supreme Court shall be binding on all

courts within the territory of India.'

14. At this stage, it will be significant to refer to the judgment of the

Hon'ble Delhi High Court in CIT vs. Dalmia Dadri Cement Ltd. (1980)

125 ITR 510 (Del). In that case, a sum of Rs. 16,46,617 was capitalized

as cost of plant and machinery installed during the year which included a

18 ITA No.3431/Del/2007

sum of Rs. 7,70,000 paid to Bhagwati Glass. It was noticed that the cost

of assets got fabricated by Bhagwati Glass was Rs.3.00 lac and odd.

Accordingly, the AO came to hold that the cost of assets was inflated.

He reduced the actual cost of such assets in terms of Explanation 3 to

section 43(1) of the Act, which led to the reduction in the amount of

depreciation. When the matter finally came up for consideration before

the Hon'ble High Court, it was noticed that total expenses incurred by

Bhagwati Glass on the asset transferred were to the tune of Rs.

3,11,954, against which the assessee showed to have paid a sum of Rs.

7,70,000. It was held that the income-tax authorities were right in

observing that the capital cost was undoubtedly inflated in the hands of

the assessee to enable it to claim higher depreciation and thus ultimately

substituting their own figure of actual cost. Here it is relevant to

mention that in reaching this conclusion under the provisions of the 1961

Act, their Lordships also referred to the judgment of the Hon'ble

Supreme Court in the case of Guzdar Kajora Coal Mines Ltd. (supra)

rendered in the context of the analogous provision of the 1922 Act. It is

further noticed that similar view has been taken by the Hon'ble Calcutta 19 ITA No.3431/Del/2007

High Court in the case of CIT vs. Jogta Coal Co. Ltd. (1965) 55 ITR 89

(Cal) laying down that if the circumstances show that an assessee has

arranged to put a fictitious price on his assets in a contract or

conveyance, it is open to the income-tax authorities to refuse to accept

that price and go behind the contract or conveyance.

15. On an overview of all the above discussed judgments led by that

of the Hon'ble Supreme Court in Guzdar Kajora Coal Mines Ltd.

(supra) in the context of the point under consideration, it clearly

emerges that when asset before the acquisition by the assessee was

used by another person for his business and the AO holds the view and

is satisfied that the actual price of such asset has been inflated or

deflated for an ulterior purpose, then there can be no fetters on the

powers of the AO in rejecting such declared price and determining the

correct actual cost.

16. Reverting to the facts of the instant case, we find that during the

course of assessment proceedings, the Assessing Officer noticed that the

20 ITA No.3431/Del/2007

tax auditor in his report had given the details of `Equipments given on

rent' as under : -

1.4.2000 Commission for arranging 8,00,000 6.4.2000 Land 10,00,000

17.4.2000 Land 63,22,867 18.4.2000 Land 3,92,377 19.4.2000 Land 1,50,000 21.4.2000 Generator install 1,60,000 25.4.2000 Generator 85,000 Total 89,10,245

17. It was noticed by the AO that the details of such assets were

mutilated by someone to divert his attention. On being pointed out, the

assessee filed fresh details, inter alia, of purchase price of Centrally Air-

conditioning unit with Generator, Otis elevator and Fire fighting

equipments acquired from BBW for a gross sum of Rs.75,00,000. The

assessee further claimed to have paid commission of Rs.10 lac and Rs.8

lac to M/s Shivaya Laminations Ltd. and M/s Light Carts Pvt. Ltd.,

respectively for the above transaction of purchase of Equipments. The 21 ITA No.3431/Del/2007

AO on making investigation found such commission payment to be not

proper . He, therefore, refused to accept such amounts as part of the cost

of asset. It is a matter of record that the Tribunal vide its original order,

has restored this matter to the file of AO for a fresh determination. In

the instant proceedings, we are not concerned with anything other than

the amount paid by the assessee to BBW towards the purchase of

`Equipments given on hire'. Hence we are desisting from commenting

on the genuineness or otherwise of such commission payments. To test

the veracity of purchase price of Equipments, the AO recorded the

statement of Sh. Neeraj Kumar, an accountant of BBW. On being asked

to show the basis of determination of Rs.75.00 lac as the price of the

Equipments, he stated that it represented their market price with labour

and installation charges, but no further detail was submitted. During the

course of assessment proceedings, the AO required the assessee to

produce the proof of purchase cost of the Equipment to BBW at

Rs.75.00 lac, but, again no evidence in this respect was filed even by the

assessee. It was only during the course of first appellate proceedings,

22 ITA No.3431/Del/2007

that the assessee came out with the basis of determining the actual cost

of Equipments at Rs.75 lac, detailed as under:-

Air Conditioning Plant 22,10,394

Generating Set 10,61,400

Lifts 5,52,046

Fire Fighting Equipments 1,03,050

Total 39,26,890

PLUS:

(i) Cost of installation, Civil work, Ducting, Pipe Fittings, Wiring, etc., for Lift, Air Conditioning Plant, Generating Set and Fire Fighting Equipments Approx. 20,00,000 (ii) Cost of Approvals for Lift, Generating Sets, Air Conditioning Plant and Fire Fighting Equipments, etc., from Government and Semi-Government Departments and Municipal Corporation Approx 10,00,000 69,26,890 PLUS: PROFIT - Estimated - Tentative of the 5,73,110 Supplier Baba - Buildwell 75,00,000

23 ITA No.3431/Del/2007

18. It is manifest from the order of the ld. CIT(A) that he simply took

on record the above details from the assessee and proceeded to delete the

disallowance without any independent appraisal. We will evaluate the

authenticity of the above details furnished by the assessee. It can be seen

that purchase price of Equipments by BBW has been shown at Rs.39.26

lac, which is based on bills. There should not be any problem in

accepting it as correct. Cost of installation, civil work and ducting, etc.

has been shown at Rs.20 lac. The claim in this regard is that cost of

installation etc. is a little more than 50% of the cost of Equipments itself,

which prima facie does not appear probable. There is no corroboration

of this figure. What was spent by BBW on installation has also not been

shown anywhere. Next item is Cost of approval etc. at Rs.10.00 lac.

Which Government department charges fee of Rs.10.00 lac for granting

approval to install AC and lift etc. at one's own premises, is beyond our

comprehension. This is not only highly improbable but ridiculous. That

appears to be the reason for not supporting such a claim with any

evidence worth the name. The next item claimed to have been forming

cost of Equipments is a sum of Rs.5,73,000/- given as profit to BBW. 24 ITA No.3431/Del/2007

It is axiomatic that the Equipments were purchased by BBW prior to

September, 1999 because these were given on rent from 1st September,

1999. It shows that such Equipments were purchased and commercially

exploited by BBW for at least three months, earning rent of Rs.11.77 lac

from their hiring, before transferring them to the assessee. It defies all

the logics that any Equipment commercially exploited for at least three

months by giving it on hire, after purchase, would fetch the same price at

which it was acquired. What to talk of transferring the Equipments at

cost price, the assessee has made out a case of paying premium of

Rs.5.73 lac to BBW, which proposition is absolutely unsustainable.

Here is a case in which the written down value of such Equipments in

the hands of BBW was Rs.32,91,746/- and the assessee is claiming to

have paid a whopping price of Rs.75 lac. The Tribunal, being a final

fact finding authority, cannot act as a mute spectator to the designs of

the parties in arranging their affairs in such a manner so as to scuttle the

legitimate tax due to the exchequer. A thing which can be seen with a

naked eye, cannot be lost sight of on some unrealistic reasoning. We

are confronted with a situation in which the assessee needlessly tried to 25 ITA No.3431/Del/2007

establish that the gross actual cost of `Equipments given on hire' was

Rs.75 lac, which in our considered opinion has been rightly refused by

the AO after making a detailed discussion and conducting due inquiries

from BBW and other related parties. It is not a case in which the AO has

arbitrarily formed a view that the purchase price of the Equipments was

declared higher and simply ignored it without any bedrock. Rather, he

took pains in establishing that the case of the assessee was caught within

the mischief of Expl. 3 to section 43(1). The afore elaborated exercise

done by the AO, before rejecting the declared price of the Equipments as

not its actual cost, reveal nothing less than recording of an objective

satisfaction in terms of the Explanation 3. It is not necessary that before

invoking Expl. 3 to section 43(1), the AO must make an express

mention in the assessment order that he was not satisfied with the

declared cost. If the exercise done by the AO before rejecting the

assessee's version of actual cost, vividly reflects his implied satisfaction

in terms of the Expl. 3 to section 43(1), then such implied satisfaction

prompted by express actions, cannot be taken as a case of absence of

satisfaction. The facts of the instant case amply show that the AO was 26 ITA No.3431/Del/2007

fully satisfied in not accepting the declared price as the actual cost of

Equipments from BBW within the meaning of the Explanation 3 to

section 43(1). The order passed by the ld. CIT(A) in holding otherwise,

is, therefore, overturned.

19. Having held that the AO was right in taking recourse to the

provisions of Explanation 3 to section 43(1) by holding that the main

purpose of the transfer of Equipments to the assessee was the reduction

of a liability to income-tax by claiming depreciation with reference to an

enhanced cost, the next question is to decide the correctness of the

amount substituted as actual cost. It is self evident that the AO, after

rejecting the assessee's claim, cannot arbitrarily assign any value as per

his ipse dixit. He is supposed to be guided by some sound principles in

determining the actual cost. The facts of the instant case transpire that

the assessee capitalized actual cost of Equipments purchased from BBW

at a net of Rs.63.22 lac, which has been held by us above to be

unacceptable. The AO determined the actual cost of such Equipments at

Rs.20 lac, which is again devoid of rationality and is not more than an

27 ITA No.3431/Del/2007

ad hocism. In our considered opinion, a realistic estimate of actual cost

in the hands of a buyer, in the absence of any special characteristics of

the asset transferred, can be made by taking into consideration the

written down value of such asset in the hands of the vendor at the time

of its transfer. No such special characteristics of the Equipments

purchased by the assessee from BBW, warranting premium on their

transfer, do exist or have been brought to our notice by the ld. AR. The

written down value of such Equipments in the hands of BBW at the

time of sale to the assessee stood at Rs. 32.91 lac. No details of

Installation charges etc. incurred by BBW has been made available. In

our considered opinion, the ends of justice would meet adequately, if the

total actual cost of such Equipments purchased from BBW is taken at

Rs.35.00 lac on all inclusive basis. The impugned order on this score is

set aside and the AO is directed to allow depreciation by considering

Rs.35.00 lac as the actual cost of Equipments purchased from BBW as

against his estimate of Rs.20.00 lac. This ground is disposed of

accordingly.

28 ITA No.3431/Del/2007

20. In the result, the appeal is partly allowed for statistical purposes.

The order pronounced in the open court on 05.05.2015.

Sd/- Sd/- [C.M. GARG] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated, 5th May, 2015. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT

AR, ITAT, NEW DELHI.

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